<PAGE> 1
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 JUNE 30, 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)
<TABLE>
<S> <C>
DELAWARE 22-3586492
(State or other jurisdiction of incorporation or (I.R.S. employer identification number)
organization)
</TABLE>
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 August 8, 2000, the number of outstanding shares of the
Registrant's Common Stock was 13,992,207.
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TABLE OF CONTENTS
<TABLE>
<S> <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............. 12
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK........................................ 17
PART II OTHER INFORMATION................................................................................. 18
ITEM 1. LEGAL PROCEEDINGS................................................................................. 18
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS......................................................... 18
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............................................... 18
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.................................................................. 18
SIGNATURES ............................................................................................... 19
</TABLE>
2
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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 June 30, 2000, and the related consolidated
statements of income for the three and six month periods ended June 30, 2000 and
1999, and the consolidated statements of cash flows for the six month periods
ended June 30, 2000 and 1999 and the consolidated statement of equity for the
six month period ended June 30, 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 as of December 31, 1999 and 1998, and the
related consolidated statements of income, stockholders' 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 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
August 2, 2000
4
<PAGE> 5
THE MIIX GROUP, INCORPORATED
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
----------- -----------
2000 1999
----------- -----------
ASSETS (Unaudited)
<S> <C> <C>
Securities available-for-sale:
Fixed-maturity investments, at fair value (amortized cost: 2000 -
$1,148,949; 1999 - $1,131,931) ............................................... $ 1,093,613 $ 1,077,806
Equity investments, at fair value (cost: 2000 - $8,138; 1999 - $13,169) ........ 6,121 12,394
Short-term investments, at cost which approximates fair value .................. 113,172 92,743
----------- -----------
Total investments ........................................................ 1,212,906 1,182,943
----------- -----------
Cash .............................................................................. 631 2,574
Accrued investment income ......................................................... 15,012 14,319
Premium receivable, net ........................................................... 14,282 17,920
Reinsurance recoverable on unpaid losses .......................................... 426,653 406,409
Prepaid reinsurance premiums ...................................................... 7,686 27,646
Reinsurance recoverable on paid losses, net ....................................... 1,997 236
Deferred policy acquisition costs ................................................. 4,881 3,165
Deferred income taxes ............................................................. 74,652 69,733
Receivable for securities ......................................................... 5,076 0
Net investment in direct financing leases ......................................... 25,985 25,522
Other assets ...................................................................... 45,911 86,691
----------- -----------
Total assets ............................................................. $ 1,835,672 $ 1,837,158
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Unpaid losses and loss adjustment expenses ........................................ $ 1,129,432 $ 1,053,597
Unearned premiums ................................................................. 102,685 75,433
Premium deposits .................................................................. 0 27,913
Funds held under reinsurance treaties ............................................. 289,762 271,637
Payable for securities ............................................................ 4,000 205
Notes Payable and other borrowings ................................................ 15,667 16,461
Other liabilities ................................................................. 35,558 73,208
----------- -----------
Total liabilities ........................................................ $ 1,577,104 $ 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 - 14,002,282 shares outstanding; 1999 - 15,258,567 shares
outstanding) ................................................................... 166 165
Additional paid-in capital ........................................................ 53,711 52,942
Retained earnings ................................................................. 286,366 328,897
Treasury stock, at cost (2000 - 2,535,723 shares; 1999 - 1,236,809 shares) ........ (35,325) (19,249)
Stock purchase loans and unearned stock compensation .............................. (5,846) (4,934)
Accumulated other comprehensive income/(loss) ..................................... (40,504) (39,117)
