<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
FOR THE QUARTER ENDED MARCH 31, 2000
[ ] Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 For the Period From _________
to __________.
Commission File Number: 001-14593
THE MIIX GROUP, INCORPORATED
(Exact name of Registrant as specified in its charter)
DELAWARE 22-3586492
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification number)
TWO PRINCESS ROAD, LAWRENCEVILLE, NEW JERSEY 08648
(Address of principal executive offices and zip code)
(609) 896-2404
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, par value $.01 per share
--------------------------------------
Securities registered pursuant to Section 12(g) of the Act: None
----
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter periods as the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
----- -----
As of May 8, 2000, the number of outstanding shares of the Registrant's
Common Stock was 14,476,608.
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TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
PART I FINANCIAL INFORMATION..............................................................................4
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS..................................................................4
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.............11
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK........................................14
PART II OTHER INFORMATION.................................................................................15
ITEM 1. LEGAL PROCEEDINGS.................................................................................15
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.........................................................15
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...............................................15
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K..................................................................15
SIGNATURES.......................................................................................................16
</TABLE>
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The Private Securities Litigation Reform Act of 1995 provides a "safe harbor"
for forward-looking statements. This Form 10-Q, the Company's Annual Report to
Stockholders, any Form 10-K or any Form 8-K of the Company or any other written
or oral statements made by or on behalf of the Company may include
forward-looking statements which reflect the Company's current views with
respect to future events and financial performance. These forward-looking
statements are subject to uncertainties and other factors that could cause
actual results to differ materially from such statements. These uncertainties
and other factors include, 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 words "believe,"
"expect," "anticipate," "project," and similar expressions identify
forward-looking statements. Readers are cautioned not to place undue reliance on
these forward-looking statements, which speak only as of their dates. The
Company undertakes no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise.
3
<PAGE> 4
PART I FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
REPORT OF INDEPENDENT ACCOUNTANTS
Board of Directors
The MIIX Group, Incorporated
We have reviewed the accompanying consolidated balance sheet of The MIIX Group,
Incorporated and subsidiaries as of March 31, 2000, and the related consolidated
statements of income and cash flows for the three-month periods ended March 31,
2000 and 1999 and the consolidated statement of equity for the three-month
period ended March 31, 2000. These financial statements are the responsibility
of the Company's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data, and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with auditing standards generally accepted in the United States,
which will be performed for the full year with the objective of expressing an
opinion regarding the financial statements taken as a whole. Accordingly, we do
not express such an opinion.
Based on our reviews, we are not aware of any material modifications that should
be made to the accompanying consolidated financial statements referred to above
for them to be in conformity with accounting principles generally accepted in
the United States.
We have previously audited, in accordance with auditing standards generally
accepted in the United States, the consolidated balance sheets of The MIIX
Group, Incorporated and subsidiaries (formerly the Medical Inter-Insurance
Exchange and subsidiaries) as of December 31, 1999 and 1998, and the related
consolidated statements of income, equity, and cash flows for each of the three
years in the period ended December 31, 1999, not presented herein, and in our
report dated March 22, 2000, we expressed an unqualified opinion on those
consolidated financial statements. In our opinion, the information set forth in
the accompanying condensed consolidated balance sheet as of December 31, 1999,
is fairly stated, in all material respects, in relation to the consolidated
balance sheet from which it has been derived.
