<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(X) Quarterly report under section 13 or 15(d) of the
Securities Exchange Act of 1934. For the quarter ended
September 30, 1998.
or
( ) Transition report pursuant to section 13 or 15(d) of
the Securities Exchange Act of 1934. For the transition
period from to .
Commission File Number: 1-11920
MMI Companies, Inc.
(Exact name of registrant as specified in its charter)
Delaware 36-3263253
(State or other jurisdiction of (IRS Employer
incorporation or organization) (Identification No.)
540 Lake Cook Road, Deerfield, Illinois 60015-5290
(Address of principal executive offices)
(847) 940-7550
(Registrant's telephone number, including area code)
Not applicable
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by a check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
There were 18,992,393 shares outstanding of the registrant's
common stock, $0.10 par value, as of November 11, 1998.
Page 1 of 14
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MMI Companies, Inc. and Subsidiaries
Index
<TABLE>
<CAPTION>
Page No.
<S> <C>
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets 3
Consolidated Statements of 4
Operations
Consolidated Statements of 5
Stockholders' Equity
Consolidated Statements of 6
Cash Flows
Notes to Consolidated 7
Financial Statements
Item 2. Management's Discussion 10
and Analysis of
Financial Condition and
Results of Operations
Part II. Other Information
Item 6. Exhibits and Reports on 13
Form 8-K
Signatures 14
EXHIBITS:
4.2 Amended and Restated Rights
Agreement
27. Financial Data Schedule
</TABLE>
<PAGE>
MMI Companies, Inc. and Subsidiaries
Consolidated Balance Sheets
(In thousands, except per share data)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
(Unaudited)
<S>
<C> <C>
ASSETS
INVESTMENTS
Short-term investments........... $ 61,613 $ 52,219
Fixed maturities................. 1,164,357 1,135,702
Preferred stocks................. 58,303 42,879
1,284,273 1,230,800
OTHER ASSETS
Cash............................. 7,489 6,698
Premium and fees receivable...... 188,933 165,906
Reinsurance receivables.......... 331,402 300,077
Prepaid reinsurance premiums..... 30,046 21,514
Accrued investment income........ 18,667 17,045
Cost in excess of net assets of
purchased subsidiaries,
less accumulated amortization.. 40,294 37,257
Furniture and equipment - at cost,
less accumulated depreciation.. 14,823 14,258
Deferred income taxes............ 35,137 42,979
Other............................ 57,254 47,533
$2,008,318 $1,884,067
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Policy liabilities:
Loss and loss adjustment expense
reserves:
Medical malpractice liability.. $ 671,531 $ 613,063
International.................. 494,397 500,032
Other.......................... 16,700 12,051
1,182,628 1,125,146
Unearned premium reserves....... 179,039 134,188
Future life policy benefits..... 8,052 8,723
1,369,719 1,268,057
Accrued expenses and other
liabilities...................... 50,521 50,071
Amounts due to reinsurers......... 57,784 48,213
Company-obligated, mandatorily
redeemable preferred
capital securities of subsidiary
trust holding solely
junior subordinated debentures
of the Company.................... 118,778 118,724
1,596,802 1,485,065
STOCKHOLDERS' EQUITY
Common Stock, par value $.10 per share:
Authorized shares: - 30,000
Issued and outstanding shares:
1998 - 18,991; 1997 - 18,857... 1,899 1,886
Additional paid-in capital......... 220,502 217,855
Retained earnings.................. 154,547 154,929
Accumulated other comprehensive
income, net of taxes:
1998 - $17,702; 1997 - $12,812.... 34,568 24,332
411,516 399,002
$2,008,318 $1,884,067
</TABLE>
See notes to consolidated financial statements.
