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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 29, 1998.
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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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.)
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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:
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<S> <C>
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 this Registration Statement becomes effective.
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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. [ ]
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CALCULATION OF REGISTRATION FEE
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PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AGGREGATE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED PRICE(1) REGISTRATION FEE
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<S> <C> <C>
Common Stock, par value $.01 per share $45,000,000 $13,275
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(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(o).
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
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.
SUBJECT TO COMPLETION, DATED SEPTEMBER 29, 1998
PROSPECTUS
SHARES
THE MIIX GROUP, INCORPORATED
COMMON STOCK
------------------
All of the shares (the "Shares") of common stock, par value $.01 per share
("Common Stock"), offered hereby are being sold by The MIIX Group, Incorporated
("The MIIX Group").
The Shares will be issued concurrently with the shares of Common Stock to
be distributed pursuant to a plan of reorganization (the "Plan of
Reorganization", and together with the transactions contemplated thereby, the
"Reorganization") pursuant to which the Medical Inter-Insurance Exchange of New
Jersey, a New Jersey reciprocal insurer (the "Exchange"), will reorganize as a
stock insurer and become a wholly owned subsidiary of The MIIX Group. In
connection with the Reorganization, up to 12,000,000 shares of Common Stock will
be issued to eligible current and former members of the Exchange. See "The
Reorganization." The MIIX Group is also currently conducting a non-underwritten
Subscription Offering (the "Subscription Offering"). See "The Subscription
Offering." The MIIX Group currently anticipates that it will issue
shares of Common Stock in the Subscription Offering. The
consummation of the offering made hereby (the "Public Offering," and with the
Subscription Offering, the "Offerings") and the Subscription Offering are each
conditioned on the consummation of the Reorganization, and the consummation of
the Subscription Offering is conditioned on the consummation of the Public
Offering. However, the consummation of the Reorganization is not conditioned on
the consummation of either Offering and the consummation of the Public Offering
is not conditioned on the consummation of the Subscription Offering. This
Prospectus relates solely to the Public Offering and does not constitute an
offer to sell, or a solicitation of an offer to buy, Common Stock in the
Subscription Offering or the Reorganization. Common Stock to be offered in the
Subscription Offering and pursuant to the Reorganization will be offered only by
means of a separate prospectus.
Prior to the offering made hereby, there has been no public market for the
Common Stock. It is anticipated that the initial public offering price will be
between $ and $ per share. See "Underwriting" for information relating
to the factors considered in determining the initial public offering price.
The Common Stock has been approved for listing, subject to official notice
of issuance, on the New York Stock Exchange (the "NYSE") under the symbol "MHU."
SEE "RISK FACTORS" COMMENCING ON PAGE 14 HEREIN FOR CERTAIN FACTORS
RELEVANT TO AN INVESTMENT IN THE COMMON STOCK.
THESE SECURITIES 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.
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PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT THE MIIX GROUP(1)
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<S> <C> <C> <C>
Per Share $ $ $
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Total(2) $ $ $
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</TABLE>
(1) Before deducting expenses of the Public Offering, estimated to be
$ .
(2) The MIIX Group has granted to the Underwriters an option, exercisable
within 30 days after the date hereof, to purchase up to an aggregate of
additional shares of Common Stock at the Price to Public, less
Underwriting Discount, solely to cover over-allotments, if any. If the
Underwriters exercise such option in full, the total Price to Public,
Underwriting Discount, and Proceeds to The MIIX Group will be $ ,
$ and $ , respectively. See "Underwriting."
The Shares are offered subject to receipt and acceptance by the
Underwriters, to prior sale, and to the Underwriters' right to reject any order
in whole or in part and to withdraw, cancel, or modify the offer without notice.
It is expected that delivery of the Shares will be made at the offices of
Salomon Smith Barney, 388 Greenwich Street, New York, New York 10013, or through
the facilities of The Depository Trust Company, on or about , 1998.
------------------
SALOMON SMITH BARNEY
FRIEDMAN, BILLINGS, RAMSEY & CO., INC.
THE ROBINSON-HUMPHREY COMPANY
, 1998
<PAGE> 3
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.
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING 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 "UNDERWRITING."
THIS PROSPECTUS RELATES SOLELY TO THE PUBLIC OFFERING AND DOES NOT
CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, COMMON STOCK
IN THE SUBSCRIPTION OFFERING OR PURSUANT TO THE REORGANIZATION. COMMON STOCK TO
BE OFFERED IN THE SUBSCRIPTION OFFERING OR PURSUANT TO THE REORGANIZATION 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- ) under the Securities Act of 1933, as amended (the
"Securities Act"), with respect to the Shares. 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. 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
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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.
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.
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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 Public Offering is not exercised. See
"Glossary of Selected Insurance Terms" and "Glossary of Reorganization and
Subscription Offering 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 New Jersey State Medical Underwriters, Inc.
(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," which is currently named Surety Re pending
regulatory approval of a change in name) 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.
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 17
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 Company's total revenues and net income were $200.4 million and $28.9
million, respectively, for 1997 and were $114.6 million and $4.8 million,
respectively, for the six months ended June 30, 1998. As of June 30, 1998, the
Company had total assets of $1.4 billion and total equity of $309.7 million.
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
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and access to capital. See "The Reorganization" and "The Subscription Offering."
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 17 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 21 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.
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
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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 the
Medical Society and the Connecticut Hospital Association. 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
medical society 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 three different transactions -- the
Reorganization, the Subscription Offering 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 (as defined in the "Glossary
of Reorganization and Subscription Offering Terms") will receive Common
Stock or, in certain cases, cash. The Reorganization will not be
consummated unless several conditions precedent are satisfied. See "The
Reorganization and Distribution."
- Subscription Offering. The Company is conducting a non-underwritten
Subscription Offering for shares of Common Stock. The Company stopped
accepting offers to subscribe from Subscription Offerees (as defined
below) on , 1998 (the "Subscription Expiration Time"). The
Subscription Offering will close, if at all, simultaneously with the
closing of the Reorganization and the Public Offering. The Company
currently anticipates that it will sell shares of Common Stock
in the Subscription Offering. See "The Subscription Offering."
- Public Offering. The Public Offering is made by this Prospectus. The
Company intends to consummate the Reorganization, the Subscription
Offering and the Public Offering simultaneously; however, the
Reorganization could be consummated without either Offering being
consummated, and the Public Offering could be consummated without the
Subscription 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 of New Jersey (the "Medical
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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.
- 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 for the Attorney-in-Fact and its
subsidiaries. The MIIX Group is the entity that will issue Common Stock
in the Reorganization and the Offerings.
- 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, up to 12,000,000 shares of Common Stock
(the "Reorganization Shares") will be distributed to the Distributees.
The distribution of the Reorganization Shares is registered under a
separate registration statement.
- 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. The "Conversion Value" means
either (i) the price at which the Common Stock is offered to the public
in the event the Public Offering is consummated simultaneously with the
Reorganization, or (ii) if the Public Offering is not so consummated,
then the economic value of the Common Stock as determined in good faith
by the Board of Governors. 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 to
the Distributees pursuant to the Reorganization. Assuming that the
Conversion Value is equal to $ , approximately $ 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, 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> 9
Set forth below is an illustration of the Company's structure both before
and after the proposed Reorganization and Offerings:
[REORGANIZATION 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> 10
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. See "The Reorganization -- Conditions to
Consummation of the Reorganization" and "The Reorganization -- Federal Tax
Consequences."
THE PUBLIC OFFERING
Concurrently with the consummation of the Reorganization on the Closing
Date, but as separate transactions, The MIIX Group intends to sell Common Stock
through the Public Offering and through the Subscription Offering. The
consummation of each Offering is conditioned on the consummation of the
Reorganization and the consummation of the Subscription Offering is conditioned
on the consummation of the Public Offering. However, the consummation of the
Reorganization is not conditioned on the consummation of either Offering and the
consummation of the Public Offering is not conditioned on the consummation of
the Subscription Offering.
Set forth below is a summary of certain terms of the Public Offering.
Common Stock Offered by the
Company Pursuant to the
Public Offering............. Shares.
Price per share............... $ (the "Public Offering Price").
Common Stock to be Outstanding
Immediately After the
Reorganization and the
Offerings................... Approximately million shares. (Assumes
that (i) million shares of Common Stock are
sold in the Subscription Offering, (ii)
approximately million shares of Common
Stock are issued in connection with the Public
Offering, (iii) 11,900,000 shares of Common
Stock are issued to Distributees in connection
with the Reorganization, (iv) $11 million worth
of Common Stock, or approximately shares
based on an assumed Public Offering Price of
$ per share, are issued to the Medical
Society in connection with the purchase of the
Attorney-in-Fact, and (v) that the Underwriters
do not exercise their over-allotment option.
Based on these assumptions, after the
consummation of the Reorganization and the
Offerings, (i) Distributees will own
approximately %, (ii) Subscription Offerees
will own approximately %, (iii) purchasers in
the Public Offering will own approximately %,
and (iv) the Medical Society will own
approximately %, of the outstanding Common
Stock.)
Voting Rights................. The Common Stock has one vote per share. For a
description of the rights of holders of Common
Stock, see "Description of Capital Stock."
Market for the Common Stock... The Company has received approval, subject to
official notice of issuance, to have the Common
Stock listed on the NYSE under the symbol
"MHU." Prior to the Public Offering, there was
no public market for the Common Stock and there
can be no assurance that an active and liquid
market for the Common Stock will develop in the
foreseeable future. Even if a market develops,
there can be no assurance that after completion
of the Public Offering, stockholders will be
able to sell their shares at or above the price
for which they purchased Common Stock in the
Public Offering.
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<PAGE> 11
Use of Proceeds............... The net proceeds of the Offerings will be used
for general corporate purposes which may
include, without limitation, capitalizing the
Company's subsidiaries in order to support
their continued growth and for financing
potential acquisitions.
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 of
Directors ("The MIIX Group Board") and will
depend 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."
NYSE Symbol................... "MHU."
THE SUBSCRIPTION OFFERING
As discussed above, the consummation of the Subscription Offering is
conditioned on the consummation of the Reorganization and the Public Offering.
The Company currently intends to consummate the Subscription Offering
simultaneously with the consummation, if any, of the Reorganization and the
Public Offering. The Company solicited offers to purchase up to shares
of Common Stock ("Subscription Shares") in the Subscription Offering, and has
received completed subscriptions ("Subscription Agreements") offering to
purchase Subscription Shares. The Company will not accept any
additional Subscription Agreements. Each Subscription Agreement constitutes an
offer to purchase Common Stock, which offer the Company may accept or reject in
its sole discretion. The Company currently anticipates that it will sell
Subscription Shares in the Subscription Offering. The price per share
in the Subscription Offering will be equal to the price per share in the Public
Offering. The terms of the Subscription Offering are described in greater detail
below under "The Subscription Offering."
RISK FACTORS
Potential investors should carefully consider the factors set forth herein
under "Risk Factors" commencing on page 14, 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 of the Exchange entitled to vote thereon voting in person or by
proxy. This approval was obtained on , 1998.
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
11
<PAGE> 12
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.