ERNST & YOUNG LLP
New York, New York
May 5, 2000
4
<PAGE> 5
THE MIIX GROUP, INCORPORATED
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE & PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
--------------------------------
2000 1999
---------- ----------
<S> <C> <C>
ASSETS (Unaudited)
Securities available-for-sale:
Fixed-maturity investments, at fair value (amortized cost: 2000 -
$1,138,844; 1999 - $1,131,931) .......................................... $1,085,591 $1,077,806
Equity investments, at fair value (cost: 2000 - $9,538; 1999 - $13,169) ... 8,478 12,394
Short-term investments, at cost which approximates fair value ............. 161,021 92,743
---------- ----------
Total investments ................................................... 1,255,090 1,182,943
---------- ----------
Cash ......................................................................... 3,234 2,574
Accrued investment income .................................................... 14,141 14,319
Premium receivable, net ...................................................... 22,938 17,920
Reinsurance recoverable on unpaid losses ..................................... 421,021 406,409
Prepaid reinsurance premiums ................................................. 17,001 27,646
Reinsurance recoverable on paid losses, net .................................. 731 236
Deferred policy acquisition costs ............................................ 6,484 3,165
Deferred income taxes ........................................................ 68,417 69,733
Receivable for securities .................................................... 2,002 0
Net investment in direct financing leases .................................... 26,211 25,522
Other assets ................................................................. 44,554 86,691
---------- ----------
Total assets ........................................................ $1,881,824 $1,837,158
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Unpaid losses and loss adjustment expenses ................................... $1,057,414 $1,053,597
Unearned premiums ............................................................ 146,395 75,433
Premium deposits ............................................................. 0 27,913
Funds held under reinsurance treaties ........................................ 273,649 271,637
Payable for securities ....................................................... 5,082 205
Notes payable and other borrowings ........................................... 16,847 16,461
Other liabilities ............................................................ 67,505 73,208
---------- ----------
Total liabilities ................................................... $1,566,892 $1,518,454
========== ==========
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value, 50,000,000 shares authorized, no shares
issued and outstanding .................................................... $ 0 $ 0
Common stock, $.01 par value, 100,000,000 shares authorized, 16,538,005 shares
issued (2000 - 14,512,083 shares outstanding; 1999 - 15,258,567 shares
outstanding) .............................................................. 166 165
Additional paid-in capital ................................................... 53,410 52,942
Retained earnings ............................................................ 335,031 328,897
Treasury stock, at cost (2000 - 2,025,922 shares; 1999 - 1,236,809 shares) .. (29,660) (19,249)
Stock purchase loans and unearned stock compensation ......................... (5,470) (4,934)
Accumulated other comprehensive income (loss) ................................ (38,545) (39,117)
---------- ----------
Total stockholders' equity .......................................... $ 314,932 $ 318,704
---------- ----------
Total liabilities and stockholders' equity .......................... $1,881,824 $1,837,158
========== ==========
</TABLE>
See accompanying notes
5
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THE MIIX GROUP, INCORPORATED
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------------------------
2000 1999
-------- --------
<S> <C> <C>
REVENUES
Net premiums earned ........................................................... $49,179 $45,581
Net investment income ......................................................... 21,479 17,387
Realized investment losses .................................................... (29) (504)
Other revenue ................................................................. 3,242 159
------- -------
Total revenues ........................................................... 73,871 62,623
------- -------
EXPENSES
Losses and loss adjustment expenses ........................................... 47,770 43,043
Underwriting expenses ......................................................... 9,833 9,319
Funds held charges ............................................................ 4,332 4,256
Other expenses ................................................................ 2,357 0
------- -------
Total expenses ........................................................... 64,292 56,618
------- -------
Income before income taxes .................................................... 9,579 6,005
Provision for income taxes .................................................... 2,725 1,399
------- -------
Net income ............................................................... $ 6,854 $ 4,606
======= =======
Basic earnings per share of common stock (1) .................................. $0.47 $0.38
===== =====
Diluted earnings per share of common stock (1) ................................ $0.47 $0.38
===== =====
Dividend per share of common stock ............................................ $0.05
=====
</TABLE>
(1) 1999 figures pro forma; see note 3.
