<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(X) Quarterly report under section 13 or 15(d) of the
Securities Exchange Act of 1934. For the quarter ended
September 30, 1997.
or
( ) Transition report pursuant to section 13 or 15(d) of
the Securities Exchange Act of 1934. For the transition
period from to .
Commission File Number: 1-11920
MMI Companies, Inc.
(Exact name of registrant as specified in its charter)
Delaware 36-3263253
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
540 Lake Cook Road, Deerfield, Illinois 60015-5290
(Address of principal executive offices)
(847) 940-7550
(Registrant's telephone number, including area code)
Not applicable
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by a 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 period that 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
There were 11,699,013 shares outstanding of the registrant's
common stock, $0.10 par value, as of September 30, 1997.
Page 1 of 12
<PAGE>
MMI Companies, Inc. and Subsidiaries
Index
<TABLE>
<CAPTION>
Page No.
<S> <C>
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets 3
Consolidated Statements of 4
Income
Consolidated Statements of 5
Stockholders' Equity
Consolidated Statements of 6
Cash Flows
Notes to Consolidated 7
Financial Statements
Item 2. Management's Discussion 8-10
and Analysis of
Financial Condition and
Results of Operations
Part II. Other Information
Item 6. Exhibits and Reports on 11
Form 8-K
Signatures 12
EXHIBITS:
11. Statement Re Computation of Per
Share Earnings.
27. Financial Data Schedule.
10.10 Amended and Restated Retirement Equity Plan
10.11 Return on Equity Incentive Plan
</TABLE>
<PAGE>
MMI Companies, Inc. and Subsidiaries
Consolidated Balance Sheets
(In thousands, except per share data)
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
(Unaudited)
<S>
<C> <C>
ASSETS
INVESTMENTS
Short-term investments............ $34,587 $42,777
Fixed maturities.................. 691,109 727,080
Other............................. 51,802 18,594
777,498 788,451
OTHER ASSETS
Cash.............................. 1,654 1,079
Premium and fees receivable....... 70,886 58,611
Reinsurance receivables........... 109,725 101,175
Prepaid reinsurance premiums...... 13,547 9,711
Accrued investment income......... 10,549 11,116
Cost in excess of net assets of
purchased subsidiaries,
less accumulated amortization... 23,141 16,244
Furniture and equipment - at cost,
less accumulated depreciation... 11,341 9,076
Deferred income taxes............. 44,960 46,459
Other............................. 20,781 16,096
1,084,082 $1,058,018
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Policy liabilities:
Loss and loss adjustment expense reserves:
Medical malpractice liability. $ 615,384 $ 620,673
Life and health............... 10,692 7,779
Other......................... 2,875 3,121
628,951 631,573
Unearned premium reserves........ 72,441 55,679
Future life policy benefits...... 8,460 8,578
709,852 695,830
Accrued expenses and other
liabilities........................ 19,120 28,051
Amounts due to reinsurers........... 21,294 24,171
Long-term notes payable............. 58,000 58,000
808,266 806,052
STOCKHOLDERS' EQUITY
Common Stock, par value $.10 per share:
Authorized shares: 1997 and 1996 - 30,000
Issued and outstanding shares:
1997 - 11,699; 1996 - 11,625.... 1,170 1,162
Additional paid-in capital........... 136,525 135,183
Retained earnings.................... 121,528 102,830
Unrealized gains on investments, net
of taxes:
1997 - $8,935; 1996 - $6,887...... 16,593 12,791
275,816 251,966
$1,084,082 $1,058,018
</TABLE>See notes to consolidated financial statements.
<PAGE>
MMI Companies, Inc. and Subsidiaries
Consolidated Statements of Income
(In thousands, except per share data)
Unaudited
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
1997 1996 1997 1996
<S> <C> <C> <C> <C>
REVENUES
Insurance premiums earned:
Medical malpractice
liability................ $38,904 $39,074 $114,789 $116,944
Life and health........... 1,406 2,055 3,832 6,009
40,310 41,129 118,621 122,953
Consulting and fee income.... 13,492 9,416 38,800 25,044
Net investment income........ 12,280 10,967 35,568 32,620
Net realized gains (losses)
on investments............. 673 (1,188) 2,303 (186)
TOTAL REVENUES............. 66,755 60,324 195,292 180,431
LOSSES AND EXPENSES
Losses and loss adjustment expenses:
Medical malpractice
liability................ 32,555 32,743 94,649 98,182
Life and health........... 594 1,341 2,858 3,627
33,149 34,084 97,507 101,809
Insurance and administrative
expenses.................. 24,524 19,075 72,079 54,861
Interest expense............. 904 896 2,682 2,498
TOTAL LOSSES AND EXPENSES. 58,577 54,055 172,268 159,168
INCOME BEFORE INCOME TAXES 8,178 6,269 23,024 21,263
Income taxes................. 535 93 1,861 1,328
NET INCOME................ $ 7,643 $ 6,176 $21,163 $19,935
Earnings per common and
common equivalent share:
Primary...................... $ .64 $ .59 $ 1.77 $ 1.93
Fully diluted................ .64 .59 1.76 1.93
</TABLE>
See notes to consolidated financial statements.
<PAGE>
MMI Companies, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
(In thousands, except per share data)
<TABLE>
<CAPTION>
Unrealized Total
Common Stock Additional Gains (Losses) Stock-
Number Par Paid-In Retained on Investments holders'
of Shares Value Capital Earnings Net of Taxes Equity
<S> <C> <C> <C> <C> <C> <C>
Balance at
December 31,1995. 9,675 $ 967 $82,645 $84,361 $18,490 $186,463
Year ended
December 31,1996:
Net income....... 21,015 21,015
Issuance of Common
Stock in connection
with public offering
net of expenses
of $2,866........ 1,626 163 46,162 46,325
Issuance of Common
Stock in connection
with acquisition of
subsidiaries..... 65 7 1,284 1,291
Issuance of Common
Stock in connection
with employee
benefit plans and
exercise of employee
stock options..... 259 25 5,092 5,117
Change in unrealized
gains, net of taxes
of $3,070......... (5,699) (5,699)
Common cash
dividends ($.24 per
share)............ (2,546) (2,546)
Balance at December
31,1996........... 11,625 1,162 135,183 102,830 12,791 251,966
Nine months ended
September 30, 1997
(unaudited):
Net income........ 21,163 21,163
Issuance of Common
Stock in connection
with acquisition
ofsubsidiary...... 105 11 2,491 2,502
Issuance of Common
Stock in connection
with director
and employee benefit
plans and exercise of
employee stock
options........... 90 9 1,678 1,687
Common Stock
repurchased....... (121) (12) (2,827) (2,839)
Change in
unrealized gains,
net of taxes of
$2,048........... 3,802 3,802
Common cash
dividends ($.21
per share)....... (2,465) (2,465)
Balance at
September 30, 1997
(unaudited)...... 11,699 1,170 136,525 121,528 16,593 275,816
</TABLE>
See notes to consolidated financial statements.
<PAGE>
MMI Companies, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(In thousands)
Unaudited
<TABLE>
<CAPTION>
Nine Months
Ended September 30,
1997 1996
<S>
<C> <C>
OPERATING ACTIVITIES
Net income......................... $ 21,163 $ 19,935
Adjustments to reconcile net income to net
cash provided (used) by operating activities:
Increase in policy liabilities.. 14,022 1,651
Change in reinsurance balances.. (15,263) 1,044
Increase in premiums receivable. (11,891) (15,183)
Change in deferred income taxes
and fees........................ (548) 403
Increase in accrued investment
income and other assets........ (3,994) (5,121)
Decrease in accrued expenses and
other liabilities.............. (9,221) (79)
Net realized (gains) losses on
investments.................... (2,303) 186
Depreciation and amortization on
investments and goodwill....... 3,184 2,568
Net cash provided (used) by
operating activities........... (4,851) 5,404
INVESTING ACTIVITIES
Net sale (purchase) of short-term
investments..................... 9,340 (37,385)
Purchases of available-for-sale
investments..................... (260,177) (299,555)
Sales of available-for-sale
investments..................... 231,406 253,099
Maturities of available-for-sale
investments..................... 41,807 47,480
Acquisitions of subsidiaries..... (8,281) (8,904)
Furniture and equipment
additions....................... (5,052) (4,164)
Net cash provided (used) by
investing activities........... 9,043 (49,429)
FINANCING ACTIVITIES
Issuance of Common Stock......... 1,687 38,655
Repurchases of Common Stock...... (2,839) -
Payments on notes payable........ - (750)
Proceeds from notes payable...... - 9,000
Dividends........................ (2,465) (1,849)
Net cash provided (used) by
financing activities........... (3,617) 45,056
Increase in cash................ 575 1,031
Cash at beginning of period............ 1,079 439
Cash at end of period........... $ 1,654 $ 1,470
</TABLE>
See notes to consolidated financial statements.
