-----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, I67TUtyCeJbmLCpm00degA54nAIo+1HzOhu2QyL620PNG2UpODUnwnnBxC27bBIs eGvaJMutnEPH6EtzcNYNBg== /in/edgar/work/20000811/0001036050-00-001460/0001036050-00-001460.txt : 20000921 0001036050-00-001460.hdr.sgml : 20000921 ACCESSION NUMBER: 0001036050-00-001460 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000630 FILED AS OF DATE: 20000811 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MUTUAL RISK MANAGEMENT LTD CENTRAL INDEX KEY: 0000826918 STANDARD INDUSTRIAL CLASSIFICATION: [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: 692128 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 0001.txt FORM 10-Q 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 quarterly period ended June 30, 2000. 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, 2000 was 41,137,169. MUTUAL RISK MANAGEMENT LTD. I N D E X Part I. Financial Information: Item 1. Financial Statements: Unaudited Consolidated Statements of Income and Comprehensive Income for the quarter and six month periods ended June 30, 2000 and 1999 3 Unaudited Consolidated Balance Sheets at June 30, 2000 and December 31, 1999 4 Unaudited Consolidated Statements of Cash Flows for the six month periods ended June 30, 2000 and 1999 5 Unaudited Consolidated Statements of Changes in Shareholders' Equity for the periods ended June 30, 2000 and December 31, 1999 6 Notes to Unaudited Consolidated Financial Statements at June 30, 2000 7-18 Item 2. Management's Discussion and Analysis of Financial 19-23 Condition and Results of Operations Item 3. Quantitative and Qualitative Disclosures about 23 Market Risk PART II. Other Information: Item 1. Legal Proceedings 23 Item 4. Submission of Matters to a Vote of Security Holders 23 Item 6. Exhibits and Reports on Form 8-K 24 Signatures 25 Exhibits Exhibit 27 - Financial Data Schedules
2 PART I. FINANCIAL INFORMATION MUTUAL RISK MANAGEMENT LTD. AND SUBSIDIARIES UNAUDITED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
Quarter ended June 30 Six months ended June 30 2000 1999 2000 1999 REVENUES Fee income $ 50,449,461 $ 45,784,153 $ 95,710,161 $ 91,278,028 Premiums earned 63,999,019 50,233,190 119,871,601 89,017,827 Net investment income 8,543,753 9,442,791 21,110,250 16,663,438 Realized capital losses (341,100) (1,531,951) (1,963,796) (1,029,574) Other income (losses) 590,312 (111,545) 603,012 (220,485) ------------ ------------ ------------ ------------- Total Revenues 123,241,445 103,816,638 235,331,228 195,709,234 ------------ ------------ ------------ ------------- EXPENSES Losses and loss expenses incurred 41,759,786 41,563,127 76,079,584 67,792,538 Acquisition costs 25,093,165 9,918,526 49,955,031 23,413,737 Operating expenses 37,711,986 30,436,875 72,359,720 59,537,010 Interest expense 4,301,017 1,521,272 10,297,456 3,123,346 Other expenses 1,404,563 663,646 2,116,574 1,323,814 ------------ ------------ ------------ ------------- Total Expenses 110,270,517 84,103,446 210,808,365 155,190,445 ------------ ------------ ------------ ------------- INCOME BEFORE INCOME TAXES, MINORITY INTEREST AND EXTRAORDINARY LOSS 12,970,928 19,713,192 24,522,863 40,518,789 Income Taxes 940,178 1,615,299 1,933,375 3,629,584 ------------ ------------ ------------ ------------- INCOME BEFORE MINORITY INTEREST AND EXTRAORDINARY LOSS 12,030,750 18,097,893 22,589,488 36,889,205 Minority interest (63,250) (2,650) 635,735 4,975 ------------ ------------ ------------ ------------- INCOME BEFORE EXTRAORDINARY LOSS 11,967,500 18,095,243 23,225,223 36,894,180 Extraordinary loss on extinguishment of debentures, net of tax - - (4,327,242) - ------------ ------------ ------------ ------------- NET INCOME $ 11,967,500 $ 18,095,243 $ 18,897,981 $ 36,894,180 Other Comprehensive income, net of tax: Unrealized losses on investments, net of reclassification adjustment ($1,893,970) ($7,332,063) ($3,052,117) ($10,824,111) ------------ ------------ ------------ ------------- COMPREHENSIVE INCOME $ 10,073,530 $ 10,763,180 $ 15,845,864 $ 26,070,069 ============ ============ ============ ============= EARNINGS PER COMMON SHARE Net income available to Common Shareholders Basic EPS $0.29 $0.42 $0.46 $0.86 ===== ===== ===== ===== Diluted EPS $0.29 $0.39 $0.46 $0.79 ===== ===== ===== ===== Dividends per Common Share $0.07 $0.06 $0.14 $0.12 ===== ===== ===== ===== Weighted average number of Common Shares outstanding - basic 41,181,750 43,411,317 41,195,162 43,024,869 ============ ============ ============ ============= Weighted average number of Common Shares outstanding - diluted 42,136,014 50,600,829 41,399,754 50,507,111 ============ ============ ============ =============
See Accompanying Notes to Unaudited Consolidated Financial Statements 3
MUTUAL RISK MANAGEMENT LTD. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS UNAUDITED JUNE 30, DECEMBER 31, 2000 1999 ASSETS Cash and cash equivalents $ 142,561,889 $ 155,387,061 Investments: Held in available for sale account at fair value (Amortized cost $452,419,232 1999 - $466,858,482) 434,429,998 451,921,349 -------------- -------------- Total marketable investments 576,991,887 607,308,410 Other investments 36,190,264 28,425,474 Investment income due and accrued 5,973,182 5,172,711 Accounts receivable 618,943,593 564,590,025 Reinsurance receivables 1,966,526,001 1,729,935,575 Deferred expenses 46,960,083 30,406,066 Prepaid reinsurance premiums 301,326,167 281,077,921 Fixed assets 32,084,880 28,880,015 Deferred tax benefit 4,163,044 4,232,826 Goodwill 51,853,419 52,924,459 Other assets 7,031,720 6,829,547 Assets held in separate accounts 738,281,043 693,390,317 -------------- -------------- Total Assets $4,386,325,283 $4,033,173,346 ============== ============== LIABILITIES & SHAREHOLDERS' EQUITY LIABILITIES Reserve for losses and loss expenses $2,091,089,881 $1,860,120,483 Reserve for unearned premiums 381,441,215 335,265,056 Pension fund reserves 60,031,244 67,980,867 Claims deposit liabilities 30,622,024 27,923,901 Accounts payable 379,628,057 353,965,743 Accrued expenses 13,955,029 11,053,705 Taxes payable 11,698,343 23,181,367 Bridge loan 217,000,000 117,000,000 Other loans payable 3,796,048 4,048,589 Debentures 13,323,008 110,898,002 Prepaid fees 62,780,988 58,025,464 Other liabilities 15,228,561 12,175,828 Liabilities related to separate accounts 738,281,043 693,390,317 -------------- -------------- Total Liabilities 4,018,875,441 3,675,029,322 -------------- -------------- SHAREHOLDERS' EQUITY Common shares - Authorized 180,000,000 (par value $0.01) Issued 41,137,169 (excluding 2,728,816 shares held in treasury) (1999 - 41,205,191) 411,372 412,052 Additional paid-in capital 109,980,709 110,754,758 Accumulated other comprehensive income (loss) (17,989,244) (14,937,127) Retained earnings 275,047,005 261,914,341 -------------- -------------- Total Shareholders' Equity 367,449,842 358,144,024 -------------- -------------- Total Liabilities & Shareholders' Equity $4,386,325,283 $4,033,173,346 ============== ==============
