EX-99.3 5 dex993.txt APPENDIX 9 EXHIBIT 99.3 MUTUAL RISK MANAGEMENT LTD. AND SUBSIDIARIES UNAUDITED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
Three Months Ended (In thousands, except share and per share data) March 31, 2002 2001 REVENUES Fee income $ 29,439 $ 31,861 Premiums earned 15,715 63,436 Net investment income 2,469 6,405 Realized capital losses (373,991) (991) Other income 82 383 ----------- ----------- Total Revenues (326,286) 101,094 ----------- ----------- EXPENSES Losses and loss expenses incurred 2,553 43,766 Acquisition and underwriting expenses 12,362 16,581 Operating expenses 39,987 22,859 Interest expense 5,245 4,538 Other expenses 75 962 ----------- ----------- Total Expenses 60,222 88,706 ----------- ----------- (LOSS) INCOME BEFORE INCOME TAXES, (386,508) 12,388 MINORITY INTEREST AND EXTRAORDINARY LOSS Income taxes 4,025 672 ----------- ----------- (LOSS) INCOME BEFORE MINORITY INTEREST AND EXTRAORDINARY LOSS (390,533) 11,716 Minority interest (155) (253) ----------- ----------- (LOSS) INCOME BEFORE EXTRAORDINARY LOSS (390,688) 11,463 Extraordinary loss on extinguishment of debt, net of tax 1,600 - ----------- ----------- NET (LOSS) INCOME (392,288) 11,463 Other comprehensive income, net of tax: Unrealized (losses) gains on investments, net of (9,859) 5,857 ----------- ----------- reclassification adjustment COMPREHENSIVE (LOSS) INCOME $ (402,147) $ 17,320 =========== =========== (Loss) EARNINGS PER COMMON SHARE: Net income available to Common Shareholders: Basic $ (9.39) $ 0.28 =========== =========== Diluted $ (9.39) $ 0.28 =========== =========== Dividends per Common Share - $ 0.01 =========== =========== Weighted average number of Common Shares Shares outstanding - basic 41,770,484 41,618,331 =========== =========== Weighted average number of Common Shares Shares outstanding - diluted 41,770,484 41,619,826 =========== ===========
See Accompanying Notes to Unaudited Consolidated Financial Statements MUTUAL RISK MANAGEMENT LTD. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
(In thousands, except share data) March 31, December 31, 2002 2001 (unaudited) (audited) ASSETS Cash and cash equivalents $ 92,317 $ 240,012 Investments: Held as available for sale at fair value (Amortized cost $367,361; 2000 - $381,911) 105,576 402,177 ---------- ---------- TOTAL MARKETABLE INVESTMENTS 197,893 642,189 Other investments 8,798 31,250 Investment income due and accrued 755 6,351 Accounts receivable 276,808 765,869 Reinsurance recoverable 61,456 2,560,602 Deferred expenses 13,220 90,011 Prepaid reinsurance premiums - 305,073 DEFERRED TAX BENEFIT 411 - Other assets 52,089 122,666 Assets held in separate accounts 850,565 839,072 ---------- ---------- TOTAL ASSETS $1,461,995 $5,363,083 ========== ========== LIABILITIES & SHAREHOLDERS' EQUITY LIABILITIES Unpaid losses and loss expenses $ 100,095 $2,934,384 Unearned premiums 13,594 456,792 Pension fund reserves 29,847 38,843 Claims deposit liabilities 9,128 20,785 Accounts payable 223,610 335,817 Taxes payable 5,346 1,137 Loans payable 154,325 197,874 Debentures 115,928 154,627 Other liabilities 100,057 122,228 Liabilities related to separate accounts 850,565 839,072 ---------- ---------- TOTAL LIABILITIES $1,602,495 $5,101,559 ========== ========== SHAREHOLDERS' EQUITY Common Shares - Authorized 180,000,000 (par value $0.01) Issued 41,623,198 (excluding 2,728,816 shares held in treasury) (2000 - 41,614,649 excluding 2,728,816 shares held in treasury) 418 418 Additional paid-in capital 121,161 121,161 Unearned stock grant compensation (855) (978) Accumulated other comprehensive loss (2,846) 7,013 Retained earnings (258,378) 133,910 ---------- ---------- TOTAL SHAREHOLDERS' EQUITY (140,500) 261,524 ---------- ---------- Total Liabilities & Shareholders' Equity $1,461,995 $5,363,083 ========== ==========