<PAGE>
MMI Companies, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
September 30, 1997
1. Basis of Presentation
The accompanying unaudited consolidated financial statements
have been prepared in accordance with generally accepted
accounting principles for interim financial information.
Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been
included. Operating results for the nine month period ended
September 30, 1997 are not necessarily indicative of the results
that may be expected for the year ending December 31, 1997. For
further information, refer to the consolidated financial
statements and notes thereto included in the Company's 1996
Annual Report on Form 10-k, as amended to date.
2. Acquisition of Equifax Medical Credentials Verification Services
and PRM, Inc.
Effective January 1,1997, the Company purchased substantially all
of the net assets of Equifax Medical Credentials Verification
Services (EMCVS), a unit of Atlanta-based Equifax, Inc., and
acquired by merger all of the outstanding stock of Professional
Risk Management, Inc. (PRM), a privately held California third
party administrator that specializes in managing enterprise
liability risk for organizations that self-insure.
Assets acquired, liabilities assumed, and cost in excess of
net assets purchased were as follows (in thousands):
<TABLE>
<CAPTION>
<S> <C>
Cost in excess of net assets purchased........ $ 9,177
Cash.......................................... 566
Other assets, principally investments......... 2,570
Other liabilities............................. (689)
$ 11,624
</TABLE>
These acquisitions were accounted for as purchases, and the
operations of EMCVS and PRM are included in MMI's consolidated
financial statements since their dates of acquisition.
3. Accounting Change
In February 1997, the Financial Accounting Standards Board
issued Statement No. 128, Earnings Per Share, which is required
to be adopted on December 31, 1997. At that time, the Company
will be required to change the method currently used to compute
earnings per share and to restate all prior periods. Under the
new requirements for calculating primary earnings per share, the
dilutive effect of stock options will be excluded. The impact
is expected to result in an increase in primary earnings per
share of $.01 and $.03 for the quarter ended September 30, 1997
and 1996, respectively, and for the nine months ended September
30, 1997 and 1996 of $.04 and $.08 per share, respectively. The
impact of Statement 128 on the calculation of fully diluted
earnings per share for these periods is not expected to be
material.
4. Pending Acquisition of Unionamerica Holdings plc.
On June 25, 1997, MMI announced the signing of an Acquisition
Agreement in connection with the proposed acquisition of
Unionamerica Holdings plc (Unionamerica) by MMI in a stock for
stock transaction. Under the terms of the Agreement, which has
been approved by the Boards of Directors of MMI and
Unionamerica, MMI will take a share for share offer to acquire
the whole of the issued capital of Unionamerica ("the Offer").
Under the terms of the Offer, MMI will offer to acquire each
<PAGE>
American Depository Share (ADS), representing one Ordinary Share
of Unionamerica, for 0.836 share of MMI Common Stock through a
tender offer. The offer will be made only pursuant to a tender
offer and Prospectus at such time as a registration statement covering
MMI's Common Stock is declared effective by the Securities and
Exchange Commission. A Registration Statement on Form S-4 was
filed with the Securities and Exchange Commission on July 25,
1997 and went effective on November 5, 1997. It is contemplated
that the proposed acquisition will be accounted for as a
pooling-of-interests for accounting purposes. Under this accounting
treatment, the accounts of MMI and Unionamerica will be
combined for all past and future periods after the Offer becomes
or is declared unconditional in all respects.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Results of Operations
Nine Months Ended September 30, 1997 compared to Nine Months
Ended September 30, 1996.
Revenues. Gross and net premiums written were relatively
unchanged for the nine months ended September 30, 1997. Gross
written premiums were $171,491,000 compared to $170,516,000 for the
1996 period and net written premiums were $131,487,000 compared to
$131,737,000 for the same periods. Net premiums earned decreased
by 3.5% for the nine months to $118,621,000 from $122,953,000. For
the three months ended September 30, 1997 gross premiums written
increased by 4.8% to $40,994,000 from $39,108,000, net premiums
written were unchanged at $31,527,000 compared to $31,512,000, and
net premiums earned decreased by 2.0% to $40,310,000 from
$41,129,000.
Medical malpractice premiums earned decreased by 1.8% to
$114,789,000 for the nine months ended September 30, 1997 from
$116,944,000 for the 1996 period and decreased 0.4% to $38,904,000
from $39,074,000 for the three month period. The Company's
quarterly written and earned premiums can vary significantly from
quarter to quarter due to one-time premiums, such as prior acts
coverage for new insureds. The decrease in premiums written and
earned for the three and nine months ended September 30, 1997 is
primarily due to higher one-time premiums in the 1996. Pricing for
healthcare systems has remained relatively stable and pricing for
physician groups has improved modestly. The Company's pricing is
heavily influenced by the loss history of the insured over time.
Life and health premiums earned decreased by 36.2%, to $3,832,000
for the nine months ended September 30, 1997 from $6,009,000 for
the 1996 period and decreased by 31.6% to $1,406,000 from
$2,055,000 for the three month period.
Consulting and fee income increased by 54.9% to $38,800,000 for
the nine months ended September 30, 1997 from $25,044,000 for the
1996 period and increased by 43.3% to $13,492,000 from $9,416,000
for the three month period. The growth in consulting and fee
income is primarily attributable to the inclusion of the results of
EMCVS and PRM from their date of acquisition, January 1, 1997 and
the inclusion of the results of Management Science Associates, Inc.
(MSA) from the date of its acquisition, April 1, 1996. Consulting
and fee income as a percentage of net premiums earned and
consulting and fee income was 24.6% for the nine months ended
September 30, 1997 compared to 16.9% in 1996.
Net investment income increased by 9.0% to $35,568,000 for the
nine months ended September 30, 1997 from $32,620,000 for the 1996
period and increased by 12.0% to $12,280,000 from $10,967,000 for
the three month period. The Company had net realized gains on
investments of $2,303,000 for the nine months ended September 30,
1997 compared to net realized losses of $186,000 for the 1996
period. For the three month period, the Company had net realized
gains of $673,000 in 1997 compared to net realized losses of
$1,188,000 in 1996.
Losses and expenses. Losses and loss adjustment expenses ("LAE")
decreased by 4.2% to $97,507,000 for the nine months ended
September 3, 1997 from $101,809,000 for the 1996 period and
decreased by 2.7% to $33,149,000 from $34,084,000 for the three
month period. Medical malpractice liability losses and LAE
decreased by 3.6% to $94,649,000 for the nine months ended
September 30, 1997 from $98,182,000 for the 1996 period and
decreased by 0.6% to $32,555,000 from $32,743,000 for the three
month period. Losses and LAE decreased due to a decrease in
<PAGE>
premiums earned in the third quarter and nine months and a slight
reduction in the property and casualty loss ratio for the nine months.
The insurance group loss ratio decreased slightly to 82.2% from 82.8%
for the nine months and decreased to 82.2% from 82.9% for the three
month period. Life and health benefit costs decreased by $769,000
or 21.2% to $2,858,000 for the nine months ended September 30, 1997
from $3,627,000 for the 1996 period. Life and health benefit costs
declined due to a decrease in premiums earned partially offset by
an increase in the loss ratio to 74.5% for the nine month 1997
period compared to 60.4% for the 1996 period.
