-----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, MmSo0QJEyc+zw8SAwr5DSrnqL83wGVplajKq+m2V3tcfprFYgZhnPLRHl7rwGyNS YHxLXGF2yNhNeNfDYsi82Q== 0001036050-01-000570.txt : 20010409 0001036050-01-000570.hdr.sgml : 20010409 ACCESSION NUMBER: 0001036050-01-000570 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010402 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-K SEC ACT: SEC FILE NUMBER: 001-10760 FILM NUMBER: 1589219 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-K 1 0001.txt FORM 10-K FOR MUTUAL RISK MANAGEMENT - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------------- FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2000 or [_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File No. 1-10760 ---------------- MUTUAL RISK MANAGEMENT LTD. (Exact name of registrant as specified in its charter) Bermuda Not Applicable (Jurisdiction of Incorporation) (I.R.S. Employer Identification No.) 44 Church Street Hamilton HM 12 Bermuda (441) 295-5688 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices). ---------------- Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange Title of Each Class on Which Registered ------------------- ----------------------- Common Shares, New York Stock Exchange $.01 par value.
Securities registered pursuant to Section 12(g) of the Act: None ---------------- 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 [_] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference into Part III of this Form 10-K or any amendment to this Form 10-K. [_] At March 16, 2001 the registrant had outstanding 41,617,329 Common Shares, the only class of registrant's common stock outstanding, and the aggregate market value of voting stock held by non-affiliates at such date was $289,240,437 (based on the closing price of such Common Shares of $6.95 on March 16, 2001, as reported on the New York Stock Exchange, Inc., composite listings). DOCUMENTS INCORPORATED BY REFERENCE Certain portions of registrant's Proxy Statement Circular relating to its Annual General Meeting of Shareholders scheduled to be held on May 16, 2001, are incorporated by reference into Part III of this report. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- MUTUAL RISK MANAGEMENT LTD TABLE OF CONTENTS
Item Page ---- ---- PART I 1. Business.......................................................... 3 2. Properties........................................................ 18 3. Legal Proceedings................................................. 18 4. Submission of Matters to a Vote of Security Holders............... 19 PART II 5. Market for Common Shares and Related Stockholder Matters.......... 21 6. Selected Consolidated Financial Data.............................. 22 Management's Discussion and Analysis of Financial Condition and 7. Results of Operations............................................. 23 7A. Quantitative and Qualitative Disclosures about Market Risk........ 33 8. Financial Statements and Supplementary Data....................... 33 Changes in and Disagreements with Accountants on Accounting and 9. Financial Disclosure.............................................. 33 PART III 10. Directors and Executive Officers.................................. 34 11. Executive Compensation............................................ 34 12. Security Ownership of Certain Beneficial Owners and Management.... 34 13. Certain Relationships and Related Transactions.................... 34 PART IV 14. Exhibits, Financial Statement Schedules and Reports on Form 8K.... 35
2 PART I ITEM 1. BUSINESS The Company Mutual Risk Management Ltd., also known as MRM, is a Bermuda company incorporated in 1977. Our principal business is the provision of risk management services to clients seeking an alternative to traditional commercial insurance for certain of their risk exposures. Risk management involves a process of analyzing loss exposures and developing risk financing methods to reduce exposure to loss and to control associated costs. The use of loss financing methods in place of traditional insurance has become known as the alternative market and involves clients participating in a significant amount of their loss exposure and transferring only the unpredictable excess risk to insurers. The benefits of alternative market techniques typically include lower and more stable costs, greater control over the client's risk management program and an increase in the emphasis within the client's organization on loss prevention and loss control. In addition, MRM provides financial services to offshore mutual funds and other companies. Income from fees is derived from four distinct business segments: Program Business: Program Business involves us replacing traditional insurers as the conduit between producers of specialty books of business and reinsurers wishing to write that business. We provide a wide range of services for a fee, and the underwriting profit is shared between the producer and the reinsurers. Corporate Risk Management: Our original business segment, 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. We earn our fees by designing and implementing risk financing and loss control programs for medium-size and large companies that seek to insure a portion of their insurable risk. Specialty Brokerage: Our Specialty Brokerage segment specializes in placing reinsurance for captive insurance companies, placing coverage with excess liability and corporate officers' and directors' liability carriers and placing reinsurance in connection with our Program and Corporate Risk Management businesses in Bermuda, Europe and the U.S. The two components of this segment are MRM Hancock Limited, which provides access to London and European reinsurers, and H&H Park International Limited, which brokers to the Bermuda market. Financial Services: Our Financial Services segment started in 1996 with the acquisition of The Hemisphere Group Limited. The Financial Services 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. Insurance Services The structure of our programs places most of the underwriting risk with our clients or reinsurers. For regulatory and other reasons, however, we are required to assume a limited amount of risk. Historically, we have sought to limit this risk to the minimum level feasible. This approach to risk distinguishes us from typical property/casualty companies, which assume significant levels of underwriting risk as part of their business. We 3 seek to earn a profit from fees for services provided rather than from underwriting risk. Commencing in the latter part of 2000 and continuing in 2001, we expect to increase the amount of underwriting risk we retain. This change in our approach reflects improved pricing in the property/casualty insurance market and a desire to reduce the amount of our reinsurance recoverables. We market our services exclusively to retail insurance brokers and consultants representing clients. The services offered to clients in connection with our products typically include the following: . design and implementation of a risk financing program; . issuance of an insurance policy by one of our wholly-owned, licensed insurance companies, referred to as the Legion Companies, which include Legion Insurance Company, Legion Indemnity Ltd., also referred to as Legion Indemnity, and Villanova Insurance Company, also referred to as Villanova; . use of our Insurance Profit Center Program, also known as the IPC Program, as the vehicle within which to fund a chosen portion of the client's risk or, alternatively, the management by us of the client's captive insurance company; . brokering to unaffiliated reinsurers the excess risk which the client chooses not to fund and, in some cases, arranging for insurers, other than Legion Insurance Company, to issue the original insurance policy; and . coordinating the purchase, on behalf of the client, of loss prevention, loss control and claims administration services from unaffiliated providers. Our major product is the IPC Program. This program allows the client to retain a significant portion of its own loss exposure without the administrative costs and capital commitment necessary to establish and operate its own captive insurance company. The actual amount of underwriting profit and investment income produced by the client's IPC Program is returned to the client, creating a direct incentive for it to engage in loss prevention and loss control in order to reduce the overall cost of financing its loss exposures. Program Business allows third parties other than the insured, typically the broker and reinsurers, to finance a portion of the insured's risk and participate in any underwriting profit or loss. For a discussion of our Corporate Risk Management and Program Business segments, see "Management's Discussion and Analysis of Financial Condition and Results of Operations". Lines of Business Our programs can be utilized by clients for many lines of insurance. In 2000, approximately 53% of our fee income was derived from workers' compensation insurance. During the 1980's and through 1993, workers' compensation presented many employers with substantial problems due to cost increases and the limited availability of commercial coverage in certain states. Workers' compensation costs accelerated rapidly because of: (i) the general level of medical cost inflation, as medical costs generally amount to 40% or more of all workers' compensation costs; (ii) an increase in the number of workers' compensation claims which resulted in litigation; (iii) a broadening of injuries which are considered to be work-related; and (iv) an increase in state mandated benefit levels. Since 1993, workers' compensation reforms have been occurring in a number of states, most notably in California, which have addressed many of these issues. A number of markets have seen a significant decline in premium rates due to new capacity entering the market subsequent to these reforms. These lower premium rates have reduced the fees we earn on our programs as fees are based on premiums. Notwithstanding the changes in the market, workers' compensation continues to be suitable for the alternative market because many states set rates or enforce minimum rate laws which prohibit the commercial insurance market from offering premium discounts to insureds with favorable loss experience. This causes these clients to seek an alternative method of funding their workers' compensation exposure, which rewards their status as a preferred risk. In addition, workers' compensation involves relatively frequent, predictable levels of loss, which are the type favored by clients for alternative market insurance programs. Workers' compensation rates have been increasing in many markets in 2000 and 2001. 