See Accompanying Notes to Consolidated Financial Statements 4 MUTUAL RISK MANAGEMENT LTD. AND SUBSIDIARIES UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended June 30, 2000 1999 CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 18,897,981 $ 36,894,180 Items not affecting cash: Depreciation 5,460,635 3,228,371 Amortization of investments (258,207) (919,120) Net loss on sale of investments 592,006 1,392,924 Other investment gains - (360,916) Amortization of Convertible Debentures 1,046,438 3,028,535 Deferred tax benefit 69,782 718,481 Extraordinary loss on extinguishment of debentures 4,327,242 - Other items 567,906 1,028,200 Net changes in non-cash balances relating to operations: Accounts receivable (54,353,568) (115,761,494) Reinsurance receivables (236,590,426) (140,398,460) Investment income due and accrued (800,471) 1,084,705 Deferred expenses (16,554,017) (8,676,509) Prepaid reinsurance premiums (20,248,246) (56,465,096) Other assets (202,173) (7,532,244) Reserve for losses and loss expenses 230,969,398 152,178,964 Prepaid fees 4,755,524 4,952,777 Reserve for unearned premiums 46,176,159 67,206,611 Accounts payable 25,662,314 41,987,385 Taxes payable (11,483,024) 5,792,008 Accrued expenses 2,901,324 (3,566,563) Other liabilities 3,057,796 (5,156,510) ------------- ------------- NET CASH FLOW FROM (APPLIED TO) OPERATING ACTIVITIES 3,994,373 (19,343,771) ------------- ------------- CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from sale of investments - Available for sale 285,192,129 40,188,085 Proceeds from maturity of investments - Available for sale 19,086,217 33,683,069 Fixed assets purchased (8,800,521) (7,213,937) Investments purchased - Available for sale (291,581,986) (78,009,960) Acquisitions and other investments (7,508,589) 924,866 Proceeds from sale of other investments - 576,522 Other items, net 167,487 28,047 ------------- ------------- NET CASH FLOW APPLIED TO INVESTING ACTIVITIES (3,445,263) (9,823,308) ------------- ------------- CASH FLOWS FROM FINANCING ACTIVITIES Bridge loan received 100,000,000 - Other loans repaid (252,541) (14,448) Extinguishment of convertible debentures (101,325,130) - Proceeds from shares issued 612,297 8,185,147 Purchase of treasury shares (1,387,026) - Claims deposit liabilities 2,698,123 (4,156,081) Pension fund reserves (7,949,623) (9,628,409) Dividends paid (5,770,382) (5,990,211) ------------- ------------- NET CASH FLOW APPLIED TO FINANCING ACTIVITIES (13,374,282) (11,604,002) ------------- ------------- Net decrease in cash and cash equivalents (12,825,172) (40,771,081) Cash and cash equivalents at beginning of period 155,387,061 117,422,652 ------------- ------------- Cash and cash equivalents at end of period $ 142,561,889 $ 76,651,571 ============= ============= Supplemental cash flow information: Interest paid $ 9,251,018 ($94,811) ============= ============= Income taxes paid, net $ 5,484,069 $ 0 ============= =============
See Accompanying Notes to Unaudited Consolidated Financial Statements 5 MUTUAL RISK MANAGEMENT LTD. AND SUBSIDIARIES UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Dividend of Treasury Change in Common Share Acquired Opening Shares Shares Unrealized Dividends Companies Closing Balance Issued Purchased Loss (1) Net Income Declared (2) (3) Balance Six months ended June 30, 2000 Common shares $ 412,052 $ 241 $ (921) - - - - $ 411,372 Additional paid-in capital 110,754,758 612,056 (1,386,105) - - - - 109,980,709 Accumulated other comprehensive income (loss) (14,937,127) - - (3,052,117) - - - (17,989,244) Retained earnings 261,914,341 - - - 18,897,981 (5,765,317) - 275,047,005 ------------------------------------------------------------------------------------------------------- Total Shareholders' Equity at June 30, 2000 $358,144,024 $ 612,297 $ (1,387,026) $ (3,052,117) $18,897,981 $ (5,765,317) - $367,449,842 ======================================================================================================= Year Ended December 31, 1999 Common shares $ 422,056 $ 16,363 $ (26,367) - - - - 412,052 Additional paid-in capital 114,916,045 25,626,183 (29,787,470) - - - - 110,754,758 Accumulated other comprehensive income (loss) 4,456,781 - - (19,393,908) - - - (14,937,127) Retained earnings 223,371,116 - - - 50,438,032 (11,003,871) (890,936) 261,914,341 ------------------------------------------------------------------------------------------------------- Total Shareholders' Equity at December 31, 1999 $343,165,998 $25,642,546 $(29,813,837) $(19,393,908) $50,438,032 $(11,003,871) $(890,936) $358,144,024 =======================================================================================================
(1) Net of reclassification adjustment, net of tax (See Note 2). (2) Dividend per share amounts were $0.14 and $0.25 for the six months ended June 30, 2000 and the year ended December 31, 1999 respectively. (3) Prior to the merger Captive Resources paid dividends of $0.51 in 1999, based on the equivalent number of Common Shares that would have been outstanding on the dividend dates after giving effect to the pooling of interests. See Accompanying Notes to Consolidated Financial Statements 6 MUTUAL RISK MANAGEMENT LTD. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS June 30, 2000 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 periods ended June 30, 2000 and 1999. 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 quarter and six months ended June 30, 2000 are not necessarily indicative of what operating results may be for the full year. 2. COMPREHENSIVE INCOME Statement 130 requires unrealized gains or losses on the Company's available for sale investments, to be included in Other comprehensive income.