Insurance and administrative expenses increased by 31.4% to
$72,079,000 for the nine months ended September 30, 1997 from
$54,861,000 for the 1996 period and increased by 28.6% to
$24,524,000 from $19,075,000 for the three month period. The
increase in administrative expense is attributable to increased
consulting and fee income, increased commission expense due to a
greater percentage of business acquired through brokers and the
inclusion of the results of acquired businesses, including MSA in
April 1996 and EMCVS and PRM in January 1997.
Interest expense increased by 7.4% to $2,682,000 for the nine
months ended September 30, 1997 from $2,498,000 for the 1996 period
due primarily to an increase in outstanding debt. For the three
month period interest expense was $904,000 in 1977 compared to
$896,000 in the prior period.
Income taxes. Income taxes were $1,861,000 for the nine months
ended September 30, 1997 compared to $1,328,000 for the 1996 period
and for the three month period were $535,000 in 1997 compared to
$93,000 in 1996. The increase in income taxes is primarily due to
realized investments gains in 1997 and realized investment losses
in 1996.
Net income. Net income increased by 6.2% to $21,163,000 for the
nine months ended September 30, 1997 from $19,935,000 for the 1996
period and increased 23.8% to $7,643,000 in 1977 from $6,176,000
for the three month period.
Net income per share. Fully diluted net income per common and
common equivalent share decreased to $1.76 for the nine months
ended September 30, 1997 from $1.93 for the 1996 period. Included
in these amounts are $.12 in net realized gains, net of taxes, in
1997 and $.01 in net realized losses, net of taxes, in 1996. Fully
diluted earnings per common and common equivalent share before
realized gains, net of taxes, decreased to $1.64 for the nine
months ended September 30, 1997 from $1.94 for the 1996 period.
Fully diluted weighted average shares and equivalents outstanding
increased primarily due to a public offering of stock by the
Company in September, 1996.
For the three month period fully diluted net income per common
and common equivalent share increased to $.64 from $.59 in the
prior period. This amount includes net realized gains, net of taxes,
of $.04 in 1997 and net realized losses, net of taxes, of $.07 in
1996. Fully diluted earnings per common and common equivalent
share before net realized gains (losses), net of taxes, decreased to
$.60 from $.66 for the three month period.
Liquidity And Capital Resources
As a holding company, the Company's assets consist primarily of
the stock of its subsidiaries. The principal sources of funds are
management fees and dividends from subsidiaries. In the nine month
periods ended September 30, 1997 and 1996 the Company received
dividends of $8,250,000 from its subsidiaries. The Company
received management fees from its subsidiaries of $20,413,000 for
the nine months ended September 30, 1997, compared to $17,400,000
in 1996.
On a consolidated basis, the Company's principal sources of
operating funds are premiums, investment income, fees and
recoveries from reinsurers. Funds are used to pay claims,
operating expenses, reinsurance premiums, acquisition related
expenses, debt service requirements, taxes and dividends to
stockholders.
Cash used by operating activities was $4,851,000 for the nine
months ended September 30, 1997 compared to cash provided of
$5,404,000 for the nine months ended September 30, 1996. Cash from
operations decreased primarily due to increased receivables during
the first nine months of 1996 and a decrease in accrued expenses and
other liabilities in 1997. Because of variability related to
the timing of payment of claims, cash from operations for a
casualty insurance company can vary substantially from quarter to
quarter.
Cash provided by investing activities was $9,043,000 for the nine
months ended September 30, 1997 compared to cash used of
$49,429,000 for the nine months ended September 30, 1996. The
increase in cash provided by investing activities was primarily due
to the sale of short-term investments to fund 1997 acquisitions.
<PAGE>
Cash used by financing activities was $3,617,000 for the nine
months ended September 30, 1997 compared to cash provided of
$45,056,000 for the nine months ended September 30, 1996 and is due
to the repurchase of the Company's stock during the first and
second quarter of 1997 and proceeds from the Company's public stock
offering in September 1996.
The Company invests in investment grade fixed income securities
and preferred stocks. The carrying value of the Company's short-
term, fixed maturity and preferred stock investments was
$777,498,000 as of September 30, 1997 compared to $788,451,000 as
of December 31, 1996. The September 30, 1997 amount includes net
unrealized gains of $25,528,000 which represent the amount by which
the estimated fair value of the investment portfolio exceeds
amortized cost. Unrealized gains as of December 31, 1996 were
$19,678,000. The increase in unrealized gains during the first
nine months of 1997 was due to a decrease in the general level of
interest rates in 1997. The Company maintains a portion of its
investment portfolio in high quality, short-term securities to meet
its short-term operating liquidity requirements, including the
payment of claims and expenses. Short-term investments totaled
$34,587,000 or 4.4% of invested assets at September 30, 1997. The
Company believes that all of its invested assets are readily
marketable.
Long-term debt at September 30, 1997 remained unchanged at
$58,000,000 from December 31, 1996.
Stockholders' equity was $275,816,000 as of September 30, 1997
compared to $251,966,000 as of December 31, 1996. Dividends to
stockholders were $2,465,000 for the nine months ended September
30, 1997.
Acquisition of EMCVS and PRM
Effective January 1, 1997 the Company purchased substantially all
of the net assets of EMCVS and all of the outstanding stock of PRM.
EMCVS provides credentials verification services to the healthcare
industry via on-line access to a comprehensive credentials
database. PRM is a third party administrator that specializes in
managing enterprise liability risk for organizations that self-
insure. The combined purchase price for these two transactions,
which together had total revenues in 1996 of approximately
$7,000,000, was $11,624,000 including expenses.
<PAGE>
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
A.Exhibits
11. Statement Re Computation of Per Share Earnings.
27. Financial Data Schedule.
10.10 Amended and Restated Retirement Equity Plan.
10.11 Return on Equity Incentive Plan.
B. Reports on Form 8-K. No reports on Form 8-K were filed
during the quarter.
<PAGE>
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.
MMI Companies, Inc.
(Registrant)
Date: November 12, 1997 /s/ B. Frederick Becker
B. Frederick Becker
Chairman and Chief
Executive Officer
Date: November 12, 1997
/s/ Paul M. Orzech
Paul M. Orzech
Executive Vice President and
Chief Financial Officer
<PAGE>
MMI Companies, Inc and Subsidiaries
Exhibit 11 - Statement re Computation of Per Share Earnings
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1997 1996 1997 1996
<S> <C> <C> <C> <C>
PRIMARY
Weighted average shares
outstanding................. 11,683 10,030 11,680 9,871
Net effect of dilutive stock
options based on the
treasury stock method using
average market price....... 265 464 308 432
Weighted average number of
common and common
equivalent shares........... 11,948 10,494 11,988 10,303
Net income.................. $ 7,643 $ 6,176 $ 21,163 $ 19,935
Earnings per common and
common equivalent
share....................... $ .64 $ .59 $ 1.77 $ 1.93
FULLY DILUTED
Weighted average shares
outstanding................. 11,683 10,030 11,680 9,871
Net effect of dilutive stock
options based on the
treasury stock method using
ending market price, if
higher than average......... 323 464 343 463
Weighted average number of
common and common equivalent
shares..................... 12,006 10,494 12,023 10,344
Net income................. $ 7,643 $ 6,176 $21,163 $19,935
Earnings per common and
common equivalent
share...................... $ .64 $ .59 $ 1.76 $ 1.93
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND> This schedule contains summary financial information
extracted from the consolidated financial statements of MMI
Companies, Inc. and subsidiaries for the nine month period ended
September 30, 1997, and is qualified in its entirety by reference
to such financial statements.
