<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 2, 1998.
REGISTRATION NO. 333-59371
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
------------------------
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
THE MIIX GROUP, INCORPORATED
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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<S> <C> <C>
DELAWARE 6719 22-3586492
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>
TWO PRINCESS ROAD
LAWRENCEVILLE, NEW JERSEY 08648
(609) 896-2404
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
DANIEL GOLDBERG
PRESIDENT AND CHIEF EXECUTIVE OFFICER
THE MIIX GROUP, INCORPORATED
TWO PRINCESS ROAD
LAWRENCEVILLE, NJ 08648
(609) 896-2404, EXT. 1274
(NAME, ADDRESS INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
WITH COPIES TO:
<TABLE>
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JAMES J. MARINO, ESQ. ALLAN G. SPERLING, ESQ.
CHRISTOPHER G. KARRAS, ESQ. CLEARY, GOTTLIEB, STEEN & HAMILTON
DECHERT PRICE & RHOADS ONE LIBERTY PLAZA
997 LENOX DRIVE NEW YORK, NY 10006
BUILDING #3, SUITE 210 (212) 225-2260
LAWRENCEVILLE, NJ 08648
(609) 620-3200
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the conditions to the consummation of the reorganization of
the Registrant are satisfied.
------------------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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<PAGE> 2
[MEDICAL INTER-INSURANCE EXCHANGE LOGO]
MEDICAL INTER-INSURANCE
EXCHANGE OF NEW JERSEY
TWO PRINCESS ROAD
LAWRENCEVILLE, NEW JERSEY 08648
PROPOSED PLAN OF REORGANIZATION -- YOUR VOTE IS VERY IMPORTANT
The Board of Governors of the Medical Inter-Insurance Exchange of New
Jersey (the "Exchange") and the New Jersey Department of Banking and Insurance
have approved a Plan of Reorganization of the Exchange (the "Plan"). Pursuant to
the Plan:
- The Exchange will be converted from a reciprocal insurer to a new stock
company, MIIX Insurance Company ("MIIX Insurance").
- The MIIX Group, Incorporated ("MIIX Group"), a stock company, will be the
holding company for MIIX Insurance and all the other MIIX companies.
- MIIX Group stock (or cash) will be distributed to eligible Exchange
members, resulting in tangible value for their membership interests,
value that could not be realized through the Exchange's current structure
as a reciprocal insurer.
Be assured that the Plan will have no impact on your current premium and
all policies currently in effect will remain in force in accordance with their
terms.
Following member approval of the Plan, MIIX Group intends to conduct an
Initial Public Offering ("IPO"). MIIX Group intends to list MIIX Group stock on
The New York Stock Exchange under the symbol "MHU."
YOUR PROMPT VOTE IS VERY IMPORTANT. IN ORDER FOR THE PLAN TO BE APPROVED
AND THE IPO TO TAKE PLACE, TWO-THIRDS (2/3) OF THE VOTES CAST MUST BE FOR THE
ADOPTION OF THE PLAN. THE MANAGEMENT TEAM JOINS THE BOARD OF GOVERNORS IN
RECOMMENDING THAT YOU VOTE FOR APPROVAL OF THE PLAN.
This Prospectus provides you with detailed information about the Plan. I
encourage you to read this entire document carefully. If you have any questions,
please call the MIIX Conversion Information Center at 1-888-359-8644.
Daniel Goldberg signature
Daniel Goldberg
President
Chief Executive
Officer
<PAGE> 3
[MEDICAL INTER-INSURANCE EXCHANGE LOGO]
MEDICAL INTER-INSURANCE
EXCHANGE OF NEW JERSEY
TWO PRINCESS ROAD
LAWRENCEVILLE, NEW JERSEY 08648
NOTICE OF SPECIAL MEETING OF MEMBERS
TO BE HELD , 1998
TO THE MEMBERS OF THE MEDICAL INTER-INSURANCE EXCHANGE:
NOTICE IS HEREBY GIVEN that a special meeting (the "Special Meeting") of
the members of the Medical Inter-Insurance Exchange of New Jersey (the
"Exchange") will be held at on , 1998, to consider
and vote upon a proposal to approve:
- An amendment to the Rules and Regulations of the Exchange to permit
the dissolution of the Exchange, and
- A Plan of Reorganization (the "Plan of Reorganization") pursuant to
which the Exchange will be dissolved and certain current and former members
("Distributees") of the Exchange will receive:
- publicly traded common stock ("Common Stock") of The MIIX Group,
Incorporated ("The MIIX Group"), a newly formed Delaware
corporation that is currently a wholly owned subsidiary of the
Exchange, or
- cash, in the case of Distributees who would otherwise receive
fewer than 100 shares of Common Stock or whose address as shown
on the records of the Exchange is outside the United States of
America or is an address to which mail is undeliverable.
The MIIX Group owns all the outstanding common stock of MIIX Insurance
Company, a newly formed stock insurer that, upon consummation of the
Reorganization, will assume all the assets and liabilities of the Exchange
(except for the Common Stock and cash to be distributed to Distributees pursuant
to the Plan of Reorganization). In addition, upon consummation of the Plan of
Reorganization, The MIIX Group will purchase all the outstanding common stock of
New Jersey State Medical Underwriters, Inc. from the Medical Society of New
Jersey in exchange for Common Stock and cash.
Each Distributee shall be allocated a pro rata share of the 12,000,000
shares of Common Stock to be allocated to Distributees pursuant to the Plan of
Reorganization in the proportion that direct premiums earned by the Exchange
attributable to such Distributee, less return premiums, over the three years
prior to October 15, 1997, bear to direct premiums earned by the Exchange
attributable to all Distributees, less return premiums, over the same period.
The total amount of direct premiums earned by the Exchange attributable to all
Distributees, less return premiums, over the three years prior to October 15,
1997 was approximately $350 million.
Members who were named insureds on policies that were in force on October
15, 1997, are entitled to notice of, and to vote at, the Special Meeting. Each
such member is entitled to one vote. Approval of the Plan of Reorganization and
the related amendment to the Rules and Regulations of the Exchange requires the
affirmative vote of two-thirds of the members voting in person or by proxy.
Whether or not you plan to attend the Special Meeting, please sign and date
the enclosed proxy card and return it in the postage-paid envelope that has been
enclosed for your convenience.
Hillel Ben-Asher, M.D.
Chairman of the Board of Governors
Dated: , 1998
<PAGE> 4
PROSPECTUS SUBJECT TO COMPLETION, DATED OCTOBER 2, 1998
[MEDICAL INTER-INSURANCE EXCHANGE LOGO]
12,000,000 SHARES
THE MIIX GROUP, INCORPORATED
COMMON STOCK
This Prospectus is being furnished to Members (as defined in the "Glossary
of Reorganization Terms") of the Medical Inter-Insurance Exchange of New Jersey,
a New Jersey reciprocal insurer (the "Exchange"), in connection with the
proposed Plan of Reorganization (the "Plan of Reorganization," and together with
the transactions contemplated thereby, the "Reorganization") of the Exchange.
Pursuant to the Plan of Reorganization, the Exchange will be dissolved, and
Distributees (as defined below) will collectively receive up to 12,000,000
shares (the "Reorganization Shares") of common stock, par value $.01 per share
("Common Stock"), of The MIIX Group, Incorporated, a Delaware corporation ("The
MIIX Group"). The MIIX Group is currently a wholly owned subsidiary of the
Exchange and owns all the outstanding common stock of MIIX Insurance Company
("MIIX Insurance"), a newly formed stock insurer. Upon consummation of the
Reorganization, MIIX Insurance will assume all the assets and liabilities of the
Exchange, except for the Common Stock and cash to be distributed in the
Reorganization. All policies issued by the Exchange will be included in such
assumption and will continue in force after the Reorganization. In addition,
upon consummation of the Reorganization, The MIIX Group will purchase all the
outstanding common stock of New Jersey State Medical Underwriters, Inc., a New
Jersey not-for-profit corporation (the "Attorney-in-Fact"), from the Medical
Society of New Jersey (the "Medical Society") in exchange for Common Stock and
cash. If the Reorganization is consummated, each Distributee will receive a pro
rata share of the Reorganization Shares in the proportion that direct premiums
earned by the Exchange attributable to such Distributee, less return premiums,
over the three years prior to October 15, 1997, bear to direct premiums earned
by the Company attributable to all Distributees, less return premiums, over the
same period, or cash, in the case of Distributees who would otherwise receive
fewer than 100 shares of Common Stock or whose address as shown on the records
of the Exchange is outside the United States of America or is an address to
which mail is undeliverable. The total amount of direct premiums earned by the
Exchange attributable to all Distributees, less return premiums, over the three
years prior to October 15, 1997, was approximately $350 million. Distributees
who receive cash in lieu of Common Stock will receive an amount of cash equal to
the product of (i) the number of shares of Common Stock which they would
otherwise be entitled to receive and (ii) the Conversion Value. The "Conversion
Value" means either (i) the price at which the Common Stock is offered to the
public in the event an initial public offering is consummated simultaneously
with the Reorganization, or (ii) if no such initial public offering is
consummated simultaneously with the Reorganization, then the economic value of
the Common Stock as determined in good faith by the Board of Governors of the
Exchange. See "Glossary of Selected Insurance Terms" and "Glossary of
Reorganization Terms" for the definition of certain terms used in this
Prospectus.
Concurrently with the consummation of the Reorganization, but as a separate
transaction, The MIIX Group intends to sell Common Stock through an underwritten
initial public offering (the "Public Offering"). The consummation of the
anticipated Public Offering is conditioned on the consummation of the
Reorganization. However, the consummation of the Reorganization is not
conditioned on the consummation of the Public Offering. This Prospectus relates
solely to the Reorganization and does not constitute an offer to sell, or a
solicitation of an offer to buy, Common Stock in the anticipated Public
Offering. Common Stock to be offered in the anticipated Public Offering will be
offered only by means of a separate Prospectus.
Consummation of the Reorganization is subject to certain conditions,
including the approval of at least two-thirds of the Members voting in person or
by proxy at a special meeting scheduled to be held on , 1998 (the
"Members' Meeting"). Only Members are entitled to notice of, and to vote at, the
Members' Meeting. A proxy card is being delivered to Members along with this
Prospectus. See "The Members' Meeting." In addition, a share allocation card is
being sent to all Members. The share allocation card shows each Member the
estimated whole number of shares of Common Stock that such Member will receive
if the Reorganization is approved and consummated.
IF THE REORGANIZATION IS NOT APPROVED, NO COMMON STOCK WILL BE DISTRIBUTED
AND THE EXCHANGE WILL CONTINUE TO DO BUSINESS AS A RECIPROCAL INSURER.
The listing of the Common Stock on the New York Stock Exchange (the "NYSE")
under the symbol "MHU" has been approved, subject to official notice of
issuance.
SEE "RISK FACTORS" COMMENCING ON PAGE 12 HEREIN FOR A DISCUSSION OF CERTAIN
FACTORS WHICH SHOULD BE CONSIDERED BEFORE VOTING.
THE SECURITIES TO BE ISSUED HEREUNDER HAVE NOT BEEN APPROVED OR DISAPPROVED BY
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR
HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this Prospectus is , 1998
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE> 5
TABLE OF CONTENTS
<TABLE>
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PAGE
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ADDITIONAL INFORMATION................ 3
FORWARD-LOOKING STATEMENTS............ 4
PROSPECTUS SUMMARY.................... 5
The Company...................... 5
Business Strategy................ 6
Overview of the Transactions..... 7
The Reorganization and
Distribution................... 7
Interest of Distributees in The
MIIX Group..................... 10
Risk Factors..................... 10
Regulatory Approvals............. 10
Summary Financial and Operating
Data........................... 11
RISK FACTORS.......................... 12
THE MEMBERS' MEETING.................. 20
THE REORGANIZATION.................... 21
General.......................... 21
Purpose.......................... 22
Transfer of Assets and
Liabilities to MIIX
Insurance...................... 22
Shares of Common Stock Issued to
Distributees................... 23
Interest of Distributees in The
MIIX Group..................... 23
Acquisition of the
Attorney-in-Fact............... 24
Conditions to Consummation of the
Reorganization................. 24
Background of the
Reorganization................. 25
Recommendation of the Board of
Governors; Reasons for the
Reorganization................. 26
Opinion of Financial Advisor..... 27
Accounting Treatment.............
Regulatory Approvals............. 30
Federal Tax Consequences......... 30
Possible Alternative Treatment of
the Reorganization............. 31
DIVIDEND POLICY....................... 32
CAPITALIZATION........................ 33
SELECTED FINANCIAL AND OPERATING
DATA................................ 34
</TABLE>
<TABLE>
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MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS....................... 35
BUSINESS.............................. 45
COMPARISON OF RIGHTS.................. 62
Liquidity/Marketability.......... 63
Distributions.................... 63
Meetings and Actions............. 63
Voting........................... 63
Preferred Stock.................. 64
Limited Liability................ 64
Removal of Governors/Directors... 64
Business Combinations............ 64
Anti-takeover Provisions......... 65
Action by Written Consent........ 65
Miscellaneous.................... 65
MANAGEMENT............................ 66
OWNERSHIP OF COMMON STOCK............. 75
DESCRIPTION OF CAPITAL STOCK.......... 77
SHARES ELIGIBLE FOR FUTURE SALE....... 80
STABILIZATION AND OTHER ACTIVITIES IN
CONNECTION WITH THE ANTICIPATED
PUBLIC OFFERING..................... 80
LEGAL MATTERS......................... 80
EXPERTS............................... 81
GLOSSARY OF SELECTED INSURANCE
TERMS............................... 82
GLOSSARY OF REORGANIZATION TERMS...... 86
INDEX TO COMBINED FINANCIAL
STATEMENTS.......................... F-1
Annexes
A. Plan of Reorganization............. A-1
B. Order of the Commissioner.......... B-1
C. Opinion of Salomon Smith
Barney Inc. ....................... C-1
</TABLE>
2
<PAGE> 6
FOR NORTH CAROLINA INVESTORS: THESE SECURITIES HAVE NOT BEEN APPROVED OR
DISAPPROVED BY THE COMMISSIONER OF INSURANCE FOR THE STATE OF NORTH CAROLINA,
NOR HAS THE COMMISSIONER OF INSURANCE PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS DOCUMENT.
STATE INSURANCE HOLDING COMPANY LAWS AND REGULATIONS APPLICABLE TO THE MIIX
GROUP IN GENERAL PROVIDE THAT NO PERSON MAY ACQUIRE CONTROL OF THE MIIX GROUP,
AND THUS INDIRECT CONTROL OF ITS INSURANCE SUBSIDIARIES, UNLESS SUCH PERSON HAS
PROVIDED CERTAIN REQUIRED INFORMATION TO, AND SUCH ACQUISITION IS APPROVED (OR
NOT DISAPPROVED) BY, THE APPROPRIATE INSURANCE REGULATORY AUTHORITIES.
GENERALLY, ANY PERSON ACQUIRING BENEFICIAL OWNERSHIP OF 10% OR MORE OF THE
COMMON STOCK WOULD BE PRESUMED TO HAVE ACQUIRED SUCH CONTROL, UNLESS THE
APPROPRIATE INSURANCE REGULATORY AUTHORITIES UPON ADVANCE APPLICATION DETERMINE
OTHERWISE.
IN CONNECTION WITH THE ANTICIPATED PUBLIC OFFERING, THE UNDERWRITERS
THEREOF MAY ENGAGE IN TRANSACTIONS THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT
THE PRICE OF THE COMMON STOCK, INCLUDING BY OVER-ALLOTMENT, ENTERING INTO
STABILIZING BIDS, EFFECTING SYNDICATE COVERING TRANSACTIONS OR IMPOSING PENALTY
BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "STABILIZATION AND OTHER
ACTIVITIES IN CONNECTION WITH THE ANTICIPATED PUBLIC OFFERING."
THIS PROSPECTUS RELATES SOLELY TO THE MEMBERS' MEETING AND DOES NOT
CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, COMMON STOCK
IN THE ANTICIPATED PUBLIC OFFERING. COMMON STOCK TO BE OFFERED IN THE
ANTICIPATED PUBLIC OFFERING WILL BE OFFERED ONLY BY MEANS OF A SEPARATE
PROSPECTUS.
ADDITIONAL INFORMATION
The MIIX Group has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement (together with all amendments, exhibits,
schedules, and supplements thereto, the "Registration Statement"), on Form S-1
(Registration No. 333-59371) under the Securities Act of 1933, as amended (the
"Securities Act"), with respect to the shares of Common Stock to be issued in
the Reorganization. As permitted by the rules and regulations of the Commission,
this Prospectus, which constitutes a part of the Registration Statement, does
not contain all information set forth in the Registration Statement. For further
information, please refer to the Registration Statement, including exhibits and
schedules thereto, which can be inspected without charge at the public reference
facilities maintained by the Commission at 450 Fifth Street, N.W., Washington,
D.C. 20549, and at the regional offices of the Commission located at
Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661 and Seven World Trade Center, Suite 1300, New York, New York
10048. Copies of such material can be obtained from the Commission at prescribed
rates from the Public Reference Section of the Commission at 450 Fifth Street,
N.W., Washington, D.C. 20549. Additionally, material filed by The MIIX Group can
be inspected at the offices of the NYSE, 20 Broad Street, New York, New York
10005. In addition, the Commission maintains a Web site (http://www.sec.gov)
that contains registration statements, reports, proxy and information
statements, and other information regarding registrants that file electronically
with the Commission, including The MIIX Group. Statements contained in this
Prospectus relating to the contents of any contract or other document referred
to herein are not necessarily complete, and reference is made to the copy of
such contract or other document filed as an exhibit to the Registration
Statement or such other document, each such statement being qualified by such
reference.
No person is authorized to give any information or to make any
representation with respect to the matters described in this Prospectus other
than those contained herein and, if given or made, such information or
representation should not be relied upon as having been authorized by The MIIX
Group or any other person.
3
<PAGE> 7
This Prospectus does not constitute an offer to sell, or a solicitation of an
offer to purchase, the securities offered by this Prospectus, or make a
solicitation of a proxy, in any jurisdiction in which, or to or from any person
to or from whom, it is unlawful to make such an offer or solicitation. Neither
the delivery of this Prospectus nor any distribution of securities hereunder
shall under any circumstances be deemed to imply that there has been no change
in the assets, properties or affairs of The MIIX Group or the Exchange since the
date hereof or that the information set forth herein is correct as of any time
subsequent to the date hereof.
To date, The MIIX Group has not been subject to the informational
requirements of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"). Following the completion of the Reorganization, The MIIX Group intends to
furnish its stockholders with annual reports containing audited consolidated
financial statements reported upon by its independent auditors.
Until , 1998, all dealers effecting transactions in the
Common Stock, whether or not participating in this distribution, may be required
to deliver a Prospectus.
FORWARD-LOOKING STATEMENTS
This Prospectus contains certain forward-looking statements. Discussions
concerning such forward-looking statements may be found in the material set
forth under "Prospectus Summary," "Risk Factors," "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Business," as
well as the Prospectus generally. These forward-looking statements include the
plans and objectives of management for future operations, including plans and
objectives relating to the products and future economic performance of the
Company (as defined under "Prospectus Summary" below). The forward-looking
statements set forth in this Prospectus include or relate to, but are not
limited to: (i) the Company having sufficient liquidity and working capital;
(ii) the Company's strategy to seek consistent profitable growth; (iii) the
Company's ability to increase its market share; (iv) the Company's ability to
diversify its product lines; (v) the Company's ability to expand into additional
states; (vi) the Company's avoidance of any material loss on collection of
reinsurance recoverables; and (vii) the continued adequacy of the Company's loss
and LAE reserves.
The forward-looking statements included herein are based on current
expectations that involve a number of risks and uncertainties. These
forward-looking statements are based on assumptions that the Company will
competitively price and market its insurance products, appropriately reserve for
losses and LAE and successfully handle claims; that competitive conditions will
not change materially or adversely; that demand for the Company's products will
be strong; that the market will accept the Company's new products and services;
that the Company will retain existing agents and key management personnel; that
the Company's reinsurers will remain solvent; and that there will be no material
adverse change in the Company's operations or business. Assumptions relating to
the foregoing involve judgments with respect to, among other things, future
economic, competitive and market conditions and future business decisions, all
of which are difficult or impossible to predict accurately and many of which are
beyond the control of the Company. Although the Company believes that the
assumptions underlying the forward-looking statements are reasonable, any of the
assumptions could prove inaccurate and, therefore, there can be no assurance
that the results contemplated in forward-looking statements will be realized.
Budgeting, reserving and other management decisions are subjective in many
respects and thus susceptible to interpretations and periodic revisions based on
actual experience and business developments, the impact of which may cause the
Company to alter its marketing, capital expenditures or other budgets, which may
in turn affect the Company's results of operations. In light of the significant
uncertainties inherent in the forward-looking information included herein, the
inclusion of such information should not be regarded as a representation by the
Company or any other person that the objectives or plans of the Company will be
achieved.
4
<PAGE> 8
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information and financial statements
appearing elsewhere in this Prospectus. Financial data and ratios set forth in
this Prospectus have been presented in accordance with generally accepted
accounting principles ("GAAP"), unless otherwise indicated. Except as otherwise
specified, all information in this Prospectus assumes that the over-allotment
option granted in connection with the anticipated Public Offering is not
exercised. See "Glossary of Selected Insurance Terms" and "Glossary of
Reorganization Terms" for definitions of certain terms used in this Prospectus.
For purposes of this Prospectus, the term "Company" refers, at all times
prior to the closing date of the Reorganization (the "Closing Date"), to the
Exchange and its subsidiaries, and the Attorney-in-Fact and its subsidiaries,
collectively, and at all times on or after the Closing Date, to The MIIX Group
and its subsidiaries, collectively; the term "Insurance Subsidiaries" refers, at
all times prior to the Closing Date, to Lawrenceville Property and Casualty Co.,
Inc. ("LP&C"), MIIX Insurance Company of New York ("MIIX New York") and
Lawrenceville Re, Ltd. ("Lawrenceville Re") and, at all times on or after the
Closing Date, to MIIX Insurance Company, a New Jersey stock insurer ("MIIX
Insurance"), LP&C, Lawrenceville Re and MIIX New York.
Except as otherwise specified, the historical financial information
presented throughout this Prospectus includes the Exchange and its wholly owned
subsidiaries and excludes the Attorney-in-Fact, which is not significant in
relation to the financial information presented. The structure of the Company
before and after the Reorganization is set forth on page 9.
THE COMPANY
Based on direct premiums written in 1997, the Company is the leading
provider of medical professional liability insurance in New Jersey and is ranked
10th among medical professional liability insurers in the United States. The
Company currently insures approximately 15,800 physicians and other medical
professionals who practice alone, in medical groups, clinics or in other health
care organizations. The Company also insures more than 80 hospitals, extended
care facilities, health maintenance organizations ("HMOs") and other managed
care organizations (collectively, "health care institutions"). The Company's
business has historically been concentrated in New Jersey but has expanded to
other states in recent years. The Company currently writes policies in 18
states. For the six months ended June 30, 1998, approximately 33% of the
Company's total direct premiums written were generated outside of New Jersey. In
addition to the Company's medical malpractice insurance operations, the Company
also offers a broad range of complementary insurance products to its insureds
and operates several fee-based consulting and other businesses.
Medical professional liability insurance, also known as medical malpractice
insurance, insures the physician, other medical professional or health care
institution against liabilities arising from the rendering of, or failure to
render, professional medical services. Under the typical medical professional
liability policy, the insurer also is obligated to defend the insured against
alleged claims.
In 1997, total medical professional liability direct premiums written in
the United States were approximately $5.9 billion, of which $299.3 million were
written in New Jersey, according to data compiled by A.M. Best Company, Inc.
("A.M. Best"), an insurance rating agency. The Company's market share of such
direct premiums written was 2.8% in the United States and 40% in New Jersey
according to A.M. Best. In 1997, medical malpractice insurance accounted for
approximately 98% of the Company's direct premiums written.
The Exchange and its subsidiaries had total revenues and net income of
$190.4 million and $30.3 million, respectively, for 1997 and $110.8 million and
$2.6 million, respectively, for the six months ended June 30, 1998. As of June
30, 1998, the Exchange and its subsidiaries had total assets of $1.4 billion and
total equity of $306.7 million.
5
<PAGE> 9
BUSINESS STRATEGY
The Company has adopted a strategy that it believes will allow it to
compete effectively and create long-term growth. To maximize the strategy's
effectiveness, the Company has adopted the Plan of Reorganization to convert
from a reciprocal insurer to a stock insurer, which will provide the Company
with greater flexibility and access to capital. See "The Reorganization and
Distribution." The Company's strategy is to:
- continue to expand geographically by increasing the number of states in
which the Company writes policies;
- enhance product offerings to facilitate "one-stop shopping" for the
Company's extensive customer base;
- expand distribution channels;
- maintain underwriting discipline to seek to assure that profitability,
rather than premium volume, is emphasized;
- take advantage of strategic acquisition opportunities; and
- maintain the Company's historically close relationship with the medical
community.
This strategy is designed to capitalize on the Company's strengths that have
enabled it to achieve its current market position, including (i) its experience
with, commitment to and focus on medical professional liability insurance, (ii)
its history of providing a stable premium environment to its customers, (iii)
the high level of service it delivers to insureds, including the aggressive
defense of claims on their behalf, (iv) its "A (Excellent)" rating by A.M. Best,
(v) its capacity on a per insured basis, (vi) its ability to customize product
features and programs to fit the needs of different customers and (vii) its
close relationship with the medical community.
Expand Geographically. From its inception in 1977 through 1990, all of the
Company's business was written in New Jersey. In 1991, the Company began to
write business in Pennsylvania and in 1996 began its expansion to other states.
Since 1996, the Company has expanded its operations significantly and currently
writes policies in 18 states. As a result of this expansion, the proportion of
the Company's business written in states other than New Jersey has grown from
approximately 11% in 1996 to 33% in the six months ended June 30, 1998. In order
to facilitate continued geographic expansion, the Company has obtained authority
to write insurance in 22 states and the District of Columbia and is in the
process of obtaining such authority in eight other states. In addition, the
Company has opened four regional sales and customer support offices to assist
its marketing efforts outside of New Jersey. Over time, the Company intends to
seek authority to write insurance in all 50 states, although the Company may
choose to not write insurance in all such states.
Enhance Product Offerings. In addition to its core medical professional
liability insurance products, the Company has developed other products and
services for health care institutions. Additional products currently offered
include comprehensive liability coverage for medical offices, directors and
officers, managed care errors and omissions, employment practices, fiduciary,
property and worker's compensation. Most of these coverages are underwritten by
the Company; several products are marketed by the Company and underwritten by
other insurance carriers with which the Company has developed strategic
alliances. The Company has also introduced the option for large health care
institutions to purchase excess insurance coverage on a multi-year basis for a
guaranteed prepaid premium. The Company intends to continue to increase the
number of products it offers to its customer base in order to be able to provide
them with a full range of coverages.
Expand Distribution Channels. The Company has traditionally written
insurance on a direct basis in New Jersey. In connection with the Company's
expansion outside New Jersey, the Company has increasingly utilized brokers. In
1997, 43% of the Company's direct premiums written were generated through
brokers. By increasing its use of this distribution channel, the Company will be
better positioned to achieve growth. In order to expand further its distribution
channels, the Company intends to develop additional brokerage relationships with
selected brokers who have demonstrated expertise in the medical malpractice
insurance market.
6
<PAGE> 10
Maintain Underwriting Discipline. The Company's experience with,
commitment to and focus on medical professional liability insurance for over 20
years has allowed it to develop strong knowledge of the market and to build an
extensive database of medical malpractice claims experience. The Company takes
advantage of this specialized expertise in medical professional liability
insurance to set premiums that it believes are appropriate for exposures being
insured. As the Company expands its business, it will maintain underwriting
discipline and emphasize profitability over premium growth.
Take Advantage of Strategic Acquisition Opportunities. The Company
believes that the Reorganization will better position the Company to make
strategic acquisitions by providing greater access to capital as a source of
financing and creating an attractive stock acquisition currency. The Company
believes that consolidation will continue in the medical professional liability
insurance industry and that opportunities to make a strategic acquisition may
arise, thus providing an effective way to expand the Company's business, product
offerings and geographic scope.
Maintain Close Relationship with the Medical Community. Since its founding
in 1977, the Company has maintained a close relationship with the medical
community. In addition to the active involvement of practicing physicians on
several of the Company's advisory committees, the Company and the medical
professional liability insurance that it offers have the endorsements of
different medical associations. The Company will continue to utilize practicing
physicians on advisory committees to provide management with input on medical
practice patterns, claims, customer needs and other relevant matters. In
addition, the Company will endeavor to maintain its endorsements.
The Company's principal executive offices are located at Two Princess Road,
Lawrenceville, New Jersey 08648. The telephone number of the Company's principal
executive offices is (609) 896-2404.
OVERVIEW OF THE TRANSACTIONS
The Company is contemplating two different transactions -- the
Reorganization and the Public Offering.
- Reorganization. Pursuant to the Plan of Reorganization, the Company will
reorganize from a reciprocal insurer to a stock corporation. If the
Reorganization is consummated, Distributees will receive Common Stock or,
in certain cases, cash. The Reorganization will not be consummated
unless, among other things, it is approved at the Members' Meeting. See
"The Reorganization and Distribution."
- Public Offering. If the Reorganization is approved at the Members'
Meeting, the Company intends to distribute a separate prospectus in
connection with the anticipated Public Offering. The Company intends to
consummate the Reorganization and the anticipated Public Offering
simultaneously; however, the Reorganization could be consummated without
the anticipated Public Offering being consummated.
These transactions are described in greater detail below.
THE REORGANIZATION AND DISTRIBUTION
The Exchange is currently organized as a New Jersey reciprocal insurer, and
accordingly has no stockholders. Since the Exchange's inception, the business of
the Exchange has been managed by the Attorney-in-Fact, which is a wholly owned
subsidiary of the Medical Society. On October 15, 1997, the Board of Governors
of the Exchange (the "Board of Governors") adopted the Plan of Reorganization.
The key components of the Plan of Reorganization are set forth below.
- The Exchange has formed a new subsidiary, MIIX Insurance. MIIX Insurance
was formed to assume, if the Reorganization is consummated, all of the
Exchange's assets and liabilities (except for the Common Stock and cash
to be distributed pursuant to the Reorganization), including insurance
policies written by the Exchange. After consummation of the
Reorganization, MIIX Insurance will continue the Exchange's business of
writing insurance policies and the Exchange will be dissolved.
7
<PAGE> 11
- The Exchange has formed a new subsidiary, The MIIX Group. The purpose of
The MIIX Group is to act as a holding company for MIIX Insurance and the
Exchange's other subsidiaries, and the Attorney-in-Fact and its
subsidiaries. The MIIX Group is the entity that will issue Common Stock
in the Reorganization and the anticipated Public Offering.
- The MIIX Group will acquire the Attorney-in-Fact from the Medical Society
for $11 million worth of Common Stock and $100,000 in cash.
- When the Exchange is dissolved, the Reorganization Shares will be
distributed to the Distributees. The distribution of the Reorganization
Shares is registered under the Registration Statement of which this
Prospectus forms a part.
- The Reorganization Shares will be allocated to Distributees in the
proportion that direct premiums earned by the Exchange attributable to
each Distributee, less return premiums, over the three years prior to
October 15, 1997, bear to direct premiums earned by the Company
attributable to all Distributees, less return premiums, over the same
period. The total amount of direct premiums earned by the Exchange
attributable to all Distributees, less return premiums, over such
period, was approximately $350 million.
- If a Distributee would be allocated fewer than 100 shares of Common
Stock, or if such Distributee's address as shown on the records of the
Exchange is outside the United States or is an address to which mail is
undeliverable, such Distributee will receive cash in lieu of Common
Stock. Distributees who receive cash in lieu of Common Stock will
receive an amount of cash equal to the product of (i) the number of
shares of Common Stock which they would otherwise be entitled to
receive and (ii) the Conversion Value. If a Distributee's address as
shown on the records of the Exchange is an address to which mail is
undeliverable, the Company will hold such Distributee's cash
distribution and will endeavor to contact such Distributee using any
other information in the Company's possession. If the Company is unable
to contact such Distributee, the Company will continue to hold the cash
for the Distributee, subject to any escheat laws that may apply.
- To the extent that a Distributee receives cash in lieu of Common Stock,
the Common Stock otherwise distributable to such Distributee will not
be distributed to other Distributees. Thus, fewer than 12,000,000
shares of Common Stock will be distributed to the Distributees pursuant
to the Reorganization. The Company currently estimates that
approximately 11,900,000 shares of Common Stock will be distributed
pursuant to the Reorganization. Assuming that the Conversion Value is
equal to $18.00 per share, approximately $1.8 million will be
distributed to Distributees in lieu of Common Stock. Cash payments will
be made from the Company's existing cash reserves.
Thus, if the Reorganization is consummated, (i) the Exchange will be
dissolved, (ii) the Distributees will receive Common Stock of The MIIX Group, or
cash, (iii) MIIX Insurance will assume the assets and liabilities of the
Exchange (except for the cash and Common Stock to be distributed pursuant to the
Reorganization), and (iv) The MIIX Group will be the holding company for MIIX
Insurance and other subsidiaries of the Exchange, and for the Attorney-in-Fact
and its subsidiaries. These steps will occur simultaneously and are described in
greater detail below under "The Reorganization."
8
<PAGE> 12
Set forth below is an illustration of the Company's structure both before
and after the proposed Reorganization and the anticipated Public Offering:
[THE MIIX GROUP FLOW CHART]
- ---------------
* Includes LP&C and MIIX New York.
** Includes Hamilton National Leasing Corporation, Pegasus Advisors, Inc., MIIX
Healthcare Group, Inc., Lawrenceville Re, Ltd. and certain other
subsidiaries.
On March 5, 1998, the Commissioner (the "Commissioner") of the New Jersey
Department of Banking and Insurance (the "New Jersey Department") approved the
Plan of Reorganization, subject to certain conditions. See "-- Regulatory
Approvals." The consummation of the Reorganization is also subject to
9
<PAGE> 13
certain other conditions precedent, including that the Company receive an
opinion from its tax advisors substantially to the effect that the
Reorganization shall constitute a tax-free reorganization to the Company for
federal income tax purposes. Distributees are urged to consult their tax
advisors as to the consequences to them of their receipt of Common Stock or cash
in connection with the Reorganization. See "The Reorganization -- Conditions to
Consummation of the Reorganization" and "The Reorganization -- Federal Tax
Consequences."
A share allocation card will accompany each copy of this Prospectus
delivered to Members. The share allocation card shows the estimated whole number
of shares of Common Stock that the applicable Member will receive pursuant to
the Reorganization if the Reorganization is approved and consummated.
INTEREST OF DISTRIBUTEES IN THE MIIX GROUP
The percentage interest in The MIIX Group that Distributees will own if the
Reorganization is consummated will depend on several factors, including whether
or not the anticipated Public Offering is consummated, the price at which Common
Stock may be sold in the anticipated Public Offering, the number of shares of
Common Stock to be issued to the Medical Society in connection with the purchase
of the Attorney-in-Fact, and the number of shares to be sold to certain members
of the Company's management pursuant to the Stock Purchase and Loan Agreements
(as defined below). See "Management -- Stock Purchase and Loan Agreements."
Assuming that the anticipated Public Offering is not consummated simultaneously
with the consummation of the Reorganization, that the number of shares to be
issued in connection with the acquisition of the Attorney-in-Fact is based on a
price of $18.00 per share of Common Stock, and that 11,900,000 shares are
distributed to Distributees in connection with the Reorganization, then
Distributees will own approximately 94% of the outstanding Common Stock of The
MIIX Group immediately after the consummation of the Reorganization. Assuming
that the anticipated Public Offering is consummated simultaneously with the
Reorganization, that Common Stock is sold in the anticipated Public Offering at
a price of $18.00 per share, that 2,500,000 shares of Common Stock are sold in
the anticipated Public Offering, and that 11,900,000 shares are distributed to
Distributees in connection with the Reorganization, then Distributees will own
approximately 79% of the outstanding Common Stock of The MIIX Group immediately
after the consummation of the Reorganization and the anticipated Public
Offering.
RISK FACTORS
Members should carefully consider the factors set forth herein under "Risk
Factors" commencing on page 12, as well as other information contained in this
Prospectus.
REGULATORY APPROVALS
The consummation of the Reorganization requires the approval of the
Commissioner. This approval was granted on March 5, 1998, subject to two
conditions. First, the Commissioner must approve the formation of MIIX
Insurance. This approval was obtained on August 3, 1998. Second, the
Reorganization must be approved by the affirmative vote of at least two-thirds
of those Members voting in person or by proxy.
Pursuant to the Plan of Reorganization, MIIX Insurance is to assume all the
assets of the Exchange (except for the Common Stock and cash to be distributed
in the Reorganization). However, insurance licenses cannot be transferred.
Accordingly, MIIX Insurance must obtain regulatory approval to become an
admitted carrier in each of the eight states other than New Jersey in which the
Exchange is currently licensed. These states are Connecticut, Delaware,
Kentucky, Maryland, Michigan, Pennsylvania, Vermont and West Virginia. These
states must also approve MIIX Insurance's rates, rules and policy forms, which
the Company expects initially will be a continuation of those currently used by
the Exchange. In addition, Virginia, which is LP&C's state of domicile, and
Texas, in which LP&C has been deemed to be commercially domiciled, must approve
the change in LP&C's ultimate parent from the Exchange to The MIIX Group.
Finally, Connecticut and Delaware approvals and the consent of the reinsurers
will be required in connection with the assignment to MIIX Insurance of the
various reinsurance agreements under which the Exchange cedes risk.
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<PAGE> 14
SUMMARY FINANCIAL AND OPERATING DATA
The following table sets forth selected consolidated financial and
operating data for the Exchange. The selected income statement data set forth
below for each of the years in the three year period ended December 31, 1997 and
the selected balance sheet data as of December 31, 1997 and 1996 are derived
from the consolidated financial statements of the Exchange audited by Ernst &
Young LLP, independent auditors, included elsewhere herein and should be read in
conjunction with, and are qualified by reference to, such statements and the
related notes thereto. The selected income statement data for the years ended
1993 and 1994 and for the six months ended June 30, 1997 and 1998, and the
selected balance sheet data as of December 31, 1993, 1994 and 1995 and as of
June 30, 1997 and 1998, are derived from unaudited consolidated financial
statements of the Exchange which management believes incorporate all of the
adjustments necessary for the fair presentation of the financial condition and
results of operations for such periods. 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"). See "Glossary of Selected Insurance Terms." The statutory surplus
amounts are derived from the audited statutory financial statements of the
Exchange (except with respect to the information provided for the six months
ended June 30, 1997 and 1998, which is derived from unaudited statutory
financial statements) and, in the opinion of management, fairly reflect the
specified data for the periods presented.
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
FOR THE YEAR ENDED DECEMBER 31, ENDED JUNE 30,
---------------------------------------------------------- -----------------------
1993(1) 1994 1995 1996 1997 1997 1998
-------- -------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Direct premiums written.................. $115,999 $127,647 $ 137,291 $ 143,218 $ 162,430 $ 134,803 $ 158,650
======== ======== ========== ========== ========== ========== ==========
Net premiums earned...................... $ 84,928 $ 96,019 $ 105,256 $ 107,887 $ 123,330 $ 57,759 $ 74,380
Net investment income.................... 48,223 47,765 51,896 49,135 53,892 26,038 30,854
Realized investment gains (losses)....... 29,891 (11,030) 13,149 5,832 10,296 (296) 4,246
Other revenue............................ 1,767 2,385 2,807 3,164 2,884 1,405 1,346
-------- -------- ---------- ---------- ---------- ---------- ----------
Total revenues......................... 164,809 135,139 173,108 166,018 190,402 84,906 110,826
-------- -------- ---------- ---------- ---------- ---------- ----------
Losses and loss adjustment expenses...... 89,202 98,899 107,889 110,593 120,496 58,550 72,952
Underwriting expenses.................... 11,739 12,777 14,743 17,553 25,415 10,971 17,319
Funds held charges....................... 16,944 3,067 5,473 8,626 11,581 5,611 6,845
Impairment of capitalized system
development
costs.................................. -- -- -- -- -- -- 12,656
-------- -------- ---------- ---------- ---------- ---------- ----------
Total expenses......................... 117,885 114,743 128,105 136,772 157,492 75,132 109,772
-------- -------- ---------- ---------- ---------- ---------- ----------
Income before income taxes and cumulative
effect of change in accounting
principle.............................. 46,924 20,396 45,003 29,246 32,910 9,774 1,054
Income tax expense (benefit)............. 15,753 5,273 11,935 10,580 2,629 1,035 (1,498)
-------- -------- ---------- ---------- ---------- ---------- ----------
Income before cumulative effect of change
in accounting principle................ 31,171 15,123 33,068 18,666 30,281 8,739 2,552
Cumulative effect of change in accounting
principle, net of tax benefit of
($7,420)............................... 13,780 -- -- -- -- -- --
-------- -------- ---------- ---------- ---------- ---------- ----------
Net income............................. $ 17,391 $ 15,123 $ 33,068 $ 18,666 $ 30,281 $ 8,739 $ 2,552
======== ======== ========== ========== ========== ========== ==========
BALANCE SHEET DATA (AT END OF PERIOD):
Total investments........................ $801,043 $788,465 $ 895,146 $ 916,330 $1,026,971 $ 959,453 $1,163,831
Total assets............................. 931,888 933,535 1,065,332 1,125,597 1,251,501 1,221,198 1,400,085
Total liabilities........................ 729,347 756,959 820,140 871,653 948,738 950,966 1,093,361
Total equity............................. 202,541 176,576 245,192 253,944 302,763 270,232 306,724
ADDITIONAL DATA:
GAAP ratios:
Loss ratio............................... 105.0% 103.0% 102.5% 102.5% 97.7% 101.4% 98.1%
Expense ratio............................ 13.8% 13.3% 14.0% 16.3% 20.6% 19.0% 23.3%
-------- -------- ---------- ---------- ---------- ---------- ----------
Combined ratio........................... 118.8% 116.3% 116.5% 118.8% 118.3% 120.4% 121.4%
======== ======== ========== ========== ========== ========== ==========
Statutory surplus........................ 147,803 156,246 184,651 208,478 242,395 227,123 248,178
Earnings per share (pro forma)(2).......... $ 1.45 $ 1.26 $ 2.76 $ 1.56 $ 2.52 $ 0.73 $ 0.21
======== ======== ========== ========== ========== ========== ==========
Book value per share (pro forma)(2)........ $ 16.88 $ 14.71 $ 20.43 $ 21.16 $ 25.23 $ 22.52 $ 25.56
======== ======== ========== ========== ========== ========== ==========
</TABLE>
- ---------------
(1) In 1993 the Exchange eliminated the practice of discounting its liabilities
for unpaid losses and loss adjustment expenses. The cumulative effect of
this change amounted to approximately $21.2 million before income taxes and
had the effect of reducing net income by approximately $13.8 million or
$1.10 per share.
(2) Gives effect in all periods to the assumed aggregate issuance of
approximately 12,000,000 shares of Common Stock to Distributees. Does not
give effect to the sale of Common Stock in the anticipated Public Offering
nor the issuance of Common Stock to the Medical Society in connection with
the acquisition of the Attorney-in-Fact.
11
<PAGE> 15
RISK FACTORS
The following risk factors, in addition to other information set forth in
this Prospectus, should be carefully considered by Members in making an
investment decision regarding the Common Stock.
POSSIBLE ADVERSE IMPACT OF LITIGATION
A group of current and previous policyholders of the Company has retained a
law firm and filed a motion for rehearing with the New Jersey Department and the
Commissioner, actions that appear designed to rescind regulatory approval of the
Plan of Reorganization. The motion challenged the authority of the New Jersey
Department to approve the actions contemplated under the Reorganization, the
fairness of the proposed allocation of Common Stock, and other key elements of
the Reorganization. The New Jersey Department has denied the motion, and the
group has filed a notice of appeal with the Appellate Division of the Superior
Court of New Jersey. The issues raised by the appeal are (i) whether the
Commissioner had the authority to approve the Plan of Reorganization in the
absence of any statute expressly permitting reciprocal insurers to engage in the
type of transaction contemplated by the Plan of Reorganization, (ii) whether
adequate notice was given to members of the Exchange regarding the
Reorganization, (iii) whether sufficient evidence was presented to the
Commissioner to support the terms of the Plan of Reorganization and (iv) whether
the New Jersey Department should have granted the request for a rehearing. The
group has also filed with the New Jersey Department a motion to stay (i) the
Commissioner's order approving the Plan of Reorganization and (ii) the denial of
the group's motion for rehearing, pending disposition of the group's appeal to
the Appellate Division of the Superior Court of New Jersey. The New Jersey
Department has denied this motion. Following the denial by the Commissioner of
the group's motion to stay the effectiveness of the order approving the Plan of
Reorganization, the group filed a motion with the Appellate Division of the
Superior Court of New Jersey to stay the order and for a remand of the
proceeding to the New Jersey Department for rehearing. This motion is currently
pending.
In addition, other persons could bring actions against the Company for a
variety of reasons, including but not limited to the relative allocation of
Common Stock among Distributees, the method by which the Company determined
which members of the Exchange would be Distributees, or the absence of any
applicable statute or published court decision expressly permitting a reciprocal
insurer to reorganize as a stock company. Final adjudication of any such case
could take a year or more and the parties could appeal any decision. Such
appeals, if made, could require a number of years to resolve. If any such action
is brought, the Company intends to vigorously defend the Reorganization.
However, no assurance can be given that a court would not enjoin the holding of
the Members' Meeting or that the Company will ultimately prevail on the merits.
Damages awarded under any such suit cannot be predicted and could have a
material adverse effect on the Company. If the Reorganization is completed, but
the authority of the New Jersey Department to approve conversion from a
reciprocal insurer to a stock company is overturned, the remedy a court might
grant is uncertain. Such remedy could have a material adverse effect on the
Company and its stockholders.
CONCENTRATION OF BUSINESS
Substantially all of the Company's direct premiums written are generated
from medical malpractice insurance policies issued to physicians, medical groups
and health care entities. As a result, negative developments in the economic,
competitive, or regulatory conditions affecting the medical malpractice
insurance industry, particularly as such developments might affect medical
malpractice insurance for physicians, could have a material adverse effect on
the Company's financial condition and results of operations.
As of June 30, 1998, approximately 67% of the Company's 1998 premiums were
written in New Jersey. The revenues and profitability of the Company are
therefore subject to prevailing regulatory, economic, competitive and other
conditions in New Jersey. See "-- Competition" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Results of
Operations."
There can be no assurance that the Company will be successful in
implementing its strategy to expand and diversify its geographic market. See
"-- Expansion into New Markets."
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<PAGE> 16
MEDICAL MALPRACTICE INSURANCE INDUSTRY FACTORS
Many factors influence the financial results of the medical malpractice
insurance industry, some of which are beyond the control of the Company and can
adversely affect the Company's results of operations. These factors include,
among other things, (i) aggressive pricing by competitors, pricing cycles and
overcapacity that result in downward pressure on rates, (ii) greater than
expected severity and frequency of claims, (iii) regulatory actions that reduce
the Company's discretion with respect to the pricing of its products, (iv)
changes in inflation and interest rates that make it difficult for the Company
to make adequate provision for loss and LAE reserves, and (v) judicial and
legislative decisions relating to insurance coverage issues and the amount of
compensation payable with respect to injuries that undermine insurers'
expectations with respect to the level of risk being assumed in a number of
ways, including expansive coverage interpretations, eliminating coverage
exclusions, multiplying limits of coverage, and creating rights for
policyholders not set forth in the insurance contract.
The availability of medical malpractice insurance, or the industry's
underwriting capacity, is determined principally by the industry's level of
capitalization, historical underwriting results, returns on investment and
perceived premium rate adequacy. Historically, the financial performance of the
medical malpractice industry has tended to fluctuate in cyclical patterns
characterized by periods of greater competition in pricing and underwriting
terms and conditions (a "soft insurance market") followed by periods of capital
shortage and lesser competition (a "hard insurance market"). In a soft insurance
market, competitive conditions could result in premium rates and underwriting
terms and conditions which may be below profitable levels. For a number of
years, the medical malpractice insurance industry in New Jersey and in many
other states has experienced a soft insurance market. There can be no assurance
as to whether or when industry conditions will improve or the extent to which
any improvement in industry conditions may improve the Company's results of
operations.
COMPETITION
The physician professional liability insurance market in the United States
is highly competitive. According to A.M. Best, in 1996 there were 357 companies
nationally that wrote medical professional liability insurance and, of those,
112 were writing in New Jersey. In New Jersey, where approximately 67% of the
Company's 1998 premiums were written as of June 30, 1998, the Company's
principal competitor is Princeton Insurance Companies. In New Jersey and other
states, the Company's principal competitors include CNA Insurance Group,
Frontier Insurance Group, Inc., PHICO Insurance Company and St. Paul Companies.
These companies rank among the top 20 medical malpractice insurers nationally
and are actively engaged in soliciting insureds in the states in which the
Company writes insurance. In addition, as the Company expands into new states,
it may face strong competition from local carriers that are closely focused on
narrow geographic markets. The Company expects to encounter such competition
from doctor-owned insurance companies and commercial companies in other states
as it carries out its expansion plans. Many of the Company's current and
potential competitors may have greater financial resources than the Company and
may seek to acquire market share by decreasing pricing for their products below
prevailing market rates, thereby reducing profitability. Several insurance
companies that have greater financial resources than the Company have started to
write medical malpractice insurance in New Jersey. There can be no assurance
that the Company will be able to compete effectively against these potential and
existing competitors.
The hospital professional liability insurance market is also extremely
competitive. Most of the Company's principal insurance company competitors for
physicians and medical groups also now actively compete in the hospital
professional liability insurance market. Moreover, the Company's primary
competitor in New Jersey was founded to provide professional liability coverage
to hospitals, while the Company traditionally served the individual physician
market. The Company also believes that the number of health care entities that
insure their affiliated physicians through self-insurance may increase, reducing
the market for physician professional liability insurance. These competitive
factors may adversely affect the Company's results of operations.
As the Company expands into new product lines and new geographic markets,
it will compete with established companies in such markets, many of which will
have existing relationships with the physicians,
13
<PAGE> 17
medical groups, hospitals, and other healthcare providers that the Company will
seek to insure. Competitors may also have existing relationships with insurance
brokers or other distribution channels. These factors may adversely affect the
Company's financial condition and results of operations. See
"Business -- Competition."
LOSS AND LAE RESERVES
The reserves for losses and LAE established by the Company are estimates of
amounts needed to pay reported and unreported claims and related LAE. The
estimates are based on assumptions related to the ultimate cost of settling such
claims based on facts and interpretation of circumstances then known,
predictions of future events, estimates of future trends in claims frequency and
severity, judicial theories of liability, legislative activity, and other
factors. Establishment of appropriate reserves is, however, an inherently
uncertain process involving estimates of future losses, and there can be no
assurance that currently established reserves will prove adequate in light of
subsequent actual experience. Clusters of cases, such as breast implant or
"Fen-Phen" cases, cannot be predicted by the Company. The inherent uncertainty
is greater for certain types of insurance, such as medical malpractice, where a
longer period may elapse before notice of a claim or a determination of
liability is made and where the judicial, political, and regulatory climates are
changing. Medical malpractice claims and expenses may be paid over a period of
10 or more years, which is longer than most property and casualty claims. Trends
in losses on "long-tail" lines of business such as medical malpractice may be
slow to emerge and, accordingly, the Company's reaction in terms of modifying
underwriting practices and changing premium rates may lag underlying loss
trends. In addition, changes in the practice of medicine and healthcare
delivery, such as the emergence of new, larger medical groups that do not have
an established claims history and additional claims resulting from restrictions
on treatment by managed care organizations, may require the Company to adjust
its underwriting and reserving practices. See "-- Changes in Health Care."
