-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, GFxHJ4Xbfwl1sV69zVCMMBa7HKiqZTsI+jwN6O3lD4cb67FNvu92iP0BaeGMX9CY dBHAiBnS06LHfSMtPvObYw== 0000950130-98-003986.txt : 19980814 0000950130-98-003986.hdr.sgml : 19980814 ACCESSION NUMBER: 0000950130-98-003986 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980813 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: MUTUAL RISK MANAGEMENT LTD CENTRAL INDEX KEY: 0000826918 STANDARD INDUSTRIAL CLASSIFICATION: FIRE, MARINE & CASUALTY INSURANCE [6331] IRS NUMBER: 000000000 STATE OF INCORPORATION: D0 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-10760 FILM NUMBER: 98684760 BUSINESS ADDRESS: STREET 1: 44 CHURCH ST STREET 2: BERMUDA CITY: HAMILTON HM 12 BERMU STATE: D0 BUSINESS PHONE: 4412955688 MAIL ADDRESS: STREET 1: PO BOX 2064 STREET 2: BERMUDA CITY: HAMILTON HM HX STATE: D0 10-Q 1 FORM 10-Q FOR THE PERIOD ENDED JUNE 30, 1998 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] Quarterly report under section 13 or 15(d) of the Securities Exchange Act of 1934. For the period ended June 30, 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 1-10760 MUTUAL RISK MANAGEMENT LTD. - --------------------------------------------------------------------------- (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) BERMUDA NOT APPLICABLE - --------------------------------------------------------------------------- (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) 44 CHURCH STREET, HAMILTON HM 12, BERMUDA - --------------------------------------------------------------------------- (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) (441) 295-5688 - --------------------------------------------------------------------------- (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) NOT APPLICABLE - --------------------------------------------------------------------------- (FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED SINCE LAST REPORT) Indicate by 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 [ ] The number of outstanding shares of the registrant's Common Stock, $0.01 par value, as of June 30, 1998 was 39,676,789. MUTUAL RISK MANAGEMENT LTD. I N D E X PART I. FINANCIAL INFORMATION: ITEM 1. FINANCIAL STATEMENTS: Unaudited Consolidated Statements of Income for the quarter and six month periods ended June 30, 1998 and 1997 3 Consolidated Balance Sheets at June 30, 1998 (unaudited) and December 31, 1997 4 Unaudited Consolidated Statements of Cash Flows for the six month periods ended June 30, 1998 and 1997 5 Consolidated Statements of Shareholders' Equity at June 30, 1998 (unaudited) and December 31, 1997 6 Notes to Unaudited Consolidated Financial Statements at June 30, 1998 7 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL 8-12 CONDITION AND RESULTS OF OPERATIONS ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 12 PART II. OTHER INFORMATION: ITEM 2. CHANGES IN SECURITIES 13 ITEM 4. SUBMISSION OF MATTER TO A VOTE OF SECURITY HOLDERS 14 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 14 SIGNATURES 15 EXHIBITS Exhibit 11 - Computation of Net Earnings per Common Share and Common Share Equivalents Exhibit 27 - Financial Data Schedule MUTUAL RISK MANAGEMENT LTD. AND SUBSIDIARIES UNAUDITED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
QUARTER ENDED JUNE 30 SIX MONTHS ENDED JUNE 30 1998 1997 1998 1997 REVENUES Fee income $32,802,055 $24,996,802 $64,357,565 $48,933,431 Premiums earned 20,877,189 17,230,635 49,806,383 35,183,242 Net investment income 7,061,419 6,985,856 15,008,712 12,973,768 Realized capital losses (944,594) (696,994) (1,157,246) (1,471,262) Other income (losses) 174,803 (35,991) 43,500 48,281 -------------- -------------- -------------- ------------- TOTAL REVENUES 59,970,872 48,480,308 128,058,914 95,667,460 -------------- -------------- -------------- ------------- EXPENSES Losses and loss expenses incurred 12,378,364 11,552,875 33,877,354 19,216,255 Acquisition costs 8,795,924 6,083,686 16,891,793 16,688,427 Operating expenses 20,112,944 15,115,134 39,784,989 