<MULTIPLIER> 1,000
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<DEBT-HELD-FOR-SALE> 691,109
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 51,802
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 777,498
<CASH> 1,654
<RECOVER-REINSURE> 2,501
<DEFERRED-ACQUISITION> 6,550
<TOTAL-ASSETS> 1,084,082
<POLICY-LOSSES> 637,411
<UNEARNED-PREMIUMS> 72,441
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 58,000
<COMMON> 1,170
0
0
<OTHER-SE> 274,646
<TOTAL-LIABILITY-AND-EQUITY> 1,084,082
118,621
<INVESTMENT-INCOME> 35,568
<INVESTMENT-GAINS> 2,303
<OTHER-INCOME> 38,800
<BENEFITS> 97,507
<UNDERWRITING-AMORTIZATION> 11,773
<UNDERWRITING-OTHER> 60,306
<INCOME-PRETAX> 23,024
<INCOME-TAX> 1,861
<INCOME-CONTINUING> 21,163
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 21,163
<EPS-PRIMARY> 1.77
<EPS-DILUTED> 1.76
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
1
Effective: July 1, 1997
Amended & Restated: August 7, 1997
<PAGE>
MMI COMPANIES, INC.
AMENDED AND RESTATED
RETIREMENT EQUITY PLAN
ARTICLE I - PURPOSE
1. This Plan is adopted to provide a select group of highly
compensated and managerial employees of MMI Companies, Inc. and
its subsidiaries covered under the MMI Companies, Inc. Savings
and Profit Sharing Plan (the "Basic Plan"), the opportunity to
accumulate deferred compensation which cannot be accumulated
under the Basic Plan because of the limitations on deferrals
under Internal Revenue Code (the "Code") Section 401(k) (the
"401(k) Limits"), the limitations on elective deferrals under
Code Section 402(g) (the "402(g) Limits"), or the limitations on
tax-qualified pension plan benefits under Code Section 401(a)(17)
(the "401(a)(17) Limits").
ARTICLE II - DEFINITIONS
1. ACCOUNTS means the accounts maintained under this Plan on
the books of the Company for the benefit of an Eligible Employee.
2. BASIC PLAN means the MMI Companies, Inc. Savings and Profit
Sharing Plan, as amended from time to time.
3. BOARD means the Board of Directors of MMI Companies, Inc.
4. CODE means the Internal Revenue Code of 1986, as amended
from time to time.
5. COMMITTEE means the Personnel and Compensation Committee
appointed by the Board.
6. COMPANY means MMI Companies, Inc. or any company which is a
successor as a result of merger, consolidation, liquidation,
transfer of assets or other reorganization.
1
<PAGE>
7. ELIGIBLE 401(k) COMPENSATION means the portion of an
Eligible Employee's compensation with respect to which he or she
is eligible to make a deferral election under the Basic Plan
(determined without regard to the 401(k) Limits, 402(g) Limits,
or 401(a)(17) Limits).
8. ELIGIBLE EMPLOYEE means, for any Plan Year, an employee of
the Company, or of a subsidiary of the Company that has adopted
the Basic Plan, (i) who is a member of a select group of
management or highly compensated employees as defined for
purposes of Sections 201(2), 301(3) and 401(a)(1) of ERISA, (ii)
who makes an election to defer Eligible 401(k) Compensation
and/or annual incentive bonus(es), as set forth in Article III
below, and (iii) who satisfies the medical underwriting
requirements for the issuance of a Policy and completes an
application form for issuance of a Policy. The Committee shall
establish criteria for determining which employees are members of
the select group described in clause (i), which criteria may
include the identification of individual employees. The
Committee may permit an employee who would otherwise be eligible
to participate notwithstanding the fact that he or she does not
qualify under clause (iii), in which event Section 6.3 shall not
apply to such Eligible Employee and the Committee or its designee
may make such adjustments as may be appropriate to determine such
Eligible Employee's earnings under Section 7.2.
9. ERISA means the Employee Retirement Income Security Act of
1974, as amended from time to time.
10. PLAN means this MMI Companies, Inc. Amended and Restated
Retirement Equity Plan.
11. PLAN YEAR means the six-month period ending December 31,
1997 and the twelve-month period ending each subsequent December
31 during which the Plan is in effect.
12. POLICY means a variable life insurance policy issued by a
carrier selected by the Committee which provides for the death
benefit provided in Section 6.3 and permits the investment of
funds in one or more investment funds as provided in Section 7.2.
ARTICLE III -EMPLOYEE CONTRIBUTIONS
1. SALARY REDUCTION CONTRIBUTIONS. An Eligible Employee may,
for any Plan Year in which he or she is an Eligible Employee,
elect to accept a reduction in Eligible 401(k) Compensation from
the Company equal to either a whole percentage of his or her
Eligible 401(k) Compensation or a fixed dollar amount per payroll
period. Elections shall be made, modified and revoked in
accordance with Section 3.3 and, while an
<PAGE>
election is in effect, the applicable percentage or amount
of each payment of Eligible 401(k) Compensation shall be
withheld and credited to the Eligible Employee's Retirement
Equity Contribution Account (as referred to in Section 7.1).
2. BONUS REDUCTION CONTRIBUTIONS. An Eligible Employee
(regardless of whether he or she has elected a reduction in his
or her Eligible 401(k) Compensation pursuant to Section 3.1)
may, for any Plan Year in which he or she is an Eligible
Employee, elect to accept a reduction in his or her annual
incentive bonus(es) from the Company, if any, equal to either a
whole percentage of his or her incentive bonus(es) or a fixed
dollar amount. Elections shall be made, modified and revoked in
accordance with Section 3.3 and, the portion, if any, which the
Eligible Employee has elected shall be withheld from her or her
incentive bonus(es) and credited to his or her Retirement Equity
Contribution Account.
3. ELECTIONS. Initial elections pursuant to Section 3.1 shall
be made as soon as practical after the adoption of this Plan, and
thereafter elections may be made, modified and revoked semi-
annually (as of January 1 and July 1 of each Plan Year) or at
such other intervals as the Committee may determine. Any
Eligible Employee who does not affirmatively make a new election
under Section 3.1 as of any election date shall be deemed to have
continued his or her old election in effect, except as the
Committee may otherwise permit. Elections under Section 3.2
shall be made annually at a time determined by the Committee
prior to the date on which Eligible Employees have the right to
receive their incentive bonuses. Elections, once made, may not
be modified or revoked until the next election date, subject to
such exceptions as the Committee may allow; provided that, to the
extent required by applicable law, an Eligible Employee may
revoke his or her election entirely on a prospective basis, but
shall thereafter no longer be considered an Eligible Employee.
The minimum aggregate amount which any Eligible Employee may
elect to have withheld during any Plan Year (under either Section
3.1 or 3.2 or any combination thereof) shall be $3,500.00.
4. RULES AND PROCEDURES. The Committee shall have the
authority to establish rules and procedures for making and
implementing elections, which may include changing the frequency
of election dates, limiting the amount withheld from any Eligible
Employee or group of Eligible Employees, and permitting
exceptions to the election rules on an individual basis;
provided, however, that in no event shall any election apply to
any payment of Eligible 401(k) Compensation or incentive bonus
that the Eligible Employee has already received, or has the right
to receive, when the election is made.
<PAGE>
ARTICLE IV - EMPLOYER MATCHING CONTRIBUTION
1. AMOUNT OF CONTRIBUTIONS. Subject to the limitation in
Section 4.2, as of December 31 and June 30 of each Plan Year the
Company will credit to each Eligible Employee's Retirement Equity
Matching Account (as referred to in Section 7.1) an amount equal
to the matching contribution which the Company would have made to
the Eligible Employee's Matching Employer Contribution Account
under the Basic Plan if the amount credited to the Eligible
Employee's Retirement Equity Contribution Account under Sections
3.1 and 3.2 since the last such date had been contributed as
before-tax savings contributions to the Basic Plan.
2. LIMITATION. Anything else contained herein to the contrary
notwithstanding, the amount credited to an Eligible Employee's
Retirement Equity Matching Account for any Plan Year shall be
limited so that such amount, when added to the amount of the
matching contributions made on behalf of the Eligible Employee to
the Basic Plan for the same Plan Year, does not exceed fifty
percent of the sum of the before-tax savings contributions made
on behalf of such Eligible Employee under the Basic Plan plus the
credits to the Eligible Employee's Requirement Equity
Contribution Account under this Plan for the Plan Year,
disregarding the portion of such sum that exceeds eight percent
of the Eligible Employee's Eligible 401(k) Compensation for the
Plan Year. If either of the percentages in Section 4.2(a) of the
Basic Plan are changed, the new percentages shall be substituted
for the percentages in the preceding sentence. The maximum
amount determined under this Section 4.2 shall be based on the
amount of the Eligible Employee's Eligible 401(k) Compensation,
regardless of whether the Eligible Employee elects to have
amounts withheld from Eligible 401(k) Compensation pursuant to
Section 3.1 or incentive bonus(es) pursuant to Section 3.2.
