-----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, PkadYRolF4NeuS8N7grX2lljz4odmaWlNBWIg/W/lioIjH92ECZHCvgTUoeeRBfK wz6AQPI8nnrAVWvbeuqXXQ== 0001021408-01-510257.txt : 20020410 0001021408-01-510257.hdr.sgml : 20020410 ACCESSION NUMBER: 0001021408-01-510257 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20010930 FILED AS OF DATE: 20011114 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: 1934 Act SEC FILE NUMBER: 001-10760 FILM NUMBER: 1789913 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 ZIP: 1000000000 10-Q 1 d10q.txt FORM 10-Q FOR MUTUAL RISK MANAGEMENT UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] Quarterly report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934. For the quarterly period ended September 30, 2001. 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 September 30, 2001 was 41,764,595. 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 nine month periods ended September 30, 2001 and 2000 3 Unaudited Consolidated Balance Sheets at September 30, 2001 and December 31, 2000 4 Unaudited Consolidated Statements of Cash Flows for the nine month periods ended September 30, 2001 and 2000 5 Unaudited Consolidated Statements of Changes in Shareholders' Equity at September 30, 2001 and 2000 6 Notes to Unaudited Consolidated Financial Statements at September 30, 2001 7-10 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 11-19 Item 3. Quantitative and Qualitative Disclosures about Market Risk 19 Part II. Other Information: Item 2. Defaults on Senior Securities 19 Item 6. Exhibits and Reports on Form 8-K 19 Signatures 20
PART I. FINANCIAL INFORMATION ITEM I. FINANCIAL STATEMENTS MUTUAL RISK MANAGEMENT LTD. AND SUBSIDIARIES UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended Nine Months Ended (In thousands, except share and per share data) September 30, September 30, 2001 2000 2001 2000 REVENUES Fee income $ 33,436 $ 25,247 $ 99,086 $ 72,030 Premiums earned 91,286 72,060 238,608 191,931 Net investment income 7,708 9,182 21,054 30,293 Realized capital losses (4,031) (204) (5,708) (2,168) Other income 210 38 979 641 ---------- ---------- ---------- ---------- Total Revenues 128,609 106,323 354,019 292,727 ---------- ---------- ---------- ---------- EXPENSES Losses and loss expenses incurred 90,176 $ 56,617 183,732 132,697 Acquisition and underwriting expenses 24,041 11,157 72,324 48,954 Operating expenses 25,124 18,365 72,150 53,955 Interest expense 6,365 4,340 15,944 14,637 Other expenses 871 1,060 2,718 3,177 ---------- ---------- ---------- ---------- Total Expenses 146,577 91,539 346,868 253,420 ---------- ---------- ---------- ---------- (LOSS) INCOME BEFORE INCOME TAXES, (17,968) 14,784 7,151 39,307 MINORITY INTEREST AND EXTRAORDINARY LOSS Income taxes (10,343) 1,485 (8,562) 3,418 ---------- ---------- ---------- ---------- (LOSS) INCOME BEFORE MINORITY INTEREST AND (7,625) 13,299 15,713 35,889 EXTRAORDINARY LOSS Minority interest (558) (70) (1,258) 565 ---------- ---------- ---------- ---------- (LOSS) INCOME BEFORE EXTRAORDINARY LOSS (8,183) 13,229 14,455 36,454 Extraordinary loss on extinguishment of debt, net of tax - - (949) (4,327) ---------- ---------- ---------- ---------- NET (LOSS) INCOME $ (8,183) $ 13,229 $ 13,506 $ 32,127 ========== ========== ========== ========== EARNINGS PER COMMON SHARE: Net income available to Common Shareholders: Basic $ (0.20) $ 0.32 $ 0.32 $ 0.78 ========== ========== ========== ========== Diluted $ (0.20) $ 0.32 $ 0.32 $ 0.77 ========== ========== ========== ========== Dividends per Common Share $ 0.01 $ 0.07 $ 0.03 $ 0.21 ========== ========== ========== ========== Weighted average number of Common Shares outstanding - basic 41,764,595 41,177,527 41,669,227 41,189,407 ========== ========== ========== ========== Weighted average number of Common Shares outstanding - diluted 41,764,595 42,521,034 41,974,753 41,558,653 ========== ========== ========== ==========
See Accompanying Notes to Unaudited Consolidated Financial Statements 3 MUTUAL RISK MANAGEMENT LTD. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
