<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarter Ended: June 30, 1995 Commission File number 0-15119
MILWAUKEE INSURANCE GROUP, INC.
(exact name of registrant as specified in its charter)
Wisconsin 39-1561230
(State of incorporation) (I.R.S. Employer Identification Number)
803 West Michigan Street
Milwaukee, Wisconsin 53233
(Address of principal executive offices)
(Zip Code)
(414) 271-0525
(Registrant's telephone number, including area code)
Indicate by check mark whether 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 ( )
The number of shares outstanding of the registrant's Common Stock, par value
$0.01 per share, at August 1, 1995, was 4,150,600 shares.
Total Pages: 14
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<PAGE> 2
MILWAUKEE INSURANCE GROUP, INC.
FORM 10-Q FOR QUARTER ENDED JUNE 30, 1995
INDEX
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION PAGES
-----
<S> <C>
Consolidated Balance Sheets - June 30, 1995
and December 31, 1994 3-4
Consolidated Statements of Operations - for the Three Months
and Six Months Ended June 30, 1995 and 1994 5
Consolidated Statements of Cash Flows - for the Six Months
Ended June 30, 1995 and 1994 6
Notes to Interim Consolidated Financial Statements 7-9
Management's Discussion and Analysis of Financial Condition
and Results of Operations 10-11
PART II - OTHER INFORMATION
Other Information 12
Signatures 12
EXHIBIT A - REPORT OF INDEPENDENT ACCOUNTANTS 13
EXHIBIT B - AWARENESS LETTER OF INDEPENDENT ACCOUNTANTS 14
</TABLE>
-2-
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MILWAUKEE INSURANCE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
1995 1994
------------- -----------------
(unaudited)
<S> <C> <C>
ASSETS
Investments:
Fixed maturities, at market value (amortized cost
$153,479,922 and $153,774,823, respectively) $156,072,946 $147,303,673
Equity securities, at market value (cost $9,697,549 and
$9,516,293, respectively) 11,649,752 9,785,493
Mortgage loan to related party, at unpaid principal
balance 974,024 1,000,000
Real estate note receivable from related party, at
unpaid principal balance 725,170 --
Short-term investments, at amortized cost, which
approximates market value (including cash equivalents
of $9,217,995 and $6,411,589, respectively) 9,217,995 10,301,980
------------- --------------
Total investments 178,639,887 168,391,146
Cash 99,087 363,146
Receivable from affiliates 217,625 --
Accrued investment income 2,427,723 2,396,291
Premiums receivable 23,336,353 19,280,850
Reinsurance receivable 65,492,219 69,353,287
Prepaid reinsurance premiums 26,853,308 25,651,562
Federal income taxes recoverable 480,797 333,988
Deferred policy acquisition costs 10,824,161 9,539,578
Deferred income taxes 4,789,159 8,859,068
Property and equipment, at cost, net of accumulated
depreciation of $1,767,965 and $791,238, respectively 14,101,441 14,798,354
Other assets 793,974 1,582,979
------------ ------------
Total assets $328,055,734 $320,550,249
============ ============
</TABLE>
See accompanying notes to interim consolidated financial statements.
-3-
<PAGE> 4
MILWAUKEE INSURANCE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS, CONTINUED
<TABLE>
<CAPTION>
June 30, December 31,
1995 1994
-------------- ------------------
(unaudited)
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Insurance reserves:
Losses and loss adjustment expenses $153,653,997 $158,009,038
Unearned premiums 72,076,313 67,282,650
Payable to affiliates -- 1,355,596
Long-term debt 11,084,279 12,030,870
Other liabilities 10,896,383 11,898,975
-------------- --------------
Total liabilities 247,710,972 250,577,129
-------------- --------------
Commitments and contingent liabilities
Shareholders' equity:
Preferred stock, $.01 par value, authorized 2,000,000
shares; none issued -- --
Common stock, $.01 par value, authorized 15,000,000
shares; issued and outstanding 4,150,600 and 4,138,100
shares, respectively 41,506 41,381
Additional paid-in capital 30,220,066 30,099,879
Unrealized gain (loss) on securities, net of deferred
income taxes 2,851,839 (3,815,197)
Retained earnings 47,231,351 43,647,057
-------------- --------------
Total shareholders' equity 80,344,762 69,973,120
-------------- --------------
Total liabilities and shareholders' equity $328,055,734 $320,550,249
============== ==============
</TABLE>
See accompanying notes to interim consolidated financial statements.