There can be no assurance that the Company's ultimate losses and LAE will
not deviate, perhaps substantially, from the estimates reflected in the
Company's financial statements. If the Company's reserves should prove
inadequate, the Company would be required to increase its loss and LAE reserves,
which would cause a corresponding reduction in earnings in the period that such
reserves are increased. This could have a material adverse effect on the
Company's results of operations and financial condition. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -- Loss
and LAE Reserves" and "Business -- Loss and LAE Reserves."
CHANGES IN HEALTH CARE
In recent years, a number of factors related to the emergence of "managed
care" have negatively impacted or threaten to impact the medical practice and
economic independence of physicians. Physicians have found it more difficult to
conduct a traditional fee-for-service practice and many have been forced to join
or affiliate with managed care organizations, health care delivery systems or
practice management organizations. This consolidation has begun to reduce the
role of the physician and the medical group in the medical malpractice insurance
purchasing decision. In addition, the consolidation could reduce primary medical
malpractice insurance premiums paid by doctors and hospitals, as larger health
care systems generally retain more risk by accepting higher deductibles and
self-insured retentions or form their own captive insurance companies.
Furthermore, larger health care systems may possess sufficient bargaining power
to negotiate discounted rates. These factors could have a material adverse
effect on the Company's profitability.
EXPANSION INTO NEW MARKETS
The Company's strategy includes expanding and diversifying its product
lines and geographic markets to meet the insurance needs of the changing health
care market, while maintaining its traditional personalized service for
physicians and medical groups, and customized products for health care
institutions. Such expansion and diversification are contingent on various
factors, including, among others, the availability of adequate capital,
marketing success, the ability to set profitable rates, and applicable
regulatory requirements. The Company's business expansion may also occur through
the acquisition of, or combination with, other medical professional liability
insurers or other entities. There can be no assurance that any such acquisition
or
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combination will be profitable for the Company. There can be no assurance that
the Company's expansion will be successful.
As the Company expands and diversifies its product lines into areas where
the Company is inexperienced, the Company will be required to retain qualified
personnel with the requisite experience in such areas. Competition for such
personnel may be intense, and there can be no assurance that the Company will be
able to attract and retain such personnel. In addition, the Company will have to
seek distribution channels for its new products. This may increase the Company's
dependence on insurance brokers and other intermediaries. There can be no
assurance that the Company will be able to develop such distribution channels or
maintain satisfactory relationships with insurance brokers and other
intermediaries.
A.M. BEST RATINGS
Ratings have become an increasingly important factor in establishing the
competitive position of insurance companies. The Company is rated "A
(Excellent)" by A.M. Best, the third highest rating of 16 ratings assigned by
A.M. Best. A.M. Best's ratings reflect its opinion of an insurance company's
financial strength, operating performance, strategic position, and ability to
meet its obligations to policyholders, and are not evaluations directed to
purchasers of an insurance company's securities. In March 1998, A.M. Best
reaffirmed the Company's "A (Excellent)" rating. The Company's rating is subject
to periodic review by A.M. Best and cannot be assured. If the Company's rating
is reduced from its current level by A.M. Best, the Company's results of
operations could be adversely affected. See "Business -- A.M. Best Ratings."
REINSURANCE
The amount and cost of reinsurance available to companies specializing in
medical professional liability insurance are subject, in large part, to
prevailing market conditions beyond the control of the Company. The Company's
ability to provide professional liability insurance at competitive premium rates
and coverage limits on a continuing basis will depend in part on its ability to
secure adequate reinsurance in amounts and at rates that are commercially
reasonable. Moreover, the Company must obtain the consents of its current
reinsurers to assign the reinsurance contracts written with the Exchange to MIIX
Insurance. There can be no assurance that the Company will be able to obtain its
reinsurers' consents or to secure adequate reinsurance, and any failure to
obtain such consents or reinsurance could have a material adverse effect on the
Company. Furthermore, the Company is subject to a credit risk with respect to
its reinsurers because reinsurance does not relieve the Company of liability to
its insureds for the risks ceded to reinsurers. A significant reinsurer's
inability to make payment under the terms of a reinsurance treaty could have a
material adverse effect on the Company. See "Business -- Reinsurance."
HOLDING COMPANY STRUCTURE; LIMITATION ON DIVIDENDS
The MIIX Group is an insurance holding company whose assets after the
Reorganization will consist primarily of all the outstanding capital stock of
the Insurance Subsidiaries, the Attorney-in-Fact, and downstream subsidiaries of
those companies. As an insurance holding company, The MIIX Group's ability to
meet its obligations and to pay dividends, if any, will largely depend on the
receipt of sufficient funds from its subsidiaries. The payment of dividends to
The MIIX Group by the Insurance Subsidiaries is subject to general limitations
imposed by applicable insurance laws. See "Business -- Regulation -- Holding
Company Regulation" and "Business -- Regulation -- Regulation of Dividends from
Insurance Subsidiaries."
ANTI-TAKEOVER PROVISIONS
The MIIX Group's certificate of incorporation and by-laws include
provisions that may be deemed to have anti-takeover effects and may delay,
defer, or prevent a takeover attempt that stockholders may consider to be in
their best interests. These provisions include: a Board of Directors consisting
of three classes with staggered terms; authorization to issue up to 50,000,000
shares of preferred stock, par value $.01 per share (the "Preferred Stock"), in
one or more series, with such rights, obligations, powers, and preferences as
The MIIX Group Board may provide; a limitation which permits only The MIIX Group
Board, the Chairman or
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Vice Chairman of The MIIX Group Board or the Chief Executive Officer (or in the
event of his or her absence or disability, any Vice President) of The MIIX
Group, to call a special meeting of stockholders; a prohibition against
stockholders acting by written consent; provisions allowing directors to be
removed only for cause and only by the affirmative vote of a majority of holders
of the outstanding shares of voting securities; provisions allowing The MIIX
Group Board to increase the size of the Board and fill vacancies and newly
created directorships; and certain advance notice procedures for nominating
candidates for election to The MIIX Group Board and for proposing business
before a meeting of stockholders. In addition, state insurance holding company
laws that will be applicable to The MIIX Group generally provide that no person
may acquire control of The MIIX Group without the prior approval of appropriate
insurance regulatory authorities. See "Management," "Description of Capital
Stock -- Delaware Law and Certain Charter and Bylaw Provisions," and
"Business -- Regulation -- Holding Company Regulation."
REGULATORY AND RELATED MATTERS
Insurance companies are subject to supervision and regulation by the state
insurance authority in each state in which they transact business. Such
supervision and regulation relate to numerous aspects of an insurance company's
business and financial condition, including limitations on lines of business,
underwriting limitations, the setting of premium rates, the establishment of
standards of solvency, statutory surplus requirements, the licensing of insurers
and agents, concentration of investments, levels of reserves, the payment of
dividends, transactions with affiliates, changes of control, and the approval of
policy forms. Such regulation is concerned primarily with the protection of
policyholders' interests rather than stockholders' interests. See
"Business -- Regulation."
State regulatory oversight and various proposals at the federal level may
in the future adversely affect the Company's results of operations. In recent
years the state insurance regulatory framework has come under increased federal
scrutiny, and certain state legislatures have considered or enacted laws that
alter and, in many cases, increase state authority to regulate insurance
companies and insurance holding company systems. Furthermore, the National
Association of Insurance Commissioners (the "NAIC") and state insurance
regulators are reexamining existing laws and regulations, which in many states
has resulted in the adoption of certain laws that specifically focus on
insurance company investments, issues relating to the solvency of insurance
companies, risk-based capital ("RBC") guidelines, interpretations of existing
laws, the development of new laws and the definition of extraordinary dividends.
See "Business -- Regulation -- Risk-Based Capital,"
"Business -- Regulation -- NAIC-IRIS Ratios," and
"Business -- Regulation -- Regulation of Investments." Changes in or the
adoption of laws or regulations regarding such issues or other matters,
including the rates charged for insurance coverage, could have a material
adverse effect on the operations of the Company. State agencies and officials
responsible for administering such laws and regulations have broad powers, which
they exercise primarily for the protection of policyholders.
STATE INSURANCE REGULATORY APPROVALS
Because New Jersey's statutory scheme does not have an explicit process for
converting a reciprocal insurance exchange into a stock company, the conversion
will be accomplished through two assumption agreements by which the Exchange
will transfer its ongoing business, assets and liabilities to MIIX Insurance.
However, insurance licenses cannot be transferred. Accordingly, it will be
necessary for MIIX Insurance to gain state regulatory approval to become an
admitted carrier in each of the eight states other than New Jersey in which the
Exchange is currently licensed. These states are Connecticut, Delaware,
Kentucky, Maryland, Michigan, Pennsylvania, Vermont and West Virginia. These
states must also approve MIIX Insurance's rates, rules and policy forms, which
the Company expects will initially be a continuation of those currently used by
the Exchange. In addition, Virginia, which is LP&C's state of domicile, and
Texas, in which LP&C has been deemed to be commercially domiciled, must approve
the change in LP&C's ultimate parent from the Exchange to The MIIX Group.
Finally, Connecticut and Delaware approvals and the consent of the reinsurers
will be required in connection with the assignment to MIIX Insurance of the
various reinsurance agreements under which the Exchange cedes risk. If these
approvals are not granted prior to the Closing Date, it may
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prevent the consummation of the Reorganization as currently contemplated and,
because MIIX Insurance will not be authorized to write new business in such
states, may have an adverse effect on the Company.
SHARES ELIGIBLE FOR FUTURE SALE
All of the shares of Common Stock issued in the Reorganization and the
anticipated Public Offering (except for the shares issued to the Medical Society
pursuant to the Plan of Reorganization, the directors and officers of the
Company and other affiliates of the Company) will be eligible for immediate sale
in the public market. No prediction can be made as to the effect, if any, that
future sales of shares, or the availability of shares for future sale, will have
on the market price of the Common Stock prevailing from time to time. Sales of
substantial amounts of such shares of Common Stock in the public market
following the consummation of the Reorganization and the anticipated Public
Offering or the perception that such sales could occur could adversely affect
the market price of the Common Stock and could impair the Company's future
ability to raise capital through an offering of its equity securities. See
"Shares Eligible for Future Sale."
LACK OF PRIOR PUBLIC MARKET FOR COMMON STOCK
Prior to the Reorganization and the anticipated Public Offering, there has
been no public market for the Common Stock and there can be no assurance that an
active trading market will develop or be sustained. The Company has applied to
list the shares of Common Stock to be issued in the Reorganization and the
anticipated Public Offering on the NYSE. There can be no assurance as to the
price at which Common Stock will trade on the NYSE. In addition, factors such as
the variations in the Company's financial results or other developments
affecting the Company could cause the market price of the Common Stock to
fluctuate significantly after the anticipated Public Offering.
Completion of the anticipated Public Offering is not a condition to the
effectiveness of the Plan of Reorganization. If the Plan of Reorganization
becomes effective, but the anticipated Public Offering does not occur, the
Company will still seek to list the shares of Common Stock distributed to
Distributees on the NYSE. However, in the absence of the anticipated Public
Offering, there can be no assurance that an active or orderly trading market for
the Common Stock will develop. The absence of an active or orderly trading
market could have an adverse effect on the market price of the Common Stock
subsequent to the Closing Date and the ability of the Company to raise
additional capital in the equity markets in the future.
FAILURE TO CONSTITUTE A TAX-FREE REORGANIZATION
PricewaterhouseCoopers LLP (the "Tax Advisor") has delivered an opinion
(the "Tax Opinion") stating that consummation of the Plan of Reorganization
shall constitute a tax-free reorganization within the meaning of Section 368(a)
of the Internal Revenue Code of 1986, as amended. The Internal Revenue Service
(the "IRS") and the courts have not previously considered the treatment of a
transaction in the form described herein. The Tax Opinion represents the Tax
Advisor's best judgment of how a court would rule. However, the opinion is not
binding upon either the IRS or any court. A ruling has not been, and will not
be, sought from the IRS with respect to the U.S. federal income tax consequences
of the consummation of the Plan of Reorganization. Accordingly, the IRS and/or a
court could reach a conclusion that differs from the conclusions in the Tax
Opinion. In that event, it is possible that the consummation of the Plan of
Reorganization would be treated as a taxable transaction, in which case the
Exchange and Members receiving Common Stock would recognize taxable gain. See
"The Reorganization -- Federal Tax Consequences."
DEPENDENCE ON KEY PERSONNEL
The Company's success since 1992 has been significantly dependent on the
contributions of Daniel Goldberg, the Company's President and Chief Executive
Officer, and the loss of his services could have a material adverse effect on
the Company's business, results of operations and financial condition. The
Company's success also depends to a significant extent on a number of other key
employees of the Company and the loss of their services could also have a
material adverse effect on the Company. In addition, the Company believes that
its future success will depend in part on its ability to attract and retain
additional highly
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skilled professional, managerial, sales, and marketing personnel. Competition
for such personnel is intense. There can be no assurance that the Company will
be successful in attracting and retaining the personnel that it requires for its
business and planned growth.
GUARANTY FUND, ASSESSMENTS AND OTHER LIABILITIES
Property and casualty insurers like the Company are subject to assessments
in most states where they are licensed for the provision of funds necessary for
the settlement of covered claims under certain policies of impaired, insolvent
or failed insurance companies. Maximum contributions required by law in any one
year vary by state, and have historically been between 1% and 2% of annual
premiums written. The Company cannot predict with certainty the amount of future
assessments but expects assessments in 1998 to be levied by Pennsylvania,
Kentucky and Maryland. In each of these three states, the amount of the
assessment under current law cannot exceed 2% of the direct premiums written by
the Company in that state. Significant assessments could have a material adverse
effect on the Company's financial condition or results of operations.
In addition to guaranty fund assessments, there is a possibility that the
Company could be required to pay some portion of the estimated $2 billion
liability of Pennsylvania's Medical Professional Liability Catastrophe (CAT)
Loss Fund. This fund provides a level of malpractice coverage above that of
primary carriers. A study is currently under way to assess the level of unfunded
liability and recommend legislative solutions. Options include a bond issue;
primary carriers assuming some of the fund's liability; major reinsurers funding
the liability; or continuing current surcharges until the liability is
eliminated. A determination that primary carriers are to share the fund's
liability could have a material adverse effect on the Company.
YEAR 2000; INFORMATION TECHNOLOGY
Because certain computer software programs have historically been designed
to use a two-digit code to identify the year for date-sensitive material, such
programs may not properly recognize post twentieth century dates. This could
result in system failures and improper information processing that could disrupt
the Company's business operations.
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 will 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 systems have been reviewed to identify those requiring
upgrading or replacement to improve current computing capabilities and to ensure
that they are Year 2000 compliant. In the course of evaluating the Year 2000
readiness of its internal systems, the Company determined that its claims
administration system is not Year 2000 compliant. The Company has purchased a
replacement system that is Year 2000 compliant and is expected to be installed
by December 1998. There can be no assurance that the replacement claims
administration system will function as represented by the vendor or that the
installation itself will not cause disruption to the Company's operations that
could have a material adverse effect on its results of operations.
The Company has not completed its review of its I/T and non I/T systems or
its investigation of whether its service providers, brokers and other external
business partners may experience Year 2000 problems that could affect the
Company. The Company expects to complete its Year 2000 compliance efforts in
1999. However, there can be no assurance that the Company will not experience
failure of its I/T or non I/T systems, which may result in business
interruption, financial loss, reputational loss or liability. There can be no
assurance that the Company's service providers, brokers and other external
business partners will not experience Year 2000 problems. Such problems may
disrupt important services upon which the Company depends, such as
telecommunications or electrical power. As the Company continues its Year 2000
compliance efforts, it may discover unforeseen problems that could require
costly remedies. Any of these
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circumstances could have a material adverse effect on the Company's operations.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Year 2000."
The Company is significantly dependent upon effective I/T systems. Any
failure in, or failure to timely update, the Company's I/T systems could have a
material adverse effect on the Company's results of operations or financial
condition. The Company is in the process of upgrading its computer systems that
relate to policy administration, billing, claims, and other aspects of the
Company's business. There can be no assurance that such upgrades will be
implemented without causing significant disruption to the Company's operations.
Any such disruptions could have a material adverse effect on the Company's
ability to conduct its operations and could increase administrative expenses.
The Company may be adversely affected if Year 2000 issues result in
additional claims being made against the Company's insureds. Such claims could
have a material adverse effect on the Company. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Year 2000."
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THE MEMBERS' MEETING
TIME, DATE AND PLACE
The Members' Meeting will be held at on ,
, 1998 at . At the Members' Meeting, Members will
consider and vote upon a proposal to approve (i) an amendment to the Rules and
Regulations of the Exchange to permit the dissolution of the Exchange (the
"Amendment") and (ii) the Plan of Reorganization.
ADOPTION DATE, QUORUM AND VOTE REQUIRED
Only persons who were Members of the Exchange on October 15, 1997, the date
on which the Board of Governors adopted the Plan of Reorganization, are entitled
to vote at the Members' Meeting. There are approximately 10,700 such Members.
Each such Member is entitled to one vote at the Members' Meeting.
The presence, either in person or by proxy, of 101 Members is necessary to
constitute a quorum at the Members' Meeting. The affirmative vote of not less
than two-thirds of the Members present in person or by proxy at the Members'
Meeting is required to approve and adopt the Amendment and the Plan of
Reorganization.
THE AMENDMENT
As part of the Plan of Reorganization, the Exchange will dissolve. At the
time of the adoption of the Plan of Reorganization, the Exchange's Rules and
Regulations did not contain any provision expressly authorizing such
dissolution. Therefore, the Board of Governors has approved an amendment to the
Rules and Regulations expressly to permit such dissolution, and the Company is
seeking the Members' approval of such amendment.
RECOMMENDATION OF THE BOARD OF GOVERNORS
The Board of Governors believes that the Plan of Reorganization is fair to,
and in the best interests of, the Exchange and its members. The Board of
Governors has unanimously adopted the Plan of Reorganization and recommends that
Members vote FOR the proposal to approve and adopt the Amendment and the Plan of
Reorganization. See "The Reorganization -- Recommendation of the Board of
Governors; Reasons for the Reorganization."
INTERESTS OF MEMBERS OF THE BOARD OF GOVERNORS IN THE REORGANIZATION
Each member of the Board of Governors is a Member who will be entitled to
vote upon the Amendment and the Reorganization and to receive Common Stock
pursuant to the Reorganization. The estimated number of shares that each member
of the Board of Governors will receive pursuant to the Reorganization is set
forth below. See "Management" and "Ownership of Common Stock."
PROXIES
All proxies that are properly executed and returned to the Company will be
voted at the Members' Meeting or any adjournments and postponements thereof in
accordance with the instructions thereon, or if no instructions are given, will
be voted for approval and adoption of the Amendment and the Plan of
Reorganization. Members are urged to mark the boxes on the proxy to indicate how
they wish to vote. A Member may revoke a proxy at any time before it is voted by
submitting a later dated proxy, by appearing in person at the Members' Meeting
and voting thereat, or by delivering a written notice to the Secretary of the
Company stating that the proxy is revoked.
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PROXY SOLICITATION
The Company will bear the cost of soliciting proxies. In addition to
solicitation by mail, proxies may be solicited by the directors, officers and
employees of the Company, who will not be specifically compensated for such
services, by personal interview, telephone or other telecommunication. In
addition, the Exchange has retained D.F. King & Co. to assist in soliciting
proxies for the Members' Meeting at a fee of approximately $7,500 plus certain
expenses.
THE REORGANIZATION
The following discussion of the Reorganization is qualified in its entirety
by reference to the Plan of Reorganization, a copy of which is attached as Annex
A hereto.
GENERAL
The Exchange is organized as a reciprocal insurer. Since the Exchange's
inception, the business of the Exchange has been managed by the
Attorney-in-Fact, which is a wholly owned subsidiary of the Medical Society. On
October 15, 1997, the Board of Governors adopted the Plan of Reorganization. The
key components of the Plan of Reorganization are set forth below.
- The Exchange has formed a new subsidiary, MIIX Insurance. MIIX Insurance
was formed to assume, if the Reorganization is consummated, all of the
Exchange's assets and liabilities (except for the Common Stock and cash
to be distributed pursuant to the Reorganization), including insurance
policies written by the Exchange. After consummation of the
Reorganization, MIIX Insurance will continue the Exchange's business of
writing insurance policies and the Exchange will be dissolved.
- The Exchange has formed a new subsidiary, The MIIX Group. The purpose of
The MIIX Group is to act as a holding company for MIIX Insurance and the
Exchange's other subsidiaries, and the Attorney-in-Fact and its
subsidiaries. The MIIX Group is the entity that will issue Common Stock
in the Reorganization and the anticipated Public Offering.
- The MIIX Group will acquire the Attorney-in-Fact from the Medical Society
for $11 million worth of Common Stock and $100,000 in cash.
- When the Exchange is dissolved, the Reorganization Shares will be
distributed to Distributees. The distribution of the Reorganization
Shares is registered under the Registration Statement of which this
Prospectus forms a part.
- The Reorganization Shares will be allocated to Distributees in the
proportion that direct premiums earned by the Exchange attributable to
each Distributee, less return premiums, over the three years prior to
October 15, 1997, bear to direct premiums earned by the Company
attributable to all Distributees, less return premiums, over the same
period. The total amount of direct premiums earned by the Exchange
attributable to all Distributees, less return premiums, over such
period, was approximately $350 million.
- If a Distributee would be allocated fewer than 100 shares of Common
Stock, or if such Distributee's address as shown on the records of the
Exchange is outside the United States or is an address to which mail
is undeliverable, such Distributee will receive cash in lieu of Common
Stock. Distributees who receive cash in lieu of Common Stock will
receive an amount of cash equal to the product of (i) the number of
shares of Common Stock which they would otherwise be entitled to
receive and (ii) the Conversion Value. If a Distributee's address as
shown on the records of the Exchange is an address to which mail is
undeliverable, the Company will hold such Distributee's cash
distribution and will endeavor to contact such Distributee using any
other information in the Company's possession. If the Company is
unable to contact such Distributee, the Company will continue to hold
the cash for the Distributee, subject to any escheat laws that may
apply.
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- To the extent that a Distributee receives cash in lieu of Common
Stock, the Common Stock otherwise distributable to such
Distributee will not be distributed to other Distributees. Thus,
fewer than 12,000,000 shares of Common Stock will be distributed
to the Distributees pursuant to the Reorganization. The Company
currently estimates that 11,900,000 shares of Common Stock will
be distributed pursuant to the Reorganization. Assuming that the
Conversion Value is equal to $18.00, approximately $1.8 million
will be distributed to Distributees in lieu of Common Stock. Cash
payments will be made from the Company's existing cash reserves.
Thus, if the Reorganization is consummated, (i) the Exchange will be
dissolved, (ii) the Distributees will receive Common Stock of The MIIX Group, or
cash, (iii) MIIX Insurance will assume the assets and liabilities of the
Exchange (except for the cash and Common Stock to be distributed pursuant to the
Reorganization), and (iv) The MIIX Group will be the holding company for MIIX
Insurance and other subsidiaries of the Exchange, and for the Attorney-in-Fact
and its subsidiaries. These steps will occur simultaneously and are described in
greater detail below.
On March 5, 1998, the Commissioner approved the Plan of Reorganization
subject to two conditions. First, the Commissioner must approve the formation of
MIIX Insurance. This approval was obtained on August 3, 1998. Second, in
accordance with the terms of the Plan of Reorganization, the Members must
approve the Plan of Reorganization by the affirmative vote of two-thirds of
those Members voting. A copy of the Commissioner's Order Approving the Plan of
Reorganization is attached as Annex B hereto.
PURPOSE
The principal purposes of the Reorganization are to enhance the Company's
strategic and financial flexibility and to provide Distributees with marketable
stock in The MIIX Group. As a reciprocal insurer, the Company can increase its
capital primarily through retained surplus. The Company believes that in the
long term this source will not be sufficient to meet its business objectives. As
a stock company, the Company will have greater access to the capital markets.
The Company believes that such access will enhance the Company's ability to
expand its existing business and to develop new business opportunities. In
addition, as a stock company the Company will have a well-recognized and
flexible organizational form that may facilitate strategic acquisitions.
TRANSFER OF ASSETS AND LIABILITIES TO MIIX INSURANCE
Pursuant to an Assumption Reinsurance and Administration Agreement to be
entered into among the Exchange, the MIIX Group and MIIX Insurance (the
"Reinsurance Assignment"), all the rights and obligations under policies written
by the Exchange, and all instruments of reinsurance ceded by the Exchange in
respect of such policies, will be transferred to MIIX Insurance in consideration
of the transfer by the Exchange to MIIX Insurance of invested assets, premium
receivables, reinsurance recoverables and other assets having a value equal to
the liabilities transferred under the Reinsurance Agreement. Following the
effectiveness of the Reinsurance Agreement, MIIX Insurance will become directly
liable under the assumed direct written policies and will service and administer
those policies. The Reinsurance Agreement's effectiveness is conditioned upon
the approval of the Commissioner and the commissioners of insurance of the
states of Connecticut and Delaware. The Commissioner's approval was obtained in
connection with the approval of the Plan of Reorganization. As promptly as
possible following the effectiveness of the Reinsurance Agreement, MIIX
Insurance will mail to each policyholder of the Exchange (and to former
policyholders with claims outstanding on the Closing Date or arising after the
Closing Date) a certificate of assumption notifying them that their policies
have been transferred to MIIX Insurance. Pursuant to an Assignment and
Assumption Agreement to be entered into among the Exchange, The MIIX Group and
MIIX Insurance (the "Asset Assignment" and, with the Reinsurance Assignment, the
"Assumption Agreements"), MIIX Insurance will assume all the non-insurance
liabilities of the Exchange, and the Exchange will transfer to MIIX Insurance
all of the non-insurance operating assets and properties used or held for use in
connection with, necessary for, or material to, the business and operations
currently conducted by the Exchange. The Common Stock and cash to be paid to
Distributees is excluded from such transfer. In consideration of the foregoing
assignments by the
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Exchange, The MIIX Group will issue Common Stock to the Exchange, which Common
Stock will be distributed to Distributees pursuant to the Reorganization. See
"The Reorganization -- General." The Asset Assignment is conditioned upon the
approval of the Commissioner, which has already been obtained in connection with
the Commissioner's approval of the Plan of Reorganization.
SHARES OF COMMON STOCK ISSUED TO DISTRIBUTEES
In connection with the Reorganization, 12,000,000 shares of Common Stock
will be available for allocation to Distributees. "Distributees" are Persons who
were Named Insureds (regardless of the person or group who paid the premiums) in
one or more Policies that were In Force on the Adoption Date and Persons who
were at any time during the three-year period prior to the Adoption Date Named
Insureds in one or more Policies. Corporate policyholders and other
policyholders who are not natural persons are not Distributees. See "Glossary of
Reorganization Terms."
Distributees will be allocated shares of Common Stock if the Plan of
Reorganization is approved by the Members at the Members' Meeting, and the other
conditions to the consummation of the Reorganization are met. See "-- Conditions
to Consummation of the Reorganization." Each Distributee will be allocated a pro
rata share of the 12,000,000 shares of Common Stock available for allocation to
Distributees, in the proportion that direct premiums earned by the Exchange
attributable to such Distributee, less return premiums, over the three years
prior to October 15, 1997, bear to direct premiums earned by the Exchange
attributable to all Distributees, less return premiums, over the same period.
The number of shares allocated will be rounded to the nearest integer, with
one-half share allocation being rounded upward. Therefore, the actual number of
shares so allocated will not precisely equal each Distributee's pro rata share
of the Exchange's earned premiums over the three years prior to October 15,
1997. The total amount of direct premium earned by the Exchange attributable to
all Distributees, less return premiums, over the three years prior to October
15, 1997 was approximately $350 million. Distributees who (i) have as their
address for mailing purposes shown on the records of the Company an address
outside the United States of America or an address to which mail is
undeliverable, or (ii) are allocated a number of shares of Common Stock fewer
than 100, will be paid cash for those shares. The gross amount of cash paid in
consideration for each such share shall equal the Conversion Value. If a
Distributee's address as shown on the records of the Exchange is an address to
which mail is undeliverable, the Company will hold such Distributee's cash
distribution and will endeavor to contact such Distributee using any other
information in the Company's possession. If the Company is unable to contact
such Distributee, the Company will continue to hold the cash for the
Distributee, subject to any escheat laws that may apply. To the extent that a
Distributee receives cash in lieu of Common Stock, the Common Stock otherwise
distributable to such Distributee will not be distributed to other Distributees.
Thus, fewer than 12,000,000 shares of Common Stock will be distributed to the
Distributees pursuant to the Reorganization. The Company currently estimates
that 11,900,000 shares of Common Stock will be distributed pursuant to the
Reorganization. Assuming that the Conversion Value is equal to $18.00,
approximately $1.8 million will be distributed to Distributees in lieu of Common
Stock. Cash payments will be made from the Company's existing cash reserves.
INTEREST OF DISTRIBUTEES IN THE MIIX GROUP
The percentage interest in The MIIX Group that Distributees will own if the
Reorganization is consummated will depend on several factors, including whether
or not the anticipated Public Offering is consummated, the price at which Common
Stock may be sold in the anticipated Public Offering, the number of shares of
Common Stock to be issued to the Medical Society in connection with the purchase
of the Attorney-in-Fact, and the number of shares to be sold to certain members
of the Company's management pursuant to the Stock Purchase and Loan Agreements
(as defined below). See "Management -- Stock Purchase and Loan Agreements."
Assuming that the anticipated Public Offering is not consummated simultaneously
with the consummation of the Reorganization, that the number of shares to be
issued in connection with the acquisition of the Attorney-in-Fact is based on a
price of $18.00 per share of Common Stock, and that 11,900,000 shares are
distributed to Distributees in connection with the Reorganization, then
Distributees will own approximately 94% of the outstanding Common Stock of The
MIIX Group immediately
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after the consummation of the Reorganization. Assuming that the anticipated
Public Offering is consummated simultaneously with the Reorganization, that
Common Stock is sold in the anticipated Public Offering at a price of $18.00 per
share, that 2,500,000 shares of Common Stock are sold in the anticipated Public
Offering, and that 11,900,000 shares are distributed to Distributees in
connection with the Reorganization, then Distributees will own approximately 79%
of the outstanding Common Stock of the MIIX Group immediately after the
consummation of the Reorganization and the anticipated Public Offering.
ACQUISITION OF THE ATTORNEY-IN-FACT
Pursuant to a Stock Purchase Agreement dated as of October 15, 1997,
between The MIIX Group and the Medical Society, as amended (the "Stock Purchase
Agreement"), on the date on which the Reorganization is consummated, The MIIX
Group will purchase all the outstanding common stock of the Attorney-in-Fact
from the Medical Society in exchange for (i) $100,000 in cash and (ii) that
number of shares of Common Stock with a value equal to $11 million based on the
price per share in the anticipated Public Offering (the "Public Offering
Price"), or if the Public Offering is not consummated, on the average trading
price (based upon the mean of the daily high and low share price) for the first
15 days of trading of the Common Stock on any nationally recognized securities
exchange. Based on an assumed Public Offering Price of $18.00 per share,
approximately 611,000 shares of Common Stock will be paid to the Medical
Society. All subsidiaries of the Attorney-in-Fact are included in the purchase.
The Common Stock received by the Medical Society pursuant to the Stock Purchase
Agreement may not be transferred by the Medical Society for a period of 10 years
following October 15, 1997 except to the Company or its affiliates at fair
market value or to another party if the Company's Board of Directors approves
such transfer.
The acquisition of the Attorney-in-Fact will be accounted for as a
purchase. As a result, the assets and liabilities of the Attorney-in-Fact will
be adjusted to reflect their fair values on the date of the consummation of the
Reorganization and any difference between the purchase price and the fair value
of the net assets will be recorded as goodwill.
CONDITIONS TO CONSUMMATION OF THE REORGANIZATION
The consummation of the Reorganization is subject to the conditions that
(i) the Company has received an opinion from a nationally-recognized investment
banking firm as to the fairness of the Plan of Reorganization; (ii) the Company
has received an opinion from its tax advisors substantially to the effect that
the transfer of the Exchange's assets to, and assumption of its liabilities by,
MIIX Insurance, and the dissolution of the Exchange, shall qualify as a tax-free
reorganization; (iii) the Members of the Exchange shall have approved the Plan
of Reorganization by the affirmative vote of two-thirds of those Members voting;
(iv) the Attorney-in-Fact shall have canceled all powers of attorney entered
into with any applicant for insurance with the Exchange; (v) all requisite
approvals of the Reinsurance Assignment shall have been obtained; (vi) the
Company shall have filed with the Commissioner certain certificates as to the
satisfaction of the conditions to the consummation of the Plan of
Reorganization; and (vii) the Commissioner shall have issued a certificate of
authority to MIIX Insurance to do business for the same lines of insurance
currently permitted of the Exchange and shall have granted MIIX Insurance any
required rate and form approvals, and the order of the Commissioner approving
the Plan of Reorganization shall have become final. The order approving the Plan
of Reorganization was issued on March 5, 1998 and became final on April 20,
1998. On August 3, 1998, the Commissioner granted a certificate of authority to
MIIX Insurance authorizing it to do business in the same lines of insurance
currently permitted of the Exchange. The Company has received the opinion of the
Tax Advisor that the Reorganization qualifies as a tax-free Reorganization. See
"-- Federal Tax Consequences." In addition, the Company has received a fairness
opinion from Salomon Smith Barney Inc. See "-- Opinion of Financial Advisor."
The consummation of the anticipated Public Offering is conditioned on the
consummation of the Reorganization. However, the consummation of the
Reorganization is not conditioned on the consummation of the anticipated Public
Offering.
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BACKGROUND OF THE REORGANIZATION
The Company has historically relied upon premium payments as its primary
source of capital. However, the Company believes that in the long term this
source will be insufficient to meet the Company's business objectives. On
January 28, 1997, representatives of the Company met with representatives of
Salomon Brothers Inc to discuss various capital raising alternatives. Such
alternatives included reorganizing as a stock insurer.
The strategic planning committees of the Board of Governors and the Board
of Directors of the Attorney-in-Fact held meetings on May 29, 1997 and May 30,
1997. At these meetings, representatives of Salomon Brothers Inc made a
presentation regarding trends in the medical malpractice insurance and health
care industries, an overview of the Company's business, and various capital
raising alternatives. At the conclusion of these presentations, the strategic
planning committees of the Board of Governors and the Board of Directors of the
Attorney-in-Fact authorized management to continue to explore the capital
raising alternatives discussed at the meeting.
On June 18, 1997, representatives of Salomon Brothers Inc met with the
strategic planning committees of the Board of Governors and the Board of
Directors of the Attorney-in-Fact to explore further the strategic alternatives
discussed on May 29, 1997 and May 30, 1997. In particular, the Salomon Brothers
Inc representatives discussed with the committees a proposed plan by which the
Exchange would reorganize as a stock insurer, acquire the Attorney-in-Fact, and
raise capital through an initial public offering. Upon the conclusion of this
meeting, Salomon Brothers Inc was asked to make a formal presentation to the
Board of Governors and the Board of Directors of the Attorney-in-Fact.
On July 30, 1997, representatives of Salomon Brothers Inc joined a special
meeting of the Board of Governors and the Board of Directors of the
Attorney-in-Fact. At this meeting, representatives of Salomon Brothers Inc
discussed various capital raising alternatives, including the key features of a
proposed plan by which the Exchange would reorganize as a stock insurer, acquire
the Attorney-in-Fact, and raise capital through an initial public offering.
After discussing the various alternatives and certain issues relating to the
reorganization of the Exchange as a stock insurer, the Board of Governors and
the Board of Directors of the Attorney-in-Fact directed their respective
managements to develop a plan for the reorganization of the Exchange as a stock
insurer.
On July 8, 1997, August 14, 1997, September 5, 1997, September 12, 1997,
September 26, 1997, and October 6, 1997, representatives of the Company met with
representatives of the New Jersey Department to discuss the proposed
reorganization. The New Jersey Department, in conjunction with its legal
counsel, determined the procedures governing the reorganization process. At
these meetings, representatives of the New Jersey Department reviewed and
discussed drafts of the Company's proposed plan of reorganization and
accompanying documents. All elements of the proposed plan were evaluated,
including but not limited to the formation of the successor company, the
purchase of the Attorney-in-Fact, the distribution of Common Stock and cash, the
dissolution of the Exchange, and reinsurance implications.
On September 17, 1997, meetings were held to update the Board of Governors
and the Board of Directors of the Attorney-in-Fact as to the status of the
proposed reorganization. Representatives of Salomon Brothers Inc made a
presentation to the Board of Governors and the Board of Directors of the
Attorney-in-Fact regarding the structure and other details of the proposed plan
of reorganization.
The terms of the acquisition of the Attorney-in-Fact were initially
proposed pursuant to a term sheet that was reviewed and commented upon by
representatives of the Company and the Medical Society during the period that
the Plan of Reorganization was being developed. In a negotiating session held on
October 6, 1997, representatives of the Company and the Medical Society
negotiated final terms of the Stock Purchase Agreement for the acquisition of
all the stock of the Attorney-in-Fact and its subsidiaries.
On October 15, 1997, a regular meeting of the Board of Governors was held.
At this meeting, Mr. Kenneth Koreyva, Vice President and Chief Financial Officer
of the Exchange, reviewed with the Board of Governors the terms and structure of
the proposed plan of reorganization. The Exchange's counsel discussed certain
legal aspects of the proposed plan of reorganization. Representatives of Salomon
Brothers
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Inc discussed the terms of the proposed plan of reorganization and delivered a
written opinion to the Board of Governors that, based upon the assumptions and
limitations set forth therein, as of October 15, 1997 (i) the consideration to
be paid to Distributees, as a group, in the Reorganization pursuant to the Plan
of Reorganization is fair, from a financial point of view, to the Distributees,
as a group in the Reorganization and (ii) the consideration to be paid for all
the outstanding common stock of the Attorney-in-Fact and its subsidiaries is
fair, from a financial point of view, to the Exchange. The Board of Governors
asked various questions during the course of these presentations. The Board of
Governors then approved the Plan and authorized management to file the Plan with
the New Jersey Department.
On October 16, 1997, the Plan of Reorganization was filed with the New
Jersey Department. On December 22, 1997, the New Jersey Department conducted a
public hearing regarding the Plan of Reorganization. On March 5, 1998, the
Commissioner approved the Plan of Reorganization, subject to certain conditions.
See "The Reorganization -- Regulatory Approvals."
RECOMMENDATION OF THE BOARD OF GOVERNORS; REASONS FOR THE REORGANIZATION
The Board of Governors has concluded that the terms of the Reorganization
are fair to, and in the best interests of, the Exchange and its members. In
reaching this conclusion the Board of Governors considered a variety of factors,
including but not limited to the following:
- The Board of Governors' belief that the Company must be able to grow
in order to maximize the Company's ability to realize continued
success and to provide a high level of service to its insureds.
- The Board of Governors' belief that such growth requires access to
capital, and that the Company must take on a corporate form in order
to gain access to capital markets.
- The Board of Governors' belief that other insurers that are
organized as stock companies possess a competitive advantage over
the Company, because stock companies (i) have access to capital
markets, (ii) operate under corporate statutes that provide greater
certainty and greater flexibility than the New Jersey statute
governing reciprocal insurers as to the types of activities in which
the Company may engage, and (iii) are better recognized and more
accepted in the business community than reciprocal insurers.
- The opinion of Salomon Brothers Inc that (i) the consideration to be
received by the Distributees, as a group, in the Reorganization
pursuant to the Plan of Reorganization is fair, from a financial
point of view, to the Distributees, as a group, and (ii) the
consideration to be paid for all the outstanding common stock of the
Attorney-in-Fact and its subsidiaries is fair, from a financial
point of view, to the Exchange.
- The expected treatment of the Reorganization as a tax-free
reorganization.
- The fact that Distributees will receive publicly traded Common Stock
in the Reorganization, in contrast to the illiquid nature of
Membership Interests.
The Board of Governors also considered certain potential risks of the
Reorganization, including but not limited to the following:
- The fact that stockholders of the Company might have interests that
are not aligned with the interests of insureds, and that such
stockholders would have ultimate control over the Company.
- The fact that as a public company, the Company would be subject to a
heightened degree of scrutiny and market pressures.
In making the determination that only Distributees would receive Common
Stock, the Board of Governors considered, in the absence of governing law in New
Jersey, expert commentary and the many analogous state laws that maintain a
"look-back" approach to the demutualization of mutual insurers in order to
reflect members' and recent former members' respective recent contributions
(measured in terms of
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premiums). Among the states that have adopted such a look-back approach, a
three-year look-back period is the most frequently used methodology.
The foregoing discussion of the information and factors considered by the
Board of Governors is not intended to be exhaustive, but the Company believes it
includes all of the material factors considered by the Board of Governors. In
making its determination, the Board of Governors did not find it practicable to
and did not quantify or otherwise assign relative weights to the specific
factors considered in reaching its determination. The Board of Governors did not
classify the various factors according to whether they were favorable,
unfavorable or neutral to its conclusions. In addition, individual members of
the Board of Governors may have given different weights to different factors.
OPINION OF FINANCIAL ADVISOR
On June 27, 1997, the Exchange retained Salomon Brothers Inc to assist it
in the investigation and possible execution of the Reorganization. In connection
with the engagement, the Exchange instructed Salomon Brothers Inc to evaluate
the fairness, from a financial point of view, (i) to the Distributees, as a
group, of the consideration to be received by the Distributees in the
Reorganization pursuant to the Plan of Reorganization and (ii) to the Exchange
of the consideration to be paid for all of the stock of the Attorney-in-Fact and
its subsidiaries.
The total amount of consideration to be received by the Distributees as a
group pursuant to the Reorganization is the value of the Company and its
subsidiaries before the consummation of the anticipated Public Offering, less
the $11.1 million dollars in cash and Common Stock that the Medical Society will
receive in connection with the acquisition of the Attorney-in-Fact. The number
of shares to be received by the Medical Society will be based on the Public
Offering Price ($11 million / Public Offering Price) or, if the Public Offering
is not consummated, based on the average trading price (based upon the mean of
the daily high and low share price) for the first fifteen days of trading of the
Common Stock on any nationally recognized securities exchange ($11 million /
average trading price).
The Exchange imposed no limitations on Salomon Brothers Inc with respect to
the investigation made, or the procedures followed, by it in rendering its
opinion. The Exchange selected Salomon Brothers Inc because of its reputation
and expertise as an internationally recognized investment banking firm. Salomon
Smith Barney Inc. (the "Financial Advisor"), successor to Salomon Brothers Inc
and Smith Barney Inc., as part of its investment banking services, is regularly
engaged in the valuation of businesses and securities in connection with stock
repurchases, mergers, acquisitions, underwritings, sales and distributions of
listed and unlisted securities, private placements and valuations for estate,
corporate and other purposes.
Salomon Brothers Inc delivered its written opinion, dated October 15, 1997,
to the Board of Governors stating that, as of the date of such opinion, and
based upon the procedures and subject to the assumptions and qualifications
described in such opinion, (i) the consideration to be received by the
Distributees, as a group, in the Reorganization pursuant to the Plan of
Reorganization is fair, from a financial point of view, to the Distributees, as
a group, and (ii) the consideration to be paid for all the outstanding common
stock of the Attorney-in-Fact and its subsidiaries is fair, from a financial
point of view, to the Exchange. The Financial Advisor has confirmed Salomon
Brothers Inc's opinion dated October 15, 1997 by delivery of a written opinion
dated the date of this Prospectus (the "Bring-Down Opinion"). In connection with
the Bring-Down Opinion, the Financial Advisor updated the analysis performed in
connection with Salomon Brothers Inc's opinion delivered on October 15, 1997 and
reviewed the assumptions on which such analysis was based and the factors
considered in connection therewith. The Exchange imposed no limitations on the
Financial Advisor with respect to the investigation made, or the procedures
followed, by it in rendering the Bring-Down Opinion.
THE FULL TEXT OF THE BRING-DOWN OPINION, WHICH SETS FORTH THE MATTERS
REVIEWED, ASSUMPTIONS MADE, FACTORS CONSIDERED, RELIANCE UPON OTHERS AND
LIMITATIONS AS TO THE REVIEW UNDERTAKEN BY IT, IS ATTACHED AS ANNEX C HERETO AND
IS INCORPORATED BY REFERENCE HEREIN. THE DISTRIBUTEES ARE
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URGED TO READ CAREFULLY THE BRING-DOWN OPINION IN ITS ENTIRETY. ANY DESCRIPTION
OF OR REFERENCE TO THE BRING-DOWN OPINION IS SUBJECT TO, AND QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO, THE FULL TEXT OF SUCH OPINION. THE BRING-DOWN OPINION
IS DIRECTED TO THE BOARD OF GOVERNORS AND DOES NOT CONSTITUTE A RECOMMENDATION
TO ANY MEMBER AS TO WHETHER SUCH MEMBER SHOULD VOTE TO APPROVE THE PLAN OF
REORGANIZATION OR A RECOMMENDATION TO THE EXCHANGE OF WHETHER TO CONDUCT THE
ANTICIPATED PUBLIC OFFERING. THE BRING-DOWN OPINION IS BASED ON CONDITIONS AS
THEY EXISTED ON THE DATE THEREOF AND THE FINANCIAL ADVISOR DOES NOT ASSUME
RESPONSIBILITY TO UPDATE OR REVISE SUCH OPINION BASED UPON CIRCUMSTANCES OR
EVENTS OCCURRING AFTER THE DATE THEREOF.
The Financial Advisor was not requested to opine as to, and its opinion
does not address, the Exchange's underlying business decision to effect the
Reorganization and/or the anticipated Public Offering. In addition, the
Financial Advisor's opinion expressly excludes any opinion as to: (i) which of
the Exchange's policyholders are to be included among the Distributees; (ii) the
fairness of the proposed consideration to be paid to any Distributee,
individually, or to any class of Distributees in connection with the
Reorganization, including any provisions of the Plan of Reorganization relating
to which Distributees receive Common Stock, the allocation of such Common Stock
among Distributees and any other provisions of the Plan of Reorganization that
distinguish among Distributees; and (iii) the anticipated Public Offering,
including the effect thereof, or of any decision not to proceed with the
anticipated Public Offering, or the Reorganization or the price at which Common
Stock may be sold in the anticipated Public Offering, if consummated, or the
fair market value of any shares of Common Stock to be issued pursuant to the
Plan of Reorganization or the price at which Common Stock issued in connection
with the Plan of Reorganization or pursuant to the anticipated Public Offering,
if consummated, will trade. The Financial Advisor noted that the Public Offering
Price, if the Reorganization and the anticipated Public Offering are
consummated, will be a function of market conditions and the recent performance
of and outlook for the Exchange at that time. Further, the Financial Advisor
noted its belief that trading in the Common Stock for a period following the
completion of a distribution of the Common Stock, including the anticipated
Public Offering, if consummated, would be characterized by a redistribution of
the Common Stock among Distributees and other investors and that the Common
Stock may trade during such periods of redistribution below the prices at which
it would trade on a fully distributed basis.
In conducting its analysis and in arriving at its opinion, the Financial
Advisor reviewed, analyzed and relied upon material bearing upon the financial
and operating condition and prospects of the Exchange and material prepared in
connection with the Reorganization. The Financial Advisor considered such
financial and other factors it deemed appropriate under the circumstances,
including, among other things, the following: (i) the historical and
then-current financial position and results of operations of the Exchange and
the Attorney-in-Fact; (ii) the business prospects of the Exchange and the
Attorney-in-Fact; (iii) the historical relationship between the Exchange and the
Attorney-in-Fact; (iv) the historical and current market for the equity
securities of certain other companies that it believed to be comparable to the
Exchange, The MIIX Group or the Attorney-in-Fact; (v) the nature and terms of
certain other transactions that it believed to be relevant; (vi) the fact that
the Exchange had advised it that growth is extremely important to remain an
effective and competitive insurer in the future; (vii) the fact that the
Exchange had advised the Financial Advisor that it is of significant strategic
importance that it have broader access to external capital to finance such
growth; (viii) the Exchange's "A (Excellent)" rating by A.M. Best and the
considerations on which such rating is based; (ix) the fact that, in its present
form as a reciprocal insurer, the Exchange has limited access to capital markets
for new capital; (x) the fact that, following the Reorganization, the Exchange
would have a capital structure potentially enabling it to access the capital
markets for new capital; and (xi) the illiquidity of Membership Interests. In
addition, the Financial Advisor took into account its assessment of general
economic, market and financial conditions and its experience in connection with
similar transactions and securities valuation generally. The nature and terms of
the transactions that the Financial Adviser believed to be relevant included the
demutualizations or conversions of the following companies: Allmerica Financial
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Corp., Amerus Life Holdings, Inc., Farm Family Holdings, Inc., Guarantee Life
Companies, Inc., Old Guard Group, Inc., SCPIE Holdings Inc. and Trigon
Healthcare, Inc.
In preparing its opinion, the Financial Advisor assumed, at the Exchange's
instruction, that: (i) the Reorganization will meet all applicable legal and
regulatory requirements and that all necessary action will have been taken to
comply with all applicable laws and requirements, including the receipt of all
required approvals by policyholders, regulators and otherwise; (ii) the
Reorganization will qualify as a tax-free reorganization within the meaning of
Section 368(a) of the Internal Revenue Code of 1986; (iii) any credit facility
entered into by the Exchange or The MIIX Group and any borrowings thereunder
will not have a material adverse impact on the Exchange's business operations or
performance or ratings by A.M. Best; (iv) the terms of the Public Offering will
not affect the legal or tax treatment of the Reorganization; and (v) the
anticipated Public Offering, which, if consummated as described herein, would
close simultaneously with the Reorganization, as a separate and distinct
transaction from the Reorganization. The Financial Advisor was advised as to
certain legal matters by counsel to the Exchange and as to certain tax matters
by the Exchange's tax advisor and, with respect to such matters, it relied upon
such counsel and tax advisor.