(In thousands) Six months ended June 30, 2000 Quarter ended June 30, 2000 Before tax Net of tax Before tax Net of tax Amount Tax Amount Amount Tax Amount ---------- --------- ---------- ----------- ----------- ----------- Net unrealized losses on available for sale investments arising during the period ($3,669) 57 ($3,612) ($2,262) 33 ($2,229) Less: reclassification adjustment for gains realized in net income 617 (57) 560 368 (33) 335 -------- ------ -------- -------- ------ ------- Other comprehensive income (loss) ($3,052) $ - ($3,052) ($1,894) $ - ($1,894) ======== ====== ======== ======== ====== ======= (In thousands) Six months ended June 30, 1999 Quarter ended June 30, 1999 Before tax Net of tax Before tax Net of tax Amount Tax Amount Amount Tax Amount ---------- --------- ---------- ----------- ----------- ----------- Net unrealized losses on available for sale investments arising during the period ($15,604) $3,403 ($12,201) ($11,100) $2,289 ($8,811) Less: reclassification adjustment for losses realized in net income 1,393 (16) 1,377 1,527 (48) 1,479 -------- ------ -------- -------- ------ ------- Other comprehensive income (loss) ($14,211) $3,387 ($10,824) ($9,573) $2,241 ($7,332) ======== ====== ======== ======== ====== =======
7 3. SEGMENT INFORMATION (In thousands)
Quarter ended June 30, Six Months ended June 30, Revenue 2000 1999 2000 1999 Program Business $ 28,902 $ 26,047 $ 53,876 $ 48,955 Corporate Risk Management 11,651 11,803 22,064 26,828 Specialty Brokerage 3,500 3,300 7,345 6,441 Financial Services 6,396 4,634 12,425 9,054 Underwriting 63,999 50,233 119,872 89,018 Net investment income (1) 8,203 7,911 19,146 15,633 Other 590 (111) 603 (220) -------- -------- -------- -------- Total $123,241 $103,817 $235,331 $195,709 -------- -------- -------- --------
Income before Income taxes, Minority interest and Extraordinary loss Program Business $ 7,755 $ 9,333 $ 14,280 $ 17,499 Corporate Risk Management 3,190 4,553 5,620 11,100 Specialty Brokerage 851 1,264 2,202 2,792 Financial Services 941 197 2,261 349 Underwriting (2,854) (1,249) (6,163) (2,188) Net investment income (2) 3,902 6,390 8,849 12,511 Other (814) (775) ($2,526) (1,544) -------- -------- -------- -------- Total $ 12,971 $ 19,713 $ 24,523 $ 40,519 -------- -------- -------- --------
(1) Net of realized capital gains and losses. (2) Net of realized capital gains and losses and interest expense. The subsidiaries' accounting records do not capture information by reporting segment sufficient to determine identifiable assets by such reporting segments. 8 4. EARNINGS PER COMMON SHARE The following table sets forth the computation of basic and diluted earnings per Common Share.
Quarter ended June 30, Six months ended June 30, 2000 1999 2000 1999 (In thousands, except shares and earnings per share) Numerator Income before extraordinary loss $ 11,967 $ 18,095 $ 23,225 $ 36,894 Extraordinary loss on extinguishment of debentures, net of tax - - (4,327) - ----------- ----------- ----------- ----------- Net income 11,967 18,095 18,898 36,894 ----------- ----------- ----------- ----------- Numerator for basic earnings per common share - Net income available to common shareholders 11,967 18,095 18,898 36,894 Effect of dilutive securities: Conversion of Zero Coupon Convertible Exchangeable Subordinated Debentures 165 1,476 -(a) 3,029 ----------- ----------- ----------- ----------- Numerator for diluted earnings per common share - Net income available to common shareholders after assumed conversions $ 12,132 $ 19,571 $ 18,898 $ 39,923 =========== =========== =========== =========== Denominator Denominator for basic earnings per common share - Weighted average shares 41,181,750 43,411,317 41,195,162 43,024,869 Effect of dilutive securities: Stock options 309,311 1,447,787 204,592 1,537,774 Conversion of Zero Coupon Convertible Exchangeable Subordinated Debentures 644,953 5,741,725 -(a) 5,944,468 ----------- ----------- ----------- ----------- Denominator for diluted earnings per common share - Adjusted weighted average shares and assumed conversions 42,136,014 50,600,829 41,399,754 50,507,111 =========== =========== =========== =========== Basic earnings per common share Income before extraordinary loss $ 0.29 $ 0.42 $ 0.57 $ 0.86 Extraordinary loss on extinguishment of debentures, net of tax $ - $ - $ (0.11) $ - ----------- ----------- ----------- ----------- Basic earnings per common share $ 0.29 $ 0.42 $ 0.46 $ 0.86 =========== =========== =========== =========== Diluted earnings per common share Income before extraordinary loss $ 0.29 $ 0.39 $ 0.56 $ 0.79 Extraordinary loss on extinguishment of debentures, net of tax $ - $ - $ (0.10) $ - ----------- ----------- ----------- ----------- Diluted earnings per common share $ 0.29 $ 0.39 $ 0.46 $ 0.79 =========== =========== =========== ===========
(a) Excludes conversion of convertible debentures which have an anti-dilutive effect 9 5. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION Mutual Group Ltd. ("Mutual Group") is a wholly owned subsidiary of the Parent Company. Substantially all of Mutual Group's income and cash flow is generated by its subsidiaries. As a result, funds necessary to meet Mutual Group's debt service obligations are provided in part by distributions or advances from its subsidiaries. Under certain circumstances, contractual and legal restrictions, as well as the financial condition and operating requirement of Mutual Group's subsidiaries, could limit the ability for Mutual Group to obtain cash from its subsidiaries for the purpose of meeting its debt service obligations. The following financial information presents the condensed consolidating balance sheets of the Parent Company, Mutual Group and other subsidiaries as of June 30, 2000 and December 31, 1999 and condensed consolidating statements of income and cash flows for the periods ended June 30, 2000 and 1999. Investments in subsidiaries are accounted for on the equity method and accordingly, entries necessary to consolidate the Company, Mutual Group and all other subsidiaries are reflected in the eliminations column. This information should be read in conjunction with the consolidated financial statements and footnotes of the Parent Company. Certain balances have been reclassified from the Mutual Risk Management Ltd. Parent Company Only Financial Information presented in Item 14B Schedule II of Form 10-K/A for purposes of this condensed presentation. 10 CONDENSED CONSOLIDATED STATEMENT OF INCOME FOR THE SIX MONTHS ENDED JUNE 30, 2000