-4-
<PAGE> 5
MILWAUKEE INSURANCE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months ended June 30, Six Months ended June 30,
--------------------------- -------------------------
1995 1994 1995 1994
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Premiums earned $27,847,716 $27,361,766 $55,004,883 $54,813,461
Investment income, net of
investment expense 2,307,924 1,961,617 4,891,059 3,836,003
Other income 354,832 204,185 660,248 381,184
Net realized capital gains 840,767 178,572 707,827 653,719
---------- ---------- ---------- ----------
31,351,239 29,706,140 61,264,017 59,684,367
---------- ---------- ---------- ----------
Losses and expenses:
Losses and loss adjustment expenses 19,096,001 19,657,974 37,854,166 40,027,958
Amortization of deferred policy
acquisition costs 6,314,810 6,076,905 12,469,665 12,175,639
Insurance and general expenses 2,828,644 2,695,412 5,656,503 5,704,457
---------- ---------- ---------- ----------
28,239,455 28,430,291 55,980,334 57,908,054
---------- ---------- ---------- ----------
Income from continuing operations
before income tax expense 3,111,784 1,275,849 5,283,683 1,776,313
Income tax expense 950,723 339,466 1,699,389 423,527
----------- ----------- ---------- -----------
Income from continuing operations 2,161,061 936,383 3,584,294 1,352,786
Discontinued operations:
Income from operations, less applicable income
taxes of $78,592 and $317,044, respectively -- 430,847 -- 930,135
---------- ---------- ---------- ----------
Net income $2,161,061 $1,367,230 $3,584,294 $2,282,921
========== ========== ========== ==========
Per share data:
Income from continuing operations $0.52 $0.23 $0.86 $0.33
Discontinued operations -- 0.10 -- 0.22
---------- --------- ---------- ----------
Net income $0.52 $0.33 $0.86 $0.55
========== ========= ========== ==========
Weighted average number of shares
outstanding 4,150,600 4,137,960 4,150,067 4,137,960
========== ========== ========== ==========
</TABLE>
See accompanying notes to interim consolidated financial statements.
-5-
<PAGE> 6
MILWAUKEE INSURANCE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six Months ended June 30,
-------------------------
1995 1994
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $3,584,294 $2,282,921
Adjustments to reconcile net income to net
cash provided by operating activities:
Net realized capital gains (707,827) (653,719)
Depreciation and amortization 1,033,236 --
Amortization of bond premium and
discount 204,960 129,750
Discontinued operations -- (930,135)
Changes in assets and liabilities:
Insurance reserves 3,097,944 10,089,419
Premiums receivable (4,055,503) (2,858,342)
Deferred policy acquisition costs (1,284,583) (2,151,278)
Receivable from/payable to affiliates (1,573,221) (2,999,701)
Accrued investment income (31,432) (176,996)
Federal income taxes (146,809) (1,071,978)
Deferred income taxes (10,237) 108,727
Net assets of discontinued operation -- 314,175
Other assets and liabilities (93,275) (1,285,477)
----------- ------------
Net cash provided by operating activities 17,547 797,366
----------- ------------
Cash flows from investing activities:
Proceeds from investments sold or matured 14,762,596 35,911,520
Purchases of investments (10,255,688) (26,297,381)
Purchases of property and equipment, net (336,323) --
Collections on mortgage loan 25,976 --
Issuance of note receivable (725,170) --
----------- ----------
Net cash provided by investing activities 3,471,391 9,614,139
---------- ----------
Cash flows from financing activites:
Payments on long-term debt (946,591) (312,500)
----------- ----------
Net cash used for financing activities (946,591) (312,500)
----------- ----------
Net increase in cash and cash equivalents 2,542,347 10,099,005
Cash and cash equivalents at beginning
of period 6,774,735 13,247,462
---------- ----------
Cash and cash equivalents at end of period $ 9,317,082 $23,346,467
=========== ===========
</TABLE>
See accompanying notes to interim consolidated financial statements.
