SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934. For the fiscal year ended: December 31, 1996
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)
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, $0.10 par value New York Stock Exchange
(Title of each class) (Name of each exchange on which registered)
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 period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. [X] Yes [ ] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of
the Registrant was $277,003,000 as of March 6, 1997. The aggregate number of the
Registrant's $0.10 par value Common Stock shares outstanding on March 6, 1997
was 11,740,206.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Annual Report to Stockholders for the year
ended December 31, 1996 are incorporated by reference into Part II of this
report. Portions of the Registrant's Proxy Statement for the 1997 annual meeting
of stockholders to be held on April 17, 1997 are incorporated by reference into
Part III of this report.
Exhibit index is located on page 17.
Page 1 of 18.
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PART I
ITEM 1. BUSINESS
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OVERVIEW
MMI Companies, Inc. ("Company") offers a comprehensive set of specialized
insurance products and consulting services that are designed to assist
healthcare providers manage the business, clinical, insurable and financial
risks associated with the delivery of healthcare. The Company was formed in 1983
to write medical malpractice insurance for hospitals and physicians in the
United States, and has since established its strategic vision to be The
Healthcare Risk Management Source . Since the initial public offering of its
Common Stock in June 1993, the Company has, through acquisitions and internal
growth, substantially increased its insurance assets and capital as well as the
breadth of its products and services and its capacity to deliver them. The
Company has acquired insurance, strategic management consulting, employee
relations consulting, and professional liability claims management businesses
and successfully integrated them into its operations. It also developed
additional services to assist healthcare providers manage their business
operations.
Because of the close relationship between clinical and insurable risks, the
Company integrates its professional liability insurance with its risk management
services and does not offer such insurance or certain of its risk management
programs on a stand alone basis. Accordingly, insurance clients are required to
purchase a specific set of risk modification services consisting of consulting,
education and information in order to have access to the Company's professional
liability coverage.
The Company's business is organized into three operating groups:
o The Insurance Group generates medical malpractice and life and health
insurance premiums by underwriting primarily professional and general
liability insurance and reinsurance for healthcare providers,
including hospitals, healthcare systems and physician groups.
o The Strategic Management Consulting Group generates fee income by
providing healthcare clients with consulting services, including
strategy development, healthcare system integration and development,
managed care strategy design and implementation, hospital/physician
alignment strategies and business process reengineering.
o The Healthcare Services Group generates fee income by providing
clinical risk modification services, employee relations and human
resource consulting services, education programs, information
services, managed care and third party administrative services,
physician credentials verification and patient billing and coding
services.
The Company believes that a close working relationship with its healthcare
industry clients is essential. Consequently it markets its products and services
directly and through insurance brokers where such a close client relationship
can be created and maintained. The Company utilizes a team approach in
delivering its services, combining the expertise of its sales, risk management,
claims and underwriting specialists. The Company's Board of Directors is
composed primarily of healthcare executives and physicians, which contributes to
the Company's understanding of the business needs of its clients. In addition,
the Company works closely with its clients in developing its products and
services through formal and ad hoc advisory committees.
Business Environment
The healthcare industry, particularly healthcare providers, constitutes the
Company's target market. This market has undergone substantial structural change
over the past decade and continues to evolve. Historically, healthcare delivery
was generally provided on a fee-for-service basis by hospitals and physicians.
The Company believes that under managed care, healthcare delivery is evolving
toward a more complex structure involving numerous healthcare provider types and
payment mechanisms. Healthcare providers are forming integrated delivery
networks by combining through mergers and acquisitions and through contractual
arrangements. These networks include healthcare systems, physician
organizations, physician management companies,
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physician hospital organizations and individual hospitals and physicians and
other specialized healthcare provider entities.
Under managed care contracts and health plans, these integrated networks
provide care for covered groups represented by large purchasers. These contracts
can include fixed price per person, or capitation arrangements, and other
criteria with respect to the type and quality of healthcare services provided.
In addition, healthcare is provided in numerous settings, including hospitals,
clinics, outpatient facilities, physician offices, rehabilitation and long-term
care facilities and the home.
The Company believes that the evolving and consolidating healthcare
environment presents providers and networks with a related set of risks:
o Business Risk - arises as providers develop and implement
organizational and operating strategies to respond to their changing
business environment.
o Clinical Risk - relates to assuring a consistent quality of care
provided to patients in the increasing variety of delivery settings.
o Insurable Risk - relates to costs associated with medical malpractice
and other traditional liability exposures.
o Financial Risk - increases for providers as managed care transforms
the operating environment from fee-for-service to capitated
arrangements.
The Company believes that healthcare providers benefit from addressing
these risks jointly rather than individually to achieve delivery of quality
healthcare at appropriate cost.
MMI's Integrated Response
The Company's client base has evolved as the structure of the healthcare
industry has changed. Initially the Company insured hospitals and physician
groups and physicians affiliated with insured hospitals. The Company's client
base has expanded to include healthcare systems, integrated delivery systems,
various types of physician organizations and health plans in addition to its
historical clients. The Company believes that as healthcare integration
continues, its prospective clients will continue to become more sophisticated in
their approach to managing risk, which should result in increased demand for its
services. The Company has developed a comprehensive set of products and services
designed to assist healthcare providers address the risks of healthcare delivery
in an evolving environment. These services have been developed both internally
and through acquisition.
PRODUCTS AND SERVICES
INSURANCE GROUP
Insurance products include professional liability insurance for healthcare
organizations and systems, physicians and allied healthcare professionals,
assumed reinsurance, and life and health insurance, written by the Company's
insurance subsidiaries: American Continental Insurance Company ("ACIC"), Health
Providers Insurance Company ("HPIC") and American Continental Life Insurance
Company ("ACLIC"). Both ACIC and HPIC are rated "A" (Excellent) by A.M. Best
Company ("A.M. Best"). ACLIC is rated "B++" (Very Good) by A.M. Best.
Healthcare Organizations and Systems. The Company writes primary, umbrella
and excess liability insurance for healthcare organizations and systems. The
Company has capacity to write policy limits to $51,000,000 and obtains
reinsurance for losses in excess of $3,000,000 subject to an annual aggregate
reinsurance deductible of $8,000,000. The Company's liability insurance is
written primarily on a claims-made basis. The Company has the capacity to write
this coverage on a surplus lines basis in most jurisdictions through HPIC in
situations where filed rates and forms are not immediately available for complex
risk exposures. The Company also writes liability insurance for directors and
officers of healthcare systems.
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Physicians and Allied Healthcare Professionals. The Company underwrites
physician groups and physicians that are employed by or affiliated with insured
hospitals or clinics, and locum tenens organizations. The Company writes both
primary and excess policies primarily on a claims-made basis and has capacity to
write policy limits of up to $5,000,000 per occurrence with a $7,000,000
aggregate policy limit. The Company cedes to reinsurers 100% of losses in excess
of $500,000 per claim. The Company's maximum exposure on any single occurrence
involving more than one insured is $750,000. The Company is also the insurer for
several liability insurance programs sponsored by associations of healthcare
professionals.
Assumed Reinsurance. The Company provides excess of loss reinsurance for
healthcare-sponsored medical malpractice insurance companies, principally
single-state organizations. The Company had assumed reinsurance gross earned
premiums of $19,510,000 in 1996.
Life and Health Insurance. The Company provides group life, stop-loss, and
disability products for healthcare institutions and their employees. The
Company's life and health insurance products further the Company's strategy of
offering a broad range of products to its existing and potential clients. The
Company also provides HMO reinsurance and healthcare provider excess insurance.
CONSULTING AND FEE GROUP
The Strategic Management Consulting Group and Healthcare Services Group
comprise the Company's consulting and fee group.
Strategic Management Consulting Group
The Company acquired McManis Associates on December 30, 1993. McManis
Associates is a Washington D.C.-based management and research consulting firm
founded in 1964 that specializes in providing services to healthcare industry
clients. McManis Associates provides a wide variety of consulting services,
including strategy development, healthcare system integration and development,
managed care strategy design and implementation, hospital/physician alignment
strategies and business process reengineering. These services are designed to
assist clients in implementing organizational change. Since the acquisition,
McManis Associates has increased its capacity to provide consulting services by
locating senior consultants in certain of the Company's other offices throughout
the United States.
Healthcare Services Group
The Healthcare Services Group provides fee-based services designed to help
its customers increase revenues, reduce cost and improve the quality of
healthcare provided. Since its inception in 1983, the Company has required that
its insurance clients purchase a combination of its risk modification programs,
educational programs and information services as a condition to obtaining its
insurance coverage. The Company subsequently broadened its strategy and now
offers certain of these services to both insured and non-insured clients and has
developed additional clinical and operations support service offerings for all
of its healthcare clients.
Risk Modification Services to Insured Clients. The clinical risk
modification process is designed to help clients change practices in the
healthcare setting that may increase risk exposure. This process begins with a
review of each prospective insured prior to underwriting in order to assess risk
exposures and to evaluate its receptivity to the Company's risk management
philosophy. Once insured, the client is provided several services by the Company
to manage its risk exposures.
The Company's risk modification approach originated with its risk
modification programs for the clinical setting. The Company has introduced
specialized clinical risk modification programs in four relatively high-risk
areas: obstetrics, anesthesia, emergency medicine and surgery. These programs,
which are updated regularly, seek to improve the quality of patient care,
thereby reducing loss exposures and incurred losses in these areas. The Company
requires that healthcare systems continually review clinical practices and
submit indicator statistics monthly. These statistics measure the insureds'
degree of compliance with the guidelines which have been developed by national
work groups of physicians and other medical professionals working under the
sponsorship of the Company. These data comprise a comparative database of
practice and outcome indicators that has been maintained since 1985. Insured
institutions, must also establish procedures for internal clinical and risk
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management review of cases and furnish reports and make available patient
records, case review summaries and other material requested to support the
evaluation of their risk management activity.
The introduction of these programs into the insured's operation is
accomplished through a combination of consultation, education and information
services.
Consultation. The Company's risk management consultants regularly
conduct on-site visits to insured institutions, which include interviews
with key executive, administrative and clinical staff; review of hospital
policies, physician profiles and patient records; and inspection of
treatment areas. The consultants' periodic observations and recommendations
are reported to the insured and are included in the risk management plan
developed for the insured. The Company's risk consultants are supported by
a nationwide network of outside clinical and legal experts who are called
upon as needed to assist with on-site reviews and risk intervention. The
consultants are available to insureds to discuss risk management issues
that arise from time to time.
Education Programs. The Company includes education programs as a key
element of its approach to risk modification. The Company provides insureds
with educational opportunities including national seminars and focused
training workshops. National seminars are offered to multi-disciplinary
audiences and are designed to address a specific area of risk exposure of
national concern. Focused training workshops, with limited enrollment,
provide in-depth training for risk managers, healthcare executives and
others within the healthcare setting on specialized areas of risk. Some
examples of workshop topics include behavioral health, laboratory services,
radiological services, home healthcare and group practice. In addition, the
Company has developed and offers The Healthcare Risk Management Certificate
Program, a ten course professional development and continuing education
program. The Company's education programs have been approved by several
states and professional organizations for professional certification or
continuing education credit.
Information Services. Insureds receive the Company's proprietary
software, RISKKEY(R), which facilitates collection, analysis and reporting
of incident, claim and clinical data and contains a policy module that
enables insureds to monitor their insurance coverages. In addition, the
Company has developed an on-line communications function with its insureds
that allows for direct interaction among all clients and from each client
to the Company's staff.
Clinical and Operations Support Services. The Healthcare Services Group
offers services to insured and non-insured clients on a fee basis. These
services include clinical risk modification program assessment and development;
third party claims administration and audit and design of self-administered
claims management systems; and customized education and training.
The Company offers managed care support services that include: physician
credentials verification services; managed care contract management, patient
billing and coding services; quality management services; health claims
administration; and accreditation preparation services.
The Company provides employee relations and human resource consulting
services to healthcare organizations. The Company believes that human resource
and compensation issues will take on increased importance as healthcare
organizations continue to consolidate and evolve.
MARKETING AND UNDERWRITING
The Company believes that a close working relationship with its healthcare
industry clients is essential and consequently markets its products and services
directly and markets through insurance brokers where such a close client
relationship can be created and maintained. The Company markets its products
nationally and has significant operations in Deerfield, Illinois; Washington,
D.C.; Atlanta, Georgia; San Francisco and San Diego, California; and
Independence, Missouri. The Company also has several small offices in locations
where specialized services are provided to clients. ACIC is licensed in 50
states and the District of Columbia. In 1996, the five largest states in terms
of direct written premium by ACIC were Florida, Illinois, California, North
Carolina and
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Georgia, which together accounted for approximately 49% of ACIC's direct written
premium. HPIC is licensed in two states and has authority to write insurance on
a surplus lines basis in 29 states.
The Company has a select risk underwriting philosophy and its account
management team approach supports the underwriting process. Clinical risk
management consultants prepare reports regarding potential new business and
provide site visit reports, risk assessments, and recommendations and monthly
statistical reports regarding risk management programs for renewal business. The
Company's risk management consultants develop a baseline risk index which
measures the degree to which clients have processes in place to assess and
manage risk. Claims managers evaluate a minimum of five years of loss history
and reserve data, and underwriters require detailed historical exposure data and
three years of financial information. The Company's underwriters perform a
complete underwriting evaluation for every new and renewal applicant and
determine premiums and coverage provisions when an insurance quotation is
issued. Pricing of healthcare system insurance is strongly influenced by the
loss experience of the insured, which provides incentive for the client to adopt
and adhere to sound risk management policies.
For physicians affiliated with insured healthcare systems, the underwriting
process involves an evaluation of the prospective insured and an underwriting
recommendation by a committee of insured physicians, in addition to an
evaluation of a physician's loss history and exposure data. Although physicians
are underwritten individually by the Company, for all physician group business
pricing is influenced by the experience of the insured physician group. The
Company believes that this approach to pricing and the review by group members
improves the physician underwriting process.
CLAIMS MANAGEMENT
The Company's approach to claims management utilizes highly experienced
multi-disciplinary teams and early clinical evaluation. The Company believes
that this approach allows it to assess claims more accurately and manage them to
resolution more efficiently. Clinical resource work groups are a key component
of claims management for the Company. Each work group meets three times a year
and includes several prominent physicians affiliated with insured healthcare
institutions and the Company's Medical Director and legal, claims and
underwriting personnel. The work groups review and evaluate clinical, standard
of care, causation and risk management issues relating to new claims.
The Company emphasizes early evaluation and aggressive management of
claims. Claims professionals are required to complete a full evaluation and
reserving of claims within nine months of the filing of a claim. The claims
department conducts major case reviews semiannually for all cases reserved at or
above $100,000 and for all obstetric claims. The major case review process
ensures ongoing senior management involvement for all large exposure claims. The
Company works closely with its defense counsel to develop case strategies and
participate in litigation of claims. Claims professionals attend case
conferences and trials and maintain an expert witness data bank. When necessary,
medical consultants are retained to assist in defense of claims.
The Company seeks a cooperative working relationship with client risk
managers. Claims professionals are assigned responsibility for claim activity on
an account basis, working closely with underwriters and risk management
consultants also assigned to these accounts. Claims professionals routinely
conduct phone consultations with client risk managers regarding specific cases
and perform claim audits annually. This working relationship and open
communication is critical for the Company in identifying incidents that may
result in claims and assists the Company in evaluating and responding to claims
expeditiously.
RESERVES AND LOSSES
The Company establishes balance sheet reserves based on its estimates of
the future amounts necessary to pay claims and expenses associated with
investigation and settlement of claims. These estimates include two components:
case reserves and non-case reserves. Case reserves are estimates of future
losses and LAE for reported claims and are established by the claims department.
Non-case reserves, which include a provision for losses that have occurred but
have not been reported to the Company as well as development on reported claims,
are the difference between (i) the sum of case reserves and paid losses and (ii)
actuarially estimated ultimate
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incurred losses. Ultimate incurred losses are an actuarially determined estimate
of total losses and LAE necessary for the ultimate settlement of all reported
claims and incurred but not reported claims including amounts already paid.
The process of estimating reserves is inherently uncertain and involves an
evaluation of many variables including social and economic conditions. A
significant period of time may elapse between the report of a claim to the
Company and the ultimate settlement of the claim. The inherent uncertainty of
establishing reserves is relatively greater for companies writing long-tail
casualty insurance, including medical malpractice insurance, due primarily to
the longer-term nature of the resolution of claims. There can be no assurance
that the ultimate liability of the Company will not exceed the amounts reserved.
The following table presents the development of balance sheet reserve
liability for property and casualty reserves net of reinsurance for the calendar
years 1987 through 1996. The amounts shown for each year on the top line of the
table represent the Company's estimate of its liability for future payments of
losses and LAE as of the balance sheet date as originally reported. The
liability for unpaid losses and LAE as originally reported is presented net of
reinsurance receivables relating to unpaid losses. The upper portion of the
table represents a re-estimate of the original balance sheet liability at the
end of each succeeding period, followed by a line indicating the change from the
original estimate to the most current re-estimate. The lower portion of the
table represents the cumulative amount of the original liability that has been
paid in the succeeding years.