In connection with rendering its opinion, the Financial Advisor reviewed
and analyzed among other things, the following: (i) a draft dated October 7,
1997 of the Plan of Reorganization; (ii) drafts dated July 15, 1998 of the
Assumption Agreements; (iii) a draft dated October 8, 1997 of the Stock Purchase
Agreement; (iv) the statutory annual statements provided by the Exchange for the
years 1993 through 1997; (v) certain GAAP financial data provided by the
Exchange[, including the unaudited income statements and balance sheets of the
Exchange and the Attorney-in-Fact for the years 1992 through 1996 and the six
month period ending June 30, 1997; (vi) certain other internal information,
primarily financial in nature, including projections, concerning the business
and operations of the Exchange and the Attorney-in-Fact furnished to it by the
Exchange for purposes of its analysis; (vii) certain publicly available
information with respect to certain other companies that it believed to be
comparable to the Exchange and the trading markets for certain of such other
companies' securities; and (viii) certain publicly available information
concerning the nature and terms of certain other transactions that it considered
relevant to its inquiry. In addition, the Financial Advisor considered such
other information, financial studies, analyses, investigations and financial,
economic and market criteria that it deemed relevant and it discussed the
foregoing, as well as other matters it believed relevant to its inquiry, with
the management of the Exchange and the Attorney-in-Fact. The Financial Advisor
compared publicly available financial information and market data of comparable
companies of the Exchange (including FPIC Insurance Group, Inc., Medical
Assurance, Inc., MMI Companies, Inc., Professionals Group Inc. and SCPIE
Holdings Inc.) with certain financial data of the Exchange not for the purposes
of comparative valuation but primarily to determine that The MIIX Group would
have an appropriate capital structure and the requisite financial performance
and size to be viable as a publicly traded company upon the consummation of the
Reorganization.
In its review and analysis and in arriving at its opinion, the Financial
Advisor assumed and relied upon the accuracy and completeness of all of the
financial and other information that was provided to it or was publicly
available and did not attempt to independently verify the same and further
relied upon the assurances of management of the Exchange that they were not
aware of any facts that would make such information inaccurate or misleading.
The Financial Advisor, upon the advice and consent of management of the
Exchange, assumed that projections provided by the Exchange were reasonably
prepared on bases reflecting the best currently available estimates and
judgments of the management of the Exchange as to the future financial
performance of the Exchange and the Attorney-in-Fact, and noted that it
expressed no opinion with respect to such projections or the assumptions on
which they were based. In addition, the Financial Advisor did not make or obtain
any evaluations or appraisals of the properties and facilities of the Exchange
or the Attorney-in-Fact nor did it make a physical inspection of such properties
and facilities. Further, the Financial Advisor assumed that the Plan of
Reorganization, Assumption Agreements and the Stock Purchase Agreement will not,
when executed, contain any terms or conditions that differ materially from the
terms and conditions contained in the drafts of such documents it reviewed, the
conditions precedent to the Reorganization contained in the Plan of
Reorganization and to the purchase of all of the stock of the Attorney-in-Fact
and its subsidiaries contained in the Stock Purchase Agreement will be
satisfied, without any waiver thereof,
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and the Reorganization and the acquisition of the Attorney-in-Fact will be
consummated in accordance with the terms of the Plan of Reorganization and the
Stock Purchase Agreement.
The preparation of financial analyses and fairness opinions is a complex
process involving subjective judgments and is not necessarily susceptible to
partial analysis or summary description. The Financial Advisor made no attempt
to assign specific weights to the relevance of the factors considered.
Accordingly, the Financial Advisor believes that the summary set forth above
must be considered as a whole, and that selecting certain of the factors
considered by the Financial Advisor, without considering all of such factors,
could create a misleading or incomplete view of the processes underlying the
analysis conducted by the Financial Advisor and its opinion.
The Exchange retained Salomon Brothers Inc and the Financial Advisor
pursuant to an engagement letter dated June 27, 1997. The Exchange paid Salomon
Brothers Inc an aggregate fee of $400,000 pursuant to such engagement letter.
The Exchange also agreed to reimburse Salomon Brothers Inc and the Financial
Advisor for all reasonable out-of-pocket expenses, including fees and expenses
of counsel, in connection with rendering such services as contemplated in the
engagement letter, and to retain the Financial Advisor to act as a lead
underwriter in connection with the anticipated Public Offering, if conducted,
for which the Financial Advisor will receive customary fees. The foregoing fees
and expenses were payable whether or not Salomon Brothers Inc or the Financial
Advisor gave the Exchange a favorable fairness opinion. The Company has agreed
to indemnify the Financial Advisor and its affiliated entities, directors,
officers, employees, legal counsel, agents and controlling persons against
certain costs, expenses and liabilities to which they may become subject arising
out of or in connection with their engagement. In addition, the Financial
Advisor or its affiliates have previously rendered certain investment banking
and financial advisory services to the Company, for which it or such affiliates
have received, or will receive, customary compensation. The Financial Advisor
and its affiliates (including Travelers Group Inc.) may have other business
relationships with the Company, the Medical Society and the Attorney-in-Fact.
REGULATORY APPROVALS
Consummation of the Reorganization requires the approval of the
Commissioner. This approval was granted on March 5, 1998, subject to two
conditions. First, the Commissioner must approve the formation of MIIX
Insurance. This approval was obtained on August 3, 1998. Second, the
Reorganization must be approved by the affirmative vote of at least two-thirds
of those Members voting in person or by proxy. An appeal has been filed that
challenges the validity of the Commissioner's approval of the Reorganization.
See "Risk Factors -- Possible Adverse Impact of Litigation."
Pursuant to the Plan of Reorganization, MIIX Insurance is to assume all the
assets of the Exchange except for the Common Stock and cash to be distributed in
the Reorganization. However, insurance licenses cannot be transferred.
Accordingly, MIIX Insurance must obtain regulatory approval to become an
admitted carrier in each of the eight states other than New Jersey in which the
Exchange is currently licensed. These states are Connecticut, Delaware,
Kentucky, Maryland, Michigan, Pennsylvania, Vermont and West Virginia. These
states must also approve MIIX Insurance's rates, rules and policy forms, which
the Company expects will initially be a continuation of those currently used by
the Exchange. In addition, Virginia, which is LP&C's state of domicile, and
Texas, in which LP&C has been deemed to be commercially domiciled, must approve
the change in LP&C's ultimate parent from the Exchange to The MIIX Group.
Finally, Connecticut and Delaware approvals and the consent of the reinsurers
will be required in connection with the assignment to MIIX Insurance of the
various reinsurance agreements under which the Exchange cedes risk.
FEDERAL TAX CONSEQUENCES
The following is a description of the principal United States federal
income tax consequences to the Company and to Members receiving Common Stock or
cash in the Reorganization. This discussion is based on the advice of
PricewaterhouseCoopers LLP (the "Tax Advisor"). The description is based on the
Internal Revenue Code of 1986, as amended (the "Code"), its legislative history,
existing and proposed regulations thereunder, judicial decisions and published
rulings and other administrative interpretations issued by the IRS,
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as currently in effect, all of which are subject to change at any time, possibly
with retroactive effect. This discussion does not address all aspects of federal
taxation that may be relevant to particular Members. Thus, for example, the
discussion is addressed only to a Member who is a citizen or resident of the
United States who is subject to United States federal income tax on a net income
basis in respect of the Reorganization, and the discussion may not be applicable
to Members who, for United States federal income tax purposes, are subject to
special rules, such as persons whose functional currency is not the U.S. dollar
or persons who do not hold their Membership Interests as capital assets.
Further, the discussion that follows, and the advice upon which it is based, are
not binding on the IRS or any court. See "Risk Factors -- Failure to Constitute
a Tax-Free Reorganization."
This discussion does not address any federal estate tax or any state, local
or foreign tax considerations arising in connection with the Reorganization.
Each Member should consult his or her tax advisor to determine the federal,
state, local and any applicable foreign tax consequences of the Reorganization,
in their particular circumstances, including the effects of any changes in tax
laws or regulations after the date of this Prospectus.
Subject to the foregoing, and assuming that the Reorganization takes place
as described in the Plan of Reorganization and this Prospectus, and based on
certain representations made by the Exchange, it is the opinion of the Tax
Advisor that the federal tax consequences to the Company and to Members shall be
as follows:
Reorganization Treatment -- Consequences to the Company. The transfer of
the assets of the Exchange to, and the assumption of the Exchange's liabilities
by, MIIX Insurance, followed by the dissolution of the Exchange shall constitute
a reorganization within the meaning of Section 368(a) of the Code. Accordingly,
neither the Exchange, MIIX Insurance nor The MIIX Group will realize any taxable
income as a result of the consummation of the Plan of Reorganization.
Consequences to Members -- In General. The distribution of Common Stock
and cash to Members in connection with the Reorganization shall be treated as
made in exchange for their existing Membership Interests, which shall be treated
as stock for purposes of Section 368(a) of the Code.
Consequences to Members Receiving Solely Common Stock. Members who receive
solely Common Stock in the Reorganization shall not recognize any gain or loss
for federal income tax purposes on the receipt of such Common Stock. The tax
basis of the Common Stock received shall be equal to the tax basis of the
Membership Interest surrendered, which is deemed to be zero. The holding period
of the Common Stock received by a Member shall include the period that the
Member held his or her Membership Interest in the Exchange.
Consequences to Members Receiving Solely Cash. A Member who receives
solely cash shall be treated as having received such cash as a distribution in
exchange for his or her Membership Interest. Members are deemed to have a tax
basis of zero in their Membership Interests and they shall recognize a capital
gain equal to the amount of the cash received. The treatment of such capital
gain (long-term or short-term) will depend upon the period that the Member held
his or her Membership Interest in the Exchange. Under recently enacted
legislation, long-term capital gain recognized by an individual generally is
subject to a maximum rate of 20% in respect of property held for more than one
year.
POSSIBLE ALTERNATIVE TREATMENT OF THE REORGANIZATION.
The IRS and the courts have not previously considered the treatment of a
transaction in the form described herein. The Tax Opinion represents the Tax
Advisor's best judgment of how a court would rule. However, the opinion is not
binding upon either the IRS or any court. A ruling has not been, and will not
be, sought from the IRS with respect to the United States federal income tax
consequences of the consummation of the Plan of Reorganization. Accordingly, the
IRS and/or a court could reach a conclusion that differs from the conclusions in
the Tax Opinion.
If the consummation of the Plan of Reorganization were not treated as a
tax-free reorganization within the meaning of Section 368(a) of the Code, then a
Member exchanging a Membership Interest for Common
31
<PAGE> 35
Stock would recognize taxable gain on such exchange in an amount equal to the
fair market value of the Common Stock received by the Member less its tax basis
in the exchanged Membership Interest (which, as discussed above, would be zero).
The tax basis of the Common Stock received pursuant to the Plan of
Reorganization would generally be equal to the fair market value of that stock
on the date of consummation of the Plan, and the holding period of the exchanged
Membership Interest would not be included in the holding period of the Common
Stock received. In addition, if the consummation of the Plan of Reorganization
were not treated as a tax-free reorganization, the Exchange would recognize
taxable gain on the transfer of its assets to MIIX Insurance in an amount equal
to the fair market value of the consideration received by the Exchange in
exchange for the assets less the Exchange's aggregate tax basis in those assets.
DIVIDEND POLICY
The Company currently intends to pay regular quarterly cash dividends. The
Company initially expects to pay a quarterly cash dividend of $.05 per share
commencing with the first quarter of 1999. The declaration and payment of
dividends to holders of Common Stock will be at the discretion of The MIIX Group
Board and will be dependent upon the Company's financial condition, results of
operations, cash requirements, future prospects, regulatory restrictions on the
payment of dividends to the Company by the Insurance Subsidiaries and other
factors deemed relevant by The MIIX Group Board. There can be no assurance that
the Company will declare and pay any dividends. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."
The MIIX Group is an insurance holding company whose business is conducted
through the Insurance Subsidiaries, the Attorney-in-Fact, and downstream
subsidiaries of those companies. The MIIX Group's ability to pay dividends to
its stockholders and meet its other obligations, including operating expenses
and any debt service, will depend primarily on the receipt of sufficient funds
from the Insurance Subsidiaries. The payment of dividends by the Insurance
Subsidiaries to The MIIX Group will be restricted by applicable insurance law.
See "Risk Factors -- Holding Company Structure; Limitation on Dividends,"
"Business -- Regulation -- Regulation of Dividends from Insurance Subsidiaries,"
and "Description of Capital Stock."
32
<PAGE> 36
CAPITALIZATION
The information set forth in the table presented below is derived from the
consolidated financial statements and the related notes thereto included
elsewhere in this Prospectus. The table presents the capitalization at June 30,
1998 of: (i) the Exchange and its subsidiaries, (ii) The MIIX Group, As
Adjusted, to reflect the Reorganization (after deducting estimated
reorganization costs) and (iii) The MIIX Group, As Further Adjusted, to reflect
the sale of 2,500,000 shares of Common Stock in the anticipated Public Offering
at an assumed Public Offering Price of $18.00 per share after deducting
estimated underwriting discounts and expenses of the anticipated Public
Offering. See "The Reorganization." The table should be read in conjunction with
the historical financial statements and the related notes thereto appearing
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AT JUNE 30, 1998
-----------------------------------
AS FURTHER
ACTUAL AS ADJUSTED ADJUSTED
-------- ----------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Total debt.................................................. $ -- $ 21,972 $ 21,972
-------- -------- --------
Equity:
Preferred stock, $.01 par value, 50,000,000 shares
authorized, no shares issued and outstanding........... -- -- --
Common stock, $.01 par value, 100,000,000 shares
authorized, no shares issued and outstanding;
approximately 12,640,000 shares issued and outstanding,
as adjusted; approximately 15,140,000 shares issued and
outstanding, as further adjusted....................... -- 126 151
Additional paid-in capital(1)............................. -- 13,334 54,259
Surplus/retained earnings................................. 277,700 274,280 274,280
Unrealized appreciation of invested assets, net of
deferred taxes......................................... 29,024 29,024 29,024
-------- -------- --------
Total equity.............................................. 306,724 316,764 357,714
======== ======== ========
Total capitalization...................................... $306,724 $338,736 $379,686
======== ======== ========
</TABLE>
- ---------------
(1) Additional paid-in capital in the As Adjusted column gives effect to the
assumed aggregate issuance of shares of Common Stock to (i) Distributees and
(ii) the Medical Society in connection with the purchase of the
Attorney-in-Fact and is reduced by $1.5 million to reflect the estimated
expenses related to transactions which would be charged to operations at
consummation of the Reorganization if the anticipated Public Offering does
not occur. Cash issued to Distributees in lieu of Common Stock will be
accounted for as a dividend and accordingly will serve to reduce equity by
approximately $1.8 million. The As Further Adjusted column reflects the sale
of the shares of Common Stock in the anticipated Public Offering less the
estimated underwriting discounts of the anticipated Public Offering of $3.2
million and additional estimated expenses of $0.9 million.
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<PAGE> 37
SELECTED FINANCIAL AND OPERATING DATA
The following table sets forth selected consolidated financial and
operating data for the Exchange. The selected income statement data set forth
below for each of the years in the three year period ended December 31, 1997 and
the selected balance sheet data as of December 31, 1997 and 1996 are derived
from the consolidated financial statements of the Exchange audited by Ernst &
Young LLP, independent auditors, included elsewhere herein and should be read in
conjunction with, and are qualified by reference to, such statements and the
related notes thereto. The selected income statement data for the years ended
1993 and 1994 and for the six months ended June 30, 1997 and 1998, and the
selected balance sheet data as of December 31, 1993, 1994 and 1995 and as of
June 30, 1997 and 1998, are derived from unaudited consolidated financial
statements of the Exchange which management believes incorporate all of the
adjustments necessary for the fair presentation of the financial condition and
results of operations for such periods. All selected financial data are
presented in accordance with GAAP, except for the item entitled "statutory
surplus" which is presented in accordance with SAP. The statutory surplus
amounts are derived from the audited statutory financial statements of the
Exchange (except with respect to the information provided for the six months
ended June 30, 1997 and 1998, which is derived from unaudited statutory
financial statements) and, in the opinion of management, fairly reflect the
specified data for the periods presented.
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
FOR THE YEAR ENDED DECEMBER 31, ENDED JUNE 30,
---------------------------------------------------------- -----------------------
1993(1) 1994 1995 1996 1997 1997 1998
-------- -------- ---------- ---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Direct premiums written.................. $115,999 $127,647 $ 137,291 $ 143,218 $ 162,430 $ 134,803 $ 158,650
-------- -------- ---------- ---------- ---------- ---------- ----------
Net premiums earned...................... 84,928 96,019 105,256 107,887 123,330 57,759 74,380
Net investment income.................... 48,223 47,765 51,896 49,135 53,892 26,038 30,854
Realized investment gains (losses)....... 29,891 (11,030) 13,149 5,832 10,296 (296) 4,246
Other revenue............................ 1,767 2,385 2,807 3,164 2,884 1,405 1,346
-------- -------- ---------- ---------- ---------- ---------- ----------
Total revenues......................... 164,809 135,139 173,108 166,018 190,402 84,906 110,826
-------- -------- ---------- ---------- ---------- ---------- ----------
Losses and loss adjustment expenses...... 89,202 98,899 107,889 110,593 120,496 58,550 72,952
Underwriting expenses.................... 11,739 12,777 14,743 17,553 25,415 10,971 17,319
Funds held charges....................... 16,944 3,067 5,473 8,626 11,581 5,611 6,845
Impairment of capitalized system
development costs...................... -- -- -- -- -- -- 12,656
-------- -------- ---------- ---------- ---------- ---------- ----------
Total expenses......................... 117,885 114,743 128,105 136,772 157,492 75,132 109,772
-------- -------- ---------- ---------- ---------- ---------- ----------
Income before income taxes and cumulative
effect of change in accounting
principle.............................. 46,924 20,396 45,003 29,246 32,910 9,774 1,054
Income tax expense (benefit)............. 15,753 5,273 11,935 10,580 2,629 1,035 (1,498)
-------- -------- ---------- ---------- ---------- ---------- ----------
Income before cumulative effect of change
in accounting principle................ 31,171 15,123 33,068 18,666 30,281 8,739 2,552
Cumulative effect of change in accounting
principle, net of tax benefit of
($7,420)............................... 13,780 -- -- -- -- -- --
-------- -------- ---------- ---------- ---------- ---------- ----------
Net income............................. 17,391 15,123 33,068 18,666 30,281 8,739 2,552
======== ======== ========== ========== ========== ========== ==========
BALANCE SHEET DATA (AT END OF PERIOD):
Total investments........................ $801,043 $788,465 $ 895,146 $ 916,330 $1,026,971 $ 959,453 $1,163,831
Total assets............................. 931,888 933,535 1,065,332 1,125,597 1,251,501 1,221,198 1,400,085
Total liabilities........................ 729,347 756,959 820,140 871,653 948,738 950,966 1,093,361
Total equity............................. 202,541 176,576 245,192 253,944 302,763 270,232 306,724
ADDITIONAL DATA:
GAAP ratios:
Loss ratio............................. 105.0% 103.0% 102.5% 102.5% 97.7% 101.4% 98.1%
Expense ratio.......................... 13.8% 13.3% 14.0% 16.3% 20.6% 19.0% 23.3%
-------- -------- ---------- ---------- ---------- ---------- ----------
Combined ratio......................... 118.8% 116.3% 116.5% 118.8% 118.3% 120.4% 121.4%
======== ======== ========== ========== ========== ========== ==========
Statutory surplus........................ 147,803 156,246 184,651 208,478 242,395 227,123 248,178
Earnings per share (pro forma)(2)........ $ 1.45 $ 1.26 $ 2.76 $ 1.56 $ 2.52 $ 0.73 $ 0.21
======== ======== ========== ========== ========== ========== ==========
Book value per share (pro forma)(2)...... $ 16.88 $ 14.71 $ 20.43 $ 21.16 $ 25.23 $ 22.52 $ 25.56
======== ======== ========== ========== ========== ========== ==========
</TABLE>
- ---------------
(1) In 1993 the Exchange eliminated the practice of discounting its liabilities
for unpaid losses and low adjustment expenses. The cumulative effect of this
change amounted to approximately $21.2 million before income taxes and had
the effect of reducing net income by approximately $13.8 million or $1.10
per share.
(2) Gives effect in all periods to the assumed aggregate issuance of
approximately 12,000,000 shares of Common Stock to Distributees. Does not
give effect to the sale of Common Stock in the anticipated Public Offering
nor to the issuance of Common Stock to the Medical Society in connection
with the acquisition of the Attorney-in-Fact.
34
<PAGE> 38
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the financial
statements and the related notes thereto appearing elsewhere in this Prospectus.
GENERAL
The Exchange was organized as a New Jersey reciprocal insurance exchange by
the Medical Society to provide physicians with an alternative to commercial
medical professional liability insurance and was approved to begin issuing
policies in 1977. A reciprocal exchange under the law of New Jersey is an
organization through which individuals, partnerships, trustees or corporations
designated as "subscribers" or "members" are authorized to insure each other.
Such insurance contracts are executed by an attorney-in-fact acting on behalf of
the subscribers through a power of attorney. Each member of the Exchange has
granted such power of attorney to the Attorney-in-Fact. The Attorney-in-Fact
manages the Exchange, including the underwriting and issuance of insurance
policies, the collection and investment of premiums, and the service and
administration of the policyholders and their claims. The Attorney-in-Fact is a
corporation that is wholly owned by the Medical Society and was formed for the
sole purpose of acting as the attorney-in-fact of the Exchange, which it does
pursuant to a management contract that requires the Exchange to reimburse the
costs of the Attorney-in-Fact. The Exchange has been operated to generate
profits. Such profits are part of the Exchange's surplus account, and the
application of such profits is in the Exchange's discretion.
The historical financial statements and financial information included
throughout this Prospectus reflect the consolidated financial information of the
Exchange and its wholly-owned subsidiaries. Refer to page 9 for an
organizational chart of the Company before and after the Reorganization.
The medical malpractice insurance industry is cyclical in nature. Many
factors influence the financial results of the medical malpractice insurance
industry, several of which are beyond the control of the Company. These factors
include, among other things, changes in severity and frequency of claims;
changes in applicable law; regulatory reform; and changes in inflation, interest
rates and general economic conditions.
The availability of medical malpractice insurance, or the industry's
underwriting capacity, is determined principally by the industry's level of
capitalization, historical underwriting results, returns on investment and
perceived premium rate adequacy.
Management periodically reviews the Company's guidelines for premiums,
premium surcharges, discounts, cancellations and non-renewals and other related
matters. As part of this review, rates and rating classifications for its
physicians, medical groups and other insureds are evaluated based on current and
historical loss, LAE and other actuarially significant data. This process may
result in changes in rates for certain exposure classes.
Currently, the majority of the Company's policies have January 1 effective
dates. Premium is recognized as written in the quarter the policy is effective,
yet the premiums are earned ratably throughout the year. As the Company expands
geographically, new policies are being written with effective dates other than
January 1.
Reinsurance. The Company reinsures its risks primarily under two
reinsurance contracts, a specific excess of loss treaty ("Specific Contract")
and an aggregate excess of loss treaty ("Aggregate Contract"). Under the
Specific Contract, the Company's retentions for casualty business range from $2
million to $3 million per loss per policy. Coverage on casualty business is
provided in layers up to $48 million per loss per policy above the retentions.
Coverage for casualty business under the Specific Contract is limited by an
aggregate deductible, aggregate limits by layer, and required Company
participation in upper layer losses. Property coverage is also provided under
the Specific Contract in the amount of $14.5 million in excess of a Company
retention of $500,000 per loss per policy and is subject to an aggregate limit.
The Company has maintained specific excess of loss reinsurance coverage
generally similar to that just described for several years.
35
<PAGE> 39
The Aggregate Contract provides 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 $130 million. The Company has
maintained aggregate excess of loss coverage substantially similar to that just
described since 1993. In addition, in 1992 the Company entered into an aggregate
excess of loss reinsurance contract to protect underwriting and operating
results from adverse development for losses and ALAE which occurred on or before
December 31, 1992.
The Company's aggregate reinsurance contracts are maintained on a funds
withheld basis whereby the Company holds the ceded premiums in a funds withheld
account for purposes of paying losses and related loss adjustment expenses.
Interest charges are credited on funds withheld at predetermined contractual
rates. Reinsurance recoverable on unpaid losses is recorded on the balance sheet
net of the funds withheld under such reinsurance contracts.
Loss and LAE Reserves. Medical malpractice and other property and casualty
loss and LAE reserves are established based on known facts and interpretation of
circumstances, including the Company's experience with similar cases and
historical trends involving claim payment patterns, loss payments, pending
levels of unpaid claims, as well as court decisions and economic conditions. The
effects of inflation are considered in the reserving process. Establishment of
appropriate reserves is an inherently uncertain process, and there can be no
assurance that currently established reserves will prove adequate in light of
subsequent actual experience.
Underwriting Expenses. The Company's continued expansion into other states
and markets will most likely increase underwriting expenses. The Company
believes that its plan of expansion via broker distribution channels will
increase its marketing expenses, but it also believes that this relationship
will reduce the need to make other significant expenditures in order to expand
into other states. Commissions for policies sold on a brokerage basis typically
range from 2.0% to 12.5% of premiums, whereas the Company does not incur
commissions on products it sells directly. To the extent that brokered business
represents an increased percentage of the Company's business in the future,
expense ratios will increase.
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 1997
Direct premiums written. Direct premiums written by the Exchange and its
subsidiaries were $158.7 million for the six months ended June 30, 1998, a 17.7%
increase over the $134.8 million for the six months ended June 30, 1997. Near
the end of 1997, PIE Mutual Insurance Company ("PIE Mutual"), an insurer in
Ohio, Michigan and Kentucky, ceased writing insurance policies. The Company's
entrance into states such as Ohio, Michigan and Kentucky during 1998 afforded it
the ability to write approximately $14.5 million of premiums which can largely
be attributed to former PIE Mutual business. During the second quarter of 1997,
the Company began doing business in Texas and wrote approximately $4.7 million
of premiums. For the six months ended June 30, 1998 the Company increased its
writing in Texas by $1.5 million bringing its total to $6.2 million. In other
states where the Company had written business in the second quarter of 1997,
mainly Pennsylvania and Maryland, premiums grew by $12.2 million. This new or
increased business more than offset a $6.1 million decrease in New Jersey
written premium for the six months ended June 30, 1998 as compared to the six
months ended June 30, 1997. Approximately $4.5 million of this decrease in New
Jersey business is related to policies that normally would have renewed January
1, 1998, but which were accelerated to November, 1997, as part of the Company's
competitive strategy. This change has resulted in less concentration of premium
renewals, which substantially exposed the Company's book of business to market
competition in one time period. Additional written premium was recognized in
1997, which would have otherwise been recognized in 1998 but for this change.
The acceleration of premiums written had no impact on earned premium recognized
in 1997 or 1998. The Company's geographic expansion is continuing to reduce the
concentration of business in New Jersey which currently comprises 67% of written
premiums as compared to approximately 73% in 1997 and 89% in 1996.
36
<PAGE> 40
Net premiums earned. Net premiums earned increased approximately $16.6
million, or 28.8% to $74.4 million, for the six months ended June 30, 1998 from
$57.8 million for the same period in 1997. This increase is generally consistent
with the increase in premiums written.
Net investment income. Net investment income of the Exchange and its
subsidiaries increased approximately $4.8 million or 18.5% to $30.9 million for
the six months ended June 30, 1998 from $26.0 million for the same period in
1997. Average invested assets increased to approximately $1.1 billion during the
six months ended June 30, 1998 compared to approximately $937 million for the
same period last year. The average annualized pre-tax yield on the investment
portfolio increased to 5.73% for the six months ended June 30, 1998 from 5.55%
for the same period in 1997, primarily as a 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.
Realized investment gains (losses). Net realized investment gains (losses)
increased approximately $4.5 million to $4.2 million for the six months ended
June 30, 1998 compared to a realized loss of $0.3 million for the same period in
1997. Approximately $3.3 million of the current year gains resulted from the
sale of bonds in a generally falling interest rate environment and the remainder
resulted from the sale of stocks.
Other revenue. Other revenue decreased approximately $0.1 million or 4.2%
to $1.3 million for the six months ended June 30, 1998 from $1.4 million for the
same period last year and is composed primarily of finance charge income
associated with the Company's financing of policyholder premiums, which declined
slightly due to management's decision to discontinue this program in the second
quarter of 1998.
Losses and loss adjustment expenses (LAE). The provision for losses and
LAE increased $14.4 million or 24.6% to $73.0 million for the six months ended
June 30, 1998 from $58.6 million for the same period in 1997. As a percentage of
earned premiums, incurred losses and LAE decreased to 98.1% for the six months
ended June 30, 1998 from 101.4% for the same period in 1997. This continued
improvement is principally attributable to an increasing portion of the
Company's business being written on a claims made basis which resulted from the
Company's geographic expansion. The provision for losses and LAE for the six
months ended June 30, 1998 and 1997 included no provision relating to prior
years due primarily to the operation of ceded aggregate excess reinsurance
contracts in place since 1992. The aggregate excess reinsurance contracts
provide coverage for losses and allocated loss adjustment expenses above
aggregate Company retentions. The aggregate excess reinsurance contracts,
therefore, have the effect of holding net incurred losses and allocated loss
adjustment expenses at a constant level as long as losses and allocated loss
adjustment expenses remain within the coverage limits, which occurred for the
six months ended June 30, 1998 and 1997. In addition, direct loss and loss
adjustment expenses incurred related to prior years, gross of reinsurance, did
not change for the six months ended June 30, 1998 and 1997. While certain
individual cases were settled during the six months ended 1998 and 1997 at
values more or less than specific case reserve amounts established in prior
years, there were no overall indications that prior established financial
reserves, including the significant portion of reserves for incurred but not
reported claims, should be adjusted. Medical malpractice business, particularly
occurrence or occurrence-like coverage, has a very long development period.
Cases may take years to be reported, and as a rule, take several years to
adjust, settle or litigate. The provision for losses and LAE is net of $39.0
million and $28.4 million for the six months ended June 30, 1998 and 1997,
respectively, of incurred losses and LAE ceded to reinsurers, primarily on a
funds withheld basis.
Underwriting expenses. Underwriting expenses increased $6.3 million or
57.9% to $17.3 million for the six months ended June 30, 1998, from $11.0
million for the six months ended June 30, 1997. The expense ratio was 23.3% for
the six months ended June 30, 1998 compared to 19.0% for the same period in
1997. Approximately $2.3 million of this increase was attributable to the cost
of acquiring new business, (primarily through a broker distribution network),
and an additional $2.3 million related to the expansion of both facilities and
staff necessary to service this business. Also in the second quarter 1998, the
Company recognized approximately $1 million in connection with guaranty fund
assessments associated with insurance company insolvencies, primarily in
Pennsylvania and Ohio.
Funds held charges. Funds held charges increased $1.2 million or 22.0% to
$6.8 million for the six months ended June 30, 1998 from $5.6 million for the
six months ended June 30, 1997 and relate primarily to
37
<PAGE> 41
the interest credited on amounts held under certain ceded aggregate excess
reinsurance contracts. This increase is the result of the net effect of the
increase in interest expense accrued on funds held under those reinsurance
contracts, consistent with the increase in the related funds held balances,
reduced by increases in offsetting profit sharing accruals on two of these
reinsurance contracts. Profit sharing was accrued on the 1993 aggregate
reinsurance contract in the amount of $1.1 million for the six months ended June
30, 1998. No profit sharing was accrued on the 1993 aggregate contract during
the six months ended June 30, 1997. In addition, profit sharing accrued on the
1992 aggregate excess contract increased to $10.4 million for the six months
ended June 30, 1998 from $10.3 million for the six months ended June 30, 1997.
Profit sharing is provided for under the aggregate excess reinsurance contracts
and is recorded by the Company after the funds held balance related to an
aggregate excess reinsurance contract exceeds the related ceded reserves. There
was no net effect on income arising from accrual of profit sharing and the
recording of funds held charges on the 1993 aggregate excess reinsurance
contract for the six months ended June 30, 1998 and on the 1992 aggregate excess
reinsurance contract for the six months ended June 30, 1998 and 1997.
Impairment of capitalized system developments costs. Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed of" ("SFAS No. 121")
requires recognition of impairment losses for long-lived assets whenever events
or changes in circumstances result in the carrying amount of an asset to exceed
the sum of the expected future cash flow associated with the asset. During the
second quarter of 1998, management began replacing its policy administration
system and accordingly recognized a $12.6 million pre-tax charge which
represents the net book value of capitalized costs associated with the old
computer system.
Income taxes. Income taxes decreased approximately $2.5 million to a $1.5
million tax benefit for the six months ended June 30, 1998, from a tax expense
of approximately $1.0 million for the six months ended June 30, 1997. The
difference between the effective tax rate and the statutory rate relates
primarily to tax exempt interest. The effective tax rate was (142.1%) for the
six months ended June 30, 1998, a decrease from 10.6% for the same period in
1997. This decrease was primarily attributable to tax-exempt interest and its
deduction from a lower pre-tax income, which was $1.1 million for the six months
ended June 30, 1998 compared to $9.8 million for the same period in 1997, before
applying the 35% statutory tax rate. For more information, refer to the
effective rate reconciliation at page F-8.
Net income. Net income was $2.6 million for the six months ended June 30,
1998, a 70.8% decrease from the $8.7 million for the same period in the prior
year. This decrease was the net result of a number of factors but is primarily
due to higher net investment income, realized gains and lower income taxes
offset by higher underwriting costs and a one time charge of $12.6 million for
the impairment of capitalized system development costs.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
Direct premiums written. Direct premiums written were $162.4 million for
the year ended December 31, 1997, a 13.4% increase over the $143.2 million for
the year ended December 31, 1996, as the Company significantly accelerated its
geographic expansion. An almost three-fold increase (to $44.1 million) in
premiums written outside of New Jersey more than offset a 7.3% decrease (to
$118.3 million) in New Jersey business, which was primarily attributable to
policies that were not renewed due to rate increases for certain exposure
classes that resulted from the Company's annual underwriting process.
Net premiums earned. Net premiums earned were $123.3 million for the year
ended December 31, 1997, an increase of 14.3% over the $107.9 million for the
year ended December 31, 1996. This increase is generally consistent with the
increase in direct premiums written.
Net investment income. Net investment income was $53.9 million for the
year ended December 31, 1997, an increase of 9.7% over the $49.1 million for the
year ended December 31, 1996. Cash flow from operations of $65.9 million for the
year ended December 31, 1997 provided the majority of the increase in the
Company's invested asset base which totaled approximately $1 billion at December
31, 1997. Although the invested asset base increased, the pre-tax book yield on
invested assets remained comparable at 5.61%.
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<PAGE> 42
Realized investment gains (losses). Net realized investment gains (losses)
were approximately $10.3 million for the year ended December 31, 1997 compared
to $5.8 million for the year ended December 31, 1996. Substantially all of these
gains resulted from the sale of equity securities during 1997 and from the sale
of bonds in 1996.
Other revenue. Other revenue was $2.9 million for the year ended December
31, 1997, a decrease of 8.8% from the $3.2 million for the year ended December
31, 1996 and is composed primarily of finance charge income associated with the
Company's financing of policyholder premiums.
Losses and loss adjustment expenses (LAE). The provision for losses and
LAE was $120.5 million for the year ended December 31, 1997, an increase of 9.0%
over the $110.6 million for the year ended December 31, 1996. The loss and LAE
ratio was 97.7% for the year ended December 31, 1997 compared to 102.5% for
1996. These decreases in the loss and LAE ratio are primarily attributed to
changes in the Company's business mix with an increasing amount of policies
being issued on a claims made basis. The provision for losses and LAE for the
years ended December 31, 1997 and 1996 included no provision relating to prior
years due primarily to the operation of ceded aggregate excess reinsurance
contracts in place since 1992. The aggregate excess reinsurance contracts
provide coverage for losses and allocated loss adjustment expenses above
aggregate Company retentions. The aggregate excess reinsurance contracts,
therefore, have the effect of holding net incurred losses and allocated loss
adjustment expenses at a constant level as long as losses and allocated loss
adjustment expenses remain within the coverage limits, which occurred for the
years ended December 31, 1996 and 1997. In addition, direct loss and loss
adjustment expenses incurred related to prior years, gross of reinsurance,
increased by $.2 million for the year ended December 31, 1997 and did not change
for the year ended December 31, 1996. Reviews of direct losses and loss
adjustment expenses conducted as of December 31, 1996 and 1997 did not indicate
a basis to further revise prior estimates at December 31, 1997 or December 31,
1996. At December 31, 1996 and 1997, reserves for direct losses and loss
adjustment expenses on incurred but not reported claims amounted to $500.0
million and $593.2 million, respectively, of which $350.9 million and $430.3
million related to prior years. While certain individual cases were settled
during 1996 and 1997 at values more or less than specific case reserve amounts
established in prior years, there were no overall indications that prior
established financial reserves, including the significant portion of reserves
for incurred but not reported claims, should be adjusted. Medical malpractice
business, particularly occurrence or occurrence-like coverage, has a very long
development period. Cases may take years to be reported, and as a rule, take
several years to adjust, settle or litigate. The provision for losses and LAE is
net of $68.6 million for the year ended December 31, 1997 and $57.6 million for
the year ended December 31, 1996 of incurred losses and LAE ceded to reinsurers.
Underwriting expenses. Underwriting expenses were $25.4 million for the
year ended December 31, 1997, an increase of 44.8% over the $17.6 million for
the year ended December 31, 1996. The expense ratio was 20.6% for the year ended
December 31, 1997 compared to 16.3% for the year ended December 31, 1996.
Approximately $5.0 million of the increase is attributable to staffing,
commissions, premium taxes and facilities costs related to the Company's
geographic expansion and increases in direct premiums earned. Additional
increases of approximately $1.6 million are related to various consulting
projects geared towards business process enhancements and approximately $0.6
million relates to an increase in the reserve for uncollectible accounts
receivable with the remaining increases attributable to the Company's geographic
expansion.
Funds held charges. Funds held charges of $11.6 million for the year ended
December 31, 1997 increased by $3.0 million or 34.3% over the $8.6 million for
the year ended December 31, 1996 and relate to the interest credited on amounts
held under certain ceded aggregate excess reinsurance contracts. This increase
is the result of the net effect of the increase in interest expense accrued on
funds held under these contracts, consistent with the increase in the related
funds held balances, reduced by an increase in an offsetting profit sharing
accrual on one of these reinsurance contracts. Profit sharing accrued on the
1992 aggregate reinsurance contract increased to $20.6 million for the year
ended December 31, 1997 from $19.4 million for the year ended December 31, 1996.
Profit sharing is provided for under the aggregate excess reinsurance contracts
and is recorded by the Company after the funds held balance related to an
aggregate reinsurance contract exceeds the related ceded reserves. There was no
net effect on income arising from
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accrual of profit sharing and the recording of funds held charges on the 1992
aggregate excess reinsurance contract for the years ended December 31, 1998 and
1997.
Income taxes. Income taxes were $2.6 million for the year ended December
31, 1997, a decrease of 75.2% from the $10.6 million for the year ended December
31, 1996. The effective tax rate was 8.0% for the year ended December 31, 1997
compared to 36.2% for 1996, primarily due to the reversal of reserves for
potential tax contingencies, the majority of which were provided for in 1996 and
which were resolved in the Company's favor in 1997.
Net income. Net income was $30.3 million for the year ended December 31,
1997, a 62.2% increase from the $18.7 million for the year ended December 31,
1996, principally as a result of higher investment income and realized
investment gains and lower income taxes.
YEAR ENDED DECEMBER 31, 1996, COMPARED TO YEAR ENDED DECEMBER 31, 1995
Direct premiums written. Direct premiums written were $143.2 million for
the year ended December 31, 1996, a 4.3% increase over the $137.3 million for
the year ended December 31, 1995. The majority of this increase was due to the
addition of a number of large physician groups and hospitals primarily in New
Jersey and Pennsylvania.
Net premiums earned. Net premiums earned were $107.9 million for the year
ended December 31, 1996, a 2.5% increase over the $105.3 million for the year
ended December 31, 1995. For the most part, this increase correlates with the
increase in direct premiums written.
Net investment income. Net investment income was $49.1 million for the
year ended December 31, 1996, a 5.3% decrease from $51.9 million for the year
ended December 31, 1995. While cash flow from operations of $41.5 million for
the year ended December 31, 1996 increased the asset base which aggregated
$916.3 million as of December 31, 1996, the pre-tax book yield on invested
assets fell from 6.20% in 1995 to 5.68% in 1996 primarily due to the Exchange's
decision to allocate $50 million to the lower book yielding equity market as
part of its total return portfolio strategy.
Realized investment gains. Net realized investment gains were
approximately $5.8 million for the year ended December 31, 1996 compared to
$13.1 million for the year ended December 31, 1995. Substantially all of these
gains resulted from the sale of bonds in a generally falling interest rate
environment.
Other revenue. Other revenue was $3.2 million for the year ended December
31, 1996, a 12.7% increase from the $2.8 million for the year ended December 31,
1995 and is primarily composed of finance charge income associated with the
Exchange's financing of policyholder premiums, which increased in proportion to
the increase in direct premiums written.
Losses and loss adjustment expenses. The provision for losses and LAE was
$110.6 million for the year ended December 31, 1996, a 2.5% increase over the
$107.9 million for the year ended December 31, 1995. The loss and LAE ratio was
102.5% for each of the years ended December 31, 1996 and 1995. The provision for
losses and LAE for the years ended December 31, 1996 and 1995 included no
provision relating to prior years due primarily to the operation of ceded
aggregate excess reinsurance contracts in place since 1992. The aggregate excess
reinsurance contracts provide coverage for losses and allocated loss adjustment
expenses above aggregate Company retentions. The aggregate excess reinsurance
contracts, therefore, have the effect of holding net incurred losses and
allocated loss adjustment expenses at a constant level as long as losses and
allocated loss adjustment expenses remain within the coverage limits, which
occurred for the years ended December 31, 1996 and 1995. In addition, direct
loss and loss adjustment expenses incurred related to prior years, gross of
reinsurance, did not change for the years ended December 31, 1996 and 1995.
Reviews of direct losses and loss adjustment expenses conducted as of December
31, 1996 and 1995 did not indicate a basis to revise prior estimates at December
31, 1996 or December 31, 1995. At December 31, 1996 and 1995, reserves for
direct losses and loss adjustment expenses on incurred but not reported claims
amounted to $500.0 million and $477.0 million, respectively, of which $350.9
million and $330.0 million related to prior years. While
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<PAGE> 44
certain individual cases were settled during 1996 and 1995 at values more or
less than specific case reserve amounts established in prior years, there were
no overall indications that prior established financial reserves, including the
significant portion of reserves for incurred but not reported claims, should be
adjusted. Medical malpractice business, particularly occurrence or
occurrence-like coverage, has a very long development period. Cases may take
years to be reported, and as a rule, take several years to adjust, settle or
litigate. The provision for losses and LAE was net of $57.6 million for the year
ended December 31, 1996, and $53.4 million for the year ended December 31, 1995
of incurred losses and LAE ceded to reinsurers.
Underwriting expenses. Underwriting expenses were $17.6 million for the
year ended December 31, 1996, an increase of 19.1% over the $14.7 million for
the year ended December 31, 1995. The expense ratio was 16.3% for the year ended
December 31, 1996 compared to 14.0% for 1995. This increase was principally
attributable to costs related to ongoing enhancements to various computer
systems.
Funds held charges. Funds held charges of $8.6 million for the year ended
December 31, 1996 increased $3.2 million or 57.6% over the $5.5 million for the
year ended December 31, 1995 and relate to the interest credited on amounts held
under certain ceded aggregate excess reinsurance contracts. This increase is the
result of the net effect of the increase in interest expense accrued on funds
held under these contracts, consistent with the increase in the related funds
held balances, reduced by an increase in an offsetting profit sharing accrual on
one of these reinsurance contracts. Profit sharing accrued on the 1992 aggregate
reinsurance contract increased to $19.4 million for the year ended December 31,
1996 from $18.0 million for the year ended December 31, 1995. Profit sharing is
provided for under the aggregate excess reinsurance contracts and is recorded by
the Company after the funds held balance related to an aggregate excess
reinsurance contract exceeds the related ceded reserves. There was no net effect
on income arising from accrual of profit sharing and the recording of funds held
charges on the 1992 aggregate excess reinsurance contract for the years ended
December 31, 1997 and 1996.
Income Taxes. Income taxes were $10.6 million for the year ended December
31, 1996, a decrease of 11.4% from the $11.9 million for the year ended December
31, 1995. The effective tax rate was 36.2% for the year ended December 31, 1996,
an increase from 26.5% for 1995, due primarily to the establishment of reserves
for potential tax contingencies in 1996 offset in part by an increase in tax
exempt investment income in 1996.
Net income. Net income was $18.7 million for the year ended December 31,
1996, a 43.6% decrease from the $33.1 million for the year ended December 31,
1995, principally as a result of higher operating expenses and lower investment
income and realized investment gains.
FINANCIAL CONDITION
Cash and invested assets. Aggregate invested assets, including cash and
short term investments, were $1,165.8 million at June 30, 1998 and $1,026.6
million and $920.9 million at December 31, 1997 and 1996, respectively. The
increase in invested assets between December 31, 1996 and June 30, 1998 resulted
primarily from cash flow from operations generated during the period and net
realized and unrealized investment gains.
Fixed maturities available for sale, including short-term investments,
aggregated approximately $1.1 billion, or 92.0% of the investment portfolio of
the Exchange and its subsidiaries as of June 30, 1998. At that date, the average
credit quality of the fixed income portfolio was "AA+," as defined by Standard &
Poor's, while the portfolio duration was 4.6 years. At June 30, 1998, the
investment portfolio of the Exchange and its subsidiaries also included $92.3
million, or approximately 8.0%, invested in equity investments.
In 1997, the Exchange implemented an "equity collar" around its equity
securities of $81.6 million. An "equity collar" is an option position created
with the simultaneous purchase and sale of an equal number of put and call
options. This resulting option position establishes, for a specified time
period, both a ceiling and a floor with respect to the financial performance of
the underlying asset upon which the equity collar is established. The collar
transaction was executed on July 8, 1997 and expired on January 2, 1998. The
purpose of the collar was to reduce equity market volatility and to stabilize
unassigned surplus. The collar was constructed using European-style S&P 500
options, and as of December 31, 1997, the collar had no unrealized
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<PAGE> 45
gain or loss. A "European-style" option is an option contract that may be
exercised only upon expiration of the contract whereas an "American-style"
option may be exercised at any time prior to the expiration of the contract. The
reference to "S&P 500" refers to the underlying asset upon which the option
contract's value will be based. To minimize loss exposure due to credit risk,
the Exchange utilized intermediaries with a Standard and Poor's rating of "AA"
or better.
On January 13, 1998, the Exchange implemented another equity collar with a
notional value of $85 million around the equity portfolio. The purpose of the
collar was to reduce equity market volatility and to stabilize unassigned
surplus.
Other than the equity collar, the Exchange and its subsidiaries do not hold
any derivative investments.
Unpaid losses and LAE, reinsurance recoverable on unpaid losses and LAE and
funds held under reinsurance treaties. Gross unpaid losses and LAE were $921.4
million at June 30, 1998 and $876.7 million and $795.4 million at December 31,
1997 and 1996, respectively. The increases in these amounts were consistent with
the continued growth in the Company's book of business. Reinsurance recoverable
on unpaid losses and LAE was $432.2 million at June 30, 1998 and $438.5 million
and $395.1 million at December 31, 1997 and 1996, respectively. Funds held under
reinsurance treaties, which are unrestricted, collateralize a significant
portion of reinsurance recoverable on unpaid losses and LAE and were $336.7
million at June 30, 1998, and $351.1 million and $340.8 million at December 31,
1997 and 1996, respectively.
Equity. The Exchange's total equity was $306.7 million at June 30, 1998
and $302.8 million and $253.9 million at December 31, 1997 and 1996,
respectively. The increases were attributable to net income and changes in
unrealized net appreciation of investments.
LIQUIDITY AND CAPITAL RESOURCES
The MIIX Group, Incorporated. The MIIX Group is a holding company whose
only material assets immediately after the Reorganization will be the capital
stock of MIIX Insurance and the Attorney-in-Fact. The net proceeds of the
anticipated Public Offering will primarily be used to capitalize the Company's
subsidiaries for general corporate purposes, while a portion of the proceeds may
be retained at the holding company. The MIIX Group's ongoing cash flow will
consist primarily of dividends and other permissible payments from its
subsidiaries. The MIIX Group will depend upon such payments for funds for
general corporate purposes and for the payment of dividends on the Common Stock.
The payment of dividends to The MIIX Group by MIIX Insurance will be
subject to limitations imposed by the New Jersey Holding Company Act. Based upon
these limitations, the maximum amount that will be available for payment of
dividends to The MIIX Group by MIIX Insurance in 1998 without the prior approval
of regulatory authorities is subject to restrictions related to surplus and net
income. MIIX Insurance's future cash flow available to The MIIX Group may be
influenced by a variety of factors, including cyclical changes in the medical
malpractice insurance market, MIIX Insurance's financial results, insurance
regulatory changes, including changes in the limitations imposed by the New
Jersey Holding Company Act on the payment of dividends by MIIX Insurance, and
changes in general economic conditions. The MIIX Group expects that the current
limitations that will be imposed on MIIX Insurance should not affect its ability
to declare and pay dividends sufficient to support The MIIX Group's initial
dividend policy. See "Risk Factors -- Holding Company Structure; Limitation on
Dividends," "Dividend Policy" and "Business -- Regulation -- Regulation of
Dividends from Insurance Subsidiaries."
MIIX Insurance. The primary sources of MIIX Insurance's liquidity, on both
a short- and long-term basis, will be funds provided by insurance premiums
collected, net investment income, recoveries from reinsurance and proceeds from
the maturity or sale of invested assets. Funds are generally used to pay claims,
LAE, operating expenses, reinsurance premiums and taxes. The Exchange and its
subsidiaries' net cash flow from operating activities was approximately $90.8
million and $32.5 million for the six months ended 1998 and 1997, respectively,
and $65.9 million and $41.5 million for the years ended 1997 and 1996,
respectively. The higher amount of cash flow from operations in 1998 compared to
1997 was principally due to higher payments of losses and LAE in 1997 as well as
accelerated collections of premiums as the Company outsourced its
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installment payment plans in the second quarter of 1998. 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.
The Exchange held collateral of $351.1 million and $340.8 million at
December 31, 1997 and 1996 respectively, in the form of funds withheld, for
recoverable amounts on ceded unpaid losses and loss adjustment expenses under
certain reinsurance agreements. Under the contracts, reinsurers may require that
a trust fund be established to hold the collateral should one or more triggering
events occur, such as a downgrade in the Company's A.M. Best rating to B+ or
lower, or a reduction in statutory capital and surplus to less than $20 million.
Otherwise, no restrictions are placed on investments held in support of the
funds withheld. In accordance with the provisions of the reinsurance contracts,
the funds withheld are credited with interest at contractual rates ranging from
7.50% to 8.60%, which is recorded as an expense in the year incurred.
The Exchange and its subsidiaries have invested, and The MIIX Group will
invest, its positive cash flow from operations in fixed maturity securities,
which includes short-term investments and equity securities. The current
investment strategy, which will be continued by MIIX Insurance immediately after
the Reorganization, seeks to maximize after-tax income through a high quality,
diversified, duration sensitive, taxable bond and tax-preferenced municipal bond
portfolio, while maintaining an adequate level of liquidity.
Based on historical trends, market conditions and its business plans, the
Company believes that its sources of funds will be sufficient to meet its
liquidity needs over the next 18 months and beyond. However, because economic,
market, and regularity conditions may change, there can be no assurance that the
Company's funds will be sufficient to meet these liquidity needs.
The Attorney-in-Fact currently leases the Company's headquarters in
Lawrenceville, New Jersey from the Medical Society, a related party. The Company
is considering purchasing this building. An independent appraisal firm has been
retained by the Company to determine the fair market value of the property to
assist both parties in negotiating the transaction.
