<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
March 31, 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 18,879,997 shares outstanding of the registrant's
common stock, $0.10 par value, as of March 31, 1998.
Page 1 of 12
<PAGE>
MMI Companies, Inc. and Subsidiaries
Index
<TABLE>
<CAPTION>
Page No.
<S> <C>
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets 3
Consolidated Statements of 4
Income
Consolidated Statements of 5
Stockholders' Equity
Consolidated Statements of 6
Cash Flows
Notes to Consolidated 7-8
Financial Statements
Item 2. Management's Discussion 9-10
and Analysis of
Financial Condition and
Results of Operations
Part II. Other Information
Item 6. Exhibits and Reports on 11
Form 8-K
Signatures 12
EXHIBITS:
11. Statement Re Computation of Per
Share Earnings.
27. Financial Data Schedule.
</TABLE>
<PAGE>
MMI Companies, Inc. and Subsidiaries
Consolidated Balance Sheets
(In thousands, except per share data)
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
(Unaudited)
<S>
<C> <C>
ASSETS
INVESTMENTS
Short-term investments.......... $ 52,486 $ 52,219
Fixed maturities................ 1,117,896 1,135,702
Preferred stocks................ 42,038 42,879
1,212,420 1,230,800
OTHER ASSETS
Cash............................. 4,844 6,698
Premium and fees receivable...... 264,288 165,906
Reinsurance receivables.......... 303,574 300,077
Prepaid reinsurance premiums..... 40,216 21,514
Accrued investment income........ 17,761 17,045
Cost in excess of net assets of
purchased subsidiaries,
less accumulated amortization.. 36,590 37,257
Furniture and equipment - at cost,
less accumulated depreciation.. 14,356 14,258
Deferred income taxes............ 43,570 42,979
Other............................ 65,720 47,533
$2,003,339 $1,884,067
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Policy liabilities:
Loss and loss adjustment expense reserves:
Medical malpractice liability.. 629,938 613,063
International.................. 492,086 500,032
Other.......................... 14,509 12,051
1,136,533 1,125,146
Unearned premium reserves...... 222,243 134,188
Future life policy benefits.... 8,226 8,723
1,367,002 1,268,057
Accrued expenses and other
liabilities.................... 46,284 50,071
Amounts due to reinsurers......... 65,004 48,213
Company-obligated, mandatorily
redeemable preferred capital
securities of subsidiary trust
holding solely junior
subordinated debentures of the
Company........................ 118,790 118,724
1,597,080 1,485,065
STOCKHOLDERS' EQUITY
Common Stock, par value $.10 per share:
Authorized shares: - 30,000
Issued and outstanding shares:
1998 - 18,880; 1997 - 18,857.. 1,888 1,886
Additional paid-in capital........ 218,403 217,855
Retained earnings................. 162,101 154,929
Accumulated other comprehensive
income, net of taxes:
1998 - $12,979; 1997 - $12,812.. 23,867 24,332
406,259 399,002
$2,003,339 $1,884,067
</TABLE>See notes to consolidated financial statements.
<PAGE>
MMI Companies, Inc. and Subsidiaries
Consolidated Statements of Income
(In thousands, except per share data)
Unaudited
<TABLE>
<CAPTION>
Three Months
Ended March 31,
1998 1997
<S> <C> <C>
REVENUES
Insurance premiums earned:
Medical malpractice liability..... $ 69,261 $ 40,975
International..................... 30,142 29,147
Life and health................... 3,143 1,301
102,546 71,423
Consulting and fee income............ 12,312 12,067
Net investment income................ 18,772 18,094
Net realized gains on investments.... 829 601
TOTAL REVENUES................ 134,459 102,185
LOSSES AND EXPENSES
Losses and loss adjustment expenses:
Medical malpractice liability..... 62,052 33,577
International..................... 18,561 17,227
Life and health................... 2,488 1,206
83,101 52,010
Insurance and administrative
expenses........................... 38,573 35,340
Interest expense..................... 2,435 1,450
TOTAL LOSSES AND EXPENSES..... 124,109 88,800
INCOME BEFORE INCOME TAXES.... 10,350 13,385
Income taxes......................... 1,655 2,760
NET INCOME.................... $ 8,695 $ 10,625
Earnings per common and common
equivalent share:
Basic............................ $ .46 $ .57
Diluted.......................... .45 .55
</TABLE>
See notes to consolidated financial statements.