4 In addition to workers' compensation, our programs are utilized for other casualty insurance lines such as medical malpractice, general liability, commercial auto liability and auto physical damage. At December 31, 2000, we had a total of 1,373 employees. Marketing--Commonwealth Risk Services, L.P. Our wholly-owned subsidiary, Commonwealth Risk Services, L.P., also referred to as CRS, markets our services in the United States, Canada and Europe to insurance brokers and consultants representing clients. CRS also designs risk financing programs for potential clients in conjunction with their insurance brokers and consultants. Through offices in Philadelphia and California, CRS markets these services using direct mail, advertising, seminars and trade and industry conventions. CRS seeks to become actively involved with the insurance broker in the presentation of our services to potential clients and maintains a direct relationship with the client after the sale. CRS assists brokers in the design and implementation of risk financing programs, although the extent of this involvement depends on the size, experience and resources of the particular broker. Members of the CRS staff frequently provide supporting promotional materials and assist in the preparation of financial analyses, comparing the net present value, after-tax cost of an IPC Program with alternative approaches. Representatives of CRS seek to be present at meetings with potential clients to explain how the IPC Program works, including how the reinsurance is handled, how funds are invested and how underwriting profits and investment income are returned. The Insurance Profit Center Program and Program Business In 1980, we developed a program which provides clients with a facility for managing their insurance exposures. This type of structure is frequently referred to as a rent-a-captive, although the facility has many significant differences from a captive insurance company. The facility was designed to provide certain of the benefits available through captive insurance companies without the administrative cost and capital commitment necessary to establish and operate a captive insurance company. Since the IPC Program involves a retention of risk by the client, it encourages the implementation of risk management and risk reduction programs to lower the losses incurred. The IPC Program is appropriate for corporations and associations which generate $0.75 million or more in annual premiums. Typically, clients which use an IPC Program are profitable and have adequate working capital, but generate insufficient premium to consider, or are otherwise unsuitable for, a wholly- owned captive. During 2000, we increased the number of agency IPC Programs in which an insurance agent or broker, rather than the insured, becomes the preferred shareholder and participates in the profit or loss on the program. Return on the IPC program is a function of the loss experience of the insured. The principal benefits of the IPC Program to the client are: . a reduction of the net present value, after-tax cost of financing the client's risks; . a lower commitment of funds than would be necessary to capitalize and maintain a captive insurance company; . access to commercial reinsurance markets for the client's excess risk; and . program structure that is customized, flexible and relatively easy to implement. We operate the IPC Program from offices in Bermuda. The Bermuda office is involved in designing, negotiating and administering IPC Programs and reviews each prospective client, negotiates the shareholder's agreement with the client and the reinsurance agreement with the Legion Companies or another policy- issuing company. One of the Company's foreign insurance companies, also referred to as the IPC Companies, receives and invests premiums, administers policy claims, establishes reserves, provides quarterly financial reports to clients and, ultimately, returns the underwriting profit and investment income to the client as preferred share dividends. 5 The funds of each IPC Program are invested by our subsidiary, Mutual Finance Ltd., using the services of professional investment advisors. In connection with the Insurance Profit Center programs, neither the Legion Companies nor the IPC Companies underwrite risk in the traditional sense. Rather, their function is to ensure that substantially all of the underwriting risk of the client is either retained by the client in the IPC Program or its captive insurance company, as the case may be, or transferred to unaffiliated reinsurers. In the event that the IPC Company sustains an underwriting loss on a program which exceeds that program's investment income, the IPC Company recovers this loss from the client. Since the client has generally collateralized the IPC Company for at least the difference between the funds available in that client's IPC Program and the level of currently expected losses by cash or a letter of credit, the IPC Company should not be affected by the bankruptcy of a client. In the event, however, that the IPC Company is unable to recover the full amount of its loss from the cash collateral or the letter of credit, the IPC Company would seek to recover from the client pursuant to the indemnity provisions of the shareholder's agreement. As of December 31, 2000, we maintained a provision of $8.8 million against losses that may occur on those programs where we may be forced to rely solely on the client's indemnity. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." In addition to programs for corporate clients, we also offer an association IPC Program, which allows smaller insureds to collectively take advantage of the financial benefits available to larger corporate insureds individually. The Legion Companies Legion Insurance is domiciled in Pennsylvania and is admitted to write primary insurance, often called being admitted or writing insurance on an admitted basis, in all 50 states of the United States, the District of Columbia and Puerto Rico. Legion Indemnity is domiciled in Illinois, is an admitted insurer in Illinois and is an authorized surplus lines insurer in 42 states, the District of Columbia, Guam and the Virgin Islands. An authorized surplus lines insurer writes specialty property and liability coverage when the specific specialty coverage is unavailable from admitted insurers. Villanova is domiciled in Pennsylvania and is admitted to write primary insurance in 43 states. In our Corporate Risk Management business segment, one of the Legion Companies issues an insurance policy to the client, which either fulfills a legal requirement that the client have a policy from a licensed insurer or satisfies a business need the client may have for an admitted policy. The client and the Legion Company determine the level of exposure the client wishes to retain and the Legion Company transfers the specific excess risk and the aggregate excess risk beyond that retention to unaffiliated reinsurers. The Legion Company then reinsures the client's chosen retention to one of the IPC Companies or to the client's captive insurance company. In certain cases the Legion Company may issue a large deductible type policy through which the client pays claims up to its chosen retention directly. Payments within the deductible are covered by a deductible reimbursement policy issued by one of the IPC Companies. In either type of policy, the Legion Company retains only a relatively small portion of the risk on each program for its own account. In Program Business, the Legion Company replaces traditional insurers as the conduit between producers of specialty books of business and reinsurers wishing to write that business. In this line of business, the reinsurer replaces the insured as the risk-bearing entity. As with the Corporate Risk Management line of business, the Legion Company negotiates the reinsurance and performs certain administrative services in connection with the program. Program Business differs from the Corporate Risk Management line of business in that policy underwriting, issuance and premium collection are usually provided by the general agent, rather than the Legion Company. The Legion Company analyzes each program prior to inception, arranges for quota share or specific and aggregate excess reinsurance coverage through its reinsurance treaties, collects the premium from the client, prepares accounting cessions for the reinsurers, audits the final premium, supervises the independent claims adjuster, collects claim reimbursements from reinsurers and performs certain other 6 related services for each account. Commencing in the latter part of 2000 and continuing in 2001, we expect that Legion will significantly increase its risk retention on selected programs where it believes it can earn an underwriting profit. For the Corporate Risk Management business, the Legion Companies have established a reinsurance treaty with unaffiliated reinsurers to transfer the specific and aggregate excess risk above the client's retention. The client's retention is negotiated separately for each program and reflects the amount of risk the client wishes to retain for its program on both a specific and aggregate basis. For Program Business, Legion has typically purchased a separate reinsurance treaty, both on a quota share and a specific and aggregate excess of loss basis, in respect of each program. The amount and type of reinsurance that we purchase on Program Business on the renewal book of business in 2001 will be dependent on the individual retention taken on each Program. The Legion Companies currently place substantially all reinsurance with unaffiliated commercial reinsurers whose ratings from A.M. Best Company are A-or higher. At December 31, 2000, the largest reinsurance recoverable from unaffiliated commercial reinsurers was $307.7 million from Transatlantic Reinsurance Company, a participant on several layers of specific and aggregate reinsurance with respect to various of our Program and Corporate Risk Management business and substantially all of our American Psychiatric Association program, $254.0 million from First Excess and Reinsurance Corp. and $134.0 million from American Re-insurance Company, which are both reinsurers on several current treaties. Transatlantic is rated A++, First Excess, now GE Reinsurance Corporation and part of the Employers Re US Group, is rated A++ and American Re-insurance is rated A++ by A.M. Best Company. Through its reinsurance arrangements, each Legion Company places significant amounts of reinsurance with a variety of unaffiliated reinsurance companies. In order to maintain an acceptable level of net written premiums for regulatory purposes, each Legion Company has in the past sought to develop a level of net written premiums which will not involve a significant degree of underwriting risk. In most Legion programs, the Legion Company retains liability for a specified amount of losses equal to approximately 10% of the gross written premium. The level of losses retained by the Legion Company are set at a level such that no significant underwriting profit or loss should occur. In order to take regulatory credit for reinsurance ceded to one of the IPC Companies or to a captive insurance company, the Legion Company must receive a letter of credit for the amount of the insurance reserves ceded since the companies to which the reinsurance is ceded are not licensed reinsurers in any state of the United States. The letter of credit must be issued or confirmed by a bank which is a member of the U.S. Federal Reserve System. At December 31, 2000, the Legion Companies had $355.6 million of such letters of credit, of which $249.7 million was supplied by the IPC Companies. Legion Insurance, Legion Indemnity and Villanova are also subject to other regulation by the insurance departments of Pennsylvania, Illinois and other states where they are licensed. See "Regulatory Considerations." As of December 31, 2000, the Legion Companies had 298 programs, they wrote gross statutory premiums of $1.4 billion during 2000 and had statutory capital of $378.4 million. See "Management's Discussion and Analysis of Financial Conditions and Results of Operations." Specialty Brokerage In 1991,we acquired a 51% interest in a newly-formed London reinsurance brokerage firm, MRM Hancock Limited. MRM Hancock specializes in the placement of reinsurance for captive insurance companies in the London market, including Lloyd's of London. In 1996, we acquired the remaining 49% of MRM Hancock from the management of MRM Hancock and General International Ltd., a Bermuda insurance subsidiary of General Motors Corporation. MRM Hancock is now a wholly-owned subsidiary. In July 1992, we acquired Park International Limited, a Bermuda broker specializing in placing coverage with Bermuda-based excess liability and corporate officers" and directors" liability carriers. In 1998, we acquired H&H Reinsurance Brokers, Ltd., a Bermuda-based specialty reinsurance broker that was part of the IAS Group, a group of companies that was acquired by MRM in 1998. During 1999, all of our brokerage business was combined into one unit to better coordinate the specialty brokerage activities and to improve customer service. 