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<TABLE>
<CAPTION>
ANALYSIS OF LOSS AND LOSS ADJUSTMENT EXPENSE RESERVE DEVELOPMENT
(IN THOUSANDS)
DECEMBER 31,
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1987 1988 1989 1990 1991 1992 1993 1994 1995 1996
-----------------------------------------------------------------------------------------
Liability for unpaid
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
losses and LAE, net $115,315 $162,812 $208,752 $244,876 $288,297 $314,401 $337,813 $361,733 $538,707 $536,635
Liability re-estimated as of:
One year later 117,015 162,938 208,674 247,086 302,168 317,727 340,198 359,967 533,599
Two years later 118,368 164,333 209,397 255,183 301,032 316,445 336,180 357,448
Three years later 120,724 162,832 212,058 248,985 287,985 305,428 324,901
Four years later 120,480 166,651 207,542 235,641 278,989 288,703
Five years later 122,992 163,278 202,287 227,666 265,482
Six years later 123,039 159,063 199,548 218,087
Seven years later 122,829 157,348 194,651
Eight years later 124,619 154,283
Nine years later 122,915
Cumulative redundancy
(deficiency) $(7,600) $8,529 $14,101 $26,789 $22,815 $25,698 $12,912 $ 4,285 $ 5,108
========= ======= ======== ======== ======== ======== ======== ======== ========
Cumulative liability paid as of:
One year later $18,209 $28,150 $47,812 $39,248 $72,518 $68,070 $77,646 $69,088 $118,959
Two years later 39,502 67,111 78,606 97,689 125,036 125,009 135,881 161,601
Three years later 61,709 82,354 119,211 126,723 157,181 166,623 202,374
Four years later 71,051 106,322 140,118 151,038 186,705 194,089
Five years later 89,864 121,615 153,606 166,893 206,336
Six years later 101,741 127,870 161,440 180,278
Seven years later 106,218 134,099 169,791
Eight years later 110,338 140,720
Nine years later 115,768
</TABLE>
In evaluating the information in the table above, it should be noted that
each column includes the effects of changes in amounts for prior periods. The
table does not present accident year or policy year development data. Conditions
and trends that have affected the development of liabilities in the past may not
necessarily occur in the future. Accordingly, it may not be appropriate to
extrapolate future redundancies or deficiencies based on this table. In 1996,
reserve redundancy of $5,108,000 represents less than a 1% decrease in the
Company's estimate of the December 31, 1995 reserve.
The following table presents a reconciliation of reserves of the Company's
property and casualty operations in accordance with statutory accounting
practices ("SAP") with reserves reflected in the Consolidated Financial
Statements prepared in accordance with generally accepted accounting principles
("GAAP") as of December 31, 1996.
<TABLE>
<CAPTION>
RECONCILIATION OF SAP RESERVES WITH GAAP RESERVES
(IN THOUSANDS)
DECEMBER 31, 1996
-----------------
<S> <C>
Liability for losses and LAE on a SAP basis...................................... $451,312
Add:
Statutory loss reserve discount................................................ 52,176
Retroactive reinsurance reserve assumed ....................................... 14,166
Other ........................................................................ 18,981
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Liability for losses and LAE on a GAAP basis (net of
reinsurance receivables of $87,159)............................................ $536,635
========
</TABLE>
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For SAP reporting, ACIC discounts reserves at a 5.0% interest rate, as
expressly approved by insurance regulatory authorities. Retroactive reinsurance
reserve assumed is reported as an aggregate write-in liability for SAP. For GAAP
reporting, ACIC does not discount its reserves.
INVESTMENTS
The Company invests principally in investment grade fixed income securities
and preferred stocks. The Investment Committee of the Company's Board of
Directors meets quarterly with management to set investment policy and review
performance of internal and external investment managers. The Company's Board of
Directors approves investment policy which currently authorizes a maximum
average effective duration of six years and limits fixed income and preferred
stock purchases to securities rated Baa/BBB or better by Moody's Investors
Services, Inc. ("Moody's"), Standard & Poor's Corporation ("S&P"), Duff & Phelps
Inc. ("D&P") or Fitch Investors Service Inc ("Fitch"). The Company's investment
managers select specific bond issues within these guidelines. The investment
policy limits holdings in private placements, common stocks, preferred stocks
and international stocks and bonds, cumulatively, to 5% of invested assets.
In general, the investment policy of the Company is to maximize after-tax
total return, subject to constraints on investment quality, maturity and
liquidity. The Company's investment policy establishes a range for the
appropriate allocation among asset classes. The precise allocation varies
depending on an evaluation of the economic environment and on the Company's tax
position. Currently, the portfolio is being managed with emphasis on corporate
and municipal bonds. As of December 31, 1996, the securities in the Company's
fixed income portfolio had an average rating of Aa3 as rated by Moody's.
S&P, D&P or Fitch ratings are used for securities not rated by Moody's.
All fixed maturity and preferred stock securities are classified as
available-for-sale and carried at estimated fair value. For these securities,
temporary unrealized gains and losses, net of tax, are reported directly through
stockholders' equity, and have no effect on net income.
CEDED REINSURANCE
Insurance companies purchase reinsurance to limit risk on individual
exposures, protect against catastrophic losses and increase their capacity to
write insurance. Reinsurance involves an insurance company transferring, or
ceding, all or a portion of its exposure on insurance to a reinsurer. The
reinsurer assumes the exposure in return for a portion of the premium received
by the insurance company. Reinsurance does not discharge the insurer from its
obligation to its insureds. If the reinsurer fails to meet its obligations, the
ceding insurer remains liable to pay the insured.
The Company cedes a material amount of its business to reinsurers to spread
risk and limit loss per exposure. Management seeks to mitigate exposure to
adverse reinsurance pricing conditions and to limit its credit risk by
maintaining a diversity of reinsurers. Furthermore, the Company diversifies its
reinsurance exposure geographically with North American, United Kingdom and
continental European companies.
For its hospital medical malpractice insurance business, the Company has
reinsurance capacity to write policy limits to $51,000,000. The Company has
reinsurance for all losses in excess of $3,000,000 per occurrence subject to an
$8,000,000 aggregate annual deductible. The Company provides for its estimated
liability relating to this deductible in loss reserves. For its physician
business, the Company has reinsurance capacity to write policy limits up to
$5,000,000 per claim with a $7,000,000 annual aggregate limit. The Company has
reinsurance for losses in excess of $500,000 per claim and $750,000 for
occurrences involving more than one claim. For its group life insurance
business, the Company has reinsurance for losses in excess of $50,000 per life
and for excess medical expense business, the Company cedes 70% of the premiums
and losses for policy limits of $1,000,000 per occurrence and $2,000,000 in the
aggregate.
The Company's Vetting Committee evaluates the credit risk associated with
every reinsurer and reports its findings to the Audit Committee of the Board of
Directors. The Board of Directors has substantially increased the Company's
creditworthiness standards for reinsurers over the past several years. For new
reinsurers, the
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standards require minimum capital and surplus of $100,000,000 or one of the
following ratings: at least A- or better from A.M. Best, Claims Paying Ability
rating from Standard & Poor's of at least A or a S&P Insurance Solvency
International rating of at least A.
COMPETITION
The Company competes with monoline medical malpractice insurance companies,
large multi-line property and casualty companies and providers of risk
management and consulting services. The insurance business is highly
competitive. Many of the Company's competitors have substantially greater
financial resources than the Company, and there are many companies that provide
risk management and other services that the Company provides. Among other
things, competition may take the form of lower prices, broader coverage, greater
product flexibility or higher quality service. However, the Company believes
that its particular combination of insurance, risk management services involving
clinical risk management, strategic management consulting services, direct
access and long-term relationships with its clients provide it with a
competitive advantage in its chosen markets.
REGULATION
The Company's insurance subsidiaries, ACIC, HPIC and ACLIC (collectively,
the "Insurance Subsidiaries") are subject to the insurance laws and regulations
in each state in which they are licensed to do business. ACIC is licensed in 50
states and the District of Columbia, HPIC is licensed in 2 states and has
authority to write on a surplus lines basis in 29 states. ACLIC is licensed in
46 states and the District of Columbia. ACIC and ACLIC are subject to
supervisory regulation by Missouri, the state of their incorporation, and HPIC
is subject to supervisory regulation in Illinois, its state of incorporation.
Each of the states in which the Insurance Subsidiaries are licensed has the duty
and obligation to impose premium taxes and other fees and to regulate rates,
financial data and major business transactions. Also, the Insurance Subsidiaries
must pass certain solvency tests and meet minimum capital and surplus
requirements in each jurisdiction where they are licensed. Statutory financial
statements must be filed on a quarterly basis and insurance reserves must be
certified by an actuary on an annual basis. The Insurance Subsidiaries are
regulated with regard to the amount of insurance they may write based upon the
amount of their respective surpluses.
As part of a holding company system, the Insurance Subsidiaries are subject
to the reporting requirements of their respective states, which require them to
file an annual Holding Company System Registration Statement (Form B). Form B is
required by Missouri, Illinois and several other jurisdictions where the
Insurance Subsidiaries are licensed. Form B must include relevant information
concerning the history, capital structure and significant transactions of each
of the Insurance Subsidiaries, their parent and affiliates. Pertinent
biographical information regarding each director and officer must also be
provided. Transfers of assets and significant transactions between the Company's
subsidiaries within the holding company system also require regulatory approval.
Every insurance company is subject to a periodic examination under the
authority of the insurance commissioner of its state of domicile. Any other
state interested in participating in a periodic examination may do so. The most
recent periodic examination reports for ACIC and ACLIC, based on December 31,
1994 financial statements, were issued on November 29, 1995 for ACIC and
September 18, 1995 for ACLIC. An examination of HPIC, based on December 31, 1994
financial statements was issued on February 28, 1997. Various states also
conduct "market conduct examinations" which are periodic, unscheduled
examinations designed to monitor the compliance with state laws and regulations
concerning the filing of rates and forms.
ACIC principally writes medical malpractice insurance and additional
requirements are placed upon ACIC to report detailed information with regard to
the settlements or judgments against its insureds. In addition to the reporting
to the states of medical malpractice settlements and judgments, payments must
also be reported to the National Practitioners Data Bank. Penalties attach if
reports to the states and to the data bank are not made. The Insurance
Subsidiaries are required to participate in the guaranty funds of states in
which they are licensed to do business. Assessments are made by the states to
pay amounts to policyholders who were insured by companies which have become
insolvent and are placed into liquidation either voluntarily or involuntarily by
the insurance commissioner. These assessments vary from state to state and are
dependent upon the amount of the insolvencies in each state during a given year.
- 10 -
<PAGE>
The Missouri and Illinois insurance laws and regulations impose
restrictions on the amount of dividends that may be paid to stockholders by
insurance companies domiciled in the respective states without prior approval of
the Director of Insurance of such states. ACIC may not, without the prior
approval of the Missouri Director of Insurance, pay a dividend that, together
with any other dividends paid within the twelve-month period ending on the date
when the dividend will be paid, exceeds the lesser of ACIC's net investment
income for the prior calendar year or 10% of its statutory capital and surplus
as of December 31 of the prior calendar year. In 1997, dividend payments by ACIC
without prior regulatory approval may not exceed $19,150,000. HPIC may not,
without the prior approval of the Illinois Director of Insurance, pay a dividend
that, together with any other dividends paid within the twelve-month period
ending on the date when the dividend will be paid, exceeds the greater of 10% of
its statutory capital and surplus as of December 31 of the prior calendar year
or net income for the prior calendar year. In 1997, dividend payments by HPIC
without prior regulatory approval may not exceed $5,153,000.
The Missouri and Illinois insurance laws and regulations impose a
risk-based minimum surplus requirement for life and health insurance companies
that attempts to measure statutory capital and surplus needs based on the risks
in a company's mix of products and investment portfolio. As of December 31, 1996
ACIC's, HPIC's and ACLIC's surplus all exceeded their respective risk-based
capital requirement under the standards.
EMPLOYEES
As of December 31, 1996, the Company employed approximately 725 persons.
None of its employees are represented by a labor union, and the Company believes
that its employee relations are excellent.
ITEM 2. PROPERTIES
- -------------------
The Company leases approximately 255,000 square feet of office space
throughout the United States ("U.S.") and the United Kingdom ("U.K."). The
Company's major leasehold obligation relates to its corporate office located in
Deerfield, Illinois. The Deerfield, Illinois office space consists of 120,000
square feet. The lease is for a term of fifteen years beginning July 1, 1991.
The Company has the right to terminate this lease in the tenth and eleventh
years of the lease under certain circumstances. Terms of the lease include an
expansion option in July 1997 for 20,000 square feet. In 2001, the Company has
the option of renting an additional 52,000 square feet. The Company's principal
regional and subsidiary offices are in Atlanta, Georgia; San Francisco and San
Diego, California; Independence, Missouri; and Washington, D.C.
ITEM 3. LEGAL PROCEEDINGS
- --------------------------
In 1992, the Company sold Ludgate Insurance Company Limited ("Ludgate") at
a loss, which was reported in discontinued operations. The Company has been
involved in two lawsuits connected with the sale. A U.K. action related to sales
contract warranties and a U.S. suit concerned the commutation of a reinsurance
transaction with Ludgate. Also at issue was a stop-loss reinsurance agreement
provided by the Company to Ludgate in connection with the sale. In February
1997, a U.K. court rendered a judgment against the Company. The U.S. lawsuit and
the stop-loss agreement remained unresolved.
In February 1997, the Company settled both lawsuits and commuted the
stop-loss reinsurance agreement. The settlement of all these matters is
reflected in the accompanying 1996 consolidated statement of income as a loss
from discontinued operations. The pre-tax loss is $7,800,000 with a
corresponding tax benefit of $2,700,000, resulting in a charge of $5,100,000.
In addition to the litigation described above, the Company is subject to
other litigation and arbitration in the normal course of its business. The
Company does not believe that any pending litigation or arbitration will have a
material adverse effect on its consolidated financial position or results of
operations.
- 11 -
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------------------------------------------------------------
There were no matters submitted to a vote of security holders during the
fourth quarter of 1996.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
- ------------------------------------------------------------------------------
The Company's Common Stock is traded on the New York Stock Exchange under
the symbol "MMI." There were 407 holders of record as of December 31, 1996. The
following table sets forth the quarterly high and low closing prices during 1996
and 1995.
High Low
-------- --------
1996
First quarter $ 30 1/4 $ 22
Second quarter 31 1/4 26 3/4
Third quarter 33 1/4 30 1/8
Fourth quarter 32 1/4 28 1/2
1995
First quarter $ 17 1/4$ 14 7/8
Second quarter 20 17
Third quarter 25 1/4 18 7/8
Fourth quarter 25 1/2 22 1/8
On March 6, 1997 the closing price of the Company's Common Stock was
$24.50.
In 1996, the Company declared quarterly dividends of $.06 per share,
compared to quarterly dividends of $.05 per share in 1995. See Notes 6 and 8 to
the Consolidated Financial Statements for a description of restrictions on the
ability of the registrant's subsidiaries to transfer funds to the registrant in
the form of dividends.
ITEM 6. SELECTED FINANCIAL DATA
- --------------------------------
Selected Consolidated Financial Data on page 13 of the MMI Companies, Inc.
1996 Annual Report to Stockholders is incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- --------------------------------------------------------------------------------
OF OPERATIONS
-------------
Management's Discussion and Analysis of Financial Condition and Results of
Operations on pages 14 through 21 of the MMI Companies, Inc. 1996 Annual Report
to Stockholders is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ----------------------------------------------------
The Consolidated Financial Statements and Notes thereto and Report of
Independent Auditors on pages 22 through 39 of the MMI Companies, Inc. 1996
Annual Report to Stockholders is incorporated herein by reference.
- 12 -
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- --------------------------------------------------------------------------------
FINANCIAL DISCLOSURE
--------------------
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- ------------------------------------------------------------
The "Election of Directors" and "Executive Officers" sections on pages 1
through 3 and page 4 of the Registrant's Proxy Statement relating to the annual
meeting of stockholders to be held on April 17, 1997, are included herein by
reference.
ITEM 11. EXECUTIVE COMPENSATION
- --------------------------------
The "Executive Compensation" section on pages 7 through 11 of the
Registrant's Proxy Statement relating to the annual meeting of stockholders to
be held on April 17, 1997, is included herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- ------------------------------------------------------------------------
The "Security Ownership of Certain Beneficial Owners and Management"
section on pages 4 through 5 of the Registrant's Proxy Statement relating to the
annual meeting of stockholders to be held on April 17, 1997, is included herein
by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- --------------------------------------------------------
The "Certain Relationships and Transactions" and "Compensation Committee
Interlocks and Insider Participation in Compensation Decisions" sections on
pages 6 and 11 of the Registrant's Proxy Statement relating to the annual
meeting of stockholders to be held on April 17, 1997, are included herein by
reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
- --------------------------------------------------------------------------
a. Filed documents
1. Financial statements.
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Stockholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Report of Independent Auditors
2. Financial statement schedules. An index to financial statement
schedules is on page 15.
3. Exhibits. An index to exhibits to this report is on page 16.
- 13 -
<PAGE>
b. Reports on Form 8-K. There were no reports on Form 8-K filed during the
fourth quarter of 1996.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Registrant: MMI Companies, Inc.
Date: March 17, 1997 By:/s/ B. Frederick Becker
-------------- -----------------------
B. Frederick Becker
Chairman and Chief Executive Officer
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities and on the dates indicated.
Date: March 17, 1997 By:/s/ B. Frederick Becker
-------------- -----------------------
B. Frederick Becker
Chairman, Chief Executive
Officer and Director
Date: March 17, 1997 By:/s/ Paul M. Orzech
-------------- ------------------
Paul M. Orzech
Executive Vice President and
Chief Financial Officer
Date: March 17, 1997 By:/s/ Joseph R. Herman
-------------- --------------------
Joseph R. Herman
Vice President and Controller
Date: March 17, 1997 By:/s/ Richard R. Barr
-------------- -------------------------
Richard R. Barr
Director
Date: March 17, 1997 By:/s/ James A. Block, M.D.
-------------- ------------------------
James A. Block, M.D.
Director
Date: March 17, 1997 By:/s/ George B. Caldwell
-------------- ----------------------
George B. Caldwell
Director
- 14 -
<PAGE>
Date: March 17, 1997 By:/s/ K. James Ehlen, M.D.
-------------- ------------------------
K. James Ehlen, M.D.
Director
Date: March 17, 1997 By:/s/ F. Laird Facey, M.D .
-------------- -----------------------
F. Laird Facey, M.D.
Director
Date: March 17, 1997 By:/s/ William M. Kelley
-------------- ---------------------
William M. Kelley
Director
Date: March 17, 1997 By:/s/ Andrew D. Kennedy
-------------- ---------------------
Andrew D. Kennedy
Director
Date: March 17, 1997 By:/s/ Timothy R. McCormick
-------------- ------------------------
Timothy R. McCormick
Director
Date: March 17, 1997 By:/s/ Gerald L. McManis
-------------- ---------------------
Gerald L. McManis
Director
Date: March 17, 1997 By:/s/ Scott S. Parker
-------------- -------------------
Scott S. Parker
Director
Date: March 17, 1997 By:/s/ Edward C. Peddie
-------------- --------------------
Edward C. Peddie
Director
Date: March 17, 1997 By:/s/ Anthony J. Perry
-------------- --------------------
Anthony J. Perry
Director
Date: March 17, 1997 By:/s/ Joseph D. Sargent
-------------- ---------------------
Joseph D. Sargent
Director
Date: March 17, 1997 By:/s/ Marshall Whisnant
-------------- ---------------------
Marshall Whisnant
Director
- 15 -
<PAGE>
INDEX TO FINANCIAL STATEMENT SCHEDULES
Page
II. Condensed Financial Information of Registrant
Condensed Balance Sheets.................................... S-1
Condensed Statements of Income.............................. S-2
Condensed Statements of Cash Flows.......................... S-3
III. Supplementary Insurance Information........................... S-4
IV. Reinsurance................................................... S-5
V. Valuation and Qualifying Accounts............................. S-6
VI. Supplementary Property/Casualty Insurance Information......... S-7
Schedule I has been omitted because the required information is included in the
Consolidated Financial Statements or Notes thereto.
