<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, 1999.
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 19,173,171 shares outstanding of the registrant's common stock,
$0.10 par value, as of November 12, 1999.
Page 1 of 14
</PAGE>
<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
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
Item 3. Quantitative and Qualitative 13
Disclosure About Market Risk
Part II. Other Information
Item 6. Exhibits and Reports on 13
Form 8-K
Signatures 14
EXHIBITS:
27. Financial Data Schedule
</TABLE>
</PAGE>
<PAGE>
MMI Companies, Inc. and Subsidiaries
Consolidated Balance Sheets
(In thousands, except per share data)
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
(Unaudited)
<S> <C> <C>
ASSETS
INVESTMENTS
Short-term investments: $ 76,468 $ 50,819
Fixed maturities: 1,032,850 1,150,622
Preferred stocks: 51,195 57,981
1,160,513 1,259,422
OTHER ASSETS
Cash: 37,045 13,323
Premium and fees receivable: 198,098 161,000
Reinsurance receivables: 343,491 336,518
Prepaid reinsurance premiums: 32,755 21,232
Accrued investment income: 16,134 17,375
Cost in excess of net assets
of purchased subsidiaries,
less accumulated amortization: 36,275 43,018
Furniture and equipment -
at cost, less accumulated
depreciation: 12,583 14,702
Deferred income taxes: 90,481 44,093
Other: 60,342 48,726
$1,987,717 $1,959,409
LIABILITIES AND STOCKHOLDERS'
EQUITY
LIABILITIES
Policy liabilities:
Loss and loss adjustment
expense reserves:
Medical malpractice liability: $ 695,668 $ 672,647
International: 493,744 484,170
Other: 30,744 19,256
1,220,156 1,176,073
Unearned premium reserves: 187,185 141,939
Future life policy benefits: 7,814 8,326
1,415,155 1,326,338
Accrued expenses and other
liabilities: 64,978 50,136
Amounts due to reinsurers: 73,791 51,190
Company-obligated, mandatorily
redeemable preferred
capital securities of
subsidiary trust holding
solely junior subordinated
debentures of the Company: 118,975 118,817
1,672,899 1,546,481
STOCKHOLDERS' EQUITY
Common Stock, par value
$.10 per share:
Authorized shares: - 30,000
Issued and outstanding shares:
1999 - 19,173; 1998 - 19,059: 1,917 1,906
Additional paid-in capital: 222,650 221,649
Retained earnings: 93,327 160,226
Accumulated other
comprehensive income
(loss), net of taxes:
1999 - $(1,654); 1998 - $15,091: (3,076) 29,147
314,818 412,928
$1,987,717 $1,959,409
</TABLE>
See notes to consolidated financial statements.
</PAGE>
<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,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
REVENUES
Insurance premiums earned:
Medical malpractice
liability: $ 41,245 $42,114 $121,186 $152,350
International: 61,723 32,599 136,728 93,314
Life and health: 5,207 2,754 15,266 9,440
108,175 77,467 273,180 255,104
Consulting and fee
income: 14,787 10,833 46,074 33,649
Net investment income: 17,623 19,372 54,014 57,110
Net realized gains (losses)
on investments: (715) 957 (623) 1,990
TOTAL REVENUES: 139,870 108,629 372,645 347,853
LOSSES AND EXPENSES
Losses and loss
adjustment expenses:
Medical malpractice
liability: 98,746 55,221 167,702 153,232
International: 73,817 24,233 123,995 62,498
Life and health 5,874 2,527 15,760 7,563
178,437 81,981 307,457 223,293
Insurance and
administrative expenses: 63,732 39,626 150,108 110,515
Interest expense: 2,421 2,491 7,712 7,388
TOTAL LOSSES AND
EXPENSES: 244,590 124,098 465,277 341,196
INCOME (LOSS) BEFORE
INCOME TAXES
AND DISCONTINUED
OPERATIONS: (104,720) (15,469) (92,632) 6,657
Income taxes (credit): (35,371) (3,186) (34,527) 397
INCOME (LOSS) FROM
CONTINUING
OPERATIONS: (69,349) (12,283) (58,105) 6,260
Discontinued operations:
Loss from operations,
net of tax:
3 months 1998 - $388;
9 months 1998 - $1,123;
9 months 1999 - $372: -- 720 691 2,084
Loss on sale, net of
tax of $1,509: -- -- 2,952 --
NET INCOME (LOSS): $ (69,349) $(13,003) $(61,748) $ 4,176
Earnings (loss) per common
and common equivalent share:
Basic:
Income (loss) from
continuing operations: $ (3.62) $ (0.65) $ (3.04) $ 0.33
Loss from discontinued
operations: -- (0.04) (0 19) (0.11)
NET INCOME (LOSS): $ (3.62) $ (0.69) $ (3.23) $ 0.22
Diluted:
Income (loss) from
continuing operations: $ (3.62) $ (0.65) $ (3.04) $ 0.33
Loss from discontinued
operations: -- (0.04) (0.19) (0.11)
NET INCOME (LOSS): $ (3.62) (0.69) (3.23) 0.22
</TABLE>
See notes to consolidated financial statements.