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<PAGE> 7
MILWAUKEE INSURANCE GROUP, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation and Basis of Presentation
Milwaukee Insurance Group, Inc. ("Company") was organized in 1985 and is a
48% owned subsidiary of Milwaukee Mutual Insurance Company ("Mutual"). The
Company is a holding company engaged through its wholly-owned subsidiaries
in the business of property and casualty insurance. The consolidated
financial statements have been prepared on the basis of generally accepted
accounting principles, and include the accounts of the Company and its
wholly-owned subsidiaries. All significant intercompany balances have been
eliminated.
Interim Financial Information
The results of operations for the interim periods reported are not
necessarily indicative of results to be expected for the year. These
statements reflect all adjustments which are, in the opinion of management,
necessary for a fair presentation. All such adjustments are of a normal
recurring nature. The year-end balance sheet data was derived from audited
financial statements, but does not include all disclosures required by
generally accepted accounting principles.
Reclassification
Certain prior year amounts have been reclassified to conform to the 1995
presentation.
2. PENDING SALE OF COMPANY
On June 16, 1995, the Company entered into an agreement in principle,
subject to the execution of a definitive acquisition agreement, with
Unitrin, Inc. (Unitrin), a financial services holding company, whereby
Unitrin or one of its affiliates would acquire 100% of the Company's
outstanding common stock for $22 per share in cash. The acquisition is
expected to be completed during the fourth quarter of 1995 and would be
accounted for under the purchase method of accounting.
-7-
<PAGE> 8
MILWAUKEE INSURANCE GROUP, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS, Continued
3. REAL ESTATE NOTE RECEIVABLE FROM RELATED PARTY
In June 1995, the Company, along with two unrelated lenders, entered into a
$2,250,000 promissory note agreement with Eagle Mountain Investors, L.L.C.
(Eagle Mountain), a real estate development joint venture owned 50% by
Mutual. Amounts advanced under the note agreement bear interest at 35%,
compounded annually, and the note, along with a loan fee of $225,000 plus
interest at 35%, compounded annually, and all unpaid interest, is due March
31, 1998. Amounts advanced under the note are unsecured and will be repaid
by Eagle Mountain from revenues generated from the development and sale of
real estate, prior to any other distributions made to joint venturers. A
loan participation agreement between the Company and the two unrelated
lenders sets forth the Company's maximum committment under the note
agreement as $1,125,000. As of June 30, 1995, the Company has advanced
$725,170 under the terms of the agreement.
4. COMMITMENTS AND CONTINGENT LIABILITIES
In December 1994, the Company entered into an agreement with a bank to
lease certain computer application software. The Company is accounting for
this agreement as a capital lease. The initial lease term is one year and
may be renewed for two additional one year terms provided, among other
conditions, there is no decrease in the appraised value of the software.
Rental payments under the lease vary with changes in interest rates. The
Company may purchase the software and terminate the lease at any time upon
payment of all remaining lease obligations due. The lease agreement
contains certain restrictive covenants, including one that limits dividend
distributions from the Company to its shareholders to the lesser of
$1,000,000 or 25% of the Company's consolidated net income for any given
year that there remains an obligation under the lease agreement.
In accordance with industry practice, the Company in its consolidated
financial statements treats risks, to the extent reinsured, as though they
were risks for which the Company is not liable. Insurance ceded by the
property and casualty subsidiaries does not relieve them of their primary
liability as the originating insurers and the Company remains contingently
liable in the event that any reinsurer fails to meet its obligations under
reinsurance agreements.
-8-
<PAGE> 9
MILWAUKEE INSURANCE GROUP, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS, Continued
4. COMMITMENTS AND CONTINGENT LIABILITIES, (Continued)
Certain of the agents of the Company can execute a covenant not to compete
in the event of the termination of their agency relationship, and receive a
predetermined percentage of their annualized written premium at the date of
termination (including policies written by the Company and, in certain
cases, by other insurance companies) for up to fifteen years depending on
the timeliness of the agents notification to terminate. The commitment has
not been quantified because the Company does not have the data for business
the agencies have written with other companies. During the six-month
period ending June 30, 1995, an agent elected this option. This election
did not have a material impact on the Company's financial statements.