(In thousands, except share data) September 30, December 31, 2001 2000 (unaudited) (audited) ASSETS Cash and cash equivalents $ 290,863 $202,015 Investments: Held as available for sale at fair value (Amortized cost $357,649; 2000 - $381,911) 357,458 371,074 ---------- ---------- Total marketable investments 648,321 573,089 Other investments 35,467 35,201 Investment income due and accrued 5,059 5,948 Accounts receivable 770,260 592,852 Reinsurance recoverable 2,550,207 2,307,466 Deferred expenses 99,592 67,461 Prepaid reinsurance premiums 344,378 346,223 Deferred tax benefit 40,732 34,503 Other assets 124,647 97,129 Assets held in separate accounts 893,806 799,777 ---------- ---------- Total Assets $5,512,469 $4,859,649 ========== ========== LIABILITIES & SHAREHOLDERS' EQUITY LIABILITIES Unpaid losses and loss expenses $2,831,715 $2,529,183 Unearned premiums 502,018 426,069 Pension fund reserves 38,582 56,191 Claims deposit liabilities 21,939 25,407 Accounts payable 363,348 310,590 Taxes payable 12,274 24,139 Loans payable 180,000 220,000 Other loans payable 18,461 3,595 Debentures 156,714 13,673 Other liabilities 118,941 99,492 Liabilities related to separate accounts 893,806 799,777 ---------- ---------- Total Liabilities $5,137,798 $4,508,116 ---------- ---------- SHAREHOLDERS' EQUITY Common Shares - Authorized 180,000,000 (par value $0.01) Issued 41,764,595 (excluding 2,728,816 shares held in treasury) (2000 - 41,614,649 excluding 2,728,816 shares held in treasury) 417 416 Additional paid-in capital 118,524 117,188 Unearned stock grant compensation (1,100) - Accumulated other comprehensive loss (191) (10,836) Retained earnings 257,021 244,765 ---------- ---------- Total Shareholders' Equity $ 374,671 $ 351,533 ---------- ---------- Total Liabilities & Shareholders' Equity $5,512,469 $4,859,649 ========== ==========
See Accompanying Notes to Unaudited Consolidated Financial Statements 4 MUTUAL RISK MANAGEMENT LTD. AND SUBSIDIARIES UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands) Nine Months Ended September 30, 2001 2000 CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 13,506 $ 32,127 Items not affecting cash: Depreciation 11,433 8,591 Amortization of investments (451) (601) Net loss on sale of investments 5,721 2,211 Amortization of convertible debentures 541 1,220 Deferred tax benefit (5,719) (6,113) Extraordinary loss on extinguishment of debt 949 4,327 Other items 1,653 1,516 Net change in non-cash balances relating to operations: Accounts receivable (177,408) 9,903 Reinsurance recoverable (242,741) (202,369) Investment income due and accrued 889 50 Deferred expenses (25,248) (45,281) Prepaid reinsurance premiums 1,845 (71,871) Other assets (2,850) (267) Unpaid losses and loss expenses 302,532 186,616 Prepaid fees 14,818 5,075 Unearned premium 75,949 109,761 Accounts payable 52,758 (50,758) Taxes payable (11,865) (1,041) Other liabilities 7,127 6,461 --------- --------- NET CASH FLOWS FROM (APPLIED TO) OPERATING ACTIVITIES 23,439 (10,443) --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from sale of investments - available for sale 40,578 336,291 Proceeds for maturity of investments - available for sale 28,208 27,002 Investments purchased - available for sale (49,795) (301,449) Acquisitions and other investments (12,150) (7,335) Fixed assets purchased (26,108) (12,941) Other items 238 166 --------- --------- NET CASH FLOWS (APPLIED TO) FROM INVESTING ACTIVITIES (19,029) 41,734 --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES Debentures issued, net of expense 134,157 - Other loans (repaid) received (25,134) 102,911 Extinguishment of convertible debentures - (101,325) Proceeds from shares issued 238 607 Claims deposit liabilities (3,468) (326) Pension fund reserves (17,609) (10,942) Dividends paid (3,746) (8,650) --------- --------- NET CASH FLOWS FROM (APPLIED TO) FINANCING ACTIVITIES 84,438 (17,725) --------- --------- Net increase in cash and cash equivalents 88,848 13,566 Cash and cash equivalents at beginning of period 202,015 155,387 --------- --------- Cash and cash equivalents at end of period $ 290,863 $ 168,953 ========= ========= Supplemental cash flow information: Interest paid 15,223 $ 13,417 ========= ========= Income taxes paid, net $ - $ 5,484 ========= =========
See Accompanying Notes to Unaudited Consolidated Financial Statements 5 MUTUAL RISK MANAGEMENT LTD. AND SUBSIDIARIES UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(In thousands, except share data) September 30, September 30, 2001 2000 Common Shares Opening balance $ 416 $ 412 Shares issued 1 1 Treasury shares purchased - (1) -------- -------- Closing balance 417 412 -------- -------- Additional paid-in capital Opening balance 117,188 110,755 Shares issued 1,336 1,993 Treasury shares purchased - (1,386) -------- -------- Closing balance 118,524 111,362 -------- -------- Unearned stock grant compensation Opening balance - - Stock grants awarded (1,222) - Amortization 122 - -------- -------- Closing balance (1,100) - ------- ------ Accumulated other