- 16 -
<PAGE>
EXHIBIT INDEX
3.1 Certificate Of Incorporation Of The Registrant.*****
3.2 Bylaws of the Registrant.***
4.1 Specimen stock certificate representing Common Stock.*
10.1 Amended and Restated Credit Agreement dated as of January 18, 1996 among
the Registrant, Various Lenders and Bank of America National Trust and
Savings Association, as Agent for the Lenders.****
10.2 Waiver of Right to Elect Director dated October 21, 1996, between the
Registrant and each of Conning Insurance Capital Limited Partnership,
Conning Insurance Capital International Partnership, Conning Insurance
Capital Limited Partnership II and Conning Insurance Capital
International Partnership II.
10.3 Agreement for the Sale and Purchase of Shares in Ludgate Insurance
Company Limited dated June 30, 1992, between the Registrant and Ken
Randall Associates Limited.*
10.4 Lease dated July 1, 1991, between the Registrant and MATAS Corporation
for the Registrant's principal executive offices and First Amendment to
Lease dated August 1, 1992.*
10.5 Second Amendment to Lease, effective January 1, 1995 between the
Registrant and MATAS Corporation.***
10.6 Third Amendment to Lease, effective February 1, 1996 between the
Registrant and MATAS Corporation.****
10.7 Fourth and Fifth Amendments to Lease, effective July 1996 between the
Registrant and MATAS Corporation.
10.8 Incentive Stock Option Plan, effective February 28, 1986.* #
10.9 Amended and Restated Return on Equity Incentive Plan, effective January
1, 1990. #
10.10 1993 Employee Stock Plan, effective January 15, 1993.* #
10.11 Employment Agreement, dated as of September 17, 1988 and amended as of
December 1, 1992, between the Registrant and its Chief Executive
Officer, Mr. B. Frederick Becker.* #
10.12 Second Amendment to Employment Agreement, dated as of April 19, 1995
between the Registrant and its Chief Executive Officer, Mr. B. Frederick
Becker.**** #
10.13 Employment Agreement dated as of October 9, 1995 between the Registrant
and Mr. Steve A. Schleisman. **** #
10.14 Employment Agreements dated as of April 17, 1996 between the Registrant
and Ms. Anna Marie Hajek, Mr. Gerald L. McManis and Mr. Paul M. Orzech.
***** #
10.15 Description of Employment Arrangement between the Registrant and Mr.
Steve A. Schleisman.
10.16 1993 Non-Employee Directors' Formula Stock Option Plan, effective
January 15, 1993.* #
10.17 Certificates of Insurance for Directors' Life Insurance Program.* #
10.18 Amended Board of Directors Retirement Plan, effective January 1, 1993. #
10.19 Amended 1996 Non-Employee Director Stock and Deferred Cash Compensation
Plan. #
10.20 Merger Agreement and Plan of Reorganization dated as of December 30,
1993 among the Registrant, McManis Associates, Inc. and the stockholders
of McManis Associates, Inc.**
10.21 Transfer and Forbearance Agreement dated as of December 30, 1993 among
the Registrant and Gerald L. McManis.**
10.22 Stock Purchase Agreement dated February 2, 1995 between the Registrant
and American Hospital Association Services, Inc.***
11.1 Statement re computation of per share earnings.
13.1 MMI Companies Inc. 1996 Annual Report to Stockholders
21.1 Subsidiaries of the registrant.
23.1 Consent of Ernst & Young LLP.
27.1 Financial data schedule.
* Incorporated herein by reference to Registration Statement No. 33-59464
on Form S-1.
** Incorporated herein by reference to Report on Form 10-K dated December
31, 1993, Commission File No. 1-11920.
- 17 -
<PAGE>
*** Incorporated herein by reference to Report on Form 10-K dated December
31, 1994, Commission File No. 1-11920.
**** Incorporated herein by reference to Report on Form 10-K dated December
31, 1995, Commission File No. 1-11920.
***** Incorporated herein by reference to Report on Form 10-Q dated June 30,
1996, Commission File No. 1-11920. # Compensatory plans or arrangements.
- 18 -
<PAGE>
<TABLE>
<CAPTION>
MMI COMPANIES, INC.
(PARENT COMPANY)
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
December 31,
---------------------------------
1996 1995
------------- -------------
ASSETS
INVESTMENTS
<S> <C> <C>
Investment in subsidiaries .............................. $ 254,992 $ 226,834
Short term investments .................................. 15,460 597
Fixed maturities ........................................ 24,822 --
------------- -------------
295,274 227,431
OTHER ASSETS
Cash (overdraft) ......................................... (299) (836)
Furniture and equipment - at cost, less accumulated
depreciation: 1996 - $5,719; 1995 - $4,222 ............. 3,964 3,287
Due from affiliates ...................................... 17,805 6,516
Deferred income taxes .................................... 5,924 (380)
Other .................................................... 2,148 4,049
------------- -------------
$ 324,816 $ 240,067
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES ..............................................
Accrued expenses and other liabilities .................. $ 13,612 $ 2,609
Due to affiliates ....................................... 1,238 1,245
Notes payable to stockholders ........................... -- 750
Long-term notes payable ................................. 58,000 49,000
------------- -------------
72,850 53,604
STOCKHOLDERS' EQUITY
Common Stock, par value $.10 per share:
Authorized shares: 1996 and 1995 - 30,000
Issued and outstanding shares: 1996 - 11,625; 1995 - 9,675 1,162 967
Additional paid-in capital ............................... 135,183 82,645
Retained earnings ........................................ 102,830 84,361
Unrealized gains on investments, net of taxes:
1996 - $6,887; 1995 - $9,957 ........................... 12,791 18,490
------------- -------------
251,966 186,463
------------- -------------
$ 324,816 $ 240,067
============= =============
<FN>
See notes to consolidated financial statements.
</FN>
</TABLE>
S-1
<PAGE>
<TABLE>
<CAPTION>
MMI COMPANIES, INC.
(PARENT COMPANY)
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED)
CONDENSED STATEMENTS OF INCOME
(IN THOUSANDS)
Year Ended December 31,
--------------------------------------------
1996 1995 1994
------------ ------------ ------------
REVENUES
<S> <C> <C> <C>
Management fees from subsidiaries.......................... $ 24,550 $ 19,100 $ 16,750
Dividends received from subsidiaries....................... 11,000 6,000 5,000
Net investmentincome....................................... 752 375 95
Net realized gains on investments.......................... 22 - -
------------ ------------ ------------
36,324 25,475 21,845
EXPENSES
Administrative and other................................... 23,193 19,558 16,574
Interest expense........................................... 3,397 2,767 1,619
------------ ------------ ------------
26,590 22,325 18,193
------------ ------------ ------------
Income from continuing operations before income
taxes and equity in undistributed net income of
subsidiaries.............. ........................... 9,734 3,150 3,652
Income taxes (credit)...................................... (396) (932) (344)
------------ ------------ ------------
Income from continuing operations before equity in
undistributed net income of subsidiaries........... 10,130 4,082 3,996
Loss from discontinued operations.......................... (5,100) - -
------------ ------------ ------------
Income before equity in undistributed net income
of subsidiaries.................................... 5,030 4,082 3,996
Equity in undistributed net income of subsidiaries......... 15,985 18,613 11,055
------------ ------------ ------------
Net income............................................. $ 21,015 $ 22,695 $ 15,051
============ ============ ============
<FN>
See notes to consolidated financial statements.
</FN>
</TABLE>
S-2
<PAGE>
<TABLE>
<CAPTION>
MMI COMPANIES, INC.
(PARENT COMPANY)
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED)
CONDENSED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
Year Ended December 31,
--------------------------------------------
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Net cash provided by operating activities....................... $ 3,955 $ 1,961 $ 4,107
Investing activities:
Net sale (purchase) of short-term investments.............. (14,769) 121 (719)
Purchases of fixed maturities.............................. (38,833) - -
Sales of fixed maturities.................................. 8,706 - -
Maturities of fixed maturities............................. 5,430 - -
Capital contribution to subsidiaries....................... (10,003) (5,000) (500)
Furniture and equipment additions.......................... (2,174) (1,770) (1,522)
Acquisition of subsidiaries................................ (8,921) (15,372) -
------------ ------------ ------------
-
Net cash used by investing activities................... (60,564) (22,021) (2,741)
Financing activities:
Issuance of Common Stock................................... 54,308 1,587 118
Costs incurred in connection with stock offering........... (2,866) - -
Payments on notes payable.................................. (750) (1,250) (28,250)
Proceeds from notes payable including
short-term borrowings... ............................. 9,000 21,000 28,000
Dividends.................................................. (2,546) (1,957) (1,376)
------------ ------------ ------------
Net cash provided (used) by financing activities........ 57,146 19,380 (1,508)
------------ ------------ ------------
Increase (decrease) in cash............................. 537 (680) (142)
Cash (deficit) at beginning of year............................. (836) (156) (14)
------------ ------------ ------------
Cash (deficit) at end of year........................... $ (299) $ (836) $ (156)
============ ============ ============
<FN>
See notes to consolidated financial statements.
</FN>
</TABLE>
S-3
<PAGE>
<TABLE>
<CAPTION>
MMI COMPANIES, INC. AND SUBSIDIARIES
SCHEDULE III -- SUPPLEMENTARY INSURANCE INFORMATION
(IN THOUSANDS)
December 31,
------------------------------------------------------------
Loss and
Deferred Loss
Policy Adjustment Unearned Future
Acquisition Expense Premium Policy
Segment Costs Reserves Reserves Benefits
- -------------- ------------ ------------ ------------ ------------
1996
<S> <C> <C> <C> <C>
Insurance........... $ 7,117 $ 628,452 $ 55,679 $ 8,578
Consulting and fees. -- -- -- --
Corporate and
eliminations..... -- 3,121 -- --
------------ ------------ ------------ ------------
$ 7,117 $ 631,573 $ 55,679 $ 8,578
============ ============ ============ ============
1995
Insurance........... $ 5,660 $ 634,621 $ 52,951 $ 8,982
Consulting and fees. -- -- -- --
Corporate and
eliminations..... -- 4,194 -- --
------------ ------------ ------------ ------------
$ 5,660 $ 638,815 $ 52,951 $ 8,982
============ ============ ============ ============
<FN>
See Note 12 to the consolidated financial statements for a discussion of the
reclassification of segment information.
</FN>
</TABLE>
<TABLE>
<CAPTION>
MMI COMPANIES, INC. AND SUBSIDIARIES
SCHEDULE III -- SUPPLEMENTARY INSURANCE INFORMATION (CONTINUED)
(IN THOUSANDS)
Year Ended December 31,
--------------------------------------------------------------------------------------------
Benefits, Amortization
Claims, of Deferred
Net Losses and Policy Other Net
Premium Investment Settlement Acquisition Operating Premiums
Segment Revenues Income Expenses Costs Expenses Written
- -------------- ------------ ------------ ------------ ------------ ------------ ------------
1996
<S> <C> <C> <C> <C> <C> <C>
Insurance........... $ 164,409 $ 43,428 $ 135,786 $ 14,024 $ 23,776 $ 167,392
Consulting and fees. -- -- -- -- 29,966 --
Corporate and
eliminations..... -- 846 -- -- 9,260 --
------------ ------------ ------------ ------------ ------------ ------------
$ 164,409 $ 44,274 $ 135,786 $ 14,024 $ 63,002 $ 167,392
============ ============ ============ ============ ============ ============
1995
Insurance........... $ 155,191 $ 39,417 $ 130,088 $ 11,353 $ 23,009 $ 161,188
Consulting and fees. -- -- -- -- 19,463 --
Corporate and
eliminations..... -- 433 -- -- 7,230 --
------------ ------------ ------------ ------------ ------------ ------------
$ 155,191 $ 39,850 $ 130,088 $ 11,353 $ 49,702 $ 161,188
============ ============ ============ ============ ============ ============
1994
Insurance........... $ 132,389 $ $28,928 $ 112,711 $ 7,507 $ 19,429 $ 139,800
Consulting and fees. -- -- -- -- 15,987 --
Corporate and
eliminations..... -- 139 -- -- 4,363 --
------------ ------------ ------------ ------------ ------------ ------------
$ 132,389 $ 29,067 $ 112,711 $ 7,507 $ 39,779 $ 139,800
============ ============ ============ ============ ============ ============
<FN>
See Note 12 to the consolidated financial statements for a discussion of the
reclassification of segment information.
</FN>
</TABLE>
S-4
<PAGE>
<TABLE>
<CAPTION>
MMI COMPANIES, INC. AND SUBSIDIARIES
SCHEDULE IV - REINSURANCE
(DOLLARS IN THOUSANDS)
Percentage
Ceded to Assumed of Amount
Gross Other from Other Net Assumed to
Amount Companies Companies Amount Net
------------ ------------ ------------ ------------ ------------
Year Ended December 31, 1996:
<S> <C> <C> <C> <C> <C>
Life insurance in force at end of year... $ 1,265,506 $ 300,385 $ - $ 965,121 -%
============ ============ ============ ============
Premiums:
Life insurance........................... $ 4,779 $ 1,210 $ - $ 3,569 -%
Accident and health insurance............ 16,222 14,383 2,279 4,118 55.34
Medical malpractice ..................... 171,058 31,567 17,231 156,722 10.99
------------ ------------ ------------ ------------
Total premiums......................... $ 192,059 $ 47,160 $ 19,510 $ 164,409
============ ============ ============ ============
Year Ended December 31, 1995:
Life insurance in force at end of year... $ 1,397,274 $ 344,807 $ - $ 1,052,467 -%
============ ============ ============ ============
Premiums:
Life insurance........................... $ 4,430 $ 1,043 $ - $ 3,387 -%
Accident and health insurance............ 12,602 12,721 4,288 4,169 102.85
Medical malpractice ..................... 169,760 35,084 12,959 147,635 8.78
------------ ------------ ------------ ------------
Total premiums......................... $ 186,792 $ 48,848 $ 17,247 $ 155,191
============ ============ ============ ============
Year Ended December 31, 1994:
Life insurance in force at end of year... $ 1,064,590 $ 223,032 $ - $ 841,558 -%
============ ============ ============ ============
Premiums:
Life insurance........................... $ 3,794 $ 830 $ 52 $ 3,016 1.72
Accident and health insurance............ 14,437 14,558 5,512 5,391 102.24
Medical malpractice ..................... 138,508 27,031 12,505 123,982 10.09
------------ ------------ ------------ ------------
Total premiums......................... $ 156,739 $ 42,419 $ 18,069 $ 132,389
============ ============ ============ ============
</TABLE>
S-5
<PAGE>
<TABLE>
<CAPTION>
MMI COMPANIES, INC. AND SUBSIDIARIES
SCHEDULE V - VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
Balance At
Beginning Balance at
Description of Year Additions Deductions End of Year
------------- ------------- ------------- -------------
Year Ended December 31, 1996:
<S> <C> <C> <C> <C>
Accumulated amortization of goodwill .......... $ 4,800 $ 1,787 $ -- $ 6,587
Accumulated depreciation of furniture and
equipment .................................. 6,500 3,149 161 9,488
Year Ended December 31, 1995:
Accumulated amortization of goodwill .......... $ 3,686 $ 1,114 $ -- $ 4,800
Accumulated depreciation of furniture and
equipment .................................. 4,749 2,502 751 6,500
Accumulated allowance for uncollectible
reinsurance (1) ............................ 11,160 -- 11,160 --
Year Ended December 31, 1994:
Accumulated amortization of goodwill .......... $ 2,572 $ 1,114 $ -- $ 3,686
Accumulated depreciation of furniture and
equipment .................................. 3,090 2,454 795 4,749
Accumulated allowance for uncollectible
reinsurance ................................ 11,160 -- -- 11,160
<FN>
(1) Represents the write-off of reinsurance receivables that were fully reserved
prior to 1993.
</FN>
</TABLE>
S-6
<PAGE>
<TABLE>
<CAPTION>
MMI COMPANIES, INC. AND SUBSIDIARIES
SCHEDULE VI-- SUPPLEMENTARY PROPERTY/CASUALTY INSURANCE INFORMATION
(IN THOUSANDS)
December 31,
--------------------------------------------------------------
Discount
Loss and Deducted from
Deferred Loss Loss and Loss
Affiliation Policy Adjustment Adjustment Unearned
with Acquisition Expense Expense Premium
Registrant Costs Reserves Reserves Reserves
- ---------------------- -------------- -------------- -------------- --------------
1996:
Consolidated
<S> <C> <C> <C> <C>
subsidiaries...... $ 7,117 $ 623,794 $ -- $ 55,677
1995:
Consolidated
subsidiaries...... 5,660 627,414 -- 52,949
</TABLE>
<TABLE>
<CAPTION>
MMI COMPANIES, INC. AND SUBSIDIARIES
SCHEDULE VI-- SUPPLEMENTARY PROPERTY/CASUALTY INSURANCE INFORMATION (CONTINUED)
(IN THOUSANDS)
Year ended December 31,
------------------------------------------------------------------------------------------------
Losses and Loss
Adjustment
Expenses Amortization Paid
Incurred Related to of Deferred Losses and
Affiliation Net -------------------------- Policy Loss Net
with Premiums Investment Current Prior Acquisition Adjustment Premiums
Registrant Earned Income Year Years Costs Expenses Written
- ----------------- ------------ ------------ ------------ ------------ ------------ ------------ ------------
1996:
Consolidated
<S> <C> <C> <C> <C> <C> <C> <C>
subsidiaries... $ 156,722 $ 42,048 $ 135,895 $ (5,108) $ 14,024 $ 129,751 $ 159,714
1995:
Consolidated
subsidiaries... 147,635 38,113 127,710 (1,766) 11,353 72,214 153,634
1994:
Consolidated
subsidiaries... 123,982 27,665 104,366 2,495 7,507 80,397 131,399
</TABLE>
S-7
<PAGE>
EXHIBIT 10.2
WAIVER
------
THIS WAIVER is made as of the 21st day of October, 1996, by and among
MMI Companies, Inc., a Delaware corporation (the ACompany@), and each of Conning
Insurance Capital Limited Partnership, Conning Insurance Capital International
Partnership, Conning Insurance Capital Limited Partnership II and Conning
Insurance Capital International Partnership II (collectively the AConning
Investors@).