YEAR 2000
Because certain computer software programs have historically been designed
to use a two-digit code to identify the year for date-sensitive material, such
programs may not properly recognize post twentieth century dates. This could
result in system failures and improper information processing that could disrupt
the Company's business operations.
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 will 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 systems have been reviewed to identify those requiring
upgrading or replacement to improve current computing capabilities and to ensure
that they are Year 2000 compliant. In the course of evaluating the Year 2000
readiness of its internal systems, the Company determined that its claims
administration system is not Year 2000 compliant. The Company has purchased a
replacement system that is Year 2000 compliant and is expected to be installed
by December 1998.
During 1997 and 1998 the Company upgraded all its I/T systems to improve
their performance and efficiency. As part of this process, the Company obtained
certifications from the vendors of such new systems that such systems would be
Year 2000 compliant. The Company has conducted internal tests of its new systems
to ensure that they are Year 2000 compliant and continues to conduct such tests.
To date, such tests have not revealed any Year 2000 issues other than in
connection with the claims administration system discussed above. However, the
Company has retained an outside expert to independently evaluate the Year 2000
readiness of the Company's internal systems. The Company may also be adversely
affected if Year 2000 issues result in additional claims being made against the
Company's insureds. The Company's liability for
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such claims, if any, is not clearly established. A number of companies who
underwrite liability coverage in the healthcare industry have submitted
applications to various state regulators requesting that policy exclusions for
such liability, if any, be approved. Other carriers have advised their clients
of their intent to deny coverage in certain circumstances. The Company has not
yet taken a formal position and is still conducting research on the matter.
The Company is in the process of sending inquiries to its service
providers, brokers and other external business partners to determine whether
they may experience Year 2000 problems that could affect the Company. Management
is currently evaluating alternative contingency plans that could become
necessary if its own or its significant external business partners' Year 2000
remediation efforts fail. Such alternatives will most likely involve the
assignment of internal and external resources to process business manually
during the duration of any non-compliance. It is not possible at this time to
estimate the cost, if any, of such contingency plans or system failures.
Remediation costs to date (including expenditures associated with
replacement systems) have been approximately $350,000 and are estimated to be
less than $1 million through the completion of remediation, which is expected in
1999. These costs have been considered in preparing the Company's capital and
operating budgets. There can be no assurance, however, that remediation efforts
will be completed within these estimated costs and time periods. See "Risk
Factors -- Year 2000; Information Technology."
RECENT DEVELOPMENTS
During the first quarter, the Company entered into a definitive agreement
to purchase MIIX New York for approximately $2.8 million. These assets are
included in the consolidated financial statements. MIIX New York wrote no
business during 1997 or year-to-date 1998.
The equity collar established on January 13, 1998 expired on July 13, 1998,
at which time the underlying hedged equity securities had an unrealized gain of
approximately $38 million offset by the loss on the collar of approximately $14
million.
The Company liquidated its equity securities in July 1998 which had an
aggregate fair value of approximately $92.3 million at June 30, 1998. All of the
proceeds were allocated to higher yielding fixed maturity investments and a net
gain of approximately $24 million was realized in the third quarter.
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BUSINESS
Based on direct premiums written in 1997, the Company is the leading
provider of medical professional liability insurance in New Jersey and is ranked
10th among medical professional liability insurers in the United States. The
Company currently insures approximately 15,800 physicians and other medical
professionals who practice alone, in medical groups, clinics or in other health
care organizations. The Company also insures more than 80 hospitals, extended
care facilities, health maintenance organizations ("HMOs") and other managed
care organizations (collectively, "health care institutions"). The Company's
business has historically been concentrated in New Jersey but has expanded to
other states in recent years. The Company currently writes policies in 18
states. For the six months ended June 30, 1998, approximately 33% of the
Company's total direct premiums written were generated outside of New Jersey. In
addition to the Company's medical malpractice insurance operations, the Company
also offers a broad range of complementary insurance products to its insureds
and operates several fee-based consulting and other businesses.
Medical professional liability insurance, also known as medical malpractice
insurance, insures the physician, other medical professional or health care
institution against liabilities arising from the rendering of, or failure to
render, professional medical services. Under the typical medical professional
liability policy, the insurer also is obligated to defend the insured against
alleged claims.
In 1997, total medical professional liability direct premiums written in
the United States were approximately $5.9 billion, of which $299.3 million were
written in New Jersey, according to data compiled by A.M. Best Company, Inc.
("A.M. Best"), an insurance rating agency. The Company's market share of such
direct premiums written was 2.8% in the United States and 40% in New Jersey
according to A.M. Best. In 1997, medical malpractice insurance accounted for
approximately 98% of the Company's direct premiums written.
The Exchange and its subsidiaries had total revenues and net income of
$190.4 million and $30.3 million, respectively, for 1997 and $110.8 million and
$2.6 million, respectively, for the six months ended June 30, 1998. As of June
30, 1998, the Exchange and its subsidiaries had total assets of $1.4 billion and
total equity of $306.7 million.
The Exchange was organized as a New Jersey reciprocal insurance exchange by
the Medical Society to provide physicians with an alternative to commercial
medical professional liability insurance and was approved to begin issuing
policies in 1977. A reciprocal exchange under the law of New Jersey is an
organization through which individuals, partnerships, trustees or corporations
designated as "subscribers" or "members" are authorized to insure each other.
Such insurance contracts are executed by an attorney-in-fact acting on behalf of
the subscribers through a power of attorney. Each member of the Exchange has
granted such power of attorney to the Attorney-in-Fact.
The Attorney-in-Fact manages the Exchange, including the underwriting and
issuance of insurance policies, the collection and investment of premiums, and
the service and administration of the policyholders and their claims. The
Attorney-in-Fact is a corporation that is wholly owned by the Medical Society
and was originally formed for the sole purpose of fulfilling the statutory role
of attorney-in-fact of the Exchange, which it does pursuant to a management
contract that requires the Exchange to reimburse the costs of the
Attorney-in-Fact. In recent years, the Attorney-in-Fact has diversified its
business, but its principal activity continues to be managing the Exchange.
The wholly owned subsidiaries of the Attorney-In-Fact offer a wide range of
reinsurance products, healthcare and financial consulting services to the
medical profession, healthcare institutions and other parties unrelated to the
Company.
Hamilton National Leasing is a middle-market leasing company for medical
and other equipment primarily to parties unrelated to the Company. Pegasus
Advisors Inc. is a reinsurance consultant/broker specializing in the design and
placement of customized reinsurance programs for the Company and other unrelated
insurance and reinsurance companies. Medical Brokers, Inc., fully licensed in
New Jersey, provides insurance broker services and sells other insurance not
underwritten by the Exchange. MIIX Healthcare
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Group, Inc. provides comprehensive consulting services designed to assist
physicians, institutions and organizations in the healthcare industry.
Lawrenceville Re, Ltd. is a reinsurance company domiciled in Bermuda designed to
provide customized reinsurance solutions to large healthcare entities.
The Exchange was initially capitalized through the issuance of
non-interest-bearing subordinated loan certificates in an aggregate principal
amount of $22.9 million. These certificates were issued in varying principal
amounts to many of the physicians who were initial members. The loan
certificates have been redeemed, with the last such redemption occurring in
1995. As an insurer, the Exchange is required to maintain levels of capital and
surplus as determined by the insurance regulators of certain states. See
"Business -- Regulation -- Insurance Company Regulation." The Exchange has been
operated to generate profits. Such profits are part of the Exchange's surplus
account, and the application of such profits is in the Exchange's discretion.
The profits from the Exchange's operations are retained in a surplus account.
American Medical Mutual, Inc., a Vermont domiciled risk retention group
("AMM"), is an underwriter of professional liability insurance for physicians.
AMM is managed by the Attorney-in-Fact through an insurance services agreement.
All medical professional liability coverage written by AMM is reinsured by the
Exchange under a quota share contract and two excess of loss contracts.
BUSINESS STRATEGY
The Company has adopted a strategy which it believes will allow it to
compete effectively and create long-term growth. To maximize the strategy's
effectiveness, the Company has adopted the Plan of Reorganization to convert
from a reciprocal insurer to a stock insurer, which will provide the Company
with greater flexibility and access to capital. See "The Reorganization." The
Company's strategy is to:
- continue to expand geographically by increasing the number of states
in which the Company writes policies;
- enhance product offerings to facilitate "one-stop shopping" for the
Company's extensive customer base;
- expand distribution channels;
- maintain underwriting discipline to seek to assure that profitability,
rather than premium volume, is emphasized;
- take advantage of strategic acquisition opportunities; and
- maintain the Company's historically close relationship with the
medical community.
This strategy is designed to capitalize on the Company's strengths that have
enabled it to achieve its current market position, including (i) its experience
with, commitment to and focus on medical professional liability insurance, (ii)
its history of providing a stable premium environment to its customers, (iii)
the high level of service it delivers to insureds, including the aggressive
defense of claims on their behalf, (iv) its "A (Excellent)" rating by A.M. Best,
(v) its capacity on a per insured basis, (vi) its ability to customize product
features and programs to fit the needs of different customers and (vii) its
close relationship with the medical community.
Expand Geographically. From its inception in 1977 through 1990, all of the
Company's business was written in New Jersey. In 1991, the Company began to
write business in Pennsylvania and in 1996 began its expansion to other states.
Since 1996, the Company has expanded its operations significantly and currently
writes policies in 18 states. As a result of this expansion, the proportion of
the Company's business written in states other than New Jersey has grown from
approximately 11% in 1996 to 33% in the six months ended June 30, 1998. In order
to facilitate continued geographic expansion, the Company has obtained authority
to write insurance in 22 states and the District of Columbia and is in the
process of obtaining such authority in eight other states. In addition, the
Company has opened four regional sales and customer support offices to assist
its marketing efforts outside of New Jersey. Over time, the Company intends to
seek authority to write insurance in all 50 states, although the Company may
choose to not write insurance in all such states.
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Enhance Product Offerings. In addition to its core medical professional
liability insurance products, the Company has developed other products and
services for health care institutions. Additional products currently offered
include comprehensive liability coverage for medical offices, directors and
officers, managed care errors and omissions, employment practices, fiduciary,
property and worker's compensation. Most of these coverages are underwritten by
the Company; several products are marketed by the Company and underwritten by
other insurance carriers with which the Company has developed strategic
alliances. The Company has also introduced the option for large health care
institutions to purchase excess insurance coverage on a multi-year basis for a
guaranteed prepaid premium. The Company intends to continue to increase the
number of products it offers to its customer base in order to be able to provide
them with a full range of coverages.
Expand Distribution Channels. The Company has traditionally written
insurance on a direct basis in New Jersey. In connection with the Company's
expansion outside New Jersey, the Company has increasingly utilized brokers. In
1997, 43% of the Company's direct premiums written were generated through
brokers. By increasing its use of this distribution channel, the Company will be
better positioned to achieve growth. In order to expand further its distribution
channels, the Company intends to develop additional brokerage relationships with
selected brokers who have demonstrated expertise in the medical malpractice
insurance market.
Maintain Underwriting Discipline. The Company's experience with,
commitment to and focus on medical professional liability insurance for over 20
years has allowed it to develop strong knowledge of the market and to build an
extensive database of medical malpractice claims experience. The Company takes
advantage of this specialized expertise in medical professional liability
insurance to set premiums that it believes are appropriate for exposures being
insured. As the Company expands its business, it will maintain underwriting
discipline and emphasize profitability over premium growth.
Take Advantage of Strategic Acquisition Opportunities. The Company
believes that the Reorganization will better position the Company to make
strategic acquisitions by providing greater access to capital as a source of
financing and creating an attractive stock acquisition currency. The Company
believes that consolidation will continue in the medical professional liability
insurance industry and that opportunities to make a strategic acquisition may
arise, thus providing an effective way to expand the Company's business, product
offerings and geographic scope.
Maintain Close Relationship with the Medical Community. Since its founding
in 1977, the Company has maintained a close relationship with the medical
community. In addition to the active involvement of practicing physicians on
several of the Company's advisory committees, the Company and the medical
professional liability insurance that it offers have the endorsements of
different medical associations. The Company will continue to utilize practicing
physicians on advisory committees to provide management with input on medical
practice patterns, claims, customer needs and other relevant matters. In
addition, the Company will endeavor to maintain its endorsements.
PRODUCT OFFERINGS
The Company has developed a variety of insurance products to cover the
professional liability exposure of individual providers such as physicians,
surgeons and dentists, medical groups, clinics and hospitals, extended care
facilities and other health care providers. The Company's core products include
medical professional liability insurance for individual providers, medical
groups and health care institutions on a "claims made," "modified claims made"
or "occurrence basis." See "Glossary of Selected Insurance Terms."
In addition to its core medical professional liability insurance products,
the Company has developed other products and services for health care
institutions. Expanded products offered include comprehensive liability coverage
for medical offices, directors and officers, managed care errors and omissions,
employment practices, fiduciary, property and worker's compensation.
47
<PAGE> 51
For premises liability and property exposures of medical offices, the
Company offers the Medical Office Policy written on an occurrence basis.
Commercial general liability coverage is offered on an occurrence basis only.
Excess/umbrella liability is a two-part policy covering excess of underlying
policies and excess of self-insured retention. Directors and officers coverage
and errors and omissions coverage are offered on a claims made basis to managed
care organizations. Extended reporting period coverage or "tail coverage" is
offered to those accounts written on a claims made basis to extend the period
when losses could be reported to the Company. The Company has also introduced
the option for large health care institutions to purchase excess insurance
coverage on a multi-year basis for a guaranteed prepaid premium. Such coverages
are also available with reinstatement options, combined with the ability to
pre-purchase such options at the inception of the policy. Most of these
coverages are underwritten by the Company; several products are marketed by the
Company and underwritten by other insurance carriers with which the Company has
developed strategic alliances.
MARKETING AND POLICYHOLDER SERVICES
The Company employs various strategies for marketing its products and
providing policyholder services. In New Jersey, the Company markets its products
to physicians and physician groups principally though medical associations,
referrals by existing policyholders, advertisements in medical journals,
seminars on health care topics for physicians, and direct mail solicitation. The
Company's professional liability program has the endorsement of the Medical
Society and the Connecticut Hospital Association. In addition to these direct
marketing channels, the Company sells its products through independent brokers
and agents who currently produce approximately 20% of the Company's direct
premiums written in New Jersey. Health care institutions frequently prefer
brokers over direct solicitation when they purchase professional liability
insurance, and the Company believes that its broker relationships in New Jersey
are important to its ability to grow in that market segment. To provide
localized marketing and policyholder services in New Jersey and nationally, the
Company has established five regional offices. See "-- Business
Strategy -- Maintain Close Relationship with the Medical Community."
Outside New Jersey, the Company markets its products exclusively through
independent brokers and agents. In 1997, 108 independent brokers and agents
actively marketed the Company's products in 13 states and produced approximately
43% of the Company's direct written premiums on a national basis. No national
broker or regional agency accounted for more than 8% of the Company's year-end
direct premiums written. The Company selects brokers and agents that it believes
have demonstrated growth and stability in the medical malpractice insurance
industry, strong sales and marketing capabilities, and a focus on selling
medical professional liability insurance. Brokers and agents receive market rate
commissions and other incentives based on the business they produce. The Company
strives to maintain relationships with those brokers and agents who are
committed to promoting the Company's products and are successful in producing
business for the Company. See "-- Business Strategy -- Expand Distribution
Capabilities."
The Company also provides risk management services through its home office
and regional offices. In addition to supplementing the Company's marketing
efforts, these services are designed to reduce potential loss exposures by
educating policyholders on ways to improve medical practice and implement risk
reduction measures. The Company conducts surveys for hospitals and large medical
groups to review their practice procedures and to focus on specific areas in
which concerns arise. The Company prepares reports that identify areas of the
insured's medical practice that may need attention and provides recommendations
to the policyholder. The Company also presents periodic seminars for medical
societies and other groups to educate physicians on risk management techniques.
These educational programs are designed to increase risk awareness and to reduce
the risk of injury to patients and third parties.
UNDERWRITING
The Company maintains a dual underwriting function at its home office and
at each regional office. The home office Underwriting Department is responsible
for the underwriting and servicing of all institutional accounts and individual
providers that exceed the regional office underwriting authority. In addition,
the home
48
<PAGE> 52
office Underwriting Department is responsible for the issuance, establishment
and implementation of underwriting standards for all of the coverages
underwritten by the Company.
The Company's regional office underwriting staff have the authority to
evaluate, approve and issue medical professional liability coverage for
individual providers and medical groups with annual premiums up to a threshold
amount.
The Company follows consistent and strict procedures with respect to the
issuance of all professional liability insurance policies. Individual providers
are required to submit an application for coverage along with supporting claims
history and proof of licensure. The individual provider applications provide
information regarding the medical training, current practice and claims history
of the applicant. Institutions are required to submit an application for
coverage, hard copy loss runs, proof of accreditation, financial statements,
copies of contracts with medical providers, information on employed
professionals and other information. An account analysis form is completed for
each submission and, if coverage is approved, the coverage recommendation and
the pricing methodology is added.
Risk management surveys may be performed prior to quoting a large account
to ascertain the insurability of the risk. All written accounts are referred to
the Risk Management Department to schedule risk management services.
Representatives from the Risk Management Department meet with the insured
institution to develop programs to control and reduce risk.
The Underwriting Department meets periodically with the Underwriting
Committee to review the guidelines for premium surcharges, cancellations and
non-renewals and any candidate for cancellation or non-renewal. The Underwriting
Committee is composed solely of physicians who are members of either the Board
of Governors or the Board of Directors of the Attorney-in-Fact and are insured
by the Company. Members of the Underwriting Committee are not employees of the
Company.
The Company maintains quality control through periodic audits at the
underwriting and processing levels. Renewal accounts are underwritten as
thoroughly as new accounts. Insureds who no longer meet underwriting guidelines
are identified as non-renewal candidates. All non-renewal candidates are
referred to the home office Underwriting Department and discussed with the
Underwriting Committee to approve the Underwriting Department's recommendations.
PRICING
The Company establishes, through its own actuarial staff and independent
consulting actuaries, rates and rating classifications for its insureds based on
loss and LAE experience it has developed and on other relevant information. The
Company has various rating classifications based on practice location, medical
specialty and other factors. The Company applies various discounts, including
discounts for part-time practice, physicians just entering medical practice,
large medical groups and claims experience. The Company has established its
premium rates and ratings classifications for hospitals and managed care
organizations using actuarially significant data filed publicly by other
insurers.
CLAIMS
The Company's Claim Department is responsible for claims investigation,
establishment of appropriate case reserves for loss and ALAE, defense planning
and coordination, supervision of attorneys engaged by the Company to defend a
claim, and negotiation of the settlement or other disposition of a claim. All of
the Company's primary policies require it to defend its insureds. Medical
malpractice claims often involve the evaluation of highly technical medical
issues, severe injuries, and conflicting medical opinions. In almost all cases,
the person bringing the claim against the insured is already represented by
legal counsel when the claim is reported to the Company.
49
<PAGE> 53
Litigation defense is provided almost exclusively by private law firms with
lawyers whose primary focus is defending malpractice cases. The Company also
maintains a staff counsel office located in New Jersey to defend malpractice
cases.
The claims representatives at the Company have on average 10 years of
experience handling medical professional liability cases. The Company limits the
average number of cases handled per claims representative to ensure personal
attention to each case.
The claims operation is assisted in its efforts by its technical unit,
which is responsible for training and educating the claims staff. The technical
unit manages the Company's relationship with defense counsel and helps control
ALAE associated with claims administration. The unit also is responsible for
tracking developments in case law and coordinating mass tort litigation.
A major resource for the Company's claims function is its database built
over a 20-year period. The database provides comprehensive details on each
claim, from incident to resolution, coupled with a document file relating to
each claim. The database enables the Company's claims professionals to analyze
trends in claims by specialty, type of injury, precipitating causes, frequency
and severity, plaintiffs' counsel, expert witnesses, and other factors. The
Company also uses the data to identify and analyze trends and to develop
seminars to educate individual physicians, physician groups, hospital staff, and
other insureds on risk management to control and reduce their exposure to
claims.
LOSS AND LAE RESERVES
The determination of loss and LAE reserves involves projection of ultimate
losses through an actuarial analysis of the claims history of the Company and
other professional liability insurers, subject to adjustments deemed appropriate
by the Company due to changing circumstances. Included in the Company's claims
history are losses and LAE paid by the Company in prior periods, and case
reserves for anticipated losses and ALAE developed by the Company's Claim
Department as claims are reported and investigated. Actuaries rely primarily on
such historical loss experience in determining reserve levels on the assumption
that historical loss experience provides a good indication of future loss
experience despite the uncertainties in loss trends and the delays in reporting
and settling claims. As additional information becomes available, the estimates
reflected in earlier loss reserves may be revised. Any increase in the amount of
reserves, including reserves for insured events of prior years, could have an
adverse effect on the Company's results of operations for the period in which
the adjustments are made.
The uncertainties inherent in estimating ultimate losses on the basis of
past experience have grown significantly in recent years principally as a result
of judicial expansion of liability standards and expansive interpretations of
insurance contracts. These uncertainties may be further affected by, among other
factors, changes in the rate of inflation and changes in the propensities of
individuals to file claims. The inherent uncertainty of establishing reserves in
the casualty insurance business is even greater for companies writing long-tail
casualty insurance, such as medical malpractice insurance. This is due primarily
to the longer time that typically elapses between the covered incident and the
resolution of the claim.
The Company utilizes internal and independent actuaries in establishing its
reserves. The Company's independent actuaries review the Company's reserves for
losses and LAE at the end of each fiscal year and prepare a report that includes
a recommended level of reserves. The Company considers this recommendation as
well as other factors, such as loss retention levels, premium rates and known,
anticipated or estimated changes in frequency and severity of claims, in
establishing the amount of its reserves for losses and LAE. The Company
continually refines reserve estimates as experience develops and further claims
are reported and settled. The Company reflects adjustments to reserves in the
results of the periods in which such adjustments are made. Medical malpractice
insurance is a line of business for which the initial loss and LAE estimates may
be adversely impacted by events occurring long after the reporting of the claim,
such as sudden severe inflation or adverse judicial or legislative decisions.
The Company has established its loss and LAE reserves within the range of
reserve estimates determined by its independent actuarial firm.
50
<PAGE> 54
Activity in the liability for unpaid losses and loss adjustment expenses is
summarized as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
-------------------------------- --------------------
1995 1996 1997 1997 1998
-------- -------- -------- -------- --------
(IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Balance as of January 1, net of
reinsurance recoverable........... $402,172 $409,565 $400,334 $400,334 $438,174
Incurred related to:
Current year...................... 107,889 110,593 120,496 58,550 72,952
Prior years....................... -- -- -- -- --
-------- -------- -------- -------- --------
Total incurred...................... 107,889 110,593 120,496 58,550 72,952
-------- -------- -------- -------- --------
Paid related to:
Current year...................... 3,000 3,630 3,930 1,253 1,445
Prior years....................... 97,496 116,194 78,726 48,697 20,427
-------- -------- -------- -------- --------
Total paid.......................... 100,496 119,824 82,656 49,950 21,872
-------- -------- -------- -------- --------
Balance at end of period, net of
reinsurance recoverable........... 409,565 400,334 438,174 408,934 489,254
Reinsurance recoverable............. 339,095 395,115 438,547 422,396 432,169
-------- -------- -------- -------- --------
Balance at end of period, gross of
reinsurance....................... $748,660 $795,449 $876,721 $831,330 $921,423
======== ======== ======== ======== ========
</TABLE>
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. From 1987 through 1992, the
Exchange had discounted its unpaid losses and LAE, using rates of 5%
(1987-1990); 4% (1991) and 2.8% (1992). Discounting of unpaid losses and LAE was
discontinued during 1993 with all unpaid losses and LAE amounts existing at
December 31, 1993 and subsequent years recorded at full undiscounted values. For
consistency of presentation, the following tables reflect all years (including
1987 through 1992) on an undiscounted basis. 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 recorded 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" 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 1995 to be $100,000 was first reserved in
1987 at $150,000, the $50,000 redundancy (original estimate minus actual loss)
would be included in the cumulative redundancy in each of the years 1987 through
1994 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.
51
<PAGE> 55
TABLE I. LOSS AND LAE RESERVES DEVELOPMENT - GROSS
<TABLE>
<CAPTION>
1987 1988 1989 1990 1991 1992 1993 1994
-------- -------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Loss and LAE Reserves........ $395,594 $453,181 $502,928 $554,076 $593,828 $629,064 $667,200 $688,455
LIABILITY REESTIMATED AS OF:
One year later.............. 409,285 447,867 516,113 541,778 583,133 616,042 623,988 688,455
Two years later............. 404,401 468,307 503,199 529,531 570,108 572,831 623,986 688,450
Three years later........... 426,667 454,530 495,663 516,501 532,877 572,831 623,989 689,122
Four years later............ 409,703 443,908 482,667 487,918 532,878 572,871 624,567
Five years later............ 399,717 431,792 463,784 487,921 540,067 570,424
Six years later............. 389,085 417,224 463,788 490,398 538,126
Seven years later........... 379,810 417,230 456,563 486,236
Eight years later........... 379,814 410,014 449,493
Nine years later............ 378,109 406,461
Ten years later............. 376,638
CUMULATIVE REDUNDANCY
(DEFICIENCY)................ 18,956 46,720 53,435 67,840 55,702 58,640 42,633 (667)
<CAPTION>
1995 1996
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Loss and LAE Reserves........ $748,660 $795,449
LIABILITY REESTIMATED AS OF:
One year later.............. 748,660 795,654
Two years later............. 744,130
Three years later...........
Four years later............
Five years later............
Six years later.............
Seven years later...........
Eight years later...........
Nine years later............
Ten years later.............
CUMULATIVE REDUNDANCY
(DEFICIENCY)................ 4,530 (205)
</TABLE>
<TABLE>
<CAPTION>
1987 1988 1989 1990 1991 1992 1993 1994
-------- -------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CUMULATIVE AMOUNT OF
LIABILITY PAID THROUGH:
One year later.............. $ 53,458 $ 57,514 $ 80,959 $ 67,483 $ 79,239 $ 83,837 $ 83,522 $ 98,053
Two years later............. 110,109 136,725 146,137 144,987 161,532 165,737 179,714 212,284
Three years later........... 182,534 196,344 218,676 221,931 238,998 256,860 284,828 293,325
Four years later............ 231,288 253,882 286,181 288,463 318,934 348,868 343,563
Five years later............ 275,567 304,194 335,723 339,121 389,638 395,244
Six years later............. 305,793 338,594 370,225 390,991 413,413
Seven years later........... 324,092 356,151 391,596 401,626
Eight years later........... 337,843 370,304 396,442
Nine years later............ 349,149 371,815
Ten years later............. 351,228
<CAPTION>
1995 1996
-------- --------
(IN THOUSANDS)
<S> <C> <C>
CUMULATIVE AMOUNT OF
LIABILITY PAID THROUGH:
One year later.............. $116,532 $101,217
Two years later............. 214,484
Three years later...........
Four years later............
Five years later............
Six years later.............
Seven years later...........
Eight years later...........
Nine years later............
Ten years later.............
</TABLE>
The Exchange and its subsidiaries have experienced favorable development on
gross reserves held at each year end in the table except 1994 and 1996, largely
in reserves first recorded in 1992 and prior years. The Company believes that
this favorable development has resulted from (i) the conservative approach to
establishing reserves for medical malpractice insurance losses and LAE; and (ii)
the improvements made to the internal claims settlement process. These internal
claims settlement process improvements result from: key staffing additions,
including Lisa Kramer, Vice President, Claims, in 1990; the building of a
detailed claims database over a 20-year period, which enables the Company's
claims professionals to better evaluate and resolve claims; the addition of
staff counsel in 1993 to defend certain malpractice cases and to control legal
costs; and the expansion and enhancement of the risk management department in
1993 to provide support to insureds in controlling and reducing their exposure
to claims. It is not possible to quantify the impact that these changes have had
on development of loss reserves. Development of reserves first recorded in 1994
and later years has been slight, as no clear development trends have yet
emerged.
52
<PAGE> 56
TABLE II. LOSS AND LAE RESERVES DEVELOPMENT - NET
<TABLE>
<CAPTION>
1987 1988 1989 1990 1991 1992 1993 1994
-------- -------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Loss and LAE
Reserves-Gross.............. $395,594 $453,181 $502,928 $554,076 $593,828 $629,064 $667,200 $688,455
Reinsurance Recoverable and
Unpaid Losses............... 495 400 400 1,025 8,265 244,394 279,260 286,283
-------- -------- -------- -------- -------- -------- -------- --------
LOSS AND LAE RESERVES-NET:... $395,099 $452,781 $502,528 $553,051 $585,563 $384,670 $387,940 $402,172
LIABILITY REESTIMATED AS OF:
One year later.............. 408,745 447,477 513,096 534,087 577,450 384,196 387,944 402,172
Two years later............. 403,871 465,300 494,044 524,264 576,974 384,200 387,940 402,172
Three years later........... 423,520 445,913 488,404 523,783 576,979 384,198 387,941 402,172
Four years later............ 402,195 436,659 487,957 523,787 576,977 384,198 387,940
Five years later............ 392,328 436,228 487,960 523,787 576,977 384,198
Six years later............. 391,881 436,229 487,961 523,786 576,977
Seven years later........... 391,075 436,232 487,961 523,786
Eight years later........... 391,076 436,232 487,961
Nine years later............ 391,076 436,232
Ten years later............. 391,076
CUMULATIVE REDUNDANCY
(DEFICIENCY)................ 4,023 16,549 14,567 29,265 8,586 472 -- --
<CAPTION>
1995 1996
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Loss and LAE
Reserves-Gross.............. $748,660 $795,449
Reinsurance Recoverable and
Unpaid Losses............... 339,095 395,115
-------- --------
LOSS AND LAE RESERVES-NET:... $409,565 $400,334
LIABILITY REESTIMATED AS OF:
One year later.............. 409,565 400,334
Two years later............. 409,565
Three years later...........
Four years later............
Five years later............
Six years later.............
Seven years later...........
Eight years later...........
Nine years later............
Ten years later.............
CUMULATIVE REDUNDANCY
(DEFICIENCY)................ -- --
</TABLE>
<TABLE>
<CAPTION>
1987 1988 1989 1990 1991 1992 1993 1994
-------- -------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CUMULATIVE AMOUNT OF LIABILITY
PAID THROUGH:
One year later............... $ 53,318 $ 57,524 $ 78,967 $ 67,479 $236,090 $ 83,628 $ 82,136 $ 97,496
Two years later.............. 109,979 134,743 144,141 245,270 318,200 164,156 178,278 211,637
Three years later............ 180,412 194,358 280,261 322,065 394,379 255,278 284,097 274,154
Four years later............. 229,162 289,966 347,702 387,337 492,314 348,031 323,961
Five years later............. 294,491 340,262 396,078 455,993 563,813 376,116
Six years later.............. 324,708 373,737 442,578 508,658 578,642
Seven years later............ 343,003 403,292 464,744 521,327
Eight years later............ 368,752 418,240 477,581
Nine years later............. 380,853 430,070
Ten years later.............. 393,482
<CAPTION>
1995 1996
-------- -------
(IN THOUSANDS)
<S> <C> <C>
CUMULATIVE AMOUNT OF LIABILITY
PAID THROUGH:
One year later............... $116,194 $78,726
Two years later.............. 194,550
Three years later............
Four years later.............
Five years later.............
Six years later..............
Seven years later............
Eight years later............
Nine years later.............
Ten years later..............
</TABLE>
While the Exchange and its subsidiaries have experienced significant
favorable development on gross loss and LAE reserves initially recorded at year
ends 1987 through 1993, development on net loss and LAE reserves has been very
limited since 1992 due to the impact of aggregate excess reinsurance contracts
in place since 1992. The aggregate excess reinsurance contracts provide coverage
for losses and ALAE above aggregate retentions. The aggregate excess reinsurance
contracts, therefore, have the effect of holding net incurred losses and ALAE at
a constant level as long as losses and ALAE ceded under the aggregate excess
reinsurance contracts remain within the coverage limits. Ceded losses and ALAE
have remained within coverage limits in each year since 1992. Each of the
aggregate excess reinsurance contracts contains a profit sharing provision
whereby favorable gross loss and ALAE reserve development may ultimately be
returned to the Exchange and its subsidiaries once all subject losses and ALAE
have been paid or the contract has been commuted. Profit sharing is recorded by
the Exchange and its subsidiaries after the funds withheld balance related to an
aggregate excess reinsurance contract exceeds the related ceded reserves. Profit
sharing is then recorded as an offset to funds held charges and to the funds
withheld liability. Profit sharing was recorded for the 1992 aggregate excess
contract as an offset to equivalent funds held charges in the amounts of $16.7
million (1994), $18.0 million (1995), $19.4 million (1996), $20.6 million (1997)
and $9.5 million (six months ended June 30, 1998). There was no net effect on
income arising from accrual of profit sharing and the recording of funds held
charges on the 1992 aggregate excess contract in the years ended December 31,
1994, 1995, 1996, 1997 and the six months ended June 30, 1998. Profit sharing
has also been recorded for the 1993 aggregate excess contract as an offset to
equivalent funds held charges of $1.1 million for the six months ended June 30,
53
<PAGE> 57
1998. There was no net effect on income arising from the accrual of profit
sharing and the recording of funds held charges on the 1993 aggregate excess
contract for the six months ended June 30, 1998.
General liability incurred losses have been less than 1.9% of medical
malpractice incurred losses in the last five years. The Company does not have
material reserves for pollution claims and the Company's claims experience for
pollution coverage has been negligible.
While the Company believes that its reserves for losses and LAE are
adequate, there can be no assurance that the Company's ultimate losses and LAE
will not deviate, perhaps substantially, from the estimates reflected in the
Company's financial statements. If the Company's reserves should prove
inadequate, the Company will be required to increase reserves, which could have
a material adverse effect on the Company's financial condition or results of
operations. See "Risk Factors -- Loss and LAE Reserves."
REINSURANCE
Reinsurance Ceded. The Company follows customary industry practice by
reinsuring some of its business. The Company typically cedes to reinsurers a
portion of its risks and pays a fee based upon premiums received on all policies
so subject to such reinsurance. Insurance is ceded principally to reduce net
liability on individual risks and to provide aggregate loss and LAE protection.
Although reinsurance does not legally discharge the ceding insurer from its
primary liability for the full extent of the policies reinsured, it does make
the reinsurer liable to the insurer to the extent of the reinsurance ceded. The
Company determines how much reinsurance to purchase based upon its evaluation of
the risks it has insured, consultations with its reinsurance brokers, and market
conditions, including the availability and pricing of reinsurance. The Company's
reinsurance arrangements are generally placed through Pegasus Advisors, Inc., a
reinsurance broker wholly owned by the Attorney-in-Fact and to be acquired by
the Company as part of the acquisition of the Attorney-in-Fact and its
subsidiaries.
The Company reinsures its risks primarily under two reinsurance contracts,
the Specific Contract and the Aggregate Contract. Under the Specific Contract,
the Company's retentions for casualty business range from $2 million to $3
million per loss per policy. Coverage on casualty business is provided in layers
up to $48 million per loss per policy above the retentions. Coverage for
casualty business under the Specific Contract is limited by an aggregate
deductible, aggregate limits by layer and required Company participation in
upper layer losses. Property coverage is also provided under the Specific
Contract in the amount of $14.5 million in excess of a Company retention of
$500,000 per loss per policy and is subject to an aggregate limit. The Company
has maintained specific excess of loss reinsurance coverage generally similar to
that just described for several years.
The Aggregate Contract provides 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 ALAE ratio ("loss and ALAE ratio"). Reinsurers
provide coverage for an additional 75% loss and ALAE ratio, with an aggregate
annual limit of $130 million. The Company has maintained aggregate excess of
loss coverage generally similar to that just described since 1993. In addition,
in 1992 the Company implemented, on a funds withheld basis, a combined aggregate
and specific excess of loss reinsurance treaty to protect the underwriting and
operating results from adverse development for losses and allocated loss
adjustment expenses occurring on or before December 31, 1992 on policies written
by the Company on or after December 31, 1992. Two coverages are provided under
the treaty. Aggregate excess of loss coverage of up to $300 million is provided
on subject losses above a Company retention of $367 million. Specific excess
coverage of $250,000 in excess of $500,000 per loss occurrence is also provided
on subject losses, after application of an aggregate deductible, up to an
aggregate limit of $60 million. The $300 million aggregate coverage limit is
reduced to the extent the specific excess limit is utilized. Additional
consideration of up to $4 million may be due reinsurers under the treaty should
ceded losses under the aggregate coverage exceed $280 million. An investment
credit of 8% is applied to the funds withheld. A profit sharing provision in the
treaty returns any excess funds withheld to the Company upon completion of the
payout or upon commutation, which the Company may elect at any quarter end.
Accrued profit sharing was recorded as an offset to equivalent funds held
charges in the amounts of $16.7 million (1994), $18.0 million
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<PAGE> 58
(1995), $19.4 million (1996), $20.6 million (1997) and $9.5 million (six months
ended June 30, 1998). There was no net effect on income arising from accrual of
profit sharing and the recording of funds held charges on the 1992 aggregate
excess contract in the years ended December 31, 1994, 1995, 1996, 1997 and the
six months ended June 30, 1998. Profit sharing has also been recorded for the
1993 aggregate excess contract as an offset to equivalent funds held charges of
$1.1 million for the six months ended June 30, 1998. There was no net effect on
income arising from the accrual of profit sharing and the recording of funds
held charges on the 1993 aggregate excess contract for the six months ended June
30, 1998.
The major elements of ceded reinsurance activity are summarized in the
following table:
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
FOR THE YEAR ENDED DECEMBER 31, ENDED JUNE 30,
-------------------------------- ------------------
1995 1996 1997 1997 1998
-------- -------- -------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Ceded premiums earned.................... $31,633 $36,699 $42,337 $15,854 $17,385
Ceded Losses and Loss Adjustment
Expenses............................... $53,405 $57,609 $68,596 $28,425 $39,048
Funds held charges....................... $ 5,473 $ 8,626 $11,581 $ 5,611 $ 6,845
</TABLE>
Credit risk from reinsurance is controlled by placing the reinsurance with
large, highly rated reinsurers and by collateralizing amounts recoverable from
reinsurers. The following table identifies the Company's most significant
reinsurers, the total amount recoverable from them for unpaid losses, prepaid
reinsurance premiums and other amounts as of December 31, 1997, and collateral
held by the Company primarily in the form of funds withheld and letters of
credit as of December 31, 1997. No other single reinsurer's percentage
participation in 1997 exceeded 5% of the total reinsurance recoverable at
December 31, 1997.
<TABLE>
<CAPTION>
AT DECEMBER 31, 1997
--------------------------------
TOTAL AMOUNTS TOTAL AMOUNT OF
REINSURER RECOVERABLE COLLATERAL HELD
- --------- ------------- ---------------
(IN THOUSANDS)
<S> <C> <C>
Hannover Reinsurance (Ireland) Ltd.......................... $253,355 $255,866
Eisen und Stahl Reinsurance (Ireland) Ltd................... 64,001 63,977
Scandinavian Reinsurance Company Ltd........................ 51,344 51,391
London Life and Casualty Reinsurance Corporation............ 48,254 48,365
Underwriters Reinsurance Company (Barbados)................. 27,053 26,827
</TABLE>
The Company analyzes the credit quality of its reinsurers and relies on its
brokers and intermediaries to assist it in such analysis. To date, the Company
has not experienced any material difficulties in collecting reinsurance
recoverables. No assurance can be given, however, regarding the future ability
of any of the Company's reinsurers to meet their obligations. See "Risk
Factors -- Reinsurance."
Reinsurance Assumed. The Company assumed reinsurance in annual amounts of
less than $1 million through 1995. The Company assumed reinsurance under three
programs, with assumed premiums of $2.2 million and $4.6 million in 1996 and
1997, respectively. The Company provides medical professional liability
reinsurance coverage to American Medical Mutual, Inc., A Risk Retention Group
("AMM") under a quota share contract and two excess of loss contracts. AMM is
also managed by the New Jersey State Medical Underwriters, Inc. and in 1997 had
$3.6 million of premiums written. The Company participated in the IRM Services,
Inc. property pool ("the Pool") with a 5% share in 1996 and 1997. The Pool was
discontinued and placed into runoff on November 30, 1996. Only minimal further
activity beyond 1997 is expected under this arrangement. The Company was also a
participant in quota share reinsurance contracts in 1996 and 1997 with
Underwriters Reinsurance Company, whereby the Company reinsured up to $250,000
per risk on business identified by Underwriters Reinsurance Company as casualty
facultative business. The contract was discontinued on March 1, 1998.
In addition, in 1997 the Company assumed reinsurance under a novation
agreement pertaining to certain policies written for a large hospital group
during 1989 through 1997. Premiums associated with this agreement
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<PAGE> 59
amounted to $10.9 million in 1997. Existing ceded reinsurance agreements with
the hospital group's captive insurer covering the novated business remain in
effect following the novation.
The Company believes that as more managed care organizations and integrated
health care delivery systems retain a larger part of their exposure directly or
through captive arrangements, they will need to obtain excess insurance or
reinsurance for the potentially larger losses, and the Company believes that it
is prepared to meet this need through assumed reinsurance arrangements.
INVESTMENT PORTFOLIO
An important component of the operating results of the Exchange and its
subsidiaries has been the return on their invested assets. Such investments are
made by investment managers and internal management under policies established
and supervised by the Investment Advisory and Finance Committee of the Board of
Governors and Board of Directors of the Attorney-in-Fact (the "Investment
Committee"). The Company's current investment policy has placed primary emphasis
on investment grade, fixed maturity securities and maximization of after-tax
yields while minimizing credit risk of the portfolio. The Company currently uses
three outside investment managers for fixed maturity securities.
The following table sets forth the composition of the investment portfolio
of the Exchange and its subsidiaries at the dates indicated. All of the fixed
maturity investments are held as available-for-sale.
<TABLE>
<CAPTION>
DECEMBER 31, 1996 DECEMBER 31, 1997 JUNE 30, 1998
-------------------- -------------------- ----------------------
COST OR COST OR COST OR
AMORTIZED FAIR AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE COST VALUE
--------- -------- --------- -------- --------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Fixed Maturity Investments:
Bonds:
US Government and
Agencies.................. $184,571 $182,506 $188,715 $193,007 $136,110 $ 141,735
State, municipalities and
political subdivisions.... 258,775 261,614 202,386 209,605 172,910 178,578
Mortgage-backed securities
and other asset-backed
securities................ 260,849 261,955 311,562 316,795 331,651 336,637
Corporate................... 56,607 56,795 130,159 133,339 273,926 278,026
-------- -------- -------- -------- -------- ----------
Total Fixed Maturity
Investments................. 760,802 762,870 832,822 852,746 914,597 934,976
-------- -------- -------- -------- -------- ----------
Equity Investments............... 55,334 67,230 65,520 89,080 68,019 92,292
-------- -------- -------- -------- -------- ----------
Total.......................... $816,136 $830,100 $899,342 $941,826 $982,616 $1,027,268
======== ======== ======== ======== ======== ==========
</TABLE>
In July 1998 the Exchange substantially liquidated its equity investment
portfolio.
The investment portfolio of the Exchange and its subsidiaries of fixed
maturity investments consists primarily of intermediate-term, investment-grade
securities along with a modest allocation to below investment-grade (i.e. high
yield) fixed maturity investments not to exceed 7.5% of invested assets. The
Company's investment policy provides that all security purchases be limited to
rated securities or unrated securities approved by the Investment Committee.
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<PAGE> 60
The table below contains additional information concerning the investment
ratings of the fixed maturity investments at June 30, 1998:
<TABLE>
<CAPTION>
PERCENTAGE OF
S&P RATING OF INVESTMENT(1) AMORTIZED COST FAIR VALUE FAIR VALUE
--------------------------- -------------- ---------- -------------
(IN THOUSANDS)
<S> <C> <C> <C>
AAA (including US Government and Agencies)............ $566,485 $581,657 62.2%
AA.................................................... 43,837 45,152 4.8
A..................................................... 187,371 190,580 20.4
BBB................................................... 76,603 78,201 8.4
Other Ratings......................................... 39,500 38,663 4.1
Not Rated............................................. 801 723 0.1
-------- -------- -----
Total....................................... $914,597 $934,976 100.0%
======== ======== =====
</TABLE>
- ---------------
(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 in the investment portfolio of the
Exchange and its subsidiaries as of June 30, 1998, by contractual maturity:
<TABLE>
<CAPTION>
PERCENTAGE OF
MATURITY OF INVESTMENT AMORTIZED COST FAIR VALUE FAIR VALUE
---------------------- -------------- ---------- -------------
(IN THOUSANDS)
<S> <C> <C> <C>
Due one year or less.................................. $ 24,903 $ 24,947 2.7%
Due after one year through five years................. 125,761 126,731 13.6
Due after five years through ten years................ 116,477 120,272 12.9
Due after ten years................................... 315,805 326,389 34.8
Mortgage-backed and other asset-backed securities..... 331,651 336,637 36.0
-------- -------- -----
Totals...................................... $914,597 $934,976 100.0%
======== ======== =====
</TABLE>
The average effective maturity and the average modified duration of the
securities in the Company's fixed maturity portfolio as of June 30, 1998, was
10.5 years and 6.31 years, respectively.
The Company's mortgage-backed portfolio represents approximately 30% of the
total fixed income portfolio, and is allocated equally across "standard" and
"more complex" securities, while the Company's asset-backed portfolio represents
approximately 6% of the total fixed income portfolio.
Standard, mortgage-backed securities are issued on and collateralized by an
underlying pool of single-family home mortgages. Principal and interest payments
from the underlying pool are distributed pro rata to the security holders. More
complex mortgage-backed security structures prioritize the distribution of
interest and principal payments to different classes of securities which are
backed by the same underlying collateral mortgages. Regardless of structure,
mortgage-backed securities involve the same risks associated with all fixed
income investments: interest rate risk, reinvestment rate risk, and default or
credit risk. In addition, mortgage-backed securities also possess prepayment
risk, which is the risk that a security's originally scheduled interest and
principal payments will differ considerably due to changes in the level of
interest rates. In a standard pass-through mortgage-backed security, the
inherent risks are identical across all security holders, but as mortgage-
backed security structures become more complex the risk is spread unevenly
across the different securities issued on the same underlying pool of mortgages.
This results in securities having dramatically different credit and/or
prepayment characteristics even though the securities are issued from the same
underlying collateral. The Company takes advantage of this "structural" risk by
purchasing those mortgage-backed securities which, due to this uneven spread of
risk, possess enhanced credit and/or stable prepayment characteristics.
"Other asset backed securities" are classified similarly to mortgage-backed
securities as these types of securities also involve prepayment risk. Assets
other than traditional home mortgages are used to collateralize
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<PAGE> 61
these types of securities. Examples include securities backed by home equity
loans, lease receivables, high yield bonds, credit card receivables, and auto
loan receivables. The Company only purchases those securities structured to
enhance credit quality and/or provide prepayment stability. The Company
continues to use and adopt financial modeling techniques to monitor and manage
the risks associated with its fixed income portfolio holdings.
The Company's short-term investments are composed of "AAA-rated" and
"AA-rated" money market instruments and money market mutual funds.
Asset and liability matching is an important part of the Company's
portfolio management process. The Company utilizes financial modeling and
scenario analysis to monitor closely the effective modified duration of both
assets and liabilities in order to minimize any "gapping" or "mismatching"
issues with respect to the balance sheet. Any adjustments to portfolio strategy
indicated from such analysis are made to reflect emerging liability pay-out
trends, significant changes in financial markets, and the Company's changing
business. Effective asset/liability management has resulted in the Company's
ability to consistently pay claims from operating funds without disrupting the
Company's long-term investment strategy.
COMPETITION
The physician professional liability insurance market in the United States
is highly competitive. According to A.M. Best, in 1996 there were 357 companies
nationally that wrote medical professional liability insurance and 112 companies
licensed in New Jersey. In New Jersey, where approximately 67% of the Company's
1998 premiums were written as of June 30, 1998, the Company's principal
competitor is Princeton Insurance Companies. In New Jersey and other states, the
Company's principal competitors include CNA Insurance Group, Frontier Insurance
Group, Inc., PHICO Insurance Company and St. Paul Companies. These companies
rank among the top 20 medical malpractice insurers nationally and are actively
engaged in soliciting insureds in the states in which the Company writes
insurance. In addition, as the Company expands into new states, it may face
strong competition from local carriers that are closely focused on narrow
geographic markets. The Company expects to encounter such competition from
doctor-owned insurance companies and commercial companies in other states as it
carries out its expansion plans. Many of the Company's current and potential
competitors may have greater financial resources than the Company and may seek
to acquire market share by decreasing pricing for their products below
prevailing market rates, thereby reducing profitability. Several insurance
companies that have greater financial resources than the company have started to
write medical malpractice insurance in New Jersey. The Company believes that the
principal competitive factors, in addition to pricing, include financial
stability and A.M. Best ratings, breadth and flexibility of coverage, and the
quality and level of services provided.
The hospital professional liability insurance market is also extremely
competitive. Most of the Company's principal insurance company competitors for
physicians and medical groups also now actively compete in the hospital
professional liability insurance market. Moreover, the Company's primary
competitor in New Jersey was founded to provide professional liability coverage
to hospitals, while the Company traditionally served the individual physician
market. The Company also believes that the number of health care entities that
insure their affiliated physicians through self-insurance may rise.
The Company plans to compete by diversifying its products, expanding
geographically, extending its distribution channels, and differentiating itself
through superior claims, risk management, and customer services. All markets in
which the Company now writes insurance and in which it expects to enter have
certain competitors with substantially greater financial and operating resources
than the Company. See "Risk Factors -- Competition."
REGULATION
The Exchange, MIIX Insurance, LP&C and MIIX New York are each subject to
supervisory regulation by their respective states of incorporation, commonly
called the state of domicile. The Exchange and MIIX Insurance are domiciled in
New Jersey, LP&C is domiciled in Virginia and MIIX New York is domiciled in New
York. Therefore, the laws and regulations of these states, including the tort
liability laws and the laws
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<PAGE> 62
relating to professional liability exposures and reports, have the most
significant impact on the operations of the combined company. Lawrenceville Re,
a wholly owned subsidiary of the Attorney-in-Fact, is domiciled in Bermuda.
Holding Company Regulation. As part of a holding company system, the
Exchange, MIIX Insurance, LP&C and MIIX New York are subject to the Insurance
Holding Company Systems Acts (the "Holding Company Act") of their domiciliary
states. The 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. Certain
transactions between an insurance company and its affiliates, including sales,
loans or investments, are deemed "material" and require prior approval by New
Jersey or Virginia insurance regulators. In New Jersey and Virginia,
transactions with affiliates involving loans, sales, purchases, exchanges,
extensions of credit, investments, guarantees, or other contingent obligations
which within any 12 month period aggregate at least 3% of the insurance
company's admitted assets or 25% of its capital and surplus, whichever is
greater, require prior approval. Prior approval is also required for all
management agreements, service contracts, and cost-sharing arrangements between
affiliates. Certain reinsurance agreements or modifications also require prior
approval.