Parent Mutual Other (In thousands) Company Group Subsidiaries Eliminations Consolidated Revenues Fee Income $ - $ - $ 95,710 $ - $ 95,710 Premiums earned - - 119,872 - 119,872 Net investment income 952 326 19,832 - 21,110 Intercompany interest income - - 16,328 (16,328) - Realized capital losses - - (1,964) - (1,964) Other income 92 186 325 - 603 Equity in subsidiary earnings 30,497 20,001 - (50,498) - ----------------------------------------------------------------------------------- Total revenues 31,541 20,513 250,103 (66,826) 235,331 ----------------------------------------------------------------------------------- Expenses Losses and loss expenses incurred - - 76,080 - 76,080 Acquisition costs - - 49,955 - 49,955 Operating expenses 103 327 71,930 - 72,360 Interest expenses 8,213 - 2,084 - 10,297 Intercompany interest expense - 16,328 - (16,328) - Other expenses - - 2,116 - 2,116 ----------------------------------------------------------------------------------- Total Expenses 8,316 16,655 202,165 (16,328) 210,808 ----------------------------------------------------------------------------------- INCOME BEFORE INCOME TAXES, MINORITY INTEREST AND EXTRAORDINARY LOSS 23,225 3,858 47,938 (50,498) 24,523 Income taxes - (5,748) 7,682 - 1,934 INCOME BEFORE MINORITY INTEREST AND EXTRAORDINARY LOSS 23,225 9,606 40,256 (50,498) 22,589 Minority interest - - 636 - 636 INCOME BEFORE EXTRAORDINARY LOSS 23,225 9,606 40,892 (50,498) 23,225 Extraordinary loss on extinguishment of debentures, net of tax (4,327) - - - (4,327) ----------------------------------------------------------------------------------- NET INCOME $ 18,898 $ 9,606 $ 40,892 $ (50,498) $ 18,898 -----------------------------------------------------------------------------------
11 CONDENSED CONSOLIDATED STATEMENT OF INCOME FOR THE QUARTER ENDED ENDED JUNE 30, 2000
Parent Mutual Other (In thousands) Company Group Subsidiaries Eliminations Consolidated Revenues Fee Income $ - $ - $ 50,449 $ - $ 50,449 Premiums earned - - 63,999 - 63,999 Net investment income 232 168 8,144 - 8,544 Intercompany interest income - - 8,164 (8,164) - Realized capital losses - - (341) - (341) Other income - 54 536 - 590 Equity in subsidiary earnings 15,987 14,153 - (30,140) - ----------------------------------------------------------------------------------- Total revenues 16,219 14,375 130,951 (38,304) 123,241 ----------------------------------------------------------------------------------- Expenses Losses and loss expenses incurred - - 41,760 - 41,760 Acquisition costs - - 25,093 - 25,093 Operating expenses 51 238 37,423 - 37,712 Interest expenses 4,201 - 100 - 4,301 Intercompany interest expense - 8,164 - (8,164) - Other expenses - - 1,404 - 1,404 ----------------------------------------------------------------------------------- Total Expenses 4,252 8,402 105,780 (8,164) 110,270 ----------------------------------------------------------------------------------- INCOME BEFORE INCOME TAXES, MINORITY INTEREST AND EXTRAORDINARY LOSS 11,967 5,973 25,171 (30,140) 12,971 Income taxes - (3,007) 3,948 - 941 INCOME BEFORE MINORITY INTEREST AND EXTRAORDINARY LOSS 11,967 8,980 21,223 (30,140) 12,030 Minority interest - - (63) - (63) INCOME BEFORE EXTRAORDINARY LOSS 11,967 8,980 21,160 (30,140) 11,967 Extraordinary loss on extinguishment of debentures, net of tax - - - - - ----------------------------------------------------------------------------------- NET INCOME $ 11,967 $ 8,980 $ 21,160 $ (30,140) $ 11,967 -----------------------------------------------------------------------------------
12 CONDENSED CONSOLIDATED STATEMENT OF INCOME FOR THE SIX MONTHS ENDED JUNE 30, 1999
Parent Mutual Other (In thousands) Company Group Subsidiaries Eliminations Consolidated Revenues Fee Income $ - $ - $ 91,278 $ - $ 91,278 Premiums earned - - 89,018 - 89,018 Net investment income 568 365 15,730 - 16,663 Intercompany interest income - - 10,200 (10,200) - Realized capital gains (losses) - 361 (1,391) - (1,030) Other losses - (44) (176) - (220) Equity in subsidiary earnings 39,425 5,912 - (45,337) - ----------------------------------------------------------------------------------- Total revenues 39,993 6,594 204,659 (55,537) 195,709 ----------------------------------------------------------------------------------- Expenses Losses and loss expenses incurred - - 67,793 - 67,793 Acquisition costs - - 23,414 - 23,414 Operating expenses 70 454 59,013 - 59,537 Interest expenses 3,029 - 94 - 3,123 Intercompany interest expense - 10,200 - (10,200) - Other expenses - - 1,323 - 1,323 ----------------------------------------------------------------------------------- Total Expenses 3,099 10,654 151,637 (10,200) 155,190 ----------------------------------------------------------------------------------- INCOME BEFORE INCOME TAXES, MINORITY INTEREST AND EXTRAORDINARY LOSS 36,894 (4,060) 53,022 (45,337) 40,519 Income taxes - (1,921) 5,551 - 3,630 INCOME BEFORE MINORITY INTEREST AND EXTRAORDINARY LOSS 36,894 (2,139) 47,471 (45,337) 36,889 Minority interest - - 5 - 5 INCOME BEFORE EXTRAORDINARY LOSS 36,894 (2,139) 47,476 (45,337) 36,894 Extraordinary loss on extinguishment of debentures, net of tax - - - - - ----------------------------------------------------------------------------------- NET INCOME $ 36,894 $ (2,139) $ 47,476 $ (45,337) $ 36,894 -----------------------------------------------------------------------------------
13 CONDENSED CONSOLIDATED STATEMENT OF INCOME FOR THE QUARTER ENDED JUNE 30, 1999
Parent Mutual Other (In thousands) Company Group Subsidiaries Eliminations Consolidated Revenues Fee Income $ - $ - $ 45,784 $ - $ 45,784 Premiums earned - - 50,233 - 50,233 Net investment income 556 170 8,716 - 9,442 Intercompany interest income - - 5,100 (5,100) - Realized capital losses - - (1,532) - (1,532) Other losses - (44) (67) - (111) Equity in subsidiary earnings 19,050 (3,852) - (15,198) - ----------------------------------------------------------------------------------- Total revenues 19,606 (3,726) 108,234 (20,298) 103,816 ----------------------------------------------------------------------------------- Expenses Losses and loss expenses incurred - - 41,563 - 41,563 Acquisition costs - - 9,919 - 9,919 Operating expenses 35 250 30,152 - 30,437 Interest expenses 1,476 - 45 - 1,521 Intercompany interest expense - 5,100 - (5,100) - Other expenses - - 663 - 663 ----------------------------------------------------------------------------------- Total Expenses 1,511 5,350 82,342 (5,100) 84,103 ----------------------------------------------------------------------------------- INCOME BEFORE INCOME TAXES, MINORITY INTEREST AND EXTRAORDINARY LOSS 18,095 (9,076) 25,892 (15,198) 19,713 Income taxes - (1,347) 2,962 - 1,615 INCOME BEFORE MINORITY INTEREST AND EXTRAORDINARY LOSS 18,095 (7,729) 22,930 (15,198) 18,098 Minority interest - - (3) - (3) INCOME BEFORE EXTRAORDINARY LOSS 18,095 (7,729) 22,927 (15,198) 18,095 Extraordinary loss on extinguishment of debentures, net of tax - - - - - ----------------------------------------------------------------------------------- NET INCOME $ 18,095 $ (7,729) $ 22,927 $ (15,198) $ 18,095 -----------------------------------------------------------------------------------