<PAGE>
MMI Companies, Inc. and Subsidiaries
Consolidated Statements of Operations
(In thousands, except per share data)
Unaudited
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
REVENUES
Insurance premiums earned:
Medical malpractice
liability............... $ 42,114 $ 38,904 $152,350 $114,789
International.............. 32,599 19,684 93,314 84,132
Life and health............ 2,754 1,406 9,440 3,832
77,467 59,994 255,104 202,753
Consulting and fee income... 11,853 13,492 37,226 38,800
Net investment income 19,372 20,235 57,110 57,215
Net realized gains on
investments................. 957 649 1,990 1,619
TOTAL REVENUES.............. 109,649 94,370 351,430 300,387
LOSSES AND EXPENSES
Losses and loss adjustment
expenses:
Medical malpractice
liability................ 55,221 32,555 153,232 94,649
International............... 24,233 8,427 62,498 47,836
Life and health............. 2,527 594 7,563 2,858
81,981 41,576 223,293 145,343
Insurance and administrative
expenses..................... 41,754 36,284 117,299 108,297
Interest expense............. 2,491 1,607 7,388 4,523
TOTAL LOSSES AND EXPENSES.. 126,226 79,467 347,980 258,163
INCOME (LOSS) BEFORE INCOME
TAXES AND EXTRAORDINARY
LOSS...................... (16,577) 14,903 3,450 42,224
Income taxes (credit)........ (3,574) 2,673 (726) 8,287
INCOME (LOSS) BEFORE
EXTRAORDINARY LOSS........ (13,003) 12,230 4,176 33,937
Extraordinary loss, net of
tax.......................... - - - 267
NET INCOME (LOSS)......... $(13,003) $12,230 $4,176 $33,670
Earnings per common and
common equivalent share:
Basic:
Income (loss) before
extraordinary loss........... $ (0.69) $ 0.65 $ 0.22 $ 1.81
Extraordinary loss, net of
tax.......................... - - - (0.01)
NET INCOME (LOSS)............ $ (0.69) $ 0.65 $ 0.22 $ 1.80
Diluted:
Income (loss) before
extraordinary loss........... $ (0.69) $ 0.63 $ 0.22 $ 1.74
Extraordinary loss, net of
tax.......................... - - - (0.01)
NET INCOME (LOSS)............ $ (0.69) $ 0.63 $ 0.22 $ 1.73
</TABLE>
See notes to consolidated financial statements.
<PAGE>
MI Companies, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
(In thousands, except per share data)
<TABLE>
<CAPTION>
Accumulated
Other
Comprehensive
Common Stock Additional Income Net Total
Number Par Paid-In Retained of Stockholders'
of Shares Value Capital Earnings Taxes Equity
<S> <C> <C> <C> <C> <C> <C>
Balance at
December 31,1996 18,681 $1,868 $215,091 $124,751 $13,456 $355,166
Year ended
December 31,1997
Net income.... 34,360 34,360
Issuance of Common
Stock in
connection
with acquisition
of subsidiary.. 85 9 1,942 1,951
Issuance of Common
Stock in connection
with employee
benefit plans and
exercise of
employee stock
options....... 212 21 3,650 3,671
Common Stock
repurchases... (121) (12) (2,828) (2,840)
Change in
accumulated other
comprehensive
income, net of
taxes of $5,595. 10,876 10,876
Common cash
dividends
($.22 per share) (4,182) (4,182)
Balance at
December 31,1997 18,857 1,886 217,855 154,929 24,332 399,002
Nine months ended
September 30, 1998
(unaudited):
Net income...... 4,176 4,176
Issuance of Common
Stock in connection
with acquisition
of subsidiary... 6 6 1,393 1,399
Issuance of Common
Stock in connection
with director
and employee benefit
plans and exercise
of employee stock
options.......... 67 7 1,254 1,261
Change in
accumulated other
comprehensive
income, net of
taxes of $4,890.. 10,236 10,236
Common cash
dividends
($.24 per share). (4,558) (4,558)
Balance at September
30, 1998.........$18,991 $1,899 $220,502 $154,547 $ 34,568 $411,516
</TABLE>
See notes to consolidated financial statements.