See accompanying notes
6
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THE MIIX GROUP, INCORPORATED
CONSOLIDATED STATEMENT OF EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 2000
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
STOCK
PURCHASE
LOANS AND ACCUMULATED
NUMBER OF COMMON ADDITIONAL UNEARNED OTHER TOTAL
SHARES STOCK PAID-IN RETAINED TREASURY STOCK COMPREHENSIVE STOCKHOLDERS'
OUTSTANDING ISSUED CAPITAL EARNINGS STOCK COMPENSATION INCOME (LOSS) EQUITY
----------- ------ ---------- -------- -------- ------------ ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 2000...... 15,258,567 $165 $52,942 $328,897 $(19,249) $(4,934) $(39,117) $318,704
Net income.................... 6,854 6,854
Other comprehensive
income, net of tax:
Unrealized depreciation
on securities available-
for-sale, net of deferred
taxes.................... 572 572
Shares issued for execution
of stock purchase and loan
agreements................... 68,066 1 468 (536) (67)
Purchase of treasury stock.... (814,550) (10,411) (10,411)
Cash dividends to
stockholders................. (720) (720)
---------- ---- ------- -------- -------- ------- -------- --------
Balance at March 31, 2000....... 14,512,083 $166 $53,410 $335,031 $(29,660) $(5,470) $(38,545) $314,932
========== ==== ======= ======== ======== ======= ======== ========
</TABLE>
See accompanying notes
7
<PAGE> 8
THE MIIX GROUP, INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------------
2000 1999
-------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income ..................................................................... $ 6,854 $ 4,606
Adjustments to reconcile net income to net cash provided by operating activities
(net of balances acquired):
Unpaid losses and loss adjustment expenses ..................................... 3,817 20,971
Unearned premiums .............................................................. 70,962 88,005
Premium deposits ............................................................... (27,913) (28,392)
Premium receivable, net ........................................................ (5,018) 6,018
Reinsurance balances, net ...................................................... (2,450) 1,541
Deferred policy acquisition costs .............................................. (3,319) (3,773)
Realized losses ................................................................ 29 504
Depreciation, accretion and amortization ....................................... (810) 52
Deferred income tax provision .................................................. 1,234 (1,074)
Due from New Jersey State Medical Underwriters ................................. 0 (1,590)
Accrued investment income ...................................................... 178 220
Net investment in direct financing leases ...................................... (689) 0
Other assets ................................................................... 42,137 (8,630)
Other liabilities .............................................................. (5,703) (6,787)
-------- ---------
Net cash provided by operating activities ...................................... 79,309 71,671
-------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from fixed-maturity investment sales .................................. 25,204 236,999
Proceeds from fixed-maturity investments matured, called, or prepaid ........... 23,951 26,945
Proceeds from equity investment sales .......................................... 4,561 0
Cost of investments acquired ................................................... (56,217) (386,069)
Change in short-term investments, net .......................................... (68,278) (12,320)
Net receivable/payable for securities .......................................... 2,875 62,221
-------- ---------
Net cash used in investing activities .......................................... (67,904) (72,224)
CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of notes payable ..................................................... 386 0
Purchase of treasury stock ..................................................... (10,411) 0
Cash dividends to stockholders ................................................. (720) 0
-------- ---------
Net cash provided by financing activities ...................................... (10,745) 0
Net change in cash ............................................................. 660 (553)
Cash at beginning of period .................................................... 2,574 1,408
-------- ---------
Cash at end of period .......................................................... $ 3,234 $ 855
======== =========
</TABLE>
See accompanying notes
8
<PAGE> 9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts and
operations of The MIIX Group, Incorporated (the "MIIX Group") and its
wholly-owned subsidiaries, MIIX Insurance Company ("MIIX"), which assumed all of
the residual assets and liabilities and ongoing business of Medical
Inter-Insurance Exchange of New Jersey (the "Exchange") in the reorganization of
the Exchange, Lawrenceville Holdings, Inc. ("LHI"), Lawrenceville Property and
Casualty Company ("LP&C"), MIIX Insurance Company of New York ("MIIX New York")
and, from August 4, 1999, New Jersey State Medical Underwriters, Inc. and its
wholly-owned subsidiaries (the "Underwriter"), collectively (the "Company").
However, they have been prepared in accordance with accounting principles
generally accepted in the United States for interim financial information and in
the opinion of management, such information reflects all adjustments considered
necessary for a fair presentation. Such adjustments are of a normal recurring
nature. Operating results for the interim period are not necessarily indicative
of the results to be expected for the full year.
These consolidated financial statements and notes should be read in conjunction
with the audited consolidated financial statements and notes of the Company for
the year ended December 31, 1999 which were filed with the Securities and
Exchange Commission on Form 10-K.
2. STOCK BASED COMPENSATION
The Company accounts for its stock-based compensation in accordance with APB
Opinion No. 25, Accounting for Stock Issued to Employees (APB 25) and related
interpretations. The Company's policy regarding stock options is to issue
options with an exercise price equal to the market price on the date of grant.