See Accompanying Notes to Unaudited Consolidated Financial Statements MUTUAL RISK MANAGEMENT LTD. AND SUBSIDIARIES UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands) Three Months Ended March 31, 2002 2001 CASH FLOWS FROM OPERATING ACTIVITIES Net (loss) income $(392,288) $ 11,463 Items not affecting cash: Depreciation 1,308 3,632 Amortization of investments (118) (177) Net loss on sale of investments 373,991 996 Reduction on cash due to Legion Companies deconsolidation (156,361) Amortization of convertible debentures 187 178 Amortization of warrants 130 - Deferred tax benefit (411) (355) Extraordinary loss on extinguishment of debt - - Other items (7,454) 466 Net change in non-cash balances relating to operations: Accounts receivable (44,480) (32,686) Reinsurance recoverable 1,701 (88,391) Investment income due and accrued 276 537 Deferred expenses 16,837 (13,704) Prepaid reinsurance premiums - (2,243) Other assets 513 8,077 Unpaid losses and loss expenses (167) 86,741 Prepaid fees 6,460 - Unearned premium (7,734) 23,350 Accounts payable 47,303 10,414 Taxes payable 1,153 (231) Other liabilities 15,697 (2,033) --------- --------- NET CASH FLOWS (APPLIED TO) FROM OPERATING ACTIVITIES (143,457) 6,034 --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from sale of investments - available for sale (13,104) 14,283 Proceeds for maturity of investments - available for sale - 9,208 Investments purchased - available for sale (4,612) (22,499) Gain on sale of Hemisphere 107,169 - Acquisitions and other investments (319) (12,849) Fixed assets purchased (952) (18,415) Other items 54 217 --------- --------- NET CASH FLOWS FROM (APPLIED TO) INVESTING ACTIVITIES 88,236 (30,055) --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES Loans (repaid) received (49,449) 14,976 Extinguishment of convertible debentures (39,016) - Proceeds from shares issued - 51 Claims deposit liabilities (93) (80) Pension fund reserves (3,500) (387) Dividends paid (416) (2,913) --------- --------- NET CASH FLOWS (APPLIED TO) FROM FINANCING ACTIVITIES (92,474) 11,467 --------- --------- Net (Decrease) increase in cash and cash equivalents (147,695) (12,374) Cash and cash equivalents at beginning of period 240,012 202,015 --------- --------- Cash and cash equivalents at end of period $ 92,317 $ 189,641 ========= ========= Supplemental cash flow information: Interest paid $ 4,360 $ 4,469 ========= ========= Income taxes paid, net $ - $ - ========= =========
See Accompanying Notes to Unaudited Consolidated Financial Statements MUTUAL RISK MANAGEMENT LTD. AND SUBSIDIARIES UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(In thousands, except share data) March 31, December 31, 2002 2001 Common Shares Opening balance $ 418 $ 416 Shares issued - 2 --------- --------- Treasury shares purchased - - --------- --------- Closing balance 418 418 --------- --------- Additional paid-in capital Opening balance 121,161 117,188 Shares issued - 1,375 Warrants issued - 2,598 --------- --------- 121,161 121,161 --------- --------- Unearned stock grant compensation Opening balance - - Stock grants awarded (978) (978) Amortization 123 - --------- --------- Closing balance (855) (978) --------- --------- Accumulated other comprehensive loss Net unrealized depreciation on investments Opening balance 7,013 (10,836) Change in period, net of reclassification, net of tax (9,859) 17,849 --------- --------- Closing balance (2,846) 7,013 --------- --------- Retained earnings Opening balance 133,910 244,765 Net loss (392,288) (109,189) Common share dividends declared (1) - (1,666) --------- --------- Closing balance (258,378) 133,910 --------- --------- Total shareholders' equity $(140,500) $ 261,524 ========= =========
(1) Dividend per share amounts were $0.00 and $0.04 for the quarter ended March 31, 2002 and the year ended December 31, 2001 respectively See Accompanying Notes to Unaudited Consolidated Financial Statement MUTUAL RISK MANAGEMENT LTD. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS March 31, 2002 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 ended March 31, 2002 and 2001. 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 ended March 31, 2002 are not necessarily indicative of what operating results may be for the full year. 2. FAS 142, "GOODWILL AND OTHER INTANGIBLE ASSETS" The Company adopted FAS 142 on January 1, 2002 and ceased amortizing goodwill at that time. All goodwill recognized in the Company's consolidated balance sheet at January 1, 2002 has been assigned to one or more reporting units. Goodwill for each reporting unit will be tested for impairment by June 30, 2002. There has been no impairment to goodwill to date due to the adoption of FAS 142. 2. COMPREHENSIVE INCOME SFAS NO. 130 requires unrealized gains or losses on the Company's available for sale investments, to be included in other comprehensive income.