29,245,468 Interest expense 1,657,702 1,618,880 3,332,384 3,210,030 Other expenses 436,953 261,184 800,136 497,607 -------------- -------------- -------------- ------------- TOTAL EXPENSES 43,381,887 34,631,759 94,686,656 68,857,787 -------------- -------------- -------------- ------------- INCOME BEFORE INCOME TAXES 16,588,985 13,848,549 33,372,258 26,809,673 Income taxes 2,052,379 2,639,725 4,304,218 4,915,825 -------------- -------------- -------------- ------------- NET INCOME 14,536,606 11,208,824 29,068,040 21,893,848 Preferred share dividends - 41,510 - 83,020 -------------- -------------- -------------- ------------- NET INCOME AVAILABLE TO COMMON SHAREHOLDERS 14,536,606 11,167,314 29,068,040 21,810,828 Other comprehensive income, net of tax: Unrealized (loss) gain on investments (332,609) 4,936,841 (561,079) 665,123 -------------- -------------- -------------- ------------- COMPREHENSIVE INCOME $14,203,997 $16,104,155 $28,506,961 $22,475,951 ============== ============== ============== ============= EARNINGS PER COMMON SHARE: Net Income available to Common Shareholders: Basic EPS $0.37 $0.30 $0.75 $0.59 ===== ===== ===== ===== Diluted EPS $0.33 $0.28 $0.67 $0.54 ===== ===== ===== ===== Dividends per share $0.05 $0.05 $0.10 $0.10 ===== ===== ===== ===== Weighted average number of Common Shares outstanding - basic 39,377,171 37,301,998 38,665,550 37,235,452 ========== ========== ========== ========== Weighted average number of Common Shares outstanding - diluted 48,238,301 46,485,300 48,002,757 46,343,738 ========== ========== ========== ==========
See Accompanying Notes to Unaudited Consolidated Financial Statements 3 MUTUAL RISK MANAGEMENT LTD. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
JUNE 30, DECEMBER 31, 1998 1997 (Unaudited) ASSETS Cash and cash equivalents $71,067,098 $78,938,489 Investments : Held in available for sale account at fair value (Amortized cost $388,645,218; 1997 - $389,292,297) 393,670,999 395,143,321 -------------- -------------- Total marketable investments 464,738,097 474,081,810 Other investments 7,926,048 9,428,142 Investment income due and accrued 4,161,247 3,768,168 Accounts receivable 238,798,621 160,364,395 Reinsurance receivables 717,408,863 630,696,642 Deferred expenses 26,541,328 29,992,266 Prepaid reinsurance premiums 204,634,513 156,017,482 Fixed assets 16,433,916 13,373,439 Deferred tax benefit 6,538,328 4,607,251 Goodwill 46,972,058 32,915,932 Other assets 5,836,192 6,698,466 Assets held in separate accounts 689,677,210 625,216,561 -------------- -------------- Total Assets $2,429,666,421 $2,147,160,554 ============== ============== LIABILITIES, REDEEMABLE COMMON SHARES & SHAREHOLDERS' EQUITY LIABILITIES Reserve for losses and loss expenses $804,817,151 $715,699,133 Reserve for unearned premiums 240,845,125 188,388,666 Claims deposit liabilities 43,420,306 42,444,900 Accounts payable 168,679,830 135,145,220 Accrued expenses 7,630,824 7,398,174 Taxes payable 16,539,831 14,994,581 Prepaid fees 20,349,391 19,268,277 Debentures 126,186,000 128,711,279 Other liabilities 9,389,067 8,166,599 Liabilities related to separate accounts 689,677,210 625,216,561 -------------- -------------- Total Liabilities 2,127,534,735 1,885,433,390 -------------- -------------- REDEEMABLE COMMON SHARES Common shares subject to redemption - 937,168 Common Shares par value $0.01, redemption value $1.75 less subscription loans receivable - $383,761, plus interest received) - 1,929,032 -------------- -------------- Total Redeemable Common Shares - 1,929,032 -------------- -------------- SHAREHOLDERS' EQUITY Common Shares - Authorized 60,000,000 (par value $0.01) Issued 39,676,789 (1997 - 37,876,883) 396,768 378,769 Additional paid-in capital 104,865,683 87,101,966 Other comprehensive income - unrealized gain on investments - net of tax 3,474,318 4,035,397 Retained earnings 193,394,917 168,282,000 -------------- -------------- Total Shareholders' Equity 302,131,686 259,798,132 -------------- -------------- Total Liabilities, Redeemable Common Shares & Shareholders' Equity $2,429,666,421 $2,147,160,554 ============== ============== See Accompanying Notes to Unaudited Consolidated Financial Statements