comprehensive loss Net unrealized depreciation on investments Opening balance (10,836) (14,937) Change in period, net of reclassification, net of tax 10,645 615 -------- -------- Closing balance (191) (14,322) -------- -------- Retained earnings Opening balance 244,765 261,914 Net income 13,506 32,127 Common share dividends declared (1) (1,250) (8,463) -------- -------- Closing balance 257,021 285,578 -------- -------- Total shareholders' equity $374,671 $383,030 ======== ======== COMPREHENSIVE INCOME Net income $ 13,506 $ 32,127 Other comprehensive income 10,645 615 -------- -------- Comprehensive income (2) $ 24,151 $ 32,742 ======== ======== Disclosure Regarding Net Unrealized (Losses) Gains Net unrealized gains arising during the periods $ 16,366 $ 2,826 Net realized gains included in net income (5,721) (2,211) -------- -------- Change in net unrealized gains on securities $ 10,645 $ 615 ======== ========
(1) Dividend per share amounts were $0.03 and $0.21 for the nine months ended September 30, 2001 and 2000 respectively. (2) Comprehensive (loss) income for the quarters ended September 30, 2001 and 2000 were ($74) and $16,896, respectively. See Accompanying Notes to Unaudited Consolidated Financial Statement 6 MUTUAL RISK MANAGEMENT LTD. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2001 1. INTERIM ACCOUNTING POLICY In the opinion of the management of Mutual Risk Management Ltd. ("the Company"), the accompanying unaudited consolidated financial statements include all adjustments, consisting of normal recurring adjustments, necessary to present fairly the financial position of the Company and the results of operations and cash flows for the quarters and nine months ended September 30, 2001 and 2000. 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 accounting principles generally accepted in the United States has been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission. Results of operations for the quarter and nine months ended September 30, 2001 are not necessarily indicative of what operating results may be for the full year. The Company's financial statements are prepared on a going concern basis. Such basis is contingent upon receipt of debt covenant waivers - see note 5. 2. FINANCIAL STATEMENT PRESENTATION The Company has amended the income statement presentation and reclassified the comparative periods to reflect the transition from its former Program Business model to a specialty insurance operation. The resulting income statement reclassification affected fee income, acquisition and underwriting expenses and operating expenses. There is no effect on net income. 7 MUTUAL RISK MANAGEMENT LTD. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS 3. SEGMENT INFORMATION The Company has changed its basis of segmentation from that used in its most recent Annual Report on Form 10-K. Management believes the new basis of segmentation most accurately reflects the Company's operating segments under the definition provided by SFAS No. 131.
Three Months ended Nine Months ended September 30, September 30, Revenue 2001 2000 (3) 2001 2000 (3) Corporate Risk Management $ 14,220 $ 11,533 $ 41,316 $ 33,595 Financial Services 12,670 7,432 37,894 19,857 Specialty Brokerage 4,806 4,777 14,057 14,163 Insurance Operations 93,026 73,565 244,427 196,346 Net investment income (1) 3,677 8,978 15,346 28,125 Other 210 38 979 641 -------- -------- -------- -------- Total $128,609 $106,323 $354,019 $292,727 ======== ======== ======== ======== (Loss) Income before income taxes, minority interest and extraordinary loss Corporate Risk Management $ 3,119 $ 2,931 $ 10,409 $ 8,523 Financial Services 2,685 1,575 8,638 3,835 Specialty Brokerage 1,352 1,394 3,954 3,951 Insurance Operations (21,775) 5,267 (13,513) 13,058 Net investment income (2) (2,688) 4,639 (598) 13,488 Other (661) (1,022) (1,739) (3,548) -------- -------- -------- -------- Total $(17,968) $ 14,784 $ 7,151 $ 39,307 ======== ======== ======== ========
The subsidiaries' accounting records do not capture information by reporting segment sufficient to determine identifiable assets by such reporting segments. (1) Net of realized capital gains and losses. (2) Net of realized capital gains and losses and interest expense. (3) Certain of the prior year figures have been reclassified to conform with the current year's presentation. 8 MUTUAL RISK MANAGEMENT LTD. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS 4. EARNINGS PER COMMON SHARE The following table sets forth the computation of basic and diluted earnings per common share.