ARTICLE V - VESTING
1. SALARY REDUCTION CONTRIBUTIONS. An Eligible Employee shall
always be 100 percent vested in amounts credited to his or her
Retirement Equity Contribution Account.
2. EMPLOYER MATCHING CONTRIBUTIONS. An Eligible Employee will
always have the same vesting percentage in his or her Retirement
Equity Matching Account as he or she has in his or her Matching
Employer Contribution Account under the Basic Plan.
<PAGE>
ARTICLE VI - PAYMENTS OF BENEFITS
1. PAYMENTS OF BENEFITS. The benefit payable under this Plan on
account of an Eligible Employee's termination of employment,
retirement, or death shall be paid in accordance with Section 6.2
beginning as soon as practicable after the first day of the first
month following the quarter in which the Eligible Employee's
termination of employment, retirement, or death occurs. Unless
otherwise designated in the Eligible Employee's election, any
death benefit payable under this Plan shall be payable to the
same beneficiary who is to be paid death benefits under the Basic
Plan. An Eligible Employee may change beneficiaries at any time
without consent of a prior beneficiary, but no designation of a
beneficiary shall be effective until actually received by the
Company on a form designated by the Committee.
2. FORM OF PAYMENT. Any benefit payable to an Eligible
Employee or beneficiary shall be paid in a single lump sum equal
to the total balance in the Eligible Employee's Account;
provided, however, that an Eligible Employee whose balance
exceeds $25,000.00 and whose employment is terminated by
retirement (either after attaining the age of 65 or by reason of
permanent disability as defined in the Company's long term
disability plan as then in effect) shall receive a series of
quarterly installments over a period of 15 years, with the amount
of each installment being equal to the balance in the Eligible
Employee's Accounts immediately prior to the payment divided by
the number of installments remaining to be paid (including such
installment). An Eligible Employee whose balance exceeds
$25,000.00 may instead elect to receive the balance in his or her
Accounts upon retirement in a lump sum, in quarterly installments
over five or ten years, or in such other form as the Committee
may approve, provided that no such election, or change in a prior
election, shall be valid unless made on a form specified by the
Committee and received by the Committee at least one year prior
to the date of the Eligible Employee's retirement. All benefits
payable to an Eligible Employee whose employment is terminated
prior to retirement, including payments to a beneficiary after
the Eligible Employee's death, shall be paid in a single lump
sum.
3. PRE-TERMINATION DEATH BENEFIT. If an Eligible Employee with
respect to whom a Policy is in force dies while employed by the
Company, a pre-termination death benefit shall be paid to the
Eligible Employee's beneficiary equal to the Eligible Employee's
Eligible 401(k) Compensation for one year (determined at the base
salary rate in effect at the time of death), which death benefit
shall be in addition to the balance in the Eligible Employee's
Accounts payable pursuant to Section 6.1. Such death benefit
shall be paid to the Eligible Employee's beneficiary under the
Policy by the insurance company that issued the Policy, and shall
be subject to all conditions and exceptions set forth in the
Policy. Notwithstanding any provision of this Plan or any other
document to
<PAGE>
the contrary, the pre-termination death benefit payable
pursuant to this Section 6.3 shall be paid only if a Policy
has been issued and is in force at the time of the Eligible
Employee's death, and the Company shall have no obligation
with respect to the payment of the death benefit, or to
maintain a Policy in force for an Eligible Employee. The
Policy may be subject to the conditions set forth in a split
dollar life insurance agreement between the Eligible
Employee and the Company, on such terms as the Committee
shall determine, which may permit the Eligible Employee to
designate a beneficiary under the Policy to receive the
Eligible Employee's death benefit, who may be different from
the beneficiary designated pursuant to Section 6.1.
ARTICLE VII - ACCOUNTS
1. ACCOUNTS. The Company will maintain on its books a
Retirement Equity Contribution Account and a Matching Employer
Contribution Account for each Eligible Employee, to which shall
be credited, as appropriate, deferral amounts under Section 3.1
or 3.2, matching contributions under 4.1, and earnings on such
amounts as provided in Section 7.2.
2. EARNINGS. Earnings shall be credited to each Eligible
Employee's Accounts at the end of each month (or at such other
intervals as the Committee shall determine) as computed under
this Section 7.2. The Committee shall designate selected
investment funds or other investment media ("funds"), and each
Eligible Employee shall have the right to have earnings
(including realized and unrealized gains and losses) on his or
her Accounts computed as if it had been invested in such funds in
such proportions as the Eligible Employee shall elect. The
portion of each Eligible Employee's Accounts that is deemed to be
invested in each fund shall be a whole percentage, which shall be
not less than 10%, and elections may be changed quarterly. The
Committee shall have the authority to select and discontinue
funds at any time, to establish a rate at which interest shall be
credited on Accounts with respect to which no fund election is in
effect, and otherwise to establish rules and procedures with
respect to the calculation and crediting of earnings, including
changing the intervals at which fund elections may be made or at
which earnings are posted, changing the minimum percentage (or
establishing a maximum percentage) that may be deemed invested in
any fund, and otherwise restricting deemed investment elections;
provided, however, that earnings shall be computed in such a
manner that they shall not be considered additional deferred
compensation under Section 3121(v) of the Code. The earnings on
each Eligible Employee's Accounts shall be reduced by the cost of
providing the death benefit described in Section 6.3, and may be
reduced by such other
<PAGE>
expenses as the Committee may determine, which shall be
allocated among Eligible Employees in a reasonable manner.
ARTICLE VIII - ADMINISTRATION
1. COMMITTEE. The Company shall be the "administrator" of this
Plan for purposes of Section 3(16)(A) of ERISA. The Committee on
behalf of the Company shall administer, construe and interpret
this Plan and shall determine, subject to the provisions of this
Plan, the Eligible Employees who shall participate in the Plan
from time to time and the amount, if any, due an Eligible
Employee (or his or her beneficiary) under this Plan. No member
of the Committee shall be liable for any act done or
determination made in good faith. No member of the Committee who
is a participant in this Plan may vote on matters affecting his
or her personal benefit under this Plan, but any such member
shall otherwise be fully entitled to act in matters arising out
of or affecting this Plan notwithstanding his or her
participation herein. In carrying out its duties herein, the
Committee shall have discretionary authority to exercise all
powers and to make all determinations, consistent with the terms
of the Plan, in all matters entrusted to it, and its
determinations shall be given deference and shall be final and
binding on all interested parties. The Committee may adopt rules
and procedures to be used in the administration of this Plan.
2. CLAIMS. Any Eligible Employee, or person claiming to be a
beneficiary of an Eligible Employee (a "claimant"), may file a
written claim for benefits under this Plan on a form designated
by the Company. Such claims shall initially be processed by the
human resources, personnel, or other applicable department of the
Eligible Employee's employer. If such claim is denied in whole
or part, the claimant shall receive a written notice of denial,
which shall be written in language calculated to be understood by
the claimant without legal assistance and shall set forth the
specific reasons for the denial and explaining the procedure for
an appeal and review of the decision by the Committee. Such
notice shall be furnished not later than 90 days after the claim
has been filed (which 90 day period may be extended for up to an
additional 90 days if special circumstances require and notice of
the extension is furnished to the claimant prior to the end of
the first 90 day period).