4 MUTUAL RISK MANAGEMENT LTD. AND SUBSIDIARIES UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended June 30, 1998 1997 NET CASH FLOW FROM OPERATING ACTIVITIES Net income $29,068,040 $21,893,848 Items not affecting cash: Depreciation 2,651,794 1,765,564 Amortization of investments and net gain on sales 3,830,180 (897,130) Amortization of Convertible Debentures 3,332,384 3,208,039 Deferred tax benefit (1,862,355) (1,060,070) Other items 455,866 400,139 Net changes in non-cash balances relating to operations: Accounts receivable (78,434,226) (10,105,441) Reinsurance receivables (86,712,221) (51,145,036) Investment income due and accrued (393,079) 1,515,418 Deferred expenses 3,450,938 (406,759) Prepaid reinsurance premiums (48,617,031) (50,565,743) Other assets 862,274 916,853 Reserve for losses and loss expenses 89,118,018 61,557,841 Prepaid fees 1,081,114 1,381,975 Reserve for unearned premium 52,456,459 57,517,728 Accounts payable 33,534,610 (8,859,015) Taxes payable 1,545,250 2,607,026 Accrued expenses 232,650 (586,227) Other liabilities 1,179,263 (794,159) ----------- ----------- NET CASH FLOW FROM OPERATING ACTIVITIES 6,779,928 28,344,851 ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from sale of investments - Available for sale 52,307,121 127,892,478 Proceeds from maturity of investments - Available for sale 26,622,831 14,897,981 Fixed assets purchased (5,715,245) (4,493,210) Investments purchased - Available for sale (82,712,167) (142,614,629) Investment in affiliates and other investments (355,307) (2,136,488) Proceeds from sale of other investments 2,928,891 - Goodwill purchased (9,690,246) (8,284,396) Other items 5,309 15,509 ----------- ----------- NET CASH FLOW APPLIED TO INVESTING ACTIVITIES (16,608,813) (14,722,755) ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES Loan repayment & interest received 388,683 20,377 Proceeds from shares issued 4,505,321 2,671,637 Claims deposit liabilities 975,406 (5,136,342) Dividends paid (3,911,916) (3,516,504) ----------- ----------- NET CASH FLOW FROM (APPLIED TO) FINANCING ACTIVITIES 1,957,494 (5,960,832) ----------- ----------- Net (decrease) increase in cash and cash equivalents (7,871,391) 7,661,264 Cash and cash equivalents at beginning of period 78,938,489 52,242,353 ----------- ----------- Cash and cash equivalents at end of period $71,067,098 $59,903,617 =========== =========== Supplemental cash flow information: Interest paid $0 $1,991 =========== =========== Income taxes paid, net $4,063,973 $3,115,756 =========== ===========
See Accompanying Notes to Unaudited Consolidated Financial Statements 5 MUTUAL RISK MANAGEMENT LTD. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
SERIES B Preferred Common Change in Share Share Opening Shares Unrealized Net Dividends Dividends Closing Balance Issued Gain (Loss) Income Declared (1) Declared (2) Balance SIX MONTHS ENDED JUNE 30, 1998 (UNAUDITED) - ------------------------------------------ Common Shares $ 378,769 $ 17,999 $ - $ - $ - $ - $ 396,768 Additional paid-in capital 87,101,966 17,763,717 - - - - 104,865,683 Unrealized gain on investments 4,035,397 - (561,079) - - - 3,474,318 Retained earnings 168,282,000 - - 29,068,040 - (3,955,123) 193,394,917 ------------ ----------- ---------- ----------- --------- ----------- ------------ TOTAL SHAREHOLDERS' EQUITY AT JUNE 30, 1998 $259,798,132 $17,781,716 $ (561,079) $29,068,040 $ $(3,955,123) $302,131,686 ============ =========== ========== =========== ========= =========== ============ YEAR ENDED DECEMBER 31, 1997 (3) - ---------------------------------- Common Shares $ 371,265 $ 7,504 $ - $ - $ - $ - $ 378,769 Additional paid-in capital 79,812,287 7,289,679 - - - - 87,101,966 Unrealized gain on investments 47,682 - 3,987,715 - - - 4,035,397 Retained earnings 127,759,654 - - 47,938,424 (104,929) (7,311,149) 168,282,000 ------------ ----------- ---------- ----------- --------- ----------- ------------ TOTAL SHAREHOLDERS' EQUITY AT DECEMBER 31, 1997 $207,990,888 $ 7,297,183 $3,987,715 $47,938,424 $(104,929) $(7,311,149) $259,798,132 ============ =========== ========== =========== ========= =========== ============