Certain other material transactions, not involving affiliates, must be
reported to the domiciliary regulatory agency within 15 days after the end of
the calendar month in which the transaction occurred (in contrast to prior
approval). These transactions include acquisitions and dispositions of assets
that are nonrecurring, are not in the ordinary course of business, and exceed 5%
of the Company's admitted assets. Similarly, nonrenewals, cancellations, or
revisions of ceded reinsurance agreements, which affect statutorily established
percentages of the Company's business, are also subject to disclosure.
The Holding Company Act also provides that the acquisition or change of
"control" of a domestic insurance company or of any person or entity that
controls such an insurance company cannot be consummated without prior
regulatory approval. In general, a presumption of "control" arises from the
ownership of voting securities and securities that are convertible into voting
securities, which in the aggregate constitute 10% or more of the voting
securities of the insurance company or of a person or entity that controls the
insurance company, such as The MIIX Group. A person or entity seeking to acquire
"control," directly or indirectly, of the Company would generally be required to
file an application for change of control containing certain information
required by statute and published regulations and provide a copy of the
application to the Company. The Holding Company Act also effectively restricts
the Company from consummating certain reorganizations or mergers without prior
regulatory approval.
Regulation of Dividends from Insurance Subsidiaries. The Holding Company
Act of the State of New Jersey will limit the ability of MIIX Insurance to pay
dividends to The MIIX Group. Without prior notice to and approval of the
Commissioner, MIIX Insurance may not declare or pay an extraordinary dividend,
which is defined as any dividend or distribution of cash or other property whose
fair market value together with other dividends or distributions made within the
preceding 12 months exceeds the greater of such subsidiary's statutory net
income of the preceding calendar year or 10% of statutory surplus as of the
preceding December 31. The law further requires that an insurer's statutory
surplus following a dividend or other distribution be reasonable in relation to
its outstanding liabilities and adequate to meet its financial needs. New Jersey
permits the payment of dividends only out of statutory earned (unassigned)
surplus unless the payment out of other funds is approved by the Commissioner.
In addition, a New Jersey insurance company is required to give the New Jersey
Department notice of any dividend after declaration, but prior to payment.
The other United States domiciled Insurance Subsidiaries will be subject to
similar provisions and restrictions under the Holding Company Acts of other
states.
Insurance Company Regulation. The Company is subject to the insurance laws
and regulations in each state in which it is licensed to do business. The
Company is licensed in 30 states and the District of Columbia. In three of such
states, the license currently does not include the authority to write medical
malpractice insurance. In addition, in seven of such states, the Company is in
the process of the rate, rule and form filings necessary in order to write
medical malpractice policies in such states. The extent of regulation varies by
state,
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<PAGE> 63
but such regulation usually includes: (i) regulating premium rates and policy
forms; (ii) setting minimum capital and surplus requirements; (iii) regulating
guaranty fund assessments; (iv) licensing companies and agents; (v) approving
accounting methods and methods of setting statutory loss and expense reserves;
(vi) setting requirements for and limiting the types and amounts of investments;
(vii) establishing requirements for the filing of annual statements and other
financial reports; (viii) conducting periodic statutory examinations of the
affairs of insurance companies; (ix) approving proposed changes of control; and
(x) limiting the amounts of dividends that may be paid without prior regulatory
approval. Such regulation and supervision are primarily for the benefit and
protection of policyholders and not for the benefit of investors.
Insurance Guaranty Associations. Most states, including New Jersey and
Virginia, require admitted property and casualty insurers to become members of
insolvency funds or associations that generally protect policyholders against
the insolvency of such insurers. Members of the fund or association must
contribute to the payment of certain claims made against insolvent insurers.
Maximum contributions required by law in any one year vary by state, and are
usually between 1% and 2% of annual premiums written by a member in that state
during the preceding year. New Jersey and Virginia, the states in which the
Exchange and LP&C are respectively domiciled, and Texas, Pennsylvania, Maryland,
Kentucky, states in which the Company has significant business, permit a maximum
assessment of 2%. Ohio permits a maximum assessment of 1.5%. New Jersey permits
recoupment of guaranty fund payments through future policy surcharges. Virginia
and Texas permit premium tax reductions as a means of recouping guaranty fund
payments. Most other states permit recoupment through future rate increases.
Examination of Insurance Companies. Every insurance company is subject to
a periodic financial examination under the authority of the insurance
commissioner of its state of domicile. Any other state interested in
participating in a periodic examination may do so. The last completed periodic
financial examination of the Exchange, based on December 31, 1993 financial
statements, was completed on March 5, 1995, and a report was issued on June 21,
1995. The Exchange currently is undergoing another periodic examination that
began on November 24, 1997. The last periodic financial examination of LP&C,
based on December 31, 1996 financial statements, was completed on April 25,
1997, and a report was issued on August 4, 1997. Various states also conduct
"market conduct examinations" which are unscheduled examinations designed to
monitor the compliance with state laws and regulations concerning the filing of
rates and forms and company operations in general. The Company has not undergone
a market conduct examination.
Risk-Based Capital. In addition to state-imposed insurance laws and
regulations, insurers are subject to the general statutory accounting practices
and the reporting format of the National Association of Insurance Commissioners
(the "NAIC"). The NAIC's methodology for assessing the adequacy of statutory
surplus of property and casualty insurers includes a risk-based capital ("RBC")
formula that attempts to measure statutory capital and surplus needs based on
the risks in a company's mix of products and investment portfolio. The formula
is designed to allow state insurance regulators to identify potentially
under-capitalized companies. Under the formula, a company determines its RBC by
taking into account certain risks related to the insurer's assets (including
risks related to its investment portfolio and ceded reinsurance) and the
insurer's liabilities (including underwriting risks related to the nature and
experience of its insurance business). The RBC rules provide for different
levels of regulatory attention depending on the ratio of an insurance company's
total adjusted capital to its "authorized control level" of RBC. At December 31,
1997, the Exchange's RBC was 2.75 times greater than the threshold requiring the
least regulatory attention. At December 31, 1997, LP&C's RBC was 17.05 times
greater than the threshold requiring the least regulatory attention.
NAIC-IRIS Ratios. The NAIC Insurance Regulatory Information System
("IRIS") was developed by a committee of state insurance regulators and is
primarily intended to assist state insurance departments in executing their
statutory mandates to oversee the financial condition of insurance companies
operating in their respective states. IRIS identifies 12 ratios for the property
and casualty insurance industry and specifies a range of "usual values" for each
ratio. Departure from the "usual value" range on four or more ratios may lead to
increased regulatory oversight from individual state insurance commissioners. In
1997 LP&C had two ratios (change in net writings and change in surplus) outside
the usual value range, which were triggered from a zero prior year basis since
LP&C was acquired in 1996. In 1996 the Exchange had one ratio (investment yield
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ratio) fall outside of the usual range, which resulted from the lower pre-tax
yields provided by the tax exempt securities in its investment portfolio. The
Exchange also had one ratio (estimated current reserve deficiency to surplus)
fall outside of the usual range in 1995. This occurred primarily as a result of
a reduction in the cost of reinsurance protection in 1995 relative to 1994 and
1993, which increased net premiums but did not result in an increase in net loss
reserves.
Regulation of Investments. The Insurance Subsidiaries are subject to state
laws and regulations that require diversification of their investment portfolios
and limit the amount of investments in certain investment categories such as
below investment grade fixed income securities, real estate and equity
investments. Failure to comply with these laws and regulations would cause
investments exceeding regulatory limitations to be treated as non-admitted
assets for purposes of measuring statutory surplus and, in some instances, would
require divestiture of such non-qualifying investments over specified time
periods unless otherwise permitted by the state insurance authority under
certain conditions. The Company did not have any non-qualifying investments in
1997.
Prior Approval of Rates and Policies. Pursuant to the New Jersey Insurance
Code, a domestic insurer must submit policies and endorsements to the
Commissioner for prior approval, but rating plans and rates are not subject to
review until 30 days after use. Virginia law requires LP&C to submit rating
plans, rates, policies, and endorsements to regulators for prior approval. The
possibility exists that the Company may be unable to implement desired rates,
policies, endorsements, forms, or manuals if such items are not approved by the
applicable regulatory authorities. See "Risk Factors -- Regulatory and Related
Matters." In the past, all of the Company's rate applications have been approved
in the normal course of review. In most other states, policy forms usually are
subject to prior approval by the regulatory agency while rates usually are "file
and use."
Medical Malpractice Tort Reform. Major revisions to New Jersey's statutory
scheme governing medical malpractice took effect in 1995. These revisions
included raising joint and several liability standards, requiring certificates
of merit, eliminating strict liability of health care providers due to defective
products used in their practices, and capping punitive damages at the greater of
five times compensatory damages or $350,000. These changes are bringing
stability to the medical malpractice insurance business in New Jersey by making
it more feasible for insurers to assess certain risks. Legislation passed in
1996 in Pennsylvania provides, among other things, that plaintiffs must prove
causation in informed consent cases, that punitive damages assessed against
individual defendants be capped at twice the compensatory damages, and that the
Pennsylvania Medical Professional Liability Catastrophe Loss Fund (the "Cat
Fund") be responsible for delay damages and post-judgment interest. Texas tort
reform applicable to cases accruing on or after September 1, 1996, bars
plaintiffs from recovery if their own negligence is more than 50% responsible
for their injuries, while defendants shall be jointly and severally liable only
if found to be more than 50% responsible. Exemplary damages shall not exceed the
greater of $200,000, or two times the economic damage plus the non-economic
damage, not to exceed $750,000.
Medical Malpractice Reports. The Exchange and LP&C principally write
medical malpractice insurance and additional requirements are placed upon them
to report detailed information with regard to settlements or judgments against
their insureds. In addition, the Company is required to report to state
regulatory agencies or the National Practitioners Data Bank payments, claims
closed without payments, and actions by the Company, such as terminations or
surcharges, with respect to its insureds. Penalties may attach if the Company
fails to report to either the state agency or the National Practitioners Data
Bank.
Catastrophe Funds. In two states in which the Company writes insurance,
its liability is capped at a level below the Company's typical policyholder
limits of coverage. Pennsylvania's Cat Fund provides coverage for medical
malpractice claims exceeding $300,000 per claim and $900,000 aggregate per year.
The Cat Fund coverage is limited to $900,000 per claim and $2.7 million in the
aggregate. Beginning in 1999, the Cat Fund will provide coverage for claims
exceeding $400,000 and $1.2 million in the aggregate, up to a maximum of
$800,000 per claim and $2.4 million in the aggregate. Similarly, after July 1,
1998, physicians in Indiana will be required to purchase insurance limits of
$250,000 per claim and $750,000 in the aggregate. The Indiana
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Patient Compensation Fund provides an additional $1 million of coverage per
claim for an insured. A plaintiff's maximum total recovery for medical
malpractice causing injury or death is $1.25 million in Indiana.
A.M. BEST RATINGS
In 1997 A.M. Best, which rates insurance companies based on factors of
concern to policyholders, rated the Company "A (Excellent)" for the third
consecutive year. This is the third highest rating of 16 ratings that A.M. Best
assigns. The Company earned its first rating, a "B+," in 1992 and achieved an
"A" rating by 1995.
A.M. Best publications indicate that the "A" rating is assigned to those
companies that in A.M. Best's opinion have a strong ability to meet their
obligations to policyholders over a long period of time. In evaluating a
company's financial and operating performance, A.M. Best reviews the company's
profitability, leverage, and liquidity; its book of business; the adequacy and
soundness of its reinsurance; the quality and estimated market value of its
assets; the adequacy of its loss reserves and surplus; its capital structure;
the experience and competence of its management; and its market presence. See
"Risk Factors -- A.M. Best Ratings."
EMPLOYEES
As of June 30, 1998, the Company employed 220 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.
PROPERTIES
As of June 30, 1998, the Company leased 49,000 square feet of space from
the Medical Society in Lawrenceville, New Jersey, where its home office and
Mid-Atlantic Region office are located. The Company also leases 28,000 square
feet of space in a second Lawrenceville office building, where its Claim
Department and a subsidiary are based. The Company's regional office facilities
are located in rented office space in Indianapolis (5,000 square feet), Boston
(3,670 square feet), Atlanta (4,190 square feet) and Dallas (5,000 square feet).
The Company believes that its office space is adequate for its present needs and
that it will be able to secure additional office space in the future if
necessary. The Company is considering the purchase of its headquarters in
Lawrenceville, New Jersey, which it currently leases from the Medical Society
and has retained an independent appraisal firm to determine its fair market
value.
LITIGATION
The Company may be a party to litigation from time to time in the ordinary
course of business. Except as described under "Risk Factors -- Possible Adverse
Impact of Litigation," the Company is not currently a party to any litigation
which may have a material adverse effect on the Company.
COMPARISON OF RIGHTS
Members of the Exchange, a reciprocal insurer, have certain rights as
members which are described herein as "Membership Interests." Membership
Interests consist of the rights arising under the Rules and Regulations of the
Exchange (the "Rules and Regulations") or under law. Upon consummation of the
Reorganization, Membership Interests will be extinguished, and Distributees will
become stockholders of The MIIX Group or will receive cash. Holders of Common
Stock will have certain rights under the Certificate of Incorporation and
By-laws of The MIIX Group and under Delaware Law.
The following is a comparison of certain rights of Members of the Exchange
and holders of Common Stock. This comparison is not intended to be complete and
is qualified in its entirety by reference to the Rules and Regulations of the
Exchange, copies of which will be sent to Members upon request, and by reference
to the Certificate of Incorporation and By-laws of The MIIX Group, which are
filed as exhibits to the Registration Statement of which this Prospectus forms a
part.
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LIQUIDITY/MARKETABILITY
A Membership Interest is not transferable and terminates when the coverage
period or certificate period of the member under the policy issued by the
Exchange terminates by expiration of time, cancellation or otherwise. The MIIX
Group has applied for listing of the shares of Common Stock on the NYSE. As a
result, The MIIX Group anticipates that there will be a public market for the
shares of Common Stock.
DISTRIBUTIONS
If the Board of Governors, in its reasonable discretion, determines that
the surplus of the Exchange is adequate to meet estimated operating requirements
and provide protection for members and that there is additional surplus
available for distribution to members, the Board may distribute all or a portion
of this additional surplus to members. Each member's share of such distribution
is determined by the Board of Governors in its reasonable discretion. When a
person ceases to be member, such person loses rights to future dividends or
other distributions.
There is no statute describing how assets would be distributed upon a
liquidation of the Exchange.
After the Reorganization holders of Common Stock will be entitled to
participate equally in dividends if, as and when declared by the Board of
Directors of The MIIX Group, and in the distribution of assets in the event of
dissolution, subject to the rights of holders of Preferred Stock, if any. See
"Dividend Policy."
MEETINGS AND ACTIONS
Any actions required to be taken by the members of the Exchange may be
taken at a duly called annual or special meeting. Special meetings of the
members may be called only by the Chairman of the Board of Governors and shall
be called by him upon the written request of one-third of the total number of
Governors and 20 members of the Exchange. The business transacted at any special
meeting of the members is confined to matters specified in the notice of
meeting. The Rules and Regulations contain an advance notice procedure with
respect to the election of Governors. All nominations for elections of Governors
must be filed with the Attorney-in-Fact at least 10 days before the election. If
nominations are not so filed, the unanimous vote of the members represented in
person or by proxy at the meeting shall be necessary to elect one not so
nominated to the Board of Governors.
Any action required or permitted to be taken by the stockholders of The
MIIX Group must be taken by vote of the stockholders at a duly called annual or
special meeting of stockholders and not by written consent. Special meetings of
stockholders may be called only by the Chief Executive Officer (or, in the event
of his or her absence or disability, by any Vice President) or the Chairman or
Vice Chairman of the Board of Directors, and shall be called by any of them
pursuant to a resolution adopted by a majority of the Board of Directors. The
business transacted at any special meeting of stockholders is confined to
matters specified in the notice of meeting. The MIIX Group By-laws establish an
advance notice procedure with regard to the nomination by stockholders of
candidates for election as directors and with regard to proposals of business to
be brought before an annual meeting of stockholders of The MIIX Group. Notice as
to any such stockholder nomination or other proposal must be received by The
MIIX Group not less than 90 days nor more than 120 days prior to the anniversary
date of the immediately preceding annual meeting. In the event that the date of
the annual meeting is advanced by more than 20 days or delayed by more than 70
days from such anniversary date, however, the By-laws provide additional time
for notice. In addition, such notice must contain certain specified information
concerning the person to be nominated or the matters to be brought before the
meeting as well as the name and address of the stockholder and the class and
number of shares beneficially owned by the stockholder submitting the proposal.
VOTING
Each member of the Exchange is entitled to one vote on all matters
submitted to the members for action or approval. The Rules and Regulations
generally require the affirmative vote of a majority of members to approve
matters submitted to the members unless a higher vote is required by law or the
Rules and
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Regulations. The Rules and Regulations may be amended by members of the Exchange
upon the affirmative vote of two-thirds of the members represented in person or
by proxy at a meeting.
Holders of Common Stock are entitled to one vote per share on all matters
with respect to which the holders of Common Stock are entitled to vote
(including the election of directors) and, except as otherwise required by law
or by the terms of any series of Preferred Stock, if any, the holders of Common
Stock will possess all stockholder voting power. The Certificate of
Incorporation of The MIIX Group provides that certain provisions thereof may not
be amended without the affirmative vote of two-thirds of the outstanding stock
entitled to vote in the election of directors. The By-laws may be amended by
stockholders upon the affirmative vote of two-thirds or more of the combined
voting power of The MIIX Group entitled to vote in the election of directors.
There is no right of cumulative voting.
PREFERRED STOCK
The Exchange is not authorized to issue preferred stock.
The MIIX Group Board of Directors is authorized, subject to any limitations
prescribed by law, without further action by stockholders, to issue up to
50,000,000 shares of Preferred Stock from time to time in one or more series
and, with respect to each series, to determine the terms thereof, including the
number of shares, dividend rates, redemption rights, conversion rights, voting
rights and rights on liquidation. See "Description of Capital Stock -- Preferred
Stock." Because The MIIX Group Board of Directors has the power to establish the
preferences, powers and rights of each series, it may afford the holders of any
particular series of Preferred Stock preferences, powers and rights (including
dividend rights, voting powers and liquidation preferences) senior to the rights
of the holders of Common Stock. No shares of Preferred Stock will be outstanding
immediately following the Reorganization and the anticipated Public Offering,
and The MIIX Group has no immediate plans to issue any series of Preferred
Stock. The issuance of a series of Preferred Stock could, depending on the terms
of such series, have the effect of discouraging, delaying or preventing a third
party from acquiring or proposing to acquire a majority of the outstanding
voting stock of The MIIX Group. See "Description of Capital Stock -- Delaware
Law and Certain Charter and By-law Provisions."
LIMITED LIABILITY
The liability of a member is generally limited to the premiums accrued
under the current policies of insurance issued by the Exchange to such member,
so long as a statutory minimum surplus is maintained. The liability of holders
of Common Stock is generally limited to the value of the Common Stock held by
the holder.
REMOVAL OF GOVERNORS/DIRECTORS
The Exchange's Rules and Regulations are silent as to the removal of
Governors. The MIIX Group's Certificate of Incorporation provides that directors
can be removed from office only for cause by a majority of the voting power of
the then outstanding shares of stock entitled to vote generally in the election
of directors.
BUSINESS COMBINATIONS
The Rules and Regulations of the Exchange state that the Board of Governors
may liquidate the Exchange only with the affirmative vote of two-thirds of the
members. The Rules and Regulations are silent with respect to business
combinations such as mergers and consolidations.
The Delaware General Corporation Law (the "DGCL") generally requires that a
majority of the stockholders approve a merger or consolidation or the sale,
lease or exchange of all or substantially all of a corporation's property and
assets. The DGCL contains additional restrictions where such action or
transaction is with, or proposed by or on behalf of, an "Interested Stockholder"
(defined generally as a person owning 15% or more of The MIIX Group's
outstanding voting stock). See "-- Anti-takeover Provisions" and "Description of
Capital Stock -- Delaware Law and Certain Charter and Bylaw Provisions."
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ANTI-TAKEOVER PROVISIONS
The Board of Governors is divided into three classes of directors, serving
staggered three-year terms. As a result, one-third of the Board of Governors is
elected each year. This classified board provision could delay a majority of
members who do not like the policies of the Board of Governors from replacing a
majority of the Board of Governors for two years.
The MIIX Group Board is divided into three classes of directors, serving
staggered terms expiring in 1999, 2000 and 2001 and thereafter three-year terms.
The classified board provisions could have the effect of discouraging a third
party from making a tender offer or otherwise attempting to gain control of The
MIIX Group. The Certificate of Incorporation and Bylaws of The MIIX Group also
contain certain provisions that may delay, defer or prevent a change of control
of The MIIX Group and make removal of management more difficult. These
provisions are intended to (i) enhance the likelihood of continuity and
stability in the composition of The MIIX Group Board of Directors and in the
policies formulated by The MIIX Group Board, (ii) discourage certain types of
transactions which may involve an actual or threatened change of control of The
MIIX Group, (iii) reduce the vulnerability of The MIIX Group to an unsolicited
proposal for a takeover that does not contemplate the acquisition of all its
outstanding shares or an unsolicited proposal for the restructuring or sale of
all or part of The MIIX Group, and (iv) discourage certain tactics that may be
used in proxy fights.
In addition, the issuance of shares of Preferred Stock by The MIIX Group
(or the issuance of rights to purchase such shares) could be used to discourage
an unsolicited acquisition proposal. For instance, the issuance of a series of
Preferred Stock might impede a business combination by including class voting
rights that would enable the holders to block such a transaction. Also, under
certain circumstances, the issuance of Preferred Stock could adversely affect
the voting power of the holders of Common Stock.
The MIIX Group is a Delaware corporation and is subject to the provisions
of Section 203 of the DGCL. In general, Section 203 prevents an Interested
Stockholder from engaging in a "business combination" (as defined in Section
203) with The MIIX Group for three years following the date that person became
an interested stockholder, subject to certain exceptions.
The provisions described in "-- Meetings and Actions" and "-- Removal of
Governors/Directors," together with the ability of The MIIX Group Board to
authorize the issuance of Preferred Stock without further stockholder action,
could delay or frustrate the removal of incumbent directors or the assumption of
control of The MIIX Group by the holder of a large block of Common Stock. These
provisions could also discourage or make more difficult a merger, tender offer
or proxy contest even if a majority of the stockholders might consider such
event to be in their best interest. See "Description of Capital
Stock -- Delaware Law and Certain Charter and By-law Provisions."
ACTION BY WRITTEN CONSENT
The Rules and Regulations do not state whether members of the Exchange may
act by written consent. Effective as of the time that the Common Stock is
registered pursuant to the Exchange Act, the Certificate of Incorporation and
the By-laws of The MIIX Group will prohibit stockholders from acting by written
consent.
MISCELLANEOUS
Neither Membership Interests in the Exchange nor Common Stock entitle their
holders to any preemptive rights, conversion rights or redemption rights.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth information concerning the individuals who
currently serve as directors of the Company. The officers set forth below are
all officers of the Attorney-in-Fact. The MIIX Group has only three executive
officers, Messrs. Goldberg, Koreyva and Hudson.
<TABLE>
<CAPTION>
NAME POSITION CLASS
- ---- -------- -----
<S> <C> <C>
Daniel Goldberg.............................. President, Chief Executive Officer and Director III
Joseph J. Hudson............................. Executive Vice President, Marketing and N/A
Business Development
Kenneth Koreyva.............................. Executive Vice President, Chief Financial N/A
Officer and Treasurer
Lisa Kramer.................................. Vice President, Claims N/A
Ronald Wade.................................. Vice President, Underwriting N/A
Angelo S. Agro, M.D. ........................ Director III
Hillel M. Ben-Asher, M.D. ................... Director III
Harry M. Carnes, M.D. ....................... Director III
Andrew Coronato, M.D. ....................... Director I
Palma E. Formica, M.D. ...................... Director II
John S. Garra, M.D. ......................... Director II
Paul J. Hirsch, M.D. ........................ Director III
Louis L. Keeler, M.D. ....................... Director II
Henry R. Liss, M.D. ......................... Director I
Arganey Lucas, Jr., M.D. .................... Director I
S. Stuart Mally, M.D. ....................... Director I
Vincent A. Maressa, Esq. .................... Director III
Murray N. Matez, D.O. ....................... Director I
Robert S. Maurer, D.O. ...................... Director II
A. Richard Miskoff, D.O. .................... Director II
Charles J. Moloney, M.D. .................... Director II
Eileen Marie Moynihan, M.D. ................. Director III
Fred M. Palace, M.D. ........................ Director I
John J. Pastore, M.D. ....................... Director I
Pascal A. Pironti, M.D. ..................... Director I
Carl Restivo, Jr., M.D. ..................... Director III
Joseph A. Riggs, M.D. ....................... Director I
Bernard Robins, M.D. ........................ Director II
Herman M. Robinson, M.D. .................... Director I
Gabriel F. Sciallis, M.D. ................... Director II
Benjamin I. Smolenski, M.D. ................. Director II
Martin L. Sorger, M.D. ...................... Director III
Bessie M. Sullivan, M.D. .................... Director III
Harvey P. Yeager, M.D. ...................... Director II
</TABLE>
The MIIX Group's Certificate of Incorporation provides for a Board of
Directors consisting of at least nine but not more than thirty-five directors.
At each succeeding Annual Meeting of stockholders following such initial
classification and election, the respective successors of each class shall be
elected for three-year terms.
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Daniel Goldberg, 51, Director, President and Chief Executive Officer of the
Attorney-in-Fact, has served in each of these capacities since 1990. Mr.
Goldberg is a member of the Board of Directors of ACCRA Holdings Corp. and
American Fidelity & Liberty Insurance Company. He is a member of the Academy of
Hospital Attorneys.
Joseph J. Hudson, 57, Executive Vice President, Marketing and Business
Development has served as Vice President of Marketing and Business Development
of the Attorney-in-Fact since 1994. Prior to that, he was a Vice President at
Alexander & Alexander, Inc. He is a member of the American Society of Hospital
Risk Managers, the Professional Liability Underwriting Society and the Society
of Chartered Property and Casualty Underwriters.
Kenneth Koreyva, 42, Executive Vice President, Chief Financial Officer and
Treasurer has served as Vice President, Chief Financial Officer and Treasurer of
the Attorney-in-Fact since 1997. From 1991 until 1997, he served as Vice
President in various capacities. Prior to that, he was a partner with the
accounting firm of Coopers & Lybrand. He is a member of the American Institute
of Certified Public Accountants.
Lisa Kramer, 52, Vice President, Claims of the Attorney-in-Fact, has served
in this capacity since 1990. She is a member of the American Bar Association,
the International Association of Defense Counsel and the Philadelphia Bar
Association.
Ronald D. Wade, 54, Vice President, Underwriting of the Attorney-in-Fact,
has served in this capacity since 1997. From 1996 until 1997 he was Senior Vice
President, Special Projects and Chief Operating Officer of ICA, a subsidiary of
P.I.E. Mutual Insurance Company. Prior to that he was Executive Vice President,
Chief Operating Officer and Assistant Secretary of Ohio Hospital Insurance
Company for more than five years. He is a member of the American Society of
Hospital Risk Managers and the Professional Liability Underwriters Association.
Angelo S. Agro, M.D., 49, Director, has been a member of the Board of
Directors of the Attorney-in-Fact since 1990. He is a physician certified by the
American Board of Otolaryngology. Dr. Agro has practiced in Voorhees, New
Jersey, for more than five years with Professional Otolaryngology Associates. He
is a member of the American Academy of Otolaryngology, the American Medical
Association, the American College of Surgeons, and the Medical Society of New
Jersey. Dr. Agro is a trustee of Camden County College and Secretary of the
Board.
Hillel M. Ben-Asher, M.D., 66, Director, has been Chairman of the Board of
Governors of the Exchange since 1988 and a member of the Board of Governors
since 1977. He has been a board-certified physician in Morristown, New Jersey,
for more than five years with Blair Medical Associates. Dr. Ben-Asher is a
Fellow of the American College of Physicians and a member of the American
Medical Association, the American Society of Internal Medicine, and the New
Jersey Society of Internal Medicine.
Harry M. Carnes, M.D., 66, Director, has been a member of the Board of
Directors of the Attorney-in-Fact since 1989. He has been a physician in
Audubon, New Jersey, for more than five years. Dr. Carnes is a member of the
American Academy of Family Practice, the Camden City Medical Society, and the
Medical Society of New Jersey.
Andrew Coronato, M.D., 58, Director, has been a member of the Board of
Governors of the Exchange since 1991. He has been a board-certified physician in
Westfield, New Jersey, for more than five years with Medical Diagnostic
Association, P.A. Dr. Coronato is a Fellow of the American College of
Gastroenterology and American College of Physicians. He is a member of the
American Gastroenterologic Association and the Medical Society of New Jersey.
Palma E. Formica, M.D., 70, Director, has been a member of the Board of
Directors of the Attorney-in-Fact since 1982. She has been a board-certified
physician in New Brunswick, New Jersey, for more than five years with St.
Peter's Medical Center and a Professor of Clinical Family Medicine at the
University of Medicine and Dentistry of New Jersey (UMDNJ) Robert Wood Johnson
Medical School. Dr. Formica is a member of the Academy of Medicine of New
Jersey, the American Academy of Family Physicians, the American College of
Physician Executives, the American Medical Association, the American Medical
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Political Action Committee, the Medical Society of New Jersey, the Middlesex
County Medical Society, the New Jersey Academy of Family Physicians, and the
Organization of Medical Society Presidents.
John S. Garra, M.D., 58, Director, has been a member of the Board of
Governors of the Exchange since 1992. He has been a board-certified physician in
Collingswood, New Jersey, for more than five years. Dr. Garra is a member of the
American College of Obstetricians and Gynecologists, the American College of
Surgeons, the American Fertility Society, the Medical Society of New Jersey, and
the New Jersey Society of Surgeons.
Paul J. Hirsch, M.D., 60, Director, has been a member of the Board of
Directors of the Attorney-in-Fact since 1990. He has been a board-certified
physician in Bridgewater, New Jersey, for more than five years with BioSport
Orthopedics & Sports Medicine. Dr. Hirsch is a member of the American Academy of
Orthopedic Surgeons, the American Orthopaedic Association, the American College
of Surgeons, the Arthroscopy Association of North America, the American Medical
Association, and the Medical Society of New Jersey. He currently serves on the
Boards of Trustees for Raritan Valley Community College, the Journal of Bone and
Joint Surgery and the Academy of Medicine of New Jersey. Dr. Hirsch is a
clinical professor of orthopedic surgery at Seton Hall School of Graduate
Medical Education.
Louis L. Keeler, M.D., 65, Director, has been a member of the Board of
Directors of the Attorney-in-Fact since 1994. He has been a board-certified
physician in Haddon Heights, New Jersey, for over five years. Dr. Keeler is a
member of the American Medical Association, the American Urological Association,
and the Medical Society of New Jersey.
Henry R. Liss, M.D., 73, Director, has been a member of the Board of
Governors of the Exchange since 1977. He has been a board-certified physician in
Summit, New Jersey, for more than five years as a neurosurgery consultant. Dr.
Liss is a member of the American Association of Neurological Surgeons, the
American Medical Association, the American Society of Military Surgeons, and the
Congress of Neurosurgeons.
Arganey Lucas, Jr., M.D., 70, Director, has been a member of the Board of
Governors of the Exchange since 1987. He is a retired board-certified
anesthesiologist. Dr. Lucas is a member of the Academy of Medicine, the American
Medical Association, the American Society of Anesthesiologists, the Medical
Society of New Jersey, the National Medical Association, the New Jersey State
Society of Anesthesiologists, the North Jersey Medical Society, and the Morris
County Medical Society.
S. Stuart Mally, M.D., 72, Director, has been a member of the Board of
Governors of the Exchange since 1990. He has been a board-certified physician in
Atlantic City, New Jersey, for more than five years. Dr. Mally is a fellow of
the American College of Surgeons and a member of the Medical Society of New
Jersey and the Society of Surgeons of New Jersey. Dr. Mally is a former
President of the New Jersey Society of Surgeons and the New Jersey Chapter,
American College of Surgeons.
Vincent A. Maressa, Esq., 56, Director, has been Chairman of the Board of
Directors of the Attorney-in-Fact since 1990 and a member of the Board of
Directors of the Attorney-in-Fact since 1977. He has been the Executive Director
and General Counsel of the Medical Society of New Jersey since 1973. Mr. Maressa
is a member of the American Bar Association, the American Society of Medical
Executives, and the Mercer County Bar Association.
Murray N. Matez, D.O., 70, Director, has been a member of the Board of
Governors of the Exchange since 1979. He has been a board-certified physician in
Camden, New Jersey, for more than five years. Dr. Matez has been a physician at
Lourdes Medical Associates, P.A. since 1996. Prior to that, Dr. Matez was a solo
practitioner. He is a member of the American College of Osteopathic Family
Physicians, the American Osteopathic Association, the Camden County Society of
Osteopathic Physicians and Surgeons and the New Jersey Chapter of American
College of Osteopathic Family Physicians. Dr. Matez is also a member and a
former President of the New Jersey Association of Osteopathic Physicians and
Surgeons.
Robert S. Maurer, D.O., 65, Director, has been a member of the Board of
Directors of the Attorney-in-Fact since 1977. He has been a board-certified
physician in Stratford, New Jersey, for more than five years.
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Dr. Maurer has been an Associate Professor of Clinical Family Medicine at
UMDNJ-SOM since 1992. He is a member of the American Osteopathic Association,
the American Osteopathic College of Family Practitioners, the American
Osteopathic College of Rheumatology, the Middlesex County Osteopathic Society,
and the New Jersey Association of Osteopathic Surgeons and Physicians.
A. Richard Miskoff, D.O., 56, Director, has been a member of the Board of
Governors of the Exchange since 1994. He has been a board-certified physician in
Edison, New Jersey, for more than five years. 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.
Charles J. Moloney, M.D., 64, Director, has been a member of the Board of
Governors of the Exchange since 1979. He has been a board-certified physician in
Moorestown, New Jersey, for more than five years. Dr. Moloney is a member of the
American Academy of Pediatrics and the Medical Society of New Jersey.
Eileen Marie Moynihan, M.D., 45, Director, has been a member of the Board
of Governors of the Exchange since 1995. She has been a board-certified
rheumatologist in Woodbury, New Jersey for more than five years. Dr. Moynihan
has also been Medical Director of the Eastern District Office for XACT Medicare
(Highmark Inc.) since 1988. She is a member of the Academy of Medicine of New
Jersey, the American College of Rheumatology, the American Medical Association,
the Camden County Medical Society and the New Jersey Rheumatism Association. Dr.
Moynihan is also a member and treasurer of the Medical Society of New Jersey.
Fred M. Palace, M.D., 62, Director, has been a member of the Board of
Directors of the Attorney-in-Fact since 1990. He has been a board-certified
radiologist in Morristown, New Jersey, for more than five years with Morris
Imaging Assoc., P.A. Dr. Palace is a member of the Medical Society of New
Jersey.
John J. Pastore, M.D., 71, Director, has been a member of the Board of
Governors of the Exchange since 1977. He has been a board-certified physician in
Vineland, New Jersey, for more than five years. Dr. Pastore is a member of the
American Academy of Family Physicians, the American Medical Association, the
Geriatric Society, and the Medical Society of New Jersey.
Pascal A. Pironti, M.D., 64, Director, has been a member of the Board of
Governors of the Exchange since 1982. He has been a board-certified urologist in
Summit, New Jersey, for more than five years. Dr. Pironti is a member of the
American College of Surgeons, the American Medical Association, the American
Urological Association, the Medical Society of New Jersey, and the Society of
Clinical Urologists.
Carl Restivo, Jr., M.D., 52, Director, has been a member of the Board of
Directors of the Attorney-in-Fact since 1997. He has been a board-certified
physician in Jersey City, New Jersey, for more than five years. Dr. Restivo is a
Delegate for the New Jersey Chapter of the American Medical Association and a
past president of the Arthritis Foundation. He is a past president of the
Medical Society of New Jersey.
Joseph A. Riggs, M.D., 64, Director, has been a member of the Board of
Directors of the Attorney-in-Fact since 1990. He has been a board-certified
physician in Haddon Heights, New Jersey, for more than five years. Dr. Riggs is
a member of the American Medical Association, the Camden County Medical Society,
the Medical Society of New Jersey, the New Jersey Obstetrics and Gynecology
Society, and the American College of Obstetricians and Gynecologists.
Bernard Robins, M.D., 70, Director, has been a member of the Board of
Directors of the Attorney-in-Fact since 1990. He has been a board-certified
physician in Tewksbury Township, New Jersey, for more than five years. Dr.
Robins is a member of the Medical Society of New Jersey.
Herman M. Robinson, M.D., 64, Director, has been a member of the Board of
Directors of the Attorney-in-Fact since 1990. He has been a board-certified
radiologist in Millburn, New Jersey, for more than five years. Dr. Robinson is a
member of the American College of Radiology, the American Medical Association,
the Medical Society of New Jersey, and the Radiology Society of New Jersey.
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Gabriel F. Sciallis, M.D., 54, Director, has been a member of the Board of
Governors of the Exchange since 1979. He has been a board-certified physician in
Mercerville, New Jersey, for more than five years. He is a member of the
American Academy of Dermatology, the Dermatology Society of New Jersey, the
Medical Society of New Jersey, and the Mercer County Medical Association.
Benjamin I. Smolenski, M.D., 58, Director, has been a member of the Board
of Governors of the Exchange since 1990. He has been a board-certified
orthopedic surgeon in Mount Laurel, New Jersey, for more than five years with
Smolenski Brill Hagren & Schwartz P.A. Dr. Smolenski is a member of the American
Academy of Orthopedic Surgery, the American College of Surgeons, Eastern
Orthopedic, the Medical Society of New Jersey, and the Philadelphia Orthopaedic
Society.
Martin L. Sorger, M.D., 63, Director, has been a member of the Board of
Governors of the Exchange since 1979. He has been a board-certified orthopedic
physician in Glen Ridge, New Jersey, and a member of the Montclair Orthopedic
Group for more than five years. Dr. Sorger is a member of the Alumni Council
Columbia Medical School, the American Academy of Orthopedic Surgeons, the
American College of Surgeons and a former member of its Board of Councilors, and
the American Medical Association. He is a former president of the New Jersey
Orthopedic Society and a member of its executive committee.
Bessie M. Sullivan, M.D., 56, Director, has been a member of the Board of
Governors of the Exchange since 1992. She has been a board-certified physician
in Edison, New Jersey, for more than five years with the Arthritis, Allergy &
Immunology Center. Dr. Sullivan is a member of the American Medical Association,
the American Rheumatism Association, the New Jersey Medical Society, and the
Union City Medical Society.
Harvey P. Yeager, M.D., 64, Director, has been a member of the Board of
Governors of the Exchange since 1985. He has been a board-certified
otolaryngologist-head and neck surgeon in West Orange, New Jersey, for more than
five years. Dr. Yeager is a member of the American Academy of Otolaryngology,
the American Society of Head and Neck Surgery and the Medical Society of New
Jersey. He is a former president of the New Jersey Academy of Ophthalmology and
Otolaryngology and a former member of the Board of Directors of Physicians
Insurers Associates of American (PIAA).
COMMITTEES OF THE MIIX GROUP, INCORPORATED
The MIIX Group Board has the following standing committees:
Executive Committee. The Executive Committee has the authority to exercise
all powers of The MIIX Group Board between meetings of The MIIX Group Board,
except as provided by the Certificate of Incorporation or the By-laws of The
MIIX Group, or by applicable law. The Executive Committee consists of four
members, Messrs. Goldberg and Maressa, and Drs. Ben-Asher and Hirsch.
Audit Committee. The Audit Committee meets periodically with the Company's
management and independent auditors to discuss the scope of the annual audit,
internal control, and financial reporting matters. The Company's independent
auditors have direct access to the Audit Committee. The Audit Committee consists
of three members, all of whom are independent directors. The members of the
Audit Committee are Drs. Agro, Carnes and Sullivan.
Compensation Committee. The Compensation Committee sets the compensation
of the Company's directors and executive officers. The Compensation Committee
has five members consisting of Mr. Maressa and Drs. Agro, Ben-Asher, Hirsch and
Liss.
The MIIX Group Board may from time to time establish certain other
committees to facilitate the management of The MIIX Group.
DIRECTOR COMPENSATION
Following the Reorganization, directors will receive the following fees.
The Chairman will receive an annual stipend of $35,000, the Vice-Chairman will
receive an annual stipend of $20,000, the Secretary will receive an annual
stipend of $20,000, the Chairman of the Audit Committee will receive an annual
stipend of $25,000, the Chairman of any other committee will receive an annual
stipend of $16,000, and other members
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<PAGE> 74
of the Board will receive an annual stipend of $14,000. Board members will not
receive travel expense reimbursement for meetings held in New Jersey.
In 1991, the Company invested in a number of corporate owned life insurance
policies insuring the lives of members of the Board of Governors, the Board of
Directors of the Attorney-in-Fact and committee members of such Boards. The
proceeds of such policies were payable to the Company. Under a separate Board
Members Plan the beneficiaries of such members were entitled to death benefit
payments from the Company over a ten-year period. On July 15, 1998, the Company
terminated such Board Members Plan.
EXECUTIVE COMPENSATION
The MIIX Group was organized as a Delaware corporation in October, 1997,
and consequently did not pay any cash compensation to its executive officers for
the year ended December 31, 1997. The following Summary Compensation Table sets
forth information concerning the compensation by the Company of (i) the
Company's President and Chief Executive Officer and (ii) the four other most
highly compensated executive officers of the Company (collectively, the "Named
Executive Officers"), for the year ended December 31, 1997.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
NAME AND PRINCIPAL POSITION(S) SALARY BONUS
------------------------------ -------- -------
<S> <C> <C>
Daniel Goldberg, President and Chief Executive Officer...... $433,750(1) $76,000
Joseph J. Hudson, Executive Vice President, Marketing and
Business Development...................................... 200,000 33,000
Kenneth Koreyva, Executive Vice President, Chief Financial
Officer and Treasurer..................................... 225,000 49,500
Lisa Kramer, Vice President, Claims......................... 225,000 24,000
Ronald Wade, Vice President, Underwriting................... 179,400 26,000
</TABLE>
- ---------------
(1) Includes $78,750 of deferred compensation paid in 1997.
EMPLOYMENT AGREEMENTS
Each of Messrs. Goldberg, Koreyva and Hudson is party to a separate
employment agreement (each an "Employment Agreement") dated , 1998 with
The MIIX Group and the Attorney-in-Fact. Each Employment Agreement is for an
initial three year term. Mr. Goldberg's Employment Agreement provides for an
initial base salary of $430,000 per annum, Mr. Koreyva's Employment Agreement
provides for an initial base salary of $275,000 per annum and Mr. Hudson's
Employment Agreement provides for an initial base salary of $250,000 per annum.
Bonuses are payable at the discretion of the Board of Directors of the Company.
In the event of a termination of employment, severance pay including up to three
years' salary (in the case of Mr. Goldberg) or two years' salary (in the case of
Messrs. Koreyva and Hudson) is payable under certain circumstances. Under the
terms of each Employment Agreement, Messrs. Goldberg, Koreyva and Hudson are
permitted to participate in the stock purchase and loan agreements and the
compensation plans described below.
The Attorney-in-Fact is party to an employment agreement dated as of August
1, 1990, with Ms. Kramer. This is currently a year-to-year agreement. Ms.
Kramer's current compensation under such agreement is $225,000 per annum. If Ms.
Kramer's employment is terminated without cause, the Attorney-in-Fact is
required to pay Ms. Kramer's salary and benefits through the end of the term of
the Agreement, reduced by the amount of any compensation received by Ms. Kramer
from other employment.
The Attorney-in-Fact is party to an employment agreement dated as of
November 1, 1997 with Mr. Wade. This agreement is for a two year term. Mr.
Wade's base salary per annum under this agreement is $179,400. Additional
compensation and bonuses are payable at the discretion of the Board of Directors
of the Attorney-in-Fact. If Mr. Wade's employment is terminated without cause,
the Attorney-in-Fact is required to pay Mr. Wade's salary and benefits for 12
months or, if earlier, until Mr. Wade obtains full-time employment
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<PAGE> 75
with another employer. If Mr. Wade's employment is terminated prior to November
1, 1999, he is entitled to receive the greater of (i) the amount determined in
accordance with the preceding sentence and (ii) his salary and benefits payable
through November 1, 1999.
STOCK PURCHASE AND LOAN AGREEMENTS
Upon the Closing Date, the Company intends to enter into Stock Purchase and
Loan Agreements with each of Messrs. Goldberg, Koreyva and Hudson (the "Stock
Purchase and Loan Agreements"). The purpose of the Stock Purchase and Loan
Agreements is to align more closely the interests of such officers with the
interests of the Company's stockholders. Pursuant to such agreements, the
Company will loan $1,290,000 to Mr. Goldberg, $550,000 to Mr. Koreyva and
$500,000 to Mr. Hudson. The proceeds of such loans will be used to purchase
unregistered shares of Common Stock from the Company at the Public Offering
Price, and the interest rate charged therefor will be the minimum rate necessary
to avoid income imputation under the Code as of the date of the closing of the
Reorganization. In each case, the number of shares to be purchased pursuant to
the Stock Purchase and Loan Agreements will equal the amount loaned to such
officer divided by the Public Offering Price, or if the Public Offering is not
consummated, by the average trading price (based upon the mean of the daily high
and low share price) for the first 15 days of trading of the Common Stock on any
nationally recognized securities exchange. Assuming that the price paid per
share pursuant to the Stock Purchase and Loan Agreements is $18.00, then Messrs.
Goldberg, Hudson and Koreyva will purchase 71,666, 27,777 and 30,555 shares of
Common Stock, respectively. Although the purchased shares will be pledged to the
Company to secure the applicable loan, each loan will be made with full recourse
against the applicable executive. Each loan has a five-year term.
COMPENSATION PLANS
Long Term Incentive Equity Plan.
The MIIX Group has adopted, and the Exchange as its sole stockholder has
approved, the 1998 Long Term Incentive Equity Plan (the "Incentive Plan"). Any
officer or key employee of The MIIX Group who is nominated by the Chief
Executive Officer of The MIIX Group and approved by the committee designated by
The MIIX Group's Board of Directors to administer the Plan (the "Committee")
will be eligible to receive awards under the Incentive Plan. Awards under the
Incentive Plan may be in the form of incentive stock options, non-qualified
options, stock appreciation rights ("SARs"), performance shares, restricted
stock, dividend equivalents or any combination thereof.
A maximum of 2,250,000 shares of Common Stock will be available for awards
during the term of the Incentive Plan. The maximum number of shares of Common
Stock that may be awarded to any employee under the Incentive Plan during any
calendar year shall not exceed 250,000. These limitations may be adjusted in the
event of a stock split, recapitalization, merger or similar event.
The price per share at which Common Stock may be purchased upon exercise of
an option granted under the Incentive Plan shall not be less than the fair
market value of a share of Common Stock on the date of grant. In the case of an
incentive stock option granted to a person owning more than 10% of the combined
voting power of all classes of stock of The MIIX Group (a "Ten Percent
Stockholder"), the option price per share shall not be less than 110% of the
fair market value of a share of Common Stock on the date of grant. An employee
who has been granted options may, at the discretion of the Committee, be
credited as of dividend payment dates that occur during the option period with
dividend equivalents that may be converted into Common Stock or cash at such
time and subject to such limitations as may be determined by the Committee. The
Committee shall specify when an option may be exercised, but the term shall in
no event be greater than 10 years (5 years in the case of a Ten Percent
Stockholder). The Committee shall specify the option price and other conditions
of exercise. The Company anticipates that the exercise price of the options will
be the fair market value of a share of Common Stock on the date of grant, or
110% of such fair market value in the case of a Ten Percent Stockholder. In
general, options granted pursuant to the Incentive Plan terminate upon the
earliest to occur of (i) the full exercise of the option, (ii) the expiration of
the option by its terms or (iii) no
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<PAGE> 76
more than 5 years (3 months for incentive stock options) after termination of
the option holder's employment with The MIIX Group.
An SAR must be granted in tandem with all or a portion of a related option.
An SAR may be granted either at the time of the grant of the option or at a
later time during the term of the option and shall be exercisable only to the
extent that the underlying option is exercisable. The base price of an SAR shall
be the option price under the related option. An SAR shall entitle the employee
to surrender unexercised the related option (or any portion of such option) and
to receive a payment equal to the excess of the fair market value of the shares
of Common Stock covered by the SAR on the date of exercise over the base price
of the SAR. Such payment may be in cash, in shares of Common Stock, in shares of
restricted stock, or any combination thereof, as the Committee shall determine.
Upon exercise of an SAR, the related option shall be canceled automatically to
the extent of the number of shares of Common Stock covered by such exercise, and
such shares shall no longer be available for purchase under the option.
Conversely, if the related option is exercised as to some or all of the shares
of Common Stock covered by the grant, the related SAR, if any, shall be canceled
automatically to the extent of the number of shares of Common Stock covered by
the option exercise. As a general matter, SARs are governed by the same rules
regarding term and termination as stock options.
An award of restricted stock is a grant by The MIIX Group of a specified
number of shares of Common Stock that are subject to forfeiture upon the
happening of specified events. The Committee may establish the terms of a
restricted stock award. Under certain conditions to be determined by the
Committee, restricted stock is subject to forfeiture upon termination of an
employee's employment.
The Committee may also grant performance awards, which are conditional
grants of Common Stock or cash which vest upon the attainment of certain goals.
An employee who has been granted performance awards may, at the discretion of
the Committee, be credited as of dividend payment dates that occur during the
performance period with dividend equivalents that may be converted into Common
Stock or cash at such time and subject to such limitations as may be determined
by the Committee. Under certain conditions to be determined by the Committee,
performance awards are subject to forfeit upon termination of an employee's
employment.
Upon a change of control of The MIIX Group, unless the Board of Directors
of The MIIX Group determines that awards may be assumed by the successor
corporation, (i) at the discretion of the Board of Directors of The MIIX Group
either all options shall become immediately exercisable or shall be canceled in
exchange for a cash payment equal to the excess of the fair market value of the
underlying common stock over the exercise price of the option and (ii) all
restricted stock and performance awards shall become nonforfeitable and
immediately payable in cash.
401(k) Plan. Following the Reorganization, the Company will assume the
401(k) Plan from the Attorney-in-Fact. The 401(k) Plan offers eligible employees
of the Company an opportunity to contribute to the 401(k) Plan on a regular
basis through payroll deductions in amounts equal to but not greater than 15% of
their compensation. The 401(k) Plan's benefits are based on amounts contributed
and individual account investment performance. All employees of the Company who
are over age 21 years and have completed six months of service with the Company
are eligible to participate in the 401(k) Plan.
The Company matches 50% of an employee's contribution to the 401(k) Plan up
to 6% of such employee's compensation. The amount of matching contributions made
by the Company for the fiscal years ended December 31, 1997, 1996, and 1995 were
$258,324, $256,291 and $238,485, respectively. In addition, the Company may make
discretionary contributions to the 401(k) Plan to be allocated among the
employees' accounts on the basis of their relative levels of compensation.