</PAGE>
<PAGE>
MMI Companies, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
(In thousands, except per share data)
<TABLE>
<CAPTION>
Accumulated
Common Other
Stock Additional Comprehensive Total
Number Par Paid-In Retained Income(Loss) Stockholders'
of Shares Value Capital Earnings Net of Taxes Equity
<S> <C> <C> <C> <C> <C> <C>
Balance at
December 31,
1997: 18,857 $ 1,886 $217,855 $154,929 $ 24,332 $399,002
Year ended
December 31,
1998:
Net income: 11,364 11,364
Change in
unrealized gains
(losses) on
investments, net
of taxes of
$2,279 and
reclassification
adjustment: 4,815 4,815
Comprehensive
income: 16,179
Issuance of Common
Stock in connection
with acquisition
of subsidiary: 66 6 1,394 1,400
Issuance of Common
Stock in connection
with employee
benefit plans and
exercise of employee
stock options: 146 15 2,553 2,568
Common Stock
repurchased (10) (1) (153) (154)
Common cash
dividends
($.32 per share): (6,067) (6,067)
Balance at
December 31,
1998: 19,059 1,906 221,649 160,226 29,147 412,928
Nine months ended
September 30, 1999
(unaudited):
Net loss: (61,748) (61,748)
Change in
unrealized gains
(losses) on
investments, net
of taxes of
($16,743) and
reclassification
adjustment: (32,223) (32,223)
Comprehensive loss: (93,971)
Issuance of Common
Stock in connection
with acquisition
of subsidiary 117 12 1,813 1,825
Issuance of Common
Stock in connection
with employee
benefit plans and
exercise of
employee stock
options: 147 14 1,459 1,473
Common Stock
repurchased: (150) (15) (2,271) (2,286)
Common cash
dividends
($.27 per share): (5,151) (5,151)
Balance at
September 30,
1999 (unaudited): 19,173 1,917 222,650 93,327 (3,076) 314,818
</TABLE>
See notes to consolidated financial statements.
</PAGE>
<PAGE>
MMI Companies, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(In thousands)
Unaudited
<TABLE>
<CAPTION>
Nine Months
Ended September 30,
1999 1998
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss): $(61,748) $ 4,176
Adjustments to reconcile net income
or loss to net cash provided
(used) by operating activities:
Increase in policy liabilities: 88,817 101,662
Change in reinsurance balances: 4,105 (30,286)
Increase in premiums and fees
receivable: (34,461) (22,984)
Change in deferred income taxes: (29,645) 2,914
Increase in accrued investment
income and other assets: (11,050) (13,352)
Decrease in accrued expenses and
other liabilities: 6,733 399
Net realized (gains) losses on
investments: 623 (1,990)
Depreciation and amortization on
investments and goodwill: 12,922 5,903
Loss on sale of discontinued
operations: 4,841 --
Net cash provided (used) by
operating activities: (18,863) 46,442
INVESTING ACTIVITIES
Net sale of short-term investments: (22,065) (9,601)
Purchases of available-for-sale
investments: (344,471) (448,549)
Sales of available-for-sale
investments: 349,235 365,277
Maturities of available-for-sale
investments: 71,150 57,553
Acquisitions of subsidiaries: (7,222) (2,384)
Disposition of subsidiary: 4,000 --
Furniture and equipment additions: (2,078) (4,650)
Net cash provided (used) by investing
activities: 48,549 (42,354)
FINANCING ACTIVITIES
Issuance of Common Stock: 1,473 1,261
Repurchases of Common Stock: (2,286) --
Dividends: (5,151) (4,558)
Net cash used by financing
activities: (5,964) (3,297)
Increase in cash: 23,722 791
Cash at beginning of period: 13,323 6,698
Cash at end of period: $ 37,045 $ 7,489
</TABLE>
See notes to consolidated financial statements.