12
<PAGE> 13
SUMMARY FINANCIAL AND OPERATING DATA
The following table sets forth selected combined financial and operating
data for the Company. 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 combined financial statements of the Company 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 financial statements of the
Company 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 and the Insurance
Subsidiaries (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 $ 108,182 $ 123,600 $ 57,907 $ 74,520
Net investment income................ 48,223 47,447 51,760 49,208 54,624 26,128 30,941
Realized investment gains (losses)... 29,891 (11,030) 13,149 8,683 10,296 (296) 4,246
Other revenue........................ 4,051 7,343 9,968 11,524 11,870 5,509 4,885
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total revenues..................... 167,093 139,779 180,133 177,597 200,390 89,248 114,592
---------- ---------- ---------- ---------- ---------- ---------- ----------
Losses and loss adjustment
expenses........................... 89,202 98,899 107,889 110,866 122,828 58,669 73,220
Underwriting expenses................ 11,739 12,777 14,743 18,385 26,855 11,596 17,581
Funds held charges................... 16,944 3,067 5,473 8,626 11,581 5,588 5,946
Impairment of fixed assets........... -- -- -- -- -- -- 8,541
Other expenses....................... 2,020 4,224 6,905 10,444 8,179 5,100 5,123
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total expenses..................... 119,905 118,967 135,010 148,321 169,443 80,953 110,411
---------- ---------- ---------- ---------- ---------- ---------- ----------
Income before income taxes and
cumulative effect of change in
accounting principle............... 47,188 20,812 45,123 29,276 30,947 8,295 4,181
Income tax expense (benefit)......... 15,885 5,647 12,108 9,779 2,085 1,279 (654)
---------- ---------- ---------- ---------- ---------- ---------- ----------
Income before cumulative effect of
change in accounting principle..... 31,303 15,165 33,015 19,497 28,862 7,016 4,835
Cumulative effect of change in
accounting principle, net of taxes
of ($7,420)........................ 13,780 -- -- -- -- -- --
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net income......................... $ 17,523 $ 15,165 $ 33,015 $ 19,497 $ 28,862 $ 7,016 $ 4,835
========== ========== ========== ========== ========== ========== ==========
BALANCE SHEET DATA (AT END OF PERIOD):
Total investments.................... $ 799,665 $ 787,621 $ 894,176 $ 919,697 $1,031,035 $ 965,637 $1,168,223
Total assets......................... 947,137 953,738 1,088,998 1,157,746 1,280,231 1,249,958 1,431,219
Total liabilities.................... 743,319 775,844 842,540 901,705 976,790 979,487 1,121,534
Total equity......................... 203,818 177,894 246,458 256,041 303,441 270,471 309,685
Statutory surplus.................... 147,803 156,246 184,651 208,738 248,050 229,923 256,610
ADDITIONAL DATA:
GAAP ratios:
Loss ratio........................... 105.0% 103.0% 102.5% 102.5% 99.4% 101.3% 98.3%
Expense ratio........................ 13.8 13.3 14.0 17.0 21.7 20.0 23.6
---------- ---------- ---------- ---------- ---------- ---------- ----------
Combined ratio....................... 118.8% 116.3% 116.5% 119.5% 121.1% 121.3% 121.9%
========== ========== ========== ========== ========== ========== ==========
Earnings Per Share (pro forma)(2)...... $ 1.40 $ 1.21 $ 2.64 $ 1.56 $ 2.31 $ 0.56 $ 0.39
========== ========== ========== ========== ========== ========== ==========
Book Value Per Share (pro forma)(2).... $ 16.31 $ 14.23 $ 19.72 $ 20.48 $ 24.28 $ 21.64 $ 24.77
========== ========== ========== ========== ========== ========== ==========
</TABLE>
- ---------------
(1) In 1993 the Company 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 [12,500,000] shares of Common Stock to (i) Distributees and
(ii) the Medical Society in connection with the purchase of the
Attorney-in-Fact. Does not give effect to the sale of Common Stock in the
Offerings.
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<PAGE> 14
RISK FACTORS
The following risk factors, in addition to other information set forth in
this Prospectus, should be carefully considered by potential investors 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
statute expressly permitting reciprocal insurers to engage in the type of
transaction contemplated by the Plan of Reorganization. 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 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> 15
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,
15
<PAGE> 16
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
16
<PAGE> 17
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."
ENDORSEMENTS
The Company has received endorsements and support from the Medical Society
and the Connecticut Hospital Association. The Company has relied on its
relationships with physicians and medical associations in marketing its policies
in competition with commercial insurance companies and other physician-governed
companies. The Company will endeavor to maintain its endorsements and continue
its close relationships with physicians and medical groups through personalized
service. There can be no assurance, however, that the Company will be able to
maintain these relationships and endorsements.
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."
17
<PAGE> 18
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 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
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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 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
Offerings (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
effectiveness of the Reorganization and the Offerings 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 Offerings, 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 Offerings 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 Offerings.
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
generally will 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 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 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
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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 phone, 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.
The Company has not completed its review of its internal 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 internal systems, or that the Company's service providers,
brokers and other external business partners will not experience Year 2000
problems, either of which 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 information systems.
Any failure in, or failure to timely update, the Company's information systems
could have a material adverse effect on the Company's results of operations or
financial condition. The Company is in the process of updating 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 updates 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 suffer an increase in claim frequency if Year 2000 issues
result in additional claims being made against the Company's insureds. Such
additional claims could have a material adverse effect on the Company.
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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 for the Attorney-in-Fact and its
subsidiaries. The MIIX Group is the entity that will issue Common Stock
in the Reorganization and the Offerings.
- 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 a separate registration statement.
- 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 11,900,000 shares of Common Stock will
be distributed to the Distributees pursuant to the
Reorganization. Assuming that the Conversion Value is equal to
$ , approximately $ 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, and (iv) The MIIX Group will be the holding company for MIIX Insurance
and
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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. This approval was obtained on , 1998. 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 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 and Subscription Offering Terms."
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Distributees will be allocated shares of Common Stock if the Reorganization
is consummated. 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 pursuant to the Reorganization. The Company currently estimates that
11,900,000 shares of Common Stock will be distributed to the Distributees
pursuant to the Reorganization. Assuming that the Conversion Value is equal to
$ , approximately $ will be distributed to Distributees in lieu of
Common Stock. Cash payments will be made from the Company's existing cash
reserves.
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 (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 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 $ per
share, 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.
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 (as such term is defined in the Glossary of
Reorganization and Subscription Offering Terms) 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
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<PAGE> 24
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. In
addition, the Company has received a fairness opinion from Salomon Smith Barney
Inc. that (i) the consideration to be received by 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. Finally, the approval of the Members was obtained at a meeting
held on , 1998. The consummation of each Offering is conditioned on
the consummation of the Reorganization and the consummation of the Subscription
Offering is conditioned on the consummation of the Public Offering. However, the
consummation of the Reorganization is not conditioned on the consummation of
either Offering and the consummation of the Public Offering is not conditioned
on the consummation of the Subscription Offering.
ACCOUNTING TREATMENT
The Reorganization will be accounted for as a combination of entities under
common control. As a result, assets and liabilities will be accounted for at
historical cost, which is consistent with the presentation set forth in the
financial statements and selected financial and operating data contained in this
Prospectus.
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. This approval was obtained at a
meeting held on , 1998. 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 of the Reorganization. This discussion is
based on the advice of 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, as currently in
effect, all of which are subject to change at any time, possibly with
retroactive effect. 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."
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Reorganization Treatment -- Consequences to the Company. Assuming that the
Reorganization takes place as described in this Prospectus and based on certain
representations made by the Exchange, it is the opinion of the Tax Advisor that
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.
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, 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.
THE SUBSCRIPTION OFFERING
The Company solicited offers to purchase up to Subscription
Shares in the Subscription Offering, and has received Subscription Agreements
offering to purchase Subscription Shares. The Company will not accept
any additional Subscription Agreements. Each Subscription Agreement constitutes
an offer to purchase Common Stock, which offer the Company may accept or reject
in its sole discretion. The Company currently anticipates that it will sell
Subscription Shares in the Subscription Offering. The price per share
in the Subscription Offering will be equal to the price per share in the Public
Offering.
The Subscription Offering was made only to Subscription Offerees.
"Subscription Offerees" means (i) policyholders of the Exchange or LP&C as of
both August 31, 1998 and four business days prior to the Closing Date ("Eligible
Policyholders"), (ii) persons who are directors, officers or employees of the
Company as of both August 31, 1998 and four business days prior to the Closing
Date, and immediate family members of such persons (collectively, "Employees"),
and (iii) other persons, as selected by the Company in its sole discretion, who
have business relationships with the Company as of both August 31, 1998 and four
business days prior to the Closing Date ("Service Providers"). A person who
satisfies one of the criteria of being a Subscription Offeree as of August 31,
1998 who subscribes for shares and who does not satisfy such criteria on the
fourth business day prior to the Closing Date will not be sold Subscription
Shares, and the Company will return to such person without interest any
subscription funds previously delivered by such person.
The primary purpose of the Subscription Offering is to provide Subscription
Offerees who will have an interest in or relationship with the Company on and
after the Closing Date with an opportunity to acquire Common Stock. It is the
Company's desire and intent that Subscription Offerees be persons who have a
policyholder or other designated relationship with the Company on the Closing
Date. However, in order to satisfy the logistics of consummating the
Subscription Offering it is necessary that persons satisfy the criteria of being
a Subscription Offeree as of August 31, 1998 and the fourth business day prior
to the Closing Date. The consummation of each Offering is conditioned on the
consummation of the Reorganization and the consummation of the Subscription
Offering is conditioned on the consummation of the Public Offering. However, the
consummation of the Reorganization is not conditioned on the consummation of
either Offering and the consummation of the Public Offering is not conditioned
on the consummation of the Subscription Offering.
25
<PAGE> 26
USE OF PROCEEDS
The principal purpose of the Public Offering is to enhance the liquidity of
the shares of Common Stock to be received by the Distributees as part of the
Reorganization. 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. The principal purpose of the Subscription
Offering is to provide Subscription Offerees who will have an interest in or
relationship with the Company on and after the Closing Date with an opportunity
to participate in the future performance of the Company. Based on an assumed
Public Offering Price of $ per share, the net proceeds to the Company
from the sale of Common Stock in the Offerings (assuming the Subscription
Offering is fully subscribed) is estimated to be approximately $
million after deducting the underwriting discount and the other expenses of the
Company in connection with the Reorganization and the Offerings. The net
proceeds of the Offerings will be used for general corporate purposes which may
include, without limitation, capitalizing the Company's subsidiaries in order to
support their continued growth and for financing potential acquisitions. Until a
specific use of proceeds is determined, the Company will invest such funds. The
Company does not know when specific needs will arise nor the amount of such
needs. The Company will not receive any proceeds from the issuance of the Common
Stock to Distributees pursuant to the Reorganization. See "Dividend Policy."
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."
26
<PAGE> 27
CAPITALIZATION
The information set forth in the table presented below is derived from the
combined 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 the Attorney-in-Fact on a combined basis and (ii) The MIIX
Group, As Adjusted, to reflect the Reorganization (after deducting estimated
reorganization costs) and to reflect the sale of shares of Common
Stock in the Public Offering at an assumed Public Offering Price of $ per
share after deducting estimated underwriting discounts and expenses of the
Offerings. 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
-----------------------
ACTUAL AS ADJUSTED
-------- -----------
(IN THOUSANDS)
<S> <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 shares issued and outstanding,
as adjusted............................................ --
Additional paid-in capital................................ -- (1)
Surplus................................................ 280,661
Unrealized appreciation of invested assets, net of
deferred taxes......................................... 29,024 29,024
-------- --------
Total equity.............................................. 309,685
======== ========
Total capitalization...................................... $331,657 $
======== ========
</TABLE>
- ---------------
(1) Additional paid-in capital in the As Adjusted column gives effect to the
assumed aggregate issuance of the Shares to (a) Distributees and (b) the
Medical Society in connection with the purchase of the Attorney-in-Fact and
is reduced by $1.5 million to reflect estimated costs of the Reorganization.
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 $2.0
million. The As Adjusted column also reflects the sale of the Shares less
the estimated underwriting discounts of the Public Offering of $ million
and additional estimated expenses of $1.0 million.