Pension Benefits. Following the Reorganization, the Company will assume
from the Attorney-in-Fact a retirement plan (the "Retirement Plan") that
provides pensions for substantially all employees of The MIIX Group. The
Retirement Plan is an employee non-contributory, tax-qualified defined benefit
plan that provides each covered employee with a basic annual benefit at normal
retirement (age 65) equal to 1.5% of the employee's highest five year average
basic compensation, plus .59% of such average compensation in excess of
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<PAGE> 77
$10,000, times years of service (subject to applicable law limitations on the
amount of earnings which may be considered for benefit accrual purposes under
tax qualified plans) with the Company. Covered employees attaining age 21 and
having completed one year of service are eligible to participate in the
Retirement Plan.
The following table sets forth the estimated maximum annual benefits
payable under the Retirement Plan to a Company officer or employee retiring at
age 65 with the specified combination of final average compensation and years of
credited service:
ESTIMATED ANNUAL BENEFIT YEARS OF CREDITED SERVICE AT AGE 65
<TABLE>
<CAPTION>
AVERAGE
COMPENSATION 10 15 20 25 30 35 40
- ------------ ------- ------- ------- ------- ------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
$125,000 $25,535 $38,303 $51,070 $63,838 $76,605 $ 89,373 $ 98,748
150,000 30,760 46,140 61,520 76,900 92,280 107,660 118,910
160,000+* 32,850 49,275 65,700 82,125 98,550 114,975 126,975
</TABLE>
- ---------------
* The Internal Revenue Code does not permit more than $160,000 in annual
compensation to count towards the determination of benefits under the pension
plan.
The amounts shown in the table are straight life annuities payable under
the Retirement Plan without reduction for the joint and survivor annuity.
Retirement benefits listed in the table are not subject to any deduction for
Social Security benefits.
The earnings subject to the retirement plans for each of the executive
officers in the Summary Compensation Table is determined from the compensation
amounts shown under "Salary," but not the amounts shown under "Bonus." As of
December 31, 1997, the years of service of Mr. Goldberg, Mr. Hudson, Mr.
Koreyva, Ms. Kramer and Mr. Wade are eight years, four years, seven years, eight
years, and one year, respectively.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Attorney-in-Fact leases 49,000 square feet for its home office and
Mid-Atlantic Region office from the Medical Society pursuant to a lease
agreement dated June 29, 1981. Annual lease payments are approximately $770,000.
The Company held a note receivable of $3.2 million and $3.0 million, included in
other assets, at December 31, 1996 and 1997, respectively, from the Medical
Society, collateralized by the building in which the Company maintains its home
office. The note provides for monthly payments of $40,000, which includes
interest at 9.05% until September 1, 2004 and reduced payments thereafter until
June 1, 2009. Vincent A. Maressa, a director of the Medical Society, is a
director of The MIIX Group.
A majority of the members of The MIIX Group Board of Directors are also
policyholders and Distributees. Such directors may experience claims requiring
coverage under their respective policies with the Company.
Mr. Goldberg is the chief executive officer of AMM. The Attorney-in-Fact
manages the business of AMM. In 1997, AMM paid the Attorney-in-Fact $360,000 for
such management services.
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<PAGE> 78
OWNERSHIP OF COMMON STOCK
The following table sets forth certain information regarding beneficial
ownership of Common Stock as of the closing of the Reorganization and the
anticipated Public Offering (assuming that 2,500,000 shares of Common Stock are
sold in the anticipated Public Offering at a price of $18.00 per share) by (i)
each person who will own beneficially more than 5% of the outstanding shares of
Common Stock, (ii) each executive officer named in the Summary Compensation
Table and each director and (iii) all directors and executive officers of The
MIIX Group as a group. This table does not include any shares which any director
or executive officer may purchase in the anticipated Public Offering. Except as
noted below, each holder listed below will have sole investment and voting power
with respect to the shares beneficially owned by the holder.
<TABLE>
<CAPTION>
NUMBER OF SHARES
TO BE
BENEFICIALLY PERCENT
ACQUIRED IN THE OF
NAME REORGANIZATION OTHER CLASS
- ---- ---------------- -------- -------
<S> <C> <C> <C>
Daniel Goldberg......................................... 0 115,416(1) *
Joseph J. Hudson........................................ 0 42,777(2) *
Kenneth Koreyva......................................... 0 50,555(3) *
Lisa Kramer............................................. 0 2,500(4) *
Ronald Wade............................................. 0 1,250(5) *
Angelo S. Agro, M.D. ................................... 2,103 0 *
Hillel M. Ben-Asher, M.D. .............................. 980 0 *
Harry M. Carnes, M.D. .................................. 586 0 *
Andrew Coronato, M.D. .................................. 1,427 0 *
Palma E. Formica, M.D. ................................. 405 0 *
John S. Garra, M.D. .................................... 4,093 0 *
Paul J. Hirsch, M.D. ................................... 3,256 0 *
Louis L. Keeler, M.D. .................................. 1,986 0 *
Henry R. Liss, M.D. .................................... 359 0 *
Arganey Lucas, Jr., M.D. ............................... 766 0 *
S. Stuart Mally, M.D. .................................. 1,727 0 *
Vincent A. Maressa, Esq. ............................... 0 0 *
Murray N. Matez, D.O. .................................. 616 0 *
Robert S. Maurer, D.O. ................................. 95 0 *
A. Richard Miskoff, D.O. ............................... 589 0 *
Charles J. Moloney, M.D. ............................... 588 0 *
Eileen Marie Moynihan, M.D. ............................ 815 0 *
Fred M. Palace, M.D. ................................... 1,291 0 *
John J. Pastore, M.D. .................................. 803 0 *
Pascal A. Pironti, M.D. ................................ 1,758 0 *
Carl Restivo, Jr., M.D. ................................ 451 0 *
Joseph A. Riggs, M.D. .................................. 562 0 *
Bernard Robins, M.D. ................................... 745 0 *
Herman M. Robinson, M.D. ............................... 1,227 0 *
Gabriel F. Sciallis, M.D. .............................. 703 0 *
Benjamin I. Smolenski, M.D. ............................ 3,207 0 *
Martin L. Sorger, M.D. ................................. 3,468 0 *
</TABLE>
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<PAGE> 79
<TABLE>
<CAPTION>
NUMBER OF SHARES
TO BE
BENEFICIALLY PERCENT
ACQUIRED IN THE OF
NAME REORGANIZATION OTHER CLASS
- ---- ---------------- -------- -------
<S> <C> <C> <C>
Bessie M. Sullivan, M.D. ............................... 1,117 0 *
Harvey P. Yeager, M.D. ................................. 2,287 0 *
All directors and executive officers as a group (34
persons).............................................. 38,010 212,498 1.7%(6)
</TABLE>
- ---------------
* Less than 1%
1. On the Closing Date, Mr. Goldberg will be granted options to purchase 175,000
shares of Common Stock, of which 43,750 options will be immediately
exercisable. In addition, Mr. Goldberg will purchase $1,290,000 worth of
Common Stock pursuant to a Stock Purchase and Loan Agreement. See
"Management -- Stock Purchase and Loan Agreements." Based on an assumed
Public Offering Price of $18.00 per share, Mr. Goldberg will purchase
approximately 71,666 shares of Common Stock pursuant to such agreement.
2. On the Closing Date, Mr. Hudson will be granted options to purchase 60,000
shares of Common Stock, of which 15,000 options will be immediately
exercisable. In addition, Mr. Hudson will purchase $500,000 worth of Common
Stock pursuant to a Stock Purchase and Loan Agreement. Based on an assumed
Public Offering Price of $18.00 per share, Mr. Hudson will purchase
approximately 27,777 shares of Common Stock pursuant to such agreement. See
"Management -- Stock Purchase and Loan Agreements."
3. On the Closing Date, Mr. Koreyva will be granted options to purchase 80,000
shares of Common Stock, of which 20,000 options will be immediately
exercisable. In addition, Mr. Koreyva will purchase $550,000 worth of Common
Stock pursuant to a Stock Purchase and Loan Agreement. Based on an assumed
Public Offering Price of $18.00 per share, Mr. Koreyva will purchase
approximately 30,555 shares of Common Stock pursuant to such agreements. See
"Management -- Stock Purchase and Loan Agreements."
4. On the Closing Date, Ms. Kramer will be granted options to purchase 10,000
shares of Common Stock, of which 2,500 options will be immediately
exercisable.
5. On the Closing Date, Mr. Wade will be granted options to purchase 5,000
shares of Common Stock, of which 1,250 options will be immediately
exercisable.
6. Or approximately 2% if the anticipated Public Offering is not consummated,
and the price per share paid pursuant to the Stock Purchase and Loan
Agreements and in connection with the purchase of the Attorney-in-Fact is
$18.00.
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<PAGE> 80
DESCRIPTION OF CAPITAL STOCK
GENERAL
The authorized capital stock of The MIIX Group as of the completion of the
Reorganization will consist of 100,000,000 shares of Common Stock, $.01 par
value, and 50,000,000 shares of Preferred Stock, $.01 par value. Upon completion
of the Reorganization and the anticipated Public Offering, assuming that
2,500,000 shares of Common Stock are issued in connection with the anticipated
Public Offering at a price of $18.00 per share, there will be approximately
15,100,000 shares (15,500,000 shares if a 15% Underwriters' over-allotment
option is granted and exercised in full) of Common Stock issued and outstanding
and no shares of Preferred Stock issued and outstanding.
The following description of the capital stock of The MIIX Group does not
purport to be complete or to give full effect to Delaware statutory or common
law and is, in all respects, qualified by reference to the applicable provisions
of the DGCL, the Restated Certificate of Incorporation of The MIIX Group (the
"Certificate") and The MIIX Group By-laws (the "By-laws").
COMMON STOCK
Holders of Common Stock are entitled to such dividends and other
distributions as The MIIX Group Board may declare from funds legally available
therefor, subject to the preferential rights of Preferred Stock, if any, and the
requirements of applicable law. Holders of Common Stock are entitled to one vote
per share on any matter subject to stockholder approval, including the election
of directors. The Certificate does not provide for cumulative voting in
connection with the election of directors. No holder of Common Stock will have
any preemptive right to subscribe for any shares of capital stock issued in the
future. The rights, preferences and powers of holders of Common Stock are
subject to the rights of the holders of any series of preferred stock that The
MIIX Group may issue in the future.
Upon any voluntary or involuntary liquidation, dissolution, or winding up
of the affairs of the Company, the holders of Common Stock are entitled to share
ratably in any distribution of the Company's net assets remaining after payment
of creditors and subject to preferential rights of the holders of Preferred
Stock, if any. All of the outstanding shares of Common Stock are, and the shares
offered by the Company and the selling shareholders will be, fully paid and
non-assessable.
PREFERRED STOCK
Pursuant to the Certificate, The MIIX Group Board may by resolution
establish one or more classes or series of Preferred Stock having such number of
shares and relative voting rights, designation, dividend rates, liquidation, and
other rights, preferences, and limitations as may be fixed by The MIIX Group
Board without further stockholder approval. Preferred Stock may be entitled to
preferences over Common Stock with respect to dividends, liquidation,
dissolution, or winding up of the Company in such amounts as are established by
The MIIX Group Board resolutions issuing such shares. Preferred Stock may also
enjoy redemption or sinking fund rights or voting rights (including the right to
vote as a class with respect to the election of directors, major corporate
transactions, or otherwise) that may limit, qualify, or otherwise adversely
affect the voting rights of the Common Stock.
Such rights, preferences, privileges, and limitations as may be established
for the Preferred Stock could also have the effect of delaying, deferring, or
preventing a change in control of the Company, making removal of the present
management of the Company more difficult, restricting the payment of dividends
and other distributions to the holders of Common Stock, diluting the voting
power of the Common Stock to the extent that the Preferred Stock has voting
rights, or diluting the equity interests of the Common Stock to the extent that
the Preferred Stock is convertible into Common Stock. Accordingly, the issuance
of Preferred Stock may be used as an "anti-takeover" device without further
action on the part of the stockholders of The MIIX Group. See "-- Delaware Law
and Certain Charter and By-law Provisions."
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<PAGE> 81
DELAWARE LAW AND CERTAIN CHARTER AND BY-LAW PROVISIONS
The following is a description of certain provisions of the DGCL, the
Certificate, and the By-laws. This summary does not purport to be complete and
is qualified in its entirety by reference to the DGCL, the Certificate, and the
By-laws.
The MIIX Group is subject to the provisions of Section 203 of the DGCL.
Section 203 of the DGCL prohibits a publicly held Delaware corporation from
engaging in a "business combination" with an "interested stockholder" for a
period of three years after the date of the transaction in which the person
became an "interested stockholder," unless the business combination is approved
in a prescribed manner. A "business combination" includes certain mergers, asset
sales, and other transactions resulting in a financial benefit to the
"interested stockholder." Subject to certain exceptions, an "interested
stockholder" is a person who, together with affiliates and associates, owns, or
within the past three years did own, 15% of the corporation's voting stock.
Certain provisions of the Certificate and the By-laws could have
anti-takeover effects. These provisions are intended to enhance the likelihood
of continuity and stability in the composition of the policies formulated by The
MIIX Group Board. In addition, these provisions also are intended to ensure that
The MIIX Group Board will have sufficient time to act in a manner that The MIIX
Group Board believes to be in the best interests of the MIIX Group and its
stockholders. These provisions also are designed to reduce the vulnerability of
The MIIX Group to an unsolicited proposal for a takeover of The MIIX Group that
does not contemplate the acquisition of all of its outstanding shares or an
unsolicited proposal for the restructuring or sale of all or part of The MIIX
Group. The provisions are also intended to discourage certain tactics that may
be used in proxy fights. These provisions, however, could delay or frustrate the
removal of incumbent directors or the assumption of control of The MIIX Group by
the holder of a large block of Common Stock and could also discourage or make
more difficult a merger, tender offer, or proxy contest, even if such event
would be favorable to the interest of stockholders.
Classified Board of Directors. The Certificate provides for The MIIX Group
Board to be divided into three classes of directors, with each class as nearly
equal in number as possible, serving staggered three-year terms (other than
directors which may be elected by holders of Preferred Stock). As a result,
approximately one-third of The MIIX Group Board will be elected each year. The
classified board provision will help to assure the continuity and stability of
The MIIX Group Board and the business strategies and policies of The MIIX Group
as determined by The MIIX Group Board. The classified board provision could have
the effect of discouraging a third party from making an unsolicited tender offer
or otherwise attempting to obtain control of The MIIX Group without the approval
of the Board. In addition, the classified board provision could delay
stockholders who do not like the policies of The MIIX Group Board from electing
a majority of The MIIX Group Board for two years.
No Stockholder Action by Written Consent; Special Meetings. The
Certificate provides that stockholder action can only be taken at an annual or
special meeting of stockholders and prohibits stockholder action by written
consent in lieu of a meeting. The By-laws provide that special meetings of
stockholders may be called only by The MIIX Group Board, the Chief Executive
Officer (or in the event of his or her absence or disability, by any Vice
President) of The MIIX Group or the Chairman or Vice Chairman of The MIIX Group
Board. Stockholders are not permitted to call a special meeting of stockholders
or to require that The MIIX Group Board call a special meeting.
Advance Notice Requirements for Stockholder Proposals and Director
Nominees. The By-laws establish an advance notice procedure for stockholders to
make nominations of candidates for election as directors or to bring other
business before an annual meeting of stockholders of The MIIX Group (the
"Stockholder Notice Procedure"). The Stockholder Notice Procedure provides that
only persons who are nominated by, or at the direction of, The MIIX Group Board
or its Chairman, or by a stockholder who has given timely written notice to the
Secretary of The MIIX Group prior to the meeting at which directors are to be
elected, will be eligible for election as directors of The MIIX Group. The
Stockholder Notice Procedure also provides that at an annual meeting only such
business may be conducted as has been brought before the meeting by, or at the
direction of, The MIIX Group Board or its Chairman or by a stockholder who has
given timely written notice
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<PAGE> 82
to the Secretary of The MIIX Group of such stockholder's intention to bring such
business before such meeting. Under the Stockholder Notice Procedure, if a
stockholder desires to submit a proposal or nominate persons for election as
directors at an annual meeting, the stockholder must submit written notice to
The MIIX Group not less than 90 days nor more than 120 days prior to the first
anniversary of the previous year's annual meeting. In the event that the date of
the annual meeting is advanced by more than 20 days or delayed by more than 70
days from such anniversary date, however, the By-laws provide additional time
for notice. In addition, under the Stockholder Notice Procedure, a stockholder's
notice to The MIIX Group proposing to nominate a person for election as a
director or relating to the conduct of business other than the nomination of
directors must contain certain specified information. If the chairman of a
meeting determines that business was not properly brought before the meeting, in
accordance with the Stockholder Notice Procedure, such business shall not be
discussed or transacted.
Number of Directors; Removal; Filling Vacancies. The Certificate and the
By-laws provide that The MIIX Group Board will consist of not less than 9 and
not more than 35 members (other than directors elected by holders of Preferred
Stock), the exact number to be fixed from time to time by resolution adopted by
the directors of The MIIX Group. The MIIX Group Board currently consists of 30
directors. Furthermore, subject to the rights of the holders of any series of
Preferred Stock, if any, the Certificate and By-laws authorize The MIIX Group
Board to elect additional directors under specified circumstances and fill any
vacancies that occur in the Board of Directors by reason of death, resignation,
removal, or otherwise. A director so elected by The MIIX Group Board to fill a
vacancy or a newly created directorship holds office until his successor is
elected and qualified or until his or her earlier death, resignation or removal.
Subject to the rights of the holders of any series of Preferred Stock, if any,
the Certificate and the By-laws also provide that directors may be removed only
for cause and only by the affirmative vote of holders of a majority of the
combined voting power of the then outstanding stock of The MIIX Group entitled
to vote generally in the election of directors. The effect of these provisions
is to preclude a stockholder from removing incumbent directors without cause and
simultaneously gaining control of The MIIX Group Board by filling the vacancies
created by such removal with its own nominees.
By-laws. The Certificate provides that the By-laws are subject to
adoption, amendment, alteration, repeal, or rescission either by (i) The MIIX
Group Board without the assent or vote of the stockholders or (ii) the
affirmative vote of the holders of not less than two-thirds of the combined
voting power of the outstanding shares entitled to vote generally in the
election of directors. This provision makes it more difficult for stockholders
to make changes in the By-laws by allowing the holders of a minority of the
voting securities to prevent the holders of a majority of voting securities from
amending the By-laws.
Indemnification and Limitations on Liability. The DGCL permits a Delaware
corporation to include in its charter and bylaws certain provisions to eliminate
the personal liability of directors for monetary damages and to indemnify its
directors and officers. The By-laws provide that subject to certain exceptions
in the case of actions by or in the right of The MIIX Group, The MIIX Group
shall indemnify its directors and officers, and may indemnify its agents and
employees, against expenses (including attorney's fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred by him or her,
incurred by reason of the fact that such person was serving as a director,
officer, employee or agent of The MIIX Group, so long as such person acted in
good faith and in a manner reasonably believed to be in or not opposed to the
best interest of The MIIX Group, and, with respect to any criminal action, so
long as the indemnified party had no reason to believe that his or her conduct
was unlawful. The Certificate provides that directors shall not be liable to The
MIIX Group or The MIIX Group's stockholders for monetary damages for breach of
his or her fiduciary duty as a director, except that liability may not be
eliminated (i) for any breach of such person's duty of loyalty, (ii) for acts or
omissions not in good faith or involving intentional misconduct or a knowing
violation of law, (iii) under Section 174 of the DGCL or (iv) for any
transaction in which such person received an improper personal benefit. Section
145 (a) of the DGCL provides that a corporation may indemnify a director,
officer, employee, or agent if such person acted in good faith and in a manner
reasonably believed to be in, or not opposed to, the best interests of the
corporation and, with respect to any criminal proceeding, had no reasonable
cause to believe the conduct was unlawful. In addition, effective upon
consummation of the
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<PAGE> 83
Reorganization, The MIIX Group will enter into indemnification agreements with
each of its directors and certain of its executive officers that generally
provide for similar indemnification.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Company's Common Stock is First
Chicago Trust Company of New York.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Reorganization and the anticipated Public Offering,
assuming that 2,500,000 shares of Common Stock are issued in connection with the
anticipated Public Offering at a price of $18.00 per share, the Company will
have approximately 15,100,000 shares (or approximately 15,500,000 shares if a
15% Underwriters' over-allotment option is granted and exercised in full) of
Common Stock issued and outstanding. All such shares of Common Stock will be
freely tradable without restriction or further registration under the Securities
Act, except for the shares issued to the Medical Society pursuant to the
Reorganization, and the directors and executive officers of the Company and
other affiliates of the Company. It is expected that the Company, and The MIIX
Group Board and executive officers will enter into an agreement with the
underwriters of the Public Offering not to offer, sell, or otherwise dispose of
any equity securities of the Company for a certain number of days after the date
of the Public Offering prospectus without the prior written consent of the
underwriters.
In general, Rule 144 of the Securities Act ("Rule 144"), as currently in
effect, provides that an "affiliate" (as defined in Rule 144) is entitled to
sell, within any three-month period, a number of shares that does not exceed the
greater of (i) the average weekly trading volume of the Common Stock during the
four calendar weeks preceding the sale or (ii) 1% of the shares of Common Stock
then outstanding. Sales under Rule 144 are subject to certain holding periods,
manner of sale restrictions, notice requirements, and availability of current
public information concerning the Company.
Prior to the Reorganization and the anticipated Public Offering, there has
been no public market for the Common Stock and no prediction can be made as to
the effect, if any, that the sale or availability for sale of shares of Common
Stock will have on the market price of the Common Stock. Sales of substantial
amounts of such shares in the public market could adversely affect the market
price of the Common Stock.
STABILIZATION AND OTHER ACTIVITIES
IN CONNECTION WITH THE ANTICIPATED PUBLIC OFFERING
In connection with the anticipated Public Offering, representatives of the
underwriters thereof (the "Underwriters"), may engage in over-allotment,
stabilizing transactions, syndicate covering transactions and penalty bids in
accordance with Rule 104 of Regulation M under the Exchange Act. Over-allotment
involves syndicate sales in excess of the offering size, which creates a short
position for the Underwriters. Stabilizing transactions permit bids to purchase
the underlying security so long as the stabilizing bids do not exceed a
specified maximum. Syndicate covering transactions involve purchases of the
Common Stock in the open market after the distribution has been completed in
order to cover syndicate short positions. Penalty bids permit the Underwriters
to reclaim a selling concession from an Underwriter or a dealer when the Common
Stock originally sold by such an Underwriter or a dealer are purchased in a
covering transaction to cover syndicate short positions. Such over-allotment,
stabilizing transactions, syndicate covering transactions and penalty bids may
cause the price of the Common Stock to be higher than it would otherwise be in
the absence of such transactions. These transactions, if commenced, may be
discontinued at any time.
LEGAL MATTERS
The validity of the Common Stock to be issued pursuant to the
Reorganization will be passed upon for the Company by Dechert Price & Rhoads,
Lawrenceville, New Jersey, counsel for the Company.
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<PAGE> 84
EXPERTS
The consolidated financial statements and schedule of the Exchange and its
subsidiaries at December 31, 1996 and 1997, and for each of the three years in
the period ended December 31, 1997 appearing in this Prospectus and Registration
Statement are included and have been audited by Ernst & Young LLP, independent
auditors, as set forth in their report thereon appearing elsewhere herein and
are included in reliance upon such report given the authority of such firm as
experts in accounting and auditing.
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<PAGE> 85
GLOSSARY OF SELECTED INSURANCE TERMS
ALLOCATED LOSS ADJUSTMENT EXPENSES ("ALAE")
Loss Adjustment Expenses allocated to a specific claim.
A.M. BEST
An independent rating agency that reports on the financial condition of
insurance companies.
ASSUMED PREMIUMS
Premiums arising from reinsurance policies under which the insurer accepts
a portion of the risk insured by another insurer (the ceding company).
CAPACITY
An insurer's ability to provide coverage up to the stated amount of a
policy through the insurer's reinsurance arrangements.
CEDE
To transfer risk and related premium in connection with a reinsurance
transaction.
CLAIMS MADE (REPORTED) BASIS
A liability insurance policy written on a basis that generally insures only
claims that are reported (made) to the insurer during the policy period, or
reported (made) during any extended reporting period provided in the policy or
any endorsement thereto, but only if the claims arise from incidents that
occurred after a retroactive date stated in the policy. A claims made (reported)
policy is to be distinguished from an "occurrence policy."
COMBINED RATIO
The sum of the loss ratio and the expense ratio, expressed as a percentage.
Generally, a combined ratio below 100% indicates an underwriting profit and a
combined ratio above 100% indicates an underwriting loss.
DIRECT PREMIUMS WRITTEN
Total premiums written by an insurer other than premiums for reinsurance
assumed by an insurer.
EXCESS INSURANCE
Insurance which covers the insured only for losses in excess of a stated
amount or a specific primary policy.
EXCESS OF LOSS REINSURANCE
A generic term describing reinsurance that indemnifies the reinsured
against all or a specified portion of losses on underlying insurance policies in
excess of a specified dollar amount, called a "layer" or "retention."
EXPENSE RATIO
Policy acquisition costs and other underwriting expenses, divided by net
premiums earned under GAAP accounting, expressed as a percentage.
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<PAGE> 86
GAAP
Generally accepted accounting principles in use throughout the United
States in the preparation of financial statements, including the financial
statements presented in this Prospectus.
GROSS PREMIUMS WRITTEN
Total of (i) direct premiums written, plus (ii) reinsurance assumed
premiums.
INCURRED BUT NOT REPORTED ("IBNR") RESERVES
The estimated liabilities for future payments of losses and LAE that have
occurred, but have not yet been reported to the insurer.
LOSS ADJUSTMENT EXPENSES ("LAE")
Expenses incurred in the settlement of claims, including outside adjustment
expenses, legal fees, and internal administration costs associated with the
claims adjustment process, but not including general overhead expenses.
LOSS ADJUSTMENT EXPENSE ("LAE") RESERVES
Liabilities established for LAE. LAE includes an estimated provision for
IBNR.
LOSS RATIO
The ratio of net incurred losses and LAE to net premiums earned. Net
incurred losses include an estimated provision for IBNR.
MODIFIED CLAIMS MADE BASIS
A claims made policy with pre-funded Tail Coverage.
NET PREMIUMS WRITTEN
Gross premiums written less premiums ceded.
NOVATION
An agreement of all parties to a contract to substitute a new party and
discharge one of the original parties to the contract.
OCCURRENCE BASIS
A liability insurance policy written on a basis that generally insures
claims that arise from incidents that occurred during the policy period,
irrespective of when the claims are reported.
PREMIUMS CEDED
The consideration paid to reinsurers in connection with reinsurance
transactions.
PREMIUMS EARNED
The portion of premiums written applicable to the expired period of
policies and, accordingly, recognized as revenue during a given period.
83
<PAGE> 87
QUOTA SHARE BASIS
Reinsurance wherein the insurer cedes an agreed fixed percentage of
liabilities, premiums and losses for each policy covered on a pro rata basis.
REDUNDANCY (DEFICIENCY)
Estimates in reserves change as more information becomes known about the
frequency and severity of claims for each year. A redundancy (deficiency) exists
when the original liability estimate is greater (less) than the reestimated
liability. The cumulative redundancy (deficiency) is the aggregate net change in
estimates over time subsequent to establishing the original liability estimate.
REINSURANCE
A procedure whereby an original insurer cedes a portion of the premium to a
reinsurer as payment for the reinsurer's assumption of a portion of the risk;
referred to as reinsurance ceded by the original insurer and as reinsurance
assumed by the reinsurer.
RESERVES
Liabilities established by insurers to reflect the estimated cost of claims
and the related LAE expenses that the insurer will ultimately be required to pay
in respect of insurance it has written.
RETENTION
The amount or portion of risk that an insurer retains for its own account.
Losses in excess of the retention level are paid by the reinsurer. In quota
share treaties, the retention may be a percentage of the original policy's
limit. In excess of loss reinsurance, the retention is a dollar amount of loss,
a loss ratio or a percentage of loss.
RISK-BASED CAPITAL REQUIREMENTS ("RBC")
Regulatory and rating agency targeted surplus based on the relationship of
statutory surplus, with certain adjustments, to the sum of stated percentages of
each element of a specified list of company risk exposures.
SEVERITY
The average claim cost, statistically determined by dividing dollars of
losses by the number of claims.
STATUTORY ACCOUNTING PRACTICES ("SAP")
The accounting rules and procedures promulgated or permitted by the
National Association of Insurance Commissioners ("NAIC") for financial reporting
by insurers licensed in one or more states of the United States.
STATUTORY SURPLUS
Total assets less total liabilities as determined in accordance with SAP.
TAIL COVERAGE
A provision that offers protection for any incidents that occurred while
insured, even after coverage is discontinued.
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<PAGE> 88
UNDERWRITING
The process whereby an insurer, directly or through its agent, reviews
applications submitted for insurance coverage and determines whether it will
accept all or part of the coverage being requested, and sets the applicable
premium.
UNEARNED PREMIUMS
A reserve account that contains the portion of premium attributable to the
unexpired period of policies that has been written by an insurer but has not
been recognized as net earned premiums and accounted for as revenues.
85
<PAGE> 89
GLOSSARY OF REORGANIZATION TERMS
ADOPTION DATE
October 15, 1997, the date that the Board of Governors adopted the Plan of
Reorganization.
ATTORNEY-IN-FACT
New Jersey State Medical Underwriters, Inc., a New Jersey corporation that
is the Exchange's attorney-in-fact.
BOARD OF GOVERNORS
The Board of Governors of the Exchange.
CERTIFICATE OF AUTHORITY
A certificate issued by the Commissioner to the Stock Insurer to do
business for same lines of insurance currently permitted of the Company.
CLOSING DATE
The date on which the closing of the transactions contemplated by the Plan
of Reorganization takes place.
CODE
Internal Revenue Code of 1986, as amended.
COMMISSIONER
The Commissioner of the New Jersey Department, or such governmental
officer, body or authority as may succeed such Commissioner as the primary
regulator of the Company's insurance business under applicable law.
COMPANY
At all times prior to the Closing Date, the Exchange and its subsidiaries
and the Attorney-in-Fact and its subsidiaries, collectively. At all times on or
after the Closing Date, The MIIX Group, Incorporated, and its subsidiaries,
collectively.
CONVERSION VALUE
Either (i) the price at which the Common Stock is offered to the public in
the event an initial public offering is consummated simultaneously with the
Reorganization, or (ii) if no such initial public offering is consummated
simultaneously with the Reorganization, then the economic value of the Common
Stock as determined in good faith by the Board of Governors of the Exchange.
DISTRIBUTEE
A Member or Look-Back Insured.
EARNED PREMIUM
For the applicable period, earned premiums in respect of a Policy.
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<PAGE> 90
EFFECTIVE DATE
The date on which the Certificate of Authority is issued by the
Commissioner, provided that in no event shall the Effective Date be less than 30
days after the Final Order Date nor more than 12 months after the Final Order
Date, unless such period is extended by the Commissioner. The Plan of
Reorganization shall be deemed to have become effective on the Effective Date at
the time specified in the Certificate of Authority.
ELIGIBLE POLICYHOLDER
Policyholders, as of both August 31, 1998 and four business days prior to
the Closing Date, of the Exchange or LP&C.
EXCHANGE
The Medical Inter-Insurance Exchange of New Jersey, a New Jersey reciprocal
insurer.
FINAL ORDER DATE
April 19, 1998, the date on which the order of the Commissioner approving
the Plan of Reorganization and the transactions contemplated thereby became
final.
HOLDING COMPANY
The MIIX Group, Incorporated, a newly-formed Delaware corporation that will
be the parent company for all of the MIIX companies upon the consummation of the
Plan of Reorganization.
IN FORCE
A Policy shall be deemed to be In Force as of any date if, as shown on the
Company's records, (1)(i) such Policy has been issued and the status of such
Policy has been changed from pending to In Force on the Company's records, or
(ii) in the case of an individual Policy, the Company's administrative office
has received by such date in respect of such Policy an application, complete on
its face, together with payment of the full initial premium (unless submission
of such premium is precluded by the Company's underwriting rules), provided that
any Policy referred to in this clause (ii) is issued as applied for and the
status of such Policy has been changed from pending to In Force on the Company's
records within 30 days of such date, and (2) such Policy has not been
surrendered, canceled, or otherwise terminated; provided that a Policy shall be
deemed to be In Force after lapse for nonpayment of premiums until expiration of
any applicable grace period (or other similar period however designated in such
Policy) during which the Policy is in full force for its basic benefits.
INITIAL PUBLIC OFFERING
An initial public offering by the Holding Company of shares of Holding
Company Stock.
INSURANCE SUBSIDIARIES
At all times prior to the Closing Date, LP&C, MIIX New York and
Lawrenceville Re. At all times on or after the Closing Date, MIIX Insurance
Company, MIIX New York, LP&C, and Lawrenceville Re.
LOOK-BACK INSURED
A Person who is not a Member, but who at any time during the three-year
period prior to the Adoption Date was the Named Insured in one or more Policies
issued by the Company and who, therefore, was a member of the Company during
such period under Article II of the Company's Rules & Regulations.
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<PAGE> 91
MEMBER
A Person who is the Named Insured in one or more Policies that are In Force
on the Adoption Date and who, therefore, is a member on the Adoption Date under
Article II of the Company's Rules & Regulation.
MEMBERS' MEETING
A special meeting of Members held after the Commissioner's approval of the
Plan of Reorganization, at which Members shall be entitled to vote on the
proposal to approve the Plan.
MEMBERSHIP INTERESTS
As of the Effective date, all the rights or interests of the Members of the
Company arising under the Company's Rules & Regulations or otherwise by law,
including, but not limited to, any right to vote and any right to a return of
the surplus of the Company, which may exist with regard to the surplus of the
Company not apportioned or declared prior to the Effective Date by the Board for
policyholder dividends. For purposes of the Plan of Reorganization, Membership
Interests shall not include any other right expressly conferred by an insurance
policy.
NAMED INSURED
The Named Insured in any Policy as of any date shall be determined on the
basis of the Company's records as of such date in accordance with the following
provisions: (a) the Named Insured in a Policy shall be as shown on the Policy
Declarations page in the Company's records; (b) the Named Insured in a Policy
that is a group insurance policy shall be the Person or Persons specified as
Named Insureds; (c) except as otherwise set forth here, the identity of the
Named Insured of a Policy shall be determined without giving effect to any
interest of any other Person in such Policy; (d) in any situation not expressly
covered by the foregoing provisions, the first Named Insured, as reflected on
the records of, and as determined in good faith by, the Company, shall
conclusively be presumed to be the Named Insured in such Policy, provided such
Named Insured is a Person, and the Company shall not be required to examine or
consider any other facts or circumstances; (e) any dispute as to the identity of
the Named Insured in a Policy or the right to vote or receive consideration
shall be resolved in accordance with the foregoing and such other procedures as
may be acceptable to the Commissioner.
NEW JERSEY DEPARTMENT
The Department of Banking and Insurance of the State of New Jersey.
PERSON
A natural person. A Person who is the Named Insured of Policies in more
than one legal capacity (e.g., a trustee under separate trusts) shall be deemed
to be a separate Person in each such capacity.
PLAN OF REORGANIZATION
The Plan of Reorganization, including all Exhibits thereto.
POLICY
Each insurance policy duly issued by the Company.
REORGANIZATION
The reorganization of the Exchange as a stock insurer pursuant to, and the
related transactions contemplated by, the Plan of Reorganization.
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REORGANIZATION SHARES
The 12,000,000 shares of Common Stock that may be allocated among
Distributees in the Reorganization.
STOCK INSURER
MIIX Insurance, a newly-incorporated New Jersey domestic stock insurer that
is a wholly-owned subsidiary of the Holding Company and is the successor to the
Company.
TRANSFER AGENT
First Chicago Trust Company of New York, or its successors or assigns.
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<PAGE> 93
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
QUARTERLY CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Report of Independent Auditors -- June 30, 1998 Review...... F-2
Consolidated Balance Sheets as of December 31, 1997 and June
30, 1998.................................................. F-3
Consolidated Statements of Income for the six months ended
June 30, 1997 and 1998.................................... F-4
Consolidated Statement of Equity for the six months ended
June 30, 1998............................................. F-5
Consolidated Statements of Cash Flows for the six months
ended June 30, 1997 and 1998.............................. F-6
Notes to Consolidated Financial Statements.................. F-7
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Auditors.............................. F-9
Consolidated Balance Sheets as of December 31, 1996 and
1997...................................................... F-10
Consolidated Statements of Income for the years ended
December 31, 1995, 1996 and 1997.......................... F-11
Consolidated Statements of Equity for the three years ended
December 31, 1997......................................... F-12
Consolidated Statements of Cash Flows for the years ended
December 31, 1995, 1996 and 1997.......................... F-13
Notes to Consolidated Financial Statements.................. F-14
Schedule I -- Summary of Investments -- Other than
Investments in Related Parties............................ F-24
</TABLE>
(ALL OTHER SCHEDULES FOR WHICH PROVISION IS MADE IN THE APPLICABLE ACCOUNTING
REGULATION OF THE SECURITIES AND EXCHANGE COMMISSION ARE NOT REQUIRED UNDER THE
RELATED INSTRUCTIONS OR ARE INAPPLICABLE AND THEREFORE HAVE BEEN OMITTED.)
F-1
<PAGE> 94
REPORT OF INDEPENDENT AUDITORS
Board of Governors
Medical Inter-Insurance Exchange
We have reviewed the accompanying consolidated balance sheet of Medical
Inter-Insurance Exchange and subsidiaries as of June 30, 1998, and the related
consolidated statements of income and cash flows for the six-month period ended
June 30, 1997 and 1998, and the consolidated statement of equity for the
six-month period ended June 30, 1998. These financial statements are the
responsibility of the Company's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data, and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, which will be performed
for the full year with the objective of expressing an opinion regarding the
financial statements taken as a whole. Accordingly, we do not express such an
opinion.
Based on our reviews, we are not aware of any material modifications that
should be made to the accompanying consolidated financial statements referred to
above for them to be in conformity with generally accepted accounting
principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheets of Medical Inter-Insurance Exchange
and subsidiaries as of December 31, 1996 and 1997, and the related consolidated
statements of income, equity, and cash flows for each of the three years in the
period ended December 31, 1997, not presented herein, and in our report dated
March 25, 1998, we expressed an unqualified opinion on those consolidated
financial statements. In our opinion, the information set forth in the
accompanying consolidated balance sheet as of December 31, 1997, is fairly
stated, in all material respects, in relation to the consolidated balance sheet
from which it has been derived.
ERNST & YOUNG LLP
New York, New York
September 2, 1998
F-2
<PAGE> 95
MEDICAL INTER-INSURANCE EXCHANGE
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1997 1998
------------ -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Securities available-for-sale:
Fixed-maturity investments, at fair value (amortized cost:
1997 -- $832,822; 1998 -- $914,597)....................... $ 852,746 $ 934,976
Equity investments, at fair value (cost: 1997 -- $66,520;
1998 -- $68,019).......................................... 89,080 92,292
Short-term investments...................................... 85,145 136,563
---------- ----------
Total investments................................. 1,026,971 1,163,831
Cash........................................................ (380) 2,012
Reinsurance recoverable on unpaid losses, net............... 87,446 95,457
Prepaid reinsurance premiums................................ 19,814 15,399
Deferred income taxes....................................... 21,580 23,909
Premiums receivable......................................... 8,245 9,607
Deferred policy acquisition costs........................... 100 4,607
Other assets................................................ 87,725 85,263
---------- ----------
Total assets...................................... $1,251,501 $1,400,085
========== ==========
LIABILITIES AND EQUITY
LIABILITIES
Unpaid losses and loss adjustment expenses.................. $ 876,721 $ 921,423
Premium deposits............................................ 21,024 --
Unearned premiums........................................... 20,886 89,139
Payable for securities...................................... 229 41,669
Other liabilities........................................... 29,878 41,130
---------- ----------
Total liabilities................................. 948,738 1,093,361
---------- ----------
Commitments and contingencies (Note 3)
EQUITY
Surplus..................................................... 275,148 277,700
Unrealized appreciation on securities available-for-sale,
net of deferred taxes..................................... 27,615 29,024
---------- ----------
Total equity...................................... 302,763 306,724
---------- ----------
Total liabilities and equity...................... $1,251,501 $1,400,085
========== ==========
</TABLE>
See accompanying notes.
F-3
<PAGE> 96
MEDICAL INTER-INSURANCE EXCHANGE
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-------------------
1997 1998
------- --------
(UNAUDITED)
<S> <C> <C>
REVENUES
Net premiums earned......................................... $57,759 $ 74,380
Net investment income....................................... 26,038 30,854
Realized investment gains................................... (296) 4,246
Other revenue............................................... 1,405 1,346
------- --------
Total revenues.................................... 84,906 110,826
EXPENSES
Losses and loss adjustment expenses......................... 58,550 72,952
Underwriting expenses....................................... 10,971 17,319
Funds held charges.......................................... 5,611 6,845
Impairment of capitalized system development costs.......... -- 12,656
------- --------
Total expenses.................................... 75,132 109,772
Income before income taxes.................................. 9,774 1,054
Provision (benefit) for income taxes........................ 1,035 (1,498)
------- --------
Net income.................................................. $ 8,739 $ 2,552
======= ========
</TABLE>
See accompanying notes.
F-4
<PAGE> 97
MEDICAL INTER-INSURANCE EXCHANGE
CONSOLIDATED STATEMENT OF EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
UNREALIZED
APPRECIATION
OF INVESTMENTS, TOTAL
SURPLUS NET OF TAXES EQUITY
-------- --------------- --------
(UNAUDITED)
<S> <C> <C> <C>
Balance at December 31, 1997............................ $275,148 $27,615 $302,763
Net income............................................ 2,552 2,552
Other comprehensive income, net of tax:
Unrealized appreciation on securities
available-for-sale, net of deferred taxes.......... 1,409 1,409
-------- ------- --------
Balance at June 30, 1998................................ $277,700 $29,024 $306,724
======== ======= ========
</TABLE>
See accompanying notes.
F-5
<PAGE> 98
MEDICAL INTER-INSURANCE EXCHANGE
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-------------------------
1997 1998
---------- -----------
(UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income................................................ $ 8,739 $ 2,552
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation, accretion and amortization............. (987) (1,386)
Impairment of capitalized system development costs... -- 12,656
Realized (gains) losses.............................. 296 (4,246)
Unpaid losses and loss adjustment expenses, net of
reinsurance recoverable............................. 15,135 36,691
Premium deposits, net of prepaid reinsurance
premiums............................................ (10,320) (5,256)
Deferred income tax provision........................ 3,031 (2,329)
Premiums receivable, net of allowance................ (29,029) (1,362)
Unearned premiums, net of prepaid reinsurance
premiums............................................ 47,656 56,900
Deferred policy acquisition costs.................... (2,691) (4,507)
Other assets......................................... (16,928) (10,194)
Other liabilities.................................... 17,559 11,252
-------- ---------
Net cash provided by operating activities................. 32,461 90,771
-------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from fixed-maturity investment sales............. 105,003 256,601
Proceeds from fixed-maturity investments matured, called,
or prepaid............................................. 21,475 53,447
Proceeds from equity investment sales..................... 2,906 (9,609)
Cost of investments acquired.............................. (146,625) (378,840)
Payable for securities.................................... -- 41,440
Change in short-term investments, net..................... (17,643) (51,418)
-------- ---------
Net cash used in investing activities..................... (34,884) (88,379)
-------- ---------
Net change in cash........................................ (2,423) 2,392
Cash at beginning of year................................. 4,532 (380)
-------- ---------
Cash at end of period..................................... $ 2,109 $ 2,012
======== =========
</TABLE>
See accompanying notes.
F-6
<PAGE> 99
MEDICAL INTER-INSURANCE EXCHANGE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The consolidated financial statements which include the accounts of Medical
Inter-Insurance Exchange, and its wholly owned subsidiaries Lawrenceville
Property and Casualty Co., Inc. ("LP&C"), MIIX Insurance Company of New York
("MIIX NY") and Lawrenceville Holdings, Inc. ("LHI"), (collectively, "MIIX"),
for the interim periods included herein are unaudited. However, they have been
prepared in accordance with generally accepted accounting principles for interim
financial information and in the opinion of management, such information
reflects all adjustments considered necessary for a fair presentation. Operating
results for the interim period are not necessarily indicative of the results to
be expected for the full year.
These consolidated financial statements and notes should be read in
conjunction with the audited consolidated financial statements and notes of MIIX
for the year ended December 31, 1997 included in pages F-9 through F-24.
2. COMPREHENSIVE INCOME
Statement of Financial Accounting Standard No. 130 -- Reporting
Comprehensive Income, ("SFAS 130") became effective for years beginning after
December 15, 1997 and therefore, is applicable to the Exchange for the
presentation of quarterly financial statements during 1998. For purposes of
comparison, all previous financial statements presented include the SFAS 130
disclosures. MIIX considers its investment portfolio as available-for-sale and
had unrealized gains at each balance sheet date that are reflected as
comprehensive income in the Consolidated Statements of Equity.
The components of comprehensive income, net of related tax, for the periods
ended June 30, 1997 and 1998 were as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
------------------
1997 1998
------- -------
(IN THOUSANDS)
<S> <C> <C>
Net income.................................................. $ 8,739 $ 2,552
Other comprehensive income:
Unrealized appreciation on securities available-for-sale,
net of deferred taxes.................................. 7,414 1,409
------- -------
Comprehensive income........................................ $16,153 $ 3,961
======= =======
</TABLE>
3. OFF-BALANCE SHEET RISK AND OTHER COMMITMENTS
On January 13, 1998, MIIX implemented an "equity collar" (the "Collar")
with a notional value of $85 million around the MIIX's equity portfolio. The
purpose of the Collar was to reduce equity market volatility and to stabilize
policyholder's equity. The Collar was constructed using European-style S&P 500
options. At June 30, 1998, unrealized gains on the equity portfolio of
approximately $35 million were offset by the unrealized loss on the Collar of
approximately $11 million, both of which are included in the consolidated
balance sheets in the net unrealized appreciation of securities available for
sale. The Collar has been accounted for as a hedge transaction held for purposes
other than trading. The Collar expired on July 13, 1998, at which time the
underlying hedged securities had approximately $38 million of unrealized gains
offset by $14 million of unrealized loss on the Collar. To minimize loss
exposure due to credit risk, the MIIX utilizes only those intermediaries that
are approved by the Securities Valuation Office of the National Association of
Insurance Commissioners.
F-7
<PAGE> 100
4. IMPAIRMENT OF CAPITALIZED SYSTEM DEVELOPMENT COSTS
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed of"
("SFAS No. 121") requires recognition of impairment losses for long-lived assets
whenever events or changes in circumstances result in the carrying amount of an
asset to exceed the sum of the expected future cash flow associated with the
asset. During the second quarter 1998, management began replacing its policy
administration system, and accordingly, recognized a $12.7 million pre-tax
charge which represents the net book value of capitalized system development
costs associated with the old computer system.
5. DEFERRED POLICY ACQUISITION COSTS
The following represents the components of deferred policy acquisition
costs and the amounts that were charged to expense for the six months ended June
30, 1998.
<TABLE>
<S> <C>
Balance at beginning of period.............................. $ 100
Cost deferred during the period............................. 9,086
Amortization expense........................................ (4,579)
-------
Balance at end of period.................................... $ 4,607
=======
</TABLE>
6. PAYABLE FOR SECURITIES
The payable for securities of $41.7 million as of June 30, 1998 relates to
investment transactions for which trades occurred prior to that date but for
which settlement was not finalized until after that date.
7. INCOME TAXES
A reconciliation of income tax computed at the federal statutory tax rate
to total income expense for the periods ended June 30 is as follows:
<TABLE>
<CAPTION>
1997 1998
------------------------------------- -------------------------------------
INCOME TAX % OF INCOME INCOME TAX % OF INCOME
EXPENSE BEFORE INCOME TAXES EXPENSE BEFORE INCOME TAXES
-------------- ------------------- -------------- -------------------
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C> <C>
Federal income tax at 35%....... 3,421 35.0% 369 35.0%
Decrease in taxes resulting
from:
Tax-exempt interest........... (2,381) (-24.4%) (1,450) (137.6%)
Other......................... (5) (0.1%) (417) (39.5%)
------- ------ ------- ------
Total income taxes......... 1,035 10.6% (1,498) (142.1%)
======= ====== ======= ======
</TABLE>
8. ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities" which is
effective for fiscal years beginning after June 15, 1999. Adoption of this
statement is not expected to have a significant impact on the Company's
financial position or results of operations.
F-8
<PAGE> 101
REPORT OF INDEPENDENT AUDITORS
Board of Governors
Medical Inter-Insurance Exchange
We have audited the accompanying consolidated balance sheets as of December
31, 1996 and 1997, of Medical Inter-Insurance Exchange and subsidiaries and the
related consolidated statements of income, equity, and cash flows for each of
the three years in the period ended December 31, 1997. Our audits also included
the financial statement schedule listed in the index at F-1. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Medical
Inter-Insurance Exchange and subsidiaries at December 31, 1996 and 1997, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1997, in conformity with generally accepted
accounting principles. Also, in our opinion, the related financial statement
schedule when considered in relation to the basic financial statements taken as
a whole, presents fairly, in all material respects, the information set forth
therein.
ERNST & YOUNG LLP
New York, New York
March 25, 1998
F-9
<PAGE> 102
MEDICAL INTER-INSURANCE EXCHANGE
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1996 1997
---------- ----------
<S> <C> <C>
ASSETS
Securities available-for-sale:
Fixed-maturity investments, at fair value (amortized cost:
1996 -- $760,802; 1997 -- $832,822).................... $ 762,870 $ 852,746
Equity investments, at fair value (cost: 1996 -- $55,334;
1997 -- $66,520)....................................... 67,230 89,080
Short-term investments.................................... 86,230 85,145
---------- ----------
Total investments................................. 916,330 1,026,971
Cash........................................................ 4,532 (380)
Reinsurance recoverable on unpaid losses, net............... 54,335 87,446
Prepaid reinsurance premiums................................ 28,788 19,814
Deferred income taxes....................................... 30,768 21,580
Other assets................................................ 90,844 96,070
---------- ----------
Total assets...................................... $1,125,597 $1,251,501
========== ==========
LIABILITIES AND EQUITY
LIABILITIES
Unpaid losses and loss adjustment expenses.................. $ 795,449 $ 876,721
Premium deposits............................................ 37,248 21,024
Unearned premiums........................................... 8,298 20,886
Other liabilities........................................... 30,658 30,107
---------- ----------
Total liabilities................................. 871,653 948,738
---------- ----------
Commitments and contingencies (Notes 5 and 6)
EQUITY
Surplus..................................................... 244,867 275,148
Unrealized appreciation on securities available-for-sale,
net of deferred taxes..................................... 9,077 27,615
---------- ----------
Total equity...................................... 253,944 302,763
---------- ----------
Total liabilities and equity...................... $1,125,597 $1,251,501
========== ==========
</TABLE>
See accompanying notes.