</PAGE>
<PAGE>
MMI Companies, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
September 30, 1999
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, 1999 are not necessarily indicative
of the results that may be expected for the year ending December 31,
1999. For further information, refer to the consolidated financial
statements and notes thereto included in the Company's 1998 Annual
Report.
2. Reserve Strengthening and Restructuring Charges
In the three and nine months ended September 30, 1999 the Company's
financial results include pre-tax charges totaling $105,100,000 for
increasing loss and loss adjustment expense reserves in its insurance
operations and restructuring its consulting and fee businesses.
The loss and loss adjustment expense reserve component of the charge
includes $60,100,000 related to reserve increases in the Company's
domestic insurance operations and $31,000,000 to increases in the
international insurance operations.
The remaining $14,000,000 relates to a restructuring the Company has
undertaken, primarily in its consulting and fee businesses. The
largest component of this restructuring charge, approximately
$6,300,000, results from an impairment of goodwill. The goodwill
relates to MMI's purchase of certain fee businesses which have
subsequently experienced a decline in revenues and customer base,
resulting in a lack of profitability. The restructuring charge also
includes a provision for the disposition of real estate lease
obligations in several locations, employee termination benefits and
discontinuance of certain product offerings. The net of tax impact
of the charges for loss and loss adjustment expense reserves and for
restructuring is approximately $71,100,000.
3. Discontinued Operations
Effective March 31, 1999, MMI sold the net assets of Healthcare
Credentials Management Services, its credentials verification
organization subsidiary. MMI received $4,000,000 in cash proceeds.
There was a loss on this transaction of $3,643,000, net of taxes of
$1,962,000. Revenues for the three months ended March 31, 1999
and nine months ended September 30, 1999 were $889,000 and for the
three and nine months ended September 30, 1998 were $1,020,000 and
$3,557,000, respectively.
MMI will continue to service credentialing clients during a transition
period. MMI will incur expenses and receive a service fee from
the purchaser during this period of time. These amounts have been
estimated and are included in the loss calculation.
4. Acquisitions
In February 1999, Professional Risk Management, Inc. (PRM), a subsidiary of
MMI, acquired Applied Risk Management (ARM), Inc., a privately held third
party administrator and consulting firm that specializes in workers'
compensation. PRM provides third party administration and consulting
related to professional and general liability risks and claims
primarily for self-insured organizations. The purchase price for ARM,
including expenses, was $7,927,000 in cash. This acquisition was
accounted for as a purchase.
In April 1999, MMI issued 117,143 shares of common stock in connection
with the acquisition of a 20% minority interest in MMedica Insurance
Limited, now a wholly owned subsidiary of MMI Companies, Inc.
</PAGE>
<PAGE>
5. 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,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Net income (loss): $(69,349) $(13,003) $(61,748) $ 4,176
Weighted average
number of common
shares outstanding: 19,158 18,967 19,089 18,918
Dilutive effect of
stock options using
the treasury stock
method: - - - 491
Weighted average
number of common
and common equivalent
shares outstanding: 19,158 18,967 19,089 19,409
Net earnings (loss) per
common share: $ (3.62) $ (0.69) $ (3.23) $ 0.22
Net earnings (loss)
per common and
common equivalent
share: $ (3.62) $ (0.69) $ (3.23) $ 0.22
</TABLE>
6. Effect of New Pronouncements
As of January 1, 1999, the Company adopted Statement of Position 98-1
(SOP 98-1), "Accounting for the Costs of Computer Software Developed
or Obtained for Internal Use." SOP 98-1 requires specific accounting
treatment for internal use software. The adoption of SOP 98-1 did not
have a material effect on consolidated operating results or financial
position.