27
<PAGE> 28
SELECTED FINANCIAL AND OPERATING DATA
The following table sets forth selected combined financial and operating
data for the Company. 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 combined financial statements of the Company 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 financial statements of the
Company 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 and the Insurance Subsidiaries
(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 $ 108,182 $ 123,600 $ 57,907 $ 74,520
Net investment income.................... 48,223 47,447 51,760 49,208 54,624 26,128 30,941
Realized investment gains (losses)....... 29,891 (11,030) 13,149 8,683 10,296 (296) 4,246
Other revenue............................ 4,051 7,343 9,968 11,524 11,870 5,509 4,885
-------- -------- ---------- ---------- ---------- ---------- ----------
Total revenues......................... 167,093 139,779 180,133 177,597 200,390 89,248 114,592
-------- -------- ---------- ---------- ---------- ---------- ----------
Losses and loss adjustment expenses...... 89,202 98,899 107,889 110,866 122,828 58,669 73,220
Underwriting expenses.................... 11,739 12,777 14,743 18,385 26,855 11,596 17,581
Funds held charges....................... 16,944 3,067 5,473 8,626 11,581 5,588 5,946
Impairment of fixed assets............... -- -- -- -- -- -- 8,541
Other expenses........................... 2,020 4,224 6,905 10,444 8,179 5,100 5,123
-------- -------- ---------- ---------- ---------- ---------- ----------
Total expenses......................... 119,905 118,967 135,010 148,321 169,443 80,953 110,411
-------- -------- ---------- ---------- ---------- ---------- ----------
Income before income taxes and cumulative
effect of change in accounting
principle.............................. 47,188 20,812 45,123 29,276 30,947 8,295 4,181
Income tax expense (benefit)............. 15,885 5,647 12,108 9,779 2,085 1,279 (654)
-------- -------- ---------- ---------- ---------- ---------- ----------
Income before cumulative effect of change
in accounting principle................ 31,303 15,165 33,015 19,497 28,862 7,016 4,835
Cumulative effect of change in accounting
principle, net of taxes of ($7,420).... 13,780 -- -- -- -- -- --
-------- -------- ---------- ---------- ---------- ---------- ----------
Net income............................. $ 17,523 $ 15,165 $ 33,015 $ 19,497 $ 28,862 $ 7,016 $ 4,835
======== ======== ========== ========== ========== ========== ==========
BALANCE SHEET DATA (AT END OF PERIOD):
Total investments........................ $799,665 $787,621 $ 894,176 $ 919,697 $1,031,035 $ 965,637 $1,168,223
Total assets............................. 947,137 953,738 1,088,998 1,157,746 1,280,231 1,249,958 1,431,219
Total liabilities........................ 743,319 775,844 842,540 901,705 976,790 979,487 1,121,534
Total equity............................. 203,818 177,894 246,458 256,041 303,441 270,471 309,685
Statutory surplus........................ 147,803 156,246 184,651 208,738 248,050 229,923 256,610
ADDITIONAL DATA:
GAAP ratios:
Loss ratio............................. 105.0% 103.0% 102.5% 102.5% 99.4% 101.3% 98.3%
Expense ratio.......................... 13.8 13.3 14.0 17.0 21.7 20.0 23.6
-------- -------- ---------- ---------- ---------- ---------- ----------
Combined ratio......................... 118.8% 116.3% 116.5% 119.5% 121.1% 121.3% 121.9%
======== ======== ========== ========== ========== ========== ==========
Earnings Per Share (pro forma)(2)........ $ 1.40 $ 1.21 $ 2.64 $ 1.56 $ 2.31 $ 0.56 $ 0.39
======== ======== ========== ========== ========== ========== ==========
Book Value Per Share (pro forma)(2)...... $ 16.31 $ 14.23 $ 19.72 $ 20.48 $ 24.28 $ 21.64 $ 24.77
======== ======== ========== ========== ========== ========== ==========
</TABLE>
- ---------------
(1) In 1993 the Company 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 [12,500,000] shares of Common Stock to (i) Distributees and
(ii) the Medical Society in connection with the purchase of the
Attorney-in-Fact. Does not give effect to the sale of Common Stock in the
Offerings.
28
<PAGE> 29
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 exchange reciprocal
or interinsurance contracts with each other. Such contracts are executed by an
attorney-in-fact acting on behalf of the subscribers through a power of
attorney. 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 historical financial statements and financial information included
throughout this Prospectus reflect the combined financial information of the
Exchange and the Attorney-in-Fact, which are commonly controlled and managed
entities.
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.
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
29
<PAGE> 30
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 were $158.6 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, 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 action caused a timing difference in
the recognition of written premium in 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.
Net premiums earned: Net premiums earned increased approximately $16.6
million, or 28.7% to $74.5 million, for the six months ended June 30, 1998 from
$57.9 million for the same period in 1997. As of June 30, 1998 and 1997, the
Company has earned approximately 47% and 43%, respectively, of the year-to-date
premiums written. This ratio generally coincides with the fact that currently,
approximately 70% of the Company's policies have been written with a January 1
effective date.
30
<PAGE> 31
Net investment income: Net investment income increased approximately $4.8
million or 18.4% to $30.9 million for the six months ended June 30, 1998 from
$26.1 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 $941 million for the same period last year. The average annualized
pre-tax yield on the investment portfolio increased to 5.64% for the six months
ended June 30, 1998 from 5.56% 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 $0.6 million or 11.3%
to $4.9 million for the six months ended June 30, 1998 from $5.5 million for the
same period last year and is comprised primarily of revenues from the Company's
non-insurance subsidiaries. Other revenue for the Company's reinsurance
brokerage and leasing subsidiaries increased by $0.6 million as compared to the
same period last year. This was offset somewhat by a $0.2 million decrease in
revenue from the Company's investment advisory service which was disposed of at
the beginning of the second quarter of 1998. In addition, the Company had
historically offered its insureds the option to pay premiums on an installment
basis for a finance charge. Management discontinued this installment program in
1998 and as a result, finance charge income decreased by approximately $1.0
million as compared to the same period in the prior year. However, this was
largely offset by interest earnings (reflected in net investment income) on the
additional funds that were collected up front rather than over time through
installments.
Losses and loss adjustment expenses (LAE): The provision for losses and
LAE increased $14.5 million or 24.8% to $73.2 million for the six months ended
June 30, 1998 from $58.7 million for the same period in 1997. As a percentage of
earned premiums, incurred losses and LAE decreased to 98.3% for the six months
ended June 30, 1998 from 101.3% 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 has been priced
using lower loss ratio assumptions than that deemed necessary for policies
written on an occurrence basis. 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 $6.0 million or
51.6% to $17.6 million for the six months ended June 30, 1998, from $11.6
million for the six months ended June 30, 1997. The expense ratio was 23.6% for
the six months ended June 30, 1998 compared to 20.0% 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 $0.3 million or 6.4% to
$5.9 million for the six months ended June 30, 1998 from $5.6 million for the
six months ended June 30, 1997 and relate to the interest credited on amounts
held under certain reinsurance treaties. This increase is the result of the net
effect of interest expense accrued on funds held under certain reinsurance
contracts, which was offset by a decrease related to an adjustment to ceded
premiums associated with the 1993 aggregate treaty.
Impairment of Fixed Assets: 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
31
<PAGE> 32
the asset. During the second quarter 1998 management began replacing its policy
administration system and accordingly recognized an $8.5 million pre-tax charge
which represents the net book value of the old computer system.
Other expenses: Other expenses were unchanged at $5.1 million for the six
months ended June 30, 1998, and for the six months ended June 30, 1997 and is
comprised primarily of non-insurance company operating expenses.
Income taxes: Income taxes decreased approximately $1.9 million to a $0.6
million tax benefit for the six months ended June 30, 1998, from a tax expense
of approximately $1.3 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 and state income taxes. The income tax benefit
in the current year is largely attributable to a state income tax benefit
recognized due to the writeoff of fixed assets.
Net income: Net income was $4.8 million for the six months ended June 30,
1998, a 31% decrease from the $7.0 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 the charge for the impairment of fixed
assets.
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 $123.6 million for the year
ended December 31, 1997, an increase of 14.3% over the $108.2 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 $54.6 million for the
year ended December 31, 1997, an increase of 11.0% over the $49.2 million for
the year ended December 31, 1996. Cash flow from operations of $68.7 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 unchanged at 5.60%.
Realized investment gains (losses). Net realized investment gains (losses)
were approximately $10.3 million for the year ended December 31, 1997 compared
to $8.7 million for the year ended December 31, 1996. Substantially all of these
gains during 1997 resulted from the sale of equity securities and from the sale
of bonds in 1996.
Other revenue. Other revenue was $11.9 million for the year ended December
31, 1997, a slight increase of 3.0% over the $11.5 million for the year ended
December 31, 1996 and is comprised primarily of revenue from the Company's
non-insurance subsidiaries.
Losses and loss adjustment expenses (LAE). The provision for losses and
LAE was $122.8 million for the year ended December 31, 1997, an increase of
10.8% over the $110.9 million for the year ended December 31, 1996. The loss and
LAE ratio was 99.4% for the year ended December 31, 1997 compared to 102.5% for
1996. This decrease is 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 is net of $66.6 million for the year ended
December 31, 1997 and $57.1 million for the year ended December 31, 1996 of
incurred losses and LAE ceded to reinsurers.
32
<PAGE> 33
Underwriting expenses. Underwriting expenses were $26.9 million for the
year ended December 31, 1997, an increase of 46.1% over the $18.4 million for
the year ended December 31, 1996. The expense ratio was 21.7% for the year ended
December 31, 1997 compared to 17.0% 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 written. 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 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 reinsurance treaties. This increase is consistent with the
change in the related funds held balances.
Other expenses. Other expenses were $8.2 million for the year ended
December 31, 1997, a 21.7% decrease from the $10.4 million for the year ended
December 31, 1996. The majority of this savings was due to the discontinuance of
certain unprofitable programs previously conducted in one of the Company's
consulting subsidiaries.
Income Taxes. Income taxes were $2.1 million for the year ended December
31, 1997, a decrease of 78.7% from the $9.8 million for the year ended December
31, 1996. The effective tax rate was 6.7% for the year ended December 31, 1997
compared to 33.4% 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 $28.9 million for the year ended December 31,
1997, a 48% increase from the $19.5 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 $108.2 million for the year
ended December 31, 1996, a 2.8% 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 $49.2 million for the
year ended December 31, 1996, a 4.9% decrease from $51.8 million for the year
ended December 31, 1995. While cash flow from operations of $40.8 million for
the year ended December 31, 1996 increased the asset base which aggregated
$925.9 million as of December 31, 1996, the pre-tax book yield on invested
assets fell from 6.19% in 1995 to 5.60% 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 (losses). Net realized investment gains (losses)
were approximately $8.7 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.
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Other revenue. Other revenue was $11.5 million for the year ended December
31, 1996, a 15.6% increase from the $10.0 million for the year ended December
31, 1995. This increase resulted primarily from higher revenue earned by the
Company's reinsurance brokerage and leasing subsidiaries.
Losses and loss adjustment expenses. The provision for losses and LAE was
$110.9 million for the year ended December 31, 1996, a 2.8% 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 is net of $57.1 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.
Other underwriting expenses. Underwriting expenses were $18.4 million for
the year ended December 31, 1996, an increase of 24.7% over the $14.7 million
for the year ended December 31, 1995. The expense ratio was 17.0% 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 its 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 reinsurance treaties. This is consistent with the change in the
related funds held balances.
Other expenses. Other expenses were $10.4 million for the year ended
December 31, 1996, a 51.3% increase from the $6.9 million for the year ended
December 31, 1995. Approximately $2.4 million of the change is related to
increases in staffing and professional fee expenditures by the non-insurance
subsidiaries, including the Company's healthcare consulting subsidiaries, some
of which were acquired or formed in 1995 and 1996, and its investment advisory
subsidiary which was acquired in 1996. The remaining increase of $1.1 million
relates to start-up expenditures and other general operating expenses of the
Company's subsidiaries.
Income Taxes. Income taxes were $9.8 million for the year ended December
31, 1996, a decrease of 19.2% from the $12.1 million for the year ended December
31, 1995. The effective tax rate was 33.4% for the year ended December 31, 1996,
an increase from 26.8% 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 $19.5 million for the year ended December 31,
1996, a 40.9% decrease from the $33.0 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 $1,171.2 million at June 30, 1998 and $1,031.2
million and $925.9 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 Company's investment
portfolio as of June 30, 1998. At that date, the average credit quality of the
Company's fixed income portfolio was "AA+," as defined by Standard & Poor's,
while the portfolio duration was 4.6 years. At June 30, 1998, the Company's
investment portfolio also included $94.8 million, or approximately 8.0%,
invested in unaffiliated common stocks.
In 1997, the Company implemented an "equity collar" around the Company'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. 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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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 Company utilizes intermediaries with a Standard and Poor's rating of "AA" or
better.
On January 13, 1998, the Company implemented another equity collar with a
notional value of $85 million around the Company's equity portfolio. The purpose
of the collar was to reduce equity market volatility and to stabilize unassigned
surplus.
Other than the equity collar, the Company does 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 $425.1 million at June 30, 1998 and $430.8 million
and $394.8 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 $331.1
million at June 30, 1998, and $344.8 million and $340.3 million at December 31,
1997 and 1996, respectively.
Equity. The Company's total equity was $309.7 million at June 30, 1998 and
$303.4 million and $256.0 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
Offerings 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's net cash
flow from operating activities was approximately $78.4 million and $22.9 million
for the second quarter of 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 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 $344.8 million and $340.3 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 has invested, and MIIX Insurance will invest, its positive
cash flow from operations in both fixed maturity securities, including
short-term investments, and equity securities. The Exchange's 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, together with a
modest level of investment in equity securities.