7 Segment information relating to our Specialty Brokerage operations is contained in note 15 to the Consolidated Financial Statements. Financial Services In July 1996, we acquired The Hemisphere Group Limited, a Bermuda financial services company. Hemisphere, which had been in business since 1980, has three active subsidiary operations in Bermuda providing company management, corporate secretarial, fund administration and trust management services. With a total staff of 232, Hemisphere had 368 mutual fund clients as of December 31, 2000. In addition, Hemisphere administers investment holding companies, trading companies and trusts. In 1998, Hemisphere expanded its operations to Dublin, Ireland and Boston, Massachusetts in order to service the European offshore and US hedge fund industry, respectively. During 1997, Hemisphere expanded its trust operations by acquiring Hugo Trust Company based in Jersey in the Channel Islands. Hemisphere Trust (Jersey) Limited, which is comprised of Hugo Trust Company and Augres Trust Company, provides a base to develop European based trust business and had revenues of $2.5 million in 2000. In January 2001, we acquired Valmet Group Ltd, a trust and corporate services company with offices in numerous jurisdictions. In January 1997, we incorporated MRM Life Ltd. in Bermuda to provide life insurance and related products, including annuities and variable annuities. We began marketing these products in the fourth quarter of 1997. All of the Company's life products are variable and accordingly we do not bear interest rate risk. All of the mortality exposure is reinsured by the Company to life reinsurers. Competition Our insurance services compete with self-insurance plans, captive insurance companies managed by others and a variety of risk financing insurance policies. We believe that the IPC Program is the largest independent alternative market facility that is not affiliated with either a major retail insurance broker or a major insurance company. We face significant competition in marketing the IPC Program from other risk management programs offered by U.S. insurance companies, from captive insurance companies for large insureds and from rent-a- captives organized by large insurance companies and brokers. The primary basis for competition among these alternative risk management vehicles varies with the financial and insurance needs and resources of each potential insurance buyer. The principal factors that are considered include an analysis of the net present value, after-tax cost of financing the client's expected level of losses, the amount of premium and collateral required, the attachment point of excess coverage provided in the event losses exceed expected levels as well as cash flow and tax planning considerations and the expected quality and consistency of the services to be provided. We believe that for insureds with financial characteristics and loss experience lending themselves to an IPC Program, the IPC Companies compete effectively with other risk financing alternatives. Regulatory Considerations The Bermuda-based IPC Companies, Mutual Indemnity Ltd., Mutual Indemnity (Bermuda) Ltd. and Mutual Indemnity (US) Ltd., are subject to regulation under the Bermuda Companies Act of 1981 and as insurers under the Bermuda Insurance Act of 1978, as amended by the Insurance Amendment Act 1995, and the regulations promulgated thereunder. They are required, among other things, to meet and maintain certain standards of solvency, to file periodic reports in accordance with Bermuda statutory accounting rules, to produce annual audited financial statements and to maintain a minimum level of statutory capital and surplus. In general, the regulation of insurers in Bermuda relies heavily upon the auditors, directors and managers of the Bermuda insurer, each of which must certify that the insurer meets the solvency and capital requirements of the Bermuda Insurance Act of 1978. Mutual Indemnity (Barbados) Ltd. and Mutual Indemnity (Dublin) Ltd. are subject to similar regulation in Barbados and Ireland, respectively. 8 The Legion Companies are subject to regulation and supervision by the insurance regulatory authorities of the various states of the United States in which they conduct business. This regulation is intended primarily for the benefit of policyholders. Legion Insurance is admitted in 50 states, the District of Columbia and Puerto Rico, and is subject to regulation in each jurisdiction. Legion Indemnity is admitted in Illinois and is authorized as a surplus lines insurer in 42 states, the District of Columbia, Guam and the Virgin Islands. Legion Indemnity is regulated in Illinois but is generally not subject to regulation in those states where it acts as a surplus lines insurer. Villanova is admitted in 43 states and is subject to regulation in each of these jurisdictions. State insurance departments have broad regulatory, supervisory and administrative powers. These powers relate primarily to the standards of solvency which must be met and maintained, the licensing of insurers and their agents, the approval of rates and forms and policies used, the nature of, and limitations on, insurers' investments, the form and content of periodic and other reports required to be filed, and the establishment of reserves required to be maintained for unearned premiums, losses and loss expenses, or other purposes. The Legion Companies are also subject to state laws regulating insurance holding companies. Under these laws, state insurance departments may examine the Legion Companies at any time, require disclosure of material transactions by the holding company and require prior approval of certain "extraordinary" transactions, such as dividends from the insurance subsidiary to the holding company and purchases of certain amounts of the insurance subsidiary's capital stock. These laws also generally require approval of changes of control, which are usually triggered by the direct or indirect acquisition of 10% or more of the insurer. Most states require all admitted insurance companies to participate in their respective guaranty funds, which cover certain claims against insolvent insurers. Solvent insurers licensed in these states are required to cover the losses paid on behalf of insolvent insurers by the guaranty funds and are generally subject to annual assessments in the state by its guaranty fund to cover these losses. Some states also require licensed insurance companies to participate in assigned risk plans which provide coverage for workers' compensation, automobile insurance and other lines for insureds that, for various reasons, cannot otherwise obtain insurance in the open market. This participation may take the form of reinsuring a portion of a pool of policies or the direct issuance of policies to insureds. Generally, the Legion Companies participate as a pool reinsurer or assign to other companies the direct policy issuance obligations. The calculation of an insurer's participation in these plans is usually based on the amount of premium for that type of coverage that was written by the insurer on a voluntary basis in a prior year. Assigned risk pools tend to produce losses which result in assessments to insurers writing the same lines on a voluntary basis. The Legion Companies also pay a fee to carriers assuming their direct policy issuance obligations. For each program a Legion Company writes, it estimates the amount of assigned risk and guaranty fund assessments that it will incur as a result of having written that program. If that estimate proves to be inadequate, the Legion Company is entitled under its reinsurance agreements with the IPC Companies to recover from the reinsurer the amount of any assessments in excess of the estimate. The IPC Companies are then entitled under the terms of each shareholder's agreement to recover this excess from the client. However, the IPC Companies are generally only able to collateralize this obligation up to the amount of the estimated assessments. The National Association of Insurance Commissioners ("NAIC") has established the Insurance Regulatory Information System ("IRIS") to assist state insurance departments in their regulation and oversight of insurance companies domiciled or operating in their respective states. IRIS has established a set of twelve financial ratios with specified "unusual values" for each ratio. Companies reporting four or more unusual values on the IRIS ratios may expect inquiries from individual state insurance departments concerning specific aspects of the insurer's financial position. As of December 31, 2000, Legion Insurance Company, Villanova Insurance Company and Legion Indemnity Company, had 4, 4 and 4 unusual values, respectively. Two of the Legion Insurance Company's ratios: Surplus Aid to Surplus and Agent's Balance to Surplus are directly related to premium growth. Liabilities to Liquid Assets, was unusual because Legion received $77.4 million in premium prior to receiving policy level detail to record the written premium. This inflates the ratio as it represents funds awaiting application to actual policies. The final ratio, Estimated Current Reserve Deficiency to Surplus is related to the difference created by the timing lag of when we receive reported premiums from our Managing General Agents to when the premium is actually earned. 9 Villanova had one unusual value related to premium growth, Change in Net Writings. It also had two unusual values, Investment Yield and Change in Surplus related to a $15.0 million capital infusion received at the end of 2000. The low value for investment yield is the result of the infusion being invested late in the year while the ratio is calculated assuming investments were made evenly throughout the year. This infusion also resulted in a substantial increase in surplus. The final unusual value, Change in Net Writings, is related to the Company's decrease in net written premium as a result of the inter-company pooling agreement. Legion Indemnity had two unusual values related to premium growth, Surplus Aid to Surplus and Agent's Balance to Surplus. The unusual value for Change in Net Writings, like Villanova, is directly related to the inter-company pooling agreement. The final unusual value, Liabilities to Liquid Assets, is the result of an increased reinsurance provision and an inter-company payable to Legion Insurance Company. The NAIC has also adopted a Risk Based Capital for Insurers Model Act. The Risk Based Capital Model Act sets forth a risk based capital formula for property and casualty insurers. The formula measures minimum capital and surplus needs based on the risk characteristics of a company's products and investment portfolio. The formula is part of each company's annual financial statement filings and is to be used as a tool to identify weakly capitalized companies. In those states having enacted the Risk Based Capital Model Act, companies having capital and surplus greater than the minimum required by the formula but less than a specified multiple of the minimum may be subject to additional regulatory scrutiny from domiciliary state insurance departments. To date, nearly all states have adopted the Risk Based Capital Model Act. At December 31, 2000, the Legion Companies combined risk-based capital was $374.8 million. Under the risk-based capital tests, the threshold that constitutes the authorized control level which authorizes the commissioner to take whatever regulatory action considered necessary to protect the best interest of the policyholders and creditors of the Legion Companies, was $161.9 million. Therefore, the Legion Companies capital exceeds all requirements of the Risk Based Capital Model Act. In reaction to increasing rates for and decreasing availability of workers' compensation insurance starting in the early 1990's, many states began to enact reforms designed to reduce the cost of workers' compensation insurance, principally through a reduction in benefits or an increase in efficiencies in the system. In California, a reform package was enacted in 1993 providing for, in part, a reduction of premium rates, an increase in the standard necessary to prove "stress-related" work injuries, group-self insurance for employers and the repeal of the minimum rate law effective January 1, 1995. In Florida, the assigned risk plan was abolished and replaced by a joint underwriting authority. Other states have enacted or are considering similar reforms. Workers' compensation reform, together with the effects of competition and other factors, has led to reduced premiums in many states. This has reduced the appeal of alternative market products such as those offered by us. This is apparent in California where workers' compensation rates have declined by more than 50% since mid-1993 while benefit levels have increased. This will inevitably lead to significant losses for those traditional carriers who are writing this business. A number of these carriers have recently filed for significant rate increases. The Legion Companies are permitted to pay dividends only from statutory earned surplus. Subject to this limitation, the maximum amount of dividends that they are able to pay in any twelve-month period will be the greater of statutory net income in the preceding year or 10% of statutory surplus. Based on 2000 results, the maximum dividend the Legion Companies would be permitted to pay in 2001 is $46.0 million. Losses and Loss Reserves We establish reserves for losses and loss adjustment expenses related to claims which have been reported on the basis of the evaluations of independent claims adjusters under the supervision of each Legion Company's claims staff. In addition, reserves are established for losses which have occurred but have not yet been reported and for adverse development of reserves on reported losses by us on a quarterly basis. The estimate of claims arising for accidents which have not yet been reported is based upon our and the insurance industry's experiences together with statistical information with respect to the probable number and nature of these claims. 