In December 1997, the AcSEC issued SOP 97-3, "Accounting by Insurance
and Other Enterprises for Insurance Related Assessments." SOP 97-3
provides guidance on when an insurance enterprise should recognize a
liability for guaranty fund or other assessments and how to measure
the liability. SOP 97-3 was effective January 1, 1999. The adoption of
SOP 97-3 did not have a significant impact on MMI's consolidated
operating results or financial position.
7. Industry Segments
Presentation of MMI's operations has been classified and summarized
into three reportable segments: domestic insurance, international
insurance, and consulting and fees. Reportable segments are
classified by the product lines of insurance and consulting and fees
with insurance segments classified along geographic lines of
domestic and international. Segment revenues and segment income (loss)
exclude realized gains (losses) on investments. Intersegment revenues
are not material. There are no individual customers that account for
ten percent or more of MMI's revenues (in thousands).
</PAGE>
<PAGE>
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Domestic insurance segment:
Total segment revenues: $ 58,317 $ 57,209 $172,625 $197,791
Segment income (loss): (62,343) (16,772) (57,182) (7,250)
International insurance
segment:
Total segment revenues: $ 67,481 $ 39,630 $154,569 $114,423
Segment income (27,810) 765 (20,271) 11,743
Consulting and fee segment:
Total segment revenues: $ 14,787 $ 10,833 $ 46,074 $ 33,649
Segment income (loss): (13,852) (419) (14,556) 174
Total:
Total segment revenues: $140,585 $107,672 $373,268 $345,863
Net realized gains (losses)
on investments: (715) 957 (623) 1,990
Total Revenues $139,870 $108,629 $372,645 $347,853
Segment income: (104,005) (16,426) (92,009) 4,667
Net realized gains (losses)
on investments: (715) 957 (623) 1,990
Income (loss) from continuing
operations before income
taxes: $(104,720) $(15,469) $(92,632) $ 6,657
</TABLE>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Results of Operations
Nine Months Ended September 30, 1999 compared to Nine Months Ended
September 30, 1998.
Reserve strengthening and restructuring charges.
In the three and nine months ended September 30, 1999 the Company's
financial results include charges totaling $105,100,000 for increasing
loss reserves in its insurance operations and restructuring its
consulting and fee businesses. Of the charge, $60,100,000 is related
to reserve increases in the Company's domestic insurance operations and
$31,000,000 to increases in the international insurance operations.
The remaining $14,000,000 relates to the restructuring the Company has
undertaken primarily in its consulting and fee businesses. The net of
tax impact of these charges is approximately $71,100,000. Details
related to these charges are discussed in the losses and expenses
section of this document.
Revenues.
Gross premiums written increased by 8.2% to $392,822,000 for the nine
months ended September 30, 1999 from $362,932,000 for the 1998 period.
Net premiums written increased by 5.4% to $307,075,000 from $291,396,000,
and net premiums earned increased by 7.1% to $273,180,000 from
$255,104,000. For the three months ended September 30, 1999 gross
premiums written increased by 53.6% to $126,107,000 from $82,086,000,
net premiums written increased by 50.6% to $100,880,000 from $66,966,000
and net premiums earned increased by 39.6% to $108,175,000 from
$77,467,000.
Medical malpractice premiums earned decreased by 20.5% to $121,186,000
for the nine months ended September 30, 1999 from $152,350,000 for the
1998 period and decreased by 2.1% to $41,245,000 from $42,114,000 for
three months ended September 30, 1999 compared to the prior year.
International premiums earned increased 46.5% to $136,728,000 for the
nine months ended September 30, 1999 from $93,314,000 for the 1998
period and increased by 89.3% to $61,723,000 from $32,599,000 for the
three month period. Life and health premiums earned increased by 61.7%,
to $15,266,000 for the nine months ended September 30, 1999 from
$9,440,000 for the 1998 period and increased by 89.1% to $5,207,000
from $2,754,000 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 1999, the Company's medical malpractice
premiums earned included $8,662,000 in such one time premiums, a decrease
of $23,740,000 in one-time premiums from the first nine months of
1998. The increase in international earned premiums for the three and
nine months was due to growth in the Company's participation in Lloyd's
syndicates as well as third quarter, 1999 premiums totaling $11,482,000
for prior policy year swing-rated medical malpractice reinsurance
treaties. Life and health premiums increased due to growth in medical
expense business.