(In thousands, except shares and earnings per share) Three Months Ended Nine Months Ended September 30, September 30, 2001 2000 2001 2000 Numerator (Loss) income before extraordinary loss $ (8,183) $ 13,229 $ 14,455 $ 36,454 Extraordinary loss on extinguishment of debt, net of tax - - 949 4,327 ----------- ----------- ----------- ----------- Net (loss) income (8,183) 13,229 13,506 32,127 ----------- ----------- ----------- ----------- Numerator for basic earnings per common share - Net (loss) income available to common shareholders (8,183) 13,229 13,506 32,127 Effect of dilutive securities: Conversion of Zero Coupon Convertible Exchangeable Subordinated Debentures -(a) 174 -(a) -(a) Conversion of 9 3/8% Convertible Exchangeable Subordinated Debentures -(b) -(b) -(b) -(b) ----------- ----------- ----------- ----------- Numerator for diluted earnings per common share - Net (loss) income available to common shareholders after assumed conversions $ (8,183) $ 13,403 $ 13,506 $ 32,127 =========== =========== =========== =========== Denominator Denominator for basic earnings per common share - Weighted average shares 41,764,595 41,177,527 41,669,227 41,189,407 Effect of dilutive securities: Stock options - 698,554 10,140 369,246 Warrants - - 295,386 - Conversion of 9 3/8 Convertible exchangeable Subordinated Debentures -(b) -(b) -(b) -(b) Conversion of Zero Coupon Convertible exchangeable Subordinated Debentures -(a) 644,953 -(a) -(a) ----------- ----------- ----------- ----------- Denominator for diluted earnings per common share - Adjusted weighted average shares and assumed conversions 41,764,595 42,521,034 41,974,753 41,558,653 =========== =========== =========== =========== Basic earnings per common share Income before extraordinary loss $ (0.20) $ 0.32 $ 0.34 $ 0.88 Extraordinary loss on extinguishment of debt, net of tax $ - $ - $ (0.02) $ (0.10) ----------- ----------- ----------- ----------- Basic earnings per common share $ (0.20) $ 0.32 $ 0.32 $ 0.78 =========== =========== =========== =========== Diluted earnings per common share Income before extraordinary loss $ (0.20) $ 0.32 $ 0.34 $ 0.87 Extraordinary loss on extinguishment of debt, net of tax $ - $ - $ (0.02) $ (0.10) ----------- ----------- ----------- ----------- Diluted earnings per common share $ (0.20) $ 0.32 $ 0.32 $ 0.77 =========== =========== =========== ===========
(a) Excludes the conversion of zero coupon convertible debentures, which have an anti-dilutive effect (b) Excludes the conversion of 9 3/8% convertible debentures, which have an anti-dilutive effect 9 MUTUAL RISK MANAGEMENT LTD. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS 5. Defaults on Senior Securities The Company has $142.5 million of outstanding 9 3/8% Convertible Exchangeable Debentures due 2006 and a further $180 million outstanding under a bank line of credit.The agreements relating to both these facilities contain a negative covenant by the Company that the Company's US insurance subsidiaries will have a statutory combined ratio at the end of each fiscal quarter of no more than 125% for the previous twelve months. Primarily as a result of the loss incurred due to the Reliance insolvency (See Management's Discussion and Analysis above) this negative covenant was breached as of September 30, 2001. Under the terms of these agreements, if a negative covenant is breached the holders of the debentures and bank debt can terminate their obligations and declare any unpaid principal and accrued interest immediately due and payable. The Company does not have sufficient available liquidity to pay the interest and principal if the holders of the debentures or holders of the bank debt declare the amounts to be immediately due and payable. Therefore, absent a waiver, there would be substantial doubt about the Company's ability to continue as a going concern. The Company is seeking, and expects to receive, a waiver of the default from the holders of the debentures and bank debt, but there is no assurance that a waiver will be received. 6. Restricted Stock Awards The Company has issued restricted stock pursuant to its Long Term Incentive Plan. During the quarter and nine months ended September 30, 2001, 137,309 restricted Common Shares of the Company with a value of $1,222,050 were awarded to employees. These shares vest ratably over various periods to March 31, 2004. At the time of grant, the market value of the shares awarded under this plan is recorded as unearned stock grant compensation and is presented as a separate component of shareholders' equity. The unearned compensation is charged to operations over the vesting period. 7. Subsequent Event In October 2001, the Company completed the previously announced sale of its interest in Tremont Advisers Inc. for cash proceeds of $25.7 million. This sale will result in a realized pre-tax gain of approximately $20.0 million, or approximately $0.32 per diluted share, which will be recorded in the fourth quarter. 10 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS For the Quarters and Nine Months Ended September 30, 2001 and 2000 The results of operations for the quarter and nine months ended September 30, 2001 reflect strong growth in new unit sales, renewals and fee income. Net income amounted to $13.5 million or $0.32 per common share on a diluted basis for the nine months ended September 30, 2001, as compared to $32.1 million or $0.77 per diluted share in the corresponding period in 2000, as shown in the tables below. These results include a third quarter after-tax charge of $17.5 million resulting from the Company's decision to write-off all reinsurance balances due from Reliance Group Holdings, Inc. and subsidiaries ("Reliance") and $0.8 million after-tax of estimated losses from the tragic events of September 11, 2001 at the World Trade Center ("WTC"). In 2001, we began a transition from our former Program Business model to a specialty insurance operation. We have amended the income statement presentation and reclassified the comparative quarter and nine months to reflect this transition. The resulting income statement reclassifies some line items, but there is no effect on net income. TABLE 1 - EARNINGS PER SHARE