W I T N E S S E T H
- - - - - - - - - -
WHEREAS, the Company and the Conning Investors have entered into
separate Unit Purchase Agreements dated January 25, 1989 and February 23, 1989
(the APurchase Agreements@); and
WHEREAS, Section 6.8 of each of the Purchase Agreements requires the
Company to use its best efforts to elect a director designated by the Conning
Investors as long as the Conning Investors own a specified number of Shares of
the Company; and
Whereas, the Company=s shares are now publicly traded and the Conning
Investors no longer need the protection afforded by Section 6.8;
NOW, THEREFORE, the parties hereby agrees as follows:
1. Waiver. Section 6.8 of the Purchase Agreements is hereby
------
irrevocably waived by the Conning Investors.
2. Counterparts. This document may be executed in any number of
-------------
counterparts, each of which shall be an original but all of which together shall
constitute one instrument.
IN WITNESS WHEREOF, the parties have executed this Waiver as of the
date first above written.
MMI COMPANIES, INC. CONNING INSURANCE
CAPITAL LIMITED PARTNERSHIP
By: _______________________________ By: CONNING & COMPANY, its
Name: B. Frederick Becker General Partner
Title: Chairman/CEO
By: ___________________________
Name:
Title:
<PAGE>
CONNING INSURANCE CAPITAL
INTERNATIONAL PARTNERSHIP
By: CONNING & COMPANY, its
General Partner
By: ___________________________
Name:
Title:
CONNING INSURANCE CAPITAL
LIMITED PARTNERSHIP II
By: CONNING & COMPANY, its
General Partner
By: ___________________________
Name:
Title:
CONNING INSURANCE CAPITAL
INTERNATIONAL PARTNERSHIP II
By: CONNING & COMPANY, its
General Partner
By: ___________________________
Name:
Title:
<PAGE>
EXHIBIT 10.7
FOURTH AMENDMENT TO LEASE
FOR
CORPORATE 500 CENTRE
This Fourth Amendment to Lease is made and entered into as of the ___ day
of July, 1996 between American National Bank and Trust Company of Chicago, not
individually, but solely, as Trustee under a certain Trust Agreement dated the
20th day of July, 1985, and known as Trust number 65110 (the "Landlord"), and
MMI Companies, Inc. (the "Tenant"). This agreement amends that certain Lease
dated the 7th day of December, 1990 between Landlord and Tenant (the "Lease") as
previously amended by First Amendment to Lease, dated August, 1992, Second
Amendment to Lease, dated October, 1994 and Third Amendment to Lease, dated
January, 1996. Landlord and Tenant are desirous of further amending the Lease
for and in consideration of the premises and the agreements hereinafter set
forth. Capitalized terms used herein shall have the same meaning as those
ascribed to them in the Lease unless otherwise defined herein.
1. LEASE OF PREMISES. The definition of Premises in Paragraph 1 of the
Lease is hereby amended to include an additional 1,648 rentable square feet on
the first floor of the Building (the "Additional Space"), to the existing
110,479 rentable square feet in the Premises as shown on Exhibit A attached
hereto and made a part hereof. The total amount of the Premises shall be 112,127
rentable square feet, which number shall be substituted for 110,479 rentable
square feet in Section 1 of the Lease.
2. TERM. The Term of the Additional Space shall commence on December 1,
1996 and the Termination Date shall be June 30, 2006. Tenant may take possession
of the Additional Space on or before December 1, 1996.
3. REVISED BASE RENT. The amount of Base Rent shown on Exhibit A-I attached
to the Lease is amended and replaced with a new Exhibit A-I attached hereto and
made a part of the Lease.
4. TENANTS PROPORTIONATE SHARE. Commencing December 1, 1996, "Tenant's
Proportionate Share" shall be amended by deleting 62.20% and substituting for
the deleted figure "63.13%."
5. CONSTRUCTION. Landlord shall construct the Additional Space pursuant to
Tenant's drawings and specifications, which drawings and specifications shall be
identified in a separate Work Letter to be provided by Tenant. All costs in
connection with construction or reconstruction of the Additional Space shall be
the responsibility of the Tenant.
6. EXCULPATORY CLAUSE. This Amendment to Lease is executed by American
National Bank and Trust Company of Chicago, not personally but as Trustee as
aforesaid, in the exercise of the power and authority conferred upon and vested
in it as such Trustee, and under the express direction of the beneficiaries of a
certain Trust Agreement dated
<PAGE>
July 30, 1985 and known as Trust Number 65110 at said Bank. Nothing in this
Lease contained shall be construed as creating any liability whatsoever against
said Trustee personally or said beneficiaries, and in particular, without
limiting the generality of the foregoing, there shall be no personal liability
to perform any covenant, either express or implied, herein contained, to keep,
preserve or sequester any property of said Trust, and that all personal
liability of said Trustee (and said beneficiaries, to the extent permitted by
law), of every sort, if any, is hereby expressly wavered by Tenant, and by every
person now or hereafter claiming any right or security hereunder, and that so
far as the parties hereto are concerned the owner of any indebtedness or
liability accruing hereunder shall look solely to the Trust Estate from time to
time subject to the provisions of said Trust Agreement for the payment thereof.
The Trustee has no agents or employees and merely holds naked title to the
property herein described and has no knowledge respecting rentals, leases or
other factual matters with respect to the Premises, except as represented to it
by the beneficiary or beneficiaries of the Trust.
7. Except as modified by the terms of this Amendment, all of the terms and
provisions of the said Lease shall be and remain in full force and effect.
LANDLORD TENANT
AMERICAN NATIONAL BANK AND MMI COMPANIES, INC.
TRUST COMPANY OF CHICAGO
not individually, but solely
and only as Trustee aforesaid.
BY: /s/ By: /s/ Wayne A. Sinclair
---------------------------- ----------------------------
Its: Asst VP Its: General Counsel
---------------------------- ----------------------------
<PAGE>
FIFTH AMENDMENT TO LEASE
FOR
CORPORATE 500 CENTRE
This Fifth Amendment to Lease is made and entered into as of the ___ day of
July, 1996 between American National Bank and Trust Company of Chicago, not
individually, but solely, as Trustee under a certain Trust Agreement dated the
30th day of July, 1985, and known as Trust number 65110 (the "Landlord"), and
MMI Companies, Inc. (the "Tenant"). This agreement amends that certain Lease
dated the 7th day of December, 1990 between Landlord and Tenant (the "Lease") as
previously amended by First Amendment to Lease, dated August, 1992, Second
Amendment to Lease, dated October, 1994, Third Amendment to Lease, dated
January, 1996, and Fourth Amendment to Lease, dated July, 1996. Landlord and
Tenant are desirous of further amending the Lease for and in consideration of
the premises and the agreement hereinafter set forth. Capitalized terms used
herein shall have the same meaning as those ascribed to them in the Lease unless
otherwise defined herein.
1. LEASE OF PREMISES. The definition of Premises in Paragraph 1 of the
Lease is hereby amended to include an additional 2,671 rentable square feet on
the first floor of the Building (the "Additional Space"), to the existing
112,127 rentable square feet in the Premises as shown on Exhibit A attached
hereto and made a part hereof. The total amount of the Premises shall be 114,798
rentable square feet, which number shall be substituted for 112,127 rentable
square feet in Section 1 of the Lease.
2. TERM. The term on the Additional Space shall commence on March 1, 1997
and the Termination Date shall be June 30, 2006. Tenant may take possession of
the Additional Space on or before March 1, 1997.
3. REVISED BASE RENT. The amount of Base Rent shown on Exhibit A-I attached
to the Lease is amended and replaced with a new Exhibit A-I attached hereto and
made a part of the Lease.
4. TENANTS PROPORTIONATE SHARE. Commending March 1, 1997 "Tenant's
Proportionate Share" shall be amended by deleting "63.13% and substituting for
the deleted figure "64.63%."
5. CONSTRUCTION Landlord shall construct the Additional Space pursuant to
Tenant's drawings and specifications, which drawings and specifications shall be
identified in a separate Work Letter to be provided by Tenant. All costs in
connection with construction or reconstruction of the Additional Space shall be
the responsibility of the Tenant.
6. EXCULPATORY CLAUSE. This Amendment to Lease is executed by American
National Bank and Trust Company of Chicago, not personally but as Trustee as
aforesaid, in the exercise of the power and authority conferred upon and vested
in it as such Trustee, and under the express direction of the beneficiaries of a
certain Trust Agreement dated July 30, 1985 and known as Trust Number 65110 at
said Bank. Nothing in this Lease contained
<PAGE>
shall be construed as creating any liability whatsoever against said Trustee
personally or said beneficiaries, and in particular, without limiting the
generality of the foregoing, there shall be no personal liability to perform any
covenant, either express or implied, herein contained, to keep, preserve or
sequester any property of said Trust, and that all personal liability of said
Trustee (and said beneficiaries, to the extent permitted by law), of every sort,
if any, is hereby expressly waived by Tenant, and by every person now or
hereafter claiming any right or security hereunder; and that so far as the
parties hereto are concerned the owner of any indebtedness or liability accruing
hereunder shall look solely to the Trust Estate from time to time subject to the
provisions of said Trust Agreement for the payment thereof. The Trustee has no
agents or employees and merely holds naked title to the property herein
described and has no knowledge respecting rentals, leases or other factual
matters with respect to the Premises, except as represented to it by the
beneficiary or beneficiaries of the Trust.
7. Except as modified by the terms of this Amendment, all of the terms and
provisions of the said Lease shall be and remain in full force and effect.
LANDLORD TENANT
AMERICAN NATIONAL BANK AND MMI COMPANIES, INC.
TRUST COMPANY OF CHICAGO
not individually, but solely
and only as Trustee aforesaid.
BY: /s/ By: /s/ Wayne A. Sinclair
---------------------------- ----------------------------
Its: Asst VP Its: General Counsel
---------------------------- ----------------------------
<PAGE>
EXHIBIT 10.9
MMI COMPANIES, INC.
RETURN ON EQUITY INCENTIVE PLAN
TABLE OF CONTENTS
-----------------
SECTION PAGE
- ------- ----
1 Introduction
Purpose and Summary 1
Effective Date, Plan Year 1
Committee 1
Employers 1
Unfunded Nature of Plan 1
2 Eligibility
Participation 2
Notice of Participation 2
3 Annual Awards
Determining Annual Award 2
Return on Equity Factor 2-3
Committee Involvement 4
4 Plan Accounts and Adjustments
Participant Accounts 4
Account Adjustments 4-5
5 Vesting
Vesting Schedule 5
Retirement or Death of Participant 5
Disability 5
Special Circumstances 6
6 Distribution of Benefits
Time of Payment 6
Form of Payment 6
Designation of Beneficiary 6
7 Administration
General Rights, Powers, and Duties of Committee 7
Information to be Furnished to Committee 8
<PAGE>
Responsibility 8
Interested Committee Member 8
Committee Expenses 8
Committee's Decision Final 8
Role of Independent Auditors 9
8 General Provisions
Action By Employer 10
Controlling Law 10
Employment Rights 10
Litigation by Participants 10
Interests Not Transferable 10
9 Amendment and Termination 11
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 c ompensation 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
2
<PAGE>
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.
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 remo ved 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 e quity 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
<PAGE>
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:
- -------------------- -----------------------------
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%
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 a nd 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 full y 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 an d losses. Operating Earnings Per Share also shall
exclude the net of tax effect of earnings adjustments
4
<PAGE>
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 regul atory
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 + [.5 x (9 - 3) ] ); the ROE Factor will be 5% for Class II; 4 (2.5
+ [.5 x (7.5 - 2.5) ] ); the ROE Factor for Class III will be 4% (2 + [.5 x (6 -
2 ]).
5
<PAGE>
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 Earn ings 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.
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 provid ed 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 int erest 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 be cause 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.
6
<PAGE>
(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.
SECTION 5
---------
Vesting
-------
5.1. Vesting Schedule. 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 %
- -------------------------- ---------
16 33 1/3%
28 50%
40 100%
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 p rovided in subsection 4.2
until completely distributed.
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 par ticipant 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.
7
<PAGE>
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 Director s 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 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 subac count 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 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 particip ant's account shall be payable to the
participant's spouse or, if there is none, to the participant's estate.
8
<PAGE>
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 fo llowing 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.
9
<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 Commi ttee 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 indi vidual 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.
10
<PAGE>
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 thei r 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;
(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.
11
<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 t o 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.
12
<PAGE>
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 veste d 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.
13
<PAGE>
EXHIBIT 10.15
Description of employment arrangement between the Registrant and Mr. Steve A.
Schleisman.
The Registrant's offer of employment to Mr. Schleisman, which he accepted,
included a salary of $250,000; a grant of 50,000 stock options vesting over a
four year period, funding of an annuity or life insurance program that will
provide the sum of $1,000,000 to Mr. Schleisman at age 65, or his spouse as his
survivor, and participation in incentive and benefit plans comparable to other
executive officers.
<PAGE>
EXHIBIT 10.18
MMI COMPANIES, INC. BOARD OF DIRECTORS' RETIREMENT PLAN
PREAMBLE
The principal objective of this Board of Directors' Retirement Plan
(the "Plan") is to ensure the payment of a competitive level of retirement
income in order to attract, retain and motivate Directors. The Plan is designed
to provide a benefit which, when added to other retirement income of the Board
member, will meet the objective described above. Eligibility for participation
in the Plan shall be limited to non-employee Directors ("Director"), serving on
or after the date of the Plan. This Plan will become effective on January 1,
1993, and will be effective as to each participant on the date he or she is, or
was, designated as such hereunder.
SECTION I
DEFINITIONS
1.1 "Committee" means the Personnel and Compensation Committee of the Board of
Directors of the Company, which has been given authority by the Board of
Directors to administer the Plan.
1.2 "Company" means MMI Companies, Inc.
1.3 "Participant" means a non-employee Director of the Company. A Director shall
become a Participant in the Plan as of the date he or she is elected to the
Board.
1.4 "Plan" means the Company's Board of Directors Retirement Plan.
1.5 "Retirement" means the termination of a Participant's tenure as a Director
provided that he or she has served at least one full three (3) year term in the
class to which he or she was elected as a non-employee Director.
1.6 "Retirement Benefit Date" means the first day of the month following the
Director's Retirement or the first day of the month following the Director's
attaining age 59 and 1/2, whichever is later.
SECTION II
ELIGIBILITY FOR BENEFITS
<PAGE>
MMI COMPANIES, INC. BOARD OF DIRECTORS' RETIREMENT PLAN
2.1 Each Participant is eligible to receive a benefit under this Plan beginning
on the Retirement Benefit Date.
2.2 If any Participant entitled to a benefit under this Plan is removed from the
Board, or enters into competition with the Company, or interferes with the
relations between the Company and any customer, the rights of such Participant
to a benefit under this Plan, including the rights of a Surviving Spouse to a
benefit, will be forfeited, unless the Committee determines that such activity
is not detrimental to the best interests of the Company.
2.3 No benefits are payable under this Plan if a Participant ceases his or her
tenure as a Director for any reason prior to his or her completing a full three
(3) year term as a non-employee director in the class to which he or she was
elected.
SECTION III
AMOUNT AND FORM OF RETIREMENT BENEFIT
Amount of Benefit
- -----------------
3.1 The annual retirement benefit payable at the Retirement Benefit Date
under the Plan will equal the annual retainer fee in effect at the time of the
retirement. The number of annual benefit payments will be equal to the number of
years of Board service provided that the maximum number of years of service for
purposes of this calculation shall be ten (10).
Form of Benefit
- ---------------
3.2 The benefits determined under this Plan will be payable in any of the
following as is elected by the Participant: (1) annual lump sum, (2) straight
life annuity, (3) 50% joint survivorship annuity, (4) 75% joint survivorship
annuity, or (5) 100% joint survivorship annuity. Payments under (1) annual lump
sum are terminated following the number of benefit years, as defined under 3.1,
or upon death, whichever comes earlier.
SECTION IV
PAYMENT OF RETIREMENT BENEFITS
<PAGE>
MMI COMPANIES, INC. BOARD OF DIRECTORS' RETIREMENT PLAN
4.1 Benefits payable in accordance with Section III will commence on the
Participant's Retirement Benefit Date in accordance with the provisions of the
election.
SECTION V
MISCELLANEOUS
5.1 The Committee may, in its sole discretion, terminate, suspend or amend this
Plan at any time, or from time to time, in whole or in part, with the approval
of the full Board of Directors. However, no amendment or suspension of the Plan
will affect a retired Participant's right or the right of a Surviving Spouse to
continue to receive a benefit in accordance with this Plan as in effect on the
date such Participant commenced to receive a benefit under this Plan.
5.2 Nothing contained herein will confer upon any Participant the right to be
retained as a Director of the Company, nor will it interfere with the right of
the Company or its shareholders to remove or otherwise deal with Participants
without regard to the existence of this Plan.
5.3 The Plan is unfunded, and the Company will make Plan benefit payments solely
on a current reimbursement basis.
5.4 To the maximum extent permitted by law, no benefit under this Plan shall be
assignable or subject to any manner to alienation, sale, transfer, claims of
creditors, pledge, attachment or encumbrances of any kind.
5.5 The Committee may adopt rules and regulations to assist it in the
administration of the Plan.
5.6 Each Participant shall receive a copy of the Plan. The Committee will make
available for inspection by any Participant a copy of the rules and regulations
used by the Committee in administering the Plan.
<PAGE>
MMI COMPANIES, INC. BOARD OF DIRECTORS' RETIREMENT PLAN
5.7 This Plan is established under and will be construed according to the laws
of the State of Illinois.