10 Gross loss reserves of $169.6 million and $136.0 million at December 31, 2000 and 1999, respectively, have been discounted by $58.1 million and $39.5 million, respectively, assuming interest rates of 6% for medical malpractice reserves and 4% for excess workers' compensation reserves based on the recommended rate under Pennsylvania law. These reserves are also discounted in our regulatory filings. In 1993, we adopted SFAS 113 and reclassified substantially all of our net retained medical malpractice reserves as claims deposit liabilities. On a net basis, therefore, the only discounted reserves are those relating to the Company's share of the excess reinsurance coverage provided in connection with each program. After reinsurance, the net effect of this discounting was to increase net income after tax by $0.2 million in 2000 and decrease net income after tax by $0.8 million in 1999. This discounting reduced net loss reserves on our consolidated balance sheets by $4.0 million and $3.8 million at December 31, 2000 and 1999, respectively. Prior to 1995, loss development had been generally favorable. The adverse development in recent years has principally been a result of losses on terminated programs. The following table sets forth a reconciliation of beginning and ending reserves for losses and loss expenses in accordance with accounting principles generally accepted in the United States, also referred to as GAAP:
Year ended December 31, ---------------------------------- 2000 1999 1998 ---------- ---------- ---------- (In thousands) Gross reserves for losses and loss expenses, beginning of year.............. $1,860,120 $1,190,426 $ 716,461 Recoverable from reinsurers............... 1,729,936 1,079,562 630,697 ---------- ---------- ---------- Net reserves for losses and loss expenses, beginning of year........................ 130,184 110,864 85,764 Less: Other net reserves(1)............... (8,058) (10,184) (3,542) ---------- ---------- ---------- 122,126 100,680 82,222 Provision for losses and loss expenses for claims occurring in: Current year............................ 157,813 140,574 74,476 Prior years(2).......................... 69,292 7,131 3,782 ---------- ---------- ---------- Total losses and loss expenses incurred... 227,105 147,705 78,258 ---------- ---------- ---------- Payments for losses and loss expenses for claims occurring in: Current year............................ (29,205) (61,697) (15,039) Prior years............................. (103,324) (64,562) (44,761) ---------- ---------- ---------- Total payments............................ (132,529) (126,259 (59,800) ---------- ---------- ---------- Net reserves for losses and loss expenses, end of year ............................. 216,702 122,126 100,680 Other net reserves(1)..................... 5,015 8,058 10,184 ---------- ---------- ---------- 221,717 130,184 110,864 ---------- ---------- ---------- Recoverable from reinsurers............... 2,307,466 1,729,936 1,079,562 ---------- ---------- ---------- Gross reserves for losses and loss expenses, end of year ................... $2,529,183 $1,860,120 $1,190,426 ========== ========== ==========
- -------- (1) Other reserves represent reinsurance contracts which are being run-off and which were written in subsidiaries other than Legion, plus reserves for other run-off business. (2) The increase in the provision for losses and loss expenses for claims occurring in prior years relates primarily to the charge taken in the fourth quarter of 2000 to increase the Company's existing provision relating to reinsurance recoverables and a strengthening of net loss reserves. 11 The following table reconciles the difference between the Legion Companies'"portion of the GAAP reserves and those contained in regulatory filings made by the Legion Companies' in accordance with statutory accounting practices, also referred to as SAP. Reconciliation of SAP and GAAP Reserves
2000 1999 1998 ---------- ---------- ---------- (in thousands) Reserves for Legion losses and loss expenses, end of year SAP................. $ 186,809 $ 141,709 $ 109,506 Gross-up for ceded reinsurance reserves.... 2,235,255 1,728,988 1,077,349 Provision for reinsurance uncollectible on a GAAP basis reported as a provision for unauthorized reinsurance on a SAP basis... 38,810 -- 302 Reclassification of loss reserves to claims deposit liabilities....................... (9,697) (13,853) (19,163) Reclassification of retroactive reinsurance reserve to receivable from affiliate...... 1,047 2,777 8,598 Elimination of statutory increase in assigned risk reserves.................... (15,000) (15,000) (15,000) Reserves for audit premium estimates not included on SAP basis..................... (639) (4,260) 2,745 ---------- ---------- ---------- Reserves for Legion losses and loss expenses, end of year GAAP................ 2,436,585 1,840,361 1,164,337 Other non-US Reserves...................... 85,161 11,567 13,813 ---------- ---------- ---------- Liabilities for unpaid losses and loss expenses.................................. 2,521,746 1,851,928 1,178,150 Reserves on run-off business............... 7,437 8,192 12,276 ---------- ---------- ---------- Total Reserves for Losses and Loss expenses, end of year GAAP................ $2,529,183 $1,860,120 $1,190,426 ========== ========== ==========
The following table presents the development of the Company's ongoing net reserves for 1990 through 2000. The top line of the table shows the estimated reserve for unpaid losses and loss adjustment expenses recorded at the balance sheet date for each of the indicated years. This amount represents the estimated amount of losses and loss adjustment expenses for claims that are unpaid at the balance sheet date, including losses that have been incurred but not yet reported to the Company. The table also shows the re-estimated amount of the previously recorded reserve based on experience as of the end of each succeeding year. The estimate changes as more information becomes known about the frequency and severity of claims for individual years. The "cumulative redundancy (deficiency)" represents the aggregate change in the estimates over all prior years. It should be noted that the following table presents a "run- off" of balance sheet reserves, rather than accident or policy year loss development. Therefore, each amount in the table includes the effects of changes in reserves for all prior years. 12 ANALYSIS OF LOSS AND LOSS EXPENSE DEVELOPMENT (Net of Reinsurance Recoverable)
Year ended December 31, ------------------------------------------------------------------------------------------------------ 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 ------- -------- -------- -------- -------- -------- -------- -------- ---------- ---------- (In thousands) Gross reserve for losses and loss adjustment expenses (1).... $88,437 $142,605 $191,775 $205,272 $242,189 $315,689 $419,737 $716,461 $1,190,426 $1,860,124 Reinsurance reserves........ (52,321) (89,295) (113,075) (148,637) (178,002) (256,678) (350,318) (630,697) (1,079,562) (1,729,935) ------- -------- -------- -------- -------- -------- -------- -------- ---------- ---------- Net reserve for losses and loss adjustment expenses........ 36,116 53,310 78,700 56,635 64,187 59,011 69,419 85,764 110,864 130,189 Other reserves (3)............. (1,357) (1,464) (1,531) (1,118) (1,006) (1,008) (1,008) (3,542) (10,184) (8,058) ------- -------- -------- -------- -------- -------- -------- -------- ---------- ---------- 34,759 51,846 77,169 55,517 63,181 58,003 68,411 82,222 100,680 122,131 Reclassification of reserves to claim deposit liabilities (2)............. (20,796) (28,322) (36,078) -- -- -- -- -- -- -- ------- -------- -------- -------- -------- -------- -------- -------- ---------- ---------- Reserve for losses and loss adjustment expenses restated for the effects of 2000 SFAS 113 :...... -13,963----23,524 41,091 55,517 63,181 58,003 68,411 82,222 100,680 122,131 Gross reserve for losses and loss adjustment expenses (1).... $2,529,183 Reinsurance reserves........ (2,307,466) ----------- Net reserve for losses and loss adjustment expenses........ 221,717 Other reserves (3)............. (5,015) ----------- 216,702 Reclassification of reserves to claim deposit liabilities (2)............. -- ----------- Reserve for losses and loss adjustment expenses restated for the effects of SFAS 113 :...... 216,702 Reserve re-estimated as of: One year later.. 35,453 53,193 40,443 55,131 60,917 54,982 67,966 86,002 103,346 190,570 Two years later........... 34,953 24,269 41,433 52,381 56,767 54,328 70,502 87,721 156,532 Three years later........... 13,131 23,298 39,351 47,657 56,291 56,576 70,669 115,602 Four years later........... 12,132 22,010 36,330 47,740 57,760 55,573 82,809 Five years later........... 12,268 20,390 36,424 48,162 57,137 60,932 Six years later........... 10,649 20,500 36,652 47,907 60,443 Seven years later........... 10,700 20,689 36,105 50,082 Eight years later........... 10,750 22,062 37,235 Nine years later........... 10,417 23,104 Ten years later........... 10,453 Reserve re-estimated as of: One year later.. Two years later........... Three years later........... Four years later........... Five years later........... Six years later........... Seven years later........... Eight years later........... Nine years later........... Ten years later........... Cumulative Redundancy (Deficiency).... 3,510 420 3,856 5,435 2,738 (2,929) (14,398) (33,380) (55,852) (68,439) Percentage...... 25% 2% 9% 10% 4% -5% -21% -41% -55% Reserve for Losses and Loss Adjustment Expenses without the effect of Discounting : Discounted reserve......... $34,759 $ 51,846 $ 77,169 $ 55,517 $ 63,181 $ 58,003 $ 68,411 $ 82,222 $ 100,680 $ 122,131 Total Discount.. 6,091 8,345 10,785 1,387 2,905 3,291 3,547 3,671 4,667 3,752 ------- -------- -------- -------- -------- -------- -------- -------- ---------- ---------- Ultimate Reserve Liability....... 40,850 60,191 87,954 56,904 66,086 61,294 71,958 85,893 105,347 125,883 Reclassification of reserves to claim deposit liabilities (2)............. (26,889) (36,667) (46,862) -- -- -- -- -- -- -- ------- -------- -------- -------- -------- -------- -------- -------- ---------- ---------- Ultimate reserve liability restated for the effects of SFAS 113........ 