3. REVIEW OF DENIALS. A claimant whose claim is denied, or his
authorized representative, may request a review upon written
application to the Committee within 60 days after receiving
notice of the denial. In connection with such application, the
claimant or his authorized representative may review pertinent
documents and may submit issues and comments in writing. If such
an application is made, the Committee
<PAGE>
shall make a full and fair review of the denial of the claim
and shall make a decision not later than 60 days after
receipt of the application, unless special circumstances
(such as the need to hold a hearing) require an extension of
time, in which case a decision shall be made as soon as
possible but not later than 120 days after receipt of the
request for review, and written notice of the extension
shall be given to the claimant before the commencement of
the extension. The decision on review shall be in writing
and shall include specific reasons for the decision and
specific references to the pertinent provisions of the Plan
on which the decision is based.
4. TAX WITHHOLDING. All payments of benefits under this Plan
shall be subject to applicable income, social security, and other
tax withholding. To the extent that Code Section 3121(v), or
other applicable law, requires that taxes be withheld prior to
payment of benefits, the Company shall determine the manner in
which the required withholding is to be determined, and shall
withhold the applicable taxes from current compensation or any
other amounts payable to the Eligible Employee. If such amounts
are insufficient, the Eligible Employee shall be required to pay
the required amount to the Company.
5. NOTICES, ETC. Persons entitled to benefits under the Plan
shall file with the Committee from time to time such person's
post office address and each change of post office address. Each
such person entitled to benefits under the Plan also shall
furnish the Committee with all appropriate documents, evidence,
data or information which the Committee considers necessary or
desirable in administering the Plan. Any document will be
properly filed with the Committee if it is delivered or mailed by
registered or certified mail postage prepaid to the Committee in
care of the Company. A notice mailed to an Eligible Employee or
beneficiary at his or her last address filed with the Committee
will be binding on the Eligible Employee or beneficiary for all
purposes of the Plan. Any notice under this Plan may be waived
by the person entitled to notice.
6. LITIGATION. In any action or proceeding regarding the Plan,
Eligible Employees or former Eligible Employees, their
beneficiaries or any other persons having or claiming to have an
interest in this Plan shall not be necessary parties and shall
not be entitled to any notice or process. Any final judgment
which is not appealed or appealable and may be entered in any
such action or proceeding shall be binding and conclusive on the
parties hereto and all persons having or claiming to have any
interest in this Plan. To the extent permitted by law, if a
legal action is begun against the Company, a member of the Board,
the Committee or any member thereof, or any of their agents by or
on behalf of any person and such action results adversely to such
person or if a legal action arises because of conflicting claims
to an Eligible Employee's or other person's benefits, the costs
to such person of defending the action will be charged to the
amounts, if any, which were involved in the action or were
payable to the Eligible Employee or other person
<PAGE>
concerned. To the extent permitted by applicable law,
acceptance of participation in this Plan shall constitute a
release of the Company, the Board, the Committee and each
member thereof, and their respective agents from any and all
liability and obligation not involving willful misconduct or
gross neglect.
7. TRUST. The Company shall establish a trust (the "Trust") of
the type commonly referred to as a "rabbi trust", and shall
transfer to it from time to time amounts that are equal to all or
a portion of the amount credited to Eligible Employee's Accounts
hereunder. The Trust may also be directed to purchase some or
all of the Policies, and to pay premiums on the Policies. The
Committee may direct the trustee of such Trust to make payments
to Eligible Employees or beneficiaries of all or a portion of the
amount to which they are entitled under the Plan, and any amount
actually so paid out of the Trust shall be charged to the
Accounts of the Eligible Employee and reduce the amount owed
hereunder, but the existence of the Trust shall otherwise not
reduce or offset the liability of the Company under the Plan.
The Committee shall have the authority to select, remove and
replace trustees of the Trust, to direct the trustee with respect
to investments and distributions, and to approve a trust
agreement for the Trust and any amendments thereto. All funds of
the Trust shall remain subject to the claims of the general
creditors of the Company (including the Eligible Employees), and
in all cases the Plan and Trust shall be so construed so that the
Plan shall be considered "unfunded" for purposes of Section 83 of
the Code and Sections 201(2), 301(3) and 401(a)(1) of ERISA.
ARTICLE IX - MISCELLANEOUS PROVISIONS
1. LIMITATION OF RIGHTS. Nothing contained in the Plan shall
be construed to:
a) Limit in any way the right of the Company to terminate an
Eligible Employee's employment at any time; or
b) Be evidence of any agreement or understanding, express or
implied, that the Company will employ an Eligible Employee
in any particular position at any particular rate of
remuneration.
1. NONALIENATION OF BENEFITS; NO WITHDRAWALS. No amounts
payable hereunder may be assigned, pledged, mortgaged or
hypothecated and, to the extent permitted by law, no such amounts
shall be subject to legal process or attachment of the payment of
any claims against any person entitled to receive the same but
the Company shall have the right to offset any amount owed to it
by the Eligible Employee. No
<PAGE>
amounts credited to an Eligible Employee's Accounts may be
withdrawn or paid to the Eligible Employee prior to his or
her termination of employment.
2. AMENDMENT OR TERMINATION OF PLAN. Although it is expected
that this Plan shall continue indefinitely, the Board may amend
this Plan from time to time in any respect, and may at any time
terminate the Plan in its entirety; provided, however, that an
Eligible Employee's Accounts as of the date of any such amendment
or termination may not be reduced nor may any such amendment or
termination adversely affect an Eligible Employee's entitlement
to his or her Accounts as of such date. This Plan shall
terminate automatically if the Basic Plan terminates, in which
event (i) no additional Eligible Employees shall become
participants in this Plan and (ii) benefits under this Plan shall
be paid in such manner and at such time as the Board, in its
discretion, determines, without regard to when benefits under the
Basic Plan are paid.
3. CONSTRUCTION OF PLAN. This Plan is unfunded. The
obligations of the Company with respect to the amounts payable
hereunder shall be paid out of the Company's general assets and
shall not be secured by any form of trust, escrow or otherwise.
This provision shall not require the Company to set aside any
funds. The Company may set aside such funds if it chooses to do
so but such funds shall remain the property of the Company and
subject to the claims of its creditors. This Plan shall be so
construed that it will be "unfunded" and maintained "primarily
for the purpose of providing deferred compensation for a select
group of management or highly compensated employees" as those
terms are used in ERISA.
4. PAYMENT OF ADMINISTRATION EXPENSES. All expenses incurred
in the administration and operation of the Plan, including any
taxes payable by the Employer in respect of the Plan shall be
paid by the Employer.
5. GENDER AND NUMBER. Wherever used in this Plan, the
masculine shall be deemed to include the feminine and the
singular shall be deemed to include the plural, unless the
context clearly indicates otherwise.
6. LAW GOVERNING. This Plan shall be construed in accordance
with and governed by the laws of the State of Illinois to the
extent that such laws are not preempted by federal law.
_______________________________
1
2/23/90 Adopted, Effective 1/1/90
1993 Amended
1996 Amended
8/7/97 Amended
<PAGE>
MMI COMPANIES, INC.
RETURN ON EQUITY INCENTIVE PLAN
<PAGE>
TABLE OF CONTENTS
SECTION
PAGE
<TABLE>
<CAPTION>
<C> <C>
<S>
1. Introduction
Purpose and Summary 1
Effective Date, Plan Year 1
Committee 1
Employers 1
Unfunded Nature of Plan 1
2. Eligibility
Participation 1-2
Notice of Participation 2
3. Annual Awards
Determining Annual Award 2
Return on Equity Factor 2-3
Committee Involvement 3
4. Plan Accounts and Adjustments
Participant Accounts 3
Account Adjustments 4
5. Vesting
Vesting Schedule 4-5
Retirement or Death of Participant 5
Disability 5
Special Circumstances 5
6. Distribution of Benefits
Time of Payment 6
Form of Payment 6
Designation of Beneficiary 6
7. Administration
General Rights, Powers, and Duties of 6-7
Committee 7
Information to be Furnished to Committee 7
Responsibility 7
Interested Committee Member 8
Committee Expenses 8
Committee's Decision Final 8
Role of Independent Auditors
8. General Provisions 9
Action By Employer 9
Controlling Law 9
Employment Rights 9
Litigation by Participants 9
Interests Not Transferable
9
9. Amendment and Termination
</TABLE>
SECTION 1
Introduction
1.1. Purpose and Summary. The MMI Companies, Inc.
Return on Equity Incentive Plan (the "Plan") is maintained by MMI
Companies, Inc. (the "Company") to assist in attracting and
retaining management personnel for the Company and certain of its
subsidiaries and affiliates and to encourage executives to strive
for outstanding results in the operation of the Company and its
subsidiaries and affiliates from year to year. The Plan is
intended to provide an incentive comparable to equity
participation in the performance of the Company and is not
intended as an element of the Company's compensation package.