Consulting and fee income increased 36.9% to $46,074,000 for the nine
months ended September 30, 1999 from $33,649,000 for the 1998 period and
increased by 36.5% to $14,787,000 from $10,833,000 for the three month
period. Included in the three and nine month periods are revenues related
to ARM totaling $6,193,000 and $17,693,000, respectively, from the date of
acquisition in February 1999.
Net investment income decreased 5.4% to $54,014,000 for the nine months
ended September 30, 1999 compared to $57,110,000 for the 1998 period
and decreased 9.0% to $17,623,000 compared to $19,372,000 for the three
month period. The decrease in investment income is due to a decrease in
invested assets. For the nine months ended September 30, 1999 the Company
had net realized losses on investments of $623,000 and net realized gains
of $1,990,000 in 1998. For the three months ended September 30, 1999,
the Company had net realized losses of $715,000 and net realized gains of
$957,000 in 1998.
Losses and expenses.
Losses and loss adjustment expenses ("LAE") increased by 37.7% to
$307,457,000 for the nine months ended September 30, 1999 from
$223,293,000 for the 1998 period and increased by 117.7% to $178,437,000
from $81,981,000 for the three month period. Medical malpractice
liability losses and LAE increased by 9.4% to $167,702,000 for the
nine months from $153,232,000 for the 1998 period and increased by 78.8%
to $98,746,000 from $55,221,000 for the three month period. Medical
malpractice losses and LAE increased due to unfavorable loss experience
recognized in the third quarter 1999 of $57,900,000, due primarily to a
change in the legal environment affecting a specific block of business.
That business, which the Company has exited completely as of December 31,
1998, consists of groups of for-profit long-term care facilities.
As a result of several large judgments and settlements, one of which
affected the Company, average case values have increased significantly.
The Company undertook a major review of all such cases and increased
reserves on open cases to reflect the environmental change and increased
its reserve for unreported cases and claim development on this block of
business. This reserve strengthening totaled $35,000,000.
In addition, two of the Company's more traditional customer blocks of
business experienced reserve growth for cases attributable to the
1996-1998 accident years. This growth was primarily the result of
increases in average case severity. Losses associated with policies
covering healthcare facilities increased by $15,000,000. The Company
also increased reserves by $7,900,000 for policies covering groups of
physicians insured under the Company's clinic programs. The three and
nine months ended September 30, 1998 include loss reserve strengthening of
$17,500,000 related to long-term care and clinic business.
International losses and LAE increased 98.4% in the nine month period to
$123,995,000 from $62,498,000 in the 1998 period and increased by 204.6%
to $73,817,000 from $24,233,000 for the three month period. The three
and nine month periods ended September 30, 1999 include $31,000,000 of
loss reserve strengthening covering the 1996-1998 policy years and
reflects a continuation of the competitive market conditions and increased
trends in frequency and severity. Approximately one-half of the reserve
increase relates to short-tail lines, primarily property and medical
expense business with the remaining reserve development occurring in the
casualty lines including medical malpractice and commercial auto. The
three and nine month periods in 1998 include $3,300,000 of loss reserve
strengthening and $1,000,000 of property catastrophe losses.
Life and health losses and LAE increased to $15,760,000 from $7,563,000
for the nine months and increased to $5,874,000 from $2,527,000 for the
three months. These increases are due to the increase in premiums earned
in the three and nine month periods in 1999 as well as $2,200,000 in
losses recorded in the third quarter 1999 in recognition of unfavorable
experience in the medical expense insurance business.
</PAGE>
<PAGE>
The consolidated loss ratio increased to 112.5% from 87.5% for the
respective nine month periods and increased to 165.0% from 105.8% for
the three month periods due to reserve strengthening in the medical
malpractice and international lines of business. The loss reserve
development reflected in medical malpractice and international losses
and loss adjustment expenses represented an increase in the three and
nine month 1999 loss ratio of 82.2 and 32.5 percentage points,
respectively.