Under APB 25 no compensation expense is recognized given the Company's policy.
During the first quarter ended March 31, 2000, certain executive officers and
employees have been granted a total of 215,661 options to purchase shares of The
MIIX Group common stock with exercise prices ranging from $11.3125 to $13.9375,
of which 56,811 options were immediately exercisable. Pursuant to stock purchase
and loan agreements, The MIIX Group loaned certain officers of the Company
approximately $770,000 during the period ended March 31, 2000, which the
officers used to purchase unregistered shares of The MIIX Group common stock at
market price.
3. EARNINGS PER SHARE
Earnings per share for the three-month period ended March 31, 2000 is computed
using the weighted-average number of common shares outstanding during this
period of 14,648,397 for basic and 14,666,572 for diluted. Basic and diluted
earnings per share for the period ended March 31, 1999 gives effect to the
reorganization and the allocation of approximately 12,025,000 shares of common
stock distributed to MIIX members.
The following table sets forth the computation of basic and diluted earnings per
share:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------------
2000 1999
------- -------
(in thousands)
<S> <C> <C>
Numerator for basic and diluted earnings per share of common stock:
Net income ................................................................ $ 6,854 $ 4,606
Numerator for:
Basic earnings per share of common stock .................................. $ 6,854 $ 4,606
Diluted earnings per share of common stock ................................ $ 6,854 $ 4,606
Denominator:
Denominator for basic earnings per share of common stock - weighted-average
shares outstanding ........................................................ 14,648 12,025
Effect of dilutive securities:
Stock options and nonvested restricted stock .............................. 19 0
------- -------
Denominator for diluted earnings per share of common stock adjusted -
weighted-average shares outstanding ....................................... 14,667 12,025
Basic earnings per share of common stock ....................................... $ 0.47 $ 0.38
======= =======
Diluted earnings per share of common stock ..................................... $ 0.47 $ 0.38
======= =======
</TABLE>
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4. COMPREHENSIVE INCOME
The Company has classified its entire investment portfolio as available-for-sale
and had unrealized gains (losses) at March 31, 2000 and December 31, 1999 that
are reflected as accumulated other comprehensive loss in the Consolidated
Statement of Equity and Consolidated Balance Sheet.
The components of comprehensive income (loss), net of related tax, for the
periods ended March 31, 2000 and 1999 are as follows:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------------
2000 1999
------ --------
(in thousands)
<S> <C> <C>
Net income ....................................................................... $6,854 $ 4,606
Other comprehensive income:
Unrealized holding appreciation (depreciation) arising during the period (net of
tax of $298 and $(5,598), respectively) ..................................... 553 (10,397)
Reclassification adjustment for losses realized in net income (net of tax of
$10 and $176, respectively) ................................................. 19 328
------ --------
Net unrealized appreciation (depreciation) arising during the period at March
31, (net of tax of $308 and $(5,421), respectively) ......................... 572 (10,069)
====== ========
Comprehensive income (loss) ...................................................... $7,426 $ (5,463)
====== ========
</TABLE>
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 three months ended March 31,
2000 and 1999.
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------
2000 1999
------- -------
(in thousands)
<S> <C> <C>
Balance at beginning of period ................................................ $ 3,165 $ 2,810
Cost deferred during the period ............................................... 6,015 6,884
Amortization expense .......................................................... (2,696) (3,111)
------- -------
Balance at end of period ...................................................... $ 6,484 $ 6,583
======= =======
</TABLE>
6. INCOME TAXES
A reconciliation of income tax computed based on the expected annual effective
federal statutory tax rate to total income tax expense for the periods ended
March 31, 2000 and 1999 are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
------------------------------------------------------------------
2000 1999
----------------------------- -----------------------------
% OF INCOME % OF INCOME
INCOME TAX BEFORE INCOME TAX BEFORE
EXPENSE INCOME TAXES EXPENSE INCOME TAXES
---------- ------------ ---------- ------------
(in thousands) (in thousands)
<S> <C> <C> <C> <C>
Expected annual effective federal
income tax at 35% .............. $3,353 35.0% $2,102 35.0%
Decrease in taxes resulting from:
Tax-exempt interest ......... (622) (6.5%) (670) (11.2%)
Other ....................... (6) (0.1%) (33) (0.5%)
Total income taxes .............. $2,725 28.4% $1,399 23.3%
====== ==== ====== =====
</TABLE>
7. RECLASSIFICATION
Certain amounts have been reclassified for the prior years to be comparable to
the 2000 presentation.