The amount awarded to each participant under the Plan for any
Plan year depends on the extent to which the amount earned on the
book value of the Company's common stock exceeds a certain
threshold.
1.2. Effective Date, Plan Year. The Plan has been
established effective January 1, 1990. The "Plan year"
is the Company's fiscal year.
1.3. Committee. The Plan is administered by the
Compensation Committee of the Company's Board of Directors (the
"Committee"). The general rights and duties of the Committee
under the Plan are described in Section 7.
1.4. Employers. The Company and each subsidiary or
affiliate of the Company which adopts the Plan with the Company's
consent is referred to herein as an "employer" and may be
referred to collectively as the "employers".
1.5. Unfunded Nature of Plan. The Plan is an unfunded
program for a select group of management employees, with
incentive award payments provided from the general assets of the
employers. Participants shall have only those rights to
incentive award payments as are set forth in the Plan and shall
be considered as unsecured creditors of the employers with
respect to any such rights.
<PAGE>
SECTION 2
Eligibility
2.1. Participation. Participants in the Plan shall be
those employees of the employers who are designated as
participants by the Committee. The Committee may add or remove
employees from participation at any time for any reason (e.g.
termination or retirement). An employee who is removed from
participation shall continue to be treated as a participant for
all purposes of the Plan except that such an employee will not
receive any awards under Section 3 for any Plan year ending after
the date the employee is removed as a participant. Each Plan year
the Committee shall classify each participant as either a Class I,
Class II or Class III participant.
2.2. Notice of Participation. The Committee will
ensure that each participant receives notice of eligibility for
participation in the Plan.
SECTION 3
Annual Awards
3.1. Determining Annual Award. Each participant in the
Plan on the last day of a Plan year shall be entitled to an award
for that Plan year. The annual award for a Plan year shall be
the amount determined by multiplying the participant's base
salary for the Plan year by the return on equity factor (as
defined in subsection 3.2) that is applicable based on the
participant's class of participation and the Company's return on
equity for the Plan year.
3.2. Return on Equity Factor. The return on equity
factor ("ROE Factor") for each class of participants shall be the
percentage for the class (determined from the table below) that
corresponds to the Company's return on equity per share (ROE" as
defined below) for the Plan year.
If the Return on
Equity Per Share Is: Then The ROE Factor shall Be:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Class I Class II Class III
Participants Participants Participants
Below 14% 0% 0% 0%
14% 3% 2.5% 2%
15% 9% 7.5% 6%
16% 18% 15% 12%
17% 30% 25% 20%
18% 42% 35% 28%
19% 51% 42% 34%
20% 57% 46% 38%
21% or more 60% 50% 40%
</TABLE>
The ROE Factor for any ROE between 14 percent and 21 percent that
is not a whole number shall be the sum of (i) the ROE Factor on
the table that corresponds to the next lower ROE on the table
that is a whole number, and (ii) the product of the fractional
portion of the ROE (expressed as a decimal and rounded to the
nearest one-tenth) multiplied by the margin between the ROE
Factors on the table that correspond to the next lower and next
higher ROE figures on the table that are whole numbers.* The
Company's ROE for a Plan year means the ratio (expressed as a
percentage) of the Company's fully diluted Operating Earnings Per
Share for the Plan year divided by the beginning of year Book
Value Per Share. For purposes of this calculation, Operating
Earnings Per Share shall mean per share income from continuing
operations less the net of tax per share impact of realized
investment gains and losses. Operating Earnings Per Share also
shall exclude the net of tax effect of earnings adjustments for
material amounts resulting from nonrecurring transactions or
agreements entered into in prior years or for adjustments that
arise from outside factors, e.g., accounting, legislative or
regulatory changes. Book Value Per Share shall mean beginning of
the year fully diluted book value per share.
*For example, if the ROE is 14.53 percent, the ROE factor will be
6 percent for Class I: (3 + [.5x(9-3)]);; the ROE factor will be
5 % for Class II; 4(2.5 + [.5x(7.5-2.5)]); the ROE factor for Class
III will be 4% (2 + [.5x(6-2]).
3.3 Committee Involvement. The Committee shall approve the
construction of "Operating Earnings Per Share" and the exclusion,
if appropriate, of the after-tax earnings impact of any material
events in order to have such earnings per share amounts in
concert with the intent of the Operating Earnings Per Share
definition. The decision of the Committee shall be final.
Further, it is the intent of the Committee to neither enhance nor
penalize the Company's ROE calculation as a result of an increase
or decrease in the per share market value of the Company's common
stock.
<PAGE>
SECTION 4
Plan Accounts and Adjustments
4.1. Participant Accounts. A bookkeeping reserve
account will be maintained by the Committee for each participant
in the Plan. A separate subaccount shall be maintained under a
participant's account for each Plan year the participant receives
an award under the Plan. The annual award determined for a
participant in accordance with the provisions of Section 3 shall
be credited to the subaccount created under the participant's
account for the Plan year and added to the amounts credited to
the participant's subaccount for prior Plan years and thereafter
shall be adjusted as provided in subsection 4.2 below.
4.2. Account Adjustments. The annual award for any
Plan year shall be credited to a participant's account as soon as
practicable after the amount of the award has been determined.
Thereafter, each subaccount under a participant's account shall
be adjusted as follows:
(a) As of each January 1 and July 1, interest shall be credited
to each subaccount based on the subaccount balance at the
beginning of the period. The interest to be credited shall
be at an annual rate equal to the prime interest rate as
reported by the Wall Street Journal on the date such
interest is to be credited (or the next closest business day
if such date is a Saturday or Sunday).
(b) As soon as practicable after the end of each Plan year but
prior to the April 1 immediately followed the end of such
year, the Company will review the ROE determinations for
each of the three Plan years preceding the Plan year just
completed. If the ROE for any such Plan year is reduced
because of a determination by the Company's auditors and
consulting actuaries that the Company's loss reserves
for the fiscal year ending with the Plan year as brought
forward were deficient, the Committee will charge each
subaccount created for that Plan year with the difference
between the award that was originally credited to the
subaccount and the award that would have been credited had
the redetermined ROE been used.
(c) As soon as practicable following a distribution under
Section 6, a participant's subaccount shall be charged with
the amount of the distribution after adjusting the
subaccount under subparagraphs (a) and (b) above.
<PAGE>
SECTION 5
Vesting
5.1. Vesting Schedule. Provided a participant is
employed on the applicable vesting dates set forth below, a
participant shall become vested (i.e., shall have a
nonforfeitable right subject to the adjustment provisions of
subsection 4.2) in a portion of each of his subaccounts in
accordance with the following vesting schedule, based upon the
number of months after the end of the Plan year for which the
subaccount was established.
Months Following Plan Year Vesting %
<TABLE>
<CAPTION>
<S>
<C>
16 33 1/3%
28 50%
40 100%
</TABLE>
That portion of any subaccount that is not vested under this
Section 5 at termination of employment shall be forfeited by the
participant.
5.2. Retirement or Death of Participant.
Notwithstanding subsection 5.1, a participant's entire
account balance shall be 100 percent vested in the event of
the participant's retirement or death while employed by an
employer; provided, that such account shall continue to be
adjusted as provided in subsection 4.2 until completely
distributed. The term "retirement" as used in this Plan
shall mean attaining a minimum of (i) age 55 with 10 years
of credited service, or (ii) age 65. In either case, it
shall also be a condition of payment(s) that the participant
does not engage in "Other Employment." "Other Employment"
means (x) performing any services, whether compensated or
not, as an employee, consultant, director, advisor, or agent
of a Competitor of the Company and its subsidiaries; or (y)
performing any services as an employee or independent
contractor of a business entity other than MMI and its
subsidiaries, except for limited consulting services
approved in advance by MMI. Such approval shall not be
unreasonably withheld. "Competitor" means a business entity
which engages in the distribution and/or sales of products
or services which are offered or in development by any of
MMI's ongoing business operations at the time of termination
of the participant's employment.