Insurance and administrative expenses increased by 35.8% to $150,108,000
for the nine months ended September 30, 1999 from $110,515,000 for the
1998 period and increased by 60.8% to $63,732,000 from $39,626,000 for
the three month period. The three and nine month 1999 periods include
$14,000,000 in restructuring charges, primarily related to the consulting
and fee businesses. These charges relate to the impairment of goodwill
for certain consulting and fee businesses reflecting unprofitable
operating results, discontinuance of certain product offerings, employee
termination benefits and disposition of real estate lease obligations in
several locations. This increase in insurance and administrative expenses
also relates to the inclusion of ARM since its date of acquisition in 1999
as well as an increase in acquisition costs related to the growth in
international premiums written in the three and nine month 1999 periods.
Interest expense increased by 4.4% to $7,712,000 for the nine months ended
September 30, 1999 from $7,388,000 for the 1998 period and decreased by
2.8% to $2,421,000 from $2,491,000 for the three month period. Debt
outstanding totaled $118,975,000 at September 30, 1999 compared to
$118,817,000 at December 31, 1998.
Income taxes.
The Company recorded an income tax credit of $34,527,000 for the nine
months ended September 30, 1999 compared to a provision of $397,000 for
the 1998 period and for the three month period recorded a credit of
$35,371,000 in 1999 compared to a credit of $3,186,000 in the prior year.
Income taxes decreased for the three and nine months due to the pre-tax
loss in the three and nine month 1999 periods.
Net income (loss).
Net income decreased to a loss of $61,748,000 for the nine months ended
September 30, 1999 from net income of $4,176,000 for the 1998 period and
decreased to a net loss of $69,349,000 in the third quarter of 1999 from
a net loss of $13,003,000 in 1998. The decrease in net income is
principally a result of adverse reserve development from the medical
malpractice and international lines of business and the restructuring
charge recorded in the third quarter 1999.
Net income (loss) per share.
Diluted net loss per common and common equivalent share decreased to
$3.23 for the nine months ended September 30, 1999 from net income $0.22
for the 1998 period. For the three months ended September 30, diluted net
loss per share was $3.62 in 1999 compared to a net loss of $.69 in 1998.
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, 1999 and September 30, 1998, the Company received dividends
of $4,500,000 from its subsidiaries. The Company received management fees
from its subsidiaries of $18,000,000 for the nine months ended September
30, 1999, compared to $18,038,000 in 1998.
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 $18,863,000 for the nine months
ended September 30, 1999 compared to cash provided of $46,442,000 for
the nine months ended September 30, 1998. 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 provided by investing activities was $48,549,000 for the nine months
ended September 30, 1999 compared to cash used of $42,354,000 for the
nine months ended September 30, 1998.
</PAGE>
<PAGE>
Cash used by financing activities was $5,964,000 for the nine months
ended September 30, 1999 compared to cash used of $3,297,000 for the
nine months ended September 30, 1998.
The Company invests primarily in investment grade fixed income securities
and also preferred stocks. The estimated fair value of preferred stocks
was 4.4% of fair value of total invested assets as of September 30, 1999.
The estimated fair value of the Company's investment portfolio was
$1,160,513,000 as of September 30, 1999 compared to $1,259,422,000 as of
December 31, 1998. The September 30, 1999 amount includes net unrealized
losses of $4,730,000 which represents the amount by which the amortized
cost of the investment portfolio exceeds estimated fair value. Net
unrealized gains as of December 31, 1998 were $44,238,000. 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 $76,468,000 or 6.6% of invested assets at September
30, 1999. The Company believes that all of its invested assets are
readily marketable.
Long-term debt consisting of Capital Securities totaled $118,975,000 at
September 30, 1999. This amount relates to the Company's $125,000,000
of 30-year, non-callable Capital Securities issued in December, 1997.
Stockholders' equity was $314,818,000 as of September 30, 1999 compared
to $412,928,000 as of December 31, 1998. Dividends to stockholders were
$5,151,000 for the nine months ended September 30, 1999.