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 Company is considering the purchase of its headquarters in
Lawrenceville, New Jersey, which it currently leases, at a price close to its
fair market value of approximately $7 million.
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 phone, 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 computer 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 is negotiating to retain an outside expert to independently
evaluate the Year 2000 readiness of the Company's internal systems.
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
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Company. The Company's investigations to date have not revealed any Year 2000
issues that would materially impact the Company's operations. 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.
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.
RECENT DEVELOPMENTS
During the second quarter, the Company entered into a definitive agreement
to purchase MIIX New York (which is currently named Surety Re pending regulatory
approval of a change in name) for approximately $2.8 million. These assets are
included in the combined 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.
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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 17
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 Company's total revenues and net income were $200.4 million and $28.9
million, respectively, for 1997 and were $114.6 million and $4.8 million,
respectively, for the six months ended June 30, 1998. As of June 30, 1998, the
Company had total assets of $1.4 billion and total equity of $309.7 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 exchange reciprocal
or interinsurance contracts with each other. Such contracts are executed by an
attorney-in-fact acting on behalf of the subscribers through a power of
attorney. 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
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 profits from the
Exchange's operations are retained in a surplus account.
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
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flexibility and access to capital. See "The Reorganization" and "The
Subscription Offering." 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 17 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 21 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.
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
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market and to build an extensive data base 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 the
Medical Society and the Connecticut Hospital Association. 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
medical society 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.
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 New Jersey Association of Osteopathic Physicians and Surgeons,
as well as the endorsements of various county medical associations and specialty
societies. In
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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 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.
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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.
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.
42
<PAGE> 43
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.
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 $400,607 $400,607 $445,958
Incurred related to:
Current year...................... 107,889 110,866 121,331 58,669 73,220
Prior years....................... -- -- 1,497 -- --
-------- -------- -------- -------- --------
Total incurred...................... 107,889 110,866 122,828 58,669 73,220
-------- -------- -------- -------- --------
Paid related to:
Current year...................... 3,000 3,630 3,930 1,253 1,445
Prior years....................... 97,496 116,194 73,547 48,697 21,363
-------- -------- -------- -------- --------
Total paid.......................... 100,496 119,824 77,477 49,950 22,808
-------- -------- -------- -------- --------
Balance at end of period, net of
reinsurance recoverable........... 409,565 400,607 445,958 409,326 496,370
Reinsurance recoverable............. 339,095 394,842 430,763 422,004 425,053
-------- -------- -------- -------- --------
Balance at end of period, gross of
reinsurance....................... $748,660 $795,449 $876,721 $831,330 $921,423
======== ======== ======== ======== ========
</TABLE>
43
<PAGE> 44
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
Company 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.
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........... 426,667 454,530 495,663 516,501 532,877 572,831 623,989 689,539
Four years later............ 409,703 443,908 482,667 487,918 532,878 572,871 624,737
Five years later............ 399,717 431,792 463,784 487,921 540,067 570,469
Six years later............. 389,085 417,224 463,788 490,398 538,129
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 55,699 58,595 42,463 (1,084)
<CAPTION>
1995 1996
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Loss and LAE Reserves........ $748,660 $795,449
LIABILITY REESTIMATED AS OF:
One year later.............. 748,660 796,946
Two years later............. 745,217
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)................ 3,443 (1,497)
</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>
44
<PAGE> 45
The Company has 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 Exchange's conservative approach to
establishing reserves for medical malpractice insurance losses and LAE; and (ii)
the improvements made to the Exchange's internal claims settlement process.
Development of reserves first recorded in 1994 and later years has been slight,
as no clear development trends have yet emerged.
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........... 423,520 445,913 488,404 523,783 576,979 384,198 387,948 402,587
Four years later............ 402,195 436,659 487,957 523,787 576,977 384,243 388,110
Five years later............ 392,328 436,228 487,960 523,787 584,171 384,713
Six years later............. 391,881 436,229 487,961 526,267 585,566
Seven years later........... 391,075 436,232 480,740 526,884
Eight years later........... 391,076 429,021 480,449
Nine years later............ 389,375 432,247
Ten years later............. 394,683
CUMULATIVE REDUNDANCY
(DEFICIENCY)................ 416 20,534 22,079 26,167 (3) (43) (170) (415)
<CAPTION>
1995 1996
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Loss and LAE
Reserves-Gross.............. $748,660 $795,449
Reinsurance Recoverable and
Unpaid Losses............... 339,095 394,842
-------- --------
LOSS AND LAE RESERVES-NET:... $409,565 $400,607
LIABILITY REESTIMATED AS OF:
One year later.............. 409,565 402,104
Two years later............. 410,433
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)................ (868) (1,497)
</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 $73,547
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>
The Company has experienced limited net loss and LAE reserve development
primarily as a result of aggregate excess reinsurance contracts in place since
1992. The aggregate excess reinsurance contracts provide coverage for losses and
LAE above a loss and ALAE to earned premiums ratio of 80% (1993 and 1994) and
75% (1995, 1996 and 1997) and therefore have the effect of holding incurred
losses and LAE at a constant level.
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
45
<PAGE> 46
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 entered into an aggregate excess of loss reinsurance
contract to protect underwriting and operating results from adverse developments
for losses and ALAE which occurred on or before December 31, 1992.
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 $36,404 $42,067 $15,854 $17,385
Ceded Losses and Loss Adjustment
Expenses............................... $53,405 $57,064 $66,563 $28,425 $39,048
Funds held charges....................... $ 5,473 $ 8,626 $11,581 $ 5,588 $ 5,946
</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 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
46
<PAGE> 47
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 AMOUNT 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 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 Company has been the
return on its invested assets. Investments of the Company 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 four outside
investment managers for fixed maturity securities.
47
<PAGE> 48
The following table sets forth the composition of the investment portfolio
of the Company at the dates indicated. All of the fixed maturity securities 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 Securities:
Bonds:
US Government and
Agencies.................. $185,971 $183,906 $190,214 $194,507 $137,609 $ 143,234
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................ 260,849 261,955 308,577 313,571 331,651 336,637
Corporate................... 56,607 56,795 132,875 136,294 273,625 277,725
-------- -------- -------- -------- -------- ----------
Total Fixed Maturity
Securities........... 762,202 764,270 834,052 853,977 915,795 936,174
-------- -------- -------- -------- -------- ----------
Equity Securities:
Unaffiliated Preferred Stock... -- -- 2,500 2,500 2,500 2,500
Unaffiliated Common Stock...... 55,334 67,230 66,520 89,080 68,019 92,292
-------- -------- -------- -------- -------- ----------
Total Equity
Securities........... 55,334 67,230 69,020 91,580 70,519 94,792
-------- -------- -------- -------- -------- ----------
Total.................. $817,536 $831,500 $903,072 $945,557 $986,314 $1,030,966
======== ======== ======== ======== ======== ==========
</TABLE>
In July 1998 the Company substantially liquidated its unaffiliated common
stock portfolio.
The Company's investment portfolio of fixed maturity securities consists
primarily of intermediate-term, investment-grade securities along with a modest
allocation to below investment-grade (i.e. high yield) fixed maturity securities
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.
The table below contains additional information concerning the investment
ratings of the Company's 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)............ $567,984 $583,078 62.2%
AA.................................................... 43,837 45,152 4.8
A..................................................... 187,371 190,580 20.3
BBB................................................... 76,603 78,201 8.4
Other Ratings......................................... 39,500 38,663 4.2
Not Rated............................................. 500 500 0.1
-------- -------- -----
Total....................................... $915,795 $936,174 100.0%
======== ======== =====
</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.
48
<PAGE> 49
The following table sets forth certain information concerning the
maturities of fixed maturity securities in the Company's investment portfolio 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.................................. $ 26,402 $ 26,446 2.8%
Due after one year through five years................. 125,761 126,731 13.5
Due after five years through ten years................ 116,977 120,772 12.9
Due after ten years................................... 315,004 325,588 34.8
Mortgage-backed and other asset-backed securities..... 331,651 336,637 36.0
-------- -------- -----
Totals...................................... $915,795 $936,174 100.0%
======== ======== =====
</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.
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 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 involve prepayment risk, which is the
risk that a security's originally scheduled interest and principal payments will
differ considerably due to interest rate changes. As part of an ongoing
portfolio risk management process, the Company continues to use and adopt
financial modeling techniques to monitor and manage the risks associated with
its fixed income portfolio holdings.
"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 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's short-term investments are comprised 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
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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 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
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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 29 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 five 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, 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, and is expected to be completed during the summer of
1998. 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.
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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
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-
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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 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 approximately 220 persons. None
of the Company's employees is 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, at a price close to its
fair market value of approximately $7 million.
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.
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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 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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<PAGE> 58
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> 59
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 MIIX
Group. 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 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> 60
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 Agreements"). The purpose of the Stock Purchase 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 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. 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. 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 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
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<PAGE> 61
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 $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.
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<PAGE> 62
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.
A majority of the members of The MIIX Group Board of Directors are also
policyholders and Distributees and are eligible to subscribe in the Subscription
Offering. Such directors may experience claims requiring coverage under their
respective policies with the Company.
Mr. Goldberg is the chief executive officer of AMM. New Jersey State
Medical Underwriters Inc. manages the business of AMM. In 1997, AMM paid New
Jersey State Medical Underwriters Inc. $360,000 for such management services.
The Company leases its headquarter space from the Medical Society. Vincent A.
Maressa, a director of the Medical Society, is a director of The MIIX Group.
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<PAGE> 63
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
Offerings 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. The number of shares of Common
Stock beneficially owned by each director and executive officer represents the
number of shares each director and certain persons and entities affiliated with
each director and executive officer will receive as members of the Exchange
pursuant to the Reorganization, and the number of shares that each director and
executive officer has indicated that he or she intends to purchase in the
Subscription Offering. This estimate does not include any shares which any
director or executive officer may purchase in the 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
NUMBER OF SHARES TO BE
TO BE BENEFICIALLY
BENEFICIALLY ACQUIRED IN THE PERCENT
ACQUIRED IN THE SUBSCRIPTION OF
NAME REORGANIZATION OFFERING CLASS
- ---- ---------------- ---------------- -------
<S> <C> <C> <C>
Daniel Goldberg.................................... 0 0** *
Joseph J. Hudson................................... 0 0** *
Kenneth Koreyva.................................... 0 0** *
Lisa Kramer........................................ 0 ** *
Ronald Wade........................................ 0 0** *
Angelo S. Agro, M.D. .............................. 2,103 *
Hillel M. Ben-Asher, M.D. ......................... 980 *
Harry M. Carnes, M.D. ............................. 586 *
Andrew Coronato, M.D. ............................. 1,427 *
Palma E. Formica, M.D. ............................ 405 *
John S. Garra, M.D. ............................... 4,093 *
Paul J. Hirsch, M.D. .............................. 3,256 *
Louis L. Keeler, M.D. ............................. 1,986 *
Henry R. Liss, M.D. ............................... 359 *
Arganey Lucas, Jr., M.D. .......................... 766 *
S. Stuart Mally, M.D. ............................. 1,727 *
Vincent A. Maressa, Esq. .......................... 0 *
Murray N. Matez, D.O. ............................. 616 *
Robert S. Maurer, D.O. ............................ 95 *
A. Richard Miskoff, D.O. .......................... 589 *
Charles J. Moloney, M.D. .......................... 588 *
Eileen Marie Moynihan, M.D. ....................... 815 *
Fred M. Palace, M.D. .............................. 1,291 *
John J. Pastore, M.D. ............................. 803 *
Pascal A. Pironti, M.D. ........................... 1,758 *
Carl Restivo, Jr., M.D. ........................... 451 *
Joseph A. Riggs, M.D. ............................. 562 *
Bernard Robins, M.D. .............................. 745 *
Herman M. Robinson, M.D. .......................... 1,227 *
Gabriel F. Sciallis, M.D. ......................... 703 *
Benjamin I. Smolenski, M.D. ....................... 3,207 *
Martin L. Sorger, M.D. ............................ 3,468 *
</TABLE>
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<PAGE> 64
<TABLE>
<CAPTION>
NUMBER OF SHARES
NUMBER OF SHARES TO BE
TO BE BENEFICIALLY
BENEFICIALLY ACQUIRED IN THE PERCENT
ACQUIRED IN THE SUBSCRIPTION OF
NAME REORGANIZATION OFFERING CLASS
- ---- ---------------- ---------------- -------
<S> <C> <C> <C>
Bessie M. Sullivan, M.D. .......................... 1,117 *
Harvey P. Yeager, M.D. ............................ 2,287 *
All directors and executive officers as a group (34
persons)......................................... 37,915
</TABLE>
- ---------------
* Less than 1%
** Pursuant to Stock Purchase and Loan Agreements to be entered into as of the
Closing Date between the Company and each of Messrs. Goldberg, Hudson and
Koreyva, Mr. Goldberg will purchase approximately shares of Common
Stock based on the Assumed Price, Mr. Hudson will purchase approximately
shares of Common Stock based on the Assumed Price and Mr. Koreyva
will purchase approximately shares of Common Stock based on the
Assumed Price. See "Management -- Stock Purchase and Loan Agreements." In
addition, on the Closing Date, Mr. Goldberg will be granted options to
purchase 175,000 shares of Common Stock, of which 43,750 will be immediately
exercisable, Mr. Hudson will be granted options to purchase 60,000 shares of
Common Stock, of which 15,000 will be immediately exercisable, Mr. Koreyva
will be granted options to purchase 80,000 shares of Common Stock, of which
20,000 will be immediately exercisable, Ms. Kramer will be granted options
to purchase 10,000 shares of Common Stock, of which 2,500 will be
immediately exercisable, and Mr. Wade will be granted options to purchase
5,000 shares of Common Stock, of which 1,250 will be immediately
exercisable. None of the options that will not be immediately exercisable
upon grant will become exercisable within 60 days of the date of grant. The
shares to be purchased pursuant to the Stock Purchase and Loan Agreements,
and the immediately exercisable options, are included under the total
ownership shown for "All directors and executive officers as a group" above.
