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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
/X/ Annual report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
For the fiscal year ended: December 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)
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, $0.10 par value; New York Stock Exchange
7 5/8% Series B Capital Securities None
(Title of each class) (Name of each exchange on which
registered)
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 / /
Indicate by a check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein and will not be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. / /
The aggregate market value of the voting stock held by non-affiliates of the
Registrant was $273,130,883 as of February 26, 1999. The aggregate number of the
Registrant's $0.10 par value Common Stock shares outstanding on February 26,
1999 was 19,001,082.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for the annual meeting of
stockholders to be held on April 22, 1999 are incorporated by reference into
Part III of this report.
Exhibit index is located on page 57.
Page 1 of 58
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PART I
ITEM 1. BUSINESS
GENERAL
INTRODUCTION
MMI Companies, Inc. (together with its subsidiaries, the "Company"or "MMI")
provides insurance products and related specialized services in two principal
markets: the United States healthcare industry and international insurance and
reinsurance markets.
Domestically, the Company offers specialized medical malpractice insurance
products and consulting services that are designed to assist healthcare
providers manage the cost and quality of care. The Company integrates its
professional liability insurance with certain of its fee-based risk management
services and does not offer such insurance or that set of risk management
services on a stand-alone basis. Accordingly, insurance clients are required to
purchase a specific set of risk modification services consisting of consulting,
education and information in order to have access to the Company's professional
liability coverage. In addition, the Company offers a variety of other
consulting and fee-based services to healthcare providers, including strategic
and management consulting, employee relations consulting, risk management
services, property and casualty claims management, healthcare credentials
verification services and billing, compliance and reimbursement services.
Internationally, the Company operates as a specialty casualty and property
reinsurer and insurer operating in the London-based reinsurance and insurance
market (the "London Market"), primarily through its subsidiary, Unionamerica
Insurance Company Limited (together with its affiliates, "Unionamerica").
Unionamerica's core businesses are professional liability reinsurance, including
malpractice reinsurance for healthcare providers, as well as lawyers and other
professionals, and reinsurance and insurance for a variety of property and
casualty risks. Of Unionamerica's insurance gross premiums written,
approximately 85% are generated in the U.S.
HISTORY
The Company was formed in 1983 to write medical malpractice insurance and
provide risk management services for hospitals and physicians in the United
States. Since the initial public offering of its Common Stock in 1993, the
Company has, through acquisitions and internal growth, substantially increased
its insurance assets and capital, the breadth of its products and services and
its capacity to deliver them. The Company has acquired insurance and
reinsurance, strategic management consulting, employee relations consulting,
credentials verification services, and property and casualty claims management
businesses and integrated them into its operations. It also developed additional
services to assist healthcare providers manage their business operations. In
December 1997, the Company acquired Unionamerica.
Unionamerica was founded in 1971. Since 1996, Unionamerica has acquired
interests in Lloyd's dedicated corporate capital vehicles, a Lloyd's managing
agency, a London market agency specializing in European Union medical
malpractice, and a Dutch auto insurance program.
BUSINESS SEGMENTS
The Company's business is organized into three reportable segments: domestic
insurance, international insurance, and consulting and fee services.
The following tables set forth the Company's revenues and income before
income taxes, by segment, over the past three years. Certain net premiums earned
have been reclassified in the international insurance segment in 1997. This
reclassification had no effect on pre-tax income.
2
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REVENUES BY SEGMENT
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Domestic insurance segment:
Net premiums earned....................................... $210,506 $159,579 $164,409
Net investment income..................................... 49,103 47,171 44,274
-------- -------- --------
259,609 206,750 208,683
International insurance segment:
Net premiums earned....................................... 136,229 127,918 116,982
Net investment income..................................... 27,453 28,319 29,407
-------- -------- --------
163,682 156,237 146,389
Consulting and fee segment.................................. 44,485 44,862 32,314
Net realized gains (losses) on investments.................. 2,678 2,182 (890)
-------- -------- --------
Total revenues........................................ $470,454 $410,031 $386,496
======== ======== ========
</TABLE>
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES
AND EXTRAORDINARY LOSS BY SEGMENT
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Domestic insurance segment.................................. $ (3,866) $ 21,113 $ 24,120
International insurance segment (1)......................... 17,064 16,451 29,330
Consulting and fee segment.................................. (200) 7,385 4,843
-------- -------- --------
Segment income........................................ 12,998 44,949 58,293
Net realized gains (losses) on investments.................. 2,678 2,182 (890)
-------- -------- --------
Income from continuing operations before income taxes
and extraordinary loss.............................. $ 15,676 $ 47,131 $ 57,403
======== ======== ========
</TABLE>
- ------------------------
(1) 1997 includes expenses of $9,745,000 related to the acquisition of
Unionamerica.
DOMESTIC INSURANCE SEGMENT
BUSINESS ENVIRONMENT
The healthcare industry, particularly healthcare providers, constitutes the
Company's target market. This market has undergone substantial structural change
over the past decade and continues to evolve. Due to changes in the financing of
healthcare under managed care, the healthcare delivery system has evolved to a
complex structure involving numerous healthcare provider types and payment
mechanisms. Healthcare providers are forming integrated delivery networks
through mergers and acquisitions and contractual arrangements. These networks
include healthcare systems, physician organizations, physician management
companies, physician hospital organizations and individual hospitals and
physicians and other specialized healthcare provider entities. In addition,
healthcare is provided in numerous settings, including hospitals, clinics,
outpatient facilities, physician offices, rehabilitation and long-term care
facilities and the home.
3
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The Company believes that the healthcare business environment requires
providers and networks to address related business, clinical and insurance
risks, and the Company has developed a comprehensive set of insurance products
and consulting and fee-based services designed to assist healthcare providers
address these issues. These products and services have been developed both
internally and through acquisition.
PRODUCTS
The Company's insurance products include professional liability insurance
for hospitals and healthcare systems, physicians and allied healthcare
professionals, as well as assumed reinsurance, and life and health insurance,
written principally by American Continental Insurance Company ("ACIC"), the
Company's primary domestic insurance subsidiary. According to A.M. Best, the
Company was the ninth largest writer of medical malpractice insurance in the
United States in 1997, based on direct premiums written.
HOSPITALS AND HEALTHCARE SYSTEMS. The Company writes primary, umbrella and
excess liability insurance for hospitals and healthcare systems. The Company has
capacity to write policy limits to $51.0 million and obtains reinsurance for
losses in excess of $3.0 million, subject to an annual aggregate reinsurance
deductible of $8.0 million. The Company's liability insurance is written
primarily on a claims-made basis. Pricing of healthcare system insurance is
strongly influenced by the loss experience of the insured, which provides
incentive for the client to adopt and adhere to sound risk management policies.
PHYSICIANS AND ALLIED HEALTHCARE PROFESSIONALS. The Company underwrites
physician groups and physicians that are employed by or affiliated with insured
hospitals or clinics, and locum tenens organizations. The Company writes both
primary and excess policies primarily on a claims-made basis and has capacity to
write policy limits of up to $5.0 million per occurrence with a $7.0 million
aggregate policy limit. The Company cedes to reinsurers 100% of losses in excess
of $500,000 per claim. The Company's maximum exposure on any single occurrence
involving more than one insured is $750,000. Although physicians are
underwritten individually by the Company, pricing for all physician group
business is influenced by the experience of the insured physician group. The
Company believes that this approach to pricing and the review by group members
improves the physician underwriting process.
DISTRIBUTION
The Company believes that a close working relationship with its healthcare
industry clients is essential and consequently markets its products and services
directly and through insurance brokers where such a close client relationship
can be created and maintained. The Company markets nationally and has regional
insurance offices in Deerfield, Illinois; Atlanta, Georgia; and San Francisco,
California. The Company also has several small offices in locations where
specialized services are provided to clients. The Company has insurance licenses
in 50 states and the District of Columbia. In 1998, the five largest states in
terms of medical malpractice direct written premium by the Company were
Illinois, Florida, California, Texas and Tennessee which together accounted for
approximately 45% of the Company's direct written premium.
UNDERWRITING
The Company has a select risk underwriting philosophy and its account
management team approach supports the underwriting process. Clinical risk
management consultants prepare reports regarding potential new business and
provide site visit reports, risk assessments and recommendations, as well as
statistical reports regarding risk management programs for renewal business. The
Company's risk management consultants conduct a pre-acquisition process to
determine the degree to which clients have processes in place to assess and
manage risk. Claims managers and underwriters evaluate a minimum of five years
of loss history and reserve data, and underwriters require detailed historical
exposure data and three years of financial information. The Company's
underwriters perform a complete underwriting evaluation for every new and
renewal applicant and determine premiums and coverage provisions when an
insurance quotation is issued.
4
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CLAIMS
The Company's approach to claims management utilizes highly experienced
multi-disciplinary teams and early clinical evaluation. The Company believes
that this approach allows it to assess claims more accurately and manage them to
resolution more efficiently. Clinical resource work groups are a key component
of claims management for the Company. Each regional work group meets four times
a year and includes several prominent physicians affiliated with insured
healthcare institutions and the Company's Medical Director and legal, claims,
risk and underwriting personnel. The work groups review and evaluate clinical,
standard of care, causation and risk management issues relating to new claims.
The Company emphasizes early evaluation and management of claims. Claims
professionals are required to complete a full evaluation and reserving of claims
within nine months of the filing of a claim. The claims department conducts
major case reviews in each region semi-annually. Cases reviewed include those
reserved at or above $250,000 and for all obstetric claims. The major case
review process ensures ongoing senior management involvement for all large
exposure claims. The Company works closely with its defense counsel to develop
case strategies and participate in litigation of claims. Claims professionals
attend case conferences and trials and maintain an expert witness data bank.
When necessary, medical consultants are retained to assist in defense of claims.
Litigation management and structured settlement specialists participate in case
strategies and mediation to minimize ultimate claim costs.
The Company seeks a cooperative working relationship with client risk
managers. Claims professionals are assigned responsibility for claim activity on
an account basis, working closely with underwriters and risk management
consultants also assigned to these accounts. Claims professionals routinely
conduct phone consultations with client risk managers regarding specific cases
and perform claim audits regularly. This working relationship and open
communication is critical for the Company to identify incidents that may result
in claims and assists the Company in evaluating and responding to claims
expeditiously.
CONSULTING AND FEE SEGMENT
The Company's consulting and fee segment consists of its clinical risk
management services, which are closely linked with its domestic insurance
operations, as well as management consulting, employee relations consulting,
property and casualty claims administration, healthcare credentials
verification, and billing, compliance and reimbursement businesses.
HEALTHCARE RISK SERVICES
The Company provides fee-based services designed to help its customers
increase revenues, reduce cost and improve the quality of healthcare provided.
Since its inception in 1983, the Company has required that its insurance clients
purchase certain of its risk modification programs, educational programs and
information services as a condition to obtaining its insurance coverage.
The clinical risk modification process is designed to help clients change
practices in the healthcare setting that may increase professional liability
risk exposure. This process includes a review of each prospective insured prior
to underwriting in order to assess risk exposures and to evaluate its
receptivity to the Company's risk management philosophy. Once insured, the
client is provided specific services by the Company to help manage its risk
exposures.
The Company's specialized clinical risk modification programs seek to
contribute to the quality of patient care by improving clinical practices,
thereby reducing loss exposures and incurred losses, and improving clinical
outcomes. The Company requires that healthcare systems continually review
clinical practices and submit clinical indicator data monthly. These data
measure the insureds' degree of compliance with the guidelines that have been
developed by national work groups of physicians and other medical professionals
working under the sponsorship of the Company. These data comprise a comparative
database of practice and outcome indicators that has been maintained since 1985.
Insured institutions must also establish procedures for internal clinical and
risk management review of cases, furnish reports and make available patient
records, case review summaries and other material requested to support the
evaluation of their risk management activity. The delivery of these services to
an insured is accomplished through a combination of consultation, education and
information services and programs.
5
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PROPERTY AND CASUALTY CLAIMS ADMINISTRATION
The Company provides professional liability, workers compensation and other
property and casualty claims administration services designed to assist
healthcare and other organizations to manage self-insured retentions. The
Company believes that in the future, consolidating healthcare organizations will
have increased financial capacity and will seek to retain liability exposures
through increased deductibles and self-insured retentions. This trend represents
an opportunity for the Company to provide a highly specialized service to
healthcare providers on an outsourced basis.
HEALTHCARE CREDENTIALS MANAGEMENT SERVICES
Healthcare providers and managed care organizations face increased
regulatory requirements to periodically review and evaluate the credentials of
physicians and other healthcare professionals. The Company provides outsourced
information technology-based services to these organizations that enable them to
assemble credentials information in a timely and cost-efficient manner rather
than through labor intensive internal processes.
STRATEGY CONSULTING SERVICES
The Company provides a wide variety of management consulting services,
including strategy development, healthcare system integration and development,
medical group practice development, managed care strategy design and
implementation, hospital/physician alignment strategies and business process
reengineering. These services are designed to assist healthcare clients in
implementing organizational change.
EMPLOYEE RELATIONS CONSULTING
The Company provides employee relations and human resource consulting
services to healthcare organizations. The Company believes that human resource
and compensation issues will take on increased importance as healthcare
organizations continue to consolidate and evolve. Principal services provided
include labor relations consulting, compensation consulting, employee opinion
surveys and executive search services.
BILLING, COMPLIANCE AND REIMBURSEMENT SERVICES
The Company provides services that help hospitals, physicians and integrated
healthcare organizations capture and report accurate and timely information on
patient care. These services are designed to assure healthcare providers that
billing and reimbursement is appropriate for service rendered.
INTERNATIONAL INSURANCE SEGMENT
Internationally, the Company operates as a specialty casualty and property
reinsurer and insurer operating in the London Market, primarily through its
subsidiary, Unionamerica. Unionamerica's core businesses are professional
liability reinsurance, including malpractice reinsurance for healthcare
providers, as well as lawyers and other professionals, and reinsurance and
insurance for a variety of property and casualty risks.
PRODUCTS
The Company writes casualty and property reinsurance on both a treaty basis
(in which the reinsurer typically agrees to reinsure all, or a specified
portion, of the risks arising under a number of similar policies) and a
facultative basis (in which the reinsurer agrees to reinsure all, or a portion,
of the insurance provided under a single policy). The Company also writes
insurance, particularly for U.S. insureds, on an excess and surplus lines basis.
The Company writes its core casualty contracts predominantly on a
claims-made basis, under which it is liable only for those claims made during
the contract period (generally subject to a limited discovery period), rather
than on an occurrence basis, in which the insurer is liable for losses occurring
during or attributable to the contract period, no matter when reported. This
approach benefits the Company by permitting a faster and more accurate
evaluation of its probable ultimate losses under a contract, which the Company
can utilize in negotiating the terms and pricing of similar new business and of
renewal policies.
6
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CASUALTY. The core casualty lines written by the Company are professional
indemnity and single industry and/or single state third-party risks coverages.
The Company writes these lines both on a treaty and a facultative reinsurance
basis as well as on a primary insurance basis. The Company's focus on these
lines is a natural outgrowth of its underwriting philosophy, in that these
coverages are predominantly written on a claims-made basis for accounts with
clearly-defined exposure parameters, which generally permit more accurate
pricing than do accounts which consist of casualty exposures arising in a number
of different geographic locations or across a range of industries. Casualty
gross premiums written totaled $111.5 million, or 68% of international premiums
in 1998.
The Company's core casualty treaty book is the largest component of its
total international book of business. The significance of the casualty treaty
book has increased since the late 1970's, following the widespread establishment
and growth of mutual and captive insurers which provide insurance for single
state groups of doctors, lawyers and other professionals in a single industry.
Such mutual and captive buyers of reinsurance have been attracted to the London
Market because its underwriters have provided a flexible underwriting approach
where there is homogeneity of risk.
The largest component of the Company's casualty treaty reinsurance business
is its professional indemnity line, which includes primarily medical malpractice
and hospital indemnity reinsurance business. The Company's experience and
reputation in the U.S. in the general area of medical malpractice has enabled it
to develop successfully similar lines of U.S. business for, among others,
lawyers, architects, engineers, accountants and insurance agents as well as a
few specialized sources for D&O business. The insured risks under these treaties
are typically associations of small professional partnerships, many of which
have memberships that are limited to a specific state or other defined
geographical areas in the United States.
The main component of the Company's casualty direct and facultative business
is U.S. primary casualty business underwritten on a surplus lines basis through
carefully selected managing general agents. Such business consists of insurance
for small commercial risks, such as restaurants, other commercial properties and
small contractors, as well as a number of individual programs.
PROPERTY. The Company's property reinsurance and insurance business totaled
$33.9 million, or 21% of international gross premiums written in 1998. The
volume and type of property business written varies from year to year depending
on the state of the market in the United States, London and elsewhere.
The Company's property treaty book consists of catastrophe and general risk
coverages. These coverages are primarily written on an excess of loss basis,
although some proportional treaties are also written where historical results
and the quality of information provided by the reinsured justify doing so. This
book covers both U.S. and international business. This book consists of
approximately half each U.S. exposures and international exposures,
predominately in the U.K. and Northern Europe and Japan (excluding earthquake).
In its underwriting, the Company seeks to limit its maximum exposure to any
catastrophe in defined geographic areas of the United States and specific
catastrophe regions elsewhere.
Property direct and facultative business comprises individual non-marine
property and automobile physical damage risks, mainly written on an excess and
surplus lines basis through selected managing general agents. The vast majority
of this business originates from North America.
LLOYDS. The Company's majority investment in Jago Capital Limited ("JCL"),
which provided 16% of capacity for Lloyd's Non-Marine Syndicate 205, produced
gross premiums written of $24.3 million in 1998. JCL's share of Syndicate 205's
1999 capacity has been increased to 26%.
In 1998, the Company made a significant minority investment in MarketForm, a
London Market agency specializing in medical professional liability insurance.
The Company formed Lloyd's Syndicate 2468, in which it has a 95% participation,
to underwrite such insurance in 1999.
DISTRIBUTION
The Company generally writes its business in the London Market. Treaty and
facultative reinsurance business originating in the United States is typically
placed for an insured or reinsured by one or more U.S. reinsurance
7
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intermediaries or brokers and then through a London Market broker to the
Company. Direct insurance business is also generally placed by London Market
brokers, who in turn have received the business directly from a U.S. broker.
Non-United States business is also generally placed by local country brokers
through London Market brokers to the Company. Recently, a small percentage of
European business has been placed with the Company directly by European brokers.
In addition, the Company now provides motor liability insurance in Holland which
has been produced through telemarketing by a Dutch associate, Polis Direct BV.
The Company devotes considerable effort to maintaining and enhancing its
relationships with key London Market and United States brokers, and management
considers relationships with such brokers to be strong. Relationships with
United States brokers are important because certain U.S. brokers control the
placement of material amounts of business in the London Market in the Company's
specialty casualty lines. Further, U.S. brokers frequently work with multiple
London Market brokers and can influence the ultimate placement of business. As
regards U.S. excess of loss business placed by London Market brokers, total
commissions received by the U.S. and London brokers together are generally about
15%. Total commissions for direct and facultative business are up to 25% of
gross premiums and those for primary business are up to 30% of gross premiums.
UNDERWRITING
The Company believes that its core professional indemnity and single
industry and/or single state risks businesses require a high level of technical
underwriting skills and judgment in order to price risks appropriately. Members
of the Company's underwriting team have an average of 15 years' experience as
underwriters with the Company. Before joining the Company, most of them were
London Market brokers, an experience that has given them an understanding of the
business acquisition process from both the broker's and the underwriter's
perspective.
A key element of the Company's strategy is its ability, primarily as a
result of the length of service and reputation of its underwriting team in the
London Market, to be one of a limited number of reinsurers involved in the
negotiation of the terms and pricing of nearly all of the specialty casualty
business in which it participates, thereby functioning, in London Market
terminology, as a "lead". Such involvement allows the Company to gain the most
advantage from its underwriting expertise. As a result, the Company is presented
with opportunities to participate in a high percentage of the reinsurance
programs in its specialized lines of business which are brought to the London
Market. In addition, the Company also has the opportunity to subscribe for a
larger percentage of each of such risks than reinsurers without such expertise.
The Company generally seeks to write the lower or middle layers of excess of
loss reinsurance coverage, which have historically demonstrated more predictable
loss experience and therefore permit more accurate pricing. In addition,
management believes that these lower or middle layers tend to receive a greater
portion of the premium in relation to the risk assumed. In its direct casualty
insurance business, the Company generally emphasizes the writing of coverage
above a significant self-retention by the insured party. The Company also
generally seeks to write business in an amount not exceeding two or three times
the attachment point, since management believes that larger multiples are less
predictable and in many cases do not provide sufficient extra premium for the
greater exposure.