<PAGE>
MMI Companies, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
(In thousands, except per share data)
<TABLE>
<CAPTION>
Accumulated
Other
Common Stock Additional Comprehensive Total
Number Par Paid-In Retained Income, Stockholders'
of Shares Value Capital Earnings Net of 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
repurchased.. (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)
share)...
Balance at
December 31,
1997........... 18,857 1,886 217,855 154,929 24,332 399,002
Three months ended
March 31, 1998
(unaudited):
Net income..... 8,695 8,695
Issuance of Common
Stock in connection
with employee
benefit plans and
exercise
of employee
stock options.... 23 2 548 550
Change in
accumulated other
comprehensive
income, net of
taxes of $167.... (465) (465)
Common cash
dividends
($.08 per share
share)... (1,523) (1,523)
Balance at
March 31,
1998
(unaudited).....18,880 $1,888 $218,403 $162,101 $23,867 $406,259
</TABLE>
See notes to consolidated financial statements.
<PAGE>
MMI Companies, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(In thousands)
Unaudited
<TABLE>
<CAPTION>
Three Months
Ended March 31,
1998 1997
<S> <C> <C>
OPERATING ACTIVITIES
Net income.............................. $ 8,695 $ 10,625
Adjustments to reconcile net income to net
cash used by operating activities:
Increase in policy liabilities....... 98,899 89,731
Change in reinsurance balances....... (5,408) (13,100)
Increase in premiums and fees
receivable.......................... (98,382) (78,413)
Increase in deferred income
taxes............................... (758) (1,170)
Increase in accrued investment
income and other assets............. (18,903) (14,793)
Decrease in accrued expenses and
other liabilities................... (3,741) (15,688)
Net realized gains on investments.... (829) (601)
Depreciation and amortization on
investments and goodwill............ 1,733 1,791
Net cash used by operating
activities........................ (18,694) (21,618)
INVESTING ACTIVITIES
Net (purchase) sale of short-term
investments......................... (454) 15,428
Purchase of fixed maturities......... (147,444) (158,889)
Sale of other investments,
principally fixed maturities........ 154,074 161,204
Maturities of fixed maturities....... 13,196 13,982
Acquisition of subsidiaries.......... -- (8,281)
Furniture and equipment additions.... (1,559) (1,767)
Net cash provided by investing
activities......................... 17,813 21,677
FINANCING ACTIVITIES
Issuance of Common Stock............. 550 (766)
Dividends............................ (1,523) (929)
Net cash used by financing
activities......................... (973) (1,695)
Decrease in cash..................... (1,854) (1,636)
Cash at beginning of period................. 6,698 4,839
Cash at end of period................ $ 4,844 $ 3,203
</TABLE>
See notes to consolidated financial statements.
<PAGE> MMI Companies, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
March 31, 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 three month period ended
March 31, 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. 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 1 (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% Junior Subordinated Deferable Interest Debentures
(Debentures), due December 15, 2027. The Debentures are the
sole assets of the Trust. The Capital Securities will pay a
dividend of 7% semiannually in arrears beginning June 30, 1998
and have a maturity date of December 15, 2027. 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 Securites is 8.06%.
4. 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 stockholders' equity.
The components of comprehensive income and accumulated
comprehensive income are as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1998 1997
<S> <C> <C>
Net income $ 8,695 $10,625
Net change in unrealized
gains on investments,
net of income taxes (465) (8,726)
Comprehensive income $ 8,230 $ 1,899
March 31, 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 (465) 10,876
Accumulated other
comprehensive income
at end of period $23,867 $24,332
<PAGE>
In 1997 the 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.
Intersegment revenues and expenses have been eliminated.