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<PAGE> 65
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 Offerings, there will be approximately
million shares ( million shares if the Underwriters' over-allotment option
is 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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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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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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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 Offerings, the Company will
have approximately
million shares (or approximately million shares if the Underwriters'
over-allotment option is exercised in full) of Common Stock issued and
outstanding. See "Prospectus Summary -- The Subscription Offering -- Common
Stock to be Outstanding Immediately after the Reorganization and the Offerings."
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
officers 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 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 Offerings, 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.
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UNDERWRITING
Subject to the terms and conditions stated in the Underwriting Agreement,
each of the Underwriters named below, for whom ,
and are acting as the representatives (the "Representatives"),
has severally agreed to purchase, and The MIIX Group has agreed to sell, to such
Underwriter the number of the Shares set forth opposite the name of such
Underwriter.
<TABLE>
<CAPTION>
NUMBER OF SHARES
UNDERWRITERS TO BE PURCHASED
- ------------ ----------------
<S> <C>
Salomon Smith Barney Inc. ..................................
Friedman, Billings, Ramsey & Co., Inc. .....................
The Robinson-Humphrey Company, LLC..........................
Total............................................. ,000,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters to purchase the Shares are subject to approval of certain legal
matters by counsel and to certain other conditions. The Underwriters are
obligated to purchase all the Shares (other than those covered by the
over-allotment option described below) if any of the Shares are purchased. In
the event of default by any Underwriter, the Underwriting Agreement provides
that, in certain circumstances, the purchase commitments of the non-defaulting
Underwriters may be increased or the Underwriting Agreement may be terminated.
The Underwriters propose to offer part of the Shares directly to the public
at the public offering price set forth on the cover page of this Prospectus and
part of the Shares to certain dealers at such price less a concession not in
excess of per share under the public offering price. The Underwriters may
allow, and such dealers may reallow, a concession not in excess of per
share to certain other dealers. After the initial public offering of the Shares
to the public, the public offering price and such concessions may be changed by
the Representatives.
The MIIX Group has granted to the Underwriters an option, exercisable for
30 days from the date of this Prospectus, to purchase up to additional
Shares at the public offering price less the underwriting discount set forth on
the cover of the Prospectus. The Underwriters may exercise such option solely
for the purpose of covering over-allotments, if any, in connection with the
offering of Shares. To the extent that the Underwriters exercise such option,
each Underwriter will be obligated, subject to certain conditions, to purchase
an additional number of the Shares proportionate to such Underwriter's initial
commitment.
The MIIX Group and the Company's officers and directors have agreed that,
for a period of days from the date of this Prospectus, they will not,
without the prior written consent of the Underwriters, offer, sell, contract to
sell, or announce the offering of, or register, cause to be registered or
announce the registration or intended registration of, any Shares or any
securities convertible into, or exercisable or exchangeable for, the Shares.
in its sole discretion may release any of the Shares subject to
the lock-up at any time without notice.
The MIIX Group has been advised by the Underwriters that they intend to
make a market in the Common Stock, but that they are not obligated to do so and
may discontinue making a market at any time without notice.
The Underwriting Agreement provides that The MIIX Group, the Exchange and
MIIX Insurance will indemnify the several Underwriters against certain
liabilities, including liabilities under the Securities Act, or contribute to
payments the Underwriters may be required to make in respect thereof.
, on behalf of 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
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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.
The Representatives may, from time to time, engage in transactions with and
perform services for the Company in the ordinary course of business.
Prior to the Public Offering, there has been no public market for the
Common Stock. The Public Offering Price has been determined through negotiations
between The MIIX Group and the Representatives and was based on, among other
things, the Company's financial and operating history and condition, the
prospects of the Company and its industry in general, the management of the
Company and the market prices of securities of companies engaged in businesses
similar to those of the Company. There can, however, be no assurance that the
prices at which the Shares will sell in the public market after the Public
Offering will not be lower than the price at which they are sold by the
Underwriters.
LEGAL MATTERS
The validity of the Common Stock to be issued pursuant to the Public
Offering will be passed upon for the Company by Dechert Price & Rhoads,
Lawrenceville, New Jersey, counsel for the Company. Certain legal matters will
be passed upon for the Underwriters by Cleary, Gottlieb, Steen & Hamilton, New
York, New York.
EXPERTS
The combined financial statements and schedule of the Company 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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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.
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.
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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.
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.
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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 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.
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.
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GLOSSARY OF REORGANIZATION AND SUBSCRIPTION OFFERING 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. If the Offerings are consummated as described
herein, they will also close on the Closing Date.
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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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.
EMPLOYEE
Persons who are directors, officers or employees of the Company as of both
August 31, 1998 and four business days prior to the Closing Date.
EXCHANGE
The Medical Inter-Insurance Exchange, 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.
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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.
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.
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REORGANIZATION
The reorganization of the Exchange as a stock insurer pursuant to, and the
related transactions contemplated by, the Plan of Reorganization.
REORGANIZATION SHARES
The 12,000,000 shares of Common Stock that may be allocated among
Distributees in the Reorganization.
SERVICE PROVIDER
Persons, as selected by the Company in its sole discretion, who have
business relationships with the Company as of both August 31, 1998 and four
business days prior to the Closing Date.
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.
SUBSCRIPTION OFFEREES
Eligible Policyholders, Employees and Service Providers.
TRANSFER AGENT
First Chicago Trust Company of New York, or its successors or assigns.
77
<PAGE> 78
INDEX TO COMBINED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
QUARTERLY COMBINED FINANCIAL STATEMENTS (UNAUDITED)
Combined Balance Sheets as of December 31, 1997 and June 30,
1998...................................................... F-2
Combined Statements of Income for the six months ended June
30, 1997 and 1998......................................... F-3
Combined Statements of Equity for the six months ended June
30, 1998.................................................. F-4
Combined Statements of Cash Flows for the six months ended
June 30, 1997 and 1998.................................... F-5
Notes to Combined Financial Statements...................... F-6
AUDITED COMBINED FINANCIAL STATEMENTS
Report of Independent Auditors.............................. F-8
Combined Balance Sheets as of December 31, 1996 and 1997.... F-9
Combined Statements of Income for the years ended December
31, 1995, 1996 and 1997................................... F-10
Combined Statements of Equity for the three years ended
December 31, 1997......................................... F-11
Combined Statements of Cash Flows for the years ended
December 31, 1995, 1996 and 1997.......................... F-12
Notes to Combined Financial Statements...................... F-13
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> 79
MEDICAL INTER-INSURANCE EXCHANGE
NEW JERSEY STATE MEDICAL UNDERWRITERS, INC.
COMBINED 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 -- $834,052; 1998 -- $915,795)....................... $ 853,977 $ 936,174
Equity investments, at fair value (cost: 1997 -- $69,020;
1998 -- $70,519).......................................... 91,580 94,792
Short-term investments...................................... 85,478 137,257
---------- ----------
Total investments................................. 1,031,035 1,168,223
Cash........................................................ 168 3,015
Reinsurance recoverable on unpaid losses, net............... 85,980 94,039
Prepaid reinsurance premiums................................ 19,621 15,235
Deferred income taxes....................................... 24,198 27,115
Premiums receivable......................................... 8,245 9,607
Deferred policy acquisition costs........................... 100 4,607
Other assets................................................ 110,884 109,378
---------- ----------
Total assets...................................... $1,280,231 $1,431,219
========== ==========
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........................................... 57,930 69,303
---------- ----------
Total liabilities................................. 976,790 1,121,534
---------- ----------
Commitments and contingencies (Note 3)
EQUITY
Surplus..................................................... 275,826 280,661
Unrealized appreciation on securities available-for-sale,
net of deferred taxes..................................... 27,615 29,024
---------- ----------
Total equity...................................... 303,441 309,685
---------- ----------
Total liabilities and equity...................... $1,280,231 $1,431,219
========== ==========
</TABLE>
See accompanying notes.
F-2
<PAGE> 80
MEDICAL INTER-INSURANCE EXCHANGE
NEW JERSEY STATE MEDICAL UNDERWRITERS, INC.
COMBINED STATEMENTS OF INCOME
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-------------------
1997 1998
------- --------
(UNAUDITED)
<S> <C> <C>
REVENUES
Net premiums earned......................................... $57,907 $ 74,520
Net investment income....................................... 26,128 30,941
Realized investment gains................................... (296) 4,246
Other revenue............................................... 5,509 4,885
------- --------
Total revenues.................................... 89,248 114,592
------- --------
EXPENSES
Losses and loss adjustment expenses......................... 58,669 73,220
Underwriting expenses....................................... 11,596 17,581
Funds held charges.......................................... 5,588 5,946
Impairment of fixed assets.................................. -- 8,541
Other operating expenses.................................... 5,100 5,123
------- --------
Total expenses.................................... 80,953 110,411
------- --------
Income before income taxes.................................. 8,295 4,181
Provision (benefit) for income taxes........................ 1,279 (654)
------- --------
Net income.................................................. $ 7,016 $ 4,835
======= ========
</TABLE>
See accompanying notes.
F-3
<PAGE> 81
MEDICAL INTER-INSURANCE EXCHANGE
NEW JERSEY STATE MEDICAL UNDERWRITERS, INC.
COMBINED STATEMENT OF EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
UNREALIZED
APPRECIATION
(DEPRECIATION)
OF INVESTMENTS, TOTAL
SURPLUS NET OF TAXES EQUITY
-------- --------------- --------
(UNAUDITED)
<S> <C> <C> <C>
Balance at December 31, 1997............................ $275,826 $27,615 $303,441
Net income............................................ 4,835 4,835
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................................ $280,661 $29,024 $309,685
======== ======= ========
</TABLE>
See accompanying notes.
F-4
<PAGE> 82
MEDICAL INTER-INSURANCE EXCHANGE
NEW JERSEY STATE MEDICAL UNDERWRITERS, INC.
COMBINED 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................................................ $ 7,016 $ 4,835
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation, accretion and amortization............. 967 851
Impairment of fixed assets........................... -- 8,541
Realized (gains) losses.............................. 73 (4,296)
Unpaid losses and loss adjustment expenses, net of
reinsurance recoverable............................. 15,215 36,643
Premium deposits, net of prepaid reinsurance
premiums............................................ (10,428) (5,285)
Deferred income tax provision........................ 3,032 (2,917)
Premiums receivable, net of allowance................ (29,029) (1,362)
Unearned premiums, net of prepaid reinsurance
premiums............................................ 47,656 56,900
Deferred policy acquisition costs.................... (2,240) (4,507)
Other assets......................................... (10,513) (8,073)
Other liabilities.................................... 16,141 11,240
-------- ---------
Net cash provided by operating activities................. 37,890 92,570
-------- ---------
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 (2,119)
Cost of investments acquired.............................. (149,197) (386,296)
Payable for securities.................................... -- 41,440
Change in short-term investments, net..................... (18,021) (51,779)
Other, net................................................ (1,714) (1,150)
-------- ---------
Net cash used in investing activities..................... (39,548) (89,856)
-------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds (payments) from notes payable................ (113) 133
-------- ---------
Net cash provided by (used in) financing activities....... (113) 133
-------- ---------
Net change in cash........................................ (1,771) 2,847
Cash at beginning of year................................. 6,292 168
-------- ---------
Cash at end of period..................................... $ 4,521 $ 3,015
======== =========
</TABLE>
See accompanying notes.