In the normal course of business, the Company is involved in litigation
with claimants and others. In the opinion of management, the ultimate
liability, if any, arising from this litigation is not expected to have a
material adverse effect on the financial position or results of operations
of the Company.
5. SALE OF BUSINESS
On July 1, 1994, the Company sold its life insurance subsidiary, Milwaukee
Life Insurance Company ("Life") to an unrelated party for $20.5 million in
cash. Immediately prior to the sale, the Company received a $3.4 million
property dividend from Life, consisting of the home office building, net of
a mortgage loan on the real estate, and a mortgage loan receivable from
Mutual. Life had revenues of $2,282,144 and $4,356,545 for the three-month
and six-month periods ending June 30, 1994, respectively. The results of
operations of Life for the three-month and six-month periods ending June
30, 1994 have been classified as discontinued operations. The net assets
of Life have been reclassified in the Company's consolidated balance sheet
as net assets of discontinued operation.
-9-
<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Results of Operations
During the first half of 1995, the Company recorded net income of $3,585,000,
or $0.86 per share, compared with net income of $2,283,000 or $0.55 per share
for the first half of 1994. Included in the first half of 1995 net income is
additional net investment income which was primarily attributable to the
investments purchased with proceeds from the July, 1994 sale of the Company's
life insurance operation. This operation generated income of $930,000 or $0.22
per share in the first half of 1994.
The Company's GAAP combined ratio improved from 105.2% during the first half of
1994 to 100.7% for the same period in 1995. The second quarter improved 3.6
points compared to the second quarter of 1994.
During the first half of 1995, net premiums written decreased by $4,042,000 or
6.5% over the same period in 1994. The decrease is primarily a result of the
termination of the quota share reinsurance contract which contributed
$2,800,000 during the first half of 1994 along with reduced policy writings in
non-standard and traditional auto lines.
Losses and loss adjustment expenses in the first half of 1995 decreased by
$2,174,000 or 5.4% over the corresponding 1994 period. The loss ratio
decreased from 73.0% to 68.8%. The improvement in the loss ratio occurred for
both personal and commercial lines. The improvement in the loss ratio can be
attributed to milder weather in the Midwest and better development on old
claims during the first half of 1995, as compared to the same period in 1994.
Net investment income in the first half of 1995 increased $1,055,000 or 27.5%
from the same period in 1994. As noted above, this increase is primarily
attributable to earnings on the additional investments generated from the sale
of the life operation.
The Company recorded an increase in other income of $279,000 or 73.2% for the
first half of 1995 as compared to the same period in 1994. The increase
relates to the rental income on the home office building. Until June, 1994,
the building was owned by the life operation, and the associated income was
classified as income from discontinued operations.
The Company recognized $708,000 of pre-tax capital gains in the first half of
1995, compared to $654,000 of gains during the same period of 1994. The second
quarter increased $662,000 over the second quarter of 1994. The increase in
realized gains is primarily the result of a strong stock market during 1995.
-10-
<PAGE> 11
The Company's effective tax rate for the first half of 1995 was 32.2% compared
to 23.8% for the first half of 1994. The change in the effective rate is
primarily attributable to tax exempt interest. The amount of tax-exempt
interest earned is fairly consistent between periods, but because the
year-to-date 1995 pre-tax income is substantially higher, the impact on the
effective rate is reduced.
Liquidity and Capital Resources
Liquidity relates to the Company's ability to produce sufficient cash to
fulfill contractual obligations, primarily to policyholders. Sources of
liquidity include premiums, investment income and sales and maturities of
investments. Additionally, the Company has secured a $5 million line of
credit. At June 30, 1995, there was no outstanding balance on the line.
Funds provided by operating activities amounted to $18,000 for the first half
of 1995, compared to $797,000 provided by operations for the same period in
1994. Funds provided during the second quarter of 1995 and 1994 were
$1,189,000 and $1,879,000, respectively.
The Company's book value per share increased from $16.91 at December 31, 1994
to $19.36 at June 30, 1995. The increase is due to additional net income and
favorable conditions in the investment market during the first half of 1995,
which increased the market value of the Company's investment portfolio by $1.61
per share after tax.