Information by segment is as follows (in thousands of dollars):
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1998 1997
<S> <C> <C>
Domestic insurance segment:
Revenues $84,797 $54,444
Income before taxes 5,296 6,586
Loss ratio 89.1% 82.3%
Expense ratio 20.7% 30.9%
Combined ratio 109.8% 113.2%
International insurance segment:
Revenues $37,350 $35,674
Income before taxes 6,405 6,013
Loss ratio 61.6% 59.1%
Expense ratio 41.1% 42.7%
Combined ratio 102.7% 101.8%
Consulting and fee segment:
Revenues $12,312 $12,067
Income (loss) before taxes (1,351) 786
Pretax margin (11.0%) 6.5%
Consolidated insurance ratios:
Loss ratio 81.0% 72.8%
Expense ratio 26.7% 35.7%
Combined ratio 107.7% 108.5%
</TABLE>
<PAGE>
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Results of Operations
Three Months Ended March 31, 1998 compared to Three Months Ended
March 31, 1997.
Revenues. Gross premiums written increased by 15.6% to
$210,448,000 for the three months ended March 31, 1998 from
$181,990,000 for the 1997 period. Net premiums written increased by
17.8% to $171,865,000 from $145,841,000, and net premiums earned
increased by 43.6% to $102,546,000 from $71,423,000.
Medical malpractice premiums earned increased by 69.0% to
$69,261,000 for the three months ended March 31, 1998 from
$40,975,000 for the 1997 period. International premiums earned
increased 3.4% to $30,142,000 from $29,147,000 and life and health
premiums earned increased by 141.6%, to $3,143,000 for the three
months ended March 31, 1998 from $1,301,000 for the 1997 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 quarter, 1998,
the Company's medical malpractice premiums earned included
$30,519,000 in such one time premiums, an increase of $26,278,000
in one-time premiums from the first quarter, 1997.
Consulting and fee income increased by 2.0% to $12,312,000 for
the three months ended March 31, 1998 from $12,067,000 for the 1997
period.
Net investment income increased by 3.7% to $18,772,000 for the
three months ended March 31, 1998 from $18,094,000 for the 1997
period. For the three month period, the Company had net realized
gains on investments of $829,000 in 1998 compared to $601,000 in
1997.
Losses and expenses. Losses and loss adjustment expenses
("LAE") increased by 59.8% to $83,101,000 for the three months
ended March 31, 1998 from $52,010,000 for the 1997 period. Medical
malpractice liability losses and LAE increased by 84.8% to
$62,052,000 for the three months ended March 31, 1998 from
$33,577,000 for the 1997 period, due to the increase in one-time
premiums in the first quarter, 1998. International losses and LAE
increased 7.7% to $18,561,000 from $17,227,000 in the 1997 period
and other losses and LAE increased to $2,488,000 from $1,206,000 in
the first quarter 1997. The consolidated loss ratio increased to
81.0% from 72.8% for the respective three month periods due to an
increase in the core medical malpractice loss ratio as well as a
higher loss ratio associated with the one-time premiums.
Insurance and administrative expenses increased by 9.1% to
$38,573,000 for the three months ended March 31, 1998 from
$35,340,000 for the 1997 period. The increase in administrative
expense is primarily due to higher acquisition expenses,
principally from new medical malpractice insurance business as well
as employee related costs including recruitment and relocation
expenses.
Interest expense increased by 67.9% to $2,435,000 for the three
months ended March 31, 1998 from $1,450,000 for the 1997 period
due to an increase in debt outstanding as well as an increase in
the interest rate on the debt. Debt outstanding totaled
$118,790,000 at March 31, 1998 compared to $93,000,000 at March 31,
1997.
Income taxes. Income taxes were $1,655,000 for the three months
ended March 31, 1998 compared to $2,760,000 for the 1997 period
due to lower pre-tax income in the current period.
Net income. Net income decreased by 18.2% to $8,695,000 for the
three months ended March 31, 1998 from $10,625,000 for the 1997
period due to an increase in the domestic insurance loss ratio and
an increase in expenses related to the consulting and fee segment.
Net income per share. Diluted net income per common and common
equivalent share decreased to $.45 for the three months ended March
31, 1998 from $.55 for the 1997 period. Included in these amounts
are $.03 in 1998 and $.02 in 1997 related to after-tax net realized
gains on investments.