5.8 Any decisions made by the full Board of Directors, with respect to the Plan,
in whole or in part, are binding.
<PAGE>
EXHIBIT 10.19
MMI COMPANIES, INC. 1996 NON-EMPLOYEE DIRECTOR STOCK
AND DEFERRED CASH COMPENSATION PLAN
I. PURPOSE
The purpose of the Non-Employee Board of Director Stock and Deferred
Cash Compensation Plan ("Plan") is to provide an alternative to
Participants to receive restricted stock as a part of the reasonable
compensation for services rendered by them, comparable to the general
prevailing practices of similar size public companies.
II. DEFINITIONS
As used herein, the following definitions shall apply:
(a) "Board" means the Board of Directors of the Company.
(b) "Cash Account" means the Account established by the
Company for Participants who elect to defer cash compensation.
(c) "Committee" means the Personnel and Compensation Committee
appointed by the Board.
(d) "Company" means MMI Companies, Inc.
(e) "Fair Market Value" of a share of Stock means the lower of the
New York Stock Exchange closing price on the first or last day
of the Offering Period. In the event the Stock is not traded
on the date as of which the Fair Market Value is to be
determined, Fair Market Value shall be determined as of the
next preceding date on which the Stock is traded.
(f) "Offering Period" means quarterly periods of each year
commencing January 1, 1997 in which retainers and meeting fees
are paid.
(g) "Participant" means a non-employee director of the Company who
elects to participate in the Plan by filing the appropriate
election.
(h) "Stock" means the Common Stock of the Company.
(i) "Stock Plan Account" means the account established by the
Company for each Participant pursuant to the Plan who elects
to receive Stock in lieu of cash compensation.
III. PAYMENT OPTIONS
Prior to the beginning of the fiscal year in which retainers and
meeting fees are earned, each Participant may irrevocably elect to
receive payment for such fiscal year in the following forms:
o Cash
o Shares of Stock as described in Section B.
o Deferral of payment as non-qualified deferred
compensation as described in Section E.
o A combination of the above.
The payment election shall be made in writing to the Secretary of the
Company in the form provided by the Company. In the absence of an
election, all retainers and meeting fees shall be paid in cash.
Notwithstanding the foregoing, elections may be made with respect to
cash deferrals in the 1996 fiscal year prior to the time applicable
retainers and meeting fees are earned. The Company may appoint a
custodian for purposes of implementing the provisions of this Plan.
A. Cash
<PAGE>
Retainer paid semi-annually in advance; meeting fees paid on
meeting date.
B. Stock
The number of shares of Stock granted to a Participant shall
be calculated as of the end of each Offering Period using
eighty-five percent (85%) of Fair Market Value of the
Company's Stock for the Offering Period. Shares granted under
the Plan are fully vested but are non-transferable until the
director departs from the Board or six months following the
date of grant, whichever is later.
Shares issued under the Plan to Participants will be held by
the Company in the Stock Plan Account which shall only be in
the name of the Participant. The Participant may elect to
receive a stock certificate for the number of shares acquired
upon a written request made to the Company or custodian,
however, such shares shall be subject to the transferability
restrictions set forth in this Plan. Dividends will accrue on
Stock held in the Plan Account for Stock owned and Stock
equivalents shall be credited to the Stock Plan Account in the
amount of such dividends.
C. A Participant's right to receive Stock in lieu of cash, if
an election is made, shall not be transferable by the
Participant other than by will, the laws of descent and
distribution or pursuant to a qualified domestic relations
order.
D. The maximum number of shares which can be granted under the
Stock payment option of this Plan shall be Fifty Thousand
(50,000) shares. The number of shares subject to this Plan
shall be adjusted in the event of a stock dividend, stock
plit, recapitalization, merger, consolidation, reorganization
or similar change.
E. Deferred Compensation
Through a properly executed election, the receipt of retainers
and/or meeting fees may be deferred. Deferred compensation
under this Plan shall be an unsecured obligation of the
Company, and not evidenced by a note. All deferred amounts
shall be held as general assets of the Company.
For Participants who elect to defer cash compensation, there
shall be established and maintained by the Company a Cash
Account in the name of each Participant electing to defer,
which shall be 100% vested. Credited to the Cash Account shall
be amounts equal to the amounts of compensation deferred and
interest equal to that which would have been earned had the
deferred compensation account balance been invested at a rate
equal to the "prime rate" in effect on January 1 and July 1 of
each year at the First National Bank of Chicago or such other
bank as may be designated the Company's principal bank.
Interest shall be calculated and credited semi-annually.
The minimum deferral period shall be one year. The deferral
may be made to any date (over one year) or to the date of
departure from the Board. Payment may be elected as a lump sum
or in annual installments up to 5 years. In the event of death
or disability, any deferred account balance shall be paid in a
lump sum.
F. Combination
Directors can elect to split their compensation, i.e. entire
retainer or meeting fees, among the above options as set forth
in the election form.
G. It is the intention of the Company that annual payment
elections under this Plan comply in all respects with Rule
16b-3 under Section 16(b) of the Securities Exchange Act or
its successor and that all Participants remain
Disinterested Persons. Accordingly, if any Plan provision is
later found to cause such an annual election to fail to comply
with Rule 16b-3 or if any Plan provision would disqualify
Participants from remaining Disinterested Persons, that
provision shall be deemed null and void, and in all events the
Plan shall be construed in favor of its meeting the
requirements of Rule 16b-3.
<PAGE>
IV. ELIGIBILITY
Only non-employee directors of the Company shall be eligible to
participate in this Plan.
V. AMENDMENTS
This Plan and any provision of this Plan may be amended or repealed by
the Board except that any amendment which shall require stockholder
approval in order to comply with SEC Rule 16b-3 or its successor shall
be submitted to the stockholders for their approval and, provided
further, any such action shall not adversely affect any Participant's
rights under this Plan relating to elections made prior to such action.
Any issue of interpretation under this Plan may be made by the
Committee.
VI. EFFECTIVE DATE
As required by SEC Rule 16b-3, this Plan must be approved by
stockholders.
<PAGE>
<TABLE>
<CAPTION>
MMI COMPANIES, INC AND SUBSIDIARIES
EXHIBIT 11 - STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Year Ended December 31,
--------------------------------------------
1996 1995 1994
---------- ---------- ----------
PRIMARY
<S> <C> <C> <C>
Weighted average shares outstanding................. 10,284 8,951 8,595
Net effect of dilutive stock options
based on the treasury stock method
using average market price.................... 430 292 86
---------- ---------- ----------
Weighted average number of common
and common equivalent shares.................. 10,714 9,243 8,681
========== ========== ==========
Earnings per common and
common equivalent share (Note 1):
Income from continuing operations. $ 2.44 $ 2.42 $ 1.73
Loss from discontinued operations.......... (.48) -- --
---------- ---------- ----------
Net income $ 1.96 $ 2.42 $ 1.73
========== ========== ==========
FULLY DILUTED
Weighted average shares outstanding.................. 10,284 8,951 8,595
Net effect of dilutive stock options
based on the treasury stock method using
ending market price, if higher than average..... 486 425 168
---------- ---------- ----------
Net effect of assuming Preferred Stock was
converted as of the May 1995 Preferred
Stock issue date................................ -- 307 --
---------- ---------- ----------
Weighted average number of common
and common equivalent shares ................... 10,770 9,683 8,763
========== ========== ==========
Earnings per common and
common equivalent share:
Income from continuing operations.......... $ 2.42 $ 2.34 $ 1.72
Loss from discontinued operations.......... (.47) -- --
---------- ---------- ----------
Net income $ 1.95 $ 2.34 $ 1.72
========== ========== ==========
<FN>
Note 1 - For primary, earnings reflect net income less, in 1995, Preferred Stock
dividends of $294,000.
</FN>
</TABLE>
<PAGE>
EXHIBIT 21.1
SUBSIDIARIES OF THE REGISTRANT
- ------------------------------
Company Domicile
- ------- --------
MMI Companies, Inc. Delaware
AmCon Re, Inc. Cayman Islands, B.W.I.
American Continental Insurance Company Missouri
American Continental Life Insurance Company Missouri
Health Providers Insurance Company Illinois
Healthcare Credentials Management Services, Inc. Delaware
Healthcare Risk Underwriters Ltd. United Kingdom
Management Science Associates, Inc. Delaware
McManis Associates, Inc. Delaware
MMI Agency, Inc. Illinois
MMI Risk Management Resources, Inc. Illinois
Healthcare Risk Resources, International Ltd. United Kingdom
MMedica Insurance Limited Ireland
Professional Risk Management, Inc. Delaware
MMedica Insurance Limited is 80% owned. All other subsidiaries are 100% owned.
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT 13.1
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected financial data are derived from the Company's
consolidated financial statements. The data should be read in conjunction with
the consolidated financial statements, related notes and other financial
information included elsewhere in this report.
YEAR ENDED DECEMBER 31,
(In thousands, except per share amounts and ratios)
1996 1995 1994 1993 1992 1991
(2) (1)(2)(4)
PREMIUMS AND INCOME DATA:
<S> <C> <C> <C> <C> <C> <C>
Gross premiums written........... $214,326 $210,752 $184,791 $ 161,421 $ 136,774 $ 130,905
Net premiums written............. 167,392 161,188 139,800 120,237 102,350 103,111
Net premiums earned.............. 164,409 155,191 132,389 116,295 100,894 100,556
Consulting and fee income........ 34,535 22,336 18,602 6,962 5,924 4,768
Net investment income............ 44,274 39,850 29,067 29,836 28,603 25,232
Total revenues................... 243,178 218,744 177,205 154,864 142,074 144,895
Income from continuing operations 26,115 22,695 15,051 14,181 6,683 12,982
Per share (7)................. 2.42 2.34 1.72 1.90 1.01 1.90
Operating income (3)............. $ 26,141 $ 21,806 $ 16,905 $ 13,030 $ 2,292 $ 10,256
Per share (7)................. 2.43 2.25 1.93 1.74 .35 1.50
Cash dividends per common share.. .24 .20 .16 .12 .11 .09
Weighted average number of common
and common equivalent shares (7) 10,770 9,683 8,763 7,483 6,613 6,850
BALANCE SHEET DATA (AT END OF YEAR):
Investments...................... $788,451 $743,622 $497,679 $ 472,040 $413,522 $ 381,146
Total assets..................... 1,058,018 982,678 693,804 643,773 558,998 529,461
Loss and loss adjustment expense
reserves.................. 631,573 638,815 448,672 419,679 384,621 366,291
Long-term notes payable.......... 58,000 49,000 28,000 16,000 23,000 29,000
Net unrealized gains (losses)
on investments (4)............ 12,791 18,490 (7,237) -- -- --
Stockholders' equity (4)......... 251,966 186,463 123,059 116,503 76,966 72,481
Book value per share (4)......... 21.67 19.27 14.28 13.56 11.96 11.28
GAAP RATIOS (5):
Loss ratio....................... 82.9% 84.8% 85.7% 88.3% 88.4% 88.6%
Expense ratio.................... 21.3 19.5 18.7 19.7 28.9 22.5
- ---------------------------------------------------------------------------------------------------------
Combined ratio................... 104.2% 104.3% 104.4% 108.0% 117.3% 111.1%
=========================================================================================================
<FN>
(1) 1991 premium amounts exclude non-recurring premiums of $11,213,000 relating
to a transaction with an affiliate.
(2) For 1992 and 1991 income from continuing operations, operating income and
GAAP (generally accepted accounting principles) ratios have been
significantly affected by the aforementioned affiliate transaction and by
certain events relating to a special assessment by the state of Florida,
option termination expense, provision for reinsurance and interest on a tax
refund.
(3) Operating income represents income from continuing operations before
after-tax realized investment gains (losses) of $(26,000) in 1996, $889,000
in 1995, $(1,854,000) in 1994, $1,151,000 in 1993, $4,391,000 in 1992, and
$2,726,000 in 1991.
(4) The Company adopted new standards on accounting for investments in 1994 and
income taxes in 1992.
(5) GAAP ratios have been derived from the financial statements of American
Continental Insurance Company and Health Providers Insurance Company from
the date of its acquisition in 1995 as prepared on a GAAP basis for
inclusion in the Company's consolidated financial statements. Transactions
and events described in Note 2 resulted in an increase in the GAAP combined
ratio of 6.2 percentage points and 3.8 percentage points in 1992 and 1991,
respectively.
(6) The Company entered into business combinations as described in Note 2 to
the Consolidated Financial Statements and acquired McManis Associates, Inc.
in December 1993.
(7) Per share data and weighted average shares are presented on a fully diluted
basis.
(8) Income from continuing operations excludes amounts relating to segments
that were discontinued in 1992. Losses from discontinued operations were
$5,100,000 in 1996, $7,024,000 in 1992, and $1,875,000 in 1991. See Note 14
to the Consolidated Financial Statements.
</FN>
</TABLE>
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATION
The following discussion of the results of operations and financial
condition of the Company should be read in conjunction with the Company's
financial statements and notes thereto included elsewhere in this report.
Results of Operations
1996 compared to 1995
Revenues. Gross premiums written increased by 1.7% to $214,326,000 in 1996
from $210,752,000 in 1995. Net premiums written increased by 3.8% to
$167,392,000 from $161,188,000, and net premiums earned increased by 5.9% to
$164,409,000 from $155,191,000.
Medical malpractice premiums earned increased by 6.2% to $156,722,000 in
1996 from $147,635,000 in 1995. In the aggregate for the 1996 policy year,
medical malpractice pricing for healthcare institutions on a per unit of
exposure basis was unchanged, and pricing for physician groups increased
modestly. Pricing of healthcare system insurance is strongly influenced by the
loss experience of the insured. Life and health earned premiums increased by
1.7% to $7,687,000 in 1996 from $7,556,000 in 1995.
Consulting and fee income increased by 54.6% to $34,535,000 in 1996 from
$22,336,000 in 1995. The growth in consulting and fee income is attributable to
growth in fees generated by the Healthcare Services Group 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 17.4% in 1996 compared to
12.6% in 1995.
Net investment income increased by 11.1% to $44,274,000 in 1996 from
$39,850,000 in 1995. Investment income growth is due to growth in invested
assets. The Company had net realized losses on investments of $40,000 in 1996
compared to gains of $1,367,000 in 1995.
Losses and expenses. Losses and loss adjustment expenses (LAE) increased by
4.4% to $135,786,000 in 1996 from $130,088,000 in 1995. Medical malpractice
liability losses and LAE increased by 3.8% to $130,787,000 in 1996 from
$125,944,000 in 1995. The property and casualty combined ratio was relatively
unchanged at 104.2% in 1996 compared to 104.3% in 1995. The components of the
combined ratio, the loss ratio and the expense ratio, declined by 1.9 percentage
points and increased by 1.8 percentage points, respectively, in 1996 compared to
1995. Life and health benefit costs increased by $855,000 or 20.6% to $4,999,000
in 1996 from $4,144,000 in 1995. Underwriting results for the Company's life and
health insurance business are variable due to the relatively small volume of
business written.
Insurance and administrative expenses increased by 26.2% to $77,026,000 in
1996 from $61,055,000 in 1995. The increase in administrative expense is
attributable to internal growth in the Company's consulting and fee segment, the
inclusion of MSA from the date of its acquisition in April 1996 and an increase
in the insurance segment expense ratio including an increase in commission
expense.
Interest expense increased by 22.8% to $3,397,000 in 1996 from $2,767,000 in
1995 due to an
<PAGE>
increase in outstanding debt.
Income taxes. Income taxes were $854,000 in 1996 compared to $2,139,000 in
1995 due to a higher percentage of investment income from tax-advantaged
securities comprising the Company's pre-tax income in 1996 compared to 1995.
Loss from discontinued operations. In 1992, MMI sold Ludgate Insurance
Company Limited (Ludgate) at a loss, which was reported in discontinued
operations. The Company has been involved in two lawsuits connected with the
sale. A U.K. action related to sales contract warranties and a U.S. suit
concerned the commutation of a reinsurance transaction with Ludgate. Also at
issue was a stop-loss reinsurance agreement provided by MMI to Ludgate in
connection with the sale. In February 1997, a U.K. court rendered a judgment
against MMI. The U.S. lawsuit and the stop-loss agreement remained unresolved.
In February 1997, MMI settled both lawsuits and commuted the stop-loss
reinsurance agreement. The settlement of all these matters is reflected in the
accompanying 1996 consolidated statement of income as a loss from discontinued
operations. The pre-tax loss is $7,800,000 with a corresponding tax benefit of
$2,700,000, resulting in a charge of $5,100,000.
Net income. Net income decreased by 7.4% to $21,015,000 in 1996 from
$22,695,000 in 1995 as a result of the discontinued operations charge in 1996.
Operating income from continuing operations, which excludes net realized gains
(losses) on investments, net of taxes, increased by 19.9% to $26,141,000 in 1996
from $21,806,000 in 1995.
Net income per share. Fully diluted net income per common and common
equivalent share decreased to $1.95 in 1996 from $2.34 in 1995. Included in the
1996 amount is a loss of $0.47 from discontinued operations as well as a loss of
$.01 in 1996 versus a gain of $.09 in 1995 related to net realized gains and
losses on investments. Fully diluted income per common and common equivalent
share before realized gains (losses), net of taxes and the loss from
discontinued operations increased to $2.43 in 1996 from $2.25 in 1995. Fully
diluted weighted average shares and equivalents outstanding increased due to the
Company's stock offering in September and October 1996.
1995 COMPARED TO 1994
Revenues. Gross premiums written increased by 14.0% to $210,752,000 in 1995
from $184,791,000 in 1994. Net premiums written increased by 15.3% to
$161,188,000 from $139,800,000 and net premiums earned increased by 17.2% to
$155,191,000 from $132,389,000. Gross premiums written, net premiums written and
net premiums earned attributable to HPIC in 1995 were $3,863,000, $1,978,000,
and $4,424,000, respectively.
Medical malpractice premiums earned increased by 19.1% to $147,635,000 in
1995 from $123,982,000 in 1994. Gross and net premiums increased principally due
to strong renewals for healthcare systems, the addition of new group practice
insureds and the acquisition of Health Providers Insurance Company (HPIC).
Reflected in 1995 premiums earned are approximately $3,000,000 more in one-time
non-recurring premiums, such as prior acts coverage, than was included in 1994.