10
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ITEM 2. 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 in Item 1 in this Form 10-Q.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2000 COMPARED TO THE THREE MONTHS ENDED MARCH 31,
1999
Net premiums earned. Net premiums earned increased approximately $3.6 million,
or 7.9% to $49.2 million for the three months ended March 31, 2000 from $45.6
million for the three months ended March 31, 1999. This increase is mainly
attributable to increased direct, assumed and ceded premiums earned of $1.6
million, $3.3 million and $1.3 million, respectively, in the three months ended
March 31, 2000. Direct premiums earned reflect the growth in written premium
during the last nine months of 1999 offset somewhat by the drop in premiums
written in first quarter 2000. Assumed premiums earned primarily relate to an
excess of loss account written on a large institutional account written during
the third quarter of 1999. The increase in ceded premiums earned largely
resulted from ceded activity under the Company's aggregate reinsurance contracts
and was the net result of three factors during the quarter. First, ceded
premiums increased as the result of growth in direct premiums earned on policies
written in years prior to 2000. Second, there were additional ceded premiums of
$1.4 million in the first quarter 2000 under aggregate excess reinsurance
contracts associated with net loss and loss adjustment expense reserve
strengthening of $3.0 million during first quarter 2000. Third, ceded premium
associated with premiums written in the first quarter 2000 declined as the
result of a change to the aggregate reinsurance program that limited subject
business of the aggregate reinsurance contract effective November 1, 1999 to
principally occurrence form physician business.
Total premiums written were $128.8 million for the three months ended March 31,
2000, a decrease of $12.9 million, or 9.1% from total premiums written of $141.6
million for the three months ended March 31, 1999. This decrease is primarily
due to net decreases in New Jersey and Pennsylvania business of $26.0 million
and $4.5 million, respectively. These declines followed significant selected
rate increases effective January 1, 2000 and intense price pressure that the
Company was unwilling to match in each of these markets, and were offset
somewhat by net premium growth in expansion states of $3.8 million, and by
increased assumed premiums written of $13.8 million. The increase in assumed
premium was primarily due to continuation of the excess of loss reinsurance
contract first written during the third quarter of 1999.
Net investment income. Net investment income increased approximately $4.1
million or 23.5% to $21.5 million for the three months ended March 31, 2000 from
$17.4 million for the same period in 1999. Average invested assets at amortized
cost increased to approximately $1.28 billion for the three months ended March
31, 2000 compared to approximately $1.22 billion for the same period last year.
The average annualized pre-tax yield on the investment portfolio increased to
6.75% for the three months ended March 31, 2000 from 5.77% for the same period
in 1999 primarily as a result of changes in asset allocation with an increased
concentration in higher pre-tax yielding securities in an increasing market
yield environment.
Realized investment losses. Net realized investment losses were $29,000
for the three months ended March 31, 2000 compared to net realized investment
losses of $0.5 million for the same period in 1999. In both periods, the losses
were principally due to sales of fixed-maturity investments to reposition the
investment portfolio in an increasing market yield environment.
Other revenue. Other revenue increased approximately $3.1 million to $3.2
million for the three months ended March 31, 2000 from $0.1 million for the same
period last year. The increase in 2000 consists primarily of $2.9 million of
revenues associated with the leasing, brokerage and other businesses acquired by
the Company in the acquisition of New Jersey State Medical Underwriters, Inc.
and its subsidiaries on August 4, 1999.
Loss and loss adjustment expense (LAE). The provision for losses and LAE
increased $4.7 million, or 11%, to $47.8 million for the three months ended
March 31, 2000 from $43.0 million for the three months ended March 31, 1999. The
provision for losses and LAE is net of ceded losses and LAE of $16.2 million and
$12.7 million for the three months ended March 31, 2000 and 1999, respectively.