CLAIMS
In accordance with standard London Market contract conditions, the majority
of claims are made on the Company through the London Market broker that placed
the business. The London Market broker acts as custodian of the claims files and
notifies the Company, and other participants, of claims that have been filed,
either by way of electronic loss advice or by direct visit to the Company's
claims department. In the London Market, it is standard practice for the lead
underwriter on a particular risk to advise the other underwriters on the
handling of the claim, including whether to pursue settlement negotiations or
litigation. However, each following reinsurer retains the right to reject such
advice and pursue alternative approaches.
8
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RESERVES
The Company establishes policy liabilities based on its estimates of the
future amounts necessary to pay claims and expenses associated with
investigation and settlement of claims. These estimates include two components:
case reserves and non-case reserves. Case reserves are estimates of future
losses and loss adjustment expenses (LAE) for reported claims. Non-case
reserves, which include a provision for losses that have occurred but have not
been reported to the Company as well as development on reported claims, are the
difference between (i) the sum of case reserves and paid losses and (ii)
actuarially estimated ultimate incurred losses. Ultimate incurred losses are an
actuarially determined estimate of total losses and LAE necessary for the
ultimate settlement of all reported claims and incurred but not reported claims
including amounts already paid.
The process of estimating reserves is inherently uncertain and involves an
evaluation of many variables including social and economic conditions. A
significant period of time may elapse between the report of a claim to the
Company and the ultimate settlement of the claim. The inherent uncertainty of
establishing reserves is relatively greater for companies writing long-tail
casualty insurance, including medical malpractice insurance, due primarily to
the longer-term nature of the resolution of claims. There can be no assurance
that the ultimate liability of the Company will not exceed the amounts reserved.
The following tables present the development of liability for property and
casualty reserves net of and before reinsurance for the calendar years 1989
through 1998. The amounts shown for each year on the top line of the table
represent the Company's estimate of its liability for future payments of losses
and LAE as of the date as originally reported. The upper portion of the table
represents a re-estimate of the original liability at the end of each succeeding
period, followed by a line indicating the change from the original estimate to
the most current re-estimate. The lower portion of the table represents the
cumulative amount of the original liability that has been paid in the succeeding
years.
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ANALYSIS OF NET LOSS AND LOSS ADJUSTMENT EXPENSE RESERVE DEVELOPMENT
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------------------------------------------------------
1989 1990 1991 1992 1993 1994 1995 1996
-------- -------- -------- -------- ---------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Liability for unpaid losses
and LAE; gross................ $1,008,114 $993,957 $1,182,431 $1,141,697
Deduct reinsurance
receivables................... 310,190 292,751 263,934 241,270
---------- -------- ---------- ----------
Liability for unpaid losses and
LAE, net...................... $511,451 $547,993 $616,003 $644,881 697,924 701,206 918,497 900,427
Liability re-estimated as of:
One year later................ 528,216 541,904 616,880 645,937 695,113 699,294 908,855 886,742
Two years later............... 524,397 552,882 606,952 641,382 694,590 693,639 897,436 905,397
Three years later............. 511,236 538,867 591,608 634,813 680,453 658,184 892,263
Four years later.............. 499,258 524,345 593,996 614,590 645,797 645,379
Five years later.............. 494,777 524,664 576,630 586,693 641,988
Six years later............... 501,074 515,775 562,064 584,379
Seven years later............. 497,157 502,340 565,831
Eight years later............. 487,165 506,336
Nine years later.............. 491,300
-------- -------- -------- -------- ---------- -------- ---------- ----------
Cumulative redundancy
(deficiency), net............. $ 20,151 $ 41,657 $ 50,172 $ 60,502 $ 55,936 $ 55,827 $ 26,234 $ (4,970)
======== ======== ======== ======== ========== ======== ========== ==========
Cumulative net liability paid as
of:
One year later................ $106,555 $103,849 $145,215 $123,719 $ 176,319 $162,844 $ 204,693 $ 228,561
Two years later............... 167,806 201,336 235,776 251,331 309,933 320,828 385,497 416,915
Three years later............. 257,924 264,043 323,344 349,441 427,157 356,676 519,638
Four years later.............. 305,337 331,625 394,961 416,852 428,801 434,506
Five years later.............. 352,998 381,599 445,555 412,083 489,069
Six years later............... 386,223 418,146 424,741 457,215
Seven years later............. 413,270 394,665 458,498
Eight years later............. 390,466 414,743
Nine years later.............. 402,889
<CAPTION>
DECEMBER 31,
-----------------------
1997 1998
---------- ----------
<S> <C> <C>
Liability for unpaid losses
and LAE; gross................ $1,115,342 $1,156,817
Deduct reinsurance
receivables................... 263,401 293,284
---------- ----------
Liability for unpaid losses and
LAE, net...................... 851,941 863,533
Liability re-estimated as of:
One year later................ 873,232
Two years later...............
Three years later.............
Four years later..............
Five years later..............
Six years later...............
Seven years later.............
Eight years later.............
Nine years later..............
----------
Cumulative redundancy
(deficiency), net............. $ (21,291)
==========
Cumulative net liability paid as
of:
One year later................ $ 251,496
Two years later...............
Three years later.............
Four years later..............
Five years later..............
Six years later...............
Seven years later.............
Eight years later.............
Nine years later..............
</TABLE>
10
<PAGE>
ANALYSIS OF GROSS LOSS AND LOSS ADJUSTMENT EXPENSE RESERVE DEVELOPMENT
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------------------------------------------------
1993 1994 1995 1996 1997 1998
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Liability for unpaid
losses and LAE,
gross............... $1,008,114 $ 993,957 $1,182,431 $1,141,697 $1,115,342 $1,156,817
Liability
re-estimated as of:
One year later..... 994,427 1,030,558 1,163,423 1,130,976 1,159,656
Two years later.... 1,034,565 1,015,670 1,148,545 1,157,271
Three years
later............ 1,019,160 972,955 1,152,790
Four years later... 979,057 971,098
Five years later... 984,271
---------- ---------- ---------- ---------- ----------
Cumulative redundancy
(deficiency),
gross............... $ 23,843 $ 22,859 $ 29,641 $ (15,574) $ (44,314)
========== ========== ========== ========== ==========
Cumulative gross
liability paid as
of:
One year later..... $ 212,816 $ 210,685 $ 256,518 $ 268,771 $ 287,632
Two years later.... 390,049 411,583 463,042 490,995
Three years
later............ 549,149 458,046 622,030
Four years later... 556,409 559,059
Five years later... 637,655
</TABLE>
In evaluating the information in the tables above, it should be noted that
each column includes the effects of changes in amounts for prior periods. The
tables do not present accident year or policy year development data. Conditions
and trends that have affected the development of liabilities in the past may not
necessarily occur in the future. Accordingly, it may not be appropriate to
extrapolate future redundancies or deficiencies based on these tables. In 1998,
during the third quarter the Company strengthened loss and LAE reserves on its
domestic and international insurance segments. The strengthening was confined to
three specific areas of operations: long-term care and a disparate group of
clinic accounts for the domestic insurance segment and asbestos exposures in the
international insurance segment. The reserve deficiencies indicated in the 1996
and 1997 columns are principally the result of these actions. See Note 7 to the
Consolidated Financial Statements for additional information on incurred and
paid losses and LAE.
The following table presents a reconciliation of reserves of the Company's
property and casualty operations in accordance with statutory accounting
practices ("SAP") with reserves reported in the consolidated financial
statements prepared in accordance with generally accepted accounting principles
("GAAP") as of December 31, 1998.
RECONCILIATION OF SAP RESERVES WITH GAAP RESERVES
(IN THOUSANDS)
<TABLE>
<S> <C>
Liability for losses and LAE on a SAP basis................. $530,733
Add:
Unionamerica.............................................. 309,404
Other..................................................... 23,396
--------
Liability for losses and LAE on a GAAP basis (net of
reinsurance receivables of $293,284)....................... $863,533
========
</TABLE>
11
<PAGE>
CEDED REINSURANCE
Insurance companies purchase reinsurance to limit risk on individual
exposures, protect against catastrophic losses and increase their capacity to
write insurance. Reinsurance involves an insurance company transferring, or
ceding, all or a portion of its exposure on insurance to a reinsurer. The
reinsurer assumes the exposure in return for a portion of the premium received
by the insurance company. Reinsurance does not discharge the insurer from its
obligation to its insureds. If the reinsurer fails to meet its obligations, the
ceding insurer remains liable to pay the insured.
The Company cedes a material amount of its business to reinsurers to spread
risk and limit loss per exposure. Management seeks to mitigate exposure to
adverse reinsurance pricing conditions and to limit its credit risk by
maintaining a diversity of reinsurers.
DOMESTIC INSURANCE OPERATIONS
For its hospital medical malpractice insurance business, the Company has
reinsurance capacity to write policy limits to $51.0 million. The Company has
reinsurance for all losses in excess of $3.0 million per occurrence subject to
an $8.0 million aggregate annual deductible. The Company provides for its
estimated liability relating to this deductible in loss reserves. For its
physician business, the Company has reinsurance capacity to write policy limits
up to $5.0 million per claim with a $7.0 million annual aggregate limit. The
Company has reinsurance for losses in excess of $500,000 per claim and $750,000
for occurrences involving more than one claim. For its group life insurance
business, the Company has reinsurance for losses in excess of $50,000 per life
and for excess medical expense business, the Company cedes 70% of the premiums
and losses for policy limits of $1.0 million per occurrence and $2.0 million in
the aggregate.
The Company's Vetting Committee evaluates the credit risk associated with
every reinsurer and reports its findings to the Audit Committee of the Board of
Directors. The Board of Directors has substantially increased the Company's
creditworthiness standards for reinsurers over the past several years. For new
reinsurers, the standards require minimum capital and surplus of $125.0 million
and one of the following ratings: at least A- or better from A.M. Best, Claims
Paying Ability rating from Standard & Poor's of at least A or a S&P Insurance
Solvency International rating of at least A.
INTERNATIONAL INSURANCE OPERATIONS
In 1998 and 1999 to date, the Company has limited its maximum exposure to
any one casualty loss (after the benefit of any automatic or individual
facultative reinsurance but before the benefit of treaty reinsurance) in respect
of any single casualty reinsurance or insurance cedant by line of business to
$2.0 million. In addition, the Company purchases treaty reinsurance in order to
reduce its exposure both to individual insured losses and to multiple insured
losses arising out of one loss event. The reinsurance program currently
purchased provides a maximum of $9.675 million of coverage exceeding a $325,000
retention by the Company for 1998, and $9.65 million exceeding a retention of
$350,000 by the Company for 1999 for each insured loss or loss event. This
program is purchased in several layers, with such layers having varied maximum
recoverable provisions.
In its property business, the Company seeks to limit its maximum exposure
before reinsurance both on any one risk and in any one geographic region. In
1998, the maximum gross exposure (except for trucking terminal automobile fire
theft and collision ("FTC") business) on any one direct or facultative property
risk is limited to $500,000. In the case of trucking terminal FTC business, the
maximum gross exposure for any one terminal is $1.0 million.
The Company purchases catastrophe reinsurance protecting its U.S. direct and
facultative property binding authority account. For 1998 and 1999, the Company
purchased two layers of coverage, collectively totaling a maximum of
$3.0 million of protection in excess of a $1.0 million retention by the Company
on an each loss basis, with each layer having one reinstatement. Within this
band of coverage, the Company retains net an amount of $150,000 in co-
reinsurance.
In addition, the Company also purchases catastrophe reinsurance protecting
its entire U.S. property account (including property treaty as well as direct
and facultative business). For 1998 and 1999, the Company purchased such
catastrophe coverage in several layers, collectively totaling a maximum of
$8.3 million of protection in excess of a retention of $1.5 million on an each
loss basis. Within this band of coverage the Company retains net an amount of
12
<PAGE>
$340,000 in co-reinsurance. Each such layer purchased permits a maximum of one
reinstatement. Furthermore, the Company protects itself against frequency of
catastrophe loss by buying additional coverage against the possibility of it
experiencing a number of losses retained under its $1.5 million retention under
the Company's principal catastrophe reinsurance coverage described above. This
"frequency of loss" coverage provides the Company with: (a) $500,000 of coverage
above a $625,000 retention on each loss, but only after an aggregate of $750,000
in losses to the layer between $500,000 and $1.0 million have been borne by the
Company; and (b) $1.0 million of coverage above a $1.0 million retention on each
loss, but only after an aggregate of $1.5 million in losses to the layer between
$1.0 million and $2.0 million have been borne by the Company. The only change to
the above for 1999 relates to the "frequency of loss" coverage. The aggregate
amount to be borne by the Company under (a) has been amended from $625,000 to
$500,000 in losses to the layer between $500,000 and $1.0 million. Likewise
under (b) the aggregate amount to be borne by the Company has been amended from
$1.5 million to $1.0 million in losses to the layer between $1.0 million and
$2.0 million. Each of the "frequency of loss" protections has one reinstatement.
The Company estimates that its maximum gross exposure in respect of all of
its property coverages with respect to a catastrophe in any one of four U.S.
geographic regions (Northeast, Southeast, West Coast and Mid-West) is
approximately $22.0 million before reinsurance, reinstatement premiums and tax
benefits, which management believes the Company would not experience except in
connection with a catastrophe producing total insured losses in excess of those
produced by Hurricane Andrew (which produced the largest insured loss in
history). Therefore, the Company estimates that its maximum net exposure to any
such catastrophe would be significantly less than $22.0 million, since it would
have $10.8 million in catastrophe reinsurance recoverables, in addition to any
reinstatement premiums. The Company would also receive tax benefits to it
arising from the loss. The Company's estimate of its maximum gross exposure to a
catastrophe in respect of all its U.S. property coverages was derived by adding
together three components: (a) the total limits exposed in its catastrophe
treaty business, subject to an adjustment to take account of nationwide treaty
accounts; (b) for property non-catastrophe treaty business, a conservative
proportion, based on the Company's experience, of the total limits exposed; and
(c) for direct and facultative business, an amount representing the largest
exposure by geographic region, taking into account likely loss based on
prevailing type of property construction and spread of risk. International,
non-U.S. property risk is managed by using carefully controlled aggregate
exposure limits for each designated geographical zone. The maximum aggregate
exposure is monitored carefully to ensure that, despite its minimal reinsurance
protection, it will not yield a catastrophe loss of more than $10.8 million. The
Company would, however, receive the tax benefits arising from such a loss.
The Company's Security Committee reviews the credit risk associated with
each reinsurer and reports its findings to the Audit Committee. In conducting
its evaluation of reinsurers, the Committee considers their capitalization,
liquidity, operating and financial leverage as well as other factors.
The following table sets forth ceded premiums for 1998 to principal
reinsurers and retrocessionaires participating in the Company's reinsurance and
retrocession program:
CEDED PREMIUMS
(IN THOUSANDS)
<TABLE>
<CAPTION>
CEDED A.M. BEST
PREMIUMS RATING
-------- ---------
<S> <C> <C>
Reinsurer or retrocessionaire
- ----------------------------
Lloyd's Underwriters..................................... $ 14,334 A
Hannover Reinsurance Company............................. 12,702 A+
CNA Reinsurance Company Limited.......................... 5,694 A
ReliaStar Life Insurance Company......................... 4,710 A+
National Reinsurance Company............................. 4,650 A+
All others............................................... 43,762
--------
Total.................................................... $ 85,852
========
</TABLE>
13
<PAGE>
The following table sets forth the Company's principal reinsurers and
retrocessionaires and reinsurance receivables with respect to paid and unpaid
losses and LAE as of December 31, 1998.
REINSURANCE RECEIVABLES
(IN THOUSANDS)
<TABLE>
<CAPTION>
REINSURANCE A.M. BEST
RECEIVABLES RATING
----------- ---------
<S> <C> <C>
Reinsurer or retrocessionaire
- ----------------------------
Lloyd's Underwriters.................................... $ 55,656 A
Hannover Reinsurance Company............................ 31,748 A+
National Reinsurance Company............................ 26,738 A+
CIGNA Reinsurance Company............................... 23,567 B+
Munich Reinsurance Company.............................. 18,583 A++
All others 180,226
--------
Total................................................... $336,518
========
</TABLE>
INVESTMENTS
The Company invests principally in investment grade fixed income securities
and preferred stocks. The Investment Committee of the Company's Board of
Directors meets quarterly with management to set investment policy and review
performance of internal and external investment managers. The Company's Board of
Directors approves investment policy which currently authorizes a maximum
average effective duration of six years. The Company's investment managers
select specific bond issues within these guidelines. The investment policy
limits holdings in private placements, common stocks, preferred stocks and
international stocks and bonds, cumulatively, to 5% of invested assets.
In general, the investment policy of the Company is to maximize after-tax
total return, subject to constraints on investment quality, maturity and
liquidity. The Company's investment policy establishes a range for the
appropriate allocation among asset classes. The precise allocation varies
depending on an evaluation of the economic environment and on the Company's tax
position. As of December 31, 1998, the securities in the Company's fixed income
portfolio had an average rating of Aa3 as rated by Moody's Investors Services,
Inc. ("Moody's"). Standard & Poor's Corporation ("S&P"), Duff & Phelps Inc.
("D&P") or Fitch Investors Service Inc. ("Fitch") ratings are used for
securities not rated by Moody's.
All fixed maturity and preferred stock securities are classified as
available-for-sale and carried at fair value. For these securities, temporary
unrealized gains and losses, net of tax, are reported in stockholders' equity,
and have no effect on net income.
The Company's investment policy emphasizes quality and liquidity. The
Company's current investment objective is to maximize current yield while
preserving principal and maintaining liquidity. At December 31, 1998, 89% of the
Company's $1.2 billion fixed maturity investment portfolio was invested in bonds
rated "A" or higher by S&P or Moody's or issued by governmental bodies or
agencies, and 71% was invested in bonds rated "AA" or higher or issued by such
bodies or agencies. The Company's policy continues to be to attempt to match the
durations and currency mix of its investments as closely as possible with those
of its obligations. See Note 4 to the Consolidated Financial Statements.
COMPETITION
The Company competes with monoline medical malpractice insurance companies,
specialty reinsurers, large multi-line property and casualty insurers and
reinsurers and providers of risk management and consulting services. The
insurance and reinsurance businesses are highly competitive and in a prolonged
soft market due in part to the level of capital available in the industry. Many
of the Company's competitors have substantially greater financial resources than
the Company and there are many companies that provide risk management and other
services that the Company provides. Among other things, competition may take the
form of lower prices, broader coverage, greater product
14
<PAGE>
flexibility or higher quality service. However, the Company believes that its
particular combination of insurance and reinsurance, risk management services
involving clinical risk management, consulting services, direct access to the
client organization, experienced staff and long-term relationships with its
clients provide it with a competitive advantage in its chosen markets.
REGULATION
DOMESTIC INSURANCE OPERATIONS
The Company's domestic insurance subsidiaries (ACIC, Health Providers
Insurance Company and American Continental Life Insurance Company, collectively,
the "Domestic Insurance Subsidiaries") are subject to the insurance laws and
regulations in each state in which they are licensed to do business, and their
states of domicile which include Missouri and Illinois. Each of the states in
which the Company's Domestic Insurance Subsidiaries are licensed has the duty
and obligation to impose premium taxes and other fees and to regulate rates,
financial data and major business transactions. Also, the subsidiaries must pass
certain solvency tests and meet minimum capital and surplus requirements in each
jurisdiction where they are licensed. Statutory financial statements must be
filed on a quarterly basis and insurance reserves must be certified by an
actuary on an annual basis. The Domestic Insurance Subsidiaries are regulated
with regard to the amount of insurance they may write based upon the amount of
their respective surpluses.
As part of a holding company system, the Domestic Insurance Subsidiaries are
subject to the reporting requirements of their respective states, which require
them to file an annual Holding Company System Registration Statement (Form B).
Form B is required by Missouri, Illinois and several other jurisdictions where
the Insurance Subsidiaries are licensed. Form B must include relevant
information concerning the history, capital structure and significant
transactions of each of the Insurance Subsidiaries, their parent and affiliates.
Pertinent biographical information regarding each director and officer must also
be provided. Transfers of assets and significant transactions between the
Company's subsidiaries within the holding company system also require regulatory
approval.
Every insurance company is subject to a periodic examination under the
authority of the insurance commissioner of its state of domicile. Any other
state interested in participating in a periodic examination may do so. Various
states also conduct "market conduct examinations" which are periodic,
unscheduled examinations designed to monitor the compliance with state laws and
regulations concerning the filing of rates and forms.