F-10
<PAGE> 103
MEDICAL INTER-INSURANCE EXCHANGE
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------
1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
REVENUES
Net premiums earned........................................ $105,256 $107,887 $123,330
Net investment income...................................... 51,896 49,135 53,892
Net realized investment gains.............................. 13,149 5,832 10,296
Other revenue.............................................. 2,807 3,164 2,884
-------- -------- --------
Total revenues................................... 173,108 166,018 190,402
EXPENSES
Losses and loss adjustment expenses........................ 107,889 110,593 120,496
Underwriting expenses...................................... 14,743 17,553 25,415
Funds held charges......................................... 5,473 8,626 11,581
-------- -------- --------
Total expenses................................... 128,105 136,772 157,492
Income before income taxes................................. 45,003 29,246 32,910
Provision for income taxes................................. 11,935 10,580 2,629
-------- -------- --------
Net income....................................... $ 33,068 $ 18,666 $ 30,281
======== ======== ========
</TABLE>
See accompanying notes.
F-11
<PAGE> 104
MEDICAL INTER-INSURANCE EXCHANGE
CONSOLIDATED STATEMENTS OF EQUITY
FOR THE THREE YEARS ENDED DECEMBER 31, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
UNREALIZED
APPRECIATION
SUBORDINATED (DEPRECIATION)
LOAN OF INVESTMENTS, TOTAL
SURPLUS CERTIFICATES NET OF TAXES EQUITY
-------- ------------ --------------- --------
<S> <C> <C> <C> <C>
Balance at January 1, 1995................. $193,133 $ 4,604 $(21,161) $176,576
Net income............................... 33,068 33,068
Unrealized appreciation of investments,
net of tax............................ 40,152 40,152
Redemption of subordinated loan
certificates.......................... (4,604) (4,604)
-------- ------- -------- --------
Balance at December 31, 1995............... 226,201 -- 18,991 245,192
Net income............................... 18,666 18,666
Unrealized depreciation of investments,
net of tax............................ (9,914) (9,914)
-------- ------- -------- --------
Balance at December 31, 1996............... 244,867 -- 9,077 253,944
Net income............................... 30,281 30,281
Unrealized appreciation of investments,
net of tax............................ 18,538 18,538
-------- ------- -------- --------
Balance at December 31, 1997............... $275,148 $ -- $ 27,615 $302,763
======== ======= ======== ========
</TABLE>
See accompanying notes.
F-12
<PAGE> 105
MEDICAL INTER-INSURANCE EXCHANGE
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income............................................ $ 33,068 $ 18,666 $ 30,281
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation, accretion and amortization........... 1,473 976 (1,029)
Realized gains..................................... (13,149) (5,832) (10,296)
Unpaid losses and loss adjustment expenses, net of
reinsurance recoverable.......................... 39,689 49,983 48,161
Premium deposits, net of prepaid reinsurance
premiums......................................... (245) (30,801) (5,064)
Deferred income tax provision...................... 2,752 1,352 (794)
Unearned premiums, net of prepaid reinsurance
premiums......................................... (2,493) 3,644 10,402
Other assets....................................... (19,428) (3,452) (5,226)
Other liabilities.................................. 1,467 6,963 (552)
--------- --------- ---------
Net cash provided by operating activities............. 43,134 41,499 65,883
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from fixed-maturity investment sales......... 311,871 606,172 228,005
Proceeds from fixed-maturity investments matured,
called, or prepaid................................. 43,212 97,325 120,034
Proceeds from equity investment sales................. 10 3,386 24,249
Cost of investments acquired.......................... (395,552) (704,486) (444,168)
Change in short-term investments, net................. 6,800 (33,979) 1,085
Acquisition of goodwill............................... -- (1,700) --
--------- --------- ---------
Net cash used in investing activities................. (33,659) (33,282) (70,795)
CASH FLOWS FROM FINANCING ACTIVITIES
Subordinated loan certificates redeemed............... (3,977) (248) --
--------- --------- ---------
Net cash used in financing activities................. (3,977) (248) --
Net change in cash.................................... 5,498 7,969 (4,912)
Cash at beginning of year............................. (8,935) (3,437) 4,532
--------- --------- ---------
Cash at end of year................................... $ (3,437) $ 4,532 $ (380)
========= ========= =========
</TABLE>
See accompanying notes.
F-13
<PAGE> 106
MEDICAL INTER-INSURANCE EXCHANGE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND RELATED MATTERS
The Medical Inter-Insurance Exchange (the "Exchange") was organized as a
New Jersey reciprocal insurance exchange by the Medical Society of New Jersey
(the "Medical Society") to provide physicians with an alternative to commercial
medical professional liability insurance and was approved to begin issuing
policies in 1977. A reciprocal exchange under the law of New Jersey is an
organization through which individuals, partnerships, trustees or corporations
designated as "subscribers" or "members" are authorized to insure each other.
Such insurance contracts are executed by an attorney-in-fact acting on behalf of
the subscribers through a power of attorney. Each member of the Exchange has
granted such power of attorney to the Attorney-in-Fact. New Jersey State Medical
Underwriters, Inc. (the "Attorney-in-Fact") manages the Exchange, including the
underwriting and issuance of insurance policies, the collection and investment
of premiums, and the service and administration of the policyholders and their
claims. The Attorney-in-Fact is a corporation that is wholly owned by the
Medical Society and was formed for the sole purpose of acting as the
attorney-in-fact for the Exchange, which it does pursuant to a management
contract that requires the Exchange to reimburse the costs of the
Attorney-in-Fact.
In 1996, the Exchange formed a down-stream holding company, Lawrenceville
Holdings, Inc. ("LHI"). On April 16, 1996, LHI acquired all of the common stock
of a property and casualty insurance company, Lawrenceville Property and
Casualty Co., Inc. ("LP&C"), which is domiciled in Virginia, and is licensed in
twenty-two states in the mid-atlantic and southeast regions of the United
States.
The Exchange, LHI and LP&C (collectively, "MIIX") provide a wide range of
insurance products to the medical profession and health care institutions
primarily in the states of New Jersey, Pennsylvania and Texas. The primary
business of MIIX is medical professional liability and it issues claims-made,
modified claims made with prepaid extended reporting endorsements and occurrence
policies. MIIX currently maintain licenses in twenty-nine states.
2. SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying consolidated financial statements have been prepared in
conformity with generally accepted accounting principles ("GAAP") which differs
from statutory accounting practices prescribed or permitted by regulatory
authorities. The significant accounting policies followed by MIIX that
materially affect financial reporting are summarized below:
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
the Exchange, LHI and LP&C (from the date of acquisition, April 16, 1996).
During 1996, no business was written by LP&C subsequent to its acquisition. All
significant intercompany transactions and balances have been eliminated in the
consolidation.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the amounts reported in
the financial statements and accompanying notes. Such estimates and assumptions
could change in the future as more information becomes known which could impact
the amounts reported and disclosed herein.
Investments
MIIX has designated their entire investment portfolio as
available-for-sale. As such, all investments are carried at their fair market
values. MIIX has no securities classified as "trading" or "held-to-maturity."
Transfers to these categories are restricted.
F-14
<PAGE> 107
MEDICAL INTER-INSURANCE EXCHANGE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Changes in fair values of available-for-sale securities, after adjustment
of deferred income taxes, are reported as unrealized appreciation or
depreciation directly in equity and, accordingly, have no effect on net income.
For the loan-backed bonds, MIIX recognizes income using a constant
effective yield based on anticipated prepayments and the estimated economic life
of securities. Prepayment assumptions are obtained from both proprietary and
broker/dealer estimates and are consistent with the current interest rate and
economic environment. When actual prepayments differ significantly from
anticipated prepayments, which are assessed at least annually, the effective
yield is recalculated to reflect actual payments to date and anticipated future
payments. The net investment in the security is adjusted to the amount that
would have existed had the new effective yield been applied since the
acquisition of the security. That adjustment is included in net investment
income.
Derivative financial instruments held are classified as other than trading.
As such, all derivatives are carried at their fair market values. Changes in
fair values, net of deferred taxes, are reported as unrealized appreciation or
depreciation directly in equity and, accordingly, have no effect on net income.
Premiums and discounts on investments are amortized to investment income
using the interest method over the contractual lives of the investments.
Realized investment gains and losses are included as a component of revenues
based on a specific identification of the investment sold.
Short-term investments include investments maturing within one-year and
other cash and cash equivalent balances earning interest.
Losses and Loss Adjustment Expenses
Estimates for unpaid losses and loss adjustment expenses are based on
MIIX's evaluation of reported claims and actuarial analyses of MIIX's operations
since its inception, including assumptions regarding expected ultimate losses
and reporting patterns, and estimates of future trends in claim severity and
frequency. Although variability is inherent in such estimates, management
believes that the reserves for unpaid losses and loss adjustment expenses are
adequate. These estimates are reviewed regularly and any adjustments to prior
year reserves are reflected in current year operating results.
The claims made policy sold to physicians and surgeons in New Jersey by
MIIX includes a standard prepaid extended reporting endorsement. The endorsement
provides coverage to the insured, triggered by termination of the policy for any
reason, for claims incurred during the claims made coverage period but reported
after the termination date of the policy. With the prepaid extended reporting
endorsement, insureds effectively receive occurrence-like coverage following
policy termination. MIIX accounts for this policy at policy inception as if it
provided occurrence coverage. Loss and loss adjustment expense reserves are
established for all losses anticipated to be incurred during the coverage period
of the policy, whether reported during the life of the policy or during the
extended reporting period after policy termination.
Premiums
Premiums are recorded as earned over the life of the policies to which they
apply. Premium deposits represent amounts received prior to the effective date
of the new or renewal policy period. The reserve for unearned premiums is
determined on a monthly pro-rata basis. Gross premiums include both direct and
assumed premiums earned.
Reinsurance
Reinsurance premiums, losses, and loss adjustment expenses are accounted
for on a basis consistent with the accounting for the original policies issued
and the terms of the reinsurance contracts. Premium deposits,
F-15
<PAGE> 108
MEDICAL INTER-INSURANCE EXCHANGE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
unearned premiums, and unpaid losses and loss adjustment expenses are reported
gross of reinsurance amounts.
Deferred Policy Acquisition Costs
Policy acquisition costs, (primarily commissions, premium taxes and other
selling expenses) which vary with and are directly related to the production of
business, are capitalized and amortized over the effective period of the related
policies. Anticipated investment income is considered in determining if premium
deficiencies exist.
Income Taxes
Deferred income taxes arise as a result of applying enacted statutory tax
rates to the temporary differences between the financial statement carrying
value and the tax basis of assets and liabilities.
Reclassification
Certain amounts have been reclassified for the prior years to be comparable
to the 1997 presentation.
Cash Flow Reporting
For purposes of reporting cash-flows, cash consists of amounts held at
banks, cash in money market accounts and time deposits with original maturities
of generally three months or less.
Recent Accounting Pronouncements
In June 1996, the Financial Accounting Standards Board (FASB) issued SFAS
No. 125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities." SFAS No. 125 provides new accounting and
reporting standards for transfers of financial assets and extinguishments of
liabilities. MIIX adopted this statement on January 1, 1997 with no significant
impact on their financial position or results of operations.
In December 1997, the American Institute of Certified Public Accountants
issued Statement of Position (SOP) 97-3 "Accounting by Insurance and Other
Enterprises for Insurance-Related Assessments." The SOP provides guidance for
determining when a liability for guaranty fund and other insurance-related
assessments should be recognized and how such liability should be measured. The
adoption of this statement is not expected to have a significant impact on
MIIX's financial position or results of operations.
F-16
<PAGE> 109
MEDICAL INTER-INSURANCE EXCHANGE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. LIABILITY FOR UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES
Activity in the liability for unpaid losses and loss adjustment expenses is
summarized as follows:
<TABLE>
<CAPTION>
1995 1996 1997
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Balance as of January 1, net of reinsurance recoverable of
$286.3 million, $339.1 million and $395.1 million,
respectively............................................. $402,172 $409,565 $400,334
Incurred related to:
Current year............................................. 107,889 110,593 120,496
Prior years.............................................. -- -- --
-------- -------- --------
Total incurred............................................. 107,889 110,593 120,496
Paid related to:
Current year............................................. 3,000 3,630 3,930
Prior years.............................................. 97,496 116,194 78,726
-------- -------- --------
Total paid................................................. 100,496 119,824 82,656
-------- -------- --------
Balance as of December 31, net of reinsurance
recoverable.............................................. 409,565 400,334 438,174
Reinsurance recoverable.................................... 339,095 395,115 438,547
-------- -------- --------
Balance, gross of reinsurance.............................. $748,660 $795,449 $876,721
======== ======== ========
</TABLE>
Loss and loss adjustment expenses incurred related to prior years, net of
reinsurance recoverable, did not change for the years ended December 31, 1995,
1996 and 1997 due primarily to the operation of ceded aggregate excess
reinsurance contracts in place since 1992. The aggregate excess reinsurance
contracts provide coverage for losses and allocated loss adjustment expenses
above aggregate Company retentions. The aggregate excess reinsurance contracts,
therefore, have the effect of holding net incurred losses and allocated loss
adjustment expenses at a constant level as long as losses and allocated loss
adjustment expenses remain within the coverage limits, which occurred for the
years ended December 31, 1995, 1996 and 1997.
In addition, direct loss and loss adjustment expenses incurred related to
prior years, gross of reinsurance, increased by $.2 million for the year ended
December 31, 1997 and did not change for the years ended December 31, 1995 and
1996. Reviews of direct losses and loss adjustment expenses conducted as of
December 31, 1995, 1996 and 1997 did not indicate a basis to further revise
prior estimates. At December 31, 1995, 1996 and 1997, reserves for direct losses
and loss adjustment expenses on incurred but not reported claims amounted to
$477.0 million, $500.0 million and $593.2 million, respectively, of which $330.0
million, $350.9 million and $430.3 million related to prior years. While certain
individual cases were settled during 1995, 1996 and 1997 at values more or less
than specific case reserve amounts established in prior years, there were no
overall indications that prior established financial reserves, including the
significant portion of reserves for incurred but not reported claims, should be
adjusted. Medical malpractice business, particularly occurrence or
occurrence-like coverage, has a very long development period. Cases may take
years to be reported, and as a rule, take several years to adjust, settle or
litigate.
Direct losses and loss adjustment expense reserve estimates have been
reviewed regularly and adjusted where judged prudent to do so. Medical
malpractice business, particularly occurrence or occurrence-like coverage, has a
very long development period. Cases may take years to be reported, and, as a
rule, take several years to adjust, settle or litigate. In addition, general
long term trends impacting ultimate reserve values such as changes in liability
standards and expanding views of contract interpretation increase the
uncertainty.
Reviews of estimates of direct losses at December 31, 1995, 1996 and 1997
did not indicate a basis to revise prior estimates. At December 31, 1995, 1996
and 1997, reserves for direct losses and loss adjustment expenses on incurred
but not reported claims amounted to $477.0 million, $500.0 million and $593.2
million,
F-17
<PAGE> 110
MEDICAL INTER-INSURANCE EXCHANGE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
respectively, of which $330.0 million, $350.9 million and $430.3 million related
to prior years. While certain individual cases were settled during 1995, 1996
and 1997 at values more or less than specific case reserve amounts established
in prior years, there were no overall indications that prior established
financial reserves, including the significant portion of reserves for incurred
but not reported claims, should be adjusted.
4. MANAGEMENT SERVICES AGREEMENT
Management services agreements between MIIX and the Attorney-in-Fact
provides, among other things, that the Attorney-in-Fact is responsible for the
administration and management of MIIX. These agreements are automatically
renewable each year unless notice of termination by either party has been
provided by December 1 of the preceding year. No such notice has been given.
Expenses of the Attorney-in-Fact reimbursed by MIIX amounted to $18.6 million in
1996 and $26.2 million in 1997.
At December 31, 1996 and 1997, MIIX had a net payable from the
Attorney-in-Fact of $3.7 million and a net receivable of $1.0 million,
respectively.
5. INVESTMENTS
MIIX's investment strategy focuses primarily on the purchase of
high-quality debt securities, which resulted in the fixed income portfolios
having a Standard and Poor's average quality rating of AA+ at December 31, 1997.
The portfolio does not include any investments in real estate or below
investment grade securities.
The actual or amortized cost and estimated market value of MIIX's
available-for-sale securities as of December 31, 1996 and 1997 were as follows:
<TABLE>
<CAPTION>
GROSS UNREALIZED ESTIMATED
AMORTIZED ----------------- MARKET
COST GAINS LOSSES VALUE
--------- ------- ------ ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
1996
U.S. Treasury securities and obligations of U.S
government corporations and agencies............. $184,571 $ 1,179 $3,244 $182,506
Obligations of states and political subdivisions... 258,775 3,268 429 261,614
Corporate securities............................... 56,607 376 188 56,795
Mortgage-backed and other asset backed
securities....................................... 260,849 3,168 2,062 261,955
-------- ------- ------ --------
Total fixed maturity investments................... 760,802 7,991 5,923 762,870
Equity investments................................. 55,334 12,071 175 67,230
-------- ------- ------ --------
Total investments........................ $816,136 $20,062 $6,098 $830,100
======== ======= ====== ========
1997
U.S. Treasury securities and obligations of U.S
government corporations and agencies............. $188,715 $ 4,348 $ 56 $193,007
Obligations of states and political subdivisions... 202,386 7,224 5 209,605
Corporate securities............................... 130,159 3,747 567 133,339
Mortgage-backed and other asset backed
securities....................................... 311,562 5,702 469 316,795
-------- ------- ------ --------
Total fixed maturity investments................... 832,822 21,021 1,097 852,746
Equity investments................................. 66,520 23,154 594 89,080
-------- ------- ------ --------
Total investments........................ $899,342 $44,175 $1,691 $941,826
======== ======= ====== ========
</TABLE>
F-18
<PAGE> 111
MEDICAL INTER-INSURANCE EXCHANGE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The fair values for fixed maturity investments are based on quoted marked
prices, where available. For fixed maturity investments not actively traded,
fair values are estimated using values obtained from independent pricing
services. The fair values for equity securities are based on quoted market
prices. At December 31, 1996 and 1997, $52.3 million and $69.7, million
respectively, of MIIX's equity investments were invested in the Vanguard
Institutional Index Fund.
The amortized cost and estimated fair value of fixed maturity investments
at December 31, 1997, by contractual maturity, are shown below. Actual
maturities will differ from contractual maturities because borrowers may have
the right to call or prepay obligations with or without call or prepayment
penalties.
<TABLE>
<CAPTION>
AMORTIZED ESTIMATED
COST FAIR VALUE
--------- ----------
(IN THOUSANDS)
<S> <C> <C>
Due in one year or less..................................... $ 7,116 $ 7,122
Due after one year through five years....................... 138,800 140,904
Due after five years through ten years...................... 188,114 193,890
Due after ten years......................................... 187,230 194,034
Mortgage-backed and other asset backed securities........... 311,562 316,796
-------- --------
Total............................................. $832,822 $852,746
======== ========
</TABLE>
Major categories of the Exchange's and LP&C's net investment income are
summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1995 1996 1997
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Fixed maturity investments............................ $50,624 $46,051 $49,241
Equity investments.................................... 829 2,149 1,678
Other................................................. 3,267 3,172 5,700
------- ------- -------
Subtotal............................................ 54,720 51,372 56,619
Investment expenses................................... 2,824 2,237 2,727
------- ------- -------
Net investment income................................. $51,896 $49,135 $53,892
======= ======= =======
</TABLE>
Realized gains and losses from sales of investments are summarized as
follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1995 1996 1997
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Fixed maturity investments
Gross realized gains................................ $14,806 $11,522 $ 2,803
Gross realized losses............................... 1,657 3,279 1,158
------- ------- -------
Net realized gains on fixed maturity investments...... 13,149 8,243 1,645
Equity investments
Gross realized gains................................ -- 474 8,719
Gross realized losses............................... -- 2,885 68
------- ------- -------
Net realized gains on equity investments.............. -- (2,411) 8,651
------- ------- -------
Net realized gains on investments..................... $13,149 $ 5,832 $10,296
======= ======= =======
</TABLE>
F-19
<PAGE> 112
MEDICAL INTER-INSURANCE EXCHANGE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The change in the Exchange's and LP&C's unrealized appreciation
(depreciation) on fixed maturity investments was $59,093, $(24,896), and $17,856
for the years ended December 31, 1995, 1996 and 1997, respectively. The
corresponding amounts for equity investments were $2,253, $9,643, and $10,664.
At December 31, 1997, investments in fixed maturity investments with a
carrying amount of approximately $6.8 million were on deposit with state
insurance departments to satisfy regulatory requirements.
6. REINSURANCE
Certain premiums, losses and loss adjustment expenses are ceded to other
insurance companies under various reinsurance agreements in-force during 1995,
1996 and 1997. These reinsurance agreements protect the underwriting and
operating results from unexpected increases in frequency, severity, and
acceleration of the payments of losses and loss adjustment expenses, and contain
the following significant terms:
<TABLE>
<CAPTION>
CONTRACT COVERAGE TYPE RETENTION COVERAGE LIMIT OTHER
-------- ------------- --------- -------------- -----
<S> <C> <C> <C> <C>
1995 Specific Excess Per loss $2-$3 million $18 million Aggregate deductible
Aggregate limits
1995 Aggregate Excess Aggregate 75% loss and ALAE ratio 75% loss and ALAE ratio Aggregate limit
1996 Specific Excess Per loss $2-$3 million $28 million Aggregate limits
Aggregate deductible
1996 Aggregate Excess Aggregate 75% loss and ALAE ratio 75% loss and ALAE ratio Aggregate limit
1997 Specific Excess Per loss $2-$3 million $38 million Aggregate deductible
Aggregate limits
1997 Aggregate Excess Aggregate 75% loss and ALAE ratio 75% loss and ALAE ratio Aggregate limit
</TABLE>
In addition, in 1992, MIIX implemented, on a funds withheld basis, a
combined aggregate and specific excess of loss reinsurance treaty to protect the
underwriting and operating results from adverse development for losses and
allocated loss adjustment expenses occurring on or before December 31, 1992 on
policies written by MIIX on or after December 31, 1992. Two coverages are
provided under the treaty. Aggregate excess of loss coverage of up to $300
million is provided on subject losses above MIIX's retention of $367 million.
Specific excess coverage of $250,000 in excess of $500,000 per loss occurrence
is also provided on subject losses, after application of an aggregate
deductible, up to an aggregate limit of $60 million. The $300 million aggregate
coverage limit is reduced to the extent the specific excess limit is utilized.
Additional consideration of up to $4 million may be due reinsurers under the
treaty should ceded losses under the aggregate coverage exceed $280 million. An
investment credit of 8% is applied to the funds withheld. A profit sharing
provision in the treaty returns any excess funds withheld to MIIX upon
completion of the payout or upon commutation, which MIIX may elect at any
quarter end. Accrued profit sharing has been recorded as an offset to equivalent
funds held charges in the amounts of $16.7 million (1994), $18.0 million (1995),
$19.4 million (1996), and $20.6 million (1997). With accrual of these profit
sharing amounts, there has been no net effect on income arising from the 1992
aggregate excess contract in the years ended December 31, 1995, 1996 or 1997.
The effect of assumed and ceded reinsurance on premiums is summarized in
the following table (dollars in thousands):
<TABLE>
<CAPTION>
1995 1996 1997
-------------------- -------------------- --------------------
WRITTEN EARNED WRITTEN EARNED WRITTEN EARNED
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Direct............... $137,291 $136,544 $143,218 $142,399 $162,430 $150,099
Assumed.............. 775 345 3,550 2,187 15,478 15,568
Ceded................ (35,303) (31,633) (34,890) (36,699) (44,522) (42,337)
-------- -------- -------- -------- -------- --------
Net premiums......... $102,763 $105,256 $111,878 $107,887 $133,386 $123,330
======== ======== ======== ======== ======== ========
</TABLE>
F-20
<PAGE> 113
MEDICAL INTER-INSURANCE EXCHANGE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
During 1995, 1996 and 1997, approximately $53.4 million, $57.6 million and
$68.6 million, respectively, of losses and loss adjustment expenses were ceded
to reinsurers.
MIIX remains liable in the event that amounts recoverable from reinsurers
are uncollectible. To minimize its exposure to losses from reinsurer
insolvencies, MIIX enters into reinsurance arrangements with carriers rated "A"
or better by A.M. Best. At December 31, 1996 and 1997, MIIX held collateral
under related reinsurance agreements for all unpaid losses and loss adjustment
expenses ceded in the form of funds withheld of $340.8 million and $351.1
million and letters of credit of $93.9 million and $126.7 million, respectively.
Reinsurance recoverable on unpaid losses, net, included in the Consolidated
Balance Sheets, have been offset by funds withheld under reinsurance treaties.
In accordance with the provisions of the reinsurance contracts, the funds
withheld are credited with interest at contractual rates ranging from 7.5% to
8.6%, which is recorded as a period expense in the year incurred.
7. COMMITMENTS, OFF BALANCE SHEET RISK AND OTHER LIABILITIES
Investment securities with an aggregate market value of $131.2 million and
$92.1 million were loaned to various brokers in connection with a securities
lending program at December 31, 1996 and 1997, respectively. These securities
are returnable on demand and collateralized by cash deposits amounting to
approximately 102% of the market value of the securities loaned. Since MIIX may
demand that a counterparty return the securities which it has borrowed at any
time, MIIX retains effective control of all assets participating in the
securities lending program. MIIX receives lending fees and continues to earn
interest on the loaned securities.
In 1997, MIIX implemented an "equity collar" (collar) around MIIX's equity
securities of $81.6 million. An "equity collar" is an option position created
with the simultaneous purchase and sale of an equal number of put and call
options which serves as a hedge transaction, the purpose of which is to reduce
equity market volatility and to protect surplus from significant declines in the
market value of MIIX's equity securities. This resulting option position
establishes both a ceiling and a floor with respect to the financial performance
of the underlying asset, upon which the "equity collar" is established, for a
specified time period. The collar transaction was executed on July 8, 1997 and
expired on January 2, 1998. The collar was constructed using European-style S&P
500 options and as of December 31, 1997, the collar had no unrealized gain or
loss. A "European-style" option is an option contract that may be exercised only
upon expiration of the contract. To minimize loss exposure due to credit risk,
MIIX utilizes intermediaries with a Standard and Poor's rating of "AA" or
better.
MIIX currently purchases annuities without recourse on a competitive basis
to fund settlements of indemnity losses. The nature and terms of the annuities
vary according to settlements. The current value of annuities purchased in prior
years from other insurance companies, but with recourse to MIIX, and reflected
as an other asset and an other liability in the consolidated balance Sheets,
totaled $18.8 million as of December 31, 1996 and 1997, respectively. MIIX
becomes liable only in the event that an insurance company cannot meet its
obligations under existing agreements and state guarantee funds are not
available. To minimize its exposure to such losses, MIIX only utilizes insurance
companies with an A.M. Best rating of "A+" or better.
As of December 31, 1996 and 1997, the Exchange is guarantor for space
leased by the Attorney-in-Fact. The lease expires in May 2001, with total
minimum lease payments remaining of $1.8 million. Additionally, the Exchange has
extended a line of credit to an Attorney-in-Fact subsidiary in an amount up to
$5.0 million, none of which was outstanding at December 31, 1996 or 1997. The
Exchange guarantees a bank loan on behalf of the Attorney-in-Fact, which had an
outstanding balance of $2.4 million and $1.6 million at December 31, 1996 and
1997, respectively.
F-21
<PAGE> 114
MEDICAL INTER-INSURANCE EXCHANGE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. STATUTORY ACCOUNTING PRACTICES
The Exchange, domiciled in New Jersey and LP&C, domiciled in Virginia,
prepare statutory-basis financial statements in accordance with accounting
practices prescribed or permitted by the New Jersey Department of Banking and
Insurance and the Virginia Department of Insurance, respectively. "Prescribed"
statutory accounting practices include state laws, regulations, and general
administrative rules, as well as a variety of publications of the National
Association of Insurance Commissioners (NAIC). "Permitted" statutory accounting
practices encompass all accounting practices that are not prescribed; such
practices may differ from state to state, may differ from company to company
within a state, and may change in the future. The NAIC currently is in the
process of codifying statutory accounting practices, the result of which is
expected to constitute the only source of "prescribed" statutory accounting
practices. Policyholders' surplus and net income, as reported to the domiciliary
state insurance departments in accordance with its prescribed or permitted
statutory accounting practices for these two companies, are summarized as
follows:
<TABLE>
<CAPTION>
1995 1996 1997
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Statutory net income for the year.................. $ 35,994 $ 20,078 $ 30,302
Statutory surplus at year-end...................... 184,651 208,478 242,395
</TABLE>
The maximum amount of dividends that domestic insurance companies in New
Jersey and Virginia can pay to their policyholders without prior approval of the
respective Insurance Commissioners is subject to restrictions relating to
statutory surplus and statutory net income. No dividends were paid or declared
in 1995, 1996 or 1997.
9. INCOME TAXES
For federal income tax purposes, the Exchange files a consolidated return
with its subsidiaries.
The components of the income tax provision in the accompanying statements
of income are summarized as follows:
<TABLE>
<CAPTION>
1995 1996 1997
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Current income tax expense............................ $ 9,183 $ 9,228 $ 3,423
Deferred income tax expense........................... 2,752 1,352 (794)
------- ------- -------
Total income tax expense.............................. $11,935 $10,580 $ 2,629
======= ======= =======
</TABLE>
A reconciliation of income tax computed at the federal statutory tax rate
to total income tax expense is as follows:
<TABLE>
<CAPTION>
1995 1996 1997
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Federal income tax at 35%............................. $15,751 $10,236 $11,519
Increase (decrease) in taxes resulting from:
Tax-exempt interest................................. (3,893) (4,490) (3,583)
Provision for (reversal of) tax contingencies and
other tax matters................................ 0 5,224 (4,217)
Other............................................... 77 (390) (1,090)
------- ------- -------
Total income taxes.......................... $11,935 $10,580 $ 2,629
======= ======= =======
</TABLE>
F-22
<PAGE> 115
MEDICAL INTER-INSURANCE EXCHANGE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Significant components of MIIX's deferred tax assets and liabilities are
summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1996 1997
------- -------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Discounting of loss reserves.............................. $33,797 $34,704
Other..................................................... 2,101 2,186
Total deferred tax assets......................... 35,898 36,890
------- -------
Deferred tax liabilities:
Unrealized gains on fixed maturity investments............ 723 6,973
Unrealized gain on equity investments..................... 4,164 7,896
Other..................................................... 243 441
------- -------
Total deferred tax liabilities.................... 5,130 15,310
------- -------
Net deferred tax assets........................... $30,768 $21,580
======= =======
</TABLE>
Deferred tax assets, net of valuation allowance, are presently considered
by management to be realizable based on the level of anticipated future taxable
income. Net deferred tax assets and income tax expense in future years can be
significantly affected by changes in enacted tax rates or by unexpected adverse
events that would impact management's conclusions as to the ultimate
realizability of deferred tax assets.
At December 31, 1996 and 1997, MIIX had income taxes payable included in
other liabilities of $7.4 million and $2.2 million, respectively.
The amount of income taxes paid in 1995, 1996 and 1997 was $3.9 million,
$3.6 million and $6.0 million, respectively.
As a result of developments during 1996 related to Internal Revenue Service
examinations, MIIX established a provision for tax contingencies of $5.2
million. During 1997, MIIX reached favorable resolutions and was able to release
$4.2 million of that amount. The federal income tax returns of the Company has
been examined by the Internal Revenue Service through the years 1994. Management
believes MIIX has adequately provided for any remaining tax contingencies.
10. NOTES RECEIVABLE
MIIX held a note receivable of $3.2 million and $3.0 million, included in
other assets, at December 31, 1996 and 1997, respectively, from the Medical
Society of New Jersey, collateralized by the building in which MIIX maintains
its home office. The note provides for monthly payments of $40,000, which
includes interest at 9.05% until September 1, 2004 and reduced payments
thereafter until June 1, 2009.
11. PLAN OF REORGANIZATION
In 1997, the Exchange's Board of Governors unanimously approved a plan to
convert from a reciprocal insurance exchange to a New Jersey domestic stock
insurer. On March 5, 1998, the Commissioner of Banking and Insurance of the
State of New Jersey approved this plan subject to ratification by members of the
Exchange at a special meeting to be scheduled in mid-year 1998.
F-23
<PAGE> 116
SCHEDULE I
SUMMARY OF INVESTMENTS -- OTHER THAN INVESTMENTS IN RELATED PARTIES
DECEMBER 31, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
AMOUNT ON
COST FAIR VALUE BALANCE SHEET
-------- ---------- -------------
<S> <C> <C> <C>
Fixed maturities:
Bonds:
United States government and government agencies and
authorities....................................... $409,356 $ 418,235 $ 418,235
States, municipalities and political subdivisions.... 202,386 209,605 209,605
Public utilities..................................... 948 970 970
All other corporate bonds............................ 218,532 222,336 222,336
Certificates of deposit.............................. 1,600 1,600 1,600
-------- ---------- ----------
Total fixed maturities............................ 832,822 852,746 852,746
-------- ---------- ----------
Equity securities:
Common stock:
Public utilities.................................. 493 668 668
Banks, trust and insurance companies.............. 3,940 4,745 4,745
Industrial, miscellaneous and all other........... 10,107 13,923 13,923
Mutual funds...................................... 51,980 69,744 69,744
-------- ---------- ----------
Total equity securities........................... 66,520 89,080 89,080
-------- ---------- ----------
Short-term investments................................. 85,145 85,145 85,145
-------- ---------- ----------
Total investments...................................... $984,487 $1,026,971 $1,026,971
======== ========== ==========
</TABLE>
F-24
<PAGE> 117
ANNEX A
PLAN OF REORGANIZATION
OF
MEDICAL INTER-INSURANCE EXCHANGE OF NEW JERSEY
AS FILED WITH THE NEW JERSEY
DEPARTMENT OF BANKING AND INSURANCE
ON
OCTOBER 16, 1997
<PAGE> 118
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
ARTICLE I: DEFINITIONS...................................... A-1
ARTICLE II: APPROVAL BY THE COMMISSIONER.................... A-3
2.1 Application.......................................... A-3
2.2 Commissioner's Public Hearing........................ A-3
2.3 Approval of Plan..................................... A-3
ARTICLE III: APPROVAL BY MEMBERS............................ A-3
3.1 Member Vote.......................................... A-3
3.2 Notice of Members' Meeting........................... A-3
3.3 Certification........................................ A-4
ARTICLE IV: THE REORGANIZATION.............................. A-4
4.1 Holding Company and Stock Insurer.................... A-4
4.2 Effect of Reorganization............................. A-4
4.3 Conditions to Effectiveness of Plan.................. A-4
4.4 Initial Public Offering.............................. A-5
ARTICLE V: POLICIES......................................... A-5
5.1 Policies............................................. A-5
5.2 Who is a Named Insured............................... A-5
5.3 In Force............................................. A-5
ARTICLE VI: ALLOCATION OF CONSIDERATION TO DISTRIBUTEES..... A-6
6.1 Allocation of Consideration.......................... A-6
6.2 Payment of Consideration............................. A-6
ARTICLE VII: ACQUISITION OF THE UNDERWRITER................. A-7
7.1 Stock Purchase Agreement............................. A-7
7.2 Determination of Consideration for Stock of the
Underwriter............................................ A-7
ARTICLE VIII: ADDITIONAL PROVISIONS......................... A-7
8.1 Assumption Certificates.............................. A-7
8.2 Notices.............................................. A-7
8.3 Adjustment of Share Numbers.......................... A-7
8.4 Authority to Remedy Errors........................... A-7
8.5 Corrections.......................................... A-7
8.6 Amendment of the Plan................................ A-7
8.7 Extension of Time Periods............................ A-7
8.8 Abandonment of Plan.................................. A-7
8.9 Costs and Expenses................................... A-7
8.10 Addresses of Members................................. A-8
8.11 Governing Law........................................ A-8
8.12 Confidentiality...................................... A-8
</TABLE>
<TABLE>
<S> <C> <C>
EXHIBIT A -- Form of Certificate of Incorporation of the Holding Company
(omitted from this copy)
EXHIBIT B -- Form of By-Laws of the Holding Company (omitted from this
copy)
EXHIBIT C -- Form of Certificate of Incorporation of the Stock Insurer
(omitted from this copy)
EXHIBIT D -- Form of By-Laws of the Stock Insurer (omitted from this
copy)
EXHIBIT E -- Form of Assumption Reinsurance and Administration Agreement
between the Company and the Stock Insurer (omitted from this
copy)
EXHIBIT F -- Form of Assignment and Assumption Agreement between the
Company and the Stock Insurer (omitted from this copy)
EXHIBIT G -- Form of Stock Purchase Agreement between and among the
Holding Company and the Medical Society of New Jersey
(omitted from this copy)
</TABLE>
A-i
<PAGE> 119
PLAN OF REORGANIZATION
OF
MEDICAL INTER-INSURANCE EXCHANGE OF NEW JERSEY
This Plan of Reorganization, which has been adopted by the Board of
Governors (the "Board") of Medical Inter-Insurance Exchange of New Jersey (the
"Company"), a reciprocal insurer organized under Chapter 50, Title 17 of the New
Jersey Statutes, at a meeting duly called and held at the offices of the Company
on October 15, 1997 (the "Adoption Date"), provides for the reorganization of
the Company from a reciprocal insurer into a New Jersey stock domestic stock
insurer owned by a Delaware stock holding company.
The principal purposes for the Company's reorganization are to enhance the
Company's strategic and financial flexibility and to provide Distributees with
(i) marketable stock of The MIIX Group, Incorporated (the "Holding Company"), a
newly-formed corporation that upon the effectiveness of this Plan of
Reorganization will become the holding company for MIIX Insurance Company (the
"Stock Insurer"), the successor to the Company, or, (ii) in certain cases, cash.
THE REORGANIZATION WILL NOT IN ANY WAY CHANGE PREMIUMS OR REDUCE POLICY BENEFITS
OR OTHER POLICY OBLIGATIONS PROVIDED UNDER EXISTING POLICIES ISSUED TO THE
COMPANY'S POLICYHOLDERS.
At present, the Company can increase its capital primarily through retained
surplus contributed by its business. The Company's management believes that in
the long term this source will not be sufficient to meet its business
objectives. The Company's business has generated significant contributions to
statutory surplus, but management believes that growth is necessary to remain an
effective, competitive, financially secure insurer in the future and that such
growth requires additional permanent capital beyond that which can be internally
generated. Upon reorganization, the Stock Insurer, the successor to the Company,
will have a corporate structure that will enable it to access the capital
markets through its proposed parent Holding Company. This new corporate
structure will enable the successor to the Company to obtain capital from a
variety of sources, including through an initial public offering of the common
stock of the Holding Company, which may be conducted at the discretion of the
Board concurrent with or at any time after the effectiveness of the
reorganization of the Company as set forth herein. In addition, the new
corporate structure will facilitate potential acquisitions by creating a more
flexible corporate organization which, among other things, will permit the
issuance of stock to consummate such acquisitions. Finally, the reorganization
of the Company pursuant to this Plan of Reorganization will provide Distributees
with marketable shares of Holding Company stock or cash.
The Company and the Board intend that the reorganization, including the
transfer of assets of the Company to the Stock Issuer as described in Section
4.2 below and the distribution of Holding Company Stock to Members, qualify as a
tax-free reorganization within the meaning of Section 368(a) of the Internal
Revenue Code of 1986, as amended.
ARTICLE I: DEFINITIONS
As used in this Plan of Reorganization, the following terms have the
following meanings:
"Adoption Date" has the meaning specified in the first paragraph hereof.
"Allocable Shares" means 12 million shares of common stock of the Holding
Company.
"Board" has the meaning specified in the first paragraph hereof.
"Certificate of Authority" has the meaning specified in Section 4.3.
"Code" means the Internal Revenue Code of 1986, as amended.
"Company" has the meaning specified in the first paragraph hereof.
A-1
<PAGE> 120
"Commissioner" means the Commissioner of Banking and Insurance of the State
of New Jersey, or such governmental officer, body or authority as may succeed
such Commissioner as the primary regulator of the Company's insurance business
under applicable law.
"Conversion Value" means the price per share at which Holding Company Stock
is offered to the public in the Initial Public Offering, or, if no Initial
Public Offering shall have been made, the price per share that would reflect the
economic value of the Holding Company Stock as determined in good faith by the
Board.
"Distributee" means a Member or a Look-Back Insured.
"Effective Date" has the meaning specified in Section 4.3.
"Effective Time" has the meaning specified in Section 4.3.
"Final Order Date" has the meaning specified in Section 4.3.
"Holding Company" means The MIIX Group, Incorporated, a corporation
organized under the laws of the State of Delaware.
"Holding Company Stock" means the shares of common stock, par value $.01
per share, of the Holding Company.
"In Force" has the meaning specified in Section 5.3.
"Information Statement" has the meaning specified in Section 3.2.
"Initial Public Offering" means an initial public offering by the Holding
Company of shares of Holding Company Stock.
"Look-Back Insured" means a Person who is not a Member, but who at any time
during the three-year period prior to the Adoption Date was the Named Insured in
one or more Policies issued by the Company and who, therefore, was a member of
the Company during such period under Article II of the Company's Rules &
Regulations.
"Member" means a Person who is the Named Insured in one or more Policies
that are In Force on the Adoption Date and who, therefore, is a member on the
Adoption Date under Article II of the Company's Rules & Regulations.
"Members' Meeting" has the meaning specified in Section 3. 1.
"Membership Interests" means, as of the Effective Date, all the rights or
interests of Members of the Company at such time arising under the Rules and
Regulations of the Company or otherwise by law, including, but not limited to,
any right to vote and any right to a return of the surplus of the Company, which
may exist with regard to the surplus of the Company not apportioned or declared
prior to the Effective Date by the Board for policyholder dividends. For
purposes of the Plan of Reorganization, Membership Interests shall not include
any other right expressly conferred by an insurance policy.
"Named Insured" shall have the meaning specified in Section 5.2.
"Person" means a natural person. A Person who is the Named Insured of
Policies in more than one legal capacity (e.g., a trustee under separate trusts)
shall be deemed to be a separate Person in each such capacity.
"Plan of Reorganization" means this Plan of Reorganization (including all
Exhibits hereto), as it may be amended from time to time in accordance with
Section 8.7.
"Policy" has the meaning specified in Section 5.1.
"Public Hearing" has the meaning specified in Section 2.2.
"Stock Insurer" means MIIX Insurance Company, a newly-incorporated New
Jersey domestic stock insurer that is a wholly owned subsidiary of the Holding
Company and is the successor to the Company.
"Transfer Agent" means the transfer agent to be designated by the Company,
or its successors or assigns.
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"Underwriter" means New Jersey State Medical Underwriters, Inc., a New
Jersey Corporation that is the attorney-in-fact for the Company.
ARTICLE II: APPROVAL BY THE COMMISSIONER
2.1. Application. The Company shall seek the approval of the Commissioner
for the reorganization of the Company into a stock insurer owned by a stock
holding company, as set forth in Article IV below by filing with the
Commissioner an application including the following documents:
(a) this Plan of Reorganization, including all exhibits hereto;
(b) a certification that this Plan of Reorganization has been duly
adopted by a vote of at least two-thirds of the members of the Board; and
(c) any other additional information as the Commissioner may
reasonably request.
In addition, the Holding Company shall file with the Commissioner an application
for the formation of the Stock Insurer containing all required documents.
2.2. Commissioner's Public Hearing. (a) This Plan of Reorganization is
subject to the approval of the Commissioner after a hearing thereon (the "Public
Hearing"), which shall be held pursuant to procedures established by the
Commissioner under New Jersey law and regulations.
2.3. Approval of Plan. The Commissioner shall make a determination
whether to approve the Plan of Reorganization after the completion of the Public
Hearing. The Stock Insurer shall be formed and licensed to do business for the
same lines of insurance currently permitted of the Company upon the entry of an
order by the Commissioner approving the Plan and the transactions contemplated
thereby.
ARTICLE III: APPROVAL BY MEMBERS
3.1. Member Vote. After the Commissioner's determination to approve the
Plan, the Company shall hold a special meeting of Members (the "Members'
Meeting"). At such Members' Meeting, the Members shall be entitled to vote on
the proposal to approve the Plan of Reorganization.
(a) The Plan of Reorganization is subject to the approval of not less
than two-thirds of the votes of the Members voting thereon in person or by
proxy at the Members' Meeting.
(b) Based upon the Company's records and pursuant to Article II,
Section Three of the Company's Rules and Regulations, each Member shall be
entitled to one vote.
3.2. Notice of Members' Meeting. (a) The Company shall mail notice of the
Members' Meeting to all Members. The notice shall set forth the reasons for the
vote and the time and place of the Members' Meeting. Such notice shall be sent
by first class mail to the address of each Member as it appears on the records
of the Company, at least 30 days prior to the Members' Meeting and shall be in a
form satisfactory to the Commissioner.
(b) Such notice of such Members' Meeting shall include an information
statement (the "Information Statement") containing the following
information:
(i) a copy of the Plan;
(ii) a copy of the Commissioner's order approving the Plan;
(iii) an explanation of the Plan;
(iv) a copy of an opinion from a nationally-recognized investment
banking firm to the effect that the Plan is fair from a financial point
of view as at the date of such opinion; and
(v) a description of the Company's business, including financial
statements.
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3.3. Certification. Promptly after the Members' Meeting, the Company
shall file a certification with the Commissioner setting forth the vote and
certifying whether the Plan of Reorganization was approved by at least
two-thirds of the votes of the Members voting in person or by proxy at the
Members' Meeting.
ARTICLE IV: THE REORGANIZATION
4.1. Holding Company and Stock Insurer. Prior to the Effective Time,
(i) the Holding Company shall exist as a duly organized Delaware corporation
that is a wholly-owned subsidiary of the Company, and (ii) the Holding Company
shall own 100% of the stock of the Stock Insurer, which shall be a duly
organized New Jersey insurer.
4.2. Effect of Reorganization. (a) At the Effective Time:
(i) pursuant to the Assumption Reinsurance and Administration
Agreement between the Company and the Stock Insurer substantially in the
form attached hereto as Exhibit E and the Assignment and Assumption
Agreement between the Company and the Stock Insurer substantially in the
form attached hereto as Exhibit F, all of the assets of the Company,
except the voting stock of the Holding Company, and the cash to be
distributed to Distributees pursuant to Article VI hereunder, shall be
transferred to the Stock Insurer, in exchange, all of the Company's
insurance and non-insurance liabilities shall be assumed by the Stock
Insurer without recourse to the Company;
(ii) pursuant to the Stock Purchase Agreement between and among the
Holding Company and The Medical Society of the State of New Jersey
substantially in the form attached hereto as Exhibit G (the "Stock
Purchase Agreement"), the Holding Company shall acquire 100% of the
stock of the Underwriter, in exchange for newly-issued Holding Company
Stock and cash, pursuant to a formula as set forth in Section 7.2 below;
(iii) Distributees shall be entitled to receive Holding Company
Stock or cash, allocated pursuant to Article VI hereof;
(iv) all Membership Interests shall be extinguished; and
(v) the Company shall dissolve.
(b) On the Effective Date, the Company shall cause to be issued to the
Transfer Agent, for the respective accounts of the Distributees entitled to
receive such stock pursuant to Article VI, a number of shares of Holding
Company Stock determined in accordance with Article VI.
(c) As promptly as possible after the Effective Date, the Transfer
Agent shall transfer to the Distributees such shares of Holding Company
Stock, allocated in accordance with Article VI, as are registered in the
respective names of such Distributees. As promptly as possible after the
Effective Date, the Holding Company shall pay or cause the Company to pay
or credit cash consideration to eligible Distributees in accordance with
Article VI.
4.3. Conditions to Effectiveness of Plan. The effectiveness of the Plan
is subject to the conditions that:
(i) the Company has received an opinion from a
nationally-recognized investment banking firm to the effect that the
Plan is fair from a financial point of view as at the date of such
opinion;
(ii) the Company has received on or prior to the Effective Date
rulings from the Internal Revenue Service or opinions of its tax
advisors substantially to the effect that the transfer of Company's
assets to, and assumption of its liabilities by, the Stock Insurer, and
dissolution of the Company, shall qualify as a tax-free reorganization.
(iii) the Members shall have approved the Plan as specified in
Section 3.3 hereof;
(iv) the Underwriter shall cancel all powers of attorney entered
into with any applicant for insurance with the Company;
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(v) all requisite approvals of the Assumption Reinsurance and
Administration Agreement shall have been obtained;
(vi) the Company shall have filed with the Commissioner the
certificate set forth in Section 3.3 hereof and a certificate stating
that the conditions set forth in clause (ii) -- (v) have been satisfied;
and
(vii) the order of the Commissioner set forth in Section 2.5 has
become final (the date of such event the "Final Order Date"), and the
Commissioner shall have issued a certificate of authority (the
"Certificate of Authority") to the Stock Insurer to do business for the
same lines of insurance currently permitted of the Company and shall
have granted to the Stock Insurer any required rate and form approvals.
The effective date of the Plan of Reorganization (the "Effective Date") shall be
the date on which the Certificate of Authority issued by the Commissioner
becomes effective, provided that in no event shall the Effective Date be less
than 30 days after the Final Order Date nor more than 12 months after the Final
Order Date, unless such period is extended by the Commissioner. The Plan of
Reorganization shall be deemed to have become effective on the Effective Date at
the time specified in the Certificate of Authority (the "Effective Time").
4.4. Initial Public Offering. An Initial Public Offering may be conducted
at the discretion of the Board concurrent with or at any time after the
Effective Date.
ARTICLE V: POLICIES
5.1. Policies. Each insurance policy duly issued by the Company is deemed
to be a Policy for purposes of this Plan of Reorganization.
5.2. Who is a Named Insured. The Named Insured in any Policy as of any
date shall be determined on the basis of the Company's records as of such date
in accordance with the following provisions;
(a) The Named Insured in a Policy shall be as shown on the Policy
Declarations page in the Company's records.
(b) The Named Insured in a Policy that is a group insurance policy
shall be the Person or Persons specified as Named Insureds.
(c) Except as otherwise set forth in this Article V, the identity of
the Named Insured of a Policy shall be determined without giving effect to
any interest of any other Person in such Policy.
(d) In any situation not expressly covered by the foregoing provisions
of this Section 5.2, the first Named Insured, as reflected on the records
of, and as determined in good faith by, the Company, shall conclusively be
presumed to be the Named Insured in such Policy for purposes of this
Section 5.2, provided such Named Insured is a Person, and the Company shall
not be required to examine or consider any other facts or circumstances.
(e) Any dispute as to the identity of the Named Insured in a Policy or
the right to vote or receive consideration shall be resolved by the Company
in accordance with the foregoing.
5.3. In Force. (a) A Policy shall be deemed to be in force ("In Force")
as of any date if, as shown on the Company's records, (1)(i) such Policy has
been issued and the status of such Policy has been changed from pending to in
force on the Company's records, or (ii) in the case of an individual Policy, the
Company's administrative office has received by such date in respect of such
Policy an application, complete on its face, together with payment of the full
initial premium (unless submission of such premium is precluded by the Company's
underwriting rules), provided that any Policy referred to in this clause (ii) is
issued as applied for and the status of such Policy has been changed from
pending to in force on the Company's records within 30 days of such date, and
(2) such Policy has not been surrendered, canceled or otherwise terminated;
provided that a Policy shall be deemed to be In Force after lapse for nonpayment
of premiums until expiration
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<PAGE> 124
of any applicable grace period (or other similar period however designated in
such Policy) during which the Policy is in full force for its basic benefits.