The ratio of net losses and LAE to net premiums earned increased to 97.1% for
the three months ended March 31, 2000 from 94.4% for the same period in 1999.
This increase was principally attributable to a net increase in loss and LAE
reserves held on 1998 and prior accident years somewhat offset by an increasing
portion of the Company's expansion business being
11
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written on a claims made basis which is expected to result in a lower ultimate
loss and LAE ratio. The changes in loss and LAE reserves were as follows: gross
loss and LAE reserves were increased by $ 3 million, ceded loss and LAE reserves
were increased by $3 million, and ceded premiums earned were increased by $1.4
million. Gross loss and LAE reserves were reduced by $0.8 million, ceded loss
and LAE reserves were reduced by $1.6 million, and ceded earned premiums were
reduced by $0.4 million for the three months ended March 31, 1999.
The Company converted its claims information system during the fourth quarter
1999. In addition, changes in claim department responsibilities occurred in the
first four months of 2000. Claims case reserving and settlement trends may have
been disrupted during this period and there may be a continuing impact as claim
department staff adjust to use of the new system and to differences in
management approach. The Company is currently evaluating the impact, if any, the
system conversion and management changes may have had during this period, and
may continue to have in the future, on case reserving and claim settlement
trends. Further, certain of the Company's competitors in the medical malpractice
market have recently reported changes in release of prior year loss and loss
adjustment expense reserves due to adverse market conditions. While the Company
continues to believe its reserves for losses and loss adjustment expense are
adequate, there is additional uncertainty in the reserves at this time given
these recent events.
Underwriting expenses. Underwriting expenses increased $.5 million or 5.5% to
$9.8 million for the three months ended March 31, 2000, from $9.3 million for
the three months ended March 31, 1999. The increase in expenses was largely
attributable to increased guarantee fund charges recognized in the three months
ended March 31, 2000. The ratio of underwriting expenses to net premiums earned,
however, declined to 20.0% for the three months ended March 31, 2000 from 20.4%
for the same period in 1999. This improvement was primarily the result of the
Company's expense management efforts.
Funds held charges. Funds held charges relate to the Company's aggregate
reinsurance contracts and increased $.1 million or 1.8% to $4.3 million for the
three months ended March 31, 2000, from $4.2 million for the three months ended
March 31, 1999. Funds held charges are calculated based upon beginning of
quarter funds held balances.
Other expenses. Other expenses amounted to $2.4 million for the three months
ended March 31, 2000 and primarily consist of the costs associated with the
leasing, brokerage and other businesses acquired by the Company in the
acquisition of New Jersey State Medical Underwriters, Inc. and its subsidiaries
on August 4, 1999.
Income taxes. Income taxes were $2.7 million for the three months ended March
31, 2000, resulting in an effective tax rate of 28.4%, compared to $1.4 million
and an effective tax rate of 23.3% for the same period in 1999. The increased
effective tax rate was primarily attributable to a reduced proportion of tax
exempt municipal bond income to total pre-tax income in the three months ended
March 31, 2000.
Net income. Net income increased by $2.3 million or 49% to $6.9 million for the
three months ended March 31, 2000, from $4.6 million for the three months ended
March 31, 1999.
FINANCIAL CONDITION
Cash and invested assets. Aggregate invested assets at fair value, including
cash and short term investments, were $1,258.3 million at March 31, 2000 and
$1,185.5 million at December 31, 1999. The net increase of $72.8 million largely
resulted from the net effect of positive cash flows from operations, including
receipt of $34.1 million on surrender of company-owned life insurance policies,
and net appreciation of investments somewhat offset by cash outflows to purchase
treasury stock and pay cash dividends to stockholders during the period.
Fixed maturities available for sale at fair value, including short-term
investments, were $ 1,246.6 million, or 99.3% of the investment portfolio of the
Company as of March 31, 2000. At that date, the average credit quality of the
fixed income portfolio was "AA," as defined by Standard & Poor's, while the
total portfolio effective duration (excluding short-term investments) was 5.41
years.