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 were assessment, role definition,
inventory and analysis, coding, testing and implementation/confirmation.
All system modifications and conversions have been completed and we
believe all mission-critical applications are now Y2K compliant.
Additionally, system-wide Y2K simulations have been completed for these
systems. The cost to address all Y2K issues through September 30,
1999 has totaled $667,000. At this time the Company believes that it
has incurred all material expenses related to Y2K.
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.
All of the identified critical internally-developed information
technologies (IT) have been modified, tested and implemented.
The Company has addressed Y2K compliance of third-party IT vendors
through a combination of written correspondence and internal testing.
All material third party IT vendors have expressed they are Year
2000 Ready.
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 the Company believes
disruption relating to these institutions would not have a
material effect on operations or financial performance.
</PAGE>
<PAGE>
C. Contingency Plans:
MMI has completed a thorough analysis and update of its disaster
recovery plans relating to technology and business continuity.
Any necessary changes related to Y2K have been completed and
reviewed by senior management.
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 included or specifically excluded.
Forward-Looking Information:
Certain matters referred to herein contain forward-looking statements
that involve risks and uncertainties. Forward-looking statements
include the information concerning possible or assumed future results
of operations and adequacy of reserves. 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. MMI assumes no duty to update such
forward-looking statements. These factors include successful
execution of the Company's operating plans, the level of continued
demand for its products and services, actions of competitors with
respect to products and pricing, future reserve development, levels of
future expenses, evolution of the healthcare industry, the Company's
principal market, general equity market conditions, and regulatory
and legal uncertainties.
Item 3. Quantitative and Qualitative Disclosure About Market Risk.
Market Risk
The following updates the "Market Risk" disclosure as reported in the
Company's Form 10-K for the year ended December 31, 1998 concerning
the Company's $125.0 million mandatorily redeemable preferred capital
securities (Capital Securities) of MMI Capital Trust I, a subsidiary
of MMI. The carrying value of the securities was $119.0 million and
$118.8 million at September 30, 1999 and December 31, 1998,
respectively. The securities had a fair value of approximately
$95.0 million as of September 30, 1999. A hypothetical 100 basis
point decrease in interest rates would increase the fair value from
$95.0 million to $104.9 million. At December 31, 1998, the fair
value of the securities was approximately $121.9 million.
A hypothetical 100 basis point decrease in interest
rates at December 31, 1998 would have increased the fair value from
$121.9 million to $137.3 million.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
A. Exhibits
27.Financial Data Schedule.
B. Reports on Form 8-K.
On November 1, 1999, the Company filed a Current Report on
Form 8-K relating to reserve strengthening and restructuring
charges of $105 million during the third quarter of 1999.
</PAGE>
<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, 1999 /s/B. Frederick Becker
B. Frederick Becker
Chairman and Chief
Executive Officer
Date: November 12, 1999 /s/Paul M. Orzech
Paul M. Orzech
Executive Vice President and
Chief Financial Officer
</PAGE>
<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, 1999,
and is qualified in its entirety by reference to such financial
statements.
<MULTIPLIER> 1,000
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<DEBT-HELD-FOR-SALE> 1,032,850
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 51,195
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 1,160,513
<CASH> 37,045
<RECOVER-REINSURE> 27,983
<DEFERRED-ACQUISITION> 37,368
<TOTAL-ASSETS> 1,987,717
<POLICY-LOSSES> 1,227,970
<UNEARNED-PREMIUMS> 187,185
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 118,975
<COMMON> 1,917
0
0
<OTHER-SE> 312,901
<TOTAL-LIABILITY-AND-EQUITY> 1,987,717
273,180
<INVESTMENT-INCOME> 54,014
<INVESTMENT-GAINS> (623)
<OTHER-INCOME> 46,074
<BENEFITS> 307,457
<UNDERWRITING-AMORTIZATION> 33,081
<UNDERWRITING-OTHER> 117,027
<INCOME-PRETAX> (92,632)
<INCOME-TAX> (34,527)
<INCOME-CONTINUING> (58,105)
<DISCONTINUED> (3,643)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (61,748)
<EPS-BASIC> (3.23)
<EPS-DILUTED> (3.23)
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