The Company may request appropriate proof that participant is
retired, including, but not limited to, obtaining a certificate
from the participant, and reviewing the participant's tax
returns.
<PAGE>
5.3. Disability. Notwithstanding subsection 5.1, a
participant's entire account balance shall be 100 percent vested
in the event the participant becomes disabled; provided, that
such account shall continue to be adjusted as provided in
subsection 4.2 until completely distributed. A participant shall
be considered disabled if it is certified to the Company by a
physician acceptable to the Company that the participant's
disability is such that it will substantially impair the
participant's ability to perform his duties for more than 180
days.
5.4. Special Circumstances. The entire balance in
participant's account shall become 100 percent vested and
nonforfeitable in the event of a change in control of the
Company. A change in control of the Company shall mean a
reconstitution of more than 50 percent of the Board of Directors
of the Company within any consecutive 12-month period or an
accumulation of more than 50 percent of the Company's outstanding
stock by any individual, by any entity, controlled group of
entities, or group of individuals or entities acting in concert
for the purpose of controlling the Company.
SECTION 6
Distribution of Benefits
6.1. Time of Payment. Each of a participant's
subaccount vested balances (as adjusted from time to time under
subsection 4.2) shall be distributed in three installments. One-
third of each subaccount balance shall be paid in the 16th month
following the end of the Plan year for which the subaccount was
created, one-half of the remaining account balance shall be paid
in the 28th month following the end of such Plan year and any
remaining balance in the subaccount shall be paid in the 40th
month following the end of such Plan year. The Committee will
combine all subaccount payments under the Plan into one payment
to a participant. Notwithstanding the foregoing, a participant's
entire account shall be distributed in one lump sum payment as
soon as practicable following a change in control of the Company
(as defined in subsection 5.4 above).
6.2. Form of Payment. Amounts distributable to a
participant (or beneficiary) will be payable in a lump sum
directly from the general assets of the employers.
6.3 Designation of Beneficiary. Each participant form time to time
may designate any person or persons to whom the participant's
account will be paid in the event the participant dies before
receiving all of his account balance. A beneficiary designation
will be effective only when filed in writing with the Committee
while the participant is alive and will
<PAGE>
cancel all beneficiary forms previously filed with the Committee.
If a deceased participant failed to designate a beneficiary, or
if the beneficiary dies before full payment of the participant's
account, the participant's account shall be payable to the
participant's spouse or, if there is none, to the participant's
estate.
SECTION 7
Administration
7.1. General Rights, Powers, and Duties of Committee.
The Committee shall be the Plan administrator and shall be
responsible for the management, operation, and administration of
the Plan. In addition to any powers, rights and duties set forth
elsewhere in the Plan, it shall have the following powers and
duties:
(a) To adopt such rules and regulations consistent with the
provisions of the Plan as it deems necessary, in its
sole discretion, for the proper and efficient
administration of the Plan;
(b) To administer the Plan in accordance with its terms and
any rules and regulations it may establish;
(c) To maintain records, concerning the Plan, sufficient to
prepare reports, returns and other information required
by the Plan or by law;
(d) To construe and interpret the Plan and to resolve all
questions arising under the Plan;
(e) To direct the employers to pay benefits under the Plan,
and to give such other directions and instructions as
may be necessary for the proper administration of the
Plan;
(f) To employ or retain agents; attorneys, accountants or
other persons, who may also be employed by or represent
the employers; and
(g) To be responsible for the preparation, filing and
disclosure on behalf of the Plan of such documents and
reports as are required by any applicable Federal or
State law.
<PAGE>
7.2. Information to be Furnished to Committee. The
employers shall furnish the Committee such data and information
as it may require. The records of the employers shall be
determinative of each participant's period of employment,
termination of employment and the reason therefor, leave of
absence, reemployment and personal data. Participants and
their beneficiaries shall furnish to the Committee such evidence,
data or information, and execute such documents as the Committee
requests.
7.3. Responsibility. No member of the Committee shall
be liable to any person for any action taken or omitted in
connection with the administration of this Plan unless
attributable to such member's fraud or willful misconduct. The
Company agrees to defend, indemnify and hold each Committee
member harmless form any and all damages, losses or costs
(including reasonable attorney's fees), which occur by reason of,
arise out of, or are incidental to implementation or
administration of the Plan unless attributable to the member's
fraud or willful misconduct.
7.4. Interested Committee Member. If a member of the
Committee is also a participant in the Plan, the member may not
decide or determine any matter or question concerning such
member's account under the Plan unless such decision or
determination could be made under the Plan by such individual if
not a member of the Committee.
7.5. Committee Expenses. All costs, charges and
expenses reasonably incurred by the Committee will be paid by the
employers in such proportions as the Company may direct.
7.6. Committee's Decision Final. Any interpretation of
the provisions of the Plan and any decisions on any matter within
the discretion of the Committee made by the Committee in good
faith shall be binding on all persons. A misstatement or other
mistake of fact shall be corrected when it becomes known and the
Committee shall make such adjustment on account thereof as it
considers equitable and practicable.
7.7 Role of Independent Auditors The determination of
the Company's ROE for a Plan year shall be reviewed by the
Company's independent auditors. The auditor's role in reviewing
the ROE calculation will be at the direction of the Committee;
however, it is contemplated that their role is for the purpose of
expressing comfort to the Committee as well as reporting and
documenting findings by performing the following:
(a) Review the calculation of original ROE including Operating
Earnings per Share and Book Value per Share;
(b) Review the calculation of per share net of tax realized
investment gains and losses;
<PAGE>
(c) Review the calculation of common shares outstanding as of
year end and of the weighted average number of common share
and common stock equivalents as of each year;
(d) Review loss reserve adjustments by accident year as of each
succeeding year end;
(e) Review the effect of net of tax loss reserve adjustments on
subsequent years per share operating earnings, as
recalculated;
(f) Review the calculation of any other adjustments deemed
appropriate by the Committee; and
(g) Review the derivation of all amounts used in the
calculation.
<PAGE>
SECTION 8
General Provisions
8.1. Action by Employer. Any action required or
permitted to be taken by an employer under the Plan shall be by
resolution of its Board of Directors, by resolution of a duly
authorized committee of its Board of Directors, or by a person or
persons authorized by resolution of its Board of Directors or
such committee.
8.2. Controlling Law. Except to the extent superseded
by laws of the United States, the laws of Illinois shall be
controlling in all matters relating to the Plan.
8.3. Employment Rights. The Plan does not constitute a
contract of employment, and participation in the Plan will not
give any employee the right to be retained in the employ of an
employer, nor any right or claim to any benefit under the Plan
unless such right or claim has specifically accrued under the
terms of the Plan.
8.4. Litigation by participants. If a legal action
begun against an employer or the Committee or any member thereof,
by or on behalf of any person results adversely to that person,
the cost to the employers or the Committee or any member thereof
of defending the action will be charged to the sums, if any,
which were involved in the action or were payable to the person
concerned.
8.5 Interests Not Transferable. The interests of persons
entitled to benefits under the Plan are not subject to their
debts or other obligations and, except as may be required by the
tax withholding provisions of the Internal Revenue Code or any
state's income tax act, may not be voluntarily or involuntarily
sold, transferred, alienated, assigned or encumbered.
SECTION 9
Amendment and Termination
While the Company expects and intends to continue the Plan, it
reserves the right to amend the Plan from time to time or to
terminate the Plan, provided, however, that each participant will
be entitled to the awards credited his account prior to such
amendment or termination which are vested at the time of the
amendment or termination or vested thereafter in accordance with
the terms of the Plan as in effect immediately report to such
amendment or termination.