(1) Dividend per share amounts were $nil for the six months ended June 30, 1998 and $.04 for the year ended December 31, 1997. (2) Dividend per share amounts were $.10 for the six months ended June 30, 1998 and $.19 for the year ended December 31, 1997 (restated for stock split). (3) Effective September 28, 1997 the Company effected a two-for-one stock split recorded in the form of a stock dividend. 18,741,121 Common Shares were issued in respect of this split. Prior periods have been restated. See Accompanying Notes to Unaudited Consolidated Financial Statements 6 MUTUAL RISK MANAGEMENT LTD. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1998 1. INTERIM ACCOUNTING POLICY In the opinion of management of the Company, the accompanying unaudited consolidated financial statements include all adjustments, consisting only of normal recurring adjustments, necessary to present fairly the financial position of the Company and the results of operations and cash flows for the six months ended June 30, 1998 and 1997. Although the Company believes that the disclosure in these financial statements is adequate to make the information presented not misleading certain information and footnote information normally included in financial statements prepared in accordance with generally accepted accounting principles has been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission. Results of operations for the six months ended June 30, 1998 are not necessarily indicative of what operating results may be for the full year. 2. COMPREHENSIVE INCOME During the first quarter of 1998 the Company adopted Statement of Financial Accounting Standards No. 130, Reporting Comprehensive Income. Comprehensive income is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from nonowner sources. It includes all changes in equity during a period except those resulting from investments by owners and distributions to owners. Specifically, the Company has reported the change in unrealized gains and losses on investments as a deduction from or increase to Net income to arrive at Comprehensive income of $14.2 million and $16.1 million for the second quarter of 1998 and 1997, and $28.5 million and $22.5 million for the six months ended June 30, 1998 and 1997. The movements in unrealized gains and losses are net of tax of $.8 million and $(1.4) million in the second quarter of 1998 and 1997, and $.1 million in each of the six months ended June 30, 1998 and 1997. 7 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS FOR THE QUARTER AND SIX MONTHS ENDED JUNE 30, 1998 AND 1997 The results of operations for the quarter and six months ended June 30, 1998, reflect a continuation of growth in Fee income and Net income due to both the addition of new accounts and the growth of existing accounts. Net income available to common shareholders amounted to $29.1 million or $0.67 per Common Share on a diluted basis for the six months ended June 30, 1998 representing an increase of 24% on a per share basis over the corresponding period as shown in the tables below. TABLE 1 EARNINGS PER SHARE
SECOND QUARTER TO JUNE 30, 1998 1997 ---------------------------- ---------------------------- ($ thousands except per share data) PER PER COMMON SHARE COMMON SHARE ---------------- ---------------- BASIC DILUTED BASIC DILUTED Net income excluding realized capital losses $15,204 $ 0.39 $ 0.35 $11,779 $ 0.32 $ 0.29 Realized capital losses (a) (667) (0.02) (0.02) (612) (0.02) (0.01) ------- ------- ------- ------- ------- ------- Net income available to Common Shareholders $14,537 $ 0.37 $ 0.33 $11,167 $ 0.30 $ 0.28 ======= ======= ======= ======= ======= ======= Average number of shares outstanding (000's) 39,377 48,238 37,302 46,485 ------- ------- ------- -------