----------- -----------
Total stockholders' equity ............................................... $ 258,568 $ 318,704
----------- -----------
Total liabilities and stockholders' equity ............................... $ 1,835,672 $ 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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------- --------------------------
2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
REVENUES
Net premiums earned .................................... $ 30,747 $ 45,906 $ 79,926 $ 91,487
Net investment income .................................. 20,902 18,348 42,381 35,735
Realized investment losses ............................. (568) (2,928) (597) (3,432)
Other revenue .......................................... 1,884 114 5,126 273
--------- --------- --------- ---------
Total revenues .................................... 52,965 61,440 126,836 124,063
EXPENSES
Losses and loss adjustment expenses .................... 118,153 43,176 165,923 86,219
Underwriting expenses .................................. 9,304 10,260 19,137 19,579
Funds held charges ..................................... (570) 2,405 3,762 6,661
Other expenses ......................................... 1,214 0 3,571 0
Restructuring charge ................................... 0 2,409 0 2,409
--------- --------- --------- ---------
Total expenses .................................... 128,101 58,250 192,393 114,868
--------- --------- --------- ---------
Income/(loss) before income taxes ...................... (75,136) 3,190 (65,557) 9,195
Income tax provision/(benefit) ......................... (27,168) 296 (24,443) 1,695
--------- --------- --------- ---------
Net income/(loss) ................................. $ (47,968) $ 2,894 $ (41,114) $ 7,500
========= ========= ========= =========
Basic earnings/(loss) per share of common .............. `
stock (1) .............................................. $ (3.37) $ 0.24 $ (2.85) $ 0.62
Diluted earnings/(loss) per share of common stock(1) ... $ (3.36) $ 0.24 $ (2.84) $ 0.62
Dividend per share of common stock ..................... $ 0.05 $ 0.10
========= =========
</TABLE>
(1) 1999 figures pro forma; see Note 4
See accompanying notes
6
<PAGE> 7
THE MIIX GROUP, INCORPORATED
CONSOLIDATED STATEMENT OF EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 2000
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
NUMBER OF COMMON ADDITIONAL
SHARES STOCK PAID-IN RETAINED
OUTSTANDING ISSUED CAPITAL EARNINGS
---------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Balance at January 1, 2000 ............... 15,258,567 $ 165 $ 52,942 $ 328,897
Net loss ............................... (41,114)
Other comprehensive
income/(loss), net of tax:
Unrealized depreciation
on securities available-
for-sale, net of deferred taxes ...
Shares issued for execution
of stock purchase and loan
agreements ............................ 68,066 1 769
Purchase of treasury stock ............. (1,324,351)
Cash dividends to
stockholders .......................... (1,417)
---------- ------------- ------------- -------------
Balance at June 30, 2000 ................. 14,002,282 $ 166 $ 53,711 $ 286,366
========== ============= ============= =============
</TABLE>
<TABLE>
<CAPTION>
STOCK
PURCHASE
LOANS AND ACCUMULATED
UNEARNED OTHER TOTAL
TREASURY STOCK COMPREHENSIVE STOCKHOLDERS'
STOCK COMPENSATION INCOME/(LOSS) EQUITY
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Balance at January 1, 2000 ............... $ (19,249) $ (4,934) $ (39,117) $ 318,704
Net loss ............................... (41,114)
Other comprehensive
income/(loss), net of tax:
Unrealized depreciation
on securities available-
for-sale, net of deferred taxes ... (1,387) (1,387)
Shares issued for execution
of stock purchase and loan
agreements ............................ (912) (142)
Purchase of treasury stock ............. (16,076) (16,076)
Cash dividends to
stockholders .......................... (1,417)
------------- ------------- ------------- -------------
Balance at June 30, 2000 ................. $ (35,325) $ (5,846) $ (40,504) $ 258,568
============= ============= ============= =============
</TABLE>
See accompanying notes
7
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THE MIIX GROUP, INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
--------------------------
2000 1999
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income/(loss) .................................................................. $ (41,114) $ 7,500
Adjustments to reconcile net income to net cash provided by operating activities
(net of balances acquired):
Unpaid losses and loss adjustment expenses ......................................... 75,835 27,084
Unearned premiums .................................................................. 27,252 46,442
Premium deposits ................................................................... (27,913) (28,392)
Premium receivable, net ............................................................ 3,638 9,535
Reinsurance balances, net .......................................................... 16,080 825
Deferred policy acquisition costs .................................................. (1,716) (2,245)
Realized losses .................................................................... 597 3,432
Depreciation, accretion and amortization ........................................... (1,781) (291)
Deferred income tax provision ...................................................... (3,988) (1,756)