13,961 23,524 41,092 56,904 66,086 61,294 71,958 85,893 105,347 125,883 Reserve re-estimated as of: One year later.. 41,084 60,820 40,443 56,272 63,480 57,866 71,008 89,347 107,507 193,341 Two years later........... 39,668 24,269 41,433 53,410 59,186 57,097 73,790 91,496 160,518 Three years later........... 13,131 23,298 39,351 48,499 58,558 59,456 73,865 118,712 Four years later........... 12,132 22,010 36,330 48,400 60,096 58,318 85,906 Five years later........... 12,268 20,390 36,424 48,854 59,294 63,887 Six years later........... 10,649 20,500 36,652 48,406 63,153 Seven years later........... 10,700 20,689 36,105 52,721 Eight years later........... 10,750 22,062 37,060 Nine years later........... 10,417 23,104 Ten years later........... 10,453 Cumulative Redundancy (Deficiency).... Percentage...... Reserve for Losses and Loss Adjustment Expenses without the effect of Discounting : Discounted reserve......... 216,703 Total Discount.. 3,990 ----------- Ultimate Reserve Liability....... 220,693 Reclassification of reserves to claim deposit liabilities (2)............. -- ----------- Ultimate reserve liability restated for the effects of SFAS 113........ 220,693 Reserve re-estimated as of: One year later.. Two years later........... Three years later........... Four years later........... Five years later........... Six years later........... Seven years later........... Eight years later........... Nine years later........... Ten years later........... Cumulative Redundancy (Deficiency) without discount effect.......... 3,508 420 4,032 4,183 2,933 (2,593) (13,948) (32,819) (55,171) (67,458) Percentage...... 25% 2% 10% 7% 4% -4% -19% -38% -52% -54% Cumulative Redundancy (Deficiency) without discount effect.......... Percentage...... Cumulative Amount of Reserve Paid through : One year later.. $ 4,705 $ 9,647 $ 15,972 $ 17,909 $ 19,720 $ 10,955 $ 25,196 $ 44,761 $ 65,931 $ 103,325 Two years later........... 4,986 13,158 21,121 25,306 21,054 22,422 43,068 62,781 111,768 Three years later........... 6,077 15,104 24,991 27,134 28,547 31,925 49,571 71,808 Four years later........... 6,859 16,897 25,510 31,972 34,398 41,684 51,343 Five years later........... 7,533 17,311 28,110 35,967 45,706 40,161 Six years later........... 7,381 17,943 30,793 41,392 43,215 Seven years later........... 7,484 19,494 33,432 39,531 Eight years later........... 8,304 20,920 31,494 Nine years later........... 8,845 20,114 Ten years later........... 8,945 Cumulative Amount of Reserve Paid through : One year later.. Two years later........... Three years later........... Four years later........... Five years later........... Six years later........... Seven years later........... Eight years later........... Nine years later........... Ten years later...........
- ---- (1) Medical malpractice reserves have been discounted at 8.25% in 1990, and 6% in 1991, 1992, 1993, 1994, 1995, 1996, 1997, 1998, 1999 and 2000. (2) The re-classification of reserves to claims deposit liablilties is a result of the adoption of SFAS 113. (3) Other reserves represent reinsurance contracts which are being run-off and which were written in subsidiaries other than Legion, plus reserves on other run-off business. 13 Investments and Investment Results For a complete description of our investments and investment results, see note 5 to the Consolidated Financial Statements. Risk Factors You should carefully consider the risks described below regarding us and our common shares. The risks and uncertainties described below are not the only ones we face. There may be additional risks and uncertainties. If any of the following risks actually occur, our business, financial condition or results of operations could be materially and adversely affected and the trading price of our common shares could decline significantly. If rating agencies downgrade their ratings of our insurance company subsidiaries, our future prospects for growth and profitability would be significantly and adversely affected. Our insurance company subsidiaries are currently rated A- by each of A. M. Best Company and Standard & Poor's Ratings Services. A.M. Best and Standard & Poor's ratings reflect their opinions of an insurance company's financial strength, operating performance, strategic position and ability to meet its obligations to 14 policyholders. These ratings are not evaluations directed to investors and are not recommendations to buy, sell or hold our securities. In February 2001, A. M. Best placed their ratings of our insurance company subsidiaries under review with negative implications, citing our unfavorable earnings in the fourth quarter of 2000 and a need for additional capital. The rating will be downgraded if the additional capital is not raised. A downgrade of these ratings would adversely affect our ability to market our insurance products and would have a significant and adverse effect on our future prospects for growth and profitability. Insurance legislation in some states has increased competition, which has reduced our fee revenues and made sales and renewals more difficult. Beginning in 1993, legislative reforms designed to reduce the cost of workers' compensation insurance in some important workers' compensation markets caused competition to increase significantly. This heightened level of competition has persisted. Increased competition has lowered the premium rates that we may charge, which has reduced our fee revenue. Increased competition also has made sales and renewals of our programs more difficult. Workers' compensation reform, to the extent it reduces premiums and introduces relative stability in the traditional workers' compensation market, may reduce the appeal of alternative market products such as those offered by us. If we are unable to purchase reinsurance and transfer risk to reinsurers, our net income would be reduced or we could incur a loss. A significant feature of our Corporate Risk Management and Program Business segments is the utilization of reinsurance to transfer all or a portion of risk not retained by the insured. The availability and cost of reinsurance is subject to market conditions, which are outside of our control. As a result, we may not be able to successfully purchase reinsurance and transfer risk through reinsurance arrangements. A lack of available reinsurance would adversely affect the marketing of our programs and/or force us to retain all or a part of the risk that cannot be reinsured. If we were required to retain these risks and ultimately pay claims with respect to these risks, our net income would be reduced or we could incur a loss. Our reinsurers may not satisfy their obligations to us. We are subject to credit risk with respect to our reinsurers because the transfer of risk to a reinsurer does not relieve us of our liability to the insured. In addition, reinsurers may be unwilling to pay us even though they are able to do so. We are currently engaged in arbitration proceedings with a number of reinsurers who have failed to honor their commitments to us under their reinsurance arrangements. We established a reserve for these disputes in the fourth quarter of 2000. Unfavorable arbitration decisions or the failure of one or more of our reinsurers to honor their obligations to us or a further delay in payment would impact our cash flow, reduce our net income and could cause us to incur a significant loss. If the issuers of letters of credit and clients fail to honor their obligations, our net income would be reduced or we could incur a loss. Each of our clients chooses a level of risk retention, which is reinsured either by one of our foreign reinsurance subsidiaries or by the client's captive insurance company. This retention is funded by the client's premium but is generally also supported by a client indemnification backed up by letters of credit. The inability of a client to honor its uncollateralized reimbursement obligation or the failure of a bank to honor its letter of credit would reduce our net income or could cause us to incur a loss. We anticipate increasing our level of retention in our business, which could increase the volatility of our earnings and have a material adverse effect on our results of operations and financial condition. We anticipate increasing the level of insurance risk retained by us in 2001 generally due to changes in market conditions and the pricing environment. By increasing our retention levels, we will purchase less reinsurance than we have historically purchased and will retain more risk. As a result, our earnings could be 15 more volatile, and increased losses could have a material adverse effect on our results of operations and financial condition. If tax laws prevent our IPC Program participants from deducting premiums paid to us, we would be unable to competitively market this program. One of our major products is the IPC Program. The IPC Program, frequently referred to as a "rent-a-captive," was designed to provide clients some of the benefits available through captive insurance companies without the administrative cost and capital commitment necessary to establish and operate a captive insurance company. The tax treatment of this program is not clear and varies significantly with the circumstances of each IPC Program participant. However, some participants deduct the premiums paid to us for federal income tax purposes. A determination that a significant portion of the IPC Program participants are not entitled to deduct the premiums paid to us without a similar determination as to competing products would adversely affect the marketability of the IPC Program. If our loss reserves are inadequate to meet our actual losses, our net income would be reduced or we could incur a loss. We are required to maintain reserves to cover our estimated ultimate liability of losses and loss adjustment expenses for both reported and unreported claims incurred. These reserves are only estimates of what we think the settlement and administration of claims will cost based on facts and circumstances known to us. Because of the uncertainties that surround estimating loss reserves and loss adjustment expenses, we cannot be certain that ultimate losses will not exceed these estimates of losses and loss adjustment reserves. If our reserves are insufficient to cover our actual losses and loss adjustment expenses, we would have to increase our reserves and our net income would be reduced or we could incur a loss. Our results may fluctuate as a result of factors generally affecting the insurance and reinsurance industry. The results of companies in the insurance and reinsurance industry historically have been subject to significant fluctuations and uncertainties. Factors that affect the industry in general could also cause our results to fluctuate. The industry's profitability can be affected significantly by: . fluctuations in interest rates, inflationary pressures and other changes in the investment environment, which affect returns on invested capital and may impact the ultimate payout of loss amounts; . rising levels of actual costs that are not known by companies at the time they price their products; . volatile and unpredictable developments, including weather-related and other natural catastrophes; . changes in reserves resulting from different types of claims that may arise and the development of judicial interpretations relating to the scope of insurers' liability; and . the overall judicial interpretations relating to the scope of insurers' liability. Insurance laws and regulations restrict our ability to operate. We are subject to extensive regulation under state and foreign insurance laws. These laws limit the amount of dividends that can be paid by our operating subsidiaries, impose restrictions on the amount and type of investments that they can hold, prescribe solvency standards that must be met and maintained by them and require them to maintain reserves. These laws also require disclosure of material transactions by the Company and require prior approval of certain "extraordinary" transactions. These "extraordinary" transactions include declaring dividends that