SIX MONTHS ENDING JUNE 30, 1998 1997 ---------------------------- ---------------------------- ($ thousands except per share data) PER PER COMMON SHARE COMMON SHARE ---------------- ---------------- BASIC DILUTED BASIC DILUTED Net income excluding realized capital losses $29,851 $ 0.77 $ 0.69 $22,937 $ 0.62 $ 0.56 Realized capital losses (a) (783) (0.02) (0.02) (1,126) (0.03) (0.02) ------- ------- ------- ------- ------- ------- Net income available to Common Shareholders $29,068 $ 0.75 $ 0.67 $21,811 $ 0.59 $ 0.54 ======= ======= ======= ======= ======= ======= Average number of shares outstanding (000's) 38,666 48,003 37,235 46,344 ------- ------- ------- -------
(a) Net of tax. 8 Total revenues amounted to $60.0 million and $128.1 million for the quarter and six months ended June 30, 1998 representing increases of 24% and 34% over the corresponding 1997 periods. Table II shows the major components of Revenues for these periods. TABLE II - REVENUES
PERIODS TO JUNE 30, (IN THOUSANDS) SECOND QUARTER SIX MONTHS 1998 1997 GROWTH 1998 1997 GROWTH ---- ---- ------ ---- ---- ------ Fee income $32,802 $24,997 31% $ 64,358 $48,933 32% Premiums earned 20,877 17,230 21% 49,806 35,183 42% Net investment income 7,062 6,986 1% 15,009 12,974 16% Realized capital losses (945) (697) (36%) (1,157) (1,471) (21%) Other income 175 (36) NM 43 48 (10%) ------- ------- -------- ------- $59,971 $48,480 24% $128,059 $95,667 34% ======= ======= ======== =======
Fee income grew by 31% in the second quarter to $32.8 million, and 32% to $64.4 million for the first six months of 1998, as compared to $25.0 million and $48.9 million respectively in 1997. Pre-tax profit margins were 39% for the second quarter of 1998 compared to 40% for 1997 and 38% for the first six months of 1998 as compared to 40% for the first six months of 1997. SEGMENT ANALYSIS The components of Fee income by business segment are illustrated in Table III. TABLE III - FEE INCOME BY BUSINESS SEGMENT
PERIODS TO JUNE 30, SECOND QUARTER SIX MONTHS 1998 1997 GROWTH 1998 1997 GROWTH ---- ---- ------ ---- ---- ------ Program business $18,598 $10,585 76% $34,115 $19,753 73% Corporate risk management 9,143 10,777 (15%) 20,486 22,227 (8%) Specialty brokerage 1,845 1,543 20% 3,639 3,131 16% Financial services 3,216 2,092 54% 6,118 3,822 60% ------- ------- ------- ------- Total $32,802 $24,997 31% $64,358 $48,933 32% ======= ======= ======= =======
9 PROGRAM BUSINESS Program Business, the Company's fastest growing business segment, involves replacing traditional insurers and acting as a conduit between producers of specialty books of business and reinsurers wishing to write that business. The segment accounted for 57% of total Fee Income in the quarter and 53% for the first six months of 1998 compared to 43% and 40% in the corresponding 1997 periods. Fees from Program Business increased 76% in the second quarter to $18.6 million and by 73% to $34.1 million in the first six months as compared to $10.6 million and $19.8 million respectively in 1997. This resulted from the continued expansion of this business segment both through the growth of existing programs and the addition of new programs. Profit margins were 41% for the quarter and 39% for the six months of 1998, down from 37% for both periods of 1997. Gross premiums written increased 56% to $436 million for the first six months of 1998 as compared to $281 million in 1997, primarily as a result of the growth within the Program Business segment. Program Business generally involves greater premium volume per unit than Corporate Risk Management business. Premiums earned increased 21% to $20.9 million in the second quarter and 42% to $49.8 million in the first six months of 1998, as compared to $17.2 million and $35.2 million in the corresponding 1997 periods. These increases were also primarily due to the growth within the Program Business segment. CORPORATE RISK MANAGEMENT Corporate Risk Management, the Company's original business segment, involves providing services to businesses and associations seeking to insure