<PAGE>
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 three
month periods ended March 31, 1998 and March 31, 1997, the Company
received dividends of $1,500,000 and $2,750,000, respectively, from
its subsidiaries. The Company received management fees from its
subsidiaries of $6,988,000 for the three months ended March 31,
1998, compared to $7,338,000 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 used by operating activities was $18,694,000 for the three
months ended March 31, 1998 compared to $21,618,000 for the three
months ended March 31, 1997. Because of variability related to the
timing of payment of claims, cash from operations for a casualty
insurance company can vary substantially from quarter to quarter.
Cash provided by investing activities was $17,813,000 for the
three months ended March 31, 1998 compared to $21,677,000 for the
three months ended March 31, 1997. The decrease in cash provided
by investing activities was primarily due to lower sales of
investments in the first quarter 1998 compared to the same period
in 1997.
Cash used by financing activities was $1,854,000 for the three
months ended March 31, 1998 compared to $1,636,000 for the three
months ended March 31, 1997.
The Company invests in investment grade fixed income securities
and preferred stocks. The estimated fair value of preferred stocks
was 3.5% of fair value of total invested assets as of March 31,
1998. The estimated fair value of the Company's investment
portfolio was $1,212,420,000 as of March 31, 1998 compared to
$1,230,800,000 as of December 31, 1997. The March 31, 1998 amount
includes net unrealized gains of $36,846,000, which represent 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. Short-term
investments totaled $52,486,000 or 4.3% of invested assets at March
31, 1998. The Company believes that all of its invested assets are
readily marketable.
Long-term debt consisting of Capital Securities totaled
$118,790,000 at March 31, 1998, virtually unchanged from the year
end amount. This amount relates to the Company's issuance of
$125,000,000 of 30-year, non-callable Capital Securities in
December, 1997.
Stockholders' equity was $406,259,000 as of March 31, 1998
compared to $399,002,000 as of December 31, 1997. Dividends to
stockholders were $1,523,000 for the three months ended March 31,
1998.
<PAGE>
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
A.Exhibits
11. Statement Re Computation of Per Share Earnings.
27. Financial Data Schedule.
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: May 14, 1998 /s/B. Frederick Becker
B. Frederick Becker
Chairman and Chief
Executive Officer
Date: May 14, 1998 /s/Paul M. Orzech
Paul M. Orzech
Executive Vice President
and Chief Financial Officer
<PAGE>
MMI Companies, Inc and Subsidiaries
Exhibit 11 - Statement re Computation of Per Share Earnings
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1998 1997
<S> <C> <C>
BASIC
Weighted average shares
outstanding................. 18,858 18,741
Earnings per common and
common equivalent
share....................... $ .46 $ .57
DILUTED
Weighted average shares
outstanding................ 18,858 18,741
Dilutive effect of stock
options using the treasury
stock method............... 573 744
Weighted average number of
common and common equivalent
shares..................... 19,431 19,485
Earnings per common and
common equivalent share.... $ .45 $ .55
</TABLE>
<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 three month period ended
March 31, 1998, and is qualified in its entirety by reference to
such financial statements.
<MULTIPLIER> 1,000
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<DEBT-HELD-FOR-SALE> 1,117,896
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 42,038
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 1,212,420
<CASH> 4,844
<RECOVER-REINSURE> 28,576
<DEFERRED-ACQUISITION> 40,701
<TOTAL-ASSETS> 2,003,339
<POLICY-LOSSES> 1,144,759
<UNEARNED-PREMIUMS> 222,243
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 118,790
<COMMON> 1,888
0
0
<OTHER-SE> 404,371
<TOTAL-LIABILITY-AND-EQUITY> 2,003,339
102,546
<INVESTMENT-INCOME> 18,772
<INVESTMENT-GAINS> 829
<OTHER-INCOME> 12,312
<BENEFITS> 83,101
<UNDERWRITING-AMORTIZATION> 12,394
<UNDERWRITING-OTHER> 26,179
<INCOME-PRETAX> 10,350
<INCOME-TAX> 1,655
<INCOME-CONTINUING> 8,695
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,695
<EPS-PRIMARY> .46
<EPS-DILUTED> .45
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