The Domestic Insurance Subsidiaries are required to participate in the
guaranty funds of states in which they are licensed to do business. Assessments
are made by the states to pay amounts to policyholders who were insured by
companies which have become insolvent and are placed into liquidation either
voluntarily or involuntarily by the insurance commissioner. These assessments
vary from state to state and are dependent upon the amount of the insolvencies
in each state during a given year.
The Missouri and Illinois insurance laws and regulations impose restrictions
on the amount of dividends that may be paid to stockholders by insurance
companies domiciled in the respective states without prior approval of the
Director of Insurance of such states. Collectively in 1999, dividend payments by
the Domestic Insurance Subsidiaries to the Company without prior regulatory
approval may not exceed $19.0 million.
The Missouri and Illinois insurance laws and regulations impose a risk-based
capital requirement for insurance companies that attempts to measure statutory
capital and surplus needs based on the risks in a company's insurance business
and investment portfolio. As of December 31, 1998, the surplus of each of the
Domestic Insurance Subsidiaries exceeded their respective risk-based capital
requirement under the standards.
The National Association of Insurance Commissioners ("NAIC") annually
calculates a number of financial ratios to assist regulators in monitoring the
financial condition of insurance companies. In 1998, the ratios for ACIC, the
Company's principal domestic insurance subsidiary fell within the "normal" range
for all of the ratios.
INTERNATIONAL INSURANCE OPERATIONS
AUTHORIZATION TO TRANSACT BUSINESS. Except as permitted under European Union
law, no person may carry on an insurance business in the United Kingdom unless
authorized to do so under the Insurance Companies Act 1982, as
15
<PAGE>
amended from time to time (the "1982 Act"). Authorization is obtained from HM
Treasury Insurance Directorate ("HMTID"). The HMTID, in deciding whether to
grant authorization, has broad discretion to act in the public interest and is
required to determine whether the applicant is a fit and proper entity to be
engaged in insurance business and, in particular, whether it has, or has
available to it, adequate knowledge and expertise and whether the criteria of
sound and prudent management will be fulfilled with respect to the applicant. In
connection with a company's authorization, the HMTID may impose such conditions
as it sees fit relating to the operation of the Company and the writing of
insurance business. These are specific to each insurance company and are set out
in a "Notice of Requirements." In addition, companies incorporated in the U.K.
must comply with certain provisions of the Companies Act 1985 as amended from
time to time (the "Companies Act") requiring them to file and provide their
shareholders with audited financial statements and related reports by their
directors.
EXCESS AND SURPLUS LINES INSURANCE IN THE UNITED STATES. Unionamerica is an
approved or eligible excess and surplus lines insurer in 46 states, as well as
in the District of Colombia, the Commonwealth of Puerto Rico and the U.S. Virgin
Islands. In order to maintain such approvals and eligibilities, Unionamerica has
established a U.S. trust fund for the benefit of U.S. surplus lines
policyholders.
REINSURANCE BUSINESS IN THE UNITED STATES. To date, Unionamerica has been
granted trusteed or accredited reinsurer status in 47 U.S. States and the
District of Colombia. Accreditation makes it more convenient for U.S. reinsureds
to do business with Unionamerica, since it allows reinsureds to take credit for
the reinsurance in their statutory financial statements without withholding
funds or requiring Unionamerica to provide letters of credit. The Company has
obtained such status in most of the states in which its significant U.S.
reinsureds are organized and is continuing to seek such a status in all other
U.S. jurisdictions in which the law would permit accreditation of Unionamerica.
Management believes that accreditation provides a marketing advantage with U.S.
clients by emphasizing Unionamerica's commitment to the U.S. market and by
enhancing Unionamerica's reputation for financial stability. As of December 31,
1998, Unionamerica's U.S. Reinsurance Trust for the benefit of its U.S. cedants
is funded with trusteed assets plus accrued interest of $273.2 million. In
addition, as of December 31, 1998, the Unionamerica provided letters of credit
totaling $64.4 million to U.S. cedants on business not currently covered by the
Trust.
UNITED KINGDOM TAX TREATMENT
Unionamerica is resident in the United Kingdom for the purposes of United
Kingdom taxation and is subject to United Kingdom corporation tax on its
profits. Advance corporation tax ("ACT") is payable in respect of dividends and
other distributions made by Unionamerica. ACT which is paid by Unionamerica on
dividends and other distributions may, in certain circumstances and subject to
certain limits and restrictions, be offset against its liability for United
Kingdom corporation tax.
EMPLOYEES
As of December 31, 1998, the Company employed 734 persons. None of its
employees are represented by a labor union, and the Company believes that its
employee relations are excellent.
ITEM 2. PROPERTIES
The Company leases approximately 230,000 square feet of office space
throughout the United States and a suite in the London Underwriting Centre in
the United Kingdom. The Company's major leasehold obligation relates to its
corporate office located in Deerfield, Illinois. The Deerfield, Illinois office
space consists of approximately 135,000 square feet. The lease is for a term of
fifteen years expiring June 30, 2006. The Company has the right to terminate
this lease in 2001 and 2002 under certain circumstances. In 2001, the Company
has the option of renting an additional 15,000 square feet in Deerfield,
Illinois. The Company's principal regional and subsidiary offices are in
Atlanta, Georgia; San Francisco, California; Independence, Missouri; and
Washington, D.C.
ITEM 3. LEGAL PROCEEDINGS
The Company is subject to litigation and arbitration in the normal course of
its business. The Company does not believe that any pending litigation or
arbitration will have a material adverse effect on its consolidated financial
position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the
fourth quarter of 1998.
16
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded on the New York Stock Exchange under
the symbol "MMI". There were 518 holders of record as of March 1, 1999. The
following table sets forth the quarterly high and low daily closing prices
during 1998 and 1997.
<TABLE>
<CAPTION>
HIGH LOW
------------- -------------
<S> <C> <C>
1998
First Quarter............................................. $ 26 $ 23 7/16
Second Quarter............................................ 24 3/4 20 3/4
Third Quarter............................................. 23 1/4 15 1/2
Fourth Quarter............................................ 19 1/16 13 7/8
1997
First Quarter............................................. $ 32 1/8 $ 22 3/4
Second Quarter............................................ 27 1/2 21
Third Quarter............................................. 27 11/16 24 5/8
Fourth Quarter............................................ 26 15/16 23 3/4
</TABLE>
On December 31, 1998 the closing price of the Company's Common Stock was
$16 3/4.
In 1998, the Company declared quarterly dividends of $0.08 per share,
compared to quarterly dividends of $0.07 per share in 1997. See Notes 6 and 8 to
the Consolidated Financial Statements for a description of restrictions on the
ability of the registrant's subsidiaries to transfer funds to the registrant in
the form of dividends.
17
<PAGE>
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following selected financial data are derived from the Company's
consolidated financial statements. The data should be read in conjunction with
the consolidated financial statements, related notes and other financial
information included elsewhere in this report.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------
1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND RATIOS)
<S> <C> <C> <C> <C> <C>
PREMIUMS AND INCOME DATA (1):
Gross premiums written............. $ 439,021 $ 372,173 $ 357,718 $ 366,802 $ 323,071
Net premiums earned (2)............ 346,735 287,497 281,391 272,903 267,976
Consulting and fee income.......... 44,485 44,862 32,314 21,544 18,587
Net investment income.............. 76,556 75,490 73,681 62,936 51,150
Net realized gains (losses) on
investments....................... 2,678 2,182 (890) 1,692 (35,261)
Total revenues (2)................. 470,454 410,031 386,496 359,075 302,452
Income from continuing operations
(3)............................... 14,060 36,897 46,490 35,294 6,983
Per share (5).................... 0.73 1.90 2.57 2.62 0.55
Operating income (4)(6)............ 12,320 35,487 47,086 34,187 30,550
Per share (5).................... 0.64 1.83 2.60 2.54 2.42
Cash dividends per common share.... 0.32 0.22 0.17 0.15 0.11
Weighted average number of common
and common equivalent shares
(5)............................... 19,385 19,396 18,087 13,446 12,634
BALANCE SHEET DATA (AT END OF YEAR)
(1):
Investments........................ $1,259,422 $1,230,800 $1,212,556 $1,166,825 $ 849,049
Total assets....................... 1,959,409 1,884,067 1,804,421 1,741,758 1,401,315
Loss and loss adjustment expense
reserves.......................... 1,176,073 1,125,146 1,149,918 1,199,870 1,002,839
Long-term notes payable............ -- -- 93,000 89,000 97,000
Mandatorily redeemable preferred
capital securities................ 118,817 118,724 -- -- 16,899
Unrealized gains (losses) on
investments....................... 29,147 24,332 13,456 22,709 (9,470)
Stockholders' equity............... 412,928 399,002 355,166 272,266 136,952
Book value per share............... 21.67 21.16 19.01 16.39 11.04
GAAP RATIOS (7)(8):
Loss ratio......................... 84.1% 72.8% 74.2% 75.6% 74.8%
Expense ratio...................... 31.7% 38.3% 31.0% 29.4% 26.7%
---------- ---------- ---------- ---------- ----------
Combined ratio..................... 115.8% 111.1% 105.2% 105.0% 101.5%
========== ========== ========== ========== ==========
</TABLE>
- ------------------------
(1) The Company acquired Unionamerica Holdings plc in December 1997 in a
transaction accounted for as a pooling of interests. As such, the
consolidated financial statements include Unionamerica's balance sheet and
results of operations for all periods presented.
(2) The Company reclassified certain premiums related to Unionamerica in 1997.
There was no effect on pre-tax income. See Note 14 to the Consolidated
Financial Statements.
(3) Income from continuing operations excludes a loss from discontinued
operations, net of tax of $2,696,000 in 1998, $1,830,000 in 1997, $6,370,000
in 1996, $1,163,000 in 1995 and $185,000 in 1994, related to former
affiliates. See Note 15 to the Consolidated Financial Statements.
(4) Operating income represents income from continuing operations before
extraordinary losses of $707,000 in 1997 and $4,737,000 in 1995 and
after-tax realized investments gains (losses) of $1,740,000 in 1998,
$1,410,000 in 1997, $(596,000) in 1996, $1,106,000 in 1995 and $(23,567,000)
in 1994.
18
<PAGE>
(5) The Company adopted a new standard on earnings per share in 1997. All
earnings per share amounts have been restated to conform to the new
requirements. Per share and weighted average shares are presented on a
diluted basis.
(6) In 1997, operating income includes a charge, net of tax, of $8,937,000 or
$.46 per share related to the acquisition of Unionamerica.
(7) GAAP ratios have been derived from the results of the Company's domestic and
international insurance segments. The 1997 expense ratio includes 3.4
percentage points related to expenses incurred in connection with the
Unionamerica acquisition.
(8) The expense ratio for 1997 and prior periods has been restated to exclude
interest expense, consistent with the 1998 calculation.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion of the results of operations and financial
condition of the Company should be read in conjunction with the Company's
financial statements and notes thereto included elsewhere in this report.
RESULTS OF OPERATIONS
1998 COMPARED TO 1997
REVENUES. Gross premiums written increased by 17.9% to $439.0 million in
1998 from $372.2 million in 1997. Medical malpractice gross premiums written
increased 18.4% to $237.3 million in 1998 from $200.5 million. International
gross premiums written increased 8.6% to $165.1 million in 1998 from $152.0
million in 1997 and other gross premiums written increased 86.3% to $36.7
million in 1998 from $19.7 million in 1997. Net premiums written increased by
15.6% to $354.8 million in 1998 from $306.9 million in 1997.
Net premiums earned increased by 20.6% to $346.7 million in 1998 from
$287.5 million in 1997. Medical malpractice net premiums earned increased by
28.2% to $197.5 million in 1998 from $154.1 million in 1997. International net
premiums earned increased 6.5% to $136.2 million from $127.9 million due to
increased premiums from Unionamerica's interest in a Lloyd's underwriting
syndicate and other net premiums earned increased 136.4% to $13.0 million from
$5.5 million. The effect of one time premiums, such as prior acts coverage for
new insureds, contributed to the increase in medical malpractice premium growth
in 1998. During 1998, medical malpractice premiums earned included $35.8 million
in such one time premiums, an increase of $28.8 million from 1997.
Consulting and fee income was relatively unchanged at $44.5 million in 1998
compared to $44.9 million in 1997. Consulting and fee income as a percentage of
net premiums earned and consulting and fee income was 11.4% in 1998 compared to
13.5% in 1997.
Net investment income increased by 1.5% to $76.6 million in 1998 from $75.5
million in 1997. A modest increase in invested assets was partly offset by a
slight decrease in portfolio yield. The Company had net realized gains on
investments of $2.7 million in 1998 compared to $2.2 million in 1997.
LOSSES AND EXPENSES. Losses and loss adjustment expenses ("LAE") increased
by 39.2% to $291.5 million in 1998 from $209.4 million in 1997. Medical
malpractice liability losses and LAE increased by 50.0% to $193.3 million in
1998 from $128.9 million in 1997. Medical malpractice liability losses and LAE
increased due to unfavorable loss experience related to two specific but small
areas of the Company's domestic operations: long-term care and a disparate group
of clinic clients. In the third quarter 1998, the Company recorded $17.5 million
of additional losses and LAE related to this business. The increase in medical
malpractice losses and LAE also includes losses related to the increase in one
time premiums in the first quarter 1998 that were recorded at a higher loss
ratio than the core medical malpractice business as well as an increase in the
core loss ratio for the current year's business. International losses and LAE
increased 15.2% to $88.0 million in 1998 from $76.4 million due to a growth in
earned premiums as well as a third quarter provision of $3.3 million for claims
related to asbestos exposures written in prior years. Other losses and LAE
increased 146.3% to $10.1 million in 1998 from $4.1 million in 1997 due to an
increase in other earned premium.
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Insurance and administrative expenses increased by 4.1% to $153.1 million in
1998 from $147.0 million in 1997. Included in the 1997 total is $9.7 million of
expenses related to the Company's acquisition of Unionamerica, which was
completed in December 1997. Before the effect of the acquisition related
expenses, insurance and administrative expenses increased 11.5%, principally due
to increased commission expense related to premium growth.
The combined ratio, which includes the sum of losses and LAE and insurance
segment expenses, divided by earned premiums, increased to 115.8% in 1998
compared to 111.1% in 1997. The loss ratio increased by 11.3 percentage points
and the expense ratio decreased by 6.6 percentage points in 1998, as compared to
1997. The loss ratio increase is due to the loss reserve development totaling
$20.8 million recorded in the third quarter 1998 as well as higher loss ratios
related to one-time premiums and an increase in the current year's loss ratio.
The expense ratio decline in 1998 is primarily due to the inclusion of the
acquisition related expenses in 1997 and one-time premiums in 1998, which have a
proportionally lower level of acquisition expense.
Interest expense increased by 56.9% to $10.2 million in 1998 from $6.5
million in 1997 due to an increase in debt outstanding and a higher interest
rate related to the Company's issuance of 30 year capital securities in December
1997. Debt outstanding totaled $118.8 million at December 31, 1998.
INCOME TAXES. Income taxes were $1.6 million in 1998 compared to $10.2
million in 1997. The decrease in income tax expense is due to a decline in
pre-tax income in 1998.
EXTRAORDINARY LOSS, NET OF TAX. In connection with the repayment of the
bank lines of credit in 1997, the Company wrote off deferred financing costs
totaling $0.7 million, net of tax.
LOSS FROM DISCONTINUED OPERATIONS. Healthcare Credentials Management
Services (HCMS) was sold on March 31, 1999. The loss on discontinued operations
from the sale was $4.2 million in 1998 and $2.8 million in 1997. Net of taxes,
the loss was $2.7 million in 1998 and $1.8 million in 1997.
NET INCOME. Net income decreased by 66.9% to $11.4 million in 1998 from
$34.4 million in 1997 as a result of loss reserve development recorded in the
third quarter 1998 as well as a decrease in the consulting and fee segment
profit margin in 1998.
NET INCOME PER SHARE. Diluted net income per common and common equivalent
share decreased to $.59 in 1998 from $1.77 in 1997. Included in the 1998 and
1997 amounts are a reduction of $.88 for loss reserve development and $.46 per
share for the expenses, net of tax, incurred in connection with the Unionamerica
acquisition, respectively. The loss from discontinued operations, net of tax,
was $0.14 in 1998 and $0.09 in 1997. Also included is an increase of $.09 in
1998 and an increase of $.07 in 1997 related to net realized gains on
investments, net of tax, as well as an extraordinary loss of $.04 in 1997.
1997 COMPARED TO 1996
REVENUES. Gross premiums written increased by 4.1% to $372.2 million in 1997
from $357.7 million in 1996. Medical malpractice gross premiums written
increased 5.0% to $200.5 million in 1997 from $191.0 million. International
gross premiums written increased 6.0% to $152.0 million in 1997 from $143.4
million in 1996 and other gross premiums written decreased 15.5% to $19.7
million in 1997 from $23.3 million in 1996. Net premiums written increased by
5.8% to $306.9 million in 1997 from $290.1 million in 1996.
Net premiums earned increased by 2.2% to $287.5 million in 1997 from $281.4
million in 1996. Medical malpractice net premiums earned decreased by 1.7% to
$154.1 million in 1997 from $156.7 million in 1996. International net premiums
earned increased 9.3% to $127.9 million from $117.0 million and other net
premiums earned decreased 28.6% to $5.5 million from $7.7 million. An extremely
competitive environment continued to exist in the medical malpractice and
international insurance marketplaces which exerts a negative influence on price
levels. The small decline from 1996 to 1997 in the Company's net earned premiums
reflects this pricing environment. Other premiums decreased due to the Company's
non-renewal of a large account.
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Consulting and fee income increased by 39.0% to $44.9 million in 1997 from
$32.3 million in 1996. Of the growth in consulting and fee income, 20.4
percentage points of the 39.0% increase is attributable to the inclusion of the
results of Professional Risk Management, Inc. (PRM) from its date of
acquisition, January 1, 1997. The balance of the increase is due to internally
generated growth. Consulting and fee income as a percentage of net premiums
earned and consulting and fee income was 13.5% in 1997 compared to 10.3% in
1996.
Net investment income increased by 2.4% to $75.5 million in 1997 from $73.7
million in 1996. Investment income growth is due to a higher average level of
invested assets in 1997 versus 1996 combined with a shift in the average asset
allocation from municipal securities to higher yielding preferred stocks and
taxable fixed income securities. The Company had net realized gains on
investments of $2.2 million in 1997 compared with losses of $0.9 million in
1996.
LOSSES AND EXPENSES. Losses and loss adjustment expenses (LAE) increased by
0.3% to $209.4 million in 1997 from $208.8 million in 1996. Medical malpractice
liability losses and LAE decreased by 1.5% to $128.9 million in 1997 from $130.8
million in 1996. International losses and LAE increased 4.7% to $76.4 million in
1997 from $73.0 million principally due to the Company's downward revision of
estimates for prior years surplus lines premium and losses as well as an
increased percentage of casualty business, which tends to have lower loss ratios
and higher expense ratios than property business. Other losses and LAE decreased
18.0% to $4.1 million in 1997 from $5.0 million in 1996 due to a decease in
other earned premium.
Insurance and administrative expenses increased by 28.7% to $147.0 million
in 1997 from $114.2 million in 1996. Of the increase in administrative expense,
$10.0 million is attributable to internal growth in the Company's consulting and
fee segment and the inclusion of acquired consulting and fee businesses while
$23.6 million is attributable to a 7.3 percentage point increase in the
insurance segment expense ratio. The increase in insurance expenses includes
$9.7 million of expenses related to the Company's acquisition of Unionamerica,
which was completed in December 1997 as well as an $8.0 million increase in
commission expense.
The combined ratio, which includes the sum of losses and LAE and insurance
segment expenses, divided by earned premiums, increased to 111.1% in 1997
compared to 105.2% in 1996. The effect on the expense ratio of expenses related
to the acquisition of Unionamerica amounted to an increase of 3.4 percentage
points. The loss ratio decreased by 1.4 percentage points and the expense ratio
increased by 7.3 percentage points in 1997, as compared to 1996. Also
contributing to the increase in the expense ratio were increased commissions on
excess casualty business written in the international segment which carries
higher acquisition expenses than the other international lines of business.
Interest expense increased by 6.6% to $6.5 million in 1997 from $6.1 million
in 1996 due to an increase in outstanding debt relating to the Company's
increased investment in a Lloyd's managing agency in July, 1997.