Unpaid losses and LAE, reinsurance recoverable on unpaid losses and LAE and
funds held under reinsurance treaties. Gross unpaid losses and LAE were $1,057.4
million at March 31, 2000 and $1,053.6 million at December 31, 1999. Reinsurance
recoverable on unpaid losses and LAE was $421.0 million at March 31, 2000 and
$406.4 million at December 31, 1999. Funds held under reinsurance treaties,
which are unrestricted,
12
<PAGE> 13
collateralize a significant portion of reinsurance recoverable on unpaid losses
and LAE and were $273.6 million at March 31, 2000, and $271.6 million at
December 31, 1999. The increases in these amounts were consistent with the
continued growth in the Company's book of business.
Equity. Total equity was $314.9 million at March 31, 2000 and $318.7 million at
December 31, 1999. The net decrease was primarily attributable to net income of
$6.9 million and unrealized net appreciation of investments of $0.6 million;
offset in part primarily by the following: the purchase of $10.4 million of
treasury stock; and $0.7 million of cash dividends paid to stockholders.
LIQUIDITY AND CAPITAL RESOURCES
The MIIX Group, Incorporated. The MIIX Group is a holding company whose only
material assets are the capital stock of MIIX Insurance Company, a New Jersey
stock insurer ("MIIX Insurance"), and the New Jersey State Medical Underwriters,
Inc., a New Jersey corporation, and cash and investments resulting from the net
proceeds of a public offering conducted during 1999. The MIIX Group's ongoing
cash flow will consist primarily of investment income on its holdings and
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 is 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 any year 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.
MIIX Insurance. The primary sources of MIIX Insurance's liquidity, on both a
short and long-term basis, are funds provided by insurance premiums collected,
net investment income, recoveries from reinsurance and proceeds from the
maturity or sale of invested assets. Such funds are generally used to pay
claims, LAE, operating expenses, reinsurance premiums and taxes. The Company's
net cash flows from operating activities was approximately $79.3 million and
$71.7 million for the three months ended March 31, 2000 and 1999 and $76.8
million for the year ended 1999. Because of the inherent unpredictability
related to the timing of the payment of claims, it is not unusual for cash flows
from operations for a medical malpractice insurance company to vary, perhaps
substantially, from period to period.
The Company held collateral of $273.6 million at March 31, 2000 and $271.6 at
December 31, 1999, 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 $60 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 7.5% to
8.6%, which is recorded as an expense in the year incurred.
The Company invests substantially all of its positive cash flow from operations
in fixed maturity securities. The current investment strategy seeks to maximize
after-tax income through a high quality, diversified, duration sensitive,
taxable bond and tax-preferenced municipal bond portfolio, while maintaining an
adequate level of liquidity.
Based on historical trends, market conditions and its business plans, the
Company believes that its sources of funds will be sufficient to meet its
liquidity needs over the next 18 months and beyond. However, because economic,
market, and regulatory conditions may change, there can be no assurance that the
Company's funds will be sufficient to meet these liquidity needs.
13
<PAGE> 14
RECENT DEVELOPMENTS
In April 2000, the Company received a commitment from Amboy National Bank to
provide a revolving line of credit in the amount of $20 million. The Company
expects to finalize the revolving line of credit agreement during the second
quarter.
YEAR 2000
Because certain computer software programs have historically been designed to
use a two-digit code to identify the year for date-sensitive material, such
programs may not properly recognize post-twentieth century dates. This could
result in system failures and improper information processing that could disrupt
the Company's business operations.
The Company began evaluating this issue in 1996 in connection with an overall
evaluation of the Company's systems and during 1997 assigned a project manager
to study the Company's information systems and computers to determine whether
they will appropriately handle post-1999 date codes. The identification of
compliance issues included the Company's internal systems and processes, as well
as exposure from service providers, brokers and other external business
partners. Software applications, hardware and information technology ("I/T")
infrastructure and non I/T systems such as the Company's telephone, security and
heating and ventilating systems have been reviewed to identify those requiring
upgrading or replacement to improve current computing capabilities and to ensure
that they are Year 2000 compliant. In the course of evaluating the Year 2000
readiness of its internal systems, the Company determined that its claims
administration system was not Year 2000 compliant. The Company has purchased a
replacement system that the vendor has represented to be Year 2000 compliant
which is now operational. The Company has also determined that its telephone
equipment was not Year 2000 compliant and has upgraded its telephone equipment
to make it Year 2000 compliant.