Third Quarter to September 30, 2001 2000 -------------------------------- -------------------------------- (In thousands, except per share data) PER PER COMMON SHARE COMMON SHARE ------------------ ------------------ Basic Diluted Basic Diluted Net income $(8,183) $(0.20) $(0.20) $13,229 $0.32 $0.32 ======== ======= ======= ======= ===== ===== Average number of shares outstanding (000's) 41,765 41,765 (a) 41,178 42,521 ------ ------ ------ ------
11 TABLE 1 - EARNINGS PER SHARE, continued
Nine Months Ended September 30, 2001 2000 --------------------------------- -------------------------------- (In thousands, except per share data) PER PER COMMON SHARE COMMON SHARE -------------------- ------------------ Basic Diluted Basic Diluted Income before extraordinary loss $14,455 $ 0.34 $ 0.34 $36,454 $ 0.88 $ 0.87 Extraordinary loss (b) (949) (0.02) (0.02) (4,327) (0.10) (0.10) ------- ------ ------ ------- ------- ------ Net income $13,506 $ 0.32 $ 0.32 $32,127 $ 0.78 $ 0.77 ======= ====== ====== ======= ====== ====== Average number of shares outstanding (000's) 41,669 41,975 (c) 41,189 41,559 (d) ------- ------- ------- -------
(a) Excludes the conversion of convertible debentures, options, warrants and convertible loan, which have an anti-dilutive effect. (b) Extraordinary loss on extinguishment of debt, net of tax. (c) Excludes the conversion of convertible debentures, warrants and convertible loan, which have an anti-dilutive effect. (d) Excludes the conversion of zero coupon convertible debentures, which have an anti-dilutive effect. REVENUES Total revenues amounted to $128.6 million and $354.0 million for the quarter and nine months ended September 30, 2001, representing increases of 21% over the corresponding 2000 periods. Table II shows the major components of revenues for these periods. TABLE II - REVENUES
Periods to September 30, (In thousands) Third Quarter Nine Months 2001 2000 Change 2001 2000 Change ---- ---- ------ ---- ---- ------ Fee income $ 33,436 $ 25,247 32% $ 99,086 $ 72,030 38% Premiums earned 91,286 72,060 27% 238,608 191,931 24% Net investment income 7,708 9,182 (16%) 21,054 30,293 (30%) Realized capital losses (4,031) (204) NM (5,708) (2,168) NM Other income 210 38 452% 979 641 53% -------- --------- -------- -------- Total $128,609 $106,323 21% $354,019 $292,727 21% ======== ======== ======== ========
12 FEE INCOME Fee income increased 32% in the third quarter to $33.4 million and 38% to $99.1 million for the first nine months of 2001, as compared to $25.2 million and $72.0 million, respectively, in 2000. Pre-tax profit margins were 24% in the third quarter and 26% for the first nine months of 2001, from 27% and 26% in 2000. The components of fee income by business segment are illustrated in Table III. TABLE III - FEE INCOME BY BUSINESS SEGMENT
Periods to September 30, (In thousands) Third Quarter Nine Months 2001 2000 Change 2001 2000 Change ---- ---- ------ ---- ---- ------ Corporate Risk Management fees $14,220 $11,533 23% $41,316 $33,595 23% Financial Services fees 12,670 7,432 70% 37,894 19,857 91% Specialty Brokerage fees 4,806 4,777 1% 14,057 14,163 (1%) Insurance Operations 1,740 1,505 16% 5,819 4,415 32% ------- ------- ------- ------- Total $33,436 $25,247 32% $99,086 $72,030 38% ======= ======= ======= =======
Corporate Risk Management Corporate Risk Management 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 42% of total fee income in both the third quarter and the nine months of 2001. Corporate Risk Management fees increased by 23% in the third quarter and nine months to $14.2 million and $41.3 million, respectively. Profit margins were 22% in the third quarter and 25% for the nine months of 2001, compared to 25% in both the corresponding 2000 periods. The Company expects that a substantial firming of prices generally will continue to increase unit sales of Corporate Risk Management accounts and associated fees. Financial Services The Financial Services business segment provides administrative services to offshore mutual funds and other companies, provides trust and private client services, and offers a proprietary family of mutual funds as well as asset accumulation life insurance products for the high net worth market. This segment accounted for 38% of total fee income for both the third quarter and first nine months of 2001. Fees from Financial Services increased in the quarter by 70% to $12.7 million and by 91% to $37.9 million for the nine months primarily as a result of an increase in mutual fund assets under administration, which were approximately $50 billion at September 30, 2001. Mutual Trust Management also added to this growth, contributing $3.0 million of fees in the quarter and $10.1 million for the first nine months. Profit margins were 18% in the third quarter and 20% for the nine months of 2001, as compared to 21% and 19%, respectively, in the corresponding 2000 periods. 