a portion of their risk in a loss sensitive Alternative Market structure. This segment accounted for 28% of total Fee income in the second quarter and 32% for the first six months of 1998, down from 43% and 46% in the corresponding 1997 periods. Corporate risk management fees decreased by 15% in the second quarter to $9.1 million, compared to $10.8 million in the second quarter of 1997, and by 8% in the first six months to $20.5 million, compared to $22.2 million in 1997 as a result of a continuation of the extremely soft commercial insurance market. Profit margins remained strong at 48% in the second quarter, as compared to 45% in 1997, and 51% for the first six months of 1998, compared to 46% in 1997. The Company added 9 new accounts in the second quarter compared to 2 in 1997 and 13 in the first six months compared to 19 in 1997. Renewal rates continued also to reflect the soft market cycle at 71% for the second quarter compared to 62% in 1997 and 61% in the first six months compared to 74% in 1997. SPECIALTY BROKERAGE The Company's Specialty Brokerage business segment provides access to Alternative Risk Transfer insurers and reinsurers in Bermuda and Europe. The segment produced $1.8 million of total Fee income in the second quarter and $3.6 million in the first six months of 1998 representing 6% of total Fee income in both the second quarter and the first six months. Specialty Brokerage fees grew by 20% in the second quarter and 16% in the first six months of 1998 from $1.5 million and $3.1 million in the corresponding 1997 periods. Renewal rates remained high in this segment at 89% for the first six months of 1998 as compared to 82% in 1997. Profit margins decreased to 29% in the second quarter, and to 26% for the first six months from 34% and 37% in the corresponding 1997 periods, primarily as a result of declining premium rates in Bermuda on new and renewal business and the effects of a small startup operation in the U.S. FINANCIAL SERVICES Financial Services, the Company's newest business segment, is being built on the acquisition of Hemisphere which provides administrative services to offshore mutual funds and other companies. The segment accounted for 9% of total Fee income for both the second quarter and six month periods of 1998. Fees from Financial Services 10 increased in the quarter by 54% to $3.2 million, over the 1997 corresponding period, and by 60%, to $6.1 million, for the half year, primarily as a result of an increase in the number of mutual funds under administration from 104 at June 30, 1997 to 163. Renewal rates remained very high in this business segment at 97% for the first six months of 1998 as compared to 96% in 1997. As previously announced, profit margins were adversely affected in 1998 by a revised executive incentive plan and staff expansion costs to service new business and declined to 2% in the second quarter and negative 2% for the first six months. Excluding the effect of the revised executive incentive plan, the profit margins in this segment would have been 21% for the quarter and 19% for the six months. INVESTMENT INCOME Gross investment income increased by $2.4 million or 17% to $17.0 million in the first six months of 1998 over the corresponding 1997 period primarily as a result of an increase in the yield on invested assets. Net investment income increased by 1% to $7.1 million in the second quarter and by 16% to $15.0 million for the first six months of 1998. Investment yields declined in the second quarter by almost 1% from the first quarter on an annualized basis primarily due to exceptionally good performance during the first quarter of 1998 in the Company's Bermuda investment portfolio which was not repeated in the second quarter. TABLE IV - EXPENSES
PERIODS TO JUNE 30, SECOND QUARTER SIX MONTHS 1998 1997 INCREASE 1998 1997 INCREASE ---- ---- -------- ---- ---- -------- Operating expenses $20,113 $15,115 33% $39,785 $29,245 36% Total insurance costs 21,174 17,637 20% 50,769 35,904 41% Interest expense 1,658 1,619 2% 3,332 3,210 4% Other expenses 437 261 67% 800 498 61% ------- ------- ------- ------- Total $43,382 $34,632 25% $94,687 $68,857 38% ======= ======= ======= =======