<PAGE>
MMI Companies, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(In thousands)
Unaudited
<TABLE>
<CAPTION>
Nine Months
Ended September 30,
1998 1997
<S> <C> <C>
OPERATING ACTIVITIES
Net income.................................. $ 4,176 $ 33,670
Adjustments to reconcile net income to net
cash provided (used) by operating activities:
Increase in policy liabilities............ 101,662 4,678
Change in reinsurance balances............ (30,286) 28,273
Increase in premiums and fees
receivable............................... (22,984) (55,211)
Change in deferred income taxes........... 2,914 (622)
Increase in accrued investment
income and other assets.................. (13,352) (15,372)
Decrease in accrued expenses and
other liabilities........................ 399 (5,916)
Net realized gains on investments......... (1,990) (1,619)
Depreciation and amortization on
investments and goodwill................. 5,903 3,679
Net cash provided (used) by
operating activities................... 46,442 (8,440)
INVESTING ACTIVITIES
Net sale (purchase) of short-term
investments................................ (9,601) 10,007
Purchases of available-for-sale
investments................................ (448,549) (494,137)
Sales of available-for-sale
investments................................ 365,277 465,756
Maturities of available-for-sale
investments................................ 57,553 41,807
Acquisitions of subsidiaries................ (2,384) (17,544)
Furniture and equipment additions........... (4,650) (5,184)
Net cash provided (used) by investing
activities................................. (42,354) 705
FINANCING ACTIVITIES
Issuance of Common Stock.................... 1,261 2,060
Repurchases of Common Stock................. - (2,840)
Proceeds from notes payable................. - 10,000
Dividends................................... (4,558) (2,670)
Net cash provided (used) by financing
activities................................. (3,297) 6,550
Increase (decrease) in cash............... 791 (1,185)
Cash at beginning of period..................... 6,698 4,839
Cash at end of period..................... $ 7,489 $ 3,654
</TABLE>
See notes to consolidated financial statements.
<PAGE>
MMI Companies, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
September 30, 1998
1. Basis of Presentation
The accompanying unaudited consolidated financial statements
have been prepared in accordance with generally accepted
accounting principles for interim financial information.
Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been
included. Operating results for the nine month period ended
September 30, 1998 are not necessarily indicative of the results
that may be expected for the year ending December 31, 1998. For
further information, refer to the consolidated financial
statements and notes thereto included in the Company's 1997
Annual Report.
2. Acquisition of Unionamerica Holdings plc
In December 1997, MMI acquired Unionamerica Holdings plc
(Unionamerica) in exchange for 7,100,000 shares of MMI Common
Stock. The acquisition was accounted for as a pooling of
interests and, accordingly, the accompanying consolidated
financial statements were restated to include the consolidated
operations of Unionamerica for all periods presented.
3. Earnings Per Share
The following table sets forth the computation of net earnings
(loss) per common share and net earnings (loss) per common and
common equivalent share (in thousands, except per share data):
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Net earnings (loss)....... $(13,003) $12,230 $ 4,176 $33,670
Weighted average number
of common shares
outstanding.............. 18,967 18,795 18,918 18,754
Dilutive effect of stock
options using the
treasury stock method.... - 634 491 661
Weighted average number of
common and common
equivalent shares
outstanding............. 18,967 19,429 19,409 19,415
Net earnings (loss)
per common share....... $ (.69) $ .65 $ .22 $ 1.80
Net earnings (loss)
per common and common
equivalent share........ $ (.69) $ .63 $ .22 $ 1.73
</TABLE>
<PAGE>
4. Trust Preferred Capital Securities
In December 1997, the Company issued $125,000,000 30-year,
mandatorily redeemable preferred capital securities (Capital
Securities) of MMI Capital Trust I (Trust), a subsidiary of MMI.