F-5
<PAGE> 83
MEDICAL INTER-INSURANCE EXCHANGE
NEW JERSEY STATE MEDICAL UNDERWRITERS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The combined financial statements 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 combined financial statements and notes should be read in conjunction
with the audited combined financial statements and notes of the Exchange and the
Attorney-in-Fact for the year ended December 31, 1997 included in pages F-8
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 Company for the
presentation of quarterly financial statements during 1998. For purposes of
comparison, all previous financial statements presented include the SFAS 130
disclosures. The Company 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 Combined Statements of Equity.
The components of comprehensive income, net of related tax, for the periods
ended June 30, 1997 and 1998 are as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
------------------
1997 1998
------- -------
(IN THOUSANDS)
<S> <C> <C>
Net income.................................................. $ 7,016 $ 4,835
Other comprehensive income:
Unrealized appreciation on securities available-for-sale,
net of deferred taxes.................................. 7,414 1,409
------- -------
Comprehensive income........................................ $14,430 $ 6,244
======= =======
</TABLE>
3. OFF-BALANCE SHEET RISK AND OTHER COMMITMENTS
On January 13, 1998, the Company implemented an "equity collar" (the
"Collar") with a notional value of $85 million around the Company's equity
portfolio. 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. 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 combined 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 Company utilizes only those intermediaries that are approved by
the Securities Valuation Office of the National Association of Insurance
Commissioners.
F-6
<PAGE> 84
4. IMPAIRMENT OF FIXED ASSETS
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 an $8.5 million pre-tax charge
(impairment of fixed assets) which represents the net book value of 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 the quarter end but
for which settlement was not finalized until after that date.
7. 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-7
<PAGE> 85
REPORT OF INDEPENDENT AUDITORS
Board of Governors
Medical Inter-Insurance Exchange
Board of Directors
New Jersey State Medical Underwriters, Inc.
We have audited the accompanying combined balance sheets as of December 31,
1996 and 1997, of Medical Inter-Insurance Exchange and subsidiaries and New
Jersey State Medical Underwriters, Inc. and the related combined 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 combined financial statements are the
responsibility of the Companies' management. Our responsibility is to express an
opinion on these combined 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 combined financial statements referred to above present
fairly, in all material respects, the financial position of Medical
Inter-Insurance Exchange and subsidiaries and New Jersey State Medical
Underwriters Inc. 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
Hackensack, New Jersey
March 25, 1998
F-8
<PAGE> 86
MEDICAL INTER-INSURANCE EXCHANGE
NEW JERSEY STATE MEDICAL UNDERWRITERS, INC.
COMBINED 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 -- $762,202; 1997 -- $834,052).................... $ 764,270 $ 853,977
Equity investments, at fair value (cost: 1996 -- $55,334;
1997 -- $69,020)....................................... 67,230 91,580
Short-term investments.................................... 88,197 85,478
---------- ----------
Total investments................................. 919,697 1,031,035
Cash........................................................ 6,292 168
Reinsurance recoverable on unpaid losses, net............... 54,568 85,980
Prepaid reinsurance premiums................................ 28,500 19,621
Deferred income taxes....................................... 32,544 24,198
Other assets................................................ 116,145 119,229
---------- ----------
Total assets...................................... $1,157,746 $1,280,231
========== ==========
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........................................... 60,710 58,159
---------- ----------
Total liabilities................................. 901,705 976,790
---------- ----------
Commitments and contingencies (Notes 5 and 6)
EQUITY
Surplus..................................................... 246,964 275,826
Unrealized appreciation on securities available-for-sale,
net of deferred taxes..................................... 9,077 27,615
---------- ----------
Total equity...................................... 256,041 303,441
---------- ----------
Total liabilities and equity...................... $1,157,746 $1,280,231
========== ==========
</TABLE>
See accompanying notes.
F-9
<PAGE> 87
MEDICAL INTER-INSURANCE EXCHANGE
NEW JERSEY STATE MEDICAL UNDERWRITERS, INC.
COMBINED STATEMENTS OF INCOME
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------
1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
REVENUES
Net premiums earned........................................ $105,256 $108,182 $123,600
Net investment income...................................... 51,760 49,208 54,624
Net realized investment gains.............................. 13,149 8,683 10,296
Other revenue.............................................. 9,968 11,524 11,870
-------- -------- --------
Total revenues................................... 180,133 177,597 200,390
-------- -------- --------
EXPENSES
Losses and loss adjustment expenses........................ 107,889 110,866 122,828
Underwriting expenses...................................... 14,743 18,385 26,855
Funds held charges......................................... 5,473 8,626 11,581
Other operating expenses................................... 6,905 10,444 8,179
-------- -------- --------
Total expenses................................... 135,010 148,321 169,443
-------- -------- --------
Income before income taxes................................. 45,123 29,276 30,947
Provision for income taxes................................. 12,108 9,779 2,085
-------- -------- --------
Net income....................................... $ 33,015 $ 19,497 $ 28,862
======== ======== ========
</TABLE>
See accompanying notes.
F-10
<PAGE> 88
MEDICAL INTER-INSURANCE EXCHANGE
NEW JERSEY STATE MEDICAL UNDERWRITERS, INC.
COMBINED 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................. $194,452 $ 4,604 $(21,161) $177,895
Net income............................... 33,015 33,015
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............... 227,467 -- 18,991 246,458
Net income............................... 19,497 19,497
Unrealized depreciation of investments,
net of tax............................ (9,914) (9,914)
-------- ------- -------- --------
Balance at December 31, 1996............... 246,964 -- 9,077 256,041
Net income............................... 28,862 28,862
Unrealized appreciation of investments,
net of tax............................ 18,538 18,538
-------- ------- -------- --------
Balance at December 31, 1997............... $275,826 $ -- $ 27,615 $303,441
======== ======= ======== ========
</TABLE>
See accompanying notes.
F-11
<PAGE> 89
MEDICAL INTER-INSURANCE EXCHANGE
NEW JERSEY STATE MEDICAL UNDERWRITERS, INC.
COMBINED 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............................................ $ 33,015 $ 19,497 $ 28,862
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation, accretion and amortization........... 3,305 4,308 3,698
Realized gains..................................... (13,183) (8,731) (10,495)
Unpaid losses and loss adjustment expenses, net of
reinsurance recoverable.......................... 39,689 49,750 49,860
Premium deposits, net of prepaid reinsurance
premiums......................................... (245) (30,513) (5,159)
Deferred income tax provision...................... 2,446 509 (1,637)
Unearned premiums, net of prepaid reinsurance
premiums......................................... (2,493) 3,644 10,402
Other assets....................................... (16,421) (6,143) (3,682)
Other liabilities.................................. 3,732 8,437 (3,172)
--------- --------- ---------
Net cash provided by operating activities............. 49,845 40,758 68,677
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from fixed-maturity investment sales......... 311,871 606,172 228,055
Proceeds from fixed-maturity investments matured,
called, or prepaid................................. 43,212 97,325 121,609
Proceeds from equity investment sales................. 10 3,386 24,249
Cost of investments acquired.......................... (395,643) (704,951) (448,124)
Change in short-term investments, net................. 7,054 (35,007) 2,719
Acquisition of goodwill............................... -- (1,961) --
Other, net............................................ (6,784) (3,910) (3,930)
--------- --------- ---------
Net cash used in investing activities................. (40,280) (38,946) (75,422)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Subordinated loan certificates redeemed............... (3,977) (248) --
Proceeds from notes payable........................... 22,150 32,900 13,200
Repayment of notes payable............................ (20,899) (26,722) (12,579)
Other................................................. -- (289) --
--------- --------- ---------
Net cash provided by (used in) financing activities... (2,726) 5,641 621
--------- --------- ---------
Net change in cash.................................... 6,839 7,453 (6,124)
Cash at beginning of year............................. (8,000) (1,161) 6,292
--------- --------- ---------
Cash at end of year................................... $ (1,161) $ 6,292 $ 168
========= ========= =========
</TABLE>
See accompanying notes.
F-12
<PAGE> 90
MEDICAL INTER-INSURANCE EXCHANGE
NEW JERSEY STATE MEDICAL UNDERWRITERS, INC.
NOTES TO COMBINED 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 exchange reciprocal
or interinsurance contracts with each other. Such contracts are executed by an
attorney-in-fact acting on behalf of the subscribers through a power of
attorney. 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, LP&C and the Attorney-in-Fact (collectively, "the
Company") 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 Company's primary business is medical professional liability and
it issues claims-made, modified claims made with prepaid extended reporting
endorsements and occurrence policies. The Company currently maintains licenses
in twenty-nine states.
2. SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying combined 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 the Company that
materially affect financial reporting are summarized below:
Principles of Combination and Consolidation
The accompanying combined financial statements combine the consolidated
financial statements of the Exchange and the Attorney-in-Fact, which are
commonly controlled and managed entities. The consolidated financial statements
of the Exchange include the accounts of the Exchange, LHI and LP&C. The
Exchange's consolidated statements of income, policyholders' equity and cash
flows include the activity of LP&C from April 16, 1996, the date of acquisition.
The consolidated financial statements of the Attorney-in-Fact include the
accounts of the Attorney-in-Fact and its wholly-owned subsidiaries, Medical
Brokers, Inc., an insurance broker; Pegasus Advisors, Inc., a reinsurance
broker; Hamilton National Leasing Corp. ("Hamilton"), a leasing company; MIIX
Healthcare Group, Inc., a health care consulting company; Medical Group
Management, Inc. ("MGM"), a managed-care management services company;
Lawrenceville Re, Ltd., a Bermuda-based reinsurance company formed on December
7, 1995; and MIIX Capital Management, an investment advisory firm purchased on
January 30, 1996. All significant intercompany transactions and balances have
been eliminated in the combination and consolidations.
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
F-13
<PAGE> 91
MEDICAL INTER-INSURANCE EXCHANGE
NEW JERSEY STATE MEDICAL UNDERWRITERS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
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
The Company has designated its entire investment portfolio as
available-for-sale. As such, all investments are carried at their fair market
values. The Company has no securities classified as "trading" or "held-to-
maturity." Transfers to these categories are restricted.
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, the Company 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 the
Company's evaluation of reported claims and actuarial analyses of the Company'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 the
Exchange 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. The Exchange 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.
F-14
<PAGE> 92
MEDICAL INTER-INSURANCE EXCHANGE
NEW JERSEY STATE MEDICAL UNDERWRITERS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
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, 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.
Accounting Pronouncements Not Yet Adopted
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. The Company adopted this statement on January 1, 1997 with no
significant impact on the Company's 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 the
Company's financial position or results of operations.
F-15
<PAGE> 93
MEDICAL INTER-INSURANCE EXCHANGE
NEW JERSEY STATE MEDICAL UNDERWRITERS, INC.
NOTES TO COMBINED 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 $394.8 million,
respectively............................................. $402,172 $409,565 $400,607
Incurred related to:
Current year............................................. 107,889 110,866 121,331
Prior years.............................................. -- -- 1,497
-------- -------- --------
Total incurred............................................. 107,889 110,866 122,828
Paid related to:
Current year............................................. 3,000 3,630 3,930
Prior years.............................................. 97,496 116,194 73,547
-------- -------- --------
Total paid................................................. 100,496 119,824 77,477
-------- -------- --------
Balance as of December 31, net of reinsurance
recoverable.............................................. 409,565 400,607 445,958
Reinsurance recoverable.................................... 339,095 394,842 430,763
-------- -------- --------
Balance, gross of reinsurance.............................. $748,660 $795,449 $876,721
======== ======== ========
</TABLE>
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. Information from reviews of estimates of direct losses did not
indicate a basis to revise earlier estimates in 1995 and 1996.