INCOME TAXES. Income taxes were $10.2 million in 1997 compared to
$10.9 million in 1996 due to lower pre-tax income in 1997 partially offset by an
increase in tax on net capital gains in 1997 versus net capital losses in 1996.
EXTRAORDINARY LOSS, NET OF TAX. In connection with the repayment of the
bank lines of credit in 1997, the Company wrote off deferred financing costs
totaling $0.7 million, net of tax.
LOSS FROM DISCONTINUED OPERATIONS. In 1997, MMI settled two lawsuits
related to its former subsidiary, Ludgate Insurance Company, Limited and
recorded the settlement in its 1996 financial statements as a loss from
discontinued operations. The pre-tax loss was $7.8 million, with a corresponding
tax benefit of $2.7 million, resulting in a charge of $5.1 million. The loss
from discontinued operations resulting from the sale of the net assets of
Healthcare Credentials Management Services (HCMS) was $2.8 million and
$2.0 million in 1997 and 1996, respectively and net of tax, the loss was
$1.8 million and $1.3 million in 1997 and 1996, respectively.
NET INCOME. Net income decreased by 14.2% to $34.4 million in 1997 from
$40.1 million in 1996 as a result of expenses related to the acquisition of
Unionamerica and a decline in the rate of growth of insurance premium and an
increase in the combined ratio partially offset by the loss from discontinued
operations in 1996.
NET INCOME PER SHARE. Diluted net income per common and common equivalent
share decreased to $1.77 in 1997 from $2.22 in 1996. Included in the 1997 amount
is a reduction of $.46 per share for the expenses, net of tax, incurred in
connection with the Unionamerica acquisition. Also included is a gain of $.07 in
1997 versus a loss of $.03 in 1996 related to net realized gains and losses on
investments, net of tax, as well as an extraordinary loss of $.04 in 1997 and a
loss from
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discontinued operations of $.09 in 1997 and $.35 in 1996. Diluted weighted
average shares and equivalents outstanding increased due to the Company's stock
offering in September and October 1996.
LIQUIDITY AND CAPITAL RESOURCES
As a holding company, the Company's assets consist primarily of the stock of
its subsidiaries. The Company's principal sources of operating funds are
management fees and dividends from its subsidiaries. In 1998, the Company
received dividends from its subsidiaries of $6.6 million, compared to $29.8
million in 1997 and $11.0 million in 1996. Of the 1997 dividend, $20.0 million
was a special dividend paid by Health Providers Insurance Company to the Company
in connection with an intercompany assumption reinsurance transaction. The
Company then contributed the $20.0 million to American Continental Insurance
Company's statutory surplus. The Company received management fees from its
subsidiaries of $24.0 million in 1998, $28.5 million in 1997 and $24.6 million
in 1996. The Company's principal uses of funds are operating expenses,
acquisitions, debt service and dividends to stockholders.
On a consolidated basis, the Company's principal sources of operating funds
are premiums, investment income, fees and recoveries from reinsurers. Funds are
used to pay claims, operating expenses, reinsurance premiums, acquisition
related expenditures, debt service requirements, taxes and dividends to
stockholders.
CASH FLOW. On a consolidated basis, the Company has had positive cash flow
from operations in each of the last three years. The level of positive cash flow
has increased in the most recent year due to the growth in premiums written and
collected. In prior years, cash flow from operations is also affected by the
difference between the collection of premiums and payment of claims and
expenses. Because of uncertainty related to the timing of payment of claims,
cash from operations for a casualty insurance company can vary substantially
from year to year and quarter to quarter. Cash provided by operating activities
was $39.2 million in 1998, $6.5 million in 1997 and $25.0 million in 1996. Cash
from operations increased principally due to an in increase in the growth rate
of net premiums written and improved collections of premium and fee balances.
Investing activities, substantially in fixed income securities, have been
the principal use of cash flow from operations. Cash used by investing
activities was $28.9 million in 1998, $24.4 million in 1997 and $88.4 million in
1996. The Company has no material commitments for capital expenditures.
Financing activities used $3.7 million in cash in 1998 and provided $19.8
million in 1997 and $54.0 million in 1996. In July 1997, the Company increased
its borrowings by $10.0 million to finance an investment in additional Lloyd's
underwriting capacity. In December 1997, the Company completed a private
placement of Capital Securities and received net proceeds of $118.7 million.
Concurrent with the receipt of the proceeds, the Company repaid the full
outstanding amounts under its credit agreements totaling $103.0 million. The
Company had no outstanding bank debt at December 31, 1998 and 1997.
Cash provided by financing activities in 1996 includes $53.6 million, net of
expenses, from the issuance of Common Stock, of which $46.3 million related to
the Company's stock offering in September and October 1996. In April 1996, the
Company increased its borrowings by $8.0 million in connection with the
acquisition of its employee relations consulting subsidiary.
INVESTED ASSETS. The Company invests in investment grade fixed income
securities and preferred stocks. The estimated fair value of preferred stocks
was less than 5.0% of the fair value of total invested assets as of
December 31, 1998. The estimated fair value of the Company's short-term, fixed
maturity and preferred stock investments was $1,259.4 million as of
December 31, 1998, compared to $1,230.8 million as of December 31, 1997. The
December 31, 1998 amount includes net unrealized gains of $44.2 million, which
represent the amount by which the estimated fair value of the investment
portfolio exceeds amortized cost. Unrealized gains were $37.1 million as of
December 31, 1997. The increase in unrealized gains during 1998 was due to an
decrease in the general level of interest rates.
The Company maintains a portion of its investment portfolio in high quality,
short-term securities to meet its short-term operating liquidity requirements,
including the payment of claims and expenses. Short-term investments totaled
$50.8 million or 4.0% of invested assets as of December 31, 1998, compared to
$52.2 million or 4.2% of invested assets as of December 31, 1997. The Company
believes that all of its invested assets are readily marketable.
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TRUST PREFERRED CAPITAL SECURITIES. In December 1997, MMI issued $125.0
million in 30 year non-callable Capital Securities of MMI Capital Trust I, a
subsidiary of MMI. The Capital Securities were rated Baa1 by Moody's Investor
Service and BBB- by Standard & Poor's Rating Services as of February 26, 1999.
The Capital Securities pay cumulative distributions at the annual rate of 7
5/8%, semiannually, in arrears and have a maturity date of December 15, 2027.
Payments on the Capital Securities are fully and unconditionally guaranteed by
MMI. Total proceeds, net of expenses, were $118.7 million.
LINE OF CREDIT. In February 1998, the Company obtained an unsecured
revolving credit line of $100.0 million. The Company has not borrowed against
this line of credit. The credit agreement provides for interest at a fixed rate
equal to the Interbank Offered Rate for periods of up to one year plus a margin
of 20 to 40 basis points, and contains financial covenants with respect to
minimum net worth and statutory surplus, maximum debt to total capitalization,
and minimum risk-based capital levels. The credit agreement also restricts the
Company's ability to pay stockholders' dividends in a single year in excess of
50% of the average of the prior three years net income.
STOCKHOLDERS' EQUITY. The Company's stockholders' equity was
$412.9 million as of December 31, 1998, compared to $399.0 million as of
December 31, 1997. Changes in stockholders' equity are primarily attributable to
net income of the Company, dividends to stockholders, changes in unrealized
gains or losses on investments and issuances of Common Stock. Cash dividends to
stockholders totaled $6.1 million in 1998, $4.2 million in 1997 and
$2.9 million in 1996. As of December 31, 1998, unrealized gains on investments
were $44.2 million, net of deferred taxes of $15.1 million, thereby increasing
stockholders' equity by $29.1 million. As of December 31, 1997 the Company had
an unrealized gain, net of taxes, of $24.3 million.
RISK-BASED CAPITAL. The NAIC has adopted risk-based capital solvency
standards for domestic insurers. Under these standards, several solvency
thresholds are calculated based on the underwriting, credit, and investment
risks of a company. As of December 31, 1998 the statutory capital and surplus of
each of the Company's domestic insurance subsidiaries exceeded its risk-based
capital requirements.
MINIMUM SOLVENCY MARGIN. Under the Insurance Companies Act of 1982, the
Department of Trade and Industry (DTI) authorizes companies in the United
Kingdom to engage in the insurance business. Under the 1982 Act, companies
authorized to transact business are required to maintain a minimum solvency
margin. As of December 31, 1998, Unionamerica's minimum solvency margin was
estimated at $16.3 million and its net assets were estimated at $143.3 million.
The DTI typically expects an insurance company to maintain net assets at least
2.5 times greater than its solvency margin.
ACQUISITIONS
In a series of transactions in 1998, the Company acquired a 49% interest in
Marketform Holdings Limited, a London-based underwriting agency specializing in
non-U.S. medical malpractice insurance and 90% ownership of Marketform Corporate
Member Limited, a dedicated Lloyd's corporate member. The total consideration
was $4.5 million in cash and $1.3 million in short-term notes payable.
On December 11, 1997, the Company acquired all of the capital stock of
Unionamerica. MMI issued 7.1 million shares of Common Stock at the exchange
ratio of 0.836 MMI shares for each Unionamerica American Depository Share. The
acquisition was accounted for as a pooling of interests, and, as such, the
Company's 1997 consolidated financial statements, and for all prior periods
presented were restated as if the acquisition had occurred at the beginning of
the earliest period presented. Founded in 1971, Unionamerica is a specialty
casualty and property reinsurer and insurer operating in the London-based
reinsurance and insurance market.
On July 23, 1997, MMI acquired a 39% interest in JMA Holdings Limited, the
parent company of Jago Managing General Agency Limited, a Lloyd's managing
agency, for consideration of $9.1 million. The consideration was comprised of
$5.9 million in cash and $3.2 million of short-term notes payable.
Effective January 1, 1997, the Company purchased substantially all of the
net assets of Equifax Medical Credentials Verification Services (EMCVS), a unit
of Atlanta-based Equifax, Inc., and acquired by merger all of the outstanding
stock
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of Professional Risk Management, Inc. (PRM), a privately held California
third-party administrator that specializes in managing enterprise liability risk
for organizations that self-insure. The total purchase price for these
acquisitions was $8.3 million in cash and $2.0 million in MMI Common Stock.
These acquisitions were accounted for as purchases and the operations of EMCVS
and PRM are included in the Company's consolidated financial statements since
their dates of acquisition.
Effective April 1, 1996, the Company purchased substantially all of the net
assets of Management Science Associates (MSA). MSA provides employee relations
and human resource consulting services to healthcare organizations and had
revenues of approximately $6.6 million in 1995. The purchase price for MSA was
$8.3 million in cash, which was funded principally by an increase in borrowings
under the Company's credit agreement.
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
beyond January 1, 2000.
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.
The Company 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 Y2K were $85,000 in the
fourth quarter of 1998 and have totaled $510,000 through December 31, 1998.
STATE OF READINESS
The Company has completed the assessment, role definition and inventory and
analysis phases which encompass hardware, software (third party and internally
developed), embedded technologies, and non-information technologies (IT)
systems.
The majority of identified critical internally developed IT systems have
been modified, tested and implemented. The remaining systems are scheduled for
implementation during the first half of 1999.
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 the Company or documented by the third party. The Company
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.
MATERIAL THIRD PARTY RELATIONSHIPS
The Company relies on continued normal operations of entities such as
brokers, reinsurers, banks, money managers and benefit plan administrators.
Plans have been developed 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.
CONTINGENCY PLANS
The Company 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. In addition, contingency plans are
being developed in conjunction with the scheduled 1999 simulations of critical
information technologies.
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OTHER
The Company has conducted a comprehensive review of its underwriting
guidelines and will, where appropriate, exclude Y2K exposures. The Company
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, the
Company 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.
MARKET RISK
The Company is exposed to various market risks, most specifically changes in
interest rates and foreign currency exchange rates. Market risk is the potential
loss arising from adverse changes in market rates and prices. The Company does
not utilize derivative or other similar financial instruments for trading or
speculative purposes. The following analysis presents the hypothetical loss in
fair value of the financial instruments held by the Company at December 31, 1998
that are sensitive to changes in interest rates and/or foreign currency exchange
rates. The range of changes in interest rates used in the analysis reflects the
Company's view of changes that are reasonably possible over a one year period.
This discussion of market risks related to the Company's consolidated balance
sheet includes estimates of future economic environments caused by changes in
interest risks. The effect of actual changes in these risk factors may differ
materially from the Company's estimates. In the ordinary course of business, the
Company also faces risks that may be either non-financial or non-quantifiable,
e.g., credit risk. Such risks are not included in the following analysis.
The Company has a comprehensive and diversified investment portfolio. The
Company's invested assets are held primarily as fixed maturities which are
available for sale, short term investments and preferred stocks. Accordingly,
these assets are subject to various market risk exposures such as interest rate
risk.
The fair value of the Company's short term investment portfolio at
December 31, 1998 approximated its carrying value due to its short term
duration. Market risk was estimated as the potential decrease in fair value
resulting from a hypothetical 100 basis point increase in interest rates for the
issues contained in the short term investment portfolio, and was not materially
different from the December 31, 1998 carrying value.
At December 31, 1998 the fair value of the Company's fixed maturity and
preferred stock portfolio was $1,208.6 million versus an amortized cost basis of
$1,164.4 million. The estimated fair value of the fixed maturity and preferred
stock portfolio resulting from a hypothetical increase in interest rates of 100
basis points at December 31, 1998 would be approximately $1,159.0 million or a
decrease of 4.1%. The Company utilizes several outside investment advisory
companies in the management of the portfolio. This portfolio, which is not
hedged, consists primarily of U.S. dollar denominated, investment grade, taxable
and tax advantaged fixed maturity securities. The primary objectives of the
portfolio are to provide the Company with a stable, long term, after tax yield
with sufficient quality and liquidity to meet its cash flow needs and to provide
an after tax total return to meet its profit objectives.
The Company is subject to foreign currency exchange risk due to several
primary reasons, including its United Kingdom-based subsidiaries which incur
expenses denominated in British pounds sterling and hold invested assets in
foreign currencies which result primarily from business generated in foreign
currencies. While there is exposure to several currencies, the predominant
exposure is in British pounds sterling.
As of December 31, 1998 the Company estimates that overhead and other
payables of approximately $1.5 million per month which must be paid in British
pounds sterling are to be paid throughout the next year by its UK subsidiaries.
The British pounds sterling are to be purchased periodically throughout the
year, usually with U.S. dollars; and a hypothetical strengthening of the British
pound sterling versus the U.S. dollar of 10% would increase the cost of these
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purchases by approximately $1.8 million throughout the year. The Company does
monitor the foreign currency markets and could purchase British pounds sterling
in advance if appropriate due to market conditions.
The Company also holds invested assets in foreign currencies which result
primarily from business generated in foreign currencies and thus expose the
Company to foreign exchange currency risk. The predominant exposure is in
British pounds sterling. Revenues from our business in foreign countries are the
primary source of funds for our purchase of these investments. The Company
purchases these investments as a natural hedge against insurance reserves and
other liabilities denominated in the same currency, effectively reducing foreign
currency exchange rate exposure. The Company does have a net unhedged foreign
currency exposure in its invested assets of approximately 5.4 million British
pounds sterling. A hypothetical weakening of 10% in the British pound sterling
versus the U.S. dollar would result in a loss of value of approximately $0.8
million. Management reviews its foreign currency exposure risk on a monthly
basis and is of the opinion that other foreign currency exchange risk is not
material.
In December 1997, the Company completed a private placement of
$125.0 million 30-year, mandatorily redeemable preferred capital securities
(Capital Securities) of MMI Capital Trust I, a subsidiary of MMI. The Capital
Securities pay a dividend of 7.625%, semiannually, in arrears and have a
maturity date of December 15, 2027. Total proceeds were $118.7 million, net of
expenses. The carrying value of the Capital Securities is $118.8 million as of
December 31, 1998. These securities had a fair value of $121.9 million at
December 31, 1998. A hypothetical 100 basis point decrease in interest rates
would increase the fair value to approximately $137.3 million.
The Company manages its market risk by matching the projected cash inflows
of assets with liabilities. For all its financial assets and liabilities, the
Company seeks to reasonably match durations consistent with the Company
objectives of maximization of income without sacrificing investment quality and
providing for necessary liquidity, return and diversification.
The estimated fair values at current market rates discussed above for
financial instruments subject to interest rate risk are the same as those in
Note 4 to the consolidated financial statements. The estimated fair value at the
adjusted market rates (assuming a 100 basis point increase in market interest
rates) are calculated using discounted cash flow methods and duration modeling,
where appropriate. The foreign currency exposure risk analysis assumes a year
end spot rate on the British pounds sterling of $1.66 at December 31, 1998.
This sensitivity analysis provides only a limited, point-in-time view of the
market risk sensitivity of certain of the Company's financial instruments. The
actual impact of interest rate and price changes may differ significantly from
those shown in the analysis. The sensitivity is further limited as it does not
take into consideration any actions the Company could take in response to or in
anticipation of movements in interest rates or prices.
EFFECT OF INFLATION
The primary effect of inflation on the Company is implicitly considered in
pricing and estimating reserves for unpaid losses and loss adjustment expenses,
particularly for claims where there is a long period between reporting and
settlement. The actual effect of inflation on the Company's results cannot be
accurately known until claims are ultimately settled. Based on actual results to
date, the Company believes that loss and LAE reserve levels and the Company's
rate-making process adequately incorporate the effects of inflation.
FORWARD-LOOKING INFORMATION
Certain matters referred to above regarding Y2K, market risk and inflation
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 as well as prospective
changes in price levels, interest rates and foreign exchange rates 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.
26
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT AUDITORS
Board of Directors
MMI Companies, Inc.
We have audited the accompanying consolidated balance sheets of MMI Companies,
Inc. and subsidiaries as of December 31, 1998 and 1997, and the related
consolidated statements of income, stockholders' equity, and cash flows for each
of the three years in the period ended December 31, 1998. Our audits also
included the financial statement schedules listed in the Index at Item 14(a).
These financial statements and schedules are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedules based on our audits. We did not audit the 1996
financial statements of Unionamerica Holdings plc, a wholly owned subsidiary,
which statements reflect total revenues of $145,539,000 for the year ended
December 31, 1996. Those statements were audited by other auditors whose report
has been furnished to us, and our opinion, insofar as it relates to data
included for Unionamerica Holdings plc, is based solely on the report of the
other auditors.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits and the report of the other auditors
provide a reasonable basis for our opinion.
In our opinion, based on our audits and, for 1996, the report of other auditors,
the consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of MMI Companies, Inc.
and subsidiaries at December 31, 1998 and 1997, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1998, in conformity with accounting principles generally
accepted in the United States. Also, in our opinion, the related financial
statement schedules, when considered in relation to the basic financial
statements taken as a whole, present fairly in all material respects the
information set forth therein.
Chicago, Illinois
February 24, 1999
except for Notes 15 and 16,
as to which the date is
January 11, 2000.
Ernst & Young LLP
27
<PAGE>
MMI COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1998 1997
---------- ----------
<S> <C> <C>
ASSETS
INVESTMENTS (Note 4)
Short-term investments -- at fair value (amortized cost:
1998 -- $50,819; 1997 -- $52,210)..................... $ 50,819 $ 52,219
Fixed maturities -- at fair value (amortized cost:
1998 -- $1,109,210; 1997 -- $1,101,970)............... 1,150,622 1,135,702
Preferred stocks -- at fair value (amortized cost:
1998 -- $55,155; 1997 -- $39,476)..................... 57,981 42,879
---------- ----------
1,259,422 1,230,800
OTHER ASSETS
Cash.................................................... 13,323 6,698
Premiums and fees receivable............................ 161,000 165,906
Reinsurance receivables (Note 3)........................ 336,518 300,077
Prepaid reinsurance premiums (Note 3)................... 21,232 21,514
Accrued investment income............................... 17,375 17,045
Cost in excess of net assets of purchased subsidiaries,
less accumulated amortization (Notes 1 and 2)......... 43,018 37,257
Furniture and equipment -- at cost, less accumulated
depreciation.......................................... 14,702 14,258
Deferred income taxes (Note 5).......................... 44,093 42,979
Other................................................... 48,726 47,533
---------- ----------
$1,959,409 $1,884,067
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Policy liabilities:
Loss and loss adjustment expense reserves (Note 7):
Medical malpractice................................. $ 672,647 $ 613,063
International....................................... 484,170 500,032
Other............................................... 19,256 12,051
---------- ----------
1,176,073 1,125,146
Unearned premium reserves............................. 141,939 134,188
Future life policy benefits........................... 8,326 8,723
---------- ----------
1,326,338 1,268,057
Accrued expenses and other liabilities.................. 50,136 50,071
Amounts due to reinsurers (Note 3)...................... 51,190 48,213
Company-obligated, mandatorily redeemable preferred
capital securities of subsidiary trust holding solely
junior subordinated debentures of the Company
(Note 6).............................................. 118,817 118,724
---------- ----------
1,546,481 1,485,065
Contingencies and commitments (Notes 3 and 11)
STOCKHOLDERS' EQUITY (Notes 8 and 10)
Common Stock, par value $.10 per share:
Authorized shares: 30,000
Issued and outstanding shares: 1998 -- 19,059;
1997 -- 18,857...................................... 1,906 1,886
Additional paid-in capital.............................. 221,649 217,855
Retained earnings....................................... 160,226 154,929
Accumulated other comprehensive income, net of taxes:
1998 -- $15,091; 1997 -- $12,812...................... 29,147 24,332
---------- ----------
412,928 399,002
---------- ----------
$1,959,409 $1,884,067
========== ==========
</TABLE>
See Notes to Consolidated Financial Statements.