Proceeds from the sale of the Capital Securities were used to
purchase $125,000,000 aggregate principal amount of the
Company's 7-5/8 Junior Subordinated Deferrable Interest
Debentures (Debentures), due December 15, 2027. The Debentures
are the sole assets of the Trust. The Capital Securities pay a
dividend of 7-5/8% semiannually in arrears on June 15th and
December 15th. Payments on the Capital Securities are fully
and unconditionally guaranteed by MMI. Total proceeds were
$118,700,000, net of expenses. The effective rate of the
Capital Securities is 8.06%.
5. Effect of New Pronouncements
As of January 1, 1998, the Company adopted Statement of
Financial Accounting Standards No. 130 (SFAS 130), "Reporting
Comprehensive Income". SFAS 130 established new rules for the
reporting and display of comprehensive income and its
components. The adoption of SFAS 130 had no effect on the
Company's net income or loss or stockholders' equity.
The components of comprehensive income and accumulated other
comprehensive income are as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Net income (loss)....... $(13,003) $12,230 $ 4,176 $33,937
Net change in unrealized
gains on investments,
net of income taxes.... 8,827 7,226 10,236 5,922
Comprehensive income
(loss)................. $(4,176) $19,456 $14,412 $39,859
September 30, December 31,
1998 1997
Accumulated other
comprehensive income at
beginning of year...... $24,332 $13,456
Net change in unrealized
gains on investments,
net of income taxes.... 10,236 10,876
Accumulated other
comprehensive income
at end of period....... $34,568 $24,332
</TABLE>
In 1997 the Financial Accounting Standards Board (FASB) also
issued Statement of Financial Accounting Standards No. 131 (SFAS
131), Disclosures about Segments of an Enterprise and Related
Information," which is effective for years beginning after December
15, 1997. SFAS 131 established standards for the way that public
business enterprises report information about operating segments in
annual financial statements and requires those enterprises report
selected information about operating segments in interim financial
reports issued to shareholders.
MMI Companies has three reportable segments: domestic insurance,
international insurance and consulting and fees. The domestic
insurance segment principally includes professional and general
liability insurance and reinsurance for hospitals, healthcare systems
and healthcare providers. The international insurance segment,
principally located in the United Kingdom, includes the international
insurance and reinsurance business. The consulting and fee segment
includes clinical risk management consulting, strategic healthcare
consulting, employee relations consulting, professional liability
claims administration, healthcare credentials verification services
and billing, compliance and reimbursement services.
<PAGE>
Intersegment revenues and expenses have been eliminated.
Information by segment is as follows (in thousands, except
ratios):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Domestic insurance
segment:
Revenues.............. $57,971 $53,263 $199,828 $156,487
Income (loss)
before taxes ........ (16,010) 6,856 (5,213) 19,334
Loss ratio............ 128.7% 82.2% 99.4% 82.2%
Expense ratio......... 36.2% 32.9% 27.3% 33.4%
Combined ratio........ 164.9% 115.1% 126.7% 115.6%
International
insurance segment:
Revenues.............. $39,825 $27,615 $114,376 $105,095
Income before taxes... 960 6,725 11,696 19,200
Loss ratio............ 74.3% 42.8% 67.0% 56.9%
Expense ratio......... 44.9% 63.3% 43.1% 45.2%
Combined ratio........ 119.2% 106.1% 110.1% 102.1%
Consulting and fee
segment:
Revenues.............. $11,853 $13,492 $37,226 $38,800
Income (loss)
before taxes ......... (1,527) 1,321 (3,033) 3,685
Pretax margin.......... (12.9%) 9.8% (8.1%) 9.5%
Consolidated insurance
ratios:
Loss ratio............. 105.8% 69.3% 87.5% 71.7%
Expense ratio.......... 39.8% 42.9% 33.1% 38.3%
Combined ratio......... 145.6% 112.2% 120.6% 110.0%
</TABLE>
In June 1998, the FASB issued Statement of Financial Accounting
Standards No. 133 (SFAS 133). "Accounting for Derivative
Instruments and Hedging Activities," which is effective for fiscal
years beginning after June 15, 1999. The Company does not
anticipate that the adoption of SFAS 133 will have a significant
effect on the Company's consolidated operating results or financial
position.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Results of Operations
Nine Months Ended September 30, 1998 compared to Nine Months
Ended September 30, 1997.