Healthcare system premium rates were generally unchanged and modest rate
increases were obtained for physician business. Life and health premiums earned
decreased by 10.1% to $7,556,000 from $8,407,000 in 1994 due to a decrease in
group accident and health and medical expense stop-loss business.
<PAGE>
Consulting and fee income increased by 20.1% to $22,336,000 in 1995 from
$18,602,000 in 1994. The growth in consulting and fee income is attributable
primarily to increases in risk management fee income and also to an increase in
McManis Associates consulting revenues. Consulting and fee income as a
percentage of net premiums earned and consulting and fee income increased to
12.6% in 1995 from 12.3% in 1994.
Net investment income increased by 37.1% to $39,850,000 in 1995 from
$29,067,000 in 1994. Net investment income attributable to HPIC in 1995 was
$4,793,000. Investment income increased principally due to an increase in
invested assets related to growth in the Company's historical business and the
acquisition of HPIC. The Company had net realized gains on investments of
$1,367,000 in 1995 compared to losses of $2,853,000 in 1994.
Losses and expenses. Losses and LAE increased by 15.4% to $130,088,000 in
1995 from $112,711,000 in 1994. Medical malpractice liability losses and LAE
increased by 17.9% to $125,944,000 in 1995 from $106,861,000 in 1994 due
principally to an increase in premiums earned. The property and casualty loss
ratio decreased to 84.8% from 85.7% in 1994. Life and health benefit costs
decreased 29.2% to $4,144,000 in 1995 from $5,850,000 in 1994 due to a decrease
in premiums earned and a decrease in the ratio of life and health benefit costs
to premiums earned.
Insurance and administrative expenses increased by 29.1% to $61,055,000 in
1995 from $47,286,000 in 1994. The increase in administrative expense is
attributable to increased revenues, increased commission expense due to a
greater percentage of business acquired through brokers and the acquisition of
HPIC.
Interest expense increased by 70.9% to $2,767,000 in 1995 from $1,619,000 in
1994 and is due to an increase in debt out-standing and to an increase in
average short-term interest rates.
Income taxes. Income taxes were $2,139,000 in 1995 compared to $538,000 in
1994. The increase was attributable to greater pretax income.
Net income. Net income increased by 50.8% to $22,695,000 in 1995 from
$15,051,000 in 1994 due to the aforementioned reasons. Operating income, which
excludes net realized gains (losses) on investments, net of taxes, increased by
29.0% to $21,806,000 in 1995 from $16,905,000 in 1994.
Net income per share. Fully diluted net income per common and common
equivalent share increased to $2.34 in 1995 from $1.72 in 1994. Included in
these amounts are gains of $.09 in 1995 and losses of $.21 in 1994 related to
net realized gains (losses) on investments. Fully diluted net income per common
and common equivalent share before realized gains (losses), net of taxes,
increased to $2.25 from $1.93. Fully diluted weighted average shares and
equivalents outstanding increased due to the issuance of capital stock in
connection with the acquisition of HPIC in May 1995.
Liquidity and Capital Resources
As a holding company, the Company's assets consist primarily of the stock of
its subsidiaries. The Company's principal sources of operating funds are
management fees and dividends from its subsidiaries. In 1996, the Company
received dividends from its subsidiaries of $11,000,000
<PAGE>
compared to $6,000,000 in 1995 and $5,000,000 in 1994. The Company received
management fees from its subsidiaries of $24,550,000 in 1996, $19,100,000 in
1995 and $16,750,000 in 1994. The Company's principal uses of funds are
operating expenses, acquisitions, debt service and dividends to stockholders.
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 expenditures, debt service requirements, taxes and dividends
to stockholders.
Cash flow. On a consolidated basis, the Company has had positive cash flow
from operations in each of the last three years. Positive cash flow has resulted
from growth in premiums and timing differences between the collection of
premiums and payment of claims. Because of uncertainty related to the timing of
payment of claims, cash from operations for a casualty insurance company can
vary substantially from year to year and quarter to quarter. Cash provided by
operating activities was $10,012,000 in 1996, $50,299,000 in 1995 and
$42,977,000 in 1994. Cash from operations decreased principally due to increased
paid losses during the first six months of 1996.
Investing activities, substantially in fixed income securities, have been
the principal use of cash flow from operations. Cash used by investing
activities was $66,518,000 in 1996, $69,738,000 in 1995 and $41,685,000 in 1994.
Reallocations of the Company's investment portfolio have resulted in significant
purchases and sales of fixed income securities. The Company has no material
commitments for capital expenditures.
Financing activities provided $57,146,000 in cash in 1996 and $19,380,000 in
1995 and resulted in a $1,508,000 use in 1994. Cash provided by financing
activities includes $51,442,000, net of expenses, from the issuance of Common
Stock in 1996 of which $46,325,000 related to the Company's stock offering in
September and October 1996. In January 1996, the Company obtained an increase in
its available credit line to $85,000,000 and increased its borrowings to
$58,000,000 as of December 31, 1996, in connection with the acquisition of MSA.
In May 1995, in connection with the acquisition of HPIC, the Company obtained an
increase in its available credit line to $56,000,000 and borrowed an additional
$15,000,000. The Company borrowed an additional $5,000,000 in July 1995.
Long-term notes payable totaled $58,000,000 as of December 31, 1996, compared to
$49,000,000 as of December 31, 1995.
Invested assets. The Company invests in investment grade fixed income
securities and preferred stocks. The estimated fair value of preferred stocks
was less than 3% of the fair value of total invested assets as of December 31,
1996. The estimated fair value of the Company's short-term, fixed maturity and
preferred stock investments was $788,451,000 as of December 31, 1996, compared
to $743,622,000 as of December 31, 1995. The December 31, 1996, amount includes
net unrealized gains of $19,678,000, which represent the amount by which the
estimated fair value of the investment portfolio exceeds amortized cost.
Unrealized gains were $28,447,000 as of December 31, 1995. The decrease in
unrealized gains during 1996 was due to an increase in the general level of
interest rates.
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
$42,777,000 or 5.4% of invested assets as of December 31, 1996, compared to
$33,550,000 or 4.5% of invested assets as of December 31, 1995. The Company
believes that all of its invested assets are readily marketable.
<PAGE>
Debt. Long-term debt totaled $58,000,000 as of December 31, 1996, compared
to $49,750,000 of long- and short-term debt as of December 31, 1995. In January
1996, the Company obtained an increase in its available credit line to
$85,000,000. The credit agreement, which is secured by the capital stock of
American Continental Insurance Company (ACIC) and HPIC, restricts the Company's
ability to enter new lines of business without the permission of the lender,
incur or assume debt, pay dividends in excess of 20% of the prior year's net
income and make acquisitions. The credit agreement contains financial covenants
with respect to minimum net worth, minimum statutory surplus, a ratio of debt to
capital, a debt service coverage ratio, certain leverage ratios for ACIC, A.M.
Best rating and risk-based capital levels. The loan bears interest at a fixed
rate equal to the London Interbank Offered Rate (LIBOR) for periods of up to one
year plus a margin ranging from 5/8% to 7/8%. The Company has entered into
interest rate swap agreements that result in a fixed interest rate of 5.4%
through 1997 on the LIBOR component for $44,500,000 of the $58,000,000 in
outstanding principal. As of December 31, 1996, the unused commitment under the
credit facility was $27,000,000.
Stockholders' equity. The Company's stockholders' equity
was $251,966,000 as of December 31, 1996, compared to $186,463,000 as of
December 31, 1995. Changes in stockholders' equity are primarily attributable to
net income of the Company, dividends to stockholders, changes in unrealized
gains or losses on investments and issuances of Common Stock. Included in the
increase in stockholders' equity is $46,325,000 from proceeds, net of expenses,
from the Company's offering of Common Stock in September and October 1996. Cash
dividends to stockholders totaled $2,546,000 in 1996, $1,957,000 in 1995 and
$1,376,000 in 1994. In 1994, the Company adopted Financial Accounting Standard
No. 115 - Accounting for Certain Investments in Debt and Equity Securities,
which requires invested assets classified as available-for-sale to be carried at
estimated fair value, with changes in temporary unrealized gains and losses
reported directly in stockholders' equity. As of December 31, 1996, estimated
unrealized gains on investments were $19,678,000 net of deferred tax liability
of $6,887,000, thereby increasing stockholders' equity by $12,791,000. As of
December 31, 1995, the Company had an unrealized gain, net of taxes, of
$18,490,000.
Risk-based capital. NAIC risk-based capital solvency standards for property
and casualty insurers became effective as of December 31, 1994, in addition to
risk-based capital standards for life and health insurance companies, which
became effective in 1993. Under risk-based capital, several solvency thresholds
are calculated based on the underwriting, credit, and asset risks of a company.
As of December 31, 1996, the statutory capital and surplus of each of the
Company's insurance subsidiaries exceeds its risk-based capital requirements.
Acquisition of MSA and HPIC
Effective April 1, 1996, the Company purchased substantially all of the net
assets of MSA. MSA provides employee relations and human resource consulting
services to healthcare organizations and had revenues of approximately
$6,600,000 in 1995. The purchase price for MSA was $8,300,000 in cash, which was
funded principally by an increase in borrowings under the Company's credit
agreement.
On May 9, 1995, the Company acquired all of the outstanding capital stock of
HPIC, an Illinois-domiciled insurance company that writes medical malpractice
insurance for healthcare organizations and assumes reinsurance from
healthcare-sponsored insurance companies. Total consideration was $30,672,000,
consisting of $15,320,000 in cash and $15,352,000 in convertible
<PAGE>
preferred stock, which was subsequently converted into 949,760 shares of Common
Stock. These two transactions were accounted for as purchases.
Effect of Inflation
The primary effect of inflation on the Company is implicitly considered in
pricing and estimating reserves for unpaid losses and loss adjustment expenses,
particularly for claims where there is a long period between reporting and
settlement. The actual effect of inflation on the Company's results cannot be
accurately known until claims are ultimately settled. Based on actual results to
date, the Company believes that loss and LAE reserve levels and the Company's
rate-making process adequately incorporate the effects of inflation.
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
MMI COMPANIES INC. AND SUBSIDIARIES
IN THOUSANDS, EXCEPT PER SHARE DATA
DECEMBER 31, 1996 1995
------------ ----------
ASSETS
INVESTMENTS (Note 4)
<S> <C> <C>
Short-term investments ....................................................$ 42,777 $ 33,550
Fixed maturities-- at fair value (amortized cost: 1996-- $707,948;
1995-- $681,643)... .................................................. 727,080 710,072
Preferred stocks .......................................................... 18,594 --
- --------------------------------------------------------------------------------------------------------
788,451 743,622
OTHER ASSETS
Cash ...................................................................... 1,079 439
Premiums and fees receivable .............................................. 58,611 41,544
Reinsurance receivables (Note 3) .......................................... 101,175 105,554
Prepaid reinsurance premiums (Note 3) ..................................... 9,711 9,925
Accrued investment income ................................................. 11,116 11,628
Cost in excess of net assets of purchased subsidiaries,
less accumulated amortization (Notes 1 and 2)............................ 16,244 8,965
Furniture and equipment-- at cost,
less accumulated depreciation (Note 1) .................................. 9,076 6,610
Deferred income taxes (Note 5) ............................................ 46,459 41,203
Other ..................................................................... 16,096 13,188
- --------------------------------------------------------------------------------------------------------
$ 1,058,018 $982,678
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Policy Liabilities:
Loss and loss adjustment expense reserves (Note 7):
Medical malpractice liability .........................................$ 620,673 $623,220
Life and health ....................................................... 7,779 11,401
Other ................................................................. 3,121 4,194
- --------------------------------------------------------------------------------------------------------
631,573 638,815
Unearned premium reserves ............................................. 55,679 52,951
Future life policy benefits ........................................... 8,578 8,982
- --------------------------------------------------------------------------------------------------------
695,830 700,748
Accrued expenses and other liabilities .................................... 28,051 21,015
Amounts due to reinsurers (Note 3) ........................................ 24,171 24,702
Notes payable to stockholders (Note 6) .................................... -- 750
Long-term notes payable (Note 6) .......................................... 58,000 49,000
- --------------------------------------------------------------------------------------------------------
806,052 796,215
Contingencies (Notes 3 and 10)
STOCKHOLDERS' EQUITY (Notes 8 and 9)
Common Stock, par value $.10 per share:
Authorized shares:
1996 and 1995 -- 30,000
Issued and outstanding shares:
1996-- 11,625; 1995-- 9,675............................................ 1,162 967
Additional paid-in capital ................................................ 135,183 82,645
Retained earnings ......................................................... 102,830 84,361
Unrealized gains on investments, net of taxes:
1996-- $6,887; 1995-- $9,957 .......................................... 12,791 18,490
- --------------------------------------------------------------------------------------------------------
251,966 186,463
- --------------------------------------------------------------------------------------------------------
$ 1,058,018 $982,678
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF INCOME
MMI COMPANIES, INC. AND SUBSIDIARIES
IN THOUSANDS, EXCEPT PER SHARE DATA
YEAR ENDED DECEMBER 31, 1996 1995 1994
REVENUES
Insurance premiums earned (Note 3):
<S> <C> <C> <C>
Medical malpractice $ 156,722 $147,635 $ 123,982
Life and health 7,687 7,556 8,407
- ------------------------------------------------------------------------------------------------
164,409 155,191 132,389
Consulting and fee income 34,535 22,336 18,602
Net investment income (Note 4) 44,274 39,850 29,067
Net realized gains (losses) on investments (Note 4) (40) 1,367 (2,853)
- ------------------------------------------------------------------------------------------------
TOTAL REVENUES 243,178 218,744 177,205
LOSSES AND EXPENSES
Losses and loss adjustment expenses (Notes 3 and 7):
Medical malpractice 130,787 125,944 106,861
Life and health 4,999 4,144 5,850
- ------------------------------------------------------------------------------------------------
135,786 130,088 112,711
Insurance and administrative expenses (Note 3) 77,026 61,055 47,286
Interest expense 3,397 2,767 1,619
- ------------------------------------------------------------------------------------------------
TOTAL LOSSES AND EXPENSES 216,209 193,910 161,616
INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES 26,969 24,834 15,589
Income taxes (Note 5) 854 2,139 538
- ------------------------------------------------------------------------------------------------
INCOME FROM CONTINUING OPERATIONS 26,115 22,695 15,051
Loss from discontinued operations (Note 14) (5,100) -- --
- ------------------------------------------------------------------------------------------------
NET INCOME $ 21,015 $ 22,695 $ 15,051
================================================================================================
Earnings per common and common equivalent share (Note 1):
Primary
Income from continuing operations $ 2.44 $ 2.42 $ 1.73
Loss from discontinued operations (.48) -- --
- ------------------------------------------------------------------------------------------------
NET INCOME $ 1.96 $ 2.42 $ 1.73
================================================================================================
Fully diluted
Income from continuing operations $ 2.42 $ 2.34 $ 1.72
Loss from discontinued operations (.47) -- --
- ------------------------------------------------------------------------------------------------
NET INCOME $ 1.95 $ 2.34 $ 1.72
================================================================================================
Weighted average number of common and common equivalent shares:
Primary 10,714 9,243 8,681
Fully diluted 10,770 9,683 8,763
================================================================================================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
MMI COMPANIES, INC AND SUBSIDIARIES
IN THOUSANDS, EXCEPT PER SHARE DATA
UNREALIZED
PREFERRED STOCK COMMON STOCK ADDITIONAL GAINS (LOSSES) TOTAL
NUMBER PAR NUMBER PAR PAID-IN RETAINED TREASURY ON INVESTMENTS, STOCKHOLDERS'
OF SHARES VALUE OF SHARES VALUE CAPITAL EARNINGS STOCK NET OF TAXES EQUITY
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT JANUARY 1, 1994 -- $ -- 8,656 $ 866 $ 66,265 $ 50,112 $(740) $ -- $116,503
Year ended December 31, 1994:
Net income 15,051 15,051
Issuance of Common Stock in
connection with exercise of
employee stock options 21 2 116 118
Cumulative effect of accounting
change, net of taxes of $6,928 12,867 12,867
Change in unrealized gains (losses)
net of taxes of $10,824 (20,104) (20,104)
Common dividends ($.16 per share) (1,376) (1,376)
- ----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31,1994 -- -- 8,677 868 66,381 63,787 (740) (7,237) 123,059
Year ended December 31, 1995:
Net income 22,695 22,695
Issuance of Preferred Stock
in connection with acquisition
of subsidiary 903 18,061 (2,709) 15,352
Conversion of Preferred to
Common Stock (903) (18,061) 941 94 17,967 --
Issuance of Common Stock
in connection with employee
benefit plans and exercise of
employee stock options 110 10 1,577 1,587
Change in unrealized gains (losses),
net of taxes of $13,853 25,727 25,727
Retirement of Treasury Stock (62) (6) (734) 740 --
Common cash dividends ($.20 per share) (1,827) (1,827)
Preferred stock dividend ($.18 per share) 9 1 163 (164) --
Preferred cash dividends ($.14 per share) (130) (130)
- ----------------------------------------------------------------------------------------------------------------------------------
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
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
MMI COMPANIES, INC. AND SUBSIDIARIES
IN THOUSANDS
YEAR ENDED DECEMBER 31, 1996 1995 1994
OPERATING ACTIVITIES
<S> <C> <C> <C>
Net income............................................................. $21,015 $ 22,695 $ 15,051
Adjustments to reconcile net income to net cash
provided by operating activities:
Increase (decrease) in policy liabilities.......................... (4,918) 39,493 38,760
Change in reinsurance balances..................................... 4,062 (1,305) (4,166)
Increase in premiums and fees receivable........................... (14,980) (6,440) (13,422)
Increase in deferred tax asset..................................... (2,020) (4,878) (3,723)
Decrease (increase) in accrued investment income and other assets . (2,203) (2,841) 5,025
Increase in accrued expenses and other liabilities................. 5,483 2,454 390
Net realized (gains) losses on investments......................... 40 (1,367) 2,853
Depreciation and amortization on investments and goodwill.......... 3,533 2,488 2,209
- ---------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED
BY OPERATING ACTIVITIES 10,012 50,299 42,977
INVESTING ACTIVITIES
Net sale (purchase) of short-term investments.......................... (8,931) 41,741 (5,157)
Purchases of other investments, principally fixed maturities........... (417,828) (548,145) (256,582)
Sales of other investments, principally fixed maturities............... 303,520 245,348 145,451
Maturities of fixed maturities......................................... 71,044 210,798 77,488
Acquisition of subsidiaries (Note 2)................................... (8,921) (15,372) --
Furniture and equipment additions...................................... (5,402) (4,108) (2,885)
- ---------------------------------------------------------------------------------------------------------------
NET CASH USED
BY INVESTING ACTIVITIES (66,518) (69,738) (41,685)
FINANCING ACTIVITIES
Issuance of Common Stock............................................... 54,308 1,587 118
Costs incurred in connection with stock offering....................... (2,866) -- --
Payments on notes payable.............................................. (750) (1,250) (28,250)
Proceeds from notes payable including short-term borrowings............ 9,000 21,000 28,000
Dividends.............................................................. (2,546) (1,957) (1,376)
- ---------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED (USED)
BY FINANCING ACTIVITIES 57,146 19,380 (1,508)
- ---------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH 640 (59) (216)
Cash at beginning of year................................................. 439 498 714
- ---------------------------------------------------------------------------------------------------------------
CASH AT END OF YEAR $ 1,079 $ 439 $ 498
===============================================================================================================
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
MMI Companies, Inc. and Subsidiaries
December 31, 1996
1. ACCOUNTING POLICIES
Nature of Operations
MMI Companies, Inc. (MMI) is a specialty company that offers insurance products
and risk management and consulting services to the healthcare industry. MMI
writes its medical malpractice liability insurance through its principal
subsidiary, American Continental Insurance Company (ACIC). MMI provides its
products and services in all 50 states and in Europe. Information on MMI's
operations by segment is included in Note 12.