13 Specialty Brokerage The Company's Specialty Brokerage business segment provides access to insurers and reinsurers in Bermuda, Europe and the United States. The segment produced $4.8 million of fee income for the third quarter and $14.1 million for the first nine months of 2001, representing 15% and 14% of total fee income in the third quarter and the nine months, respectively. Specialty Brokerage fees increased by 1% in the third quarter, but decreased by 1% for the nine months of 2001 from $14.2 million in the corresponding 2000 period. This resulted from the decreased purchase of reinsurance by the Company's Insurance Operations, offset by higher commissions on new and renewal business due to increased pricing. Profit margins remained steady at 28% for the third quarter and nine months of 2001, from 29% and 28%, respectively, in the corresponding 2000 periods. Insurance Operations Insurance Operations represents the Company's former Program Business segment which is being transitioned into a specialty insurance operation in which the Company will retain a more significant portion of the underwriting risk over time. Fee income earned in this segment is comprised of fees for rent-a-captive services performed and accounted for 5% and 6% of total fee income for the third quarter and nine months of 2001, respectively, as compared to 6% in both of the corresponding 2000 periods. Insurance Operations fees increased by 16% for the third quarter to $1.7 million and by 32% for the nine months to $5.8 million from $1.5 million and $4.4 million in the corresponding 2000 periods. Profit margins remained strong at 66% for the third quarter and 68% for the nine months of 2001 as compared to 65% and 63%, respectively, in 2000. NET PREMIUMS EARNED Gross premiums written, which include premium from the Company's Insurance Operations and Corporate Risk Management segments, increased 5% to $1.2 billion for the first nine months of 2001, as compared to $1.1 billion for the corresponding period in 2000. Net premiums written increased 41% to $319.4 million for the nine months of 2001 from $227.1 million in 2000. Net premiums earned increased 27% to $91.3 million for the third quarter and 24% to $238.6 million for the first nine months of 2001, as compared to $72.1 million and $191.9 million, respectively, in the corresponding 2000 periods. This was primarily due to the corresponding increase in gross premiums written and an improved rating environment. INVESTMENT INCOME Gross investment income decreased by $9.5 million to $24.3 million for the first nine months of 2001 versus the corresponding 2000 period. Net investment income decreased by 16% to $7.7 million for the third quarter and by 30% to $21.1 million for the first nine months of 2001. Investment yields declined to 5.3% and 5.2% for the third quarter and nine months of 2001, respectively, as compared to 7.4% and 7.0% in the corresponding 2000 periods. The 2000 yields exclude $3.7 million from a special purpose entity, Endeavour Real Estate Securities Ltd. Net investment income was affected by lower 14 interest rates and a change in the portfolio mix to include more invested cash. EXPENSES TABLE IV - EXPENSES
Periods to September 30, (In thousands) Third Quarter Nine Months 2001 2000 Change 2001 2000 Change ---- ---- ------ ---- ---- ------ Operating expenses $ 25,124 $18,365 37% $ 72,150 $ 53,956 34% Total insurance costs 114,217 67,774 69% 256,056 181,650 41% Interest expense 6,365 4,340 47% 15,944 14,637 9% Other expenses 871 1,060 (18%) 2,718 3,177 (14%) -------- ------- -------- -------- Total $146,577 $91,539 60% $346,868 $253,420 37% ======== ======= ======== ========
Operating expenses increased 37% to $25.1 million for the quarter, compared to $18.4 million in the third quarter of 2000, and increased 34% to $72.1 million for the first nine months of 2001, compared to $54.0 million for the first nine months of 2000. The increase in operating expenses was attributable to growth in personnel and other expenses to service the Company's existing businesses. Recent acquisitions also contributed an additional $4.5 million and $13.5 million for the quarter and nine months, respectively. Excluding the effect of recent acquisitions, operating expenses increased by 12% in the quarter and 9% for the nine months ended September 30, 2001. The movement in total insurance costs, which includes losses and loss expenses and acquisition and underwriting expenses, is the direct result of the fluctuations in net premiums earned. Losses and loss expenses increased to $90.2 million and $183.7 million for the third quarter and nine months ended September 30, 2001 for loss ratios of 98.8% and 77.0%, respectively, as compared to $56.6 million and $132.7 million for loss ratios of 78.6% and 69.1%, respectively, in the corresponding 2000 periods. Included in the losses and loss expenses for the quarter and nine months of 2001 is the Reliance charge of $26.9 million and $1.2 million for the Company's net exposure to the WTC tragedy. Acquisition and underwriting expenses amounted to $24.0 million and $72.3 million for the quarter and nine months ended September 30, 2001 for expense ratios of 26.3% and 30.3%, respectively, as compared to $11.2 million and $49.0 million for expense ratios of 15.5% and 25.5%, respectively, in the corresponding 2000 periods. The components of acquisition and underwriting expenses are shown below: 15
Third Quarter to September 30, (In thousands) 2001 2000 ----------------- ------------------ Acquisition costs $ 28,533 31.2% $ 20,109 27.9% Excess ceding commissions (29,110) (31.9%) (30,562) (42.4%) Operating expenses 24,618 27.0% 21,610 30.0% -------- ----- -------- ----- Acquisition and underwriting expenses $ 24,041 26.3% $ 11,157 15.5% ======== ===== ======== ====
Nine Months Ended September 30, (In thousands) 2001 2000 ------------------ ----------------- Acquisition costs $ 86,958 36.4% $ 70,064 36.5% Excess ceding commissions (87,571) (36.7%) (79,489) (41.4%) Operating expenses 72,937 30.6% 58,379 30.4% -------- ----- -------- ----- Acquisition and underwriting expenses $ 72,324 30.3% $ 48,954 25.5% ======= ===== ======== =====