Management completed the development of alternative Year 2000 contingency plans
during 1999. Such plans would most likely involve the assignment of internal and
external resources to process business manually during the period of any
non-compliance. The plans remain available should Year 2000 difficulties develop
at some point in the future.
The Company completed its Year 2000 review, identification and remediation
process during 1999 at a total cost of less than $500,000. No Year 2000
difficulties related to internal systems or the systems of service providers and
other external business partners were encountered during the three months ended
March 31, 2000. The Company, however, may still be adversely impacted to the
extent Year 2000 difficulties result in claims being made against the Company's
insureds. The Company's liability for such claims, if any, is not clearly
established. To date, the Company is unaware of any such claims.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in the reported market risks since the end
of the most recent fiscal year as described in the Company's Annual Report on
Form 10-K for the year ended December 31, 1999.
14
<PAGE> 15
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
ACTIONS OPPOSING THE PLAN OF REORGANIZATION
The description of Legal Proceedings in the Company's Annual Report on Form 10-K
for the year ended December 31, 1999, as amended, is incorporated herein by
reference. Since December 31, 1999 there have been no actions requiring
amendment to this description.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
From January 1, 2000, through May 5, 2000, approximately $10.9 million of the
net proceeds of the Company's initial public offering was used to purchase an
additional .8 million shares of treasury stock. The balance has been
incorporated into the Company's invested assets. None of the net proceeds of the
Offering were paid by the Company, directly or indirectly, to any director,
officer or general partner of the Company or any of their associates, or to any
persons owning 10% or more of any class of the Company's equity securities, or
any affiliates of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The MIIX Group's annual meeting of shareholders was held on May 5, 2000, at
which time the following directors were elected by the shareholders of The MIIX
Group, to serve as Class II directors for a term expiring at the Annual Meeting
of shareholders to be held in 2003: Harry M. Carnes, M.D., Vincent A. Maressa,
Esq. and Bessie M. Sullivan, M.D. The terms of the following directors continued
after such meeting: Angelo S. Agro, M.D., Paul J. Hirsch, M.D., Kenneth Koreyva,
A. Richard Miskoff, D.O., Eileen Marie Moynihan, M.D., Carl Restivo, Jr., M.D.,
Gabriel F. Sciallis, M.D. and Martin L. Sorger, M.D.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
The following exhibits are filed herewith:
15 Acknowledgement of Independent Accountants
27.1 Financial Data schedule.
b. Reports on Form 8-K
No reports on Form 8-K were filed during the first quarter of
2000.
15
<PAGE> 16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.
THE MIIX GROUP, INCORPORATED
By: /s/ Kenneth Koreyva
--------------------------------------------
President and Chief Executive Officer
(principal executive officer)
By: /s/ Thomas M. Redman
--------------------------------------------
Chief Financial Officer
(principal financial and accounting officer)
DATED: MAY 15, 2000
16
<PAGE> 17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.
THE MIIX GROUP, INCORPORATED
By:
--------------------------------------------
Kenneth Koreyva
President and Chief Executive Officer
(principal executive officer)
By:
--------------------------------------------
Thomas M. Redman
Chief Financial Officer
(principal financial and accounting officer)
DATED: MAY 15, 2000
17
<PAGE> 1
EXHIBIT 15
ACKNOWLEDGMENT OF INDEPENDENT ACCOUNTANTS
Board of Directors
The MIIX Group, Incorporated
We are aware of the incorporation by reference in the Registration Statement
(Form S-8) of the MIIX Group, Incorporated, pertaining to the 1998 Long Term
Incentive Equity Plan of the MIIX Group, Incorporated, of our report dated May
5, 2000 relating to the unaudited consolidated interim financial statements of
the MIIX Group, Incorporated and subsidiaries included in this Form 10-Q filed
on May 15, 2000 for the quarter ended March 31, 2000.
ERNST & YOUNG LLP
New York, New York
May 5, 2000
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE AUDITED
FINANCIAL STATEMENTS CONTAINED IN FORM 10-K OF WHICH THIS SCHEDULE FORMS A PART
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
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