Quarter Ended March 31, 2002 Quarter Ended March 31, 2001 Net of Net of (In thousands) Before tax Tax tax Before Tax tax --- --- amount amount tax amount ------ ------ ------ amount ------ Net unrealized (losses) gains on available for sale investments arising during the period $(9,859) $ - $(9,859) $ 6,583 $ 1 $ 6,584 Less: reclassification adjustment for gains realized in net income 77 - 77 (996) (1) (997) ------- ------- ------- ------- ------- ------- Other comprehensive (loss) income $(9,782) $ - $(9,782) $ 5,587 $ - $ 5,857 ======= ======= ======= ======= ======= =======
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.
Quarter ended March 31, Revenue 2002 2001 (4) Insurance Operations $ 15,715 $ 63,436 Corporate Risk Management Captive Operations 9,253 7,750 IPC Operations 2,740 7,791 Financial Services 12,844 11,942 Specialty Brokerage 4,602 4,378 Net investment income (1) (371,522) 5,414 Other 82 383 ---------- -------- Total $ (326,286) $101,094 ========== ======== (Loss) Income before income taxes, minority interest and extraordinary items Insurance Operations $ 800 $ 3,090 Corporate Risk Management Captive Operations 2,356 1,857 IPC Operations (2,571) 3,441 Financial Services 546 2,634 Specialty Brokerage 1,108 1,069 Net investment income (2) (376,767) 876 Other (3) (11,980) (579) ---------- -------- Total $ (386,508) $ 12,388 ========== ========
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) Includes corporate expenses in 2002. These expenses were previously allocated to each business segment. (4) Certain of the prior year figures have been reclassified to conform with the current year's presentation. 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) Quarter Ended March 31, 2002 2001 Numerator (Loss) Income before extraordinary loss $ (390,688) $ 11,463 Extraordinary loss on non-renewal of Letter of Credit facility (1,600) - ------------- ------------- Net (loss) income (392,288) 11,463 ------------- ------------- Numerator for basic earnings per common share - Net (loss) income available to common shareholders (392,288) 11,463 Numerator for diluted earnings per common share - Net (loss) income available to common shareholders after assumed Conversions $ (392,288) $ 11,463 ============= ============= Denominator Denominator for basic earnings per common share - Weighted average shares 41,770,484 41,618,331 Effect of dilutive securities: Stock options - 1,495 Denominator for diluted earnings per common share - Adjusted weighted average shares and assumed conversions 41,770,484 (a) 41,619,826 (b) ============= ============= Basic earnings per common share (Loss) Income before extraordinary loss $ (9.35) $ 0.28 Extraordinary loss on extinguishment of debt, net of tax $ (0.04) $ - ------------- ------------- Basic earnings per common share $ (9.39) $ 0.28 ============= ============= Diluted earnings per common share (Loss) Income before extraordinary loss $ $(9.35) $ 0.28 Extraordinary loss on extinguishment of debt, net of tax $ $(0.04) $ - ------------- ------------- Diluted earnings per common share $ (9.39) $ 0.28 ============= =============
(a) Excludes the conversion of 9 3/8% debentures, zero coupon debentures, warrants, options and convertible loan which have an anti-dilutive effect. (b) Excludes the zero coupon debentures and convertible loan which have an anti-dilutive effect. MUTUAL RISK MANAGEMENT LTD. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS 5. SALE OF HEMISPHERE MANAGEMENT LIMITED On March 21, 2002, the Company completed the sale of its fund administration business, principally Hemisphere Management Ltd. The proceeds of the sale amounted to approximately $114.6 million, with a gain on sale of approximately $97 million after taxes and expenses. The cash flow impact was to increase the Company's cash by approximately $107.2 million in the quarter. The proceeds after expenses have been used to repay indebtedness. This business had fee income of $8.3 million and net income of $1.0 million in the first quarter of 2002, which is included in the consolidated statement of income. 