4. INVESTMENTS
The Company's investment strategy focuses primarily on the purchase of
high-quality debt securities, which resulted in the fixed income portfolio's
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.
F-16
<PAGE> 94
MEDICAL INTER-INSURANCE EXCHANGE
NEW JERSEY STATE MEDICAL UNDERWRITERS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The actual or amortized cost and estimated market value of the Company'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............. $185,971 $ 1,179 $3,244 $183,906
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................... 762,202 7,991 5,923 764,270
Equity investments................................. 55,334 12,071 175 67,230
-------- ------- ------ --------
Total investments........................ $817,536 $20,062 $6,098 $831,500
======== ======= ====== ========
1997
U.S. Treasury securities and obligations of U.S
government corporations and agencies............. $190,214 $ 4,349 $ 56 $194,507
Obligations of states and political subdivisions... 202,386 7,224 5 209,605
Corporate securities............................... 132,875 3,986 567 136,294
Mortgage-backed and other asset backed
securities....................................... 308,577 5,463 469 313,571
-------- ------- ------ --------
Total fixed maturity investments................... 834,052 21,022 1,097 853,977
Equity investments................................. 69,020 23,154 594 91,580
-------- ------- ------ --------
Total investments........................ $903,072 $44,176 $1,691 $945,557
======== ======= ====== ========
</TABLE>
The fair values for fixed maturity securities are based on quoted marked
prices, where available. For fixed maturity securities 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
the Company'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..................................... $ 8,615 $ 8,623
Due after one year through five years....................... 124,991 126,725
Due after five years through ten years...................... 127,935 132,798
Due after ten years......................................... 263,934 272,260
Mortgage-backed and other asset backed securities........... 308,577 313,571
-------- --------
Total............................................. $834,052 $853,977
======== ========
</TABLE>
F-17
<PAGE> 95
MEDICAL INTER-INSURANCE EXCHANGE
NEW JERSEY STATE MEDICAL UNDERWRITERS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Major categories of the Company'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 $46,022 $49,853
Equity investments.................................... 564 2,149 1,798
Other................................................. 3,396 3,274 5,700
------- ------- -------
Subtotal............................................ 54,584 51,445 57,351
Investment expenses................................... 2,824 2,237 2,727
------- ------- -------
Net investment income................................. $51,760 $49,208 $54,624
======= ======= =======
</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............................... -- 34 68
------- ------- -------
Net realized gains on equity investments.............. -- 440 8,651
------- ------- -------
Net realized gains on investments..................... $13,149 $ 8,683 $10,296
======= ======= =======
</TABLE>
The change in the Company's unrealized appreciation (depreciation) on fixed
maturity investments was $59,093, $(24,896), and $17,857 for the years ended
December 31, 1995, 1996 and 1997, respectively. The corresponding amounts for
equity securities were $2,253, $9,643, and $10,664.
At December 31, 1997, investments in fixed maturity securities with a
carrying amount of approximately $6.8 million were on deposit with state
insurance departments to satisfy regulatory requirements.
5. 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
F-18
<PAGE> 96
MEDICAL INTER-INSURANCE EXCHANGE
NEW JERSEY STATE MEDICAL UNDERWRITERS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
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 1992, MIIX implemented, on a funds withheld basis, an aggregate excess
of loss reinsurance treaty to protect the underwriting and operating results
from adverse development for losses and loss adjustment expenses occurring on or
before December 31, 1992. Coverage of $300 million is provided under the treaty
above a retention of $367 million of losses on the subject business after
January 1, 1993.
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) (34,595) (36,404) (44,252) (42,067)
-------- -------- -------- -------- -------- --------
Net premiums......... $102,763 $105,256 $112,173 $108,182 $133,656 $123,600
======== ======== ======== ======== ======== ========
</TABLE>
During 1995, 1996 and 1997, approximately $53.4 million, $57.1 million and
$66.6 million, respectively, of losses and loss adjustment expenses were ceded
to reinsurers.
The Company remains liable in the event that amounts recoverable from
reinsurers are uncollectible. To minimize its exposure to losses from reinsurer
insolvencies, the Company enters into reinsurance arrangements with carriers
rated "A" or better by A.M. Best. At December 31, 1996 and 1997, the Company
held collateral under related reinsurance agreements for all unpaid losses and
loss adjustment expenses ceded in the form of funds withheld of $340.3 million
and $344.8 million and letters of credit of $93.5 million and $126.0 million,
respectively.
Reinsurance recoverable on unpaid losses, net, included in the Combined
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.
6. 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 the
Company may demand that a counterparty return the securities which it has
borrowed at any time, the Company retains effective control of all assets
F-19
<PAGE> 97
MEDICAL INTER-INSURANCE EXCHANGE
NEW JERSEY STATE MEDICAL UNDERWRITERS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
participating in the securities lending program. The Company receives lending
fees and continues to earn interest on the loaned securities.
In 1997, the Company implemented an "equity collar" (collar) around the
Company'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 the Company'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, the Company utilizes intermediaries with a Standard and
Poor's rating of "AA" or better.
Hamilton has entered into a loan and security agreement with a bank with
respect to financing its leases receivable, which is collateralized by specified
leases receivable and the related equipment. Aggregate borrowing under the
agreement cannot exceed $22.0 million. The term of the agreement, as amended, is
from November 24, 1993 through May 31, 1998. Hamilton was in compliance with
this agreement's requirements on December 31, 1996 and 1997. As of December 31,
1996 and 1997 notes payable amounted to $15.4 million and $17.8 million,
respectively, with installments due through 2001 with interest rates ranging
from 6.775% to 8.865% during 1997.
The following are the maturities of the Company's notes payable, primarily
related to Hamilton (in thousands):
<TABLE>
<CAPTION>
<S> <C>
1998....................................................... $11,342
1999....................................................... 6,081
2000....................................................... 3,210
2001....................................................... 1,238
-------
$21,871
=======
</TABLE>
Interest paid in 1995, 1996 and 1997 was $1.1 million, $1.0 million and
$1.7 million, respectively.
The Company leases office space and office equipment. Rent expense for
1995, 1996 and 1997 was $1.0 million, $1.4 million and $1.5 million,
respectively, including rent paid to the Medical Society of New Jersey of $0.6
million, $0.7 million and $0.8 million for 1995, 1996 and 1997, respectively.
Minimum future rental obligations for leases currently in effect are as follows
(in thousands):
<TABLE>
<CAPTION>
<S> <C>
1998....................................................... $ 2,015
1999....................................................... 1,763
2000....................................................... 1,632
2001....................................................... 1,258
2002....................................................... 926
Thereafter................................................. 2,579
-------
$10,173
=======
</TABLE>
The Company provided a letter of credit on behalf of American Medical
Mutual, Inc., A Risk Retention Group, with which it has a service agreement. As
of December 31, 1996 and 1997, investments with an
F-20
<PAGE> 98
MEDICAL INTER-INSURANCE EXCHANGE
NEW JERSEY STATE MEDICAL UNDERWRITERS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
approximate value of $1.6 and $1.5 million, respectively included in the
accompanying combined financial statements, were pledged to banks in connection
with this irrevocable letter of credit.
The Company has employment contracts with certain officers, which commit
the Company to various salary and fringe benefit obligations as specified in the
individual agreements.
7. STATUTORY ACCOUNTING PRACTICES
The Exchange, domiciled in New Jersey, LP&C, domiciled in Virginia, and
Lawrenceville Re, domiciled in Bermuda, prepare statutory-basis financial
statements in accordance with accounting practices prescribed or permitted by
the New Jersey Department of Banking and Insurance, Virginia Department of
Insurance and the Bermuda Registrar of Companies, 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 three companies, are summarized as
follows:
<TABLE>
<CAPTION>
1995 1996 1997
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Statutory net income for the year.................. $ 35,994 $ 20,109 $ 35,645
Statutory surplus at year-end...................... 184,651 208,738 $248,050
</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.
8. INCOME TAXES
For federal income tax purposes, the Exchange and the Attorney-in-Fact
separately file consolidated returns with their respective 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 provisions:
Federal.............................................. $ 9,559 $9,008 $ 3,626
State................................................ 103 262 96
------- ------ -------
9,662 9,270 3,722
------- ------ -------
Deferred provisions:
Federal.............................................. 2,495 969 (1,884)
State................................................ (49) (460) 247
------- ------ -------
2,446 509 (1,637)
------- ------ -------
$12,108 $9,779 $ 2,085
======= ====== =======
</TABLE>
F-21
<PAGE> 99
MEDICAL INTER-INSURANCE EXCHANGE
NEW JERSEY STATE MEDICAL UNDERWRITERS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
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%............................. $15,793 $10,247 $10,831
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............................................... 208 (1,202) (946)
------- ------- -------
Total income taxes.......................... $12,108 $ 9,779 $ 2,085
======= ======= =======
</TABLE>
Significant components of the Company'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 $37,005
Net operating loss carryforwards.......................... 1,125 444
Other..................................................... 3,922 3,238
Valuation allowance....................................... (107) (258)
------- -------
Total deferred tax assets......................... 38,737 40,429
------- -------
Deferred tax liabilities:
Unrealized gains on fixed maturity investments............ 723 6,973
Unrealized gain on equity investments..................... 4,164 7,896
Other..................................................... 1,306 1,362
------- -------
Total deferred tax liabilities.................... 6,193 16,231
------- -------
Net deferred tax assets........................... $32,544 $24,198
======= =======
</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, the Company had income taxes payable
included in other liabilities of $7.0 million and $2.6 million, respectively.
The amount of income taxes paid in 1995, 1996 and 1997 was $4.5 million,
$4.0 million and $6.2 million, respectively.
As a result of developments during 1996 related to Internal Revenue Service
examinations, the Company established a provision for tax contingencies of
$5,224. During 1997, the Company reached favorable resolutions and was able to
release $4,217 of that amount. The federal income tax returns of the Exchange
and the Attorney-In-Fact have been examined by the Internal Revenue Service
through the years 1994 and 1993, respectively. Management believes the Company
has adequately provided for any remaining tax contingencies.
F-22
<PAGE> 100
MEDICAL INTER-INSURANCE EXCHANGE
NEW JERSEY STATE MEDICAL UNDERWRITERS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
9. NOTES RECEIVABLE
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 of New Jersey, 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.
10. RETIREMENT PLANS
The Company provides a noncontributory defined pension plan covering
substantially all its employees. The funding policy for the plan is to make
minimum annual contributions required by applicable regulations.
The components of pension expense for 1995, 1996 and 1997 include the
following:
<TABLE>
<CAPTION>
1995 1996 1997
------- ------- -------
<S> <C> <C> <C>
Service cost.......................................... $ 447 $ 541 $ 560
Interest cost......................................... 309 365 416
Actual return on plan assets.......................... (1,336) (1,020) (1,158)
Net amortization and deferral......................... 688 201 217
------- ------- -------
Net pension cost...................................... $ 108 $ 87 $ 35
======= ======= =======
</TABLE>
The funded status of the Company's plan at December 31, 1996 and 1997 was
as follows:
<TABLE>
<CAPTION>
1996 1997
------- -------
<S> <C> <C>
Accumulated benefit obligation including vested benefits of
$3.8 million in 1996 and $4.8 million in 1997............. $ 3,996 $ 5,163
======= =======
Projected benefit obligation................................ $ 5,421 $ 6,737
Plan assets at fair value................................... 7,613 8,718
------- -------
Plan assets in excess of projected benefit obligation....... 2,192 1,981
Unrecognized net gain from past experience, which is
different from that assumed, and effect of changes in
assumptions............................................... (3,421) (3,267)
Unrecognized transition asset being recognized over 15
years..................................................... (155) (133)
------- -------
Accrued pension liability................................... $(1,384) $(1,419)
======= =======
</TABLE>
The weighted average discount rate and rate of increase in future
compensation levels used in determining the actuarial present value of the
projected benefit obligation was 8% and 7.5% at December 31, 1996 and 1997,
respectively. The expected long-term rate of return on plan assets was 9% in
1995, 1996 and 1997. Plan assets are primarily invested in listed stocks,
registered investment company holdings and U.S. government obligations.
The Company also has a contributory 401(k) Retirement Savings Plan which
covers substantially all employees. Employee contributions up to 6% of earnings
are matched by the Company at a rate of 50(cent) per $1.00. The maximum
contribution by an employee for 1997 cannot exceed $9,500. Total contributions
by employees amounted to $0.7 million in 1995, 1996 and 1997. Employer
contributions for the same period totaled $0.2 million, $0.3 million and $0.3
million, respectively.