Due from New Jersey State Medical Underwriters ..................................... 0 (939)
Accrued investment income .......................................................... (693) 943
Net investment in direct financing leases .......................................... (463) 0
Other assets ....................................................................... 40,780 (5,625)
Other liabilities .................................................................. (37,650) (8,702)
--------- ---------
Net cash provided by operating activities .......................................... 48,864 47,811
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from fixed-maturity investment sales ...................................... 49,700 658,879
Proceeds from fixed-maturity investments matured, called, or prepaid ............... 44,972 53,028
Proceeds from equity investment sales .............................................. 5,608 0
Cost of investments acquired ....................................................... (111,086) (732,945)
Change in short-term investments, net .............................................. (20,430) (4,854)
Net receivable/(payable) for securities ............................................ (1,281) (22,989)
--------- ---------
Net cash used in investing activities .............................................. (32,517) (48,881)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of notes payable and other borrowings .................................... (794) 0
Purchase of treasury stock ......................................................... (16,076) 0
Cash dividends to stockholders ..................................................... (1,417) 0
Subordinated loan certificates redeemed ............................................ (3) (8)
--------- ---------
Net cash used in financing activities .............................................. (18,290) (8)
--------- ---------
Net change in cash ................................................................. (1,943) (1,078)
Cash at beginning of period ........................................................ 2,574 1,408
--------- ---------
Cash at end of period .............................................................. $ 631 $ 330
========= =========
</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 the 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"). The
consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States for interim
financial information and in the opinion of management, reflect 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. BORROWING ARRANGEMENTS
On April 7, 2000, the Company obtained a $20.0 million revolving credit facility
with Amboy National Bank to meet certain non-operating cash needs as they may
arise. The credit facility terminates April 7, 2002 and bears a fixed interest
rate of 8.0% per annum. As of June 30, 2000 the Company had borrowed
approximately $4.0 million against the credit facility. No interest was paid
during 2000.
3. 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 six months ended June 30, 2000, certain executive officers and
employees were 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, and 13,501 options were
subsequently cancelled. During 2000, no options were exercised. Pursuant to
stock purchase and loan agreements, The MIIX Group loaned certain officers of
the Company approximately $770,000 during the period ended June 30, 2000, which
the officers used to purchase unregistered shares of The MIIX Group common stock
at market price.
4. EARNINGS/(LOSS) PER SHARE
Earnings/(loss) per share for the three and six month periods ended June 30,
2000 is computed using the weighted-average number of common shares outstanding
during those periods of 14,252,255 and 14,450,326, respectively. Basic and
diluted earnings/(loss) per share for the three and six month periods ended June
30, 1999 gives effect to the reorganization and the allocation of approximately
12,025,000 shares of common stock distributed to the Exchange's members.
9
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The following table sets forth the computation of basic and diluted
earnings/(loss) per share:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
2000 1999 2000 1999
-------- -------- -------- --------
(in thousands) (in thousands)
<S> <C> <C> <C> <C>
Numerator for basic and diluted earnings/(loss) per
share of common stock:
Net income/(loss) ................................... $(47,968) $ 2,894 $(41,114) $ 7,500
Denominator:
Denominator for basic earnings/(loss) per share
of common stock - weighted-average shares of
outstanding ......................................... 14,252 12,025 14,450 12,025
Effect of dilutive securities:
Stock options and nonvested restricted stock ........ 20 0 20 0
-------- -------- -------- --------
Denominator for diluted earnings/(loss) per share
of common stock adjusted - weighted-average ......... 14,272 12,025 14,470 12,025
Basic earnings/(loss) per share of common stock .......... $ (3.37) $ 0.24 $ (2.85) $ 0.62
======== ======== ======== ========
Diluted earnings/(loss) per share of common stock ........ $ (3.36) $ 0.24 $ (2.84) $ 0.62
======== ======== ======== ========
</TABLE>
5. COMPREHENSIVE INCOME/(LOSS)
The Company has classified its entire investment portfolio as available-for-sale
and had unrealized gains/(losses) at June 30, 2000 and December 31, 1999 that
are reflected as accumulated other comprehensive income/(loss) in the
Consolidated Statement of Equity and Consolidated Balance Sheets.