-11-
<PAGE> 12
PART II - OTHER INFORMATION
ITEM 5. OTHER INFORMATION
The financial statements included herein have been subjected to a review by
Coopers and Lybrand L.L.P., the Registrant's independent public accountants, in
accordance with professional standards and procedures for such review.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) (27) Financial Data Schedule.
(b) No reports on Form 8-K have been filed by the Registrant during the
quarter ending June 30, 1995.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
MILWAUKEE INSURANCE GROUP, INC.
(Registrant)
/s/ TRACY WATCHMAKER SCHNEIDER
-----------------------------------
Tracy Watchmaker Schneider
Treasurer
Date: August 8, 1995
-12-
<PAGE> 13
EXHIBIT A
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors
Milwaukee Insurance Group, Inc.
We have reviewed the accompanying consolidated balance sheet of Milwaukee
Insurance Group, Inc. and consolidated subsidiaries as of June 30, 1995, and
the related consolidated statements of operations for the three and six-month
periods ended June 30, 1995, and the consolidated statement of cash flows for
the six-month period ended June 30, 1995. These financial statements are the
responsibility of the Company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted
in accordance with generally accepted auditing standards, the objective of
which is the expression of an opinion regarding the financial statements taken
as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying financial statements for them to be in conformity
with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet as of December 31, 1994, and the
related consolidated statements of operations, changes in shareholders' equity,
and cash flows for the year then ended (not presented herein); and in our
report dated February 23, 1995, we expressed an unqualified opinion on those
consolidated financial statements. In our opinion, the information set forth
in the accompanying consolidated balance sheet as of December 31, 1994, is
fairly stated in all material respects in relation to the consolidated balance
sheet from which it has been derived.
/S/ COOPERS & LYBRAND L.L.P.
Milwaukee, Wisconsin
August 1, 1995
-13-
<PAGE> 14
EXHIBIT B
AWARENESS LETTER OF INDEPENDENT ACCOUNTANTS
Securities and Exchange Commission
Washington, D.C.
RE: Milwaukee Insurance Group, Inc.
We are aware that our report dated August 1, 1995 on our review of interim
financial information of Milwaukee Insurance Group, Inc. for the three and
six-month periods ended June 30, 1995 and included in the Company's quarterly
report on Form 10-Q for the quarter then ended, is incorporated by reference in
the registration statements of Milwaukee Insurance Group, Inc. on Form S-8
(File Nos. 33-19526, 33-81604 and 33-77198). Pursuant to Rule 436(c) under the
Securities Act of 1933, this report should not be considered a part of the
registration statement prepared or certified by us within the meaning of
Sections 7 and 11 of that Act.
/S/ COOPERS & LYBRAND L.L.P.
Milwaukee, Wisconsin
August 7, 1995
-14-
<TABLE> <S> <C>
<ARTICLE> 7
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> JUN-30-1995
<EXCHANGE-RATE> 1
<DEBT-HELD-FOR-SALE> 156,073
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 11,650
<MORTGAGE> 974
<REAL-ESTATE> 0
<TOTAL-INVEST> 169,422
<CASH> 9,317
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 10,824
<TOTAL-ASSETS> 328,056
<POLICY-LOSSES> 153,654
<UNEARNED-PREMIUMS> 72,076
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 11,084
<COMMON> 42
0
0
<OTHER-SE> 80,303
<TOTAL-LIABILITY-AND-EQUITY> 328,056
55,005
<INVESTMENT-INCOME> 4,891
<INVESTMENT-GAINS> 708
<OTHER-INCOME> 660
<BENEFITS> 37,854
<UNDERWRITING-AMORTIZATION> 12,470
<UNDERWRITING-OTHER> 5,657
<INCOME-PRETAX> 5,284
<INCOME-TAX> 1,699
<INCOME-CONTINUING> 3,584
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,584
<EPS-PRIMARY> .86
<EPS-DILUTED> 0
<RESERVE-OPEN> 88,655
<PROVISION-CURRENT> 37,124
<PROVISION-PRIOR> 730
<PAYMENTS-CURRENT> 19,780
<PAYMENTS-PRIOR> 18,567
<RESERVE-CLOSE> 88,162
<CUMULATIVE-DEFICIENCY> 6
</TABLE>