Acquisition costs, which include all external costs associated with the production of net premiums, amounted to $28.5 million for the third quarter of 2001 and $87.0 million for the nine months ended September 30, 2001, as compared to $20.1 million and $70.1 million, respectively, for the corresponding 2000 periods. Acquisition costs are reduced by the excess of the ceding commissions received from reinsurers over the related acquisition costs on ceded premium. These excess ceding commissions, which were previously recorded as Program Business fees, amounted to $29.1 million and $87.6 million for the quarter and the nine months ended September 30, 2001, as compared to $30.6 million and $79.5 million, respectively, for the corresponding 2000 periods. Acquisition costs and excess ceding commissions are expensed and earned respectively over the life of the underlying contract. Underwriting expenses for this segment, which were previously recorded as Program Business operating expenses, amounted to $24.6 million for the quarter and $72.9 million for the nine months, as compared to $21.6 million and $58.4 million, respectively, for the corresponding 2000 periods. The Company believes that, given its move to retain more underwriting risk, this new presentation is more consistent with insurance company disclosure. The Company had a combined ratio of 107.3% for the first nine months of 2001, as compared to 94.6% in 2000. Insurance Operations incurred a $13.5 million operating loss for the first nine months of 2001, as compared to $13.1 million of operating income in the corresponding 2000 period. The 2001 combined ratio and Insurance Operations' operating loss includes the Reliance charge of $26.9 million and $1.2 million for the Company's net exposure to the WTC tragedy. 16 Interest expense increased by 9% to $15.9 million for the first nine months of 2001, as compared to $14.6 million for the corresponding period in 2000. The increase from the prior year was primarily as a result of increased debt, offset in part by no Endeavour interest in the current year and lower market interest rates. The effective tax rate was 57.6% in the quarter and negative 119.7% for the first nine months of 2001, compared to 10.0% and 8.7%, respectively, for the corresponding 2000 periods. The 2001 tax rates reflect the net loss incurred during the third quarter as a result of the Company's decision to write-off all balances due from Reliance. This net loss was partially offset by earnings outside of the United States. LIQUIDITY AND CAPITAL RESOURCES Total assets increased to $5.5 billion at September 30, 2001 from $4.9 billion at December 31, 2000. Assets held in separate accounts, which are principally managed assets attributable to participants in the Company's IPC Programs, accounted for approximately 16% of total assets at September 30, 2001 and December 31, 2000. Total shareholders' equity increased to $374.7 million at September 30, 2001 from $351.5 million at December 31, 2000, primarily as a result of net income and a decrease in the change in unrealized losses within other comprehensive income for the nine months ended September 30, 2001. Return on equity, before the extraordinary loss in each year, was 5.3% for the first nine months of 2001, as compared to 13.1% for the corresponding period in 2000. Excluding the Reliance charge and WTC events, the nine month return on equity was 12.0%. CASH FLOW As of September 30, 2001, the Company was involved in three reinsurance disputes in arbitration to collect disputed balances due from reinsurers. The Company has paid approximately $49 million of losses and loss expenses for which it has not been reimbursed. In addition, the Company estimates that it will ultimately pay another $36 million of unpaid losses and loss expenses in relation to the disputed business. One of these arbitration proceedings involves a series of accident and health programs written by the Company from 1997 through 1999. The Company received a good-faith payment from the reinsurers of $12.3 million during the first quarter, reducing the unreimbursed paid losses to $29.8 million on these programs, with an estimated $2.2 million of unpaid losses. This dispute involves a number of Lloyd's syndicates, as well as a number of other reinsurers, and is presently in non-binding mediation. If this mediation does not resolve the dispute, it will be arbitrated in Philadelphia, Pennsylvania. One of these arbitration proceedings involves a number of reinsurance treaties with a U.S. life insurance company that wrote workers' compensation reinsurance. This life insurance company is no longer writing workers' compensation reinsurance and is believed by the Company to be disputing similar obligations to other property casualty insurers. At September 30, 2001, this dispute involved $9.0 million in unreimbursed paid claims and an 17 estimated $30.9 million in additional unpaid claims. The remaining arbitration proceeding involves claims under individual reinsurance agreements with a reinsurer and involves $10.3 million of unreimbursed paid claims and an estimated $2.6 million of additional unpaid claims. The Company is in settlement discussions with the reinsurer and an arbitration panel has not yet been selected. In addition to the reinsurance disputes discussed above, the Company was involved in a terminated property program written in 1998 and 1999, in which the Company acted as both a reinsurer and a direct writer of property insurance. In 1999, the Company established a reserve with respect to this terminated program of $4.7 million. The Company and its lead reinsurers, which also issued some of this business directly, are presently investigating this business and negotiating a cooperation agreement. The Company has denied certain reinsurance claims presented to it, which are subject to arbitration. In addition, two of the Company's quota share reinsurers, representing approximately 15% of the Company's quota share reinsurance, are questioning certain ceded claims, and this dispute is also the subject of arbitration. These disputes have adversely affected the Company's operating cash flow, however the Company still produced positive cash flow from operations of $23.4 million for the nine months ended September 30, 2001, as compared to negative $10.4 million in 2000. The Company expects that its inability to settle these disputes favorably or in a