(b) A Policy shall not be deemed to be In Force merely because, prior
to the date on which such Policy was issued, insurance coverage may have
been provided by a binder of coverage.
(c) A Policy shall not be deemed to be In Force as of any date if the
Policy is returned to the Company and all return premiums due have been
refunded within 60 days after such date.
ARTICLE VI: ALLOCATION OF CONSIDERATION TO DISTRIBUTEES
6.1. Allocation of Consideration. (a) The consideration to be given to
Distributees shall be shares of Holding Company Stock, or, as set forth in
Section 6.2(b), cash. Solely for purposes of calculating the amount of such
consideration, each Distributee will be allocated (but not issued) shares of
Holding Company Stock in accordance with this Article VI.
(b) Each Distributee shall be allocated a pro rata share of the
Holding Company Stock held by the Company after the purchase of the
Underwriter, in proportion to the percentage that direct premium earned by
the Company attributable to such Distributee, less return premiums, over
the three years prior to the Adoption Date bears to direct premium earned
by the Company attributable to all Distributees, less return premiums, over
the three years prior to the Adoption Date.
(c) The number of shares of Holding Company Stock calculated in
accordance with Section 6.1(b) in respect of each Distributee shall be the
sum of the number of shares of Holding Company Stock after rounding such
number to the nearest integral number of shares (with one-half being
rounded upward). Because of such rounding, the aggregate number of certain
Distributees' Holding Company Stock will not necessarily be precisely equal
to the such Distributee's pro rata proportion of direct premium earned by
such Distributee over the three years prior to the Adoption Date.
6.2. Payment of Consideration. (a) The Company shall be deemed to issue
to the Transfer Agent for the account of each Distributee a number of shares of
Holding Company Stock equal to the number of shares of Holding Company Stock
allocated to such Distributee, except that a Distributee shall not be issued
such shares of Holding Company Stock and shall instead be paid cash (in an
amount determined pursuant to subsection (b) of this Section 6.2) based on the
number of shares of Holding Company Stock allocated to such Distributee as
provided in this Article VI.
(b) A Distributee shall not be issued such shares of Holding Company
Stock and shall instead be paid cash based on the number of shares of
Holding Company Stock allocated to such Distributee as provided in this
Article VI if: (i) shares of Holding Company Stock are allocable to a
Distributee whose address for mailing purposes as shown on the records of
the Company is located outside the States of the United States of America
or is shown on the Company's records to be an address at which mail to such
Distributee is undeliverable, or (ii) such Distributee is allocated an
integral number of shares of Holding Company Stock that is less than or
equal to 99 (as each such number is subject to proportional adjustment as
provided in Section 8.3).
(c) If consideration is to be paid or credited to a Distributee in
cash, the amount of such consideration shall be equal to the number of
shares of Holding Company Stock allocable to such Distributee as provided
in this Article VI multiplied by the Conversion Value. Payment shall be
made by check, net of any applicable withholding tax, as soon as reasonably
practicable after the Effective Date.
(d) In the event that a Person who is a Distributee is the Named
Insured in more than one Policy, any calculation of consideration to be
allocated to such Distributee shall aggregate earned premium under all
Policies in which such Person is the Named Insured.
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ARTICLE VII: ACQUISITION OF THE UNDERWRITER
7.1. Stock Purchase Agreement. Pursuant to the terms of the Stock
Purchase Agreement, the Holding Company shall acquire on the Effective Date 100%
of the stock of the Underwriter in exchange for specified, negotiated
consideration consisting of shares of Holding Company Stock and cash in an
amount of $11.1 million.
7.2. Determination of Consideration for Stock of The Underwriter. The
consideration for the stock of the Underwriter was determined in negotiations
with The Medical Society of the State of New Jersey. Consideration to be paid to
The Medical Society of the State of New Jersey is set forth in a formula in the
Stock Purchase Agreement.
ARTICLE VIII: ADDITIONAL PROVISIONS
8.1. Assumption Certificates. Pursuant to the Assumption Reinsurance
Agreement between the Company and the Stock Insurer, on or after the Effective
Date, the Stock Insurer shall mail assumption certificates to all current
policyholders of the Company to transfer by assumption reinsurance the
obligations of the Company to the Stock Insurer.
8.2. Notices. If the Company complies substantially and in good faith
with the requirements of this Plan of Reorganization with respect to the giving
of any required notice to policyholders or Members, its failure in any case to
give such notice to any person or persons entitled thereto shall not impair the
validity of the actions and proceedings taken under this Plan of Reorganization
or entitle such person to any injunctive or other equitable relief with respect
thereto.
8.3. Adjustment of Share Numbers. Subject to the Commissioner's approval,
by vote of the Company's Board or a duly authorized committee thereof at any
time before the Effective Date, the Company may adjust the number of shares of
Holding Company Stock set forth in the definition of Allocable Shares. Upon such
an adjustment, the following numbers of shares of Holding Company Stock in the
Plan of Reorganization shall be adjusted proportionately; (a) the number of
shares set forth in the definition of Allocable Shares in Article I, and (b) the
number of shares of Holding Company Stock expected to be outstanding on the
Effective Date. The number of shares resulting from any such adjustment shall be
rounded up to the next higher whole share.
8.4. Authority to Remedy Errors. Subject to the terms of the Plan of
Reorganization and with, the prior approval of the Commissioner, at or after the
Effective Date, the Holding Company may issue additional shares of Holding
Company Stock and take any other action it deems appropriate to remedy errors or
miscalculations made in connection with this Plan of Reorganization.
8.5. Corrections. The Company may make such modifications as are
appropriate to correct errors, clarify existing items or make additions to
correct manifest omissions in this Plan of Reorganization. After the conclusion
of the Public Hearing, any such modification shall be made only with the prior
approval of the Commissioner.
8.6. Amendment of The Plan. Prior to the conclusion of the Public
Hearing, the Plan of Reorganization may be amended by the vote of at least
two-thirds of the members of the Board.
8.7. Extension of Time Periods. Any time periods for action by the
Commissioner set forth in this Plan may be extended with the consent of the
Company.
8.8. Abandonment of Plan. The Company may, by at least a two-thirds vote
of the Board and upon reasonable notice to the Commissioner, abandon the Plan of
Reorganization at any time before the issuance of the Certificate of Authority
by the Commissioner.
8.9. Costs and Expenses. All reasonable out-of-pocket costs of the
Commissioner related to the review of the Plan of Reorganization shall be paid
by the Company and/or the Holding Company.
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8.10. Addresses of Members. The mailing address of a Member as of any
date for purposes of this Plan of Reorganization shall be the Member's last
known address as shown on the records of the Company as of such date.
8.11. Governing Law. The terms of the Plan of Reorganization shall be
governed by and construed in accordance with the laws of the State of New
Jersey.
8.12. Confidentiality. All information relating to the Plan of
Reorganization, other than information which has become part of the record for
the Public Hearing, shall be given confidential treatment and shall not be made
public by the Commissioner or any other person without the prior written consent
of the Company unless the Commissioner, after giving the Company and its
affiliates who would be affected thereby notice and opportunity to be heard,
determines that the interests of policyholders or the public will be served by
the publication thereof, in which event the Commissioner may publish all or any
part thereof in such manner as the Commissioner may deem appropriate.
IN WITNESS WHEREOF, Medical Inter-Insurance Exchange, by authority of its
Board of Governors, has caused this Plan of Reorganization to be duly executed
this 15th day of October, 1997.
MEDICAL INTER-INSURANCE
EXCHANGE OF NEW JERSEY
By DANIEL GOLDBERG
--------------------------------------
Daniel Goldberg
President & Chief Executive Officer
New Jersey State Medical Underwriters,
Inc.
Attorney-in-Fact for
Medical Inter-Insurance Exchange of
New Jersey
Attest:
CATHERINE E. WILLIAMS
Catherine E. Williams
Assistant Corporate Secretary
New Jersey State Medical Underwriters, Inc.
Attorney-in-Fact for
Medical Inter-Insurance Exchange of New Jersey
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ANNEX B
STATE OF NEW JERSEY
DEPARTMENT OF BANKING AND INSURANCE
IN THE MATTER OF THE REORGANIZATION
OF THE MEDICAL INTER-INSURANCE
EXCHANGE
ORDER APPROVING
PLAN OF REORGANIZATION
This matter having been opened by the Commissioner of Banking and Insurance
("Commissioner"), State of New Jersey pursuant to the authority of N.J.S.A.
17:1-15e, 17:17-10, 17:50-1 et seq. and all powers expressed or implied therein;
and
IT APPEARING that the Medical Inter-Insurance Exchange ("MIIX") is a
reciprocal insurance exchange formed in 1977 pursuant to N.J.S.A. 17:50-1 et
seq. and is governed by a Board of Governors elected by its
members/policyholders; and
IT FURTHER APPEARING that MIIX was formed under the auspices of the Medical
Society of New Jersey ("Medical Society"), a physician trade association,
initially in order to create a medical malpractice insurer committed to service
the Medical Society's membership; and
IT FURTHER APPEARING that MIIX is managed by an attorney-in-fact, New
Jersey State Medical Underwriters, Inc. ("Medical Underwriters") which is wholly
owned by the Medical Society; and
IT FURTHER APPEARING that MIIX has matured into a significant insurer of
medical malpractice liability in New Jersey, with a significant share of the New
Jersey medical malpractice insurance market; and that in addition to New Jersey,
MIIX is licensed and conducts business in Connecticut, Pennsylvania, Delaware,
Maryland and Kentucky, and is also licensed to transact business in Michigan,
Vermont and West Virginia;
IT FURTHER APPEARING that on October 16, 1997, the MIIX Board of Governors
filed with the Department of Banking and Insurance ("Department") a plan of
reorganization by which MIIX would change its structure from a reciprocal
insurance exchange into a domestic stock insurer; and
IT FURTHER APPEARING that the stated purpose for the reorganization is to
provide MIIX with a corporate structure that will enable it to access capital
markets through its parent holding company, and thus provide a long-term source
of permanent capital to allow the company to grow and develop new business as
well as strengthen its ability to meet all of its commitments, thereby
permitting growth necessary for it to remain an effective, competitive,
financially secure insurer in the future; and
IT FURTHER APPEARING that the plan of reorganization consists of the
following:
1. Formation of the MIIX Group, Inc. ("MIIX Group"), which will be
the ultimate parent company of all of the MIIX companies upon the effective
date of the plan and will wholly own MIIX Insurance Company;
2. Formation of MIIX Insurance Company ("New MIIX"), to be a New
Jersey domiciled stock insurer and successor to MIIX;
3. The assumption of all existing MIIX business and liabilities by
New MIIX;
4. The allocation and distribution of MIIX Group's stock and cash by
which MIIX Group will acquire 100 percent of the stock of Medical
Underwriters from the Medical Society and all subsidiaries of Medical
Underwriters, and the distribution of MIIX Group's stock or equivalent cash
to current members of MIIX as defined in its rules and regulations
("members"), and former MIIX members who were insured at any time during
the three years prior to the plan adoption date ("look back insureds").
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<PAGE> 128
The amount of stock will be based on MIIX direct premium on, less any
return premium (that is, net earned premium), attributable to each member
and look back insured over the three years prior to the plan adoption date.
Pursuant to the plan, cash will be distributed instead of stock to members
and look back insureds where the allocation would be less than 100 shares;
and
5. The dissolution of MIIX as a reciprocal exchange; and
IT FURTHER APPEARING that the Department reviewed the plan and related
documents and information, and provided notice of the proposed plan both by
publication in the December 1, 1997 issue of the New Jersey Register and by mail
to persons comprising the Department's mailing list for the Insurance Division;
and
IT FURTHER APPEARING that following the review of the plan by the
Department staff, the Department sought comments, views and relevant data from
interested parties and the public, and pursuant to N.J.S.A. 52:14B-4g, held a
hearing on December 22, 1997 to receive public comment from interested parties
regarding whether the proposed plan should be approved; and
IT FURTHER APPEARING that the Department accepted written comments until
December 31, 1997 from interested parties regarding the proposed plan as well as
any additional documentation or responses from comments from MIIX; and
IT FURTHER APPEARING that the Department received two timely written
comments from MIIX member insureds on the proposed plan; and
IT FURTHER APPEARING that the Hearing Officer for the hearing filed a
report dated March 3, 1998 that recommended that the proposed plan of
reorganization as filed by MIIX on October 16, 1997 be approved, subject to the
conditions of approval by the MIIX membership in accordance with its rules of
governance and the formation of New MIIX in accordance with applicable law; and
IT FURTHER APPEARING that upon review of the Hearing Officer's Report and
the recommendations set forth therein, and for the reasons set forth therein, I
find that it is appropriate to approve the proposed plan of reorganization
subject to the conditions set forth in the Hearing Officer's Report dated March
3, 1998.
THEREFORE, IT IS ON this 5th day of March, 1998,
ORDERED that the proposed plan of reorganization as filed by MIIX on
October 16, 1997 is approved, subject to the conditions of authorization and
approval by the MIIX membership in accordance with its rules of governance, and
the formation of New MIIX in accordance with applicable law.
/s/ ELIZABETH RANDALL
--------------------------------------
Elizabeth Randall
Commissioner
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Annex C
[TO COME]
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med inter logo
<PAGE> 131
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
<TABLE>
<S> <C>
SEC Registration Fee........................................ $ 95,875
NYSE Filing Fee............................................. 97,531
Blue Sky Fees and Expenses.................................. 0
Legal Fees and Expenses..................................... 1,300,000
Accounting Fees and Expenses................................ 525,000
Registrar and Transfer Agent Fees........................... 100,000
Printing and Engraving Expenses............................. 200,000
Miscellaneous............................................... 75,000
----------
Total............................................. $2,393,406
==========
</TABLE>
- ---------------
Each amount set forth above, except the SEC registration fee and NYSE
filing fee, is estimated.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Delaware General Corporation Law (the "DGCL") permits a Delaware
corporation to include in its charter and bylaws certain provisions to eliminate
the personal liability of directors for monetary damages and to indemnify its
directors and officers. The MIIX Group By-laws (the "By-laws") provide that
subject to certain exceptions in the case of actions by or in the right of the
Company, the Company shall indemnify its directors and officers, and may
indemnify its agents and employees, against judgments, fines and amounts paid in
settlement actually and reasonably incurred by him or her, incurred by reason of
the fact that such person was serving as a director, officer, employee or agent
of the Company, so long as such person acted and in a manner reasonably believed
to be in or not opposed to the best interest of the Company, and, with respect
to any criminal action, so long as the indemnified party had no reason to
believe that his or her conduct was unlawful. The MIIX Group's Certificate of
Incorporation provides that directors shall not be liable to the Company or the
Company's stockholders for monetary damages for breach of his or her fiduciary
duty as a director, except that liability may not be eliminated (i) for any
breach of such person's duty of loyalty, (ii) for acts or omissions not in good
faith or involving intentional misconduct or a knowing violation of law, (iii)
under Section 174 of the DGCL or (iv) for any transaction in which such person
received an improper personal benefit. Section 145(a) of the DGCL provides that
a corporation may indemnify a director, officer, employee, or agent if such
person acted in good faith and in a manner reasonably believed to be in, or not
opposed to, the best interests of the corporation and, with respect to any
criminal proceeding, had no reasonable cause to believe the conduct was
unlawful. In addition, effective upon consummation of the Reorganization, The
MIIX Group will enter into indemnification agreements with each of its directors
and certain of its executive officers that generally provide for similar
indemnification. Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers or persons
controlling the registrant pursuant to the foregoing provisions, the Registrant
has been informed that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is
therefore unenforceable.
The Underwriting Agreement provides for indemnification by the Underwriters
of the registrant and its directors, officers and controlling persons for
certain liabilities, including liabilities arising under the Securities Act of
1933, as amended.
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ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
The MIIX Group was incorporated under the laws of the State of Delaware on
October 14, 1997. On October 15, 1997, The MIIX Group issued 10 shares of its
Common Stock, par value $.01 per share, to the Medical Inter-Insurance Exchange
of New Jersey for an aggregate purchase price of $10. Such issuance was exempt
from registration under the Securities Act of 1933, as amended, pursuant to
Section 4(2) thereof, because such issuance did not involve any public offering
of securities.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits
The following exhibits are filed herewith unless otherwise indicated:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S>
2.1 Plan of Reorganization of Medical Inter-Insurance
Exchange.(2)
3.1 Restated Certificate of Incorporation of the MIIX Group,
Incorporated.
3.2 Bylaws of The MIIX Group, Incorporated.(2)
5.1 Opinion of Dechert Price & Rhoads.(1)
8.1 Tax Opinion of PricewaterhouseCoopers LLP.(1)
10.1 Lease Between the Medical Society of New Jersey and New
Jersey State Medical Underwriters, Inc. dated June 29,
1981.(2)
10.2 Extension of Lease between the Medical Society of New Jersey
and New Jersey State Medical Underwriters, dated June 26,
1998.(2)
10.3 Lease Between Princeton Pike Corporate Center Associates IV
and Physician Healthcare Plan of New Jersey Inc. dated May
24, 1991 and assigned to New Jersey State Medical
Underwriters, Inc. on February 11, 1997.(2)
10.4 Specific Excess Reinsurance Contract, effective January 1,
1997, among Medical Inter-Insurance Exchange of New Jersey
and Swiss Reinsurance Company; Hannover Ruckversicherungs;
Underwriters Reinsurance Company; Kemper Reinsurance
Company; and London Life and Casualty Reinsurance
Corporation.(2)
10.5 Specific Excess Reinsurance Contract, effective January 1,
1997, between Medical Inter-Insurance Exchange of New Jersey
and American Re-Insurance Company.(2)
10.6 Combined Quota Share, Aggregate and Specific Excess of Loss
Reinsurance Treaty, effective November 1, 1996, among
Medical Inter-Insurance Exchange of New Jersey and Hannover
Reinsurance (Ireland) Ltd.,; E&S Reinsurance (Ireland) Ltd.;
Underwriters Reinsurance Company (Barbados) Inc.; London
Life and Reinsurance Corporation; and Lawrenceville Re,
Ltd.(2)
10.7 Specific Excess Reinsurance Contract, effective January 1,
1996 and terminated December 31, 1996, among Medical
Inter-Insurance Exchange of New Jersey and Swiss Reinsurance
Company; Hannover Ruckversicherungs; Underwriters
Reinsurance Company; American Re-Insurance Company; Kemper
Reinsurance Company; and London Life and Casualty
Reinsurance Corporation.(2)
10.8 Combined Aggregate and Casualty Catastrophe Excess of Loss
Reinsurance Treaty, effective January 1, 1996 among Medical
Inter-Insurance Exchange of New Jersey and Hannover
Reinsurance (Ireland) Ltd.; Eisen und Stahl Reinsurance
(Ireland) Ltd.; London Life and Casualty Reinsurance
Corporation; and Scandinavian Reinsurance Company, Ltd.; and
Lawrenceville Re, Ltd.(2)
</TABLE>
II-2
<PAGE> 133
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S>
10.9 Specific Excess Reinsurance Contract, effective January 1,
1995 and terminated December 31, 1995 among Medical
Inter-Insurance Exchange of New Jersey and Swiss Reinsurance
Company; Hannover Ruckversicherungs; Underwriters
Reinsurance Company; and PMA Reinsurance Corporation.(2)
10.10 Combined Aggregate and Casualty Catastrophe Excess of Loss
Reinsurance Treaty, effective January 1, 1995 among Medical
Inter-Insurance Exchange of New Jersey and Hanover
Reinsurance (Ireland) Ltd.; Eisen und Stahl Reinsurance
(Ireland) Ltd.; London Life and Casualty Reinsurance
Corporation; and Scandinavian Reinsurance Company Ltd.(2)
10.11 Combined Aggregate and Casualty Catastrophe Excess of Loss
Reinsurance Treaty, effective January 1, 1994 among Medical
Inter-Insurance Exchange of New Jersey and Scandinavian
Reinsurance Company Ltd.; Hannover Reinsurance (Ireland)
Ltd.; and Eisen und Stahl Reinsurance (Ireland) Ltd.(2)
10.12 Combined Aggregate and Casualty Catastrophe Excess of Loss
Reinsurance Treaty, effective January 1, 1993 among Medical
Inter-Insurance Exchange of New Jersey and Scandinavian
Reinsurance Company Ltd.; Hannover Reinsurance (Ireland)
Ltd.; and Eisen und Stahl Reinsurance (Ireland) Ltd.(2)
10.13 Combined Aggregate and Casualty Catastrophe Excess of Loss
Reinsurance Treaty, effective December 15, 1992 among
Medical Inter-Insurance Exchange of New Jersey and Hannover
Reinsurance (Ireland) Ltd.; and Eisen und Stahl Reinsurance
(Ireland) Ltd.(2)
10.14 1998 Long Term Incentive Equity Plan of The MIIX Group,
Incorporated.(2)
10.15 Employment Agreement among The MIIX Group, Incorporated, New
Jersey State Medical Underwriters, Inc. and Daniel
Goldberg.(1)
10.16 Employment Agreement among The MIIX Group, Incorporated, New
Jersey State Medical Underwriters, Inc. and Kenneth
Koreyva.(1)
10.17 Employment Agreement among The MIIX Group, Incorporated, New
Jersey State Medical Underwriters, Inc. and Joseph
Hudson.(1)
10.18 Employment Agreement between New Jersey State Medical
Underwriters, Inc. and Lisa Kramer.(2)
10.19 Employment Agreement between New Jersey State Medical
Underwriters, Inc. and Ronald Wade.(2)
10.20 Form of Stock Purchase and Loan Agreement between The MIIX
Group, Incorporated and Daniel Goldberg.(1)
10.21 Form of Stock Purchase and Loan Agreement between The MIIX
Group, Incorporated and Kenneth Koreyva.(1)
10.22 Form of Stock Purchase and Loan Agreement between The MIIX
Group, Incorporated and Joseph Hudson.(1)
15.1 Letter of Independent Auditor regarding Unaudited Interim
Financial Information.
21.1 Subsidiaries of The MIIX Group, Incorporated.(2)
23.1 Consent of Dechert Price & Rhoads (included in Exhibit 5.1).
23.2 Consent of Ernst & Young LLP.
23.3 Consent of PricewaterhouseCoopers LLP (included in Exhibit
8.1).
24.1 Powers of Attorney.(2)
27.1 Financial Data Schedules.
</TABLE>
II-3
<PAGE> 134
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S>
99.1 Consent of Salomon Smith Barney Inc.
99.2 Form of Proxy Cards.
99.3 Form of Share Allocation Cards.
99.4 Miscellaneous communications materials.
</TABLE>
- ---------------
(1) To be filed by amendment.
(2) Previously filed.
(b) Financial Statement Schedules:
The required schedules as identified on the Index to Consolidated Financial
Statements on page F-1 of the Prospectus forming part of this Registration
Statement and are incorporated herein by reference. All other schedules for
which provision is made in the applicable accounting regulation of the
Securities and Exchange Commission are not required under the related
instructions or are inapplicable and therefore have been omitted.
ITEM 17. UNDERTAKINGS.
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20% change in the
maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement.
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(b) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the
II-4
<PAGE> 135
securities being registered, the registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
(c) The undersigned registrant hereby undertakes that:
(1) For purposes of determining the liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-5
<PAGE> 136
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of
Lawrenceville and State of New Jersey on October 2, 1998.
By: /s/ DANIEL GOLDBERG
------------------------------------
Daniel Goldberg
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
NAME TITLE DATE
---- ----- ----
<C> <S> <C>
/s/ DANIEL GOLDBERG President, Chief Executive Officer October 2, 1998
- ------------------------------------------------ and Director (principal executive
Daniel Goldberg officer)
/s/ KENNETH KOREYVA Executive Vice President and Chief October 2, 1998
- ------------------------------------------------ Financial Officer (principal
Kenneth Koreyva financial accounting officer)
* Director October 2, 1998
- ------------------------------------------------
Angelo S. Agro, M.D.
* Director October 2, 1998
- ------------------------------------------------
Hillel M. Ben-Asher, M.D.
* Director October 2, 1998
- ------------------------------------------------
Harry M. Carnes, M.D.
* Director October 2, 1998
- ------------------------------------------------
Palma E. Formica, M.D.
* Director October 2, 1998
- ------------------------------------------------
John S. Garra, M.D.
* Director October 2, 1998
- ------------------------------------------------
Paul Hirsch, M.D.
* Director October 2, 1998
- ------------------------------------------------
Louis L. Keeler, M.D.
* Director October 2, 1998
- ------------------------------------------------
Henry R. Liss, M.D.
* Director October 2, 1998
- ------------------------------------------------
Arganey Lucas, Jr., M.D.
* Director October 2, 1998
- ------------------------------------------------
S. Stuart Mally, M.D.
</TABLE>
II-6
<PAGE> 137
<TABLE>
<CAPTION>
NAME TITLE DATE
---- ----- ----
<C> <S> <C>
* Director October 2, 1998
- ------------------------------------------------
Vincent A. Maressa, Esq.
* Director October 2, 1998
- ------------------------------------------------
Murray N. Matez, D.O.
* Director October 2, 1998
- ------------------------------------------------
Robert S. Maurer, D.O.
* Director October 2, 1998
- ------------------------------------------------
A. Richard Miskoff, D.O.
* Director October 2, 1998
- ------------------------------------------------
Charles J. Moloney, M.D.
* Director October 2, 1998
- ------------------------------------------------
Eileen Marie Moynihan, M.D.
* Director October 2, 1998
- ------------------------------------------------
John J. Pastore, M.D.
* Director October 2, 1998
- ------------------------------------------------
Pascal A. Pironti, M.D.
* Director October 2, 1998
- ------------------------------------------------
Joseph A. Riggs, M.D.
* Director October 2, 1998
- ------------------------------------------------
Bernard Robins, M.D.
* Director October 2, 1998
- ------------------------------------------------
Herman M. Robinson, M.D.
* Director October 2, 1998
- ------------------------------------------------
Gabriel F. Sciallis, M.D.
* Director October 2, 1998
- ------------------------------------------------
Martin L. Sorger, M.D.
* Director October 2, 1998
- ------------------------------------------------
Bessie M. Sullivan, M.D.
* Director October 2, 1998
- ------------------------------------------------
Harvey P. Yeager, M.D.
*By: /s/ DANIEL GOLDBERG
-------------------------------------------
Daniel Goldberg
Attorney-in-Fact
</TABLE>
II-7
<PAGE> 1
Exhibit 3.1
RESTATED CERTIFICATE OF INCORPORATION
OF
THE MIIX GROUP, INCORPORATED
The name of the Corporation (which is hereinafter referred to
as the Corporation) is "The MIIX Group, Incorporated."
The original certificate of incorporation was filed with the
Secretary of State of the State of Delaware on October 14, 1997.
This Restated Certificate of Incorporation has been duly
proposed by resolutions adopted and declared advisable by the Board of Directors
of the Corporation, duly adopted by the sole stockholder of the Corporation and
duly executed and acknowledged by the officers of the Corporation in accordance
with Sections 103, 242 and 245 of the General Corporation Law of the State of
Delaware.
The text of the Certificate of Incorporation of the
Corporation is hereby amended and restated to read in its entirety as follows:
Article I.
The name of the Corporation is The MIIX Group, Incorporated.
Article II.
The Corporation's registered office in the State of Delaware
is at 222 Delaware Avenue, P.O. Box 2306, Wilmington, New Castle County,
Delaware 19899. The name of its registered agent at such address is Delaware
Corporate Services, Inc.
Article III.
The nature of the business of the Corporation and its purpose
is to engage in any lawful act or activity for which corporations may be
organized under the General Corporation Law of the State of Delaware, including
without limitation, holding all of the voting stock of MIIX Insurance Company, a
New Jersey stock insurance company.
Article IV.
Section 1. The total number of shares of stock which the
Corporation shall have authority to issue is one hundred-fifty million
(150,000,000) shares, consisting of (a) one-
<PAGE> 2
hundred million (100,000,000) shares of Common Stock, par value $.01
per share (the "Common Stock"), and (b) fifty million (50,000,000) shares of
preferred stock, par value $.01 per share.
Section 2. The Common Stock shall be subject to the express
terms of any series of preferred stock.
Section 3. Except as may be provided in this Certificate of
Incorporation or in a preferred stock Certificate of Designation (as hereinafter
defined), if any, the Common Stock shall have the exclusive right to vote for
the election of Directors and for all other purposes, and holders of preferred
stock shall not be entitled to receive notice of any meeting of stockholders at
which they are not entitled to vote.
Section 4. Subject to the rights of holders of preferred
stock, if any, and subject to any other provisions of this Certificate of
Incorporation, holders of Common Stock shall be entitled to receive such
dividends and other distributions in cash, stock or property of the Corporation
as may be declared thereon by the Board of Directors from time to time out of
assets or funds of the Corporation legally available therefor.
Section 5. Additional preferred stock may be issued at any
time and from time to time in one or more series. The Board of Directors is
hereby authorized to provide by resolution or resolutions from time to time for
the issuance of shares of preferred stock in one or more series and, by filing a
certificate pursuant to the applicable provisions of the General Corporation Law
of the State of Delaware (referred to herein as a "Preferred Stock Certificate
of Designation"), to establish from time to time the number of shares to be
included in each such series, and to fix the designation, powers, preferences
and rights of shares of each such series and the qualifications, limitations and
restrictions thereof. The authority of the Board of Directors with respect to
each series shall include, but not be limited to, determination of the
following:
(a) The designation of the series, which may be by
distinguishing number, letter or title.
(b) The number of shares of the series, which number
the Board of Directors may thereafter (except where otherwise provided in the
applicable Preferred Stock Certificate of Designation) increase or decrease (but
not below the number of shares thereof then outstanding).
(c) Whether dividends, if any, shall be cumulative or
noncumulative and the dividend rate of the series.
(d) The conditions upon which and dates as of which
dividends, if any, shall be payable, and the relation which such dividends, if
any, shall bear to the dividends payable on any other class or classes of stock.
-2-
<PAGE> 3
(e) The redemption rights and price or prices, if
any, for shares of the series.
(f) The terms and amount of any sinking fund provided
for the purchase or redemption of shares of the series.
(g) The amounts payable on and the preferences, if
any, of shares of the series in the event of any voluntary or involuntary
liquidation, dissolution or winding up of the affairs of the Corporation.
(h) Whether the shares of the series shall be
convertible or exchangeable into shares of any other class or series, or any
other security, of the Corporation or any other corporation, and, if so, the
specification of such other class or series or such other security, the
conversion or exchange price or prices or rate or rates, any adjustments
thereof, the date or dates as of which such shares shall be convertible or
exchangeable and all other terms and conditions upon which such conversion or
exchange may be made.
(i) Restrictions on the issuance of shares of the
same series or of any other class or series.
(j) The voting rights, if any of the holders of
shares of the series.
Section 6. No stockholder of the Corporation shall be entitled
to exercise any right of cumulative voting.
Section 7. No stockholder of the Corporation shall have any
preemptive or preferential right, nor be entitled as such as a matter of right,
to subscribe for or purchase any part of any new or additional issue of stock of
the Corporation of any class or series, whether issued for money or for
consideration other than money, or of any issue of securities convertible into
stock of the Corporation.
Section 8. The Corporation shall be entitled to treat the
person in whose name any share of its stock is registered as the owner thereof
for all purposes and shall not be bound to recognize any equitable or other
claim to, or interest in, such share on the part of any other person, whether or
not the Corporation shall have notice thereof, except as expressly provided by
applicable law.
Article V.
The Board of Directors is hereby authorized to create and
issue, whether or not in connection with the issuance and sale of any of its
stock or other securities or property, rights entitling the holders thereof to
purchase from the Corporation shares of stock or other securities of the
Corporation or any other corporation. The times at which and the terms upon
which such rights are to be issued shall be determined by the Board of Directors
and set forth in the contracts
-3-
<PAGE> 4
or instruments that evidence such rights. The authority of the Board of
Directors with respect to such rights shall include, but not be limited to,
determination of the following:
(a) The initial purchase price per share or other
unit of the stock or other securities or property to be purchased upon exercise
of such rights.
(b) Provisions relating to the times at which and the
circumstances under which such rights may be exercised or sold or otherwise
transferred, either together with or separately from, any other stock or
securities of the Corporation.
(c) Provisions which adjust the number or exercise
price of such rights, or amount or nature of the stock or other securities or
property receivable upon exercise of such rights, in the event of a combination,
split or recapitalization of any stock of the Corporation, a change in ownership
of the Corporation's stock or other securities or a reorganization, merger,
consolidation, sale of assets or other occurrence relating to the Corporation or
any stock of the Corporation, and provisions restricting the ability of the
Corporation to enter into any such transaction absent an assumption by the other
party or parties thereof of the obligations of the Corporation under such
rights.
(d) Provisions which deny the holder of a specified
percentage of the outstanding stock or other securities of the Corporation the
right to exercise such rights and/or cause the rights held by such holder to
become void.
(e) Provisions which permit the Corporation to redeem
such rights.
(f) The appointment of a rights agent with respect to
such rights.
Article VI.
The following provisions are inserted for the management of
the business and for the conduct of the affairs of the Corporation and for the
purpose of creating, defining, limiting and regulating the powers of the
Corporation and its Directors and stockholders.
(a) The number of Directors constituting the initial
Board of Directors shall be thirty (30) and, subject to the rights of holders of
any series of preferred stock, if any, to elect additional Directors under
specified circumstances, thereafter the number of Directors shall be as set
forth in or pursuant to the By-laws of the Corporation, but shall not be less
than nine (9) nor more than thirty-five (35). The Board of Directors, other than
those who may be elected by the holders of any series of preferred stock, if
any, shall be divided into three classes, designated Classes I, II and III,
which shall be as nearly equal in number as possible. Directors of Class I shall
be elected to hold office for a term expiring at the annual meeting of
stockholders to be held in 1999, Directors of Class II shall be elected to hold
office for a term expiring at the annual meeting of stockholders to be held in
2000 and Directors of Class III shall be elected to hold office for a term
expiring at the annual meeting of stockholders to be held in 2001. At each
-4-
<PAGE> 5
succeeding annual meeting of stockholders following such initial classification
and election, the respective successors of each class shall be elected for
three-year terms.
(b) Subject to the rights of any holders of any
series of preferred stock, if any, to elect additional Directors under specified
circumstances, the holders of a majority of the combined voting power of the
then outstanding stock of the Corporation entitled to vote generally in the
election of Directors may remove any Director or the entire Board of Directors,
but only for cause.
(c) Vacancies in the Board of Directors resulting
from death, resignation, retirement, disqualification, removal from office or
other cause and newly created Directorships resulting from any increase in the
authorized number of Directors shall be filled in the manner provided in the
By-laws of the Corporation.
(d) Advance notice of nominations for the election of
Directors shall be given in the manner and to the extent provided in the By-laws
of the Corporation.
(e) The election of Directors need not be by written
ballot.
(f) All corporate powers and authority of the
Corporation (except as at the time otherwise provided by law, by this
Certificate of Incorporation or by the By-laws) shall be vested in and exercised
by the Board of Directors.
(g) The Board of Directors shall have the power
without the assent or vote of the stockholders to adopt, amend, alter or repeal
the By-laws of the Corporation, except to the extent that the By-laws or this
Certificate of Incorporation otherwise provide. In addition to any requirements
of law and any other provision of this Certificate of Incorporation, the
stockholders of the Corporation may adopt, amend, alter or repeal any provision
of the By-laws upon the affirmative vote of the holders of two-thirds (2/3) or
more of the combined voting power of the then outstanding stock of the
Corporation entitled to vote generally in the election of Directors.
(h) A Director of the Corporation, in determining
what he or she reasonably believes to be in the best interests of the
Corporation, shall consider the interests of the Corporation's stockholders and,
in his or her discretion, may consider the following:
(1) the interests of the policyholders of
the Corporation's subsidiaries;
(2) the interests of the Corporation's
employees, independent contractors, agents,
suppliers, creditors and customers;
(3) the economy of the nation;
-5-
<PAGE> 6
(4) community and societal interests; and
(5) the long-term as well as the short-term
interests of the Corporation and its stockholders,
including the possibility that these interests may be
best served by continuing the existing ownership
structure of the Corporation.
Article VII.
Section 1. No Director of the Corporation shall be liable to
the Corporation or its stockholders for monetary damages for breach of his or
her fiduciary duty as a Director, provided that nothing contained in this
Article shall eliminate or limit the liability of a Director (a) for any breach
of the Director's duty of loyalty to the Corporation or its stockholders, (b)
for acts or omissions not in good faith or which involve intentional misconduct
or a knowing violation of the law, (c) under Section 174 of the General
Corporation Law of the State of Delaware, or (d) for any transaction from which
the Director derived an improper personal benefit. If the General Corporation
Law of the State of Delaware is amended after the filing of this Certificate of
Incorporation to authorize corporate action further eliminating or limiting the
personal liability of Directors, then the liability of a Director of the
Corporation shall be eliminated or limited to the fullest extent permitted by
the General Corporation Law of the State of Delaware, as so amended.
Section 2. Any repeal or modification of the foregoing
paragraph by the stockholders of the Corporation shall not adversely affect any
right or protection of a Director or the Corporation existing at the time of
such repeal or modification.
Article VIII.
Effective as of the time the Common Stock shall be registered
pursuant to the provisions of the Securities Exchange Act of 1934, as amended,
any action required or permitted to be taken by the stockholders of the
Corporation must be effected at a duly called annual or special meeting of the
stockholders of the Corporation, and the ability of the stockholders to consent
in writing to the taking of any action is specifically denied.
Article IX.
The Corporation reserves the right to amend or repeal any
provision contained in this Certificate of Incorporation in the manner now or
hereafter prescribed by the laws of the State of Delaware, and all rights herein
conferred upon stockholders or Directors (in the present form of this
Certificate of Incorporation or as hereinafter amended) are granted subject to
this reservation; provided, however, that any amendment or repeal of Article VII
of this Certificate of Incorporation shall not adversely affect any right or
protection existing hereunder immediately prior to such amendment or repeal;
and, provided, further, that Section 6 of Article IV and Articles V, VI, VII,
VIII and IX of this Certificate of Incorporation shall not be amended, altered
-6-
<PAGE> 7
or repealed without the affirmative vote of the holders of at least two-thirds
(2/3) of the then outstanding stock of the Corporation entitled to vote
generally in the election of Directors.
IN WITNESS WHEREOF, the Corporation has caused this Restated
Certificate of Incorporation to be signed by its duly authorized officer on this
17th day of September, 1998.
THE MIIX GROUP, INCORPORATED
By:/s/ Daniel Goldberg
---------------------------------------
Name: Daniel Goldberg
Title: President and Chief Executive
Officer
7
<PAGE> 1
Exhibit 15.1
Board of Governors
Medical Inter-Insurance Exchange
We are aware of the inclusion of our report dated September 2, 1998 relating to
the unaudited consolidated interim financial statements of Medical
Inter-Insurance Exchange and subsidiaries as of and for the six months ended
June 30, 1998 in the Registration Statement (Form S-1 No. 333-59371) of the MIIX
Group, Incorporated for the registration of shares of its common stock.
/s/ Ernst & Young LLP
October 2, 1998
New York, New York
<PAGE> 1
Exhibit 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to the
use of our report dated March 25, 1998 with respect to the consolidated
financial statements and schedule of the Medical Inter-Insurance Exchange
included in the Registration Statement on Form S-1 (File No. 333-59371) and
related Prospectus of The MIIX Group, Incorporated for the registration of
shares of its common stock.
/s/ Ernst & Young LLP
New York, New York
October 2, 1998
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE AUDITED
AND UNAUDITED FINANCIAL STATEMENTS CONTAINED IN THE REGISTRATION STATEMENT ON
FORM S-1 OF WHICH THIS SCHEDULE FORMS A PART AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C> <C> <C>
<PERIOD-TYPE> 12-MOS 3-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1998 DEC-31-1998
<PERIOD-START> JAN-01-1997 JAN-01-1998 JAN-01-1998
<PERIOD-END> DEC-31-1997 MAR-31-1998 JUN-30-1998
<DEBT-HELD-FOR-SALE> 852,746 869,218 934,976
<DEBT-CARRYING-VALUE> 0 0 0
<DEBT-MARKET-VALUE> 0 0 0
<EQUITIES> 89,080 88,688 92,292
<MORTGAGE> 0 0 0
<REAL-ESTATE> 0 0 0
<TOTAL-INVEST> 1,026,971 1,086,890 1,163,831
<CASH> (380) 0 2,012
<RECOVER-REINSURE> 87,446 88,941 95,457
<DEFERRED-ACQUISITION> 100 5,183 4,607
<TOTAL-ASSETS> 1,251,501 1,381,871 1,400,085
<POLICY-LOSSES> 876,721 901,712 921,423
<UNEARNED-PREMIUMS> 20,886 120,443 89,139
<POLICY-OTHER> 0 0 0
<POLICY-HOLDER-FUNDS> 0 0 0
<NOTES-PAYABLE> 0 0 0
0 0 0
0 0 0
<COMMON> 0 0 0
<OTHER-SE> 302,763 304,443 306,724
<TOTAL-LIABILITY-AND-EQUITY> 1,251,501 1,381,871 1,400,085
123,330 35,817 74,380
<INVESTMENT-INCOME> 53,892 14,803 30,854
<INVESTMENT-GAINS> 10,296 1,441 4,246
<OTHER-INCOME> 2,884 657 1,346
<BENEFITS> 120,496 36,050 72,952
<UNDERWRITING-AMORTIZATION> 0 0 0
<UNDERWRITING-OTHER> 25,415 8,194 17,319
<INCOME-PRETAX> 32,910 4,477 1,054
<INCOME-TAX> 2,629 705 (1,498)
<INCOME-CONTINUING> 30,281 3,772 2,552
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 30,281 3,772 2,552
<EPS-PRIMARY> 0 0 0
<EPS-DILUTED> 0 0 0
<RESERVE-OPEN> 400,334 438,174 438,174
<PROVISION-CURRENT> 120,496 36,050 72,952
<PROVISION-PRIOR> 0 0 0
<PAYMENTS-CURRENT> 3,930 668 1,445
<PAYMENTS-PRIOR> 78,726 11,477 20,427
<RESERVE-CLOSE> 438,174 462,079 489,254
<CUMULATIVE-DEFICIENCY> 0 0 0
</TABLE>
<PAGE> 1
Exhibit 99.1
CONSENT OF SALOMON SMITH BARNEY INC.
Salomon Smith Barney Inc., successor to Salomon Brothers Inc and Smith Barney
Inc., hereby consents to the use of its name and Salomon Brothers Inc's name and
the description of its opinion, referred to under the heading "THE
REORGANIZATION-Opinion of the Financial Advisor" in the Prospectus, dated
October 2, 1998, contained in the Registration Statement on Form S-1 of The MIIX
Group, Incorporated. By giving such consent Salomon Smith Barney Inc. does not
hereby admit that (1) Salomon Smith Barney Inc. is, or Salomon Brothers Inc was,
an expert with respect to any part of such Registration Statement within the
meaning of the term "expert" as used in the Securities Act of 1933, as amended,
or the rules and regulations of the Securities and Exchange Commission
promulgated thereunder, or (2) Salomon Smith Barney Inc. comes, or Salomon
Brothers Inc came, within the category of persons whose consent is required
under the Securities Act of 1933, as amended, or the rules and regulations of
the Securities and Exchange Commission promulgated thereunder.
SALOMON SMITH BARNEY INC.
By: /s/ Mario Torsiello
--------------------------
Name:
Title:
October 2, 1998
New York, New York
<PAGE> 1
Exhibit 99.2
[Form of Proxy Card--Obverse]
PROXY
[MIIX LOGO]
Medical Inter-Insurance Exchange of New Jersey (the "Exchange") Proxy solicited
by the Board of Governors for a Special Meeting of Members to be held at 10:00
a.m. EST, November , 1998 at xxx xxxx, xxxx, N.J.
The undersigned, revoking all previous proxies, hereby appoints Angelo S. Agro,
M.D. and Palma E. Formica, M.D. and each of them proxies with full power of
substitution to represent the undersigned at the Special Meeting of Members of
the Exchange, be held on November , 1998 or at any adjournments thereof and
to vote, as directed below, all of which the undersigned would be entitled to
vote if personally present.
The Board of Governors recommends a vote "FOR" Item 1.
1. To approve the Plan of Reorganization dated October 15, 1997, pursuant to
which, among other things, the Exchange will be dissolved, the assets and
liabilities of the Exchange will be assumed by MIIX Insurance Company, a
wholly owned subsidiary of The MIIX Group, Incorporated, and certain current and
former Members of the Exchange will receive common stock of The MIIX Group,
Incorporated, or in certain cases, cash; and to approve an amendment to the
Rules and Regulations of the Exchange to permit the dissolution of the Exchange
in accordance with the Plan of Reorganization.
2. In their discretion, the proxies are authorized to vote upon such other
business as may properly come before the meeting or at any adjournment thereof.
This proxy when properly executed will be voted in the manner directed herein by
the undersigned Member. If no decision is made, this proxy will be voted "FOR"
Item 1.
The undersigned acknowledges receipt of the Prospectus and the Notice of the
Special Meeting relating to the Plan of Reorganization.
/ / / /
FOR AGAINST
Please mark only one box
___________________________________________________
Name Policy Number
___________________________________________________
Address #1
___________________________________________________
Address #2
Please read the
___________________________________________________ important information
City State Zip on the back of this card
SIGN HERE
___________________________________________________
Signature Date
Please sign exactly as your name appears above. When signing as attorney,
executor, administrator, trustee or guardian, please give your title as such.
[Form of Proxy Card -- Reverse]
PROXY
[MIIX LOGO]
Please make any corrections to name and address on the back of your Taxpayer
Identification card, rather than on this card.
IT IS IMPORTANT THAT YOU RETURN THIS CARD IMMEDIATELY.
If Business Reply Envelope is lost, please return this card to:
MIIX
c/o First Chicago Trust Company of New York
P.O. Box xxxx
Edison, NJ 08838-3211
The Plan of Reorganization will have no impact on your current premiums or
policies. All policies will remain in force according to their current terms.
IF YOU HAVE ANY QUESTIONS, CALL THE MIIX CONVERSION INFORMATION CENTER AT (888)
359-8644.
<PAGE> 1
Exhibit 99.3
[Form of Share Allocation Card -- Obverse]
SHARE ALLOCATION
[MIIX LOGO]
If MIIX's Plan of Reorganization is approved, you will receive approximately
shares* of common stock of The MIIX Group, Incorporated. The share
allocation is based on preliminary calculations and is subject to change. The
MIIX Group, Incorporated, intends to list its shares on The New York Stock
Exchange.
*If the number of shares noted above is less than 100, you will receive cash
instead of stock.
DR. JOHN DOE
MEDICAL BUILDING
STREET IN USA
PO BOX NUMBER
CITY, STATE AND ZIP CODE
IF YOU HAVE ANY QUESTIONS, CALL THE MIIX CONVERSION INFORMATION CENTER AT (888)
359-8644.
Retain this card for your records.
[Form of Share Allocation Card -- Reverse]
SHARE ALLOCATION
[MIIX LOGO]
PLEASE RETAIN THIS
CARD FOR YOUR RECORDS
<PAGE> 1
Exhibit 99.4
VOTING MEMBERS
K E Y F A C T S H E E T
- - In order for you to receive a distribution of marketable stock in The MIIX
Group, Incorporated ("MIIX Group") or cash, two-thirds (2/3) of the votes cast
by eligible members must be FOR the Plan of Reorganization.
- - You are eligible to vote if you were an insured member on the Plan adoption
date, October 15, 1997. Each voting member may cast only one vote, regardless of
the number or types of policies he or she currently has.
- - If your allocation is 100 shares or greater, you will receive stock (see
the Share Allocation card for your allocation). If your allocation is less than
100 shares, you will receive cash. Whether in cash or stock, your allocation
will be distributed as soon as practicable after the reorganization becomes
effective.
- - The value of your shares will equal the number of shares allocated to you
multiplied by the price per share at which the stock trades on The New York
Stock Exchange. The price will fluctuate in the stock market.
- - The reorganization will have no impact on your current premium or policies
and they will remain in force in accordance with their terms.
- - The enclosed Prospectus discusses federal tax consequences of the voting
members' distribution. Generally, you will not immediately be subject to federal
income tax on the receipt of stock, but you will immediately be subject to
federal income tax if you receive a cash distribution.
- - MIIX Group stock will be traded on The New York Stock Exchange under the
symbol MHU.
IF YOU HAVE ANY QUESTIONS, PLEASE CALL
THE MIIX CONVERSION INFORMATION CENTER AT (888) 359-8644
[MIIX LOGO]
<PAGE> 2
Exhibit 99.4
Dear Doctor,
On November , 1998, eligible MIIX members will vote on the MIIX Plan of
Reorganization ("Plan") pursuant to which, among other things, MIIX will
reorganize as a stock company and stock of The MIIX Group, Incorporated, ("MIIX
Group") will be distributed. The Plan, which has been approved by the Board of
Governors and the New Jersey Department of Banking and Insurance, incorporates
a three-year "look-back" approach to the allocation of stock to members and
recent former members of MIIX.
Because you were not a MIIX policyholder on the date the Plan was adopted,
October 15, 1997, you are not eligible to vote on the Plan, but you will, as a
look-back insured, receive a share allocation (stock or cash) from the MIIX
Group if the Plan is completed.
It is important to note that there are immediate tax consequences for this
allocation because you were not a MIIX policyholder on October 15, 1997. You
should carefully review the enclosed Prospectus and other information and
consult with your financial or tax adviser.
Please keep the enclosed Share Allocation card for your records. In order for
MIIX Group to distribute your allocation, you must complete, sign, date and
return the Taxpayer Identification (TIN) card in the enclosed postage-paid
envelope.
If you have any questions, please call the MIIX Conversion Information Center
at (888) 359-8644. We hope to serve your insurance needs again in the future.
Sincerely,
/s/ Daniel Goldberg
Daniel Goldberg
President
Chief Executive Officer
<PAGE> 3
EXHIBIT 99.4
SHARE ALLOCATION
KEY FACT SHEET
- - If your allocation is 100 shares or greater, you will receive stock (see the
Share Allocation card for your allocation). If your allocation is less than 100
shares, you will be paid in cash rather than stock. Whether in cash or stock,
your allocation will be distributed as soon as practicable after the Plan of
Reorganization is completed.
- - Since you were not a member of Medical Inter-Insurance Exchange as of October
15, 1997, the adoption date of the Plan of Reorganization, the Company will
treat the distribution of common stock and cash to you as a policyholder
dividend for federal income tax purposes.
- - Common stock and cash that is considered to have been received as a
policyholder dividend would generally be treated as a return of premiums paid
in an amount equal to the fair market value of the common stock and cash
received, and subject to tax as ordinary income provided that you were entitled
to a deduction for premiums paid. Further, under this treatment, you should
obtain a tax basis in the common stock received in an amount equal to its fair
market value. MIIX Group may also be required to withhold federal income taxes
from your allocation if you fail to complete and return the Taxpayer
Identification (TIN) card included in this package.
- - You are urged to consult with your financial or tax adviser regarding state
taxes or any other tax matters.
- - MIIX Group stock will be traded on The New York Stock Exchange under the
symbol MHU.
IF YOU HAVE ANY QUESTIONS, PLEASE CALL
THE MIIX CONVERSION INFORMATION CENTER AT (888) 359-8644
[MIIX LOGO]