Revenues. Gross premiums written increased by 18.2% to
$362,932,000 for the nine months ended September 30, 1998 from
$306,948,000 for the 1997 period. Net premiums written increased
by 19.6% to $291,396,000 from $243,717,000, and net premiums earned
increased by 25.8% to $255,104,000 from $202,753,000. For the
three months ended September 30, 1998 gross premiums written
increased by 35.5% to $82,086,000 from $60,559,000, net premiums
written increased by 41.8% to $66,966,000 from $47,238,000 and net
premiums earned increased by 29.1% to $77,467,000 from $59,994,000.
Medical malpractice premiums earned increased by 32.7% to
$152,350,000 for the nine months ended September 30, 1998 from
$114,789,000 for the 1997 period and increased by 8.3% to
$42,114,000 from $38,904,000 for three months ended September 30,
1998 compared to the prior year. International premiums earned
increased 10.9% to $93,314,000 for the nine months ended September
30, 1998 from $84,132,000 for the 1997 period and increased by
65.6% to $32,599,000 from $19,684,000 for the three month period.
Life and health premiums earned increased by 146.3%, to $9,440,000
for the nine months ended September 30, 1998 from $3,832,000 for
the 1997 period and increased by 95.9% to $2,754,000 from
$1,406,000 for the three month period. The Company's written and
earned premiums can vary significantly from quarter to quarter due
to one-time premiums, such as for prior acts coverage for new
insureds. During the first nine months of 1998, the Company's
medical malpractice premiums earned included $32,118,000 in such
one time premiums, an increase of $25,836,000 in one-time premiums
from the first nine months of 1997. The increase in international
earned premiums for the three and nine months was primarily due to
a downward adjustment made to prior premium estimates in the third
quarter 1997.
Consulting and fee income decreased 4.1% to $37,226,000 for the
nine months ended September 30, 1998 from $38,800,000 for the 1997
period and decreased by 12.1% to $11,853,000 from $13,492,000 for
the three month period.
Net investment income was unchanged at $57,110,000 for the nine
months ended September 30, 1998 compared to $57,215,000 for the
1997 period and decreased 4.3% to $19,372,000 compared to
$20,235,000 for the three month period. For the three and nine
month periods, the Company had net realized gains on investments of
$957,000 and $1,990,000 in 1998 compared to $649,000 and $1,619,000
respectively, in 1997.
Losses and expenses. Losses and loss adjustment expenses
("LAE") increased by 53.6% to $223,293,000 for the nine months
ended September 30, 1998 from $145,343,000 for the 1997 period and
increased by 97.2% to $81,981,000 from $41,576,000 for the three
month period. Medical malpractice liability losses and LAE
increased by 61.9% to $153,232,000 for the nine months from
$94,649,000 for the 1997 period and increased by 69.6% to
$55,221,000 from $32,555,000 for the three month period. Medical
malpractice losses and LAE increased due to unfavorable loss
experience recognized in the third quarter 1998 of approximately
$17,500,000. This charge related to adverse reserve development
from two specific but small areas of the Company's domestic
insurance operations: long-term care and a disparate group of
clinic clients. The increase in medical malpractice losses and
LAE for the nine month period also includes losses related to an
increase in one-time premiums in the first quarter 1998 which were
booked at a higher loss ratio than the core medical malpractice
business. International losses and LAE increased 30.7% in the nine
month period to $62,498,000 from $47,836,000 in the 1997 period and
increased by 187.6% to $24,233,000 from $8,427,000 for the three
month period. During the third quarter of 1998, international
losses and LAE include a $3,300,000 provision for claims related to
asbestos exposures written in prior years as well as a provision
for claims of $1,000,000 related to Hurricane Georges.