14 CONDENSED CONSOLIDATED BALANCE SHEETS JUNE 30, 2000
Parent Mutual Other (In thousands) Company Group Subsidiaries Eliminations Consolidated ASSETS Cash and cash equivalents $ 5,310 $ 705 $ 136,547 $ - $ 142,562 Investments 11,166 - 423,264 - 434,430 Other Investments - 513 35,677 - 36,190 Investments in and advances to subsidiaries and affiliates, net 582,411 229,544 (435,970) (375,985) - Accounts receivable - 1,007 617,937 - 618,944 Reinsurance receivables - - 1,966,526 - 1,966,526 Prepaid reinsurance premiums - - 301,326 - 301,326 Fixed assets - - 32,085 - 32,085 Deferred tax benefit - - 5,238 (1,075) 4,163 Taxes receivable - 11,553 - (11,553) - Other assets 251 66 111,501 - 111,818 Assets held in separate accounts - - 738,281 - 738,281 -------- -------- ---------- ---------- ----------- Total Assets $599,138 $243,388 $3,932,412 $ (388,613) $ 4,386,325 ======== ======== ========== ========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY LIABILITIES Reserve for losses and loss expenses $ - - $2,091,090 $ - $ 2,091,090 Reserve for unearned premiums - - 381,441 - 381,441 Pension fund reserves - - 60,031 - 60,031 Claims deposit liabilities - - 30,622 - 30,622 Accounts payable - - 379,628 - 379,628 Accrued expenses 1,365 295 12,295 - 13,955 Taxes payable - - 23,251 (11,553) 11,698 Bridging loan 217,000 - - - 217,000 Other loans payable - - 3,796 - 3,796 Prepaid fees - - 62,781 - 62,781 Debentures 13,323 - - - 13,323 Deferred tax liability - 1,075 - (1,075) - Other liability - - 15,229 - 15,229 Liabilities related to separate accounts - - 738,281 - 738,281 -------- -------- ---------- ---------- ----------- Total liabilities 231,688 1,370 3,798,445 (12,628) 4,018,875 -------- -------- ---------- ---------- ----------- SHAREHOLDERS' EQUITY 367,450 242,018 133,967 (375,985) 367,450 -------- -------- ---------- ---------- ----------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $599,138 $243,388 $3,932,412 $ (388,613) $ 4,386,325 ======== ======== ========== ========== ===========
15 CONDENSED CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1999
Parent Mutual Other (In thousands) Company Group Subsidiaries Eliminations Consolidated ASSETS Cash and cash equivalents $ 6,722 $ 1,019 $ 147,646 $ - $ 155,387 Investments 9,665 - 442,255 - 451,920 Other Investments 1,006 474 26,946 - 28,426 Investments in and advances to subsidiaries and affiliates, net 566,724 244,693 (428,022) (383,395) - Accounts receivable - 906 563,684 - 564,590 Reinsurance receivables - - 1,729,936 - 1,729,936 Prepaid reinsurance premiums - - 281,078 - 281,078 Fixed assets - - 28,880 - 28,880 Deferred tax benefit - - 5,308 (1,075) 4,233 Other assets 2,319 26 92,989 - 95,334 Assets held in separate accounts - - 693,390 - 693,390 -------- -------- ---------- ---------- ----------- Total Assets $586,436 $247,118 $3,584,090 $ (384,470) $ 4,033,174 ======== ======== ========== ========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY LIABILITIES Reserve for losses and loss expenses $ - $ - $1,860,120 $ - $ 1,860,120 Reserve for unearned premiums - - 335,265 - 335,265 Pension fund reserves - - 67,981 - 67,981 Claims deposit liabilities - - 27,924 - 27,924 Accounts payable 394 247 353,325 - 353,966 Accrued expenses - - 11,054 - 11,054 Taxes payable - - 23,181 - 23,181 Bridging loan 117,000 - - - 117,000 Other loans payable - - 4,049 - 4,049 Prepaid fees - - 58,026 - 58,026 Debentures 110,898 - - - 110,898 Deferred tax liability - 1,075 - (1,075) - Other liability - - 12,176 - 12,176 Liabilities related to separate accounts - - 693,390 - 693,390 -------- -------- ---------- ---------- ----------- Total liabilities 228,292 1,322 3,446,491 (1,075) 3,675,030 -------- -------- ---------- ---------- ----------- SHAREHOLDERS' EQUITY 358,144 245,796 137,599 (383,395) 358,144 -------- -------- ---------- ---------- ----------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $586,436 $247,118 $3,584,090 $ (384,470) $ 4,033,174 ======== ======== ========== ========== ===========
16 CONDENSED CONSOLIDATED CASH FLOW JUNE 30, 2000
Parent Mutual Other In thousands Company Group Subsidiaries Consolidated NET CASH FLOW FROM OPERATING ACTIVITIES $ (4,810) $(22,459) $ 31,263 $ 3,994 ---------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from sale of investment - available for sale -- -- 285,192 285,192 Proceeds from maturity of investment - available for sale -- -- 19,086 19,086 Fixed asset purchases -- -- (8,801) (8,801) Investments purchased - available for sale (1,495) -- (290,087) (291,582) Acquisitions and other investments -- -- -- (7,509) Proceeds from other investments -- -- -- -- Other items -- -- 169 169 Investments in and advances to subsidiaries and affiliates, net 12,763 22,145 (34,908) -- ---------------------------------------------------------------- NET CASH FLOWS FROM (APPLIED TO) INVESTING ACTIVITIES 11,268 22,145 (36,858) (3,445) ---------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES Bridging loan received 100,000 -- -- 100,000 Other loans received -- -- (253) (253) Extinguishment of convertible debentures (101,325) -- -- (101,325) Proceeds from shares issued (775) -- -- (775) Claims deposit liabilities -- -- 2,699 2,699 Pension fund reserves -- -- (7,950) (7,950) Dividend paid (5,770) -- -- (5,770) ---------------------------------------------------------------- NET CASH FLOW FROM (APPLIED TO) FINANCING ACTIVITIES (7,870) -- (5,504) (13,374) ---------------------------------------------------------------- Net decrease in cash and cash equivalents (1,412) (314) (11,099) (12,825) Cash and cash equivalents at beginning of year 6,722 1,019 147,646 155,387 ---------------------------------------------------------------- Cash and cash equivalents at end of year $ 5,310 $ 705 $136,547 $142,562 ================================================================
17 CONDENSED CONSOLIDATED CASH FLOW JUNE 30, 1999
Parent Mutual Other In thousands Company Group Subsidiaries Consolidated NET CASH FLOW FROM OPERATING ACTIVITIES $ 331 $(9,159) $(10,516) $(19,344) --------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from sale of investment - available for sale - - 40,188 40,188 Proceeds from maturity of investment - available for sale - - 33,683 33,683 Fixed asset purchases - - (7,214) (7,214) Investments purchased - available for sale (871) - (77,139) (78,010) Acquisitions and other investments - - 925 925 Proceeds from other investments - - 577 577 Other items - - 28 28 Investments in and advances to subsidiaries and affiliates, net (2,209) 7,372 (5,163) - --------------------------------------------------- NET CASH FLOWS FROM (APPLIED TO) INVESTING ACTIVITIES (3,080) 7,372 (14,115) (9,823) --------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES Bridging loan received - - - - Other loans received - - (14) (14) Extinguishment of convertible debentures - - - - Proceeds from shares issued 8,185 - - 8,185 Claims deposit liabilities - - (4,156) (4,156) Pension fund reserves - - (9,629) (9,629) Dividend paid (5,990) - - (5,990) --------------------------------------------------- NET CASH FLOW FROM (APPLIED TO) FINANCING ACTIVITIES 2,195 - (13,799) (11,604) --------------------------------------------------- Net decrease in cash and cash equivalents (554) (1,787) (38,430) (40,771) Cash and cash equivalents at beginning of year 689 1,872 114,862 117,423 --------------------------------------------------- Cash and cash equivalents at end of year 135 85 76,432 76,652 ===================================================