28
<PAGE>
MMI COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
REVENUES
Insurance premiums earned (Note 3):
Medical malpractice..................................... $197,461 $154,097 $156,722
International........................................... 136,229 127,918 116,982
Other................................................... 13,045 5,482 7,687
-------- -------- --------
346,735 287,497 281,391
Consulting and fee income................................. 44,485 44,862 32,314
Net investment income (Note 4)............................ 76,556 75,490 73,681
Net realized gains (losses) on investments (Note 4)....... 2,678 2,182 (890)
-------- -------- --------
Total revenues........................................ 470,454 410,031 386,496
LOSSES AND EXPENSES
Losses and loss adjustment expenses (Notes 3 and 7):
Medical malpractice..................................... 193,302 128,869 130,787
International........................................... 88,032 76,417 72,990
Other................................................... 10,147 4,079 4,999
-------- -------- --------
291,481 209,365 208,776
Insurance and administrative expenses (Note 3)............ 153,132 147,046 114,234
Interest expense.......................................... 10,165 6,489 6,083
-------- -------- --------
Total losses and expenses............................. 454,778 362,900 329,093
-------- -------- --------
Income from continuing operations before income taxes
and extraordinary loss.............................. 15,676 47,131 57,403
Income taxes (Note 5)..................................... 1,616 10,234 10,913
-------- -------- --------
Income from continuing operations before extraordinary
loss................................................ 14,060 36,897 46,490
Extraordinary loss, net of tax (Note 6)................... -- 707 --
-------- -------- --------
Income from continuing operations..................... 14,060 36,190 46,490
Loss from discontinued operations, net of tax
(Note 15)............................................... 2,696 1,830 6,370
-------- -------- --------
Net income............................................ $ 11,364 $ 34,360 $ 40,120
======== ======== ========
Earnings per common and common equivalent share (Note 9):
Basic
Income from continuing operations before extraordinary
loss.................................................. $ .74 $ 1.97 $ 2.68
Extraordinary loss, net of tax.......................... -- (.04) --
Loss from discontinued operations, net of tax........... (.14) (.10) (.37)
-------- -------- --------
Net income.............................................. $ .60 $ 1.83 $ 2.31
======== ======== ========
Diluted
Income from continuing operations before extraordinary
loss.................................................. $ .73 $ 1.90 $ 2.57
Extraordinary loss, net of tax.......................... -- (.04) --
Loss from discontinued operations, net of tax........... (.14) (.09) (.35)
-------- -------- --------
Net income.............................................. $ .59 $ 1.77 $ 2.22
======== ======== ========
Weighted average number of common and common equivalent
shares:
Basic..................................................... 18,936 18,751 17,336
Diluted................................................... 19,385 19,396 18,087
</TABLE>
See Notes to Consolidated Financial Statements.
29
<PAGE>
MMI COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
ACCUMULATED
COMMON STOCK OTHER
-------------------- 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 January 1, 1996.............. 16,607 $1,666 $160,396 $ 87,495 $22,709 $272,266
Year ended December 31, 1996:
Net income............................ 40,120 40,120
Change in unrealized gains (losses) on
investments, net of taxes of
($4,557) and reclassification
adjustment.......................... (9,253) (9,253)
--------
Comprehensive income.................... 30,867
Issuance of Common Stock, net of
expenses of $2,866.................. 1,750 170 48,280 48,450
Issuance of Common Stock in connection
with acquisition of subsidiaries.... 65 7 1,284 1,291
Issuance of Common Stock in connection
with employee benefit plans and
exercise of employee stock
options............................. 259 25 5,131 5,156
Common cash dividends ($.17 per
share).............................. (2,864) (2,864)
------ ------ -------- -------- ------- --------
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
Change in unrealized gains (losses) on
investments, net of taxes of $5,595
and reclassification adjustment..... 10,876 10,876
--------
Comprehensive income.................... 45,236
Issuance of Common Stock in connection
with acquisition of subsidiary...... 85 9 1,942 1,951
Issuance of Common Stock in connection
with employee benefit plans and
exercise of employee stock
options............................. 212 21 3,650 3,671
Common Stock repurchased.............. (121) (12) (2,828) (2,840)
Common cash dividends ($.22 per
share).............................. (4,182) (4,182)
------ ------ -------- -------- ------- --------
Balance at December 31, 1997............ 18,857 1,886 217,855 154,929 24,332 399,002
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
====== ====== ======== ======== ======= ========
</TABLE>
See Notes to Consolidated Financial Statements.
30
<PAGE>
MMI COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income................................................ $ 11,364 $ 34,360 $ 40,120
Adjustments to reconcile net income to net cash provided
by operating activities:
Change in policy liabilities............................ 58,281 2,978 (33,912)
Change in reinsurance balances.......................... (33,182) (19,380) 24,858
Change in premiums and fees receivable.................. 4,949 (6,600) (15,162)
Increase in deferred tax asset.......................... (3,431) (2,686) (2,255)
Change in accrued investment income and other assets.... (3,342) (8,398) 134
Change in accrued expenses and other liabilities........ (2) 1,961 5,279
Net realized (gains) losses on investments.............. (2,678) (2,182) 890
Depreciation and amortization........................... 7,227 6,453 5,042
--------- --------- ---------
Net cash provided by operating activities............. 39,186 6,506 24,994
INVESTING ACTIVITIES
Net sale (purchase) of short-term investments............. 365 8,660 (8,103)
Purchase of available for sale investments................ (542,809) (721,863) (715,649)
Sale of available for sale investments.................... 433,116 644,791 579,531
Maturities of available for sale investments.............. 92,299 71,916 73,575
Acquisition of subsidiaries............................... (5,824) (21,006) (11,074)
Furniture and equipment additions......................... (6,055) (6,915) (6,679)
--------- --------- ---------
Net cash used by investing activities................. (28,908) (24,417) (88,399)
FINANCING ACTIVITIES
Issuance of Common Stock.................................. 2,568 1,899 56,725
Common Stock repurchased.................................. (154) (2,840) --
Issuance of Capital Securities............................ -- 124,551 --
Costs incurred in connection with securities offerings.... -- (5,832) (3,119)
Finance costs of long-term debt........................... -- (826) --
Payments on notes payable................................. -- (103,000) (5,750)
Proceeds from notes payable............................... -- 10,000 9,000
Dividends................................................. (6,067) (4,182) (2,864)
--------- --------- ---------
Net cash provided (used) by financing activities...... (3,653) 19,770 53,992
--------- --------- ---------
Increase (decrease) in cash........................... 6,625 1,859 (9,413)
Cash at beginning of year................................... 6,698 4,839 14,252
--------- --------- ---------
Cash at end of year................................... $ 13,323 $ 6,698 $ 4,839
========= ========= =========
</TABLE>
See Notes to Consolidated Financial Statements.
31
<PAGE>
MMI COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
1. ACCOUNTING POLICIES
NATURE OF OPERATIONS
MMI Companies, Inc. (MMI) is a specialty company that offers insurance
products and risk management and consulting services primarily to the healthcare
industry. MMI writes its medical malpractice liability insurance and property
and casualty insurance and reinsurance through its principal subsidiaries,
American Continental Insurance Company (ACIC) and Unionamerica Insurance Company
Limited (Unionamerica). MMI provides its products and services in all 50 states
and in Europe. Information on MMI's operations by reportable segment is included
in Note 13.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements have been prepared in
conformity with generally accepted accounting principles (GAAP) and include the
accounts and operations of MMI and its majority owned subsidiaries. All material
intercompany accounts and transactions have been eliminated in consolidation.
Certain reclassifications have been made to the prior years' financial
statements in order to conform to the current year presentation. MMI's
participation in Lloyd's Non-Marine Syndicate 205 through its majority
investment in Jago Capital Limited is consolidated with the international
insurance segment results.
USE OF ESTIMATES
The preparation of the financial statements in conformity with GAAP requires
management to make estimates and assumptions that can affect the amounts
reported in the consolidated financial statements and accompanying notes. Such
estimates and assumptions could change in the future as more information becomes
known, which could impact the amounts reported and disclosed herein.
INVESTMENTS
MMI classifies all of its fixed maturity and preferred stock investments as
"available for sale," requiring that these investments be carried at fair value,
with unrealized gains and losses, less related deferred income taxes, excluded
from earnings and reported in stockholders' equity as accumulated other
comprehensive income.
Realized gains and losses on sales of investments are recognized on the
specific identification basis. Realized losses also include losses for fair
value declines that are considered to be other than temporary.
FAIR VALUE INFORMATION
The fair values of investments are reported in Note 4. The fair values of
other financial instruments, principally accrued investment income, premiums and
fees receivable, accrued expenses and other liabilities and amounts due to
reinsurers approximate their December 31, 1998 and 1997 carrying values. The
fair value of mandatorily redeemable preferred capital securities is reported in
Note 6.
PREMIUM REVENUES
Premiums are earned pro rata over the terms of the policies, which are
generally one year. Adjustments to estimated premiums are made in the period in
which it is determined an adjustment is warranted. Unearned premiums are
calculated using the monthly pro rata basis.
32
<PAGE>
MMI COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. ACCOUNTING POLICIES (CONTINUED)
CONSULTING AND FEE INCOME
Consulting and fee income is derived from fixed fee contracts and projects
performed on a per diem basis. Fixed fee contracts are for a specific period of
time, generally one year, in which MMI provides services that are delivered over
the entire contract term. Ratable recognition of fixed fee contract revenue
results in a matching with expenses incurred as the related expenses are
principally employee compensation and benefits. Revenues from projects are
recognized as the services are rendered.
DEFERRED POLICY ACQUISITION COSTS
Commissions and other costs that vary with, and are primarily related to,
the production of new and renewal business have been deferred and are amortized
over the period of the related insurance policies. Such unamortized amounts
included in other assets amounted to $28,300,000 and $26,500,000 at
December 31, 1998 and 1997, respectively. Amortization of such costs are
included in insurance and administrative expenses and amounted to $56,200,000 in
1998, $49,000,000 in 1997 and $41,800,000 in 1996.
UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES
The liabilities for unpaid losses and loss adjustment expenses represent the
estimated liability for claims reported to MMI plus claims incurred but not yet
reported and the related estimated adjustment expenses. The liabilities for
losses and related loss adjustment expenses are determined using case-basis
evaluations and statistical analyses. Although considerable variability is
inherent in such estimates, management believes that the liabilities for unpaid
losses and loss adjustment expenses are reasonable. The estimates are
continually reviewed and adjusted as necessary; such adjustments are included in
current operations.
FUTURE POLICY BENEFITS
The liability for future policy benefits principally represents reserves
related to disability policies.
REINSURANCE
Reinsurance premiums, commissions, expense reimbursements and liabilities
related to reinsurance, assumed and ceded, are accounted for on bases consistent
with those used in accounting for the original policies issued and with the
terms of the reinsurance contracts. Premiums assumed from other companies have
been reported as an increase to premium revenues. Premiums ceded to other
companies have been reported as a reduction of premium revenues. Expense
allowances received and paid in connection with reinsurance ceded and assumed,
respectively, have been accounted for as an adjustment of the related deferred
policy acquisition costs and are deferred and amortized accordingly. Reinsurance
receivables and prepaid reinsurance premiums are reported as assets in the
accompanying balance sheets.
FURNITURE AND EQUIPMENT
The costs of furniture and equipment are depreciated over their estimated
useful lives of three to seven years using the straight line method. As of
December 31, 1998 and 1997, accumulated depreciation amounted to $16,100,000 and
$10,700,000, respectively.
33
<PAGE>
MMI COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. ACCOUNTING POLICIES (CONTINUED)
GOODWILL
Costs in excess of net assets of purchased subsidiaries are being amortized
on a straight-line basis over periods ranging from ten to twenty years. As of
December 31, 1998 and 1997, accumulated amortization amounted to $12,600,000 and
$9,100,000, respectively.
INCOME TAXES
MMI and its United States subsidiaries file a consolidated federal income
tax return. Unionamerica and its subsidiaries file tax returns with Inland
Revenue in the United Kingdom. Deferred tax assets and liabilities are
determined based on differences between financial reporting and tax bases of
assets and liabilities and are measured using tax rates and laws that are
expected to be in effect when the differences reverse.
STOCK-BASED COMPENSATION
MMI grants stock options for a fixed number of shares to employees with an
exercise price equal to the fair value of the shares at the date of grant. MMI
recognizes no compensation expense for the stock option grants. Additional stock
option information is included in Note 10.
EARNINGS PER SHARE
Earnings per share are computed based on the weighted average number of
common and common equivalent shares outstanding during the respective period.
Common equivalent shares include incremental shares from dilutive stock options.
Refer to Note 9 for more information.
SEGMENT INFORMATION
As of December 31, 1998, MMI adopted Statement of Financial Accounting
Standards (SFAS) 131, "Disclosure about Segments of an Enterprise and Related
Information", which superseded SFAS 14, "Financial Reporting for Segments of a
Business Enterprise". SFAS 131 establishes standards for the way that public
business enterprises report information about operating segments in annual
financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports issued to
stockholders. SFAS 131 also establishes standards for related disclosures about
products and services, geographic areas and major customers. The adoption of
SFAS 131 had no impact on MMI's consolidated operating results or financial
position, but did affect the disclosure of segment information. Prior year
segment information has been reclassified to conform to the requirements of SFAS
131. See Note 13 to the consolidated financial statements.
COMPREHENSIVE EARNINGS
As of January 1, 1998, MMI adopted SFAS 130, "Reporting Comprehensive
Income". SFAS 130 establishes new rules for the reporting and display of
comprehensive income and its components; however, the adoption of SFAS 130 had
no impact on MMI's consolidated net income or total stockholders' equity. SFAS
130 requires unrealized gains or losses on MMI's available for sale securities,
which prior to adoption were reported separately in stockholders' equity, to be
included in other comprehensive income. Prior year consolidated financial
statements have been reclassified to conform to the requirements of SFAS 130.
34
<PAGE>
MMI COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. ACCOUNTING POLICIES (CONTINUED)
CASH FLOWS
In the consolidated statements of cash flows, cash includes principally
demand deposit accounts. Also, sales and purchases of short-term investments
presented on a net cash basis include investments with original maturities of
three months or less.
EFFECT OF NEW PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities," which
is effective for fiscal years beginning after June 15, 1999. MMI has not
completed the analysis to determine the full impact, but does not anticipate the
adoption of SFAS 133 will have a significant effect on the Company's
consolidated operating results or financial position.
In 1998, the Accounting Standards Board Executive Committee (AcSEC) issued
Statement of Position (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 which is effective for 1999. MMI does not
expect that SOP 98-1 will 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 is effective for
1999. MMI has not completed the analysis to determine the full impact but does
not anticipate that the adoption of SOP 97-3 will have a significant impact on
MMI's consolidated operating results or financial position.
2. BUSINESS COMBINATIONS
In a series of transactions in 1998, MMI acquired for total consideration of
$5,800,000, a 49% interest in Marketform Holdings Limited, a London-based
underwriting agency specializing in non-U.S. medical malpractice insurance. The
purchase price consisted of $4,500,000 in cash and $1,300,000 in short-term
notes payable.
On December 11, 1997, MMI acquired the capital stock of Unionamerica
Holdings plc (Unionamerica Holdings), in exchange for 7,100,000 shares of MMI
Common Stock. Unionamerica Holdings' principal subsidiary, Unionamerica
Insurance Company Limited is a United Kingdom-domiciled insurance and
reinsurance company. The acquisition was accounted for as a pooling of interests
and, as such, MMI's 1997 consolidated financial statements, and all prior
periods presented, were restated as if the acquisition had occurred at the
beginning of the earliest period presented.
Effective January 1, 1997, MMI purchased substantially all of the net assets
of Equifax Medical Credentials Verification Services (EMCVS), a unit of
Atlanta-based Equifax, Inc. and acquired by merger all of the outstanding stock
of Professional Risk Management (PRM), a privately held California third-party
administrator that specializes in managing enterprise liability risk for
organizations that self-insure. The total purchase price of EMCVS and PRM was
$8,300,000 in cash and $2,000,000 of MMI Common Stock.
On July 23, 1997, MMI acquired a 39% interest in JMA Holdings Limited
(JMAHL), the parent company of Jago Managing General Agency Limited, a Lloyd's
managing agency, for total consideration of $9,100,000 . The consideration was
comprised of $5,900,000 cash and $3,200,000 of short-term notes payable. JMAHL's
financial results are included in the Company's consolidated financial
statements on the equity basis.
Effective April 1, 1996, MMI purchased substantially all of the assets of
Management Science Associates, Inc. (MSA). MSA provides employee relations and
human resource consulting services to healthcare organizations. The
35
<PAGE>
MMI COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. BUSINESS COMBINATIONS (CONTINUED)
purchase price for MSA, including expenses, was $8,300,000 in cash, which was
funded principally by an increase in borrowings under MMI's credit agreement.
The Marketform, EMCVS, PRM and MSA acquisitions were accounted for as
purchases, and the operations of the acquired businesses are included in MMI's
consolidated financial statements since the dates of acquisition. Assets
acquired, liabilities assumed, and the excess of cost over net assets purchased
were as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Cost in excess of net assets purchased............. $5,800 $18,252 $7,155
Cash............................................... -- 566 395
Other assets....................................... -- 2,570 1,758
Liabilities........................................ -- (689) (955)
------ ------- ------
$5,800 $20,699 $8,353
====== ======= ======
</TABLE>
The pro forma impact of the purchased businesses on results of operations
was not material.
3. REINSURANCE
MMI's insurance subsidiaries are involved in the cession of reinsurance to
other domestic and foreign companies, which permits the recovery of a portion of
the gross losses. MMI's insurance subsidiaries would remain liable to the extent
that these reinsurance companies are unable to meet their obligations under
these arrangements.
Insurance premiums earned are composed of the following (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Direct........................................ $303,019 $234,462 $241,974
Assumed....................................... 129,568 110,492 105,442
Ceded......................................... (85,852) (57,457) (66,025)
-------- -------- --------
$346,735 $287,497 $281,391
======== ======== ========
</TABLE>
36
<PAGE>
MMI COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. REINSURANCE (CONTINUED)
MMI evaluates the financial condition of its reinsurers and monitors the
geographic spread of risk to minimize the exposure to losses from reinsurer
insolvencies. The reinsurers with the largest receivable balance due to MMI are
identified as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1998 1997
-------- --------
<S> <C> <C>
Lloyd's Underwriters*................................... $ 55,656 $ 51,082
Hannover Reinsurance Company*........................... 31,748 29,630
National Reinsurance Company............................ 26,738 18,920
CIGNA Reinsurance Company............................... 23,567 21,439
Munich Reinsurance Company*............................. 18,583 16,597
CNA Reinsurance Company Limited*........................ 10,880 6,187
TIG Reinsurance Company................................. 8,312 6,585
Transatlantic Reinsurance Company....................... 8,120 8,186
American Re-Insurance Company........................... 6,543 3,644
Terra Nova Insurance Ltd.*.............................. 6,324 5,883
All others.............................................. 140,047 131,924
-------- --------
Total................................................... $336,518 $300,077
======== ========
</TABLE>
- ------------------------
* Represents a foreign reinsurer.
In 1998, 1997 and 1996 respectively, MMI's losses and loss adjustment
expenses were net of reinsurance ceded of $99,743,000, $64,000,000 and
$33,100,000.