Operating expenses increased 33% to $20.1 million for the quarter, compared to $15.1 million in the second quarter of last year, and increased 36% to $39.8 million for the first six months of 1998, compared to $29.2 million in the first six months of 1997. The increase in Operating expenses is attributable to recent acquisitions, growth in personnel and other expenses resulting from the increased business in each segment, as well as the costs associated with the revised executive incentive plan in the Financial Services segment. Excluding this revised executive bonus plan and the effect of acquisitions, the increase in operating expenses would have been 25% for the quarter and 28% for the six months over the corresponding 1997 periods. The increases in Total insurance costs are the direct result of the increases in premiums earned during the quarter and six months. The effective tax rate was 12.4% in the quarter and 12.9% for the six months compared to 19.1% and 18.3% in the corresponding 1997 periods. The decreases in the quarterly and six month rates are due mainly to an increase in earnings outside of the United States, a restructuring of the taxable entities in both the United States and Europe and the tax benefit derived from the exercise of employee stock options. 11 LIQUIDITY AND CAPITAL RESOURCES Total assets increased to $2.4 billion at June 30, 1998 from $2.1 billion at December 31, 1997. Assets held in separate accounts which are principally managed assets attributable to participants in the Company's IPC Programs accounted for approximately 28 % of Total assets at June 30, 1998 and 29% at December 31, 1997. Total Shareholders' equity increased to $302 million at June 30, 1998 from $260 million at December 31, 1997 primarily as a result of Net income in the six months and the issuance of Common Shares offset by the payment of dividends. Return on equity was 21% for the first six months of 1998 compared to 20% in the corresponding 1997 period. The Company continues to produce a positive cash flow from operating activities which is used to fund short term requirements. The decline in cash flows to $6.8 million from $28.3 million was mainly due to two factors. First, a large account, which previously had been retained by the Company on a retrospectively rated premium basis, was ceded in the second quarter to one of The IPC Companies. Second, a number of accounts in the Company's Program Business segment did not produce the expected levels of cash flow during the quarter. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. NOT APPLICABLE 12 PART II - OTHER INFORMATION ITEM 2. CHANGES IN SECURITIES During the quarter ended June 30, 1998, Registrant issued the following securities in the following transactions which were not registered under the Securities Act of 1933, as amended (the "Act"): 1. (a) Securities Sold: 99,539 Common Shares of the Registrant on June 8, 1998. (b) No underwriters participated in the sale of the shares. The shares were issued to each of the following:
NAME NUMBER OF SHARES Michael P. Miles 62,337 S. Alan Pcsolyar 19,787 Robert Hill 10,780 Diversified Insurance Industries, Inc. 1,272 Edward J. O'Hara, Jr. 1,157 James M. O'Hara, Jr. 1,157 William a. Graham Company 2,313 Matterhorn Insurance Agency, Inc. 736
