<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: March 31, 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 May 5, 1995, was 4,150,600 shares.
Total Pages: 13
-1-
<PAGE> 2
MILWAUKEE INSURANCE GROUP, INC.
FORM 10-Q FOR QUARTER ENDED MARCH 31, 1995
INDEX
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION PAGES
-----
<S> <C>
Consolidated Balance Sheets - March 31, 1995
and December 31, 1994 3-4
Consolidated Statements of Operations - Three Months Ended
March 31, 1995 and 1994 5
Consolidated Statements of Cash Flows - Three Months Ended
March 31, 1995 and 1994 6
Notes to Interim Consolidated Financial Statements 7-8
Management Discussion and Analysis of Financial Condition
and Results of Operations 9-10
PART II - OTHER INFORMATION
Other Information 10
Signatures 11
EXHIBIT A - REPORT OF INDEPENDENT ACCOUNTANTS 12
EXHIBIT B - AWARENESS LETTER OF INDEPENDENT ACCOUNTANTS 13
</TABLE>
-2-
<PAGE> 3
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
MILWAUKEE INSURANCE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31,
1995 1994
--------- ------------
(unaudited)
<S> <C> <C>
ASSETS
Investments:
Fixed maturities, at market value (amortized cost
$157,282,112 and $153,774,823, respectively) $155,438,832 $147,303,673
Equity securities, at market value (cost $9,329,418 and
$9,516,293, respectively) 10,377,656 9,785,493
Mortgage loan to related party, at unpaid principal
balance 1,000,000 1,000,000
Short-term investments, at amortized cost, which
approximates market value (including cash equivalents
of $4,995,189 and $6,411,589, respectively) 4,995,189 10,301,980
------------ ------------
Total investments 171,811,677 168,391,146
Cash 401,471 363,146
Accrued investment income 2,363,335 2,396,291
Premiums receivable 19,117,564 19,280,850
Reinsurance receivable 66,802,296 69,353,287
Prepaid reinsurance premiums 25,228,951 25,651,562
Federal income taxes recoverable -- 333,988
Deferred policy acquisition costs 9,863,970 9,539,578
Deferred income taxes 6,634,211 8,859,068
Property and equipment, at cost, net of accumulated
depreciation of $1,306,328 and $791,238, respectively 14,357,745 14,798,354
Other assets 1,520,970 1,582,979
------------ ------------
Total assets $318,102,190 $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>
March 31, December 31,
1995 1994
--------- ------------
(unaudited)
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Insurance reserves:
Losses and loss adjustment expenses $154,207,071 $158,009,038
Unearned premiums 66,409,195 67,282,650
Payable to affiliates 1,399,162 1,355,596
Long-term debt 11,558,727 12,030,870
Federal income taxes payable 122,917 --
Other liabilities 9,591,956 11,898,975
------------ -------------
Total liabilities 243,289,028 250,577,129
------------ -------------
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 loss on securities, net of deferred
income taxes (518,700) (3,815,197)
Retained earnings 45,070,290 43,647,057
------------ -------------
Total shareholders' equity 74,813,162 69,973,120
------------ -------------
Total liabilities and shareholders' equity $318,102,190 $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 March 31,
----------------------------
1995 1994
---- ----
<S> <C> <C>
Revenues:
Premiums earned $ 27,157,167 $27,451,695
Investment income, net of investment expense 2,583,135 1,874,386
Other income 305,416 176,999
Net realized capital gains (losses) (132,940) 475,147
------------ -----------
29,912,778 29,978,227
------------ -----------
Losses and expenses:
Losses and loss adjustment expenses 18,758,165 20,369,984
Amortization of deferred policy acquisition costs 6,154,855 6,098,734
Insurance and general expenses 2,827,859 3,009,045
------------ -----------
27,740,879 29,477,763
------------ -----------
Income from continuing operations before
income tax expense 2,171,899 500,464
Income tax expense 748,666 84,061
------------ -----------
Income from continuing operations 1,423,233 416,403
Discontinued operations:
Income from operations, less applicable income
taxes of $78,592 -- 499,288
------------ -----------
Net income $ 1,423,233 $ 915,691
============ ===========
Per share data:
Income from continuing operations $ 0.34 $ 0.10
Discontinued operations -- 0.12
------------ -----------
Net income $ 0.34 $ 0.22
============ ===========
Weighted average number of common shares
outstanding 4,149,527 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>
Three months ended March 31,
----------------------------
1995 1994
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,423,233 $ 915,691
Adjustments to reconcile net income to net
cash provided by (used for) operating activities:
Net realized capital (gains) losses 132,940 (475,147)
Depreciation and amortization 516,277 --
Amortization of bond premium and discount 65,482 67,815
Discontinued operations -- (499,288)
Changes in assets and liabilities:
Insurance reserves (1,701,820) 2,680,592
Premiums receivable 163,286 (1,119,552)
Deferred policy acquisition costs (324,392) (1,021,263)
Payable to affiliates 43,566 1,434,521
Accrued investment income 32,956 (25,311)
Federal income taxes 456,905 (1,445,043)
Deferred income taxes 144,562 196,727
Net assets of discontinued operation -- 175,000
Other assets and liabilities (2,124,698) (1,966,626)
------------- -------------
Net cash used by operating activities (1,171,703) (1,081,884)
------------- -------------
Cash flows from investing activities:
Proceeds from investments sold or matured 6,431,096 11,079,852
Purchases of investments (6,089,657) (17,775,849)
Purchases of property and equipment, net (75,668) --
------------- -------------
Net cash provided by (used for) investing
activities 265,771 (6,695,997)
------------- -------------
Cash flows from financing activities:
Payments on long-term debt (472,143) (156,250)
------------- -------------
Net cash used for financing activities (472,143) (156,250)
------------- -------------
Net decrease in cash and cash equivalents (1,378,075) (7,934,131)
Cash and cash equivalents at beginning of period 6,774,735 13,247,462
------------- -------------
Cash and cash equivalents at end of period $ 5,396,660 $ 5,313,331
============= =============
</TABLE>
See accompanying notes to interim consolidated financial statements.