exceed statutory maximums from operating subsidiaries to the Company or purchases of an operating subsidiary's capital stock. These laws also generally require approval of changes of control. Our failure to comply with these laws could subject us to fines and penalties and restrict us from conducting 16 business. The application of these laws could affect our liquidity and ability to make payments on our securities and could restrict our ability to expand our business operations through acquisitions involving our insurance subsidiaries. Failure to comply with insurance laws and regulations could have a material adverse effect on our business. We cannot assure you that we have or can maintain all required licenses and approvals or that our business fully complies with the wide variety of applicable laws and regulations or the relevant authority's interpretation of the laws and regulations. In addition, some regulatory authorities have relatively broad discretion to grant, renew or revoke licenses and approvals. If we don't have the requisite licenses and approvals or do not comply with applicable regulatory requirements, the insurance regulatory authorities could preclude or temporarily suspend us from carrying on some or all of our activities or monetarily penalize us. These types of actions could have a material adverse effect on our business. Our holding company structure could prevent us from making payments on our securities. Mutual Risk Management Ltd. is a holding company with no material assets other than the stock of Mutual Group Ltd. and other holding companies. Mutual Group is a holding company with no material assets other than the stock of its operating subsidiaries. Our ability to meet our obligations on our securities will be dependent on the earnings and cash flows of our subsidiaries and the ability of the subsidiaries to pay dividends or to advance or repay funds to us. Payment of dividends and advances and repayments from our operating subsidiaries are regulated by state and foreign insurance laws and regulatory restrictions, including minimum solvency and liquidity thresholds. Accordingly, our operating subsidiaries may not be able to pay dividends or advance or repay funds to us in the future, which could prevent us from making payments on our securities. Our ability to generate the cash needed to make payments on our securities depends on many factors beyond our control. Our ability to make payments on our securities will depend on our ability to generate cash and to secure financing in the future. This ability is subject to general economic, financial, competitive, regulatory and other factors beyond our control. If our business does not generate sufficient cash flow from operations, and sufficient future borrowings are not available to us, we may not be able to make payments on our securities. A significant amount of our investment portfolio is invested in fixed income securities and is subject to market fluctuations. A significant amount of our investment portfolio consists of fixed income securities. The fair market value of these assets and the investment income from these assets fluctuate depending on general economic and market conditions. The fair market value of our fixed income securities generally increases or decreases in an inverse relationship with fluctuations in interest rates, while net investment income realized by us from future investments in fixed income securities will generally increase or decrease with interest rates. In addition, net investment income from investments that carry prepayment risk, such as mortgage-backed and other asset-backed securities, may differ from those anticipated at the time of investment as a result of interest rate fluctuations. Because substantially all of our fixed income securities are classified as available for sale, changes in the market value of our securities are reflected in our balance sheet. Similar treatment is not available for liabilities. As a result, interest rate fluctuations could reduce our net income or cause us to incur a loss. Our industry is highly competitive and we may not be able to compete successfully in the future. Our industry is highly competitive and has experienced severe price competition over the last several years. We compete in the United States and international markets with domestic and international insurance companies. Some of these competitors have greater financial resources than we do, have been operating for 17 longer than we have and have established long-term and continuing business relationships throughout the industry, which can be a significant competitive advantage. In addition, we expect to face further competition in the future. We may not be able to compete successfully in the future. We are dependent on our key personnel. Our success has been, and will continue to be, dependent on our ability to retain the services of our existing key executive officers and to attract and retain additional qualified personnel in the future. The loss of the services of any of our key executive officers or the inability to hire and retain other highly qualified personnel in the future could adversely affect our ability to conduct our business. If U.S. tax law changes, our net income may be reduced. Some members of Congress have recently expressed concern over a competitive advantage that foreign-controlled insurers and reinsurers may have over U.S.- controlled insurers and reinsurers due to the purchase of reinsurance by U.S. insurers from affiliates operating in some foreign jurisdictions, including Bermuda. Legislation was proposed in the last session of Congress that would increase the U.S. tax burden on some of these transactions. We do not know whether this legislation will be reproposed in the current or some future session of Congress, and we do not know whether this or any similar legislation will ever be enacted into law. If it were enacted, the U.S. tax burden on some business ceded from our licensed U.S. insurance subsidiaries, including the Legion Companies, to some offshore reinsurers could be increased. This could reduce our net income. ITEM 2. PROPERTIES We and our subsidiaries operate out of leased premises, the most significant of which are in located in Bermuda, Milwaukee and Philadelphia. ITEM 3. LEGAL PROCEEDINGS The Company has generally retained only a small portion of the insurance risk that it assumes. Accordingly, the Company has relied heavily on reinsurance and carries a significant recoverable from reinsurers, which amounted to $2.3 billion at December 31, 2000. On a gross basis, some of the Company's business has been unprofitable to reinsurers and certain of these reinsurers have chosen to dispute their obligation to pay the Company. At December 31, 2000 the Company was involved in five arbitration proceedings to collect disputed balances due from reinsurers. At December 31, 2000, the Company had paid $56.1 million in losses and loss expenses, for which it had not been reimbursed. In addition, the Company estimates that it will ultimately pay another $83.3 million in unpaid losses and loss expenses in relation to the disputed business. One of these arbitration proceedings, which involves a series of accident and health programs written by the Company from 1997 through 1999, accounted for $37.4 million of the unreimbursed paid losses and an estimated $7.0 million of the unpaid losses. The Company, however, received a good-faith payment from the reinsurers of $12.3 million in February 2001. This dispute involves a number of syndicates at Lloyd's, 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. Two of the arbitration proceedings are with U.S. life insurance companies that wrote workers' compensation reinsurance for the Company from 1994 to 1997, involving a number of reinsurance treaties. These life insurance companies are no longer writing workers' compensation reinsurance and are believed by the Company to be disputing similar obligations to other property casualty insurers. Both of these disputes will be arbitrated in Philadelphia, Pennsylvania. The first arbitration is scheduled for April 2001 and the second for July 2001. At December 31, 2000, these disputes involved $13.6 million in paid claims and an estimated $47.6 million in unpaid claims. 18 The two remaining arbitration proceedings involve claims under individual reinsurance agreements with two reinsurers and involve $5.1 million of paid claims and an estimated $28.7 million of unpaid claims. In each of these disputes, the Company is in settlement discussions with the reinsurers and arbitration panels have 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, where the Company acted as both a reinsurer and a direct writer of property insurance. The Company has previously 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 will be subject to arbitration. In addition, one of the Company's quota share reinsurers, representing 6% of the Company's quota share reinsurance, is questioning certain ceded claims, and this dispute will also be the subject of arbitration. These reinsurance arbitrations and terminated programs have adversely affected operating cash flow and we have established provisions to cover the likely costs of resolving these matters. Any adverse arbitration award may expose the Company to further losses. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. 19 EXECUTIVE OFFICERS OF THE REGISTRANT
Officer Name Age Since Principal Occupation & Business Experience ---- --- ------- ------------------------------------------ Robert A. Mulderig... 48 1982 Chief Executive Officer of MRM since 1982; Chairman of Legion Insurance Co.; Director of The Galtney Group, Inc., and The Bank of N.T. Butterfield & Sons Ltd. Also serves as a director or officer of a number of unaffiliated captive insurance companies to which we provide management services. John Kessock, Jr..... 52 1979 President of MRM, Mutual Group Ltd. and Legion Insurance; primarily responsible for marketing the Company's programs since 1979; Chairman of Commonwealth Risk Services L.P. and the IPC Companies. Director of Ward North America, Inc. Richard G. Turner.... 50 1984 Executive Vice President of MRM; President of CRS since 1984; Vice President of Marketpac International, a subsidiary of American International Group, from 1979 to 1984. Director of Colonial Penn Insurance Company; Director of Ward North America, Inc. Glenn R. Partridge... 47 1983 Executive Vice President of MRM; Senior Vice President of Legion Insurance; primarily responsible for Legion Insurance's underwriting function since 1987; Vice President of CRS from 1983 to 1987. Andrew Cook.......... 38 2001 Senior Vice President and Chief Financial Officer of MRM since January 1, 2001, having joined the Company in October 2000; independent consultant from 1999 to 2000; Senior Vice President and Chief Financial Officer of LaSalle Re Holdings Limited from 1993 to 1999. Paul D. Watson....... 42 1986 Senior Vice President and Chief Operating Officer of MRM; Vice President of MRM since March 1991; President of the IPC Companies from July 1992 until December 1998; held various management and accounting positions since joining MRM in 1986. Richard E. O'Brien... 43 1995 Senior Vice President and General Counsel of MRM; A partner in the law firm of Dunnington, Bartholow & Miller, New York, from 1989 to 1995.
All Executive Officers are appointed by MRM's Board of Directors and serve until the next annual general meeting of the shareholders or until their successors are appointed. 20 PART II ITEM 5. MARKET FOR COMMON SHARES AND RELATED STOCKHOLDER MATTERS Our common shares have been listed on the New York Stock Exchange under the symbol MM since June 25, 1991. Our common shares were listed in connection with our initial public offering completed in July 1991. There were 365 holders of record of our common shares as of February 23, 2001. The following table sets forth the high and low closing sale prices for the shares during 1999 and 2000 for the calendar quarters indicated as reported by the New York Stock Exchange Composite Tape.