The components of comprehensive income/(loss), net of related tax, for the
periods ended June 30, 2000 and 1999 are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------ ------------------------
2000 1999 2000 1999
-------- -------- -------- --------
(in thousands) (in thousands)
<S> <C> <C> <C> <C>
Net income/(loss) .................................... $(47,968) $ 2,894 $(41,114) $ 7,500
Other comprehensive income/(loss):
Unrealized holding appreciation/(depreciation)
arising during period (net of tax of $(1,254),
$(9,979), $(956) and $(15,578) respectively) ......... (2,328) (18,533) (1,775) (28,930)
Reclassification adjustment for (gains)/losses
realized in net income/(loss) (net of tax of $199,
$1,025, $209 and $1,201, respectively) ............... 369 1,903 388 2,231
-------- -------- -------- --------
Net unrealized appreciation/(depreciation) arising
during the period ended June 30 (net of tax of
$(1,055), $(8,954), $(747) and $(14,376),
respectively) ........................................ (1,959) (16,630) (1,387) (26,699)
-------- -------- -------- --------
Comprehensive income/(loss) .......................... $(49,927) $(13,736) $(42,501) $(19,199)
======== ======== ======== ========
</TABLE>
10
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6. 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, 2000
and 1999.
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
--------------------------
2000 1999
------- -------
(in thousands)
<S> <C> <C>
Balance at beginning of period ........... $ 3,165 $ 2,810
Cost deferred during the period .......... 7,412 8,195
Amortization expense ..................... (5,696) (5,950)
------- -------
Balance at end of period ................. $ 4,881 $ 5,055
======= =======
</TABLE>
7. RESTRUCTURING CHARGE
The Company undertook a restructuring during the second quarter of 1999 and on
June 23 announced the reduction of regional and home office staff and the
closing of regional offices in Boston and Atlanta to centralize their functions
at the Company's home office. The Company recognized a pre-tax charge in the
second quarter of 1999 related to this restructuring of $2.4 million. No similar
event occurred during the period ended June 30, 2000.
8. INCOME TAXES
A reconciliation of income tax computed based on the expected annual effective
federal statutory tax rate to total income tax expense/(benefit) for the periods
ended June 30, 2000 and 1999 are as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
---------------------------------------------------------------
2000 1999
------------------------------ -----------------------------
% OF INCOME % OF INCOME
BEFORE BEFORE
INCOME TAXES INCOME TAXES INCOME TAXES INCOME TAXES
-------------- ------------ ------------ ------------
(in thousands) (in thousands)
<S> <C> <C> <C> <C>
Expected annual effective federal
income tax expense/(benefit)
at 35% ............................ $(22,945) (35.0)% $ 3,218 35.0%
Decrease in taxes resulting from:
Tax-exempt interest ............... (1,224) (1.9)% (1,262) (13.7%)
Other ............................. (274) (0.4)% (261) (2.8%)
-------- ---- -------- ----
Total income tax expense/(benefit) ... $(24,443) (37.3)% $ 1,695 18.5%
======== ===== ======== ====
</TABLE>
9. RECLASSIFICATION
Certain amounts have been reclassified for the prior years to be comparable to
the 2000 presentation.