37
<PAGE>
MMI COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. INVESTMENTS
The amortized cost and fair value of investments, which are available for
sale, are as follows (in thousands):
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
December 31, 1998:
Fixed maturities:
U.S. Government and
agencies.................... $ 149,038 $ 6,365 $ (133) $ 155,270
State and political
subdivisions................ 441,442 23,245 (153) 464,534
Foreign governments........... 20,893 1,193 (17) 22,069
Corporate securities.......... 208,685 7,778 (1,440) 215,023
Mortgage-backed securities.... 289,152 5,162 (588) 293,726
---------- ------- ------- ----------
1,109,210 43,743 (2,331) 1,150,622
Short-term investments.......... 50,819 -- -- 50,819
Preferred stocks................ 55,155 3,450 (624) 57,981
---------- ------- ------- ----------
$1,215,184 $47,193 $(2,955) $1,259,422
========== ======= ======= ==========
December 31, 1997:
Fixed maturities:
U.S. Government and
agencies.................... $ 182,638 $ 2,552 $ (112) $ 185,078
State and political
subdivisions................ 437,512 21,534 (232) 458,814
Foreign governments........... 28,571 2,509 (427) 30,653
Corporate securities.......... 261,248 5,254 (573) 265,929
Mortgage-backed securities.... 192,001 3,500 (273) 195,228
---------- ------- ------- ----------
1,101,970 35,349 (1,617) 1,135,702
Short-term investments.......... 52,210 9 -- 52,219
Preferred stocks................ 39,476 3,445 (42) 42,879
---------- ------- ------- ----------
$1,193,656 $38,803 $(1,659) $1,230,800
========== ======= ======= ==========
</TABLE>
Fair values of investments are principally based on quoted market prices.
Short-term investments are comprised principally of corporate and municipal
securities.
The amortized cost and fair value of fixed maturities at December 31, 1998,
by contractual maturity, are as follows (in thousands):
<TABLE>
<CAPTION>
AMORTIZED FAIR
COST VALUE
---------- ----------
<S> <C> <C>
Due in 1998.......................................... $ 39,401 $ 39,574
Due in 1999 through 2002............................. 187,562 194,479
Due in 2003 through 2007............................. 174,497 185,164
Due in 2008 and thereafter........................... 418,598 437,679
---------- ----------
820,058 856,896
Mortgage-backed securities........................... 289,152 293,726
---------- ----------
$1,109,210 $1,150,622
========== ==========
</TABLE>
38
<PAGE>
MMI COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. INVESTMENTS (CONTINUED)
The expected maturities may differ from contractual maturities in the
foregoing table because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties, or MMI may have the
right to put obligations back to the issuer prior to stated maturity.
The changes in unrealized gains and losses, which are recorded in
stockholders' equity as accumulated other comprehensive income, were as follows
(in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Fixed maturities and short-term investments....... $7,671 $14,538 $(14,229)
Preferred stock................................... (577) 1,933 419
------ ------- --------
$7,094 $16,471 $(13,810)
====== ======= ========
</TABLE>
Net realized gains (losses) on investments are comprised of the following
(in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Fixed maturities:
Gross gains..................................... $ 4,703 $ 2,771 $ 5,590
Gross losses.................................... (2,840) (1,270) (6,660)
------- ------- -------
1,863 1,501 (1,070)
Preferred stocks:
Gross gains..................................... 1,211 726 206
Gross losses.................................... (396) (45) (26)
------- ------- -------
815 681 180
------- ------- -------
$ 2,678 $ 2,182 $ (890)
======= ======= =======
</TABLE>
Major categories of net investment income are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Fixed maturities................................. $72,892 $72,520 $69,825
Short-term investments and cash.................. 4,220 4,586 6,594
Preferred stocks................................. 3,408 2,215 983
------- ------- -------
Total investment income.......................... 80,520 79,321 77,402
Expenses......................................... 3,964 3,831 3,721
------- ------- -------
Net investment income............................ $76,556 $75,490 $73,681
======= ======= =======
</TABLE>
39
<PAGE>
MMI COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. INVESTMENTS (CONTINUED)
The components of other comprehensive income are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Holding gains (losses) arising during the year, net
of taxes of $3,216, $6,359 and $(4,869),
respectively...................................... $6,556 $12,294 $(9,831)
Reclassification adjustment for gains (losses)
realized in net income during the year, net of
taxes of $937, $764 and $(312), respectively...... 1,741 1,418 (578)
------ ------- -------
Net change in unrealized gain (loss) on available
for sale securities during the year, net of taxes
of $2,279, $5,595 and $(4,557), respectively...... $4,815 $10,876 $(9,253)
====== ======= =======
</TABLE>
At December 31, 1998, investments with a fair value of $11,567,000 were on
deposit to meet domestic statutory requirements.
Certain investments of the international segment are held in a trust fund
set up as collateral for holders of United States insurance policies. At
December 31, 1998 and 1997, the fair value of fixed maturities in the trust fund
amounted to $6,700,000 and $6,500,000, respectively. The required minimum trust
fund was $5,400,000 for 1998 and 1997.
Fixed maturities of the international segment of $273,200,000 in 1998 and
$251,900,000 in 1997 were held in a trust fund required by virtue of status as
an accredited reinsurer in a number of United States jurisdictions.
5. INCOME TAXES
Deferred income taxes reflect the net tax effect of temporary differences
between the amounts of assets and liabilities for financial reporting purposes
and the amounts used for income tax purposes. Significant components of MMI's
deferred tax assets and liabilities as of December 31, 1998 and 1997 are as
follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1998 1997
-------- --------
<S> <C> <C>
Deferred tax assets:
Tax-basis loss reserve adjustment...................... $ 31,288 $ 39,329
Tax-basis unearned premium reserve adjustment.......... 4,004 3,855
Accrued expenses....................................... -- 914
Net operating loss carryforward........................ 14,658 --
Alternative minimum tax credit carryforward............ 13,445 12,647
Other.................................................. 2,249 4,161
-------- --------
Total deferred tax assets.............................. 65,644 60,906
Deferred tax liabilities:
Unrealized investment gains............................ (12,056) (11,503)
Deferred policy acquisition costs...................... (2,698) (2,563)
Receivables............................................ (1,134) (561)
Other.................................................. (5,663) (3,300)
-------- --------
Total deferred tax liabilities......................... (21,551) (17,927)
-------- --------
Net deferred tax asset................................... $ 44,093 $ 42,979
======== ========
</TABLE>
MMI expects adequate future taxable income to realize the deferred tax
asset. Accordingly, no valuation reserve is considered necessary.
40
<PAGE>
MMI COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. INCOME TAXES (CONTINUED)
Significant components of the provision for income taxes are as follows (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Current (credit):
Federal........................................ $(3,037) $ 3,705 $ 1,115
Foreign........................................ 7,392 8,505 9,338
------- -------- -------
Total current.................................. 4,355 12,210 10,453
Deferred (credit):
Federal........................................ (1,476) (959) 423
Foreign........................................ (1,263) (1,017) 37
------- -------- -------
Total deferred................................. (2,739) (1,976) 460
------- -------- -------
Provision for income tax......................... $ 1,616 $ 10,234 $10,913
======= ======== =======
</TABLE>
A reconciliation of income tax computed at the United States federal
statutory tax rate of 35% to income tax expense in the accompanying financial
statements is as follows (dollars in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
------------------- ------------------- -------------------
<S> <C> <C> <C> <C> <C> <C>
AMOUNT % AMOUNT % AMOUNT %
------- ---- ------- ---- -------- ----
Tax at U.S. statutory rate..... $ 5,487 35% $16,496 35% $ 20,091 35%
Non-taxable investment
income........................ (7,126) (46) (8,431) (18) (7,896) (14)
Acquisition costs.............. -- -- 2,603 5 -- --
Foreign operations............. 1,275 8 -- -- -- --
Other.......................... 1,980 13 (434) -- (1,282) (2)
------- ---- ------- ---- -------- ----
Net provision.................. $ 1,616 10% $10,234 22% $ 10,913 19%
======= ==== ======= ==== ======== ====
</TABLE>
Federal income taxes have not been provided on the difference between the
amount for financial reporting and the tax basis in the stock of the foreign
subsidiaries because management intends to indefinitely invest that difference
in these subsidiaries. Determination of the amount of the unrecognized deferred
United States income tax liability is not practicable.
MMI's net payments of income taxes were $7,947,000, $9,302,000, and
$5,572,000 during 1998, 1997 and 1996, respectively. As of December 31, 1998,
MMI had federal net operating loss carryforwards of approximately $41,880,000
that, if not utilized, expire in 2018.
6. TRUST PREFERRED CAPITAL SECURITIES AND NOTES PAYABLE
In December 1997, the Company completed a private placement of $125,000,000
30-year, mandatorily redeemable preferred capital securities (Capital
Securities) of MMI Capital Trust I, a subsidiary of MMI. The Capital Securities
pay a dividend of 7 5/8%, semiannually, in arrears 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 Securities is 8.06%. The fair value
at December 31, 1998 was $121,934,000 and was estimated using discounted cash
flow analyses, based on MMI's current incremental borrowing rates for similar
types of borrowing arrangements.
With the proceeds from the Capital Securities, MMI repaid its $103,000,000
in bank debt and had no long-term notes payable as of December 31, 1998 and
1997. In connection with the extinguishment of the notes payable in the
41
<PAGE>
MMI COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. TRUST PREFERRED CAPITAL SECURITIES AND NOTES PAYABLE (CONTINUED)
second and fourth quarters of 1997, costs of $700,000, net of taxes of $400,000,
that were deferred when paid and amortized over the terms of the notes were
expensed and are classified as an extraordinary item in the 1997 financial
statements.
In February 1998, MMI obtained a $100,000,000 unsecured bank line of credit.
The interest rate called for by this agreement is equal to the Interbank Offer
Rate for periods of up to one year plus a margin of 20 to 40 basis points. The
bank agreement subjects MMI and its subsidiaries to certain covenants and
restrictions with respect to minimum net worth and statutory surplus, maximum
debt to total capitalization, and minimum risk-based capital levels. The
agreement also restricts MMI's ability to pay stockholders' dividends and
repurchase shares in a single year in excess of 50% of the average of the prior
three years' net income. The credit agreement expires on February 20, 2003.
Total interest paid in 1998, 1997 and 1996 was $9,800,000, $6,400,000 and
$5,900,000, respectively.
7. LIABILITY FOR LOSS AND LOSS ADJUSTMENT EXPENSE RESERVES
The following table presents a reconciliation of beginning and ending
property/casualty loss and loss adjustment expense (LAE) reserve balances for
the years indicated (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Liability for losses and LAE at beginning of
year (net of reinsurance receivables:
1998 -- $263,401; 1997 -- $241,270; 1996 --
$263,934).................................... $851,941 $900,427 $918,497
Add provision for losses and LAE for claims
occurring in:
Current year................................ 260,043 209,367 213,419
Prior years................................. 21,291 (4,081) (9,642)
-------- -------- --------
Total incurred losses and LAE............... 281,334 205,286 203,777
Less losses and LAE payments for claims
occurring in:
Current year from continuing operations..... 24,772 13,108 17,974
Prior years from continuing operations...... 244,471 240,365 200,765
Prior years from discontinued operations.... 499 299 3,108
-------- -------- --------
Total paid losses and LAE................... 269,742 253,772 221,847
-------- -------- --------
Liability for losses and LAE at end of year
(net of reinsurance receivables: 1998 --
$293,284; 1997 -- $263,401; 1996 --
$241,270).................................... $863,533 $851,941 $900,427
======== ======== ========
</TABLE>
The portion of the provision for losses and LAE in the foregoing schedule
for 1998 in connection with prior years are a result of loss reserve
strengthening of $20,800,000 recorded in the third quarter 1998 relating to
three specific areas of operations: long-term care and a disparate group of
clinic accounts for the domestic insurance segment and asbestos exposures in the
international insurance segment. MMI's loss and LAE reserves and related
provision for prior years' losses attributable to health business are
immaterial.
8. STOCKHOLDERS' EQUITY
The statutory accounting practices prescribed or permitted by regulatory
authorities for MMI's insurance subsidiaries differ in some respects from GAAP.
Prior to 1997, ACIC discounted loss and LAE reserves for statutory reporting
42
<PAGE>
MMI COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. STOCKHOLDERS' EQUITY (CONTINUED)
purposes as permitted by regulatory authorities. Reconciliations of
statutory-basis capital and surplus and net income of its domestic insurance
operations to MMI's GAAP-basis amounts included in the accompanying financial
statements are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1998 1997
-------- --------
<S> <C> <C>
Statutory-basis capital and surplus..................... $188,309 $191,548
Additions:
Unionamerica.......................................... 129,118 118,562
GAAP-basis deferred income taxes...................... 30,974 33,085
Other, including non-insurance company amounts........ 64,527 55,807
-------- --------
GAAP-basis consolidated stockholders' equity of MMI..... $412,928 $399,002
======== ========
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Statutory-basis combined net income.............. $ 4,150 $27,763 $32,685
Additions (deductions):
Unionamerica................................... 11,382 8,162 19,105
Statutory-basis loss reserve discount.......... -- -- (1,994)
GAAP-basis deferred income taxes............... (1,553) (786) (5,986)
Other, including non-insurance company
amounts...................................... (2,615) (779) (3,690)
------- ------- -------
GAAP-basis consolidated net income of MMI........ $11,364 $34,360 $40,120
======= ======= =======
</TABLE>
The above statutory-basis capital and surplus amounts relate to MMI's direct
domestic insurance subsidiaries, ACIC and Health Providers Insurance Company
(HPIC). The capital and surplus amounts for ACIC include the capital and surplus
of American Continental Life Insurance Company (ACLIC), a life insurance company
owned by ACIC, in the amount of $16,000,000 at December 31, 1998 and $15,500,000
at December 31, 1997. Statutory net income of ACLIC amounted to $500,000 in
1998, $300,000 in 1997 and $400,000 in 1996.
The maximum amount of dividends that can be paid from ACIC to MMI without
regulatory approval is the lesser of net investment income or 10% of ACIC's
statutory-basis capital and surplus, each as of the preceding December 31. For
HPIC, the maximum amount of dividends that can be paid to MMI without regulatory
approval is the greater of net income or 10% of capital and surplus, each as of
the preceding December 31. Accordingly, the maximum total dividend amount is
$19,000,000 in 1999.
Under a Notice of Requirements from its regulatory body in the United
Kingdom, the Department of Trade and Industry (DTI), Unionamerica may not pay
any dividends unless it has given the DTI 14 days advance notice and the DTI has
not objected. The DTI has the power to prohibit or require Unionamerica to
reduce the amount of a dividend.
ACIC and HPIC's combined GAAP-basis net assets amounted to $271,000,000 at
December 31, 1998. The excess of these combined net assets over ACIC and HPIC's
maximum dividend amount represents restricted consolidated net assets.
MMI has authorized and unissued 5,000,000 shares of $20 par value Preferred
Stock. Of such Preferred Stock, 300,000 shares have been designated as Series B
Junior Participating Preferred Stock in connection with the Rights Plan
described in the following paragraph.
43
<PAGE>
MMI COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. STOCKHOLDERS' EQUITY (CONTINUED)
On June 14, 1997, the Board of Directors declared a dividend distribution to
holders of record on June 30, 1997 of one right (Right) to purchase 1/100 share
of Series B Junior Participating preferred stock on each outstanding share of
MMI Common Stock. The Rights issued under the Plan become exercisable only when
a person or group acquires or announces its intention to acquire 15% or more of
the Common Stock of MMI. Under certain conditions, each Right would, upon
exercise, entitle stockholders, other than the third party acquirer, to buy $150
worth of a MMI Common Stock equivalent at an exercise price of $75. If MMI is
acquired in a merger or other business combination transaction that has not been
approved by the Board of Directors, each Right will entitle its holder to
acquire common stock of the acquiring company with a market value equal to two
times the exercise price of the Right, a purchase value of $150 of the common
stock of the acquiring company for $75. At any time prior to the distribution
date, the Board of Directors retains the right to amend the Rights Plan and to
redeem the Rights at $.01 per Right. The Rights have a ten year term.
9. EARNINGS PER SHARE
Earnings per share are computed based on the weighted average number of
outstanding shares of common stock and equivalents, including incremental shares
from dilutive stock options since the date of grant using the treasury stock
method.
The following table sets forth the computation of basic and diluted earnings
per share (in thousands, except per share amounts):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Income from continuing operations................ $14,060 $36,190 $46,490
Weighted average shares for basic earnings per
share........................................... 18,936 18,751 17,336
Effect of dilutive employee stock options........ 449 645 751
------- ------- -------
Adjusted weighted average shares for diluted
earnings per share.............................. 19,385 19,396 18,087
======= ======= =======
Basic earnings per share......................... $ 0.74 $ 1.93 $ 2.68
Diluted earnings per share....................... 0.73 1.86 2.57
</TABLE>
Options to purchase 585,000, 143,000 and 18,000 shares of Common Stock were
outstanding during 1998, 1997 and 1996, respectively, but were not included in
the computation of the dilutive effect of stock options. These options were
excluded from the computation because the options' exercise prices were greater
than the average market price of the common shares and, therefore, would be
antidilutive.
10. STOCK OPTION PLANS
MMI has an employee stock plan that authorizes the issuance, subject to
directors' approval, of nonqualified stock options, incentive stock options and
restricted stock, and a nonqualified stock option plan for non-employee
directors. In addition, MMI has adopted the Long-Term Incentive Formula Plan
(LTIP) of 1997 under which it has issued restricted stock and stock options to
non-executives. The directors plan provides for the issuance of 1,375 options
annually for each director and 4,125 options to a new director joining MMI's
Board of Directors, with exercise prices equal to fair value at the grant date.
In addition, performance options for 2,500 shares are granted to each
non-employee director on January 1 of each year. All options, other than options
issued in replacement of Unionamerica options, have 10-year terms and generally
vest and become fully exercisable six months after the date of grant.
44
<PAGE>
MMI COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. STOCK OPTION PLANS (CONTINUED)
A summary of the MMI stock option activity, and related information for the
years ended December 31 follows:
<TABLE>
<CAPTION>
1998 1997 1996
-------------------- -------------------- --------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
--------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of
year...................... 1,589,362 $16.15 1,580,916 $14.98 1,298,185 $11.97
Granted (at fair value).... 478,336 21.19 130,625 25.30 531,319 21.89
Exercised.................. (16,400) 10.01 (121,079) 10.57 (213,338) 12.56
Cancelled.................. (53,000) 24.22 (1,100) 24.25 (35,250) 23.09
--------- ------ --------- ------ --------- ------
1,998,298 17.20 1,589,362 16.15 1,580,916 14.98
LTIP options outstanding... 357,245 16.29 -- -- -- --
--------- ------ --------- ------ --------- ------
2,355,543 $17.06 1,589,362 $16.15 1,580,916 $14.98
========= ====== ========= ====== ========= ======
Options exercisable at
year-end.................. 1,597,712 $16.28 1,534,862 $15.76 1,164,722 $13.34
Shares available for grant
at end of year............ 225,039 650,392 229,900
</TABLE>
Shares available for grant exclude LTIP shares. Other information regarding
options outstanding and exercisable as of December 31, 1998 is as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------ ----------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
RANGE OF EXERCISE PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE
- ------------------------ ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$5.36.............................. 264,317 1.69 $ 5.36 264,317 $ 5.36
$13.13 to $18.63................... 1,450,126 7.23 15.60 918,045 15.27
$21.06 to $32.25................... 641,100 8.21 25.17 415,350 25.43
--------- ---- ------ --------- ------
2,355,543 6.87 $17.06 1,597,712 $16.28
========= ==== ====== ========= ======
</TABLE>
Pro forma information regarding net income and net income per share has been
determined as if MMI had accounted for its stock option grants since January 1,
1995 under the plan using the fair value method of SFAS 123, "Accounting for
Stock-Based Compensation." For these purposes, the fair value for the stock
option grants was estimated at the date of the grant using a Black-Scholes
option pricing model with the following weighted-average assumptions for 1998,
1997 and 1996, respectively: risk-free interest rate of 5%, 6% and 6%, a
volatility factor of 33%, 29% and 29%, expected life of the option in years of
five, four and four, and an annual dividend yield of 2%, 1% and 1%.
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options that have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
MMI's employee and director stock options have characteristics significantly
different from those of traded options, and because changes in the selected
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee and director stock options.
45
<PAGE>
MMI COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. STOCK OPTION PLANS (CONTINUED)
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' six-month vesting period.
MMI's pro forma information is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Pro forma net income (in thousands).............. $10,266 $33,216 $36,361
Pro forma net income per common and common
equivalent share:
Basic.......................................... $ 0.54 $ 1.77 $ 2.10
Diluted........................................ 0.53 1.71 2.01
</TABLE>
The pro forma disclosures only include the effect of options granted
subsequent to January 1, 1995. Accordingly, the effects of applying the SFAS 123
pro forma disclosures to future periods may not be indicative of future effects.