High Low ---- ---- Year ended December 31, 1999 First Quarter.......................................... $42 5/8 $32 7/8 Second Quarter......................................... 40 3/8 33 3/8 Third Quarter.......................................... 35 12 1/4 Fourth Quarter......................................... 16 15/16 10 3/8 Year ended December 31, 2000 First Quarter.......................................... 20 12 5/8 Second Quarter......................................... 19 5/8 13 3/16 Third Quarter.......................................... 22 3/16 15 1/16 Fourth Quarter......................................... 23 9/16 12 5/16 Year ended December 31, 2001 First Quarter (through March 16, 2001)................. 16.36 6.95
During 2000 and 1999, we paid total dividends of $0.28 and $0.25 per common share, respectively. Dividends are paid quarterly. Our ability to pay dividends is restricted due to certain insurance regulations. See "Management's Discussion and Analysis of Financial Conditions and Results of Operations" and Note 11 to the Consolidated Financial Statements. 21 ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
Year ended December 31, ------------------------------------------------------------ 2000 1999 1998 1997 1996 ----------- ----------- ----------- ----------- ----------- (In thousands, except share and per share amounts) INCOME STATEMENT DATA: Revenues................ $ 497,817 $ 387,626 $ 287,914 $ 230,498 $ 171,426 =========== =========== =========== =========== =========== (Loss) income before income taxes, minority interest and extraordinary loss .................. (18,397) 50,307 72,970 60,109 46,465 ----------- ----------- ----------- ----------- ----------- Income before minority interest and extraordinary loss..... 736 50,672 64,434 49,477 38,322 ----------- ----------- ----------- ----------- ----------- Net (loss) income....... (5,582) 50,438 64,527 49,477 37,900 ----------- ----------- ----------- ----------- ----------- (Loss) earnings per common share --Basic............... $ (0.14) $ 1.18 $ 1.56 $ 1.25 $ 0.99 --Diluted............. $ (0.14) $ 1.14 $ 1.42 $ 1.15 $ 0.93 =========== =========== =========== =========== =========== Diluted weighted average number of common shares outstanding(1) --Basic............... 41,244,621 42,797,133 41,275,156 39,379,122 38,369,457 --Diluted............. 41,244,621 49,606,913 50,233,147 48,785,252 47,280,653 =========== =========== =========== =========== =========== Dividends per common share.................. $ 0.28 $ 0.25 $ 0.21 $ 0.19 $ 0.16 As at December 31, ------------------------------------------------------------ 2000 1999 1998 1997 1996 ----------- ----------- ----------- ----------- ----------- (In thousands) BALANCE SHEET DATA: Total assets............ $ 4,859,649 $ 4,033,174 $ 3,074,257 $ 2,206,050 $ 1,690,428 =========== =========== =========== =========== =========== Reserve for losses and loss expenses.......... 2,529,183 1,860,120 1,190,426 716,461 419,737 ----------- ----------- ----------- ----------- ----------- Loans payable(2)........ 233,673 227,898 125,485 128,711 122,211 ----------- ----------- ----------- ----------- ----------- Redeemable preferred and common shares.......... -- -- -- 1,929 4,462 ----------- ----------- ----------- ----------- ----------- Shareholders' equity.... $ 351,533 $ 358,144 $ 343,166 $ 263,575 $ 211,343 =========== =========== =========== =========== ===========
- -------- (1) See Note 13 to the Consolidated Financial Statements for an explanation of the method used to determine the number of shares used to compute per share amounts. (2) See Notes 6 and 7 to the Consolidated Financial Statements. 22 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Consolidated Results of Operations For the Years Ended December 31, 2000, 1999 and 1998 The Company reported a net loss of $5.6 million or $0.14 per diluted share in 2000, as compared to net income of $50.4 million or $1.14 per diluted share in 1999 and $64.5 million or $1.42 per diluted share in 1998. The 2000 results include a fourth quarter after-tax charge of $46.1 million or $1.11 per diluted share to establish a reserve for reinsurance recoverables, add to provisions for terminated programs and increase the Company's net loss reserves. Earnings in 1999 were adversely affected by provisions related to net losses incurred on terminated programs of $8.0 million, net of tax, taken in the third quarter of 1999. Set forth in Table I is an analysis of the components of the Company's revenues for each of the last three years. Table I--Revenues
Year ended December 31, -------------------------------------------- 2000 Growth 1999 Growth 1998 -------- ------ -------- ------ -------- (In thousands) Fee income..................... $207,513 17 % $177,711 13 % $157,271 Premiums earned................ 254,505 40 181,798 78 101,913 Net investment income.......... 39,332 17 33,616 14 29,590 Realized capital (losses)...... (4,735) (9) (5,199) 418 (1,003) Other income (loss)............ 1,202 501 (300) (310) 143 -------- -------- -------- Total........................ $497,817 28 % $387,626 35 % $287,914 ======== ======== ========
For the years ended December 31, 2000, 1999 and 1998, total revenues have grown primarily as a result of increased fee income and premiums earned. This growth is mainly attributable to the increase in gross premiums written in the Program Business segment, which offset the marginal decline in Corporate Risk Management business due to prolonged soft market conditions. Fee Income The components of fee income by business segment are illustrated in Table II. Table II--Fee Income by Business Segment
Year ended December 31, ------------------------------------------ 2000 Growth 1999 Growth 1998 -------- ------ -------- ------ -------- (In thousands) Program Business fees............. $118,034 24 % $ 95,132 16 % $ 82,267 Corporate Risk Management fees.... 46,689 (5) 49,365 (4) 51,640 Specialty Brokerage fees.......... 14,847 8 13,692 52 9,021 Financial Services fees........... 27,943 43 19,522 36 14,343 -------- -------- -------- Total........................... $207,513 17 % $177,711 13 % $157,271 ======== ======== ========
23 Program Business Program Business involves replacing traditional insurers and acting as the conduit between producers of specialty books of business and reinsurers wishing to write that business. Program Business accounted for 57% of total fees for 2000 compared to 53% in 1999 and 52% in 1998. This increase resulted from the growth of existing programs due to premium increases and decreased competition. Fees earned on individual Program Business accounts are more likely to grow compared to Corporate accounts because new policy holders are constantly being added in each program. Program Business also has historically had a higher retention rate than Corporate Risk Management. Pre-tax margins in this segment were 27% for 2000 compared to 28% in 1999 and 40% in 1998. The Company expects that the number of programs in its Program Business segment will decline during 2001, but that the remaining programs will be larger and more profitable due to increased pricing rates, decreased competition and the non-renewal of marginal and unprofitable programs both by the Company and its reinsurers. 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, which accounted for 22% of total fee income for 2000 compared to 28% in 1999 and 33% in 1998, has been the most affected by the extremely soft insurance market cycle for commercial risks. The number of Corporate Risk Management accounts increased slightly in 2000 to 104 from 103 in 1999 both of which are down from 118 in 1998. Profit margins fell in 2000 to 26% from 32% in 1999 and 39% in 1998. The decline in the 2000 profit margins is primarily attributable to the overall decline in fees while the associated expenses have risen. The Company believes that profit margins will stabilize due to the continued firming of pricing, which should improve the sale of Corporate Risk Management accounts and associated fees. Strong unit sales during the last quarter of 2000 reinforced this belief. Historically, workers' compensation has been the major line of business written by the Company in both its Corporate Risk and Program Business segments. Generally, competition for workers' compensation business increased in recent years. The resulting under-pricing of workers' compensation risks by traditional insurers reduced the incentive for insureds to enter alternative market vehicles such as those offered by the Company's Corporate Risk Management segment. Beginning in early 2000, the amount of competition for workers' compensation business declined and pricing began to improve. This was due to poor reported underwriting results in the workers' compensation market. As a percentage of total fee income, workers' compensation decreased from over 80% at December 31, 1994 to 53% at December 31, 2000. This is a result of the Company writing accounts in other lines of coverage such as, accident and health, commercial, auto liability, auto physical damage and other liability coverages, as well as the expansion of the Company's Financial Services segment. Specialty Brokerage The Company's Specialty Brokerage business segment provides access to alternative risk transfer insurers and reinsurers in Bermuda, Europe and the U.S. Fees in this segment grew by 8% to $14.8 million in the year as a result of increased business placed in Bermuda and London. Profit margins decreased to 31% from 38% in 1999 due to increased operating expenses, but improved from 25% in 1998 as a result of increased revenues. Financial Services The Financial Services business segment provides administrative services primarily to offshore mutual funds and other companies. This segment also includes the Company's family of proprietary mutual funds, asset accumulation life insurance products for the high net worth market and trust and private client services. 