International losses and LAE were impacted in the third quarter of
1997 as a result of the revision in premium estimates discussed
previously. Life and health losses and LAE increased to $7,563,000
from $2,858,000 for the nine months. This increase is due to an
increase in premiums earned in 1998. The consolidated loss ratio
increased to 87.5% from 71.7% for the respective nine month periods
and increased to 105.8% from 69.3% for the three month periods due
to reserve strengthening in the medical malpractice and
international lines of business as well as a higher loss ratio
associated with the one-time premiums.
<PAGE>
Insurance and administrative expenses increased by 8.3% to
$117,299,000 for the nine months ended September 30, 1998 from
$108,297,000 for the 1997 period and increased by 15.1% to
$41,754,000 from $36,284,000 for the three month period. This
increase is principally due to increased acquisition costs and
taxes related to higher levels of premiums in the current year as
well as higher expenses related to the consulting segment.
Interest expense increased by 63.3% to $7,388,000 for the nine
months ended September 30, 1998 from $4,523,000 for the 1997
period and increased by 55.0% to $2,491,000 from $1,607,000 for the
three month period, due to an increase in debt outstanding as well
as an increase in the interest rate on the debt. Debt outstanding
totaled $118,778,000 at September 30, 1998 compared to $118,724,000
at December 31, 1997 and $103,000,000 at September 30, 1997.
Income taxes. The Company recorded an income tax credit of
$726,000 for the nine months ended September 30, 1998 compared to a
provision of $8,287,000 for the 1997 period and for the three
month period recorded a credit of $3,574,000 in 1998 compared to a
provision of $2,673,000 in the prior year. Income taxes decreased
for the three and nine months due to a pre-tax loss in the third
quarter and lower pre-tax income for the nine months compared to
the prior year.
Net income. Net income decreased by 87.6% to $4,176,000 for the
nine months ended September 30, 1998 from $33,670,000 for the 1997
period and decreased to a net loss of $13,003,000 in the third
quarter of 1998 compared to net income of $12,230,000 in 1997. The
decrease in net income is principally a result of adverse reserve
development from the medical malpractice and international lines of
business recorded in the third quarter 1998.
Net income per share. Diluted net income per common and common
equivalent share decreased to $.22 for the nine months ended
September 30, 1998 from $1.73 for the 1997 period. For the three
months ended September 30, diluted net loss per share was $.69 in
1998 compared to net income per share of $.63 in 1997.
Liquidity And Capital Resources
As a holding company, the Company's assets consist primarily of
the stock of its subsidiaries. The principal sources of funds are
management fees and dividends from subsidiaries. In the nine month
periods ended September 30, 1998 and September 30, 1997, the
Company received dividends of $4,500,000 and $8,250,000,
respectively, from its subsidiaries. The Company received
management fees from its subsidiaries of $18,038,000 for the nine
months ended September 30, 1998, compared to $20,413,000 in 1997.
On a consolidated basis, the Company's principal sources of
operating funds are premiums, net investment income, fees and
recoveries from reinsurers. Funds are used to pay claims,
operating expenses, reinsurance premiums, acquisition related
expenses, debt service requirements, taxes and dividends to
stockholders.
Cash provided by operating activities was $46,442,000 for the
nine months ended September 30, 1998 compared with cash used of
$8,440,000 for the nine months ended September 30, 1997. Because of
variability related to the amount and timing of payment of claims
and collection of premiums and fees, cash from operations for a
casualty insurance company can vary substantially from quarter to
quarter.
Cash used by investing activities was $42,354,000 for the nine
months ended September 30, 1998 compared to cash provided of
$705,000 for the nine months ended September 30, 1997.