11
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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 JUNE 30, 2000 COMPARED TO THE THREE MONTHS ENDED JUNE 30,
1999
Net premiums earned. Net premiums earned were $30.7 million for the three months
ended June 30, 2000, a decrease of approximately $15.2 million, or 33.0%, from
$45.9 million for the three months ended June 30, 1999. This net decrease
consists of increased direct, assumed and ceded premiums earned of $1.1 million,
$3.3 million and $19.6 million, respectively, in the three months ended June 30,
2000. Direct premiums earned reflect the growth in direct premiums written
during the last six months of 1999 offset somewhat by the drop in direct
premiums written in the first quarter 2000. Assumed premiums earned primarily
relate to an excess of loss contract written on a large institutional account
during the third quarter of 1999 and continuing through 2000. The increase in
ceded premiums earned largely resulted from additional ceded losses incurred
under the Company's aggregate reinsurance contracts of $19.9 million associated
with reserve strengthening that occurred at June 30, 2000.
Total premiums written were $15.7 million for the three months ended June 30,
2000, an increase of $3.1 million, or 24.3%, from total premiums written of
$12.6 million for the three months ended June 30, 1999. This increase consisted
of a net increase in direct premiums written in New Jersey and Pennsylvania of
$2.9 million and $0.9 million, respectively. The increase in New Jersey was
largely the result of new business while the increase in Pennsylvania was
largely the result of rate increases taken. Written premiums in other states
decreased by $0.7 million, primarily as the net result of rate increases and
re-underwriting efforts.
Net investment income. Net investment income increased approximately $2.6
million, or 13.9%, to $20.9 million for the three months ended June 30, 2000
from $18.3 million for the same period in 1999. Average invested assets at
amortized cost increased to approximately $1.28 billion for the three months
ended June 30, 2000 compared to approximately $1.23 billion for the same period
last year. The average annualized pre-tax yield on the investment portfolio
increased to 6.48% for the three months ended June 30, 2000 from 6.05% 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 a generally
increasing market yield environment.
Realized investment losses. Net realized investment losses decreased
approximately $2.3 million to $0.6 million for the three months ended June 30,
2000 compared to net realized investment losses of $2.9 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 a generally
increasing market yield environment.
Other revenue. Other revenue increased approximately $1.8 million to $1.9
million for the three months ended June 30, 2000 from $0.1 million for the same
period last year. The increase in 2000 consists primarily of $1.8 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. In 1999, other revenue was primarily
composed of finance charge income associated with the Company's financing of
policyholder premiums.
Loss and loss adjustment expense (LAE). The provision for losses and LAE
increased $75.0 million, or 173.7%, to $118.2 million for the three months ended
June 30, 2000 from $43.2 million for the three months ended June 30, 1999. The
provision for losses and LAE is net of ceded losses and LAE of $12.8 million and
$12.2 million for the three months ended June 30, 2000 and 1999, respectively.
The ratio of net losses and LAE to net premiums earned increased to 384.3% for
the three months ended June 30, 2000 from 94.1% for the same period in 1999.
12
<PAGE> 13
The significant increase in loss and loss adjustment expenses for the three
months ended June 30, 2000 was principally due to the results of a loss and LAE
reserve study conducted as of June 30. The reserve study was undertaken as a
result of management's concerns with changes in emerging loss and LAE data in a
very difficult market environment, and with the recent conversion of the
Company's claims information system and reassignment of claims department
responsibilities. Following from the reserve study, gross loss and LAE reserves
were increased by $92.4 million, including $78.4 million for 1999 and prior
accident years and $14.0 million for accident year 2000. Ceded loss and LAE
reserves were increased by $22.3 million, including $20.3 million for 1999 and
prior accident years and $2.0 million for accident year 2000. Net loss and LAE
reserves were increased by $70.1 million, including $58.1 million for 1999 and
prior accident years and $12.0 million for accident year 2000.
The increase in loss and loss adjustment expense reserves resulted from three
primary factors: increased loss severity combined with a lengthened loss
development period on the New Jersey physician book; higher than anticipated
loss frequency and, particularly, severity in certain of the Company's expansion
states; and greater than expected loss frequency and severity on the
Pennsylvania physician and institution book.