-6-
<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. 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 $2,074,401 for the three-month period ending
March 31, 1994. The results of operations of Life for the three-month
period ending March 31, 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.
-7-
<PAGE> 8
MILWAUKEE INSURANCE GROUP, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS, Continued
3. 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.
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
three-month period ending March 31, 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.
-8-
<PAGE> 9
ITEM 2. MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Results of Operations
During the first quarter of 1995, the Company recorded net income of
$1,423,000, or $0.34 per share, compared with net income from continuing
operations of $416,000 or $0.10 per share for the 1994 first quarter. Included
in the 1995 first quarter 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 $499,000 or $0.12 per share in the first quarter of 1994.
The Company's GAAP combined ratio improved from 106.8% during the first quarter
of 1994 to 101.4% for the same period in 1995.
Premiums earned decreased by $295,000 or 1% in the first quarter of 1995
compared to the first quarter of 1994. The reduction in earned premium was
driven principally by an increase in the ceded premium under the
retrospectively rated reinsurance contract.
Losses and loss adjustment expenses in the first quarter of 1995 decreased by
$1,612,000 or 8% over the corresponding 1994 period. This decrease is greater
than the 1% decrease in premiums earned. The loss ratio decreased from 74.2%
to 69.1%. The improvement in the loss ratio occurred for both personal and
commercial lines. A portion of the improvement in the loss ratio can be
attributed to the milder weather in the Midwest during the first quarter of
1995, as compared to the same period in 1994.
The Company's expense ratio remained relatively flat at 32.3% in the first
quarter of 1995 compared to 32.6% for the same period in 1994.
Net investment income in the first quarter of 1995 increased $709,000 or 38%
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 $128,000 or 73% for the
first quarter of 1995 as compared to the same period in 1994. The increase is
caused by the rental income on the home office building owned by the Company.
Until June, 1994, the building was owned by the life operation, and in the
first quarter of 1994, associated income was included in income from
discontinued operations.
The Company recognized $133,000 of pre-tax capital losses in the first quarter
of 1995, compared to $475,000 of gains during the same period of 1994. The
reduction
-9-
<PAGE> 10
in realized gains is primarily the result of sales of common stocks.
The Company's effective tax rate for the first quarter of 1995 was 34.5%
compared to 16.8% for the first quarter 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 first quarter 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 a $5 million line of credit. At
March 31, 1995, there was no outstanding balance on the line.
Funds used by operating activities amounted to $1,172,000 for the first quarter
of 1995, compared to $1,082,000 used by operations for the same period in 1994.
Contingent commissions are paid in the first quarter of the year. Payment of
this liability is the principal reason for the use of operating funds during
the first quarter of 1994 and 1995.
The Company's book value per share increased from $16.91 at December 31, 1994
to $18.02 at March 31, 1995. Besides net income, the increase was due to more
favorable conditions in the investment market during the 1995 first quarter,
which increased the market value of the Company's fixed investment portfolio by
$0.79 per share after tax.
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 March 31, 1995.
-10-
<PAGE> 11
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: May 11, 1995
-11-
<PAGE> 12
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 March 31, 1995, and
the related consolidated statements of operations and cash flows for the
three-month period then ended. 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.
/S/ COOPERS & LYBRAND L.L.P.
Milwaukee, Wisconsin
May 4, 1995
-12-
<PAGE> 13
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 May 4, 1995 on our review of interim
financial information of Milwaukee Insurance Group, Inc. for the three-month
period ended March 31, 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
May 4, 1995
-13-
<TABLE> <S> <C>
<ARTICLE> 7
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> MAR-31-1995
<EXCHANGE-RATE> 1
<DEBT-HELD-FOR-SALE> 155,439
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 10,378
<MORTGAGE> 1,000
<REAL-ESTATE> 0
<TOTAL-INVEST> 166,817
<CASH> 5,397
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 9,864
<TOTAL-ASSETS> 318,102
<POLICY-LOSSES> 154,207
<UNEARNED-PREMIUMS> 66,409
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 11,559
<COMMON> 42
0
0
<OTHER-SE> 74,772
<TOTAL-LIABILITY-AND-EQUITY> 318,102
27,157
<INVESTMENT-INCOME> 2,583
<INVESTMENT-GAINS> (133)
<OTHER-INCOME> 305
<BENEFITS> 18,758
<UNDERWRITING-AMORTIZATION> 6,155
<UNDERWRITING-OTHER> 2,827
<INCOME-PRETAX> 2,172
<INCOME-TAX> 749
<INCOME-CONTINUING> 1,423
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,423
<EPS-PRIMARY> 0.34
<EPS-DILUTED> 0
<RESERVE-OPEN> 88,655
<PROVISION-CURRENT> 15,029
<PROVISION-PRIOR> 3,729
<PAYMENTS-CURRENT> 7,271
<PAYMENTS-PRIOR> 12,737
<RESERVE-CLOSE> 87,405
<CUMULATIVE-DEFICIENCY> (87)
</TABLE>