Principles of Consolidation
The accompanying consolidated financial statements have been prepared in
conformity with generally accepted accounting principles (GAAP) and include the
accounts and operations, after intercompany eliminations, of MMI and its
subsidiaries. Certain reclassifications have been made to the prior years'
financial statements in order to conform to the current year presentation.
Use of Estimates
The preparation of the financial statements in conformity with GAAP requires
management to make estimates and assumptions that can affect the amounts
reported in the consolidated financial statements and accompanying notes. Such
estimates and assumptions could change in the future as more information becomes
known, which could impact the amounts reported and disclosed herein.
Investments
In 1993, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards (SFAS) No.115, "Accounting for Certain Investments in Debt
and Equity Securities" and as of January 1, 1994, MMI adopted the standard. MMI
classifies 100% of its fixed maturity and preferred stock investments as
"available for sale," requiring that these investments be carried at fair value,
with unrealized gains and losses, less related deferred income taxes, excluded
from earnings and reported as a separate component of stockholders' equity. At
January 1, 1994, the cumulative effect of implementing SFAS No. 115 resulted in
an increase in fixed maturity investments of $19,795,000 and an increase in
stockholders' equity, less deferred income taxes, of $12,867,000.
Realized gains and losses on sales of investments are recognized on the specific
identification basis. Realized losses also include losses for fair value
declines that are considered to be other than temporary.
Fair Value Information
The fair values of investments are reported in Note 4. The fair values of other
financial instruments, principally accrued investment income, premiums and fees
receivable, accrued expenses and other liabilities, amounts due to reinsurers
and notes payable approximate their December 31, 1996 and 1995 carrying values.
<PAGE>
Premium Revenues
Premiums are earned pro rata over the terms of the policies, which are generally
one year for medical malpractice and monthly for life and health. Unearned
premiums are calculated using the monthly pro rata basis.
Deferred Policy Acquisition Costs
Commissions and other costs that vary with, and are primarily related to, the
production of new and renewal business have been deferred and are amortized over
the period of the related insurance policies. Such unamortized amounts included
in other assets amounted to $7,100,000 and $5,700,000 at December 31, 1996 and
1995, respectively. Amortization of such costs are included in insurance and
administrative expenses and amounted to $14,000,000 in 1996, $11,400,000 in 1995
and $7,500,000 in 1994.
Unpaid Losses and Loss Adjustment Expenses
The liabilities for unpaid losses and loss adjustment expenses represent the
estimated liability for claims reported to MMI plus claims incurred but not yet
reported and the related estimated adjustment expenses. The liabilities for
losses and related loss adjustment expenses are determined using case-basis
evaluations and statistical analyses. Although considerable variability is
inherent in such estimates, particularly considering the nature of medical
malpractice liability business, management believes that the liabilities for
unpaid losses and loss adjustment expenses are reasonable. The estimates are
continually reviewed and adjusted as necessary; such adjustments are included in
current operations.
Future Policy Benefits
The liability for future policy benefits principally represents reserves related
to disability policies.
Reinsurance
Reinsurance premiums, commissions, expense reimbursements and liabilities
related to reinsured business are accounted for on bases consistent with those
used in accounting for the original policies issued and with the terms of the
reinsurance contracts. Premiums ceded to other companies have been reported as a
reduction of premium revenues. Expense allowances received in connection with
reinsurance ceded have been accounted for as a reduction of the related deferred
policy acquisition costs and are deferred and amortized accordingly. Reinsurance
receivables and prepaid reinsurance premiums are reported as assets in the
accompanying balance sheets.
Furniture and Equipment
The costs of furniture and equipment are depreciated over their estimated useful
lives of five years using an accelerated method. As of December 31, 1996 and
1995, accumulated amortization amounted to $9,500,000 and $6,500,000,
respectively.
Goodwill
Costs in excess of net assets of purchased subsidiaries are being amortized on a
straight-line basis over periods ranging from ten to twenty years. As of
December 31, 1996 and 1995, accumulated amortization amounted to $6,600,000 and
$4,800,000, respectively.
Income Taxes
MMI and its subsidiaries file a consolidated federal income tax return. Deferred
tax assets and liabilities are determined based on differences between financial
reporting and tax bases of assets and liabilities and are measured using tax
rates and laws that will be in effect when the differences are expected to
reverse.
Stock Based Compensation
MMI grants stock options for a fixed number of shares to employees with an
exercise price equal to the fair value of the shares at the date of grant. MMI
accounts for stock option grants in accordance with APB Opinion No. 25,
"Accounting for Stock Issued to Employees," and accordingly, recognizes no
compensation expense for the stock option grants.
<PAGE>
Earnings Per Share
Earnings per share are computed based on the weighted average number of
outstanding shares of common stock and equivalents, including incremental shares
from dilutive stock options since the date of grant using the treasury stock
method.
As described in Note 2, MMI issued Preferred Stock in May 1995 that was
converted into Common Stock in September 1995. For primary earnings per share,
earnings are net of Preferred Stock dividends of $294,000 in 1995. For fully
diluted earnings per share, weighted average common and common equivalent shares
in 1995 are computed assuming the Preferred Stock was converted as of the May
1995 Preferred Stock issue date. If primary earnings per share also had been
computed without deducting dividends and assuming a May 1995 Preferred Stock
conversion date, primary earnings per share would have amounted to $2.38 in
1995.
Cash Flows
In the consolidated statements of cash flows, cash includes principally demand
deposit accounts. Also, sales and purchases of short-term investments presented
on a net cash basis include investments with original maturities of three months
or less.
2. BUSINESS COMBINATIONS
Effective April 1, 1996, MMI purchased substantially all of the net assets of
Management Science Associates, Inc. (MSA). MSA provides employee relations and
human resource consulting services to healthcare organizations and had revenues
of approximately $6.6 million in 1995. The purchase price for MSA, including
expenses, was $8,353,000 in cash, which was funded principally by an increase in
borrowings under the Company's credit agreement.
Assets acquired, liabilities assumed, and the excess of cost over net assets
purchased were as follows (in thousands):
Cost in excess of net assets purchased $ 7,155
Cash 395
Other assets, principally receivables 1,758
Other liabilities (955)
- ------------------------------------------------------------
$ 8,353
============================================================
On May 9, 1995, MMI acquired all of the outstanding capital stock of Health
Providers Insurance Company (HPIC) from American Hospital Association Services,
Inc. HPIC is an Illinois-domiciled insurance company that writes medical
malpractice insurance for healthcare organizations and assumes reinsurance from
healthcare-sponsored insurance companies. Total consideration was $30,672,000,
with $15,320,000 in cash and the balance in the form of Series A Convertible
Preferred Stock that was converted into 941,000 shares of Common Stock on
September 5, 1995.
Assets acquired and liabilities assumed were as follows (in thousands):
Invested assets $ 138,612
Other assets 31,654
Liabilities, principally
policy liabilities (139,594)
- ------------------------------------------------------------
$ 30,672
============================================================
The following table summarizes pro forma results of operations as if the
acquisition of HPIC had occurred as of the beginning of the respective years (in
thousands, except per share data):
Year ended December 31,
- ------------------------------------------------------------
1995 1994
- ------------------------------------------------------------
Total revenues $224,513 $199,582
Net income 22,838 19,067
Earnings per common and common equivalent share:
Primary $ 2.40 $ 2.09
Fully diluted 2.28 1.96
These acquisitions were accounted for as purchases, and the operations of the
acquirees are included in MMI's consolidated financial statements since the
dates of acquisition.
<PAGE>
3. REINSURANCE
MMI's insurance subsidiaries are involved in the cession of reinsurance to other
domestic and foreign companies, which permits the recovery of a portion of the
direct losses. MMI's insurance subsidiaries would remain liable to the extent
that these reinsurance companies are unable to meet their obligations under
these arrangements.
Insurance premiums earned are comprised of the following (in thousands):
Year Ended December 31,
- ------------------------------------------------------------
1996 1995 1994
- ------------------------------------------------------------
Direct $192,059 $186,792 $156,739
Assumed 19,510 17,247 18,069
Ceded (47,160) (48,848) (42,419)
- ------------------------------------------------------------
$164,409 $155,191 $132,389
MMI's reinsurance receivables from foreign reinsurers amounted to $68,500,000
and $71,900,000 at December 31, 1996 and 1995 respectively, of which $40,600,000
and $46,300,000 related to United Kingdom-based reinsurers.
In 1996, 1995 and 1994 respectively, MMI's losses and loss adjustment expenses
were net of reinsurance ceded of $30,800,000, $28,800,000 and $19,100,000.
4. INVESTMENTS
The amortized cost and fair value of investments, which are available for sale,
are as follows (in thousands):
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
- --------------------------------------------------------------------------------------------------------------
December 31, 1996:
Fixed maturities:
<S> <C> <C> <C> <C>
U.S. Government and agencies $76,429 $891 $(30) $77,290
State and political subdivisions 438,139 13,228 (684) 450,683
Corporate securities 77,236 3,802 (2) 81,036
Mortgage-backed securities 116,144 2,167 (240) 118,071
- --------------------------------------------------------------------------------------------------------------
707,948 20,088 (956) 727,080
Short-term investments 42,746 31 -- 42,777
Preferred stocks 18,079 585 (70) 18,594
- --------------------------------------------------------------------------------------------------------------
$768,773 $20,704 $(1,026) $788,451
==============================================================================================================
December 31, 1995:
Fixed maturities:
U.S. Government and agencies $75,646 $2,338 $(17) $77,967
State and political subdivisions 394,746 16,517 (644) 410,619
Corporate securities 128,576 7,853 (1,076) 135,353
Mortgage-backed securities 82,675 3,466 (8) 86,133
- --------------------------------------------------------------------------------------------------------------
681,643 30,174 (1,745) 710,072
Short-term investments 33,532 18 -- 33,550
- --------------------------------------------------------------------------------------------------------------
$715,175 $30,192 $(1,745) $743,622
==============================================================================================================
</TABLE>
Fair values of investments are principally based on quoted market prices.
Short-term investments are comprised principally of corporate and municipal
securities.
<PAGE>
The amortized cost and fair value of fixed maturities at December 31, 1996, by
contractual maturity, are as follows (in thousands):
Amortized Fair
Cost Value
- --------------------------------------------------------
Due in 1997 $22,683 $22,800
Due in 1998
through 2001 125,524 128,089
Due in 2002
through 2006 152,601 158,616
Due in 2007
and thereafter 290,996 299,504
- --------------------------------------------------------
591,804 609,009
Mortgage-backed
securities 116,144 118,071
- --------------------------------------------------------
$707,948 $727,080
========================================================
The expected maturities may differ from contractual maturities in the foregoing
table because borrowers may have the right to call or prepay obligations with or
without call or prepayment penalties, or MMI may have the right to put
obligations back to the issuer prior to stated maturity.
The changes in unrealized gains and losses, which are reflected in stockholders'
equity, were as follows (in thousands):
<TABLE>
<CAPTION>
` Year Ended December 31,
- --------------------------------------------------------------------------------------------------------------
1996 1995 1994
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Fixed maturities and short-term investments $(9,284) $39,580 $(30,928)
Preferred stocks 515 -- --
- --------------------------------------------------------------------------------------------------------------
$(8,769) $39,580 $(30,928)
==============================================================================================================
</TABLE>
Net realized gains (losses) on investments are comprised of the following (in
thousands):
<TABLE>
<CAPTION>
` Year Ended December 31,
- --------------------------------------------------------------------------------------------------------------
1996 1995 1994
- --------------------------------------------------------------------------------------------------------------
Fixed maturities:
<S> <C> <C> <C>
Gross gains $ 3,347 $3,357 $661
Gross losses (3,567) (1,990) (3,514)
- --------------------------------------------------------------------------------------------------------------
(220) 1,367 (2,853)
- --------------------------------------------------------------------------------------------------------------
Preferred stocks:
Gross gains 206 -- --
Gross losses (26) -- --
- --------------------------------------------------------------------------------------------------------------
180 -- --
- --------------------------------------------------------------------------------------------------------------
$ (40) $ 1,367 $ (2,853)
==============================================================================================================
</TABLE>
Major categories of net investment income are as follows (in thousands):
<TABLE>
<CAPTION>
` Year Ended December 31,
- --------------------------------------------------------------------------------------------------------------
1996 1995 1994
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Fixed maturities $43,492 $38,276 $29,265
Short-term investments and cash 3,001 4,610 1,981
Preferred stocks 785 -- --
- --------------------------------------------------------------------------------------------------------------
Total investment income 47,278 42,886 31,246
Expenses 3,004 3,036 2,179
- --------------------------------------------------------------------------------------------------------------
Net investment income $44,274 $39,850 $29,067
==============================================================================================================
</TABLE>
At December 31, 1996, investments with a fair value of $13,050,000 were on
deposit to meet statutory requirements.
<PAGE>
5. INCOME TAXES
Deferred income taxes reflect the net tax effect of temporary differences
between the amounts of assets and liabilities for financial reporting purposes
and the amounts used for income tax purposes. Significant components of MMI's
deferred tax assets and liabilities as of December 31, 1996 and 1995 are as
follows (in thousands):
<TABLE>
<CAPTION>
December 31,
1996 1995
- ---------------------------------------------------------------------------------------------------
Deferred tax assets:
<S> <C> <C>
Tax-basis loss reserve adjustment $42,696 $50,697
Tax-basis unearned premium reserve adjustment 3,261 3,012
Accrued expenses 4,238 710
Alternative minimum tax credit carryforward 5,584 1,692
Other 4,317 706
- ---------------------------------------------------------------------------------------------------
Total deferred tax assets 60,096 56,817
- ---------------------------------------------------------------------------------------------------
Deferred tax liabilities:
Unrealized investment gains (6,887) (9,957)
Deferred policy acquisition costs (2,453) (1,893)
Receivables (2,115) (2,223)
Other (2,182) (1,541)
- ---------------------------------------------------------------------------------------------------
Total deferred tax liabilities (13,637) (15,614)
- ---------------------------------------------------------------------------------------------------
Net deferred tax asset $46,459 $41,203
===================================================================================================
</TABLE>
MMI expects adequate future taxable income to realize the deferred tax asset.
Accordingly, no valuation reserve is considered necessary.
Significant components of the provision for income taxes are as follows (in
thousands):
<TABLE>
<CAPTION>
` Year Ended December 31,
- --------------------------------------------------------------------------------------------------------------
1996 1995 1994
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current $431 $7,017 $4,261
Deferred (credit) 423 (4,878) (3,723)
- --------------------------------------------------------------------------------------------------------------
Net provision $854 $2,139 $538
==============================================================================================================
</TABLE>
A reconciliation of income tax computed at the U.S. federal statutory tax rate
of 35% to income tax expense in the accompanying financial statements is as
follows (dollars in thousands):
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
- ------------------------------------------------------------------------------------------------------
1996 1995 1994
- ------------------------------------------------------------------------------------------------------
Amount % Amount % Amount %
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Tax at U.S. Statutory rate $9,439 35% $8,692 35% $5,456 35%
Non taxable investment income (7,896) (29) (6,187) (25) (4,730) (31)
Other (689) (3) (366) (1) (188) (1)
- ------------------------------------------------------------------------------------------------------
Net provision $854 3% $2,139 9% $538 3%
======================================================================================================
</TABLE>
MMI's net payments (refunds) of income taxes were $(500,000), $8,000,000, and
$(2,400,000) during 1996, 1995 and 1994, respectively.
6. NOTES PAYABLE
In January 1996, MMI amended its bank credit agreement to provide MMI with a
$50,000,000 term loan and a $35,000,000 line of credit, of which $49,000,000 of
the term loan was drawn to retire debt outstanding at December 31, 1995. At
December 31, 1996, a total of $58,000,000 was outstanding with the remaining
$27,000,000 from the line of credit unused and available for general corporate
purposes.
The loan bears interest at a rate equal to the London Interbank Offered Rate
(5.6% at December 31, 1996) for periods of up to one year plus a margin ranging
from 5/8% to 7/8%. MMI also has the option of selecting an interest rate related
to the bank's prime rate. As of December 31, 1996, the LIBOR component on
$44,500,000 of MMI's borrowings was fixed at 5.4% through December, 1997.
The bank credit agreement subjects MMI and its subsidiaries to certain covenants
and restrictions, including limitations on dividends (limited to 20% of
prior-year's net income), purchases of capital stock, additional borrowings,
encumbrances or sales of assets and types of investment purchases. Covenants
also include maintenance of various financial ratios and amounts, including
maintaining $135,000,000 of statutory-basis capital and surplus for ACIC.
The line of credit is secured by the capital stock of ACIC and HPIC, which own
the majority of MMI's consolidated assets. Annual fees related to the agreement
range from 1/5% to 3/8% of the unused commitment.