(c) The shares were issued at a deemed purchase price of $34.87 per share (aggregate price $3,471,017), based upon the market value on the date of issuance. The shares were issued as additional consideration in connection with the acquisition by the Registrant of Professional Underwriters Corp. pursuant to an Agreement and Plan of Reorganization dated December 6, 1995. (d) An exemption from registration under the Act was claimed based upon Section 4(2) as a sale by an issuer not involving a public offering. 2. (a) Securities Sold: 48,586 Common Shares on May 14, 1998. (b) No underwriters participated in the sale of the shares. The shares were issued to each of the following: Stephen Friedberg -- 24,293 Mark Ouimette -- 24,293 (c) The shares were issued at a deemed purchase price of $33.55 per share (aggregate price $1,630,000), based upon the market value on the date of issuance, in connection with the acquisition by the Registrant of Livery Management Inc. pursuant to a Plan and Agreement of Merger dated May 14, 1998 (d) Exemption from registration under the Act was claimed based upon Section 4(2) as a sale by an issuer not involving a public offering. 13 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Company held it's 1998 Annual General Meeting of Shareholders on May 22, 1998. The following are the results of the voting on the various matters considered at the meeting:
(i) Election of Directors. NOMINEE FOR WITHHELD RICHARD G. TURNER 33,023,451 44,313 ALLAN W. FULKERSON 33,021,787 45,977 WILLIAM F. GALTNEY 31,764,777 1,302,987 JERRY S. ROSENBLOOM 33,016,457 51,307 (ii) Appointment of Ernst & Young as the Company's Auditors. FOR: 33,039,877 AGAINST: 6,638 ABSTAIN: 21,249
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K A. EXHIBIT 11 - Computation of Net Earnings Per Common Share and Common Share Equivalents. EXHIBIT 27 - Financial Data Schedule B. REPORTS ON FORM 8-K. No reports on Form 8-K were filed during the three month period ended June 30, 1998. 14 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. MUTUAL RISK MANAGEMENT LTD. /s/ James C. Kelly ___________________________________________ James C. Kelly Senior Vice President, Chief Financial Officer and Authorized Signatory Date: August 11, 1998 15 EX-11 2 COMPUTATION OF EARNINGS PER SHARE Exhibit 11 MUTUAL RISK MANAGEMENT LTD. COMPUTATION OF EARNINGS PER SHARE
QUARTER ENDED JUNE, 30 SIX MONTHS ENDED JUNE, 30 1998 1997 1998 1997 (IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS) BASIC - ----- Income Available to Common Shareholders $14,537 $11,167 $29,068 $21,811 ======= ======= ======= ======= Weighted Average Common Shares outstanding 39,377,171 37,301,998 38,665,550 37,235,452 ---------- ---------- ---------- ---------- Basic earnings per Common Share $0.37 $0.30 $0.75 $0.59 ===== ===== ===== ===== DILUTED - ------- Income Available to Common Shareholders $ 14,537 $ 11,167 $ 29,068 $ 21,811 Debenture interest 1,658 1,618 3,333 3,208 ----------- ----------- ----------- ----------- $ 16,195 $ 12,785 $ 32,401 $ 25,019 =========== =========== =========== =========== Weighted Average Common Shares outstanding 39,377,171 37,301,998 38,665,550 37,235,452 ----------- ----------- ----------- ----------- Common share equivalents associated with options, Redeemable Common Shares and Convertible Debentures: Options 4,065,366 3,895,036 4,065,366 3,895,036 Redeemable Common Shares 0 937,168 0 937,168 Convertible Debentures 6,666,881 6,978,800 6,666,881 6,978,800 ----------- ----------- ----------- ----------- 10,732,247 11,811,004 10,732,247 11,811,004 Common Shares purchased with proceeds from Options exercised (1,871,117) (2,627,702) (1,395,040) (2,702,718) ----------- ----------- ----------- ----------- 8,861,130 9,183,302 9,337,207 9,108,286 ----------- ----------- ----------- ----------- Total Weighted Average Common Shares 48,238,301 46,485,300 48,002,757 46,343,738 =========== =========== =========== =========== Diluted earnings per Common Share $0.33 $0.28 $0.67 $0.54 =========== =========== =========== ===========
EX-27 3 FINANCIAL DATA SCHEDULE
7 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM MUTUAL RISK MANAGEMENT LTD.'S FINANCIAL STATEMENTS AS OF JUNE 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0000826918 MUTUAL RISK MANAGEMENT LTD. 1,000 U.S. DOLLARS 6-MOS DEC-31-1998 JAN-01-1998 JUN-30-1998 1 393,671 0 0 0 0 0 393,671 71,067 717,409 26,541 2,429,666 804,817 240,845 0 43,420 126,186 0 0 397 301,735 2,429,666 49,806 15,009 (1,157) 43 33,877 16,892 43,918 33,372 4,304 29,068 0 0 0 29,068 0.75 0.67 0 0 0 0 0 0 0
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