18 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, 2000 and 1999 The results of operations for the quarter and six months ended June 30, 2000 reflect substantial improvement in Fees, Operating income, Profit margins and Return on equity compared to the Company's last three quarters. However, comparisons to the first half of 1999 continue to reflect the decline in operating results that took place in the 1999 third quarter. Net income available to common shareholders was $18.9 million or $0.46 per Common Share on a diluted basis for the six months ended June 30, 2000, as compared to $36.9 or $0.79 per diluted share in the corresponding period in 1999, as shown in the tables below. TABLE 1 - EARNINGS PER SHARE
Second Quarter to June 30, 2000 1999 ----------------------------------- ------------------------------------- ($ thousands except per share data) PER PER COMMON SHARE COMMON SHARE ---------------- ----------------- Basic Diluted Basic Diluted Net income available to Common Shareholders $11,968 $0.29 $0.29 $18,095 $0.42 $0.39 ======= ===== ===== ======= ===== ===== Average number of shares outstanding (000's) 41,182 42,136 43,411 50,601 ------ ------ ------ ------
Six Months ended June 30, 2000 1999 ----------------------------------- ------------------------------------- ($ thousands except per share data) PER PER COMMON SHARE COMMON SHARE ---------------- ----------------- Basic Diluted Basic Diluted Income before Extraordinary loss $23,225 $0.57 $0.56 $36,894 $0.86 $0.79 Extraordinary Loss (a) (4,427) (0.11) (0.10) - - - ------- ----- ----- ------- ----- ----- Net income available to Common Shareholders $18,898 $0.46 $0.46 $36,894 $0.86 $0.79 ======= ===== ===== ======= ===== ===== Average number of shares outstanding (000's) 41,195 41,400(b) 43,025 50,507 ------ ------ ------ ------
(a) Extraordinary loss on extinguishment of Convertible Debentures, net of tax. (b) Excludes the conversion of Convertible Debentures which have an anti- dilutive effect. Total revenues amounted to $123.2 million and $235.3 million for the quarter and six months ended June 30, 2000, representing increases of 19% and 20% over the corresponding 1999 periods. Table II shows the major components of Revenues for these periods. 19 TABLE II - REVENUES
Periods to June 30, (In thousands) Second Quarter Six Months 2000 1999 Growth 2000 1999 Growth -------- -------- ------ -------- -------- ------ Fee income $ 50,449 $ 45,784 10% $ 95,710 $ 91,278 5% Premiums earned 63,999 50,233 27% 119,872 89,018 35% Net investment income 8,544 9,443 -10% 21,110 16,663 27% Realized capital losses (341) (1,532) -78% (1,964) (1,030) 91% Other income (losses) 590 (111) NM 603 (220) NM -------- -------- -------- -------- Total $123,241 $103,817 19% $235,331 $195,709 20% ======== ======== ======== ========
Fee income increased 10% in the second quarter to $50.4 million and 5% to $95.7 million for the first six months of 2000, as compared to $45.8 million and $91.3 million, respectively, in 1999. Pre-tax profit margins were 25% for both the second quarter and first six months of 2000 as compared to 34% and 35% in the corresponding 1999 periods. 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, (In thousands) Second Quarter Six Months 2000 1999 Growth 2000 1999 Growth ------- ------- ------ ------- ------- ------ Program business fees $28,902 $26,047 11% $53,876 $48,955 10% Corporate risk management fees 11,651 11,803 (1)% 22,064 26,828 (18)% Specialty brokerage fees 3,500 3,300 6% 7,345 6,441 14% Financial services fees 6,396 4,634 38% 12,425 9,054 37% ------- ------- ------- ------- Total $50,449 $45,784 10% $95,710 $91,278 5% ======= ======= ======= =======
20 Program Business Program Business 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 56% for the first six months of 2000 compared to 57% and 54% in the corresponding 1999 periods. Program Business fees increased 11% in the second quarter to $28.9 million and 10% to $53.9 million in the first six months as compared to $26.0 million and $49.0 million, respectively, in 1999. This resulted primarily from the growth of existing programs as a result of premium increases and decreased competition. Pre-tax margins were 27% for both the quarter and six months of 2000, down from 36% for the corresponding periods of 1999. Gross premiums written increased 18% to $656.1 million for the first six months of 2000 as compared to $556.3 million in 1999, 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 27% to $64.0 million in the second quarter and 35% to $119.9 million in the first six months of 2000, as compared to $50.2 million and $89.0 million in the corresponding 1999 periods. These increases in Premiums earned were also primarily due to the growth within the Program Business segment and are offset by similar increases in Total insurance costs. 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 23% of total Fee income in the second quarter and for the first six months of 2000, down from 26% and 29% in the corresponding 1999 periods. Corporate Risk Management fees decreased by 1% in the second quarter to $11.7 million, compared to $11.8 million in the second quarter of 1999, and by 18% in the first six months to $22.1 million, compared to $26.8 million in 1999. Profit margins were 27% in the second quarter and 25% for the first six months of 2000, compared to 39% and 41% in the corresponding 1999 periods. The Company continues to expect that a firming of prices generally will begin to improve the sale of Corporate Risk Management accounts in the second half of 2000. 