Reduction of the credit commitment is scheduled as follows (in thousands):
1997 $ 5,000
1998 7,000
1999 10,000
2000 13,000
2001 50,000
Principal payments are not required based on the current level of borrowings
until 2000. The credit agreement expires on April 1, 2001.
At December 31, 1995, short term notes payable due to hospital stockholders
amounted to $750,000. The interest rate on these borrowings averaged 6.9% at
December 31, 1995. The notes were retired in 1996.
Total interest paid in 1996, 1995 and 1994 was $3,406,000, $2,818,000 and
$1,440,000, respectively.
<PAGE>
7. LIABILITY FOR LOSS AND LOSS ADJUSTMENT EXPENSE RESERVES
The following table presents a reconciliation of beginning and ending
property/casualty loss and loss adjustment expense (LAE) reserve balances for
the years indicated (in thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
- -----------------------------------------------------------------------------------------------------------------
1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------
Liability for losses and LAE at beginning of year
(net of reinsurance receivables: 1996 -- $88,707;
<S> <C> <C> <C> <C> <C> <C> <C>
1995-- $78,057; 1994-- $71,851) $538,707 $ 361,733 $ 337,813
Liability for losses and LAE for HPIC at date of acquisition
(net of reinsurance receivables: $9,944) -- 124,651 --
Add: Provision for losses and LAE for claims occurring in:
The current year from continuing operations 135,895 127,710 104,366
The current year from discontinued operations -- -- 759
Prior years from continuing operations (5,108) (1,766) 2,495
Prior years from discontinued operations -- -- (110)
- -----------------------------------------------------------------------------------------------------------------
Total incurred losses and LAE 130,787 125,944 107,510
Less: Losses and LAE payments for claims occurring in:
The current year from continuing operations 13,900 4,533 5,944
The current year from discontinued operations -- -- --
Prior years from continuing operations 115,851 67,681 74,453
Prior years from discontinued operations 3,108 1,407 3,193
- -----------------------------------------------------------------------------------------------------------------
Total paid losses and LAE 132,859 73,621 83,590
- -----------------------------------------------------------------------------------------------------------------
Liability for losses and LAE at end of year (net of reinsurance
receivables: 1996 -- $87,159; 1995-- $88,707; 1994-- $78,057) $ 536,635 $ 538,707 $361,733
=================================================================================================================
<FN>
The portion of the provision for losses and LAE in the foregoing schedule for
the years ended December 31, 1996, 1995 and 1994 that relate to prior years'
from continuing operations each represent less than 1% of the respective prior
years' liabilities for losses and LAE. MMI's loss and LAE reserves and related
provision for prior years' losses attributable to health business are
immaterial.
</FN>
</TABLE>
<PAGE>
8. STOCKHOLDERS' EQUITY
The statutory accounting practices prescribed or permitted by regulatory
authorities for MMI's insurance subsidiaries differ in some respects from GAAP.
ACIC's discounting of loss and LAE reserves for statutory reporting purposes is
permitted by regulatory authorities. Reconciliations of statutory-basis capital
and surplus and net income to MMI's GAAP-basis amounts included in the
accompanying financial statements are as follows (in thousands):
<TABLE>
<CAPTION>
December 31,
- -----------------------------------------------------------------------------------------------------------
1996 1995
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Statutory-basis capital and surplus $225,945 $205,596
Additions (deductions):
Statutory-basis loss reserve discount (52,176) (50,182)
GAAP-basis deferred income taxes 38,122 41,034
Other, including non-insurance company amounts 40,075 (9,985)
- -----------------------------------------------------------------------------------------------------------
GAAP-basis consolidated stockholders' equity of MMI $251,966 $186,463
===========================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31,
- -----------------------------------------------------------------------------------------------------------
1996 1995 1994
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Statutory-basis combined net income $32,685 $25,763 $15,398
Additions (deductions):
Statutory-basis loss reserve discount (1,994) (6,607) (3,122)
GAAP-basis deferred income taxes (5,986) 6,938 2,150
Other, including non-insurance company amounts (3,690) (3,399) 625
- -----------------------------------------------------------------------------------------------------------
GAAP-basis consolidated net income of MMI $21,015 $22,695 $15,051
===========================================================================================================
</TABLE>
The foregoing statutory-basis capital and surplus amounts relate to MMI's direct
insurance subsidiaries, ACIC and HPIC. The capital and surplus amounts for ACIC
include the capital and surplus of ACLIC, a life insurance company owned by
ACIC, in the amount of $15,200,000 at December 31, 1996 and $14,800,000 at
December 31, 1995. Statutory net income of ACLIC amounted to $400,000 in 1996,
$500,000 in 1995 and $200,000 in 1994.
The maximum amount of dividends that can be paid from ACIC to MMI without
regulatory approval is the lesser of net investment income or 10% of ACIC's
statutory-basis capital and surplus, each as of the preceding December 31. For
HPIC, the maximum amount of dividends that can be paid to MMI without regulatory
approval is the greater of net income or 10% of capital and surplus, each as of
the preceding December 31. Accordingly, the maximum total dividend amount is
$24,000,000 in 1997. ACIC and HPIC's combined GAAP-basis net assets amounted to
$235,000,000 at December 31, 1996. The excess of these combined net assets over
ACIC and HPIC's maximum dividend amount represents restricted consolidated net
assets.
MMI has authorized and unissued 5,000,000 shares of $20 par value Preferred
Stock.
<PAGE>
9. STOCK OPTION PLANS
MMI has an employee stock plan that authorizes the issuance, subject to
directors' approval, of nonqualified stock options and restricted stock, and a
nonqualified stock option plan for non-employee directors. The directors plan
provides for the issuance of 1,375 options each year for each director and 4,125
options to a new director joining MMI's Board, with exercise prices equal to
fair value at the grant date. All options have 10-year terms and generally vest
and become fully exercisable six months after the date of grant.
A summary of the Company's stock option activity and related information for the
years ended December 31 is as follows:
<TABLE>
<CAPTION>
1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------
Weighted Average Weighted Average Weighted Average
Options Exercise Price Options Exercise Price Options Exercise Price
- ------------------------------------------------------------------------------------------------------------------
Oustanding at
<S> <C> <C> <C> <C> <C> <C>
beginning of year 962,737 $ 14.27 875,775 $ 12.89 708,600 $ 12.60
Granted
(at fair value) 223,875 26.48 146,750 20.32 188,750 13.20
Exercised (204,978) 12.85 (59,788) 8.93 (20,575) 5.73
Cancelled (35,250) 23.09 -- -- (1,000) 13.63
- ------------------------------------------------------------------------------------------------------------------
946,384 $ 17.14 962,737 $ 14.27 875,775 $ 12.89
==================================================================================================================
Options exercisable
at year-end 837,634 $ 16.45 801,237 $ 13.44 744,525 $ 12.82
======= ======= =======
Options available for
grant at end of year 229,900 418,525 565,275
======= ======= =======
</TABLE>
Other information regarding options outstanding and exercisable as of December
31, 1996, is as follows:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
- -------------------------------------------------------------------------------------------------------
Weighted
Average Weighted Weighted
Number Remaining Average Number Average
Range of Outstanding Contractual Exercise Exercisable Exercise
Exercise Prices at 12/31/96 Life Price at 12/31/96 Price
- -------------------------------------------------------------------------------------------------------
<C> <C> <C> <C> <C> <C>
$5.91 5,450 0.2 years $ 5.91 5,450 $ 5.91
$13.13 to $18.63 671,059 6.9 13.69 631,309 13.72
$24.00 to $32.00 269,875 9.2 25.95 200,875 25.31
- -------------------------------------------------------------------------------------------------------
946,384 7.5 $17.14 837,634 $16.45
=======================================================================================================
</TABLE>
Pro forma information regarding net income and net income per share has been
determined as if MMI had accounted for its 1996 and 1995 stock option grants
under the plans using the fair value method of SFAS No. 123, "Accounting for
Stock-Based Compensation." For these purposes, the fair value for the stock
option grants was estimated at the date of the grant using a Black-Scholes
option pricing model with the following weighted-average assumptions for 1996
and 1995: a risk-free interest rate of 6%, a volatility factor of 23%, an
expected life of the option of five years and a 1% annual dividend yield.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
MMI's employee and director stock options have characteristics significantly
different from those of traded options, and because changes in the selective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee and director stock options.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' six-month vesting
period. MMI's pro forma information is as follows:
1996 1995
- --------------------------------------------------------------------
Pro forma net income
(in thousands) $20,053 $22,363
Pro forma net income
per common and
common equivalent share:
Primary $ 1.87 $ 2.39
Fully diluted 1.86 2.31
The pro forma disclosures above only include the effect of options granted
subsequent to January 1, 1995. Accordingly, the effects of applying the SFAS No.
123 pro forma disclosures to future periods may not be indicative of future
effects.
<PAGE>
10. COMMITMENTS AND CONTINGENCIES
In addition to the litigation disclosed in Note 14, MMI is engaged in various
other legal actions incident to the nature of its business. Management is of the
opinion that none of the other litigation will have a material effect on MMI's
financial position or results of operations.
MMI leases its office space and certain equipment under noncancelable leases.
Rental expense for 1996, 1995 and 1994 was $6,000,000, $5,200,000 and
$4,500,000, respectively. As of December 31, 1996, aggregate minimum rental
commitments under noncancelable leases amounted to $5,000,000 in 1997,
$5,000,000 in 1998, $4,800,000 in 1999, $4,200,000 in 2000, $3,900,000 in 2001
and $5,300,000 thereafter.
11. EMPLOYEE BENEFIT PLANS
MMI has a defined-contribution pension plan that covers substantially all
employees who have attained age 21 and completed three months of service. MMI
contributes 4% of salary for all employees who have completed 1,000 hours of
service in the plan year and who are employed at December 31. In addition, MMI
contributes the greater of 75% of the first $2,000 of employee contributions or
50% of employee contributions up to 4% of salary (3% in 1994). Additional MMI
contributions are made at the discretion of MMI's Board of Directors. MMI's
contributions charged to operations were $2,200,000 in 1996, $1,600,000 in 1995
and $1,000,000 in 1994.
MMI provides no post retirement benefits to its employees.
12. INDUSTRY SEGMENTS
MMI's operations are classified and summarized into insurance and consulting and
fees. Prior to 1996, the insurance segment consisted of the medical malpractice
liability segment and the life and health segment. These segments were combined
in 1996 and segment results for 1994 and 1995 were combined to reflect this
change. The insurance segment principally includes professional and general
liability insurance and reinsurance for hospitals, healthcare systems and
healthcare providers, group life, disability and health stop-loss insurance and
reinsurance. The consulting and fee segment includes strategic healthcare
consulting and healthcare-related risk management consulting and fee-based
services. Investment income and expense allocations are based on estimates and
certain assets have been allocated to segments by formulas. Depreciation expense
and capital expenditures are not material. Corporate and eliminations represents
certain corporate income and expenses that have not been allocated to specific
industry segments.
Information by segment is as follows (in thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
- -----------------------------------------------------------------------------------------------------------
1996 1995 1994
- -----------------------------------------------------------------------------------------------------------
Revenues:
<S> <C> <C> <C>
Insurance $207,837 $194,608 $161,317
Consulting and fees 34,535 22,336 18,602
Net realized investment gains (losses) (40) 1,367 (2,853)
Corporate and eliminations 846 433 139
- -----------------------------------------------------------------------------------------------------------
Total $243,178 $218,744 $177,205
===========================================================================================================
Pre-tax income:
Insurance $ 34,251 $ 30,158 $ 21,670
Consulting and fees 4,569 2,873 2,615
Net realized investment gains (losses) (40) 1,367 (2,853)
Corporate and eliminations (11,811) (9,564) (5,843)
- -----------------------------------------------------------------------------------------------------------
Total $ 26,969 $ 24,834 $ 15,589
===========================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31,
- -----------------------------------------------------------------------------------------------------------
1996 1995 1994
- -----------------------------------------------------------------------------------------------------------
Identifiable assets at end of year:
<S> <C> <C> <C>
Insurance $ 972,833 $961,128 $667,244
Consulting and fees 16,549 10,354 12,734
Corporate, discontinued and eliminations 68,636 11,196 13,826
- -----------------------------------------------------------------------------------------------------------
Total $1,058,018 $982,678 $693,804
===========================================================================================================
</TABLE>
<PAGE>
13. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
(In thousands, except per share data):
<TABLE>
<CAPTION>
Three Months Ended,
- --------------------------------------------------------------------------------------------------------------
3/31/96 6/30/96 9/30/96 12/31/96
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues $61,211 $58,896 $60,324 $62,747
Income from continuing operations $ 7,411 $ 6,348 $ 6,176 $ 6,180
Loss from discontinued operations -- -- -- (5,100)
- --------------------------------------------------------------------------------------------------------------
Net income $ 7,411 $ 6,348 $ 6,176 $ 1,080
==============================================================================================================
Earnings per common and common equivalent share:
Primary
Income from continuing operations $ .73 $ .62 $ .59 $ .52
Loss from discontinued operations -- -- -- (.43)
- --------------------------------------------------------------------------------------------------------------
Net income $ .73 $ .62 $ .59 $ .09
==============================================================================================================
Fully diluted
Income from continuing operations $ .72 $ .62 $ .59 $ .52
Loss from discontinued operations -- -- -- (.43)
- --------------------------------------------------------------------------------------------------------------
Net income $ .72 $ .62 $ .59 $ .09
==============================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended,
- --------------------------------------------------------------------------------------------------------------
3/31/95 6/30/95 9/30/95 12/31/95
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues $46,579 $52,806 $60,098 $59,261
Net income 4,410 5,638 5,906 6,741
Net income per common and common equivalent share:
Primary $ .50 $ .62 $ .62 $ .67
Fully diluted .50 .60 .59 .67
</TABLE>
14. DISCONTINUED OPERATIONS
In 1992, MMI sold Ludgate Insurance Company Limited ("Ludgate") at a loss, which
was reported in discontinued operations. The Company has been involved in two
lawsuits connected with the sale. A U.K. action related to sales contract
warranties and a U.S. suit concerned the commutation of a reinsurance
transaction with Ludgate. Also at issue was a stop-loss reinsurance agreement
provided by MMI to Ludgate in connection with the sale. In February 1997, a U.K.
court rendered a judgment against MMI. The U.S. lawsuit and the stop-loss
agreement remained unresolved.
In February 1997, MMI settled both lawsuits and commuted the stop-loss
reinsurance agreement. The settlement of all these matters is reflected in the
accompanying 1996 consolidated statement of income as a loss from discontinued
operations. The pre-tax loss is $7,800,000 with a corresponding tax benefit of
$2,700,000, resulting in a charge of $5,100,000.
<PAGE>
Report of Independent Auditors
Board of Directors
MMI Companies, Inc.
We have audited the accompanying consolidated balance sheets of MMI
Companies, Inc. and subsidiaries as of December 31, 1996 and 1995, and the
related consolidated statements of income, stockholders' equity, and cash flows
for each of the three years in the period ended December 31, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
MMI Companies, Inc. and subsidiaries at December 31, 1996 and 1995, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1996, in conformity with generally
accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, in 1994,
the Company adopted a new standard on accounting for investments.
Ernst & Young LLP
Chicago, Illinois
February 27, 1997
<PAGE>
Exhibit 23.1
------------
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in this Annual Report (Form 10-K)
of MMI Companies, Inc. of our report dated February 27, 1997, included in the
1996 Annual Report to Stockholders of MMI Companies, Inc.
Our audits also included the financial statement schedules of MMI Companies,
Inc. listed in Item 14(a). These schedules are the responsibility of the
Company's management. Our responsibility is to express an opinion based on our
audits. In our opinion, with respect to which the date is February 27, 1997, the
financial statement schedules referred to above, when considered in relation to
the basic financial statements taken as a whole, present fairly in all material
respects the information set forth therein. As discussed in Note 1 to the
consolidated financial statements, in 1994, the Company adopted a new standard
on accounting for investments.
We also consent to the incorporation by reference in the Registration Statement
pertaining to the MMI Companies, Inc. Savings and Profit Sharing Plan (401(k))
(Form S-8 No. 33-72786), in the Registration Statement pertaining to the MMI
Companies, Inc. Incentive Stock Option Plan (1986), 1993 Employee Stock Plan,
and 1993 Non-employee Director's Formula Stock Option Plan (Form S-8 No.
33-81228), and in the Registration Statement pertaining to the 1995 Employee
Stock Investment Plan (Form S-8 No. 33-87356), and in the related Prospectuses,
of our report dated February 27, 1997, with respect to the consolidated
financial statements incorporated herein by reference, and our report included
in the preceding paragraph with respect to the financial statement schedules
included in this Annual Report (Form 10-K) of MMI Companies, Inc.
ERNST & YOUNG LLP
Chicago, Illinois
March 17, 1997
<PAGE>
<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 twelve month period ended December 31, 1996, and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<DEBT-HELD-FOR-SALE> 727,080
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 18,594
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 788,451
<CASH> 1,079
<RECOVER-REINSURE> 5,768
<DEFERRED-ACQUISITION> 7,117
<TOTAL-ASSETS> 1,058,018
<POLICY-LOSSES> 640,151
<UNEARNED-PREMIUMS> 55,679
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 58,000
0
0
<COMMON> 1,162
<OTHER-SE> 250,804
<TOTAL-LIABILITY-AND-EQUITY> 1,058,018
164,409
<INVESTMENT-INCOME> 44,274
<INVESTMENT-GAINS> (40)
<OTHER-INCOME> 34,535
<BENEFITS> 135,786
<UNDERWRITING-AMORTIZATION> 14,024
<UNDERWRITING-OTHER> 63,002
<INCOME-PRETAX> 26,969
<INCOME-TAX> 854
<INCOME-CONTINUING> 26,115
<DISCONTINUED> (5,100)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 21,015
<EPS-PRIMARY> 1.96
<EPS-DILUTED> 1.95
<RESERVE-OPEN> 538,707
<PROVISION-CURRENT> 135,895
<PROVISION-PRIOR> (5,108)
<PAYMENTS-CURRENT> 13,900
<PAYMENTS-PRIOR> 118,959
<RESERVE-CLOSE> 536,635
<CUMULATIVE-DEFICIENCY> (5,108)
</TABLE>