Underwriting expenses. Underwriting expenses decreased $1.0 million or 9.3% to
$9.3 million for the three months ended June 30, 2000, from $10.3 million for
the three months ended June 30, 1999. This improvement was primarily the result
of the Company's expense management efforts. The ratio of underwriting expenses
to net premiums earned, however, increased to 30.3% for the three months ended
June 30, 2000 from 22.4% for the same period in 1999. This increase primarily
resulted from additional ceded premiums of $19.9 million associated with the
loss reserve strengthening at June 30, 2000. The ratio of underwriting expenses
to net premiums earned excluding the impact of the ceded premiums associated
with the loss reserve strengthening was 18.5% for the three months ended June
30, 2000.
Funds held charges. Funds held charges relate to the Company's aggregate
reinsurance contracts and decreased $3.0 million or 123.7% to $(0.6) million for
the three months ended June 30, 2000, from $2.4 million for the three months
ended June 30, 1999. This decrease primarily resulted from a $5.7 million
reduction in funds held charges which arose out of changes to ceded loss and
loss adjustment expense reserves associated with the loss reserve strengthening
at June 30, 2000. Funds held charges are calculated based upon beginning of
quarter funds held balances and are adjusted based upon changes to ceded
premiums associated with changes in ceded losses.
Other expenses. Other expenses amounted to $1.2 million for the three months
ended June 30, 2000 and consisted primarily 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.
Restructuring charge. The Company undertook a restructuring during the second
quarter of 1999 and on June 23, 1999 announced the reduction of regional and
home office staff and the closing of regional offices in Boston and Atlanta to
centralize their functions at the Company's home office. The Company recognized
a pre-tax charge in the second quarter of 1999 related to this restructuring of
$2.4 million. No similar event occurred during the second quarter ended June 30,
2000.
Income taxes. Income taxes decreased approximately $27.5 million to a tax
benefit of $27.2 million for the three months ended June 30, 2000, resulting in
an effective tax rate of 36.2%, compared to income tax expense of $0.3 million
and an effective tax rate of 9.3% for the same period in 1999. This decrease was
primarily attributable to a decline in pre-tax income in 2000 of $78.3 million
resulting in reduced tax expense of $27.4 million at a 35% rate.
Net income/(loss). Net loss was $48.0 million for the three months ended June
30, 2000, a decrease of $50.9 million from net income of $2.9 million for the
three months ended June 30, 1999.
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<PAGE> 14
SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 1999
Net premiums earned. Net premiums earned were $79.9 million for the six months
ended June 30, 2000, a decrease of approximately $11.6 million, or 12.6% from
$91.5 million for the six months ended June 30, 1999. This net decrease consists
of increased direct, assumed and ceded premiums earned of $2.7 million, $6.6
million and $20.9 million, respectively. Direct premiums earned reflect the
growth in direct premiums written in the last six months of 1999 offset in part
by the drop in direct premiums written in the first quarter 2000. Assumed
premiums earned primarily relate to a large institutional account written during
the third quarter of 1999 and continuing through 2000. The increase in ceded
premiums earned largely resulted from ceded activity under the Company's
aggregate reinsurance contracts of $19.9 associated with reserve strengthening
at June 30, 2000.
Total premiums written were $144.4 million for the six months ended June 30,
2000, a decrease of $9.8 million, or 6.3%, from total premiums written of $154.2
million for the six months ended June 30, 1999. This decrease consisted of a net
decrease in direct premiums written of $23.6 million, somewhat offset by an
increase in assumed premiums written of $13.8 million. The net decrease in
direct premiums written was composed of decreases in New Jersey and Pennsylvania
of $23.1 million and $3.7 million, respectively, and net increases in other
states of $3.2 million. The decreases in New Jersey and Pennsylvania followed
significant selected rate increases effective January 1, 2000 that led to loss
of certain business. The net increase in other states largely reflected new
business added in those states. The increase in assumed premiums written was
primarily due to continuation of an excess of loss reinsurance contract with an
institutional account first written during the third quarter of 1999 and
continuing through 2000.