Cash used by financing activities was $3,297,000 for the nine
months ended September 30, 1998 compared to cash provided of
$6,550,000 for the nine months ended September 30, 1997.
The Company invests primarily in investment grade fixed income
securities and also preferred stocks. The estimated fair value of
preferred stocks was 4.5% of fair value of total invested assets as
of September 30 1998. The estimated fair value of the Company's
investment portfolio was $1,284,273,000 as of September 30, 1998
compared to $1,230,800,000 as of December 31, 1997. The September
30, 1998 amount includes net unrealized gains of $52,270,000 which
represents the amount by which the estimated fair value of the
investment portfolio exceeds amortized cost. Net unrealized gains
as of December 31, 1997 were $37,144,000. 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.
<PAGE>
Short-term investments totaled $61,613,000 or 4.8% of invested
assets at September 30, 1998. The Company believes that all of its
invested assets are readily marketable.
Long-term debt consisting of Capital Securities totaled
$118,778,000 at September 30, 1998. This amount relates to the
Company's $125,000,000 of 30-year, non-callable Capital Securities
issued in December, 1997.
Stockholders' equity was $411,516,000 as of September 30, 1998
compared to $399,002,000 as of December 31, 1997. Dividends to
stockholders were $4,558,000 for the nine months ended September
30, 1998.
Year 2000
The Company has implemented an enterprise-wide plan to address Year
2000 ("Y2K") issues across all of its technology platforms as well as
to reasonably assure that its critical business partners are prepared
for business continuity.
The phases of the Company's work plan are assessment, role
definitions, inventory and analysis, coding, testing and
implementation/confirmation. The majority of system modifications and
conversions have been completed. The Company is working closely with
its business partners and suppliers to ensure alignment in addressing
the Y2K issue.
MMI has completed the modifications, testing and implementation of
its main insurance and financial systems, making these applications
Y2K compliant. Additionally, system-wide Y2K simulations are
scheduled throughout 1999. The cost to address Y2K issues is
expected to be less than $600,000, and is being expensed as incurred.
Costs associated with Year 2000 were $150,000 in the third quarter of
1998 and have totaled $425,000 to date.
A. State of Readiness:
The Company has thoroughly completed the assessment, role
definition and inventory and analysis phases which
encompass hardware, software (third party and internally
developed), embedded technologies, and non-IT systems.
The majority of identified critical internally developed
information technologies (IT) have been modified, tested
and implemented. The remaining systems are scheduled for
testing or implementation during the fourth quarter of
1998.
The Company is addressing Y2K compliance of third party IT
vendors through a combination of written correspondence and
internal testing. All identified critical third party IT
vendors have been contacted and asked to document
compliance. All Y2K compliance by material third party
vendors has been either internally tested by MMI or
documented by the third party. MMI is currently planning
the implementation for any necessary modifications based on
vendor comments.
The Company has contacted related non-IT parties to ensure
Y2K compliance. The Company believes failure of non-IT
systems would not have a material effect on the Company's
operations.
B. Material Third Party Relationships:
The Company relies on continued normal operations of
entities such as brokers, reinsurers, banks, money managers
and benefit plan administrators. Diligent action is
underway to ensure alignment with these business partners,
even though disruption relating to these institutions would
not have a material effect on operations or financial
performance.
C. Contingency Plans:
MMI plans to leverage existing disaster recovery plans
relating to technology and business continuity. Both sets
of plans will be reviewed in 1999 as to their application
to the Y2K issue.
<PAGE>
D. Other:
MMI has conducted a comprehensive review of its
underwriting guidelines and will, where appropriate,
exclude Y2K exposures. MMI believes, as a basic principle
of insurance, that non-fortuitous losses are not covered
under its policies of insurance even without specific
exclusions. With respect to its domestic insurance
operations, if underwriting reveals an acceptable risk, an
endorsement will be attached that affirmatively grants Y2K
coverage under the professional liability coverage part and
excludes Y2K under the general liability coverage part.