11. COMMITMENTS AND CONTINGENCIES
MMI is engaged in various legal actions incident to the nature of its
business. Management is of the opinion that the outcome of the litigation will
not have a material effect on MMI's financial position or results of operations.
MMI leases its office space and certain equipment under noncancelable
leases. Rental expense for 1998, 1997 and 1996 was $10,100,000, $8,600,000 and
$7,400,000, respectively. As of December 31, 1998, aggregate minimum rental
commitments under noncancelable leases amounted to $12,800,000 in 1999,
$12,900,000 in 2000, $12,700,000 in 2001, $3,900,000 in 2002, $3,400,000 in 2003
and $8,100,000 thereafter.
12. EMPLOYEE BENEFIT PLANS
MMI has a defined-contribution pension plan that covers substantially all
domestic employees who have attained age 21 and completed three months of
service. MMI contributes 4% of salary for all eligible employees and matches a
portion of employee contributions. MMI's contributions charged to operations
were $2,900,000 in 1998, $2,700,000 in 1997 and $2,200,000 in 1996.
MMI operates a non-contributory, defined pension plan (the "Plan"),
principally for its international employees. The Plan provides for monthly
retirement benefits, normally at ages between 60 to 65, to eligible employees
based on employee compensation and length of employment.
46
<PAGE>
MMI COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. EMPLOYEE BENEFIT PLANS (CONTINUED)
The following table is a summary of activity for the Plan (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1998 1997
-------- --------
<S> <C> <C>
Change in benefit obligation:
Benefit obligation at beginning of year.......... $12,553 $ 9,118
Service cost..................................... 895 704
Interest cost.................................... 826 656
Actuarial (gains)................................ (161) 2,578
Foreign currency exchange rate change............ 153 (374)
Benefits paid.................................... (229) (129)
------- -------
Benefit obligation at end of year................ 14,037 12,553
Change in Plan assets:
Fair value of Plan assets at beginning of year... 12,894 10,360
Actual return on Plan assets..................... 2,190 1,883
Foreign currency exchange rate change............ 157 --
Company contributions............................ 858 780
Benefits paid.................................... (229) (129)
------- -------
Fair value of Plan assets at end of year......... 15,870 12,894
------- -------
Plan overfunding................................... 1,832 341
Unrecognized net actuarial (gain) loss............. (421) 886
Unrecognized prior service cost.................... (852) (902)
------- -------
Prepaid benefit cost............................... $ 559 $ 325
======= =======
</TABLE>
Weighted-average assumptions are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Discount rate.................................... 5.25% 6.50% 7.75%
Expected return on Plan assets................... 6.50 8.00 8.00
Rate of compensation increase.................... 3.50 5.50 5.50
</TABLE>
Net pension expense includes the following components (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Service cost.................................. $ 895 $ 704 $ 677
Interest cost................................. 826 656 551
Expected return on plan assets................ (1,044) (829) (623)
Amortization of prior service cost............ (50) (49) (50)
------- ----- -----
Net pension expense........................... $ 627 $ 482 $ 555
======= ===== =====
</TABLE>
47
<PAGE>
MMI COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. INDUSTRY SEGMENTS
In 1998, MMI adopted SFAS 131, "Disclosures about Segments of an Enterprise
and Related Information." 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. The domestic
insurance segment principally includes professional and general liability
insurance for hospitals, healthcare systems and healthcare providers. The
international insurance segment, principally located in the United Kingdom,
includes casualty insurance, principally professional and general liability
insurance and property insurance. The consulting and fee segment includes
clinical risk management, strategic healthcare, and employee relations
consulting, and other services consisting of claims administration, healthcare
credential verification, and billing, compliance and reimbursement services.
Investment income and expense allocations are based on estimates, and certain
assets have been allocated to segments by formulas. Segment revenues and segment
income (loss) exclude realized gains and losses on investments. Intersegment
revenues are not material. All revenues generated and assets held outside of the
United States are disclosed in the international insurance segment. There are no
individual customers that account for ten percent or more of MMI's revenues (in
thousands).
<TABLE>
<CAPTION>
DOMESTIC INTERNATIONAL CONSULTING
INSURANCE INSURANCE AND FEES TOTAL
---------- ------------- ---------- ----------
<S> <C> <C> <C> <C>
1998:
Revenues from external customers.............. $ 210,506 $136,229 $44,485 $ 391,220
Net investment income......................... 49,103 27,453 -- 76,556
---------- -------- ------- ----------
Total segment revenues........................ 259,609 163,682 44,485 467,776
Net realized gains on investments............. 2,678
----------
Total revenues................................ $ 470,454
==========
Segment income (loss)......................... (3,866) 17,064 (200) $ 12,998
Net realized gains on investments............. 2,678
----------
Income from continuing operations before
income taxes and extraordinary loss......... $ 15,676
==========
Interest expense.............................. 4,921 3,936 1,308 $ 10,165
Depreciation and amortization................. 3,921 1,625 3,625 9,171
Reserve strengthening......................... 17,500 3,300 -- 20,800
Significant non-cash items:
Increase (decrease) in policy liabilities... 70,055 (11,774) -- 58,281
Amortization of deferred policy acquisition
costs..................................... 19,311 36,906 -- 56,217
Identifiable assets at end of year............ 1,165,551 778,137 15,721 1,959,409
</TABLE>
48
<PAGE>
MMI COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. INDUSTRY SEGMENTS (CONTINUED)
<TABLE>
<CAPTION>
DOMESTIC INTERNATIONAL CONSULTING
INSURANCE INSURANCE AND FEES TOTAL
---------- ------------- ---------- ----------
<S> <C> <C> <C> <C>
1997:
Revenues from external customers.............. $ 159,579 $127,918 $44,862 $ 332,359
Net investment income......................... 47,171 28,319 -- 75,490
---------- -------- ------- ----------
Total segment revenues........................ 206,750 156,237 44,862 407,849
Net realized gains on investments............. 2,182
----------
Total revenues................................ $ 410,031
==========
Segment income................................ 21,113 16,451 7,385 $ 44,949
Net realized gains on investments............. 2,182
----------
Income from continuing operations before
income taxes and extraordinary loss......... $ 47,131
==========
Interest expense.............................. 3,118 2,777 594 $ 6,489
Depreciation and amortization................. 3,232 1,302 3,427 7,961
Acquisition expenses.......................... -- 9,745 -- 9,745
Significant non-cash items:
Increase (decrease) in policy liabilities... 5,154 (2,176) -- 2,978
Amortization of deferred policy acquisition
costs..................................... 15,805 33,244 -- 49,049
Identifiable assets at end of year............ 1,074,189 784,650 25,228 1,884,067
1996:
Revenues from external customers.............. $ 164,409 $116,982 $32,314 $ 313,705
Net investment income......................... 44,274 29,407 -- 73,681
---------- -------- ------- ----------
Total segment revenues........................ 208,683 146,389 32,314 387,386
Net realized losses on investments............ (890)
----------
Total revenues................................ $ 386,496
==========
Segment income................................ 24,120 29,330 4,843 $ 58,293
Net realized losses on investments............ (890)
----------
Income from continuing operations before
income taxes and extraordinary loss......... $ 57,403
==========
Interest expense.............................. 2,914 2,686 483 $ 6,083
Depreciation and amortization................. 2,877 1,218 2,059 6,154
Significant non-cash items:
Decrease in policy liabilities.............. (4,918) (28,994) -- (33,912)
Amortization of deferred policy acquisition
costs..................................... 14,024 27,811 -- 41,835
Identifiable assets at end of year............ 1,037,791 750,081 16,549 1,804,421
</TABLE>
49
<PAGE>
MMI COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. INDUSTRY SEGMENTS (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
ENTERPRISE-WIDE DISCLOSURES 1998 1997 1996
- --------------------------- -------- -------- --------
<S> <C> <C> <C>
Revenues from external customers by product:
Professional liability insurance.......................... $197,461 $154,097 $156,722
International insurance................................... 136,229 127,918 116,982
Life and health insurance................................. 13,045 5,482 7,687
Consulting services....................................... 44,485 44,862 32,314
-------- -------- --------
Total..................................................... $391,220 $332,359 $313,705
======== ======== ========
</TABLE>
50
<PAGE>
MMI COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
(in thousands, except per share data):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------------------------
3/31/98 6/30/98 9/30/98 12/31/98
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues.......................................... $133,147 $106,077 $108,629 $122,601
Income (loss) from continuing operations.......... 9,418 9,125 (12,283) 7,800
Loss from discontinued operations, net of tax..... (723) (641) (720) (612)
-------- -------- -------- --------
Net income (loss)................................. $ 8,695 $ 8,484 $(13,003) $ 7,188
======== ======== ======== ========
Earnings per common and common equivalent share:
Basic:
Income (loss) before extraordinary losses..... $ 0.50 $ 0.48 $ (0.65) $ 0.41
Loss from discontinued operations, net of
tax......................................... (0.04) (0.03) (0.04) (0.03)
-------- -------- -------- --------
Net income (loss)............................. $ 0.46 $ 0.45 $ (0.69) $ 0.38
======== ======== ======== ========
Diluted:
Income (loss) before extraordinary losses..... $ 0.49 $ 0.47 $ (0.65) $ 0.40
Loss from discontinued operations, net of
tax......................................... (0.04) (0.03) (0.04) (0.03)
-------- -------- -------- --------
Net income (loss)............................. $ 0.45 $ 0.44 $ (0.69) $ 0.37
======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------------------------
3/31/97 6/30/97 9/30/97 12/31/97
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues.......................................... $100,783 $101,989 $101,851 $105,408
Income from continuing operations before
extraordinary losses............................ 11,037 11,458 12,745 1,657
Extraordinary losses, net of taxes................ -- (267) -- (440)
Loss from discontinued operations, net of tax..... (412) (376) (515) (527)
-------- -------- -------- --------
Net income........................................ $ 10,625 $ 10,815 $ 12,230 $ 690
======== ======== ======== ========
Earnings per common and common equivalent share:
Basic:
Income before extraordinary losses............ $ 0.59 $ 0.61 $ 0.68 $ 0.09
Extraordinary losses, net of tax.............. -- (0.01) -- (0.02)
Loss from discontinued operations, net of
tax......................................... (0.02) (0.02) (0.03) (0.03)
-------- -------- -------- --------
Net income.................................... $ 0.57 $ 0.58 $ 0.65 $ 0.04
======== ======== ======== ========
Diluted:
Income before extraordinary losses............ $ 0.57 $ 0.59 $ 0.66 $ 0.09
Extraordinary losses, net of tax.............. -- (0.01) -- (0.02)
Loss from discontinued operations, net of
tax......................................... (0.02) (0.02) (0.03) (0.03)
-------- -------- -------- --------
Net income.................................... $ 0.55 $ 0.56 $ 0.63 $ 0.04
======== ======== ======== ========
</TABLE>
MMI reclassified certain international insurance revenues, resulting in an
increase of $9,260,000 to revenues in the three months ended September 30, 1997.
There was no effect on net income.
15. DISCONTINUED OPERATIONS
In 1992, MMI sold Ludgate Insurance Company Limited (Ludgate) at a loss,
which was reported in discontinued operations. The Company was involved in two
lawsuits connected with the sale. Also at issue was a stop-loss reinsurance
agreement provided by MMI to Ludgate in connection with the sale. In February
1997, a United Kingdom court rendered a judgment against MMI.
51
<PAGE>
MMI COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. DISCONTINUED OPERATIONS (CONTINUED)
In February 1997, MMI settled both lawsuits and commuted the stop-loss
reinsurance agreement. The settlement of all these matters is reflected in the
accompanying 1996 consolidated statement of income as a loss from discontinued
operations. The pre-tax loss was $7,800,000 with a corresponding tax benefit of
$2,700,000, resulting in a charge of $5,100,000.
On March 31, 1999, MMI sold the net assets of Healthcare Credentials
Management Services, its credentials verification subsidiary, and reported the
disposal as a discontinued operation. Included in the loss from discontinued
operations are HCMS' pre-tax operating losses of $4.2 million in 1998,
$2.8 million in 1997 and $2.0 million in 1996. Net of tax, the loss was
$2.7 million, $1.8 million and $1.3 million in 1998, 1997 and 1996,
respectively.
16. SUBSEQUENT EVENT
In December 1999, MMI announced the signing of a definitive agreement to
merge with The St. Paul Companies, Inc. (The St. Paul). Under the terms of the
merger, MMI will merge with a subsidiary of The St. Paul. The merger is
anticipated to close during the second quarter of 2000 pending the receipt of
the required shareholder and regulatory approvals.
52
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The "Election of Directors", "Executive Officers" and "Compliance with
Section 16(a) of the Exchange Act" sections on pages 2 and 3, pages 4 and 5, and
page 8 of the Registrant's Proxy Statement relating to the annual meeting of
shareholders to be held on April 22, 1999, are included by reference.
ITEM 11. EXECUTIVE COMPENSATION
The "Executive Compensation" section on pages 8 through 16 of the
Registrant's Proxy Statement relating to the annual meeting of stockholders to
be held on April 22, 1999, is included herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The "Security Ownership of Certain Beneficial Owners and Management" section
on pages 5 through 7 of the Registrant's Proxy Statement relating to the annual
meeting of stockholders to be held on April 22, 1999, is included herein by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The "Certain Relationships and Related Transactions: and "Compensation
Committee Interlocks and Insider Participation in Compensation Decisions"
sections on pages 7 and 13 of the Registrant's Proxy Statement relating to the
annual meeting of stockholders to be held on April 22, 1999, are included herein
by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
a. Filed documents
1. Financial statements.
Report of Independent Auditors
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Stockholders' Equity
Consolidated Statements of Cash Flow
Notes to Consolidated Financial Statements
2. Financial statement schedules. Financial statement schedules begin on
page S-1.
3. Exhibits. An index to exhibits to this report is on page 57.
b. Reports on Form 8-K.
None.
53
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
<TABLE>
<S> <C> <C>
Registrant: MMI Companies, Inc.
Date: January 18, 2000 By: /s/ B. FREDERICK BECKER
----------------- -----------------------------------------
B. Frederick Becker
Chairman and Chief Executive Officer
</TABLE>
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities and on the dates indicated.
<TABLE>
<S> <C> <C>
Date: January 18, 2000 By: /s/ B. FREDERICK BECKER
-----------------------------------------
B. Frederick Becker
Chairman and Chief Executive Officer
Officer and Director
Date: January 18, 2000 By: /s/ PAUL M. ORZECH
-----------------------------------------
Paul M. Orzech
Executive Vice President and
Chief Financial Officer
Date: January 18, 2000 By: /s/ JOSEPH R. HERMAN
-----------------------------------------
Joseph R. Herman
Senior Vice President and Controller
Date: January 18, 2000 By: /s/ RICHARD R. BARR
-----------------------------------------
Richard R. Barr
Director
Date: January 18, 2000 By: /s/ GEORGE B. CALDWELL
-----------------------------------------
George B. Caldwell
Director
Date: January 18, 2000 By: /s/ K. JAMES EHLEN, M.D.
-----------------------------------------
K. James Ehlen, M.D.
Director
</TABLE>
54
<PAGE>
<TABLE>
<S> <C> <C>
Date: January 18, 2000 By: /s/ F. LAIRD FACEY, M.D.
-----------------------------------------
F. Laird Facey, M.D.
Director
Date: January 18, 2000 By: /s/ ALAN C. GUY
-----------------------------------------
Alan C. Guy
Director
Date: January 18, 2000 By: /s/ WILLIAM M. KELLEY
-----------------------------------------
William M. Kelley
Director
Date: January 18, 2000 By: /s/ ANDREW D. KENNEDY
-----------------------------------------
Andrew D. Kennedy
Director
Date: January 18, 2000 By: /s/ TIMOTHY R. MCCORMICK
-----------------------------------------
Timothy R. McCormick
Director
Date: By:
-----------------------------------------
Gerald L. McManis
Director
Date: January 18, 2000 By: /s/ SCOTT S. PARKER
-----------------------------------------
Scott S. Parker
Director
Date: January 18, 2000 By: /s/ EDWARD C. PEDDIE
-----------------------------------------
Edward C. Peddie
Director
Date: January 18, 2000 By: /s/ JOSEPH D. SARGENT
-----------------------------------------
Joseph D. Sargent
Director
Date: January 18, 2000 By: /s/ ROBERT A. SPASS
-----------------------------------------
Robert A. Spass
Director
</TABLE>
55
<PAGE>
INDEX TO FINANCIAL STATEMENT SCHEDULES
<TABLE>
<CAPTION>
PAGE
--------
<S> <C> <C>
II. Condensed Financial Information of Registrant
Condensed Balance Sheets.................................. S-1
Condensed Statements of Income............................ S-2
Condensed Statements of Cash Flow......................... S-3
III. Supplementary Insurance Information......................... S-4
IV. Reinsurance................................................. S-5
V. Valuation and Qualifying Accounts........................... S-6
VI. Supplementary Property/Casualty Insurance Information....... S-7
</TABLE>
Schedule I has been omitted because the required information is included in the
Consolidated Financial Statements or Notes thereto.
56
<PAGE>
EXHIBIT INDEX
<TABLE>
<S> <C> <C>
3.1 Certificate Of Incorporation of The Registrant. (6)
3.2 Bylaws of the Registrant. (3)
4.1 Specimen stock certificate representing Common Stock. (7)
4.2 Amended and Restated Rights Agreement dated as of
September 24, 1998 by and between the Registrant and Chase
Mellon Shareholder Services LLC, as Rights Agent. (13)
10.1 Credit Agreement dated as of February 20, 1998 among the
Registrant, Various Lenders and Bank of America National
Trust and Savings Association, as Agent for the Lenders.
(11)
10.2 Indenture dated December 23, 1997 relating to Junior
Subordinated Debentures. (10)
10.3 Amended and Restated Declaration of Trust of MMI Capital
Trust I dated December 23, 1997. (10)
10.4 Lease dated July 1, 1991 for the Registrant's principal
executive offices and First through Seventh Amendments to
Lease, various dates (1)(3)(4)(5)(7)
10.5 Amended and Restated Return on Equity Incentive Plan,
effective January 1, 1990. (5) #
10.6 Amended 1993 Employee Stock Plan, effective January 15,
1993.(9) #
10.7 Retirement Equity Plan.(7) #
10.8 1993 Non-Employee Directors' Formula Stock Option Plan,
effective January 15, 1993. (11) #
10.9 Certificates of Insurance for Directors' Life Insurance
Program.(1) #
10.10 Amended Board of Directors Retirement Plan, effective
January 1, 1993. (11) #
10.11 Amended 1996 Non-Employee Director Stock and Deferred Cash
Compensation Plan. (5) #
10.12 Employment Agreement, as amended, dated as of May 1, 1997,
between the Registrant and its Chief Executive Officer,
Mr. B. Frederick Becker. (11)(12) #
10.13 Form of agreements between the Registrant and Ms. Anna Marie
Hajek, Mr. Gerald L. McManis, Mr. Paul M. Orzech and
Mr. Wayne A. Sinclair. (6) #
10.14 Service Agreement dated September 10, 1993, between Ian G.
Sinclair and UA Management Company. (8) #
10.15 Transfer and Forbearance Agreement dated as of December 30,
1993 among the Registrant and Gerald L. McManis. (2)
10.16 Acquisition Agreement dated June 25, 1997 by and between the
Registrant and Unionamerica Holdings plc (7)
10.17 Share Purchase Agreement, as amended, dated as of June 30,
1993, among Unionamerica Acquisition Company Ltd.,
Unionamerica Holdings Ltd. and The Continental Corporation.
(8)
10.18 Tax Indemnification Agreement, dated as of September 10,
1993, by and among The Continental Corporation and
Unionamerica Acquisition Company Ltd. (8)
10.19 Form of Promissory Note in connection with Loan Stock
Program.
10.20 Long Term Incentive Plan, effective January 1, 1997 #
12.1 Statement re computation of ratio of earnings to fixed
charges
21.1 Subsidiaries of the registrant.*
23.1 Consent of Ernst & Young LLP.
23.2 Consent of KPMG Audit Plc.
27.1 Financial data schedule.
99.1 Opinion of KPMG Audit Plc.
</TABLE>
- ------------------------
* Previously filed.
(1) Incorporated herein by reference to Registration Statement No. 33-59464 on
Form S-1 dated June 24, 1993.
(2) Incorporated herein by reference to Report on Form 10-K dated December 31,
1993, Commission File No. 1-11920.