Net investment income. Net investment income increased approximately $6.7
million, or 18.6%, to $42.4 million for the six months ended June 30, 2000 from
$35.7 million for the same period in 1999. Average invested assets at amortized
cost increased to approximately $1.28 billion during the six months ended June
30, 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
6.66% for the six months ended June 30, 2000 from 6.01% 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 a generally increasing
market yield environment.
Realized investment losses. Net realized investment losses decreased
approximately $2.8 million to $0.6 million for the six months ended June 30,
2000 compared to $3.4 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 a generally increasing market yield environment.
Other revenue. Other revenue increased approximately $4.8 million to $5.1
million for the six months ended June 30, 2000 from $0.3 million for the same
period last year. The increase in 2000 is primarily composed of $4.8 million of
revenues associated with the leasing brokerage and other business acquired by
the Company in the acquisition of New Jersey State Medical Underwriters, Inc.
and its subsidiaries on August 4, 1999. In 1999, other revenue was primarily
composed of finance charge income associated with the Company's financing of
policyholder premiums.
Losses and loss adjustment expenses (LAE). The provision for losses and LAE
increased $79.7 million, or 92.4%, to $165.9 million for the six months ended
June 30, 2000 from $86.2 million for the six months ended June 30, 1999. The
provision for losses and LAE is net of ceded losses and LAE of $28.9 million and
$24.9 million for the six months ended June 30, 2000 and 1999, respectively. The
ratio of net losses and LAE to net earned premiums increased to 207.6% from
94.2% for the six months ended June 30, 2000 and 1999 respectively.
The significant increase in loss and loss adjustment expenses for the six months
ended June 30, 2000 was principally due to the results of a loss and LAE reserve
study conducted as of June 30. The reserve study was undertaken as a result of
management's concerns with changes in emerging loss and LAE data in a very
difficult market environment, and with the recent conversion of the Company's
claims information system and reassignment of claims department
responsibilities. Following from the reserve study, gross loss and LAE reserves
were increased by $92.4 million, including $78.4 million for 1999 and prior
accident years and $14.0 million for accident year 2000. Ceded loss and LAE
reserves were increased by $22.3 million, including $20.3
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<PAGE> 15
million for 1999 and prior accident years and $2.0 million for accident year
2000. Net loss and LAE reserves were increased by $70.1 million, including $58.1
million for 1999 and prior accident years and $12.0 million for accident year
2000.
The increase in loss and loss adjustment expense reserves resulted from three
primary factors: increased loss severity combined with a lengthened loss
development period on the New Jersey physician book; higher than anticipated
loss frequency and, particularly, severity in certain of the Company's expansion
states; and greater than expected loss frequency and severity on the
Pennsylvania physician and institution book.
Underwriting expenses. Underwriting expenses decreased $0.5 million or 2.3% to
$19.1 million for the six months ended June 30, 2000, from $19.6 million for the
six months ended June 30, 1999. The ratio of underwriting expenses to net
premiums earned, however, increased to 23.9% for the six months ended June 30,
2000 from 21.4% for the same period in 1999. This increase primarily resulted
from additional ceded premiums of $19.9 million associated with the loss reserve
strengthening at June 30, 2000. The ratio of underwriting expenses to net
premiums earned excluding the impact of the ceded premiums associated with the
loss reserve strengthening was 19.2% for the six months ended June 30, 2000.
Funds held charges. Funds held charges decreased $2.9 million, or 43.5%, to $3.8
million for the six months ended June 30, 2000, from $6.7 million for the six
months ended June 30, 1999 primarily as the result of a $5.7 million reduction
in funds held charges which arose out of changes to ceded loss and loss
adjustment expense reserves associated with the loss reserve strengthening at
June 30, 2000. Funds held charges are calculated based upon the beginning of
quarter funds held balances and are adjusted based upon changes to ceded
premiums associated with changes in ceded losses.