With respect to reinsurance contracts, it is unusual to
apply specific Y2K exclusions to these contracts and there
may or may not be such exclusions in the original policies,
depending on exposure, class of service or industry, and
original coverage. For these reasons, MMI believes that
its exposure to Y2K claims is not material. However,
because of lack of legal precedent, it is impossible to
predict what, if any, exposure insurance companies may
ultimately have for Y2K claims whether coverage for the
issue is specifically excluded or included.
E. Forward-Looking Information
Certain matters referred to above regarding Y2K contain
forward-looking statements that involve risks and
uncertainties. In particular, the general business
community's readiness for the Y2K and the Company's
potential underwriting exposure to Y2K claims are difficult
to predict. To that extent, MMI claims the protection of
the disclosure liability safe harbor for forward-looking
statements contained in the Private Securities Litigation
Reform Act of 1995.
PART II. OTHER INFORMATION
Item 5. Other Information
As of September 24, 1998, the Company and the Rights Agent amended
and restated the Shareholder Rights Plan to (i) eliminate the term
"Continuing Directors" and all provisions which required that
certain actions be taken only by Continuing Directors, and (ii)
delete Section 23 (c) which provided that the Rights may not be
redeemed for 180 days following a change in a majority of the Board
either by election in which such majority was not nominated by the
Board, or by a consent solicitation.
On November 5, 1998, the Company issued a news announcement
reporting a net loss per share for the third quarter, 1998 of $0.67.
The Company subsequently revised the number of anti-dilutive common
stock equivalents which resulted in a net loss per share of $0.69
for the third quarter.
Item 6. Exhibits and Reports on Form 8-K
A. Exhibits
4.2 Amended and Restated Rights Agreement dated as of
September 24, 1998 between MMI Companies, Inc. and
ChaseMellon Shareholder Services L.L.C. (Incorporated
by reference to Exhibit 99.1 to MMI Companies, Inc.
Amendment No. 1 to Form 8-A filed November 6, 1998.)
27. Financial Data Schedule.
B. Reports on Form 8-K. No reports on Form 8-K were filed
during the quarter.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
MMI Companies,Inc.
(Registrant)
Date: November 12, 1998 /s/B. Frederick Becker
B. Frederick Becker
Chairman and Chief
Executive Officer
Date: November 12, 1998 /s/Paul M. Orzech
Paul M. Orzech
Executive Vice President and
Chief Financial Officer
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<LEGEND> This schedule contains summary financial information
extracted from the consolidated financial statements of MMI
Companies, Inc. and subsidiaries for the nine month period ended
September 30, 1998, and is qualified in its entirety by reference
to such financial statements.
<MULTIPLIER> 1,000
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<DEBT-HELD-FOR-SALE> 1,164,357
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 58,303
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 1,284,273
<CASH> 7,489
<RECOVER-REINSURE> 25,005
<DEFERRED-ACQUISITION> 32,780
<TOTAL-ASSETS> 2,008,318
<POLICY-LOSSES> 1,190,680
<UNEARNED-PREMIUMS> 179,039
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 118,778
<COMMON> 1,899
0
0
<OTHER-SE> 409,617
<TOTAL-LIABILITY-AND-EQUITY> 2,008,318
255,104
<INVESTMENT-INCOME> 57,110
<INVESTMENT-GAINS> 1,990
<OTHER-INCOME> 37,226
<BENEFITS> 223,293
<UNDERWRITING-AMORTIZATION> 39,503
<UNDERWRITING-OTHER> 77,796
<INCOME-PRETAX> 3,450
<INCOME-TAX> (726)
<INCOME-CONTINUING> 4,176
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,176
<EPS-PRIMARY> 0.22
<EPS-DILUTED> 0.22
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