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 $3.5 million of Fee income in the second quarter and $7.3 million in the first six months of 2000, representing 7% of total Fee income in the second quarter and 8% for the first six months. Specialty Brokerage fees grew by 6% in the second quarter and 14% in the first six months of 2000 from $3.3 million and $6.4 million in the corresponding 1999 periods as a result of increased business placed in Bermuda and London. Profit margins decreased to 24% in the second quarter and to 30% for the first six months from 38% and 43% in the corresponding 1999 periods, as a result of increased operating expenses. Financial Services Financial Services, the Company's newest business segment, provides administrative services to offshore mutual funds and other companies and offers a proprietary family of mutual funds as well as asset accumulation life insurance products for the high net worth market. The segment accounted for 13% of total Fee income for both the second quarter and six month periods of 2000. Fees from Financial Services increased in the quarter by 38% to $6.4 million over the 1999 corresponding period, and by 37% to $12.4 million for the half year, primarily as a result of an increase in the number of mutual funds under administration from 237 at June 30, 1999 to 320 at June 30, 2000. Profit margins in the Financial Services segment have been adversely affected since 1998 by the previously announced revised executive incentive plan and staff expansion costs to service new business, but increased to 15% in the second quarter and 18% for the first six months of 2000 from 4% in the corresponding 1999 periods. Excluding the effect of the revised executive incentive plan, which will end in December 2000, the profit margins in this segment would have been 19% for the quarter and 23% for the first six months of 2000 as compared to 15% in the corresponding periods of 1999. 21 Investment Income Gross investment income increased by $0.8 million or 4% to $19.6 million in the first six months of 2000 over the corresponding 1999 period. Net investment income decreased by 10% to $8.5 million in the second quarter, but increased by 27% to $21.1 million for the first six months of 2000. The first six month increase includes $3.7 million of investment income from a special purpose entity, Endeavour Real Estate Securities Ltd. ("Endeavour") in the first quarter of 2000. Endeavour was established by the Company's Financial Services segment to offer offshore investors an opportunity to invest in U.S. real estate investment trusts. The investment income from Endeavour in the first quarter was offset by $1.4 million of Realized losses, $1.9 million of Interest expense, $0.9 million of Operating expenses and $(0.8) million of Minority interest. In the second quarter of 2000, the ownership structure of Endeavour was changed so that it is no longer consolidated on a line by line basis, but is accounted for on an equity basis. Investment yields declined to 6.7% in the second quarter and first six months of 2000 as compared to 9.0% and 7.8% in the corresponding periods in 1999. The higher yields in the 1999 periods were due to higher rates of return on invested assets in Bermuda and the inclusion of income from one of the Company's programs accounted for as Claims deposit liabilities. TABLE IV - EXPENSES
Periods to June 30, (In Thousands) Second Quarter Six Months 2000 1999 Increase 2000 1999 Increase -------- ------- -------- -------- -------- -------- Operating expenses $ 37,712 $30,437 24% $ 72,360 $ 59,537 22% Total insurance costs 66,853 51,482 30% 126,035 91,206 38% Interest expense 4,301 1,521 183% 10,297 3,123 230% Other expenses 1,404 664 112% 2,117 1,324 60% -------- ------- -------- -------- Total $110,270 $84,104 31% $210,809 $155,190 36% ======== ======= ======== ========
Operating expenses increased 24% to $37.7 million for the quarter, compared to $30.4 million in the second quarter of last year, and increased 22% to $72.4 million for the first six months of 2000, compared to $59.5 million in the first six months of 1999. The increase in Operating expenses is attributable to growth in personnel and other expenses to service the Company's businesses, the effect of recent acquisitions and $0.9 million of Operating expenses from Endeavour in the first quarter of 2000. Included in Other expenses are $0.7 million of expenses related to the Company's shelf registration of Senior Notes. The fluctuations in Total insurance costs are the direct result of the increases in Premiums earned. During the quarter and six months ended June 30, 2000, however, the net underwriting loss increased to $2.9 million and $6.2 million, respectively, compared to $1.2 million and $2.2 million in the corresponding 1999 periods. The growth over the 1999 periods is a result of increased legal costs and premium audit costs, as well as an increase in the loss ratio on the Company's participation in its reinsurance treaty. Interest expense increased by $7.2 million for the six months ended June 30, 2000 over the corresponding 1999 period as a result of Endeavour interest of $1.9 million, interest on the bridge loan financing, offset in part by a reduction in debenture interest. The effective tax rate was 7.3% in the quarter and 7.9% for the six months of 2000 compared to 8.2% and 9.0% in the corresponding 1999 periods. These effective tax rates were lower than the expected federal tax rate in the United States of 35% plus state income taxes due to increased earnings outside of the United States and the Company's investment in tax-exempt municipal securities, partially offset by state income taxes and foreign taxes. LIQUIDITY AND CAPITAL RESOURCES Total assets increased to $4.4 billion at June 30, 2000 from $4.0 billion at December 31, 1999. Assets held in separate accounts which are principally managed assets attributable to participants in the Company's IPC Programs accounted for approximately 17% of Total assets at June 30, 2000 and at December 31, 1999. Total Shareholders' equity increased to $367 million at June 30, 2000 from $358 million at December 31, 1999 primarily as a result of Net income in the period, less treasury shares purchased, dividends paid and the change in unrealized losses. Return on equity, before the extraordinary loss, was 12.8% for the first six months of 2000. 22 CASH FLOW Cash flow from operations has historically provided the Company its principal source of liquidity. The Company produced a positive operating cash flow for the six months ended June 30, 2000 of $4.0 million. Due to market conditions, the Company has decided to refinance its existing Bridge Loan with a bank syndicated Revolving Credit Facility, rather than offering Senior Notes. The refinancing is expected to close during the third quarter. The company is involved in ongoing arbitration and litigation with two life insurance companies that wrote workers' compensation reinsurance for the Company, and in June 2000 commenced action against a number of Lloyd's syndicates and other companies on a series of related accident and health accounts (See Part II Item 1. Legal Proceedings). Paid losses owed by these reinsurers were approximately $38.0 million at June 30, 2000. The company currently expects to prevail in these disputes. These disputes have adversely affected the operating cash flow, however, cash flow still improved to $3.9 million for the second quarter and $4.0 million for the first half of 2000 as compared to negative $0.8 million and $19.3 million in the corresponding periods in 1999. The Company believes that funds generated from operations and available credit will be sufficient to finance its current operations and to make payments under its debt facilities. SAFE HARBOR DISCLOSURE FOR FORWARD-LOOKING STATEMENTS In connection with the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995 (the "1995 Act"), the Company sets forth below cautionary statements identifying important factors that could cause the Company's actual results to differ materially from those which might be projected, forecasted, or estimated or otherwise implied in the Company's forward-looking statements, as defined in the 1995 Act, made by or on behalf of the Company in press releases, written statements or documents filed with the Securities and Exchange Commission, or in its communications and discussions with investors and analysts in the normal course of business through meetings, telephone calls and conference calls. Such statements may include, but are not limited to, projections of Fee income, Premiums earned, Net investment income, Other income, Losses and loss expenses incurred, Acquisition costs, Operating expenses, Other expenses, earnings (including earnings per share), cash flows, plans for future operations, Shareholders' equity, financing needs, capital plans, dividends, plans relating to products or services of the Company, and estimates concerning the effects of litigation or other disputes, as well as assumptions for any of the foregoing and are generally expressed with words such as "believes", "estimates", "expects", "anticipates", "could have", "may have", and similar expressions. Forward-looking statements are inherently subject to risks and uncertainties. The Company cautions that factors which may cause the Company's results to differ materially from such forward-looking statements include, but are not limited to, the following: (a) changes in the level of competition in the reinsurance or primary insurance markets that adversely affect the volume or profitability of the Company's business, including the intensification of price competition, the entry of new competitors, existing competitors exiting the market, and the development of new products by new and existing competitors; (b) the failure by reinsurers, clients and others to meet their obligations to the Company; (c) changes in tax laws; (d) the inadequacy of our reserves; (e) changes in the demand for reinsurance, including changes in ceding companies' retentions, and changes in the demand for primary and excess and surplus lines insurance coverages; (f) the ability of the Company to execute its business strategies and its reliance on key personnel; and (g) adverse development on claims and claims expense liabilities related to business and the failure of clients, reinsurers or others to meet their obligations to the Company in connection with such losses. ACQUISITIONS The Company has entered into an agreement to acquire Valmet Group Ltd. ("Valmet"). Valmet is a leading independent fiduciary Company, providing trust and corporate services through offices in the Isle of Man, Amsterdam, Geneva, Gibraltar, Cyprus, Dublin and Mauritius. Valmet employs 122 people and in 1999 earned revenues of $12.3 million. The acquisition is expected to close in the third quarter of 2000 and is subject to a number of conditions, including regulatory approval. 23 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. No material changes since December 31, 1999 Form 10-K. PART II - OTHER INFORMATION ITEM 1. Legal proceedings In June 2000, the Company received a favorable award in connection with one of the three arbitrations that the Company has been engaged in against reinsurers who have withheld payment under reinsurance agreements with Legion. The Company continues to pursue additional arbitration proceedings with two life insurance companies that wrote workers' compensation reinsurance for the Company. These proceedings are being conducted in accordance with the arbitration provisions contained in the relevant reinsurance agreements and will be held before arbitration panels in Philadelphia. At June 30, 2000, the amount currently owing from these reinsurers for paid losses was approximately $7.6 million although this amount will increase if the reinsurers continue to withhold payment of reinsurance recoveries on future paid losses. These arbitrations are in the preliminary stages and, to date, none of the reinsurers has produced any evidence that causes the Company to believe it will not recover all amounts owing to it under the relevant agreements. In addition, in June 2000, Legion commenced an action in state court in Philadelphia against a number of Lloyd's syndicates and other companies who provided reinsurance on a series of related accident and health accounts. Paid losses owed by these reinsurers were approximately $30 million at June 30, 2000. The Company expects to prevail in these disputes and recover these amounts in full. ITEM 4. Submission of matters to a vote of Security Holders. The Company held its 2000 Annual General Meeting of Shareholders on May 16, 2000. The following are the results of voting on the various matters considered at the meeting: (i) Election of Directors NOMINEE FOR WITHHELD Roger E. Dailey 34,929,376 295,443 David J. Doyle 34,893,455 331,364 Arthur E. Engel 34,917,166 307,653 Norman L. Rosenthal 34,931,766 293,053 Joseph D. Sargent 34,907,855 316,964 (ii) Appointment of Ernst & Young as the Company's Auditors For: 35,175,200 Against: 36,707 Abstain: 12,912 ITEM 6. Exhibits and Reports on Form 8-K A. Exhibit 27 - Financial Data Schedules 24 27.1 Current quarter ended Jun-30-2000 B. Reports on Form 8-K. No reports on Form 8-K were filed during the three month period ended June 30, 2000. 25 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. ---------------------------------------------- James C. Kelly Senior Vice President, Chief Financial Officer and Authorized Signatory Date: August 10, 2000 26 /s/ James C. Kelly ---------------------------------------------- James C. Kelly for conformed copy 27 EX-27 2 0002.txt FINANCIAL DATA SCHEDULE
7 This schedule contains summary financial information extracted from Mutual Risk Management Ltd.'s financial statements as of June 30, 2000 and is qualified in its entirety by reference to such financial statements. DOLLAR 6-MOS DEC-31-2000 JAN-01-2000 JUN-30-2000 1 434,430 0 0 0 0 0 434,430 142,562 1,966,526 46,960 4,386,325 2,091,090 381,441 60,031 30,622 220,796 0 0 411 367,450 4,386,325 119,872 21,110 (1,964) 96,313 76,080 49,955 84,774 24,523 1,933 22,589 0 (4,327) 0 18,898 0.46 0.46 0 0 0 0 0 0 0
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