(3) Incorporated herein by reference to Report on Form 10-K dated December 31,
1994, Commission File No. 1-11920.
57
<PAGE>
(4) Incorporated herein by reference to Report on Form 10-K dated December 31,
1995, Commission File No. 1-11920.
(5) Incorporated herein by reference to Report on Form 10-K dated December 31,
1996, Commission File No. 1-11920.
(6) Incorporated herein by reference to Report on Form 10-Q dated June 30, 1996,
Commission File No. 1-11920.
(7) Incorporated herein by reference to Registration Statement No. 333-32027 on
Form S-4, dated November 4, 1997.
(8) Incorporated by reference to Registration Statement No. 33-99186 on
Form F-1 dated November 9, 1995.
(9) Incorporated by reference to Registration Statement No. 333-46889 on
Form S-8, dated February 25, 1998.
(10) Incorporated herein by reference to Registration Statement No. 333-44565 on
Form S-4, dated January 20, 1998
(11) Incorporated herein by reference to Report on Form 10-K dated December 31,
1997, Commission File No. 1-11920.
(12) Incorporated herein by reference to Report on Form 10-Q dated June 30,
1998, Commission File No. 1-11920.
(13) Incorporated herein by reference to Report on Form 8-A dated November 6,
1998, Commission File No. 1-11920.
# Compensatory plans or arrangements.
58
<PAGE>
MMI COMPANIES, INC.
(PARENT COMPANY)
SCHEDULE II -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1998 1997
-------- --------
<S> <C> <C>
ASSETS
INVESTMENTS
Investment in subsidiaries.............................. $417,762 $403,200
Short-term investments.................................. 6,806 835
Fixed maturities........................................ 19,301 31,855
Preferred stocks........................................ 2,000 2,000
-------- --------
445,869 437,890
OTHER ASSETS
Cash.................................................... 68 161
Furniture and equipment -- at cost, less accumulated
depreciation: 1998 -- $6,404; 1997 -- $4,298.......... 6,098 5,501
Due from affiliates..................................... 71,288 78,164
Deferred income taxes................................... 8,851 8,888
Other................................................... 9,503 4,888
-------- --------
$541,677 $535,492
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Accrued expenses and other liabilities.................. $ 9,932 $ 15,484
Due to affiliates....................................... -- 2,282
Company-obligated, mandatorily redeemable preferred
securities of subsidiary trust holding solely junior
subordinated debentures of the Company................ 118,817 118,724
-------- --------
128,749 136,490
STOCKHOLDERS' EQUITY
Common Stock, par value $.10 per share:
Authorized shares: 30,000
Issued and outstanding shares: 1998 -- 19,059;
1997 -- 18,857...................................... 1,906 1,886
Additional paid-in capital.............................. 221,649 217,855
Retained earnings....................................... 160,226 154,929
Accumulated other comprehensive income, net of taxes:
1998 -- $15,091; 1997 -- $12,812...................... 29,147 24,332
-------- --------
412,928 399,002
-------- --------
$541,677 $535,492
======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
S-1
<PAGE>
MMI COMPANIES, INC.
(PARENT COMPANY)
SCHEDULE II -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT
MMI CONDENSED STATEMENTS OF INCOME
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
REVENUES
Management fees from subsidiaries......................... $23,950 $28,450 $24,550
Dividends received from subsidiaries...................... 6,551 29,750 11,000
Net investment income..................................... 1,746 1,578 752
Net realized gains on investments......................... 154 16 22
------- ------- -------
32,401 59,794 36,324
EXPENSES
Administrative and other.................................. 29,082 24,394 23,193
Interest expense.......................................... 5,324 3,712 3,397
------- ------- -------
34,406 28,106 26,590
------- ------- -------
Income (loss) from continuing operations before income
taxes, extraordinary loss and equity in undistributed
net income of subsidiaries............................ (2,005) 31,688 9,734
Income taxes (credit)..................................... (3,806) 381 (396)
------- ------- -------
Income from continuing operations before extraordinary
loss and equity in undistributed net income of
subsidiaries.......................................... 1,801 31,307 10,130
Extraordinary loss, net of taxes.......................... -- 141 --
------- ------- -------
Income from continuing operations before equity in
undistributed net income of subsidiaries.............. 1,801 31,166 10,130
Loss from discontinued operations......................... 2,696 1,830 6,370
------- ------- -------
Income (loss) before equity in undistributed net income
of subsidiaries....................................... (895) 29,336 3,760
Equity in undistributed net income of subsidiaries........ 12,259 5,024 36,360
------- ------- -------
Net income.............................................. $11,364 $34,360 $40,120
======= ======= =======
</TABLE>
See Notes to Consolidated Financial Statements.
S-2
<PAGE>
MMI COMPANIES, INC.
(PARENT COMPANY)
SCHEDULE II -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Net cash provided (used) by operating activities............ $ 5,437 $(17,619) $ 3,558
Investing activities:
Net sale (purchase) of short-term investments............. (5,971) 14,649 (14,769)
Purchases of fixed maturities............................. ( 8,373) (43,108) (38,833)
Sales of fixed maturities................................. 19,377 33,133 8,706
Maturities of fixed maturities............................ 1,618 1,588 5,430
Capital contribution to subsidiaries...................... -- (20,000) (10,003)
Furniture and equipment additions......................... (2,704) (3,200) (2,174)
Acquisition of subsidiaries............................... (5,824) (21,006) (11,074)
------- -------- --------
Net cash used by investing activities................. (1,877) (37,944) (62,717)
Financing activities:
Issuance of Common Stock.................................. 2,568 1,899 56,725
Common Stock repurchased.................................. (154) (2,840) --
Issuance of Capital Securities............................ -- 124,551 --
Costs incurred in connection with securities offering..... -- (5,832) (3,119)
Payments on notes payable................................. -- (58,000) (750)
Proceeds from notes payable............................... -- -- 9,000
Dividends................................................. (6,067) (4,182) (2,864)
------- -------- --------
Net cash provided (used) by financing activities...... (3,653) 55,596 58,992
------- -------- --------
Increase (decrease) in cash........................... (93) 33 (167)
Cash at beginning of year................................... 161 128 295
------- -------- --------
Cash at end of year................................... $ 68 $ 161 $ 128
======= ======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
S-3
<PAGE>
MMI COMPANIES, INC. AND SUBSIDIARIES
SCHEDULE III - SUPPLEMENTARY INSURANCE INFORMATION
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, YEAR ENDED DECEMBER 31,
------------------------------------------------------- ----------------------------------------
BENEFITS,
LOSS AND CLAIMS,
DEFERRED LOSS LOSSES
POLICY ADJUSTMENT UNEARNED FUTURE NET AND
ACQUISITION EXPENSE PREMIUM POLICY PREMIUM INVESTMENT SETTLEMENT
SEGMENT COSTS RESERVES RESERVES BENEFITS REVENUES INCOME EXPENSES
- --------------------- ----------- ---------- -------- -------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
1998:
Domestic
insurance........ $ 8,132 $ 691,903 $ 70,810 $8,326 $210,506 $49,103 $203,449
International
insurance........ 20,169 484,170 71,129 -- 136,229 27,453 88,032
Consulting and
fees............. -- -- -- -- -- -- --
------- ---------- -------- ------ -------- ------- --------
$28,301 $1,176,073 $141,939 $8,326 $346,735 $76,556 $291,481
======= ========== ======== ====== ======== ======= ========
1997:
Domestic
insurance........ $ 7,462 $ 625,114 $ 67,147 $8,723 $159,579 $47,171 $132,948
International
insurance(1)..... 19,077 500,032 67,041 -- 127,918 28,319 76,417
Consulting and
fees............. -- -- -- -- -- -- --
------- ---------- -------- ------ -------- ------- --------
$26,539 $1,125,146 $134,188 $8,723 $287,497 $75,490 $209,365
======= ========== ======== ====== ======== ======= ========
1996:
Domestic
insurance........ $ 7,117 $ 631,573 $ 55,679 $8,578 $164,409 $44,274 $135,786
International
insurance........ 16,006 518,345 50,796 -- 116,982 29,407 72,990
Consulting and
fees............. -- -- -- -- -- -- --
------- ---------- -------- ------ -------- ------- --------
$23,123 $1,149,918 $106,475 $8,578 $281,391 $73,681 $208,776
======= ========== ======== ====== ======== ======= ========
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------
AMORTIZATION
OF DEFERRED
POLICY OTHER NET
ACQUISITION OPERATING PREMIUMS
SEGMENT COSTS EXPENSES WRITTEN
- --------------------- ------------ --------- --------
<S> <C> <C> <C>
1998:
Domestic
insurance........ $19,311 $ 40,715 $214,028
International
insurance........ 36,906 21,680 140,744
Consulting and
fees............. -- 53,272 --
------- -------- --------
$56,217 $115,667 $354,772
======= ======== ========
1997:
Domestic
insurance........ $15,805 $ 36,885 $168,607
International
insurance(1)..... 33,244 30,125 138,342
Consulting and
fees............. -- 47,055 --
------- -------- --------
$49,049 $114,065 $306,949
======= ======== ========
1996:
Domestic
insurance........ $14,024 $ 34,753 $167,392
International
insurance........ 27,811 16,258 122,725
Consulting and
fees............. -- 31,646 --
------- -------- --------
$41,835 $ 82,657 $290,117
======= ======== ========
</TABLE>
- ------------------------
(1) The Company reclassified certain international insurance revenues, resulting
in an increase of $9,260,000 to premium revenues and net premiums written,
and a corresponding increase of $9,604,000 to benefits, claims, losses and
settlement expenses and a decrease of $344,000 to other operating expenses.
There was no effect on pre-tax income.
See Note 13 to the Consolidated Financial Statements for a discussion of the
reclassification of segment information.
S-4
<PAGE>
MMI COMPANIES, INC. AND SUBSIDIARIES
SCHEDULE IV -- REINSURANCE
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
PERCENTAGE
CEDED TO OF AMOUNT
GROSS OTHER ASSUMED NET ASSUMED TO
AMOUNT COMPANIES FROM OTHER AMOUNT NET
---------- --------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1998:
Life insurance in force at end of
year: $1,073,993 $343,583 $ -- $730,410
========== ======== ======== ========
Premiums:
Medical malpractice................. $ 222,232 $ 33,438 $ 8,669 $197,463 4.39%
International....................... 53,000 28,951 112,180 136,229 82.35%
Other............................... 27,787 23,463 8,719 13,043 66.85%
---------- -------- -------- --------
Total premiums.................... $ 303,019 $ 85,852 $129,568 $346,735
========== ======== ======== ========
Year ended December 31, 1997:
Life insurance in force at end of
year: $ 992,060 $302,889 $ -- $689,171
========== ======== ======== ========
Premiums:
Medical malpractice................. $ 173,025 $ 32,946 $ 14,018 $154,097 9.10%
International (1)................... 43,583 10,326 94,661 127,918 74.00%
Other............................... 17,854 14,185 1,813 5,482 33.07%
---------- -------- -------- --------
Total premiums.................... $ 234,462 $ 57,457 $110,492 $287,497
========== ======== ======== ========
Year ended December 31, 1996:
Life insurance in force at end of
year: $1,265,506 $300,385 $ -- $965,121
========== ======== ======== ========
Premiums:
Medical malpractice................. $ 171,058 $ 29,504 $ 15,168 $156,722 9.68%
International....................... 49,915 21,040 88,107 116,982 75.32%
Other............................... 21,001 15,481 2,167 7,687 28.19%
---------- -------- -------- --------
Total premiums.................... $ 241,974 $ 66,025 $105,442 $281,391
========== ======== ======== ========
</TABLE>
- ------------------------
(1) The Company reclassified certain international insurance revenues, resulting
in a decrease of $9,260,000 to premiums ceded to other companies and an
increase to the net amount. The percentage of amount assumed to net
decreased accordingly.
See Note 13 to the Consolidated Financial Statements for a discussion of the
reclassification of segment information.
S-5
<PAGE>
MMI COMPANIES, INC. AND SUBSIDIARIES
SCHEDULE V -- VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT
BEGINNING BALANCE AT
DESCRIPTION OF YEAR ADDITIONS DEDUCTIONS END OF YEAR
- ----------- ---------- --------- ---------- -----------
<S> <C> <C> <C> <C>
Year ended December 31, 1998:
Accumulated amortization of goodwill............... $ 9,102 $3,488 $ -- $12,590
Accumulated depreciation of furniture and
equipment........................................ 10,699 5,683 284 16,098
Year ended December 31, 1997:
Accumulated amortization of goodwill............... 5,788 3,314 -- 9,102
Accumulated depreciation of furniture and
equipment........................................ 11,626 4,647 5,574 10,699
Year ended December 31, 1996:
Accumulated amortization of goodwill............... 3,777 2,011 -- 5,788
Accumulated depreciation of furniture and
equipment........................................ 7,733 4,143 250 11,626
</TABLE>
S-6
<PAGE>
MMI COMPANIES, INC. AND SUBSIDIARIES
SCHEDULE VI -- SUPPLEMENTARY PROPERTY/CASUALTY INSURANCE INFORMATION
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, YEAR ENDED DECEMBER 31,
------------------------------------------------ -------------------------------------------
DISCOUNT
DEDUCTED LOSSES AND LOSS
FROM ADJUSTMENT
LOSS AND LOSS AND EXPENSES
DEFERRED LOSS LOSS INCURRED RELATED TO
POLICY ADJUSTMENT ADJUSTMENT UNEARNED NET -------------------
ACQUISITION EXPENSE EXPENSE PREMIUM PREMIUMS INVESTMENT CURRENT PRIOR
AFFILIATION WITH REGISTRANT COSTS RESERVES RESERVES RESERVES EARNED INCOME YEAR YEARS
- --------------------------- ----------- ---------- ---------- -------- -------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1998:
Consolidated
subsidiaries.......... $28,301 $1,156,817 $ -- $141,939 $333,690 $76,072 $260,043 $21,291
1997:
Consolidated
subsidiaries.......... 26,539 1,113,095 -- 134,188 282,015 74,019 209,367 (4,081)
1996:
Consolidated
subsidiaries.......... 23,123 1,139,018 -- 106,475 273,704 72,301 213,419 (9,642)
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
AMORTIZATION PAID
OF DEFERRED LOSSES AND
POLICY LOSS NET
ACQUISITION ADJUSTMENT PREMIUMS
AFFILIATION WITH REGISTRANT COSTS EXPENSES WRITTEN
- --------------------------- ------------ ---------- --------
<S> <C> <C> <C>
1998:
Consolidated
subsidiaries.......... $56,217 $269,243 $341,562
1997:
Consolidated
subsidiaries.......... 49,049 253,473 301,465
1996:
Consolidated
subsidiaries.......... 41,835 218,739 282,443
</TABLE>
- ------------------------
(1) The Company reclassified certain international insurance revenues, resulting
in an increase of $9,260,000 to premiums earned and net premiums written,
and a corresponding increase of $9,604,000 to losses and loss adjustment
expenses incurred related to prior years, and paid losses and loss
adjustment expenses. There was no effect on pre-tax income.
S-7
<PAGE>
Exhibit 12.1
MMI COMPANIES, INC. AND SUBSIDIARIES
EXHIBIT 12 -- RATIO OF EARNINGS TO FIXED CHARGES
(IN THOUSANDS EXCEPT RATIOS)
<TABLE>
<CAPTION>
Year ended December 31,
-------------------------------------------------------
1998 1997 1996 1995 1994
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Income from continuing operations before income taxes and
extraordinary losses........................................ $15,676 $47,131 $57,403 $44,002 $ 7,083
Add fixed charges:
Interest expense......................................... 10,165 6,489 6,083 10,889 10,084
Amortization of issuance costs........................... -- -- 70 -- 123
Portion of rents representative of interest factor....... 2,515 2,150 1,850 1,625 1,345
------- ------- ------- ------- -------
12,680 8,639 8,003 12,514 11,552
------- ------- ------- ------- -------
Income as adjusted............................................ $28,356 $55,770 $65,406 $56,516 $18,635
======= ======= ======= ======= =======
Fixed charges................................................. $12,680 $ 8,639 $ 8,003 $12,514 $11,552
======= ======= ======= ======= =======
Ratio of earnings to fixed charges............................ 2.2 6.5 8.2 4.5 1.6
</TABLE>
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement
pertaining to the MMI Companies, Inc. Savings and Profit Sharing Plan
(401(k)) Form S-8 No. 33-72786), in the Registration Statements pertaining to
the MMI Companies, Inc. 1993 Employee Stock Plan, and 1993 Non-employee
Director's Formula Stock Option Plan (Form S-8 No. 333-46889 and No.
33-81228) and the Registration Statement pertaining to the 1995 Employee
Stock Investment Plan (Form S-8 No. 33-87356), and in the related
Prospectuses, of our report dated February 24, 1999, except for Notes 15 and
16 as to which the date is January 11, 2000, with respect to the consolidated
financial statements and schedules of MMI Companies, Inc. included in the
Annual Report (Form 10-K) for the year ended December 31, 1998, as amended.
ERNST & YOUNG LLP
Chicago, Illinois
January 18, 2000
<PAGE>
Exhibit 23.2
The Board of Directors
Unionamerica Holdings plc
We consent to the incorporation by reference in the registration statements
(Nos. 33-72786, 33-81228, 33-87356 and 333-46889) on Form S-8, of MMI
Companies, Inc. of our report dated March 11, 1997 with respect to the
consolidated statements of operations, shareholders' equity and cash flows
for the year ended December 31, 1996, and all related schedules, which report
appears in the December 31, 1998 Form 10-K/A No. 1 of MMI Companies, Inc.
KPMG Audit Plc
Chartered Accountants
Registered Auditor
London, England
18 January, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM THE CONSOLIDATED
FINANCIAL STATEMENTS ON MMI COMPANIES, INC. AND SUBSIDIARIES FOR THE TWELVE
MONTH PERIOD ENDED DECEMBER 31, 1998, AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<DEBT-HELD-FOR-SALE> 1,150,622
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 57,981
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 1,259,422
<CASH> 13,323
<RECOVER-REINSURE> 26,418
<DEFERRED-ACQUISITION> 28,301
<TOTAL-ASSETS> 1,939,409
<POLICY-LOSSES> 1,184,339
<UNEARNED-PREMIUMS> 141,039
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 118,817
0
0
<COMMON> 1,906
<OTHER-SE> 411,022
<TOTAL-LIABILITY-AND-EQUITY> 1,959,409
346,735
<INVESTMENT-INCOME> 76,556
<INVESTMENT-GAINS> 2,678
<OTHER-INCOME> 44,485
<BENEFITS> 291,481
<UNDERWRITING-AMORTIZATION> 56,217
<UNDERWRITING-OTHER> 96,915
<INCOME-PRETAX> 15,676
<INCOME-TAX> 1,616
<INCOME-CONTINUING> 14,060
<DISCONTINUED> (2,696)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 11,364
<EPS-BASIC> 0.60
<EPS-DILUTED> 0.59
<RESERVE-OPEN> 851,941
<PROVISION-CURRENT> 260,043
<PROVISION-PRIOR> 21,291
<PAYMENTS-CURRENT> 24,772
<PAYMENTS-PRIOR> 244,471
<RESERVE-CLOSE> 863,533
<CUMULATIVE-DEFICIENCY> 21,291
</TABLE>
<PAGE>
Exhibit 99.1
The Board of Directors
Unionamerica Holdings plc
We have audited the consolidated statement of operations, shareholders'
equity and cash flow of Unionamerica Holdings plc and subsidiaries for the
year ended 31 December 1996. In connection with our audit of the consolidated
statement of operations, shareholders' equity and cash flow, we have also
audited the financial statement schedules IV and VI, (none of which
aforementioned consolidated statement of operations, shareholders' equity and
cash flow and financial statement schedules are separately presented herein).
These consolidated statement of operations, shareholders' equity and cash
flow and financial statement schedules are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated statement of operations, shareholders' equity and cash flow and
financial statement schedules based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards in the United States of America. Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion, the consolidated statement of operations, shareholders'
equity and cash flow referred to above present fairly, in all material
respects, the results of Unionamerica Holdings Plc and subsidiaries
operations and their cash flows for the year ended 31 December 1996, in
conformity with generally accepted accounting principles in the United States
of America. Also in our opinion, the related financial statement schedules,
when considered in relation to the basic consolidated statement of
operations, shareholders' equity and cash flow taken as a whole, present
fairly, in all material respects, the information set forth therein.
KPMG Audit Plc
Chartered Accountants
Registered Auditor
London, England
11 March 1997