timely manner will continue to strain its operating cash flow. The Company will attempt to aggressively resolve these disputes on acceptable terms. Any future reinsurance disputes could significantly affect future operating cash flow. The Company believes that its cash flow from Corporate Risk Management, Specialty Brokerage and Financial Services will not be affected by disputes and will assist the Company in financing its current operations and meeting its commitments under its debt facilities. As of September 30, 2001 the Company had $2.5 billion of reinsurance balances recoverable. The Company monitors the credit worthiness of these balances on a regular basis. The Company pays particular attention to the claims paying and financial strength ratings assigned to its reinsurers by the commercial rating agencies. The tragic events of September 11, 2001 have had a tremendous impact on the state of the insurance and reinsurance industry. The Company has been closely monitoring recent announcements from the rating agencies regarding the financial strength of its individual reinsurers. While there have been a number of reinsurers with balances outstanding to the Company who have had their rating either downgraded or placed on review, the Company continues to believe that it will collect in full what is owed from its reinsurers and thus no provision has been established for reinsurers' credit default. In the event that a number of the Company's reinsurers are downgraded further or become insolvent as a result of the events of September 11, 2001 or other events that have impacted the industry in 2001, it could have a significant negative impact on the Company's cash flow, earnings and shareholders' equity. The Company has defaulted on agreements relating to its 9 3/8% Convertible Debentures due 2006 and a bank line of credit. This is discussed in more detail in Part II, Item 2. 18 RECENT ACCOUNTING PRONOUNCEMENTS In July 2001, the Financial Accounting Standards Board issued Statement 142, "Goodwill and Other Intangible Assets". Under Statement 142, goodwill and certain intangible assets are no longer amortized but are reviewed annually for impairment. For goodwill and certain intangible assets existing at June 30, 2001, the new impairment only approach (non-amortization) must be adopted on January 1, 2002. SAFE HARBOR DISCLOSURE FOR FORWARD-LOOKING STATEMENTS The above Management's Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements that reflect management's current views with respect to future events and financial performance and are made pursuant to the safe harbor provision of the Private Securities Litigation Reform Act of 1995. In some cases, readers can identify forward-looking statements by terminology such as "may", "will", "should", "could", "expects", "plans", "anticipates", "believes", "estimates", "predicts", "potential" or "continue". In particular, these statements include our expectations regarding the outcome of disputes and arbitrations, and our beliefs regarding the continuing firming of prices generally and the affirmation of the Legion Companies' A- (Excellent) rating by A.M. Best, which the Company believes will continue to generate the sale of Corporate Risk Management accounts and associated fees. These statements involve known and unknown risks, uncertainties and other factors that could cause actual results, performance or achievements to differ materially from those in the forward-looking statements. Although management believes that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, performance or achievements. The factors that could cause results, performance and achievements to differ materially from these forward-looking statements are discussed in "Business - Risk Factors" in Item 1 of the Company's Annual Report on Form 10-K for the year ended December 31, 2000. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK No material changes since December 31, 2000 on Form 10-K. PART II. OTHER INFORMATION ITEM 2. DEFAULTS ON SENIOR SECURITIES The Company has $142.5 million of outstanding 9 3/8% Convertible Exchangeable Debentures due 2006 and a further $180 million outstanding under a bank line of credit. The agreements relating to both these facilities contain a negative covenant by the Company that the Company's US insurance subsidiaries will have a statutory combined ratio at the end of each fiscal quarter of no more than 125% for the previous twelve months. Primarily as a result of the loss incurred due to the Reliance insolvency (See Management's Discussion and Analysis above) this negative covenant was breached as of September 30, 2001. Under the terms of these agreements, if a negative covenant is breached the holders of the debentures and bank debt can terminate their obligations and declare any unpaid principal and accrued interest immediately due and payable. The Company does not have sufficient available liquidity to pay the interest and principal if the holders of the debentures or the holders of the bank debt declare the amounts to be immediately due and payable. Therefore, absent a waiver, there would be substantial doubt about the Company's ability to continue as a going concern. The Company is seeking, and expects to receive, a waiver of the default from the holders of the debentures and bank debt, but there is no assurance that a waiver will be received. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K A. Reports on Form 8-K The Company filed a report on Form 8-K on September 18, 2001 concerning the World Trade Center tragedy. 19 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934 as amended, the Company has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. MUTUAL RISK MANAGEMENT LTD. /s/ Andrew Cook ------------------------------------- Andrew Cook Senior Vice President, Chief Financial Officer and Authorized Signatory November 14, 2001 20 -----END PRIVACY-ENHANCED MESSAGE-----