Other expenses. Other expenses amounted to $3.6 million for the six months ended
June 30, 2000 and consisted primarily 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.
Restructuring charge. The Company undertook a restructuring during the second
quarter of 1999 and on June 23, 1999 announced the reduction of regional and
home office staff and the closing of regional offices in Boston and Atlanta to
centralize their functions at the Company's home office. The Company recognized
a pre-tax charge in the second quarter of 1999 related to this restructuring of
$2.4 million. No such event occurred during the six months ended June 30, 2000.
Income taxes. Income taxes decreased approximately $26.1 million to a tax
benefit of $24.4 million for the six months ended June 30, 2000, resulting in an
effective tax benefit rate of 37.3%, compared to income tax expense of $1.7
million and an effective tax rate of 18.4% for the same period in 1999. This
decrease was primarily attributable to a decline in pre-tax income in 2000 of
$74.8 million resulting in reduced tax expense of $26.2 million at a 35% rate.
Net income/(loss). Net loss was $41.1 million for the six months ended June 30,
2000, a decrease of $48.6 million from net income of $7.5 million for the six
months ended June 30, 1999
FINANCIAL CONDITION
Cash and invested assets. Aggregate invested assets at fair value, including
cash and short term investments, were $1,213.5 million at June 30, 2000 and
$1,185.5 million at December 31, 1999. The net increase of $28.0 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,
somewhat offset by a reduction in federal income taxes payable, of $26.8
million, and cash outflows to purchase treasury stock and pay cash dividends to
stockholders during the period.
Fixed maturity investments available for sale at fair value, including
short-term investments, were $1,206.8 million, or 99.5% of the investment
portfolio of the Company as of June 30, 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 5.20 years.
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<PAGE> 16
Unpaid losses and LAE, reinsurance recoverable on unpaid losses and LAE and
funds held under reinsurance treaties. Gross unpaid losses and LAE were $1,129.4
million at June 30, 2000 and $1,053.6 million at December 31, 1999. Reinsurance
recoverable on unpaid losses and LAE was $426.7 million at June 30, 2000 and
$406.4 million at December 31, 1999. Funds held under reinsurance treaties,
which are unrestricted, collateralize a significant portion of reinsurance
recoverable on unpaid losses and LAE and were $289.8 million at June 30, 2000,
and $271.6 million at December 31, 1999. The increases in these amounts were
primarily the result of the loss reserves strengthening actions taken by the
Company at June 30, 2000.
Equity. Total equity was $258.6 million at June 30, 2000 and $318.7 million at
December 31, 1999. The net decrease of $60.1 million was primarily attributable
to net loss of $41.1 million, unrealized net depreciation of investments of $1.4
million, purchase of $16.1 million of treasury stock, and $1.4 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.
On May 26, 2000 the Company entered into a credit agreement with Amboy National
Bank to meet certain non-operating cash needs as they may arise. Under the
credit agreement, the Company may borrow up to $20.0 million and bears a fixed
interest rate of 8% per annum. The proceeds from the credit agreement may be
used by the company for general corporate purposes. As of June 30, 2000 $4.0
million had been borrowed under this facility.
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 $5.4 million and
$47.8 million for the six months ended June 30, 2000 and 1999, respectively, 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 $289.8 million at June 30, 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
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<PAGE> 17
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.
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.
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<PAGE> 18
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 August 4, 2000, approximately $16.1 million of the
net proceeds of the Company's initial public offering was used to purchase an
additional 1.3 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:
<TABLE>
<S> <C>
15 Acknowledgement of Independent Accountants
27.1 Financial Data schedule.
</TABLE>
b. Reports on Form 8-K
No reports on Form 8-K were filed during the second
quarter of 2000.
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<PAGE> 19
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: AUGUST 11, 2000
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