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> 101
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....................................... $410,855 $ 419,735 $ 419,735
States, municipalities and political subdivisions.... 202,386 209,605 209,605
Public Utilities..................................... 948 970 970
All other corporate bonds............................ 218,263 222,067 222,067
Certificates of Deposit.............................. 1,600 1,600 1,600
-------- ---------- ----------
Total Fixed Maturities............................ 834,052 853,977 853,977
-------- ---------- ----------
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
Non-redeemable preferred stock....................... 2,500 2,500 2,500
-------- ---------- ----------
Total Equity Securities........................... 69,020 91,580 91,580
-------- ---------- ----------
Short-term Investments................................. 85,478 85,478 85,478
-------- ---------- ----------
Total Investments...................................... $988,550 $1,031,035 $1,031,035
======== ========== ==========
</TABLE>
F-24
<PAGE> 102
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> 103
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-4
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>
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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.
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"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> 109
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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<PAGE> 112
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").
B-1
<PAGE> 113
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
B-2
<PAGE> 114
- ---------------------------------------------------------------
- ---------------------------------------------------------------
NO DEALER, SALESPERSON, OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION, OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS, AND, IF GIVEN
OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED ON AS HAVING
BEEN AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE
ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY
SINCE THE DATE HEREOF. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OR
SOLICITATION BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION
IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS
NOT QUALIFIED TO DO SO OR TO ANYONE TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR
SOLICITATION.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Additional Information....................... 3
Forward-Looking Statements................... 4
Prospectus Summary........................... 5
Risk Factors................................. 14
The Reorganization........................... 21
The Subscription Offering.................... 25
Use of Proceeds.............................. 26
Dividend Policy.............................. 26
Capitalization............................... 27
Selected Financial and Operating Data........ 28
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................. 29
Business..................................... 38
Management................................... 54
Ownership of Common Stock.................... 63
Description of Capital Stock................. 65
Shares Eligible for Future Sale.............. 68
Underwriting................................. 69
Legal Matters................................ 70
Experts...................................... 70
Glossary of Selected Insurance Terms......... 71
Glossary of Reorganization and Subscription
Offering Terms............................. 74
Index to Financial Statements................ F-1
</TABLE>
UNTIL , 1998, ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON
STOCK, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO
DELIVER A PROSPECTUS. THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION
OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT
TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
- ---------------------------------------------------------------
- ---------------------------------------------------------------
- ---------------------------------------------------------------
- ---------------------------------------------------------------
,000,000 SHARES
THE MIIX GROUP,
INCORPORATED
COMMON STOCK
THE MIIX GROUP LOGO
---------
PROSPECTUS
, 1998
---------
SALOMON SMITH BARNEY
FRIEDMAN BILLINGS, RAMSEY & CO., INC.
THE ROBINSON-HUMPHREY COMPANY
- ---------------------------------------------------------------
- ---------------------------------------------------------------
<PAGE> 115
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
<TABLE>
<S> <C>
SEC Registration Fee........................................ $ 13,275
NYSE Filing Fee............................................. 20,319
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............................................. $2,233,594
==========
</TABLE>
- ---------------
* To be completed by amendment.
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.
II-1
<PAGE> 116
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>
1.1 Underwriting Agreement among The MIIX Group, Incorporated,
Salomon Smith Barney, Inc., Friedman, Billings, Ramsey &
Co., Inc., and The Robinson-Humphrey Company, LLC.(1)
2.1 Plan of Reorganization of Medical Inter-Insurance
Exchange.(2)
3.1 Restated Certificate of Incorporation of the MIIX Group,
Incorporated.(1)
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> 117
<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.(1)
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)
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).
23.4 Report of Independent Auditor -- June 30, 1998 Review.(2)
24.1 Powers of Attorney (included in the signature pages to this
Registration Statement).
</TABLE>
II-3
<PAGE> 118
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S>
27.1 Financial Data Schedules.
99.1 Consent of Salomon Smith Barney Inc.
</TABLE>
- ---------------
(1) To be filed by amendment.
(2) Incorporated by reference to the same numbered exhibit in the Registrant's
Registration Statement on Form S-1 (Reg. No. 333-59371).
(b) Financial Statement Schedules:
The required schedules are included on page F-22 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) 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 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.
(b) 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-4
<PAGE> 119
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 September 29, 1998.
By: /s/ DANIEL GOLDBERG
------------------------------------
Daniel Goldberg
President and Chief Executive
Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Vincent A. Maressa, Esq., Daniel Goldberg
and Kenneth Koreyva, each and individually, his or her attorneys-in-fact, with
full power of substitution and resubstitution, for him or her in any and all
capacities, to sign any or all amendments or post-effective amendments to this
Registration Statement or any Registration Statement for the same offering that
is effective upon filing pursuant to Rule 462(b) under the Securities Act of
1933, as amended, and to file the same with exhibits thereto and other documents
in connection therewith, or in connection with the registration of Common Stock
under the Securities Exchange Act of 1934, as amended, with the Securities and
Exchange Commission, granting unto each of such attorneys-in-fact and agents
full power and authority to do and perform each and every act and thing
requisite and necessary in connection with such matters and hereby ratifying and
confirming all that each such attorney-in-fact, or his agent or substitutes, may
do or cause to be done by virtue hereof.
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
---- ----- ----
<S> <C> <C>
/s/ DANIEL GOLDBERG President, Chief Executive September 29, 1998
- ------------------------------------------------ Officer and Director
Daniel Goldberg (principal executive officer)
/s/ KENNETH KOREYVA Executive Vice President and September 29, 1998
- ------------------------------------------------ Chief Financial Officer
Kenneth Koreyva (principal financial
accounting officer)
/s/ ANGELO S. AGRO Director September 29, 1998
- ------------------------------------------------
Angelo S. Agro, M.D.
/s/ HILLEL M. BEN-ASHER Director September 29, 1998
- ------------------------------------------------
Hillel M. Ben-Asher, M.D.
/s/ HARRY M. CARNES Director September 29, 1998
- ------------------------------------------------
Harry M. Carnes, M.D.
Director
- ------------------------------------------------
Andrew Coronato, M.D.
/s/ PALMA E. FORMICA Director September 29, 1998
- ------------------------------------------------
Palma E. Formica, M.D.
</TABLE>
II-5
<PAGE> 120
<TABLE>
<CAPTION>
NAME TITLE DATE
---- ----- ----
<S> <C> <C>
/s/ JOHN S. GARRA Director September 29, 1998
- ------------------------------------------------
John S. Garra, M.D.
/s/ PAUL HIRSCH Director September 29, 1998
- ------------------------------------------------
Paul Hirsch, M.D.
/s/ LOUIS L. KEELER Director September 29, 1998
- ------------------------------------------------
Louis L. Keeler, M.D.
/s/ HENRY R. LISS Director September 29, 1998
- ------------------------------------------------
Henry R. Liss, M.D.
/s/ ARGANEY LUCAS, JR. Director September 29, 1998
- ------------------------------------------------
Arganey Lucas, Jr., M.D.
/s/ S. STUART MALLY Director September 29, 1998
- ------------------------------------------------
S. Stuart Mally, M.D.
/s/ VINCENT A. MARESSA Director September 29, 1998
- ------------------------------------------------
Vincent A. Maressa, Esq.
/s/ MURRAY N. MATEZ Director September 29, 1998
- ------------------------------------------------
Murray N. Matez, D.O.
/s/ ROBERT S. MAURER Director September 29, 1998
- ------------------------------------------------
Robert S. Maurer, D.O.
/s/ A. RICHARD MISKOFF Director September 29, 1998
- ------------------------------------------------
A. Richard Miskoff, D.O.
/s/ CHARLES J. MOLONEY Director September 29, 1998
- ------------------------------------------------
Charles J. Moloney, M.D.
/s/ EILEEN MARIE MOYNIHAN Director September 29, 1998
- ------------------------------------------------
Eileen Marie Moynihan, M.D.
Director
- ------------------------------------------------
Fred M. Palace, M.D.
/s/ JOHN J. PASTORE Director September 29, 1998
- ------------------------------------------------
John J. Pastore, M.D.
/s/ PASCAL A. PIRONTI Director September 29, 1998
- ------------------------------------------------
Pascal A. Pironti, M.D.
Director
- ------------------------------------------------
Carl Restivo, Jr., M.D.
/s/ JOSEPH A. RIGGS Director September 29, 1998
- ------------------------------------------------
Joseph A. Riggs, M.D.
</TABLE>
II-6
<PAGE> 121
<TABLE>
<CAPTION>
NAME TITLE DATE
---- ----- ----
<S> <C> <C>
/s/ BERNARD ROBINS Director September 29, 1998
- ------------------------------------------------
Bernard Robins, M.D.
/s/ HERMAN M. ROBINSON Director September 29, 1998
- ------------------------------------------------
Herman M. Robinson, M.D.
/s/ GABRIEL F. SCIALLIS Director September 29, 1998
- ------------------------------------------------
Gabriel F. Sciallis, M.D.
/s/ MARTIN L. SORGER Director September 29, 1998
- ------------------------------------------------
Martin L. Sorger, M.D.
/s/ BESSIE M. SULLIVAN Director September 29, 1998
- ------------------------------------------------
Bessie M. Sullivan, M.D.
/s/ HARVEY P. YEAGER Director September 29, 1998
- ------------------------------------------------
Harvey P. Yeager, M.D.
</TABLE>
II-7
<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 combined financial
statements and schedule of the Medical Inter-Insurance Exchange and New Jersey
State Medical Underwriters, Inc. included in the Registration Statement on Form
S-1 dated September 29, 1998 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
September 29, 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> 853,977 870,433 936,174
<DEBT-CARRYING-VALUE> 0 0 0
<DEBT-MARKET-VALUE> 0 0 0
<EQUITIES> 91,580 91,188 94,792
<MORTGAGE> 0 0 0
<REAL-ESTATE> 0 0 0
<TOTAL-INVEST> 1,031,035 1,091,230 1,168,223
<CASH> 168 1,432 3,015
<RECOVER-REINSURE> 85,980 87,528 94,039
<DEFERRED-ACQUISITION> 100 5,183 4,607
<TOTAL-ASSETS> 1,280,231 1,409,546 1,431,219
<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> 21,871 22,054 21,972
0 0 0
0 0 0
<COMMON> 0 0 0
<OTHER-SE> 303,441 304,674 309,685
<TOTAL-LIABILITY-AND-EQUITY> 1,280,231 1,409,546 1,431,219
123,600 35,892 74,520
<INVESTMENT-INCOME> 54,624 14,873 30,941
<INVESTMENT-GAINS> 10,296 1,441 4,246
<OTHER-INCOME> 11,870 2,963 4,885
<BENEFITS> 122,828 36,194 73,220
<UNDERWRITING-AMORTIZATION> 0 0 0
<UNDERWRITING-OTHER> 26,855 8,118 17,581
<INCOME-PRETAX> 30,947 4,162 4,181
<INCOME-TAX> 2,085 837 (654)
<INCOME-CONTINUING> 28,862 3,325 4,835
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 28,862 3,325 4,835
<EPS-PRIMARY> 0 0 0
<EPS-DILUTED> 0 0 0
<RESERVE-OPEN> 400,607 445,958 445,958
<PROVISION-CURRENT> 121,331 36,194 73,220
<PROVISION-PRIOR> 1,497 0 0
<PAYMENTS-CURRENT> 3,930 668 1,445
<PAYMENTS-PRIOR> 73,547 12,115 21,363
<RESERVE-CLOSE> 445,958 469,369 496,370
<CUMULATIVE-DEFICIENCY> 0 0 0
</TABLE>
<PAGE> 1
Exhibit 99.1
CONSENT OF SALOMON SMITH BARNEY INC.
We hereby consent to the use of our name and to the description of the
opinion letter of Salomon Brothers Inc., dated October 15, 1998, referred to in
the Prospectus under the heading "THE REORGANIZATION--Conditions to Consummation
of the Reorganization", dated September 29, 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 and Exchange Commission
promulgated thereunder.
SALOMON SMITH BARNEY INC.
By: /s/ MARIO TORSIELLO
-----------------------
Name: Mario Torsiello
Title: Managing Director
September 29, 1998
New York, New York