6. THE LEGION COMPANIES On March 28, 2002, the Commonwealth Court of Pennsylvania entered an Order of Rehabilitation placing Legion Insurance Company and Villanova Insurance Company in rehabilitation, effective April 1, 2002. Similarly, on April 3, 2002, the Illinois Court entered an Order of Conservation placing Legion Indemnity in conservation. The Legion Companies consented to these Orders and waived any rights to hearings before the Insurance Commissioner or the Commonwealth Court. The insurance companies were placed in rehabilitation due to cash flow issues arising as a result of the ratings downgrade and concerns regarding the timely collection of reinsurance. On August 28 and 29, 2002, the Insurance Commissioner of Pennsylvania filed petitions to liquidate Legion Insurance Company and Villanova Insurance Company. Similarly, on September 10, 2002, the Illinois Insurance Department filed a motion to liquidate Legion Indemnity Company. Court hearings on this motion have been held but no decisions have been made. The Company's investment in the Legion Companies and their subsidiaries has been accounted for using the cost method and the carrying values have been written down to Nil due to uncertainty as to whether the companies will emerge from rehabilitation and conservation. 7. SUBSEQUENT EVENTS On June 24, 2002, the Company completed the sale of the assets of Captive Resources LLC, a manager of group captive insurance companies. The proceeds of the sale, which will amount to approximately $26.3 million after taxes and expenses, are being held by the Company in a separate account and will be used to repay the Company's senior creditors. Due to the rehabilitation, and subsequent liquidation petitions, of the Legion Companies, the Company had been seeking one or more replacement insurance companies to issue policies in connection with our Corporate Risk Management business. However, the Company was unsuccessful in obtaining such replacement insurance companies and the "rent-a-captive" operations have effectively gone into run-off. As a result, the Company's marketing division, CRS Services Inc., was closed down effective June 28, 2002. The Company's offshore investment companies (the "IPC Companies") have provided letters of credit to the Legion Companies as security for the obligations of those companies under reinsurance arrangements with the Legion Companies. These letters of credit are collateralized by cash, investments and letters of credit provided to the IPC Companies. The providers of the letter of credit facility declined to renew the facility and effective July 11, 2002, the letter of credit facility will be replaced by trust arrangements in favor of the Legion Companies. The trusts will be funded by the collateral that previously supported the letter of credit facility. 8. LEGION COMPANIES DECONSOLIDATION Income Statement Due to the events described in Note 6, the results of the Legion Companies have not been consolidated in the statement of (loss) income and comprehensive income for the quarter ended March 31, 2002. Management feels that by doing so, the results as reported for the quarter ended March 31, 2002, more truly reflect the ongoing operations of the Company. Balance Sheet The Legion Companies balance sheets have not been consolidated as at March 31, 2002 as due to the rehabilitation and conservation, the Company no longer exercises operational control. Cash Flow Statement The cash flow statement for the quarter ended March 31, 2002 has been prepared excluding detail relating to the Legion Companies. The effect of the deconsolidation was to reduce the Company's cash balance by $156 million, being the cash at the Legion Companies as at December 31, 2001.