24 Financial Services accounted for 14% of total fee income for 2000, up from 11% for 1999 and 9% in 1998. Fees from Financial Services increased primarily as a result of an increase in mutual fund assets under administration from $12.2 billion in 1998 and $21.3 billion in 1999, to $36.7 billion at December 31, 2000. Profit margins improved from 4% in 1998 to 7% in 1999 and 18% in 2000 due to these increased fees. Margins in the Financial Services segment have been adversely affected by the executive incentive plan implemented in 1998. The effect of this executive incentive plan ended on December 31, 2000. Excluding the effect of the executive incentive plan, the profit margins in this segment would have been 18%, 17% and 22% for the years ended December 31, 1998, 1999 and 2000 respectively. Underwriting Premiums earned increased 40% to $254.5 million in 2000 from $177.7 million in 1999 and $157.3 million in 1998. These increases are attributable to the shift in business from the Corporate Risk Management segment to the Program Business segment and the strong growth within this segment. Program Business usually involves higher premiums than business derived from the Corporate Risk Management segment due to new policies constantly being added by agents. Premiums earned represent the net premiums retained by the Company on which it bears underwriting risk. The Company believes that, due to the nature of the business written and the structure of its reinsurance, both the volatility of underwriting profit or loss and the probability of experiencing a severe underwriting loss are less than would ordinarily be expected for a traditional property/casualty insurer. Historically, the level of premiums earned has been closely matched by the level of total insurance costs, resulting in small amounts of underwriting loss as a percentage of premiums earned. The fact that premiums earned have historically matched total insurance costs means that even a significant fluctuation in premiums earned should have a relatively insignificant impact on the Company's net income. However, in 1999 and 2000, losses incurred under certain programs, the charge against reinsurance recoverables and the increases in net loss reserves caused underwriting losses to be higher than historical levels. In 2000, the Company established an additional provision of $69.0 million (1999--$12.3 million; 1998--Nil). This provision includes $35.0 million related to actual and anticipated losses incurred due to the failure or unwillingness of a small number of reinsurers to honor their obligations to the Company. While the Company is actively pursuing resolutions of these disputes with the reinsurers, the provision reflects what the Company believes is the likely cost of bringing such matters to a timely resolution. In order to bring these matters to resolution, the Company has included $9.0 million in the provision for estimated legal and other settlement costs. The provision also includes $18.0 million for additional terminated programs, credit exposures and the associated loss development on these programs. Finally, $7.0 million was set up for adverse net loss reserve development on prior underwriting years. The 1999 reserve amount of $12.3 million relates primarily to provisions established in the third quarter of 1999 on a number of terminated programs. Included in premiums earned are assigned risk premiums of $1.2 million in 2000 as compared to $1.8 million in 1999 and $2.5 million in 1998. The underwriting losses associated with these assigned risk premiums, together with other charges imposed by certain states on voluntary insurers such as Legion to support involuntary market losses ("residual market loads"), are passed on by Legion to clients' accounts. Other than the risks discussed above, the Company's principal exposure to underwriting loss exists in relation to the premium associated with: . the Company's retention of a portion of its main reinsurance treaty, which covers the specific and aggregate excess risk on most of the Company's Corporate Risk Management business written by Legion and some of Legion's Program Business; and . the premium associated with certain "limited risk" programs. In connection with its main reinsurance treaty participation, the Company may experience volatility in the underwriting results. The portion of the Company's premiums earned which relate to this risk was $4.1 million in 2000 as compared to $2.4 million in 1999 and $2.1 million in 1998. The Company incurred an underwriting loss of $15.2 million in 2000, $1.6 million in 1999 and $2.4 million in 1998 related to this risk. 25 For risks retained under "limited risk" programs, the Company may experience an underwriting loss, but the volatility of this business is limited in nature. The portion of the Company's premiums earned that relate to this risk was $21.0 million in 2000, as compared with $1.7 million in 1999 and nil in 1998. The Company incurred an underwriting loss as a result of this risk of $0.4 million in 2000 (1999 and 1998--nil). This increase in "limited risk" premiums is primarily a result of a restructuring of the Company's Small Business Underwriters program. Financial and Credit Risk The Company generally requires each Corporate Risk Management client to indemnify it against an underwriting loss. The client normally provides collateral for at least the difference between the funds available in that client's account and the level of expected losses as actuarially determined by the Company, although in certain circumstances the collateral level is below the level of expected losses. This is also the case for Program Business clients who participate in an IPC Program. For Program Business that does not involve an IPC Program, reinsurance protection is purchased by the Company to minimize its underwriting risk. The Company faces a credit exposure in the event that losses exceed their expected level and the client is unable or unwilling to honor its indemnity to the Company. The Company also faces credit exposure on both Program and Corporate Risk Business if its clients or brokers fail to pay the premium due, through failure of the program manager or broker to properly administer the program and through the failure of reinsurers to honor their obligations. Lastly, the Company is exposed to underwriting risk if losses incurred under programs exceed their reinsurance limits or where there is a gap in purchased reinsurance cover. In the normal course of operations, the Company establishes provisions as a result of its exposures from certain clients and programs. Depending on the nature of the exposure, these provisions generally reduce the amount of reinsurance recoverable and/or accounts receivable or increase the reserve for losses and loss expenses. On an inception-to-date basis, these provisions totaled $28.3 million at December 31, 2000, $18.0 million in 1999 and $7.3 million in 1998. The 1999 and 2000 provisions are net of a reinsurance recovery under a contingency excess of loss policy. While the Company evaluates the financial condition of its clients, brokers and reinsurers to minimize its exposure to losses from insolvencies, its exposure to such losses has increased significantly due to the following factors: . the increase in the number of accounts and their inherent growth in premium volume; . the increase in the clients' aggregate retentions since 1991; . the increase in amounts recoverable from reinsurers to $2.3 billion at December 31, 2000 from $1.7 billion at December 31, 1999 and $1.1 billion at December 31, 1998; and . competitive factors, which have limited the amount of collateral that clients are willing to provide. Investment Income Gross investment income increased by $7.2 million in 2000 to $43.4 million from $36.2 million in 1999 and $35.2 million in 1998. Net investment income, after adjusting for investment income payable to others, increased by 17% to $39.3 million in 2000 from $33.6 million in 1999 and $29.6 million in 1998. The increase in net investment income for 2000 includes $3.7 million of investment income from a special purpose entity, Endeavour Real Estate Securities Ltd ("Endeavour") recorded in the first quarter of 2000. 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. The increase in net investment income for 1999 is due, in part, to the inclusion of investment income from one of the Company's programs, accounted for as claims deposit liabilities, which added $2.8 million for the year. Net invested assets decreased slightly to 26 $503.6 million in 2000 from $527.1 million in 1999 and $439.3 million in 1998. The yield on these assets was 7.6% in 2000, up from 6.9% in 1999 and 1998. The Company's investment income is produced through the investment of its capital funds, long term debt, other funds held representing amounts due others and reserves held by the Company for unearned premiums and unpaid losses. Expenses The breakdown of expenses for each of 2000, 1999 and 1998 is set forth in Table III. Table III--Expenses
Year ended December 31, ---------------------------------------- 2000 Growth 1999 Growth 1998 -------- ------ -------- ------ -------- (In thousands) Losses incurred..................... $227,155 54% $147,705 89% $ 78,258 Acquisition costs................... 110,226 114 51,582 98 26,061 -------- -------- -------- Total insurance costs............... 337,381 69 199,287 91 104,319 Operating expenses.................. 155,453 21 128,524 26 101,687 Interest expense.................... 19,192 182 6,807 0 6,819 Other expenses...................... 4,188 55 2,701 27 2,119 -------- -------- -------- Total............................. $516,214 53% $337,319 57% $214,944 ======== ======== ========
The underwriting loss increased to $82.9 million for 2000, as compared to $17.5 million in 1999 and $2.4 million in 1998. The 2000 underwriting loss includes a provision related primarily to reinsurance recoverables in the amount of $69.0 million, pre-tax. Except for this provision, the fluctuations in total insurance costs are the direct result of fluctuations in premiums earned. This resulted in a $60.0 million increase in losses and loss expenses incurred and a $9.0 million increase in acquisition costs, offset by a $22.9 million reduction in income taxes. The 1999 amount includes a provision related to net losses incurred on a number of terminated programs of $12.3 million, pre-tax. Losses incurred also increased in 1999 and 2000 as a result of the decreased use of large deductible policies and the increase in Program Business. Acquisition costs were higher in 2000 due to legal expenses related to reinsurance disputes and increased payroll audit expenses. Operating expenses increased 26% to $128.5 million in 1999 and by 21% to $155.5 million in 2000. The primary factors responsible for the increases in operating expenses were: . the increased cost of administering the Company's highly regulated policy-issuing subsidiaries, as the volume of policies issued increased; . increased personnel costs in all areas, caused by an increase in the number of full time employees from 934 in 1998 to 1,143 in 1999 to 1,373 in 2000. Included in the 2000 increase are additional Program Operations personnel, whose duties include oversight of all managing general agents and implementing exit strategies for poorly performing programs; and . the effect of acquisitions, including Avreco, Compfirst's TPA operations, Professional Risk Management Services, Inc., expansion of captive management operations to the Cayman Islands and of Financial Services in the U.S. and Ireland. Interest expense increased by $12.4 million to $19.2 million for the year over $6.8 million in both 1999 and 1998 as a result of increased debt, higher interest rates and Endeavour interest, offset in part by a reduction in debenture interest. 27 The charges for income taxes represent effective tax rates of 11.7%, (0.7)% and 104.0% in 1998 through 2000 respectively. The reduced tax rate in 1998 and 1999 is due to increased earnings outside of the United States. The tax rate in 2000 reflects the net loss incurred during the year as a result of provisions established on reinsurance recoverables. The Legion Companies, as insurance companies in the United States, are subject to income tax on an accelerated basis and, as a result, a deferred tax benefit was carried on the Consolidated Balance Sheets of $34.5 million in 2000 and $4.2 million in 1999. Liquidity and Capital Resources Investments At December 31, 2000, the market value of the Company's total marketable investments was $573.1 million, as compared to $607.3 million at December 31, 1999. In accordance with SFAS 115, investments held as available for sale are reported at fair market value with unrealized gains and losses included as a separate component of shareholders' equity. These investments generally consist of investment grade fixed-income securities that the Company believes are readily marketable and could be liquidated to meet cash requirements, if necessary. Cash Flow In the first quarter of 2000, the Company repurchased $222.0 million face amount of its convertible exchangeable subordinated debentures due 2015 at a cost of $101.3 million. As a result, the Company incurred an extraordinary loss on the extinguishment of the debentures of $4.3 million, net of tax. The Company completed the refinancing of its former bridge loan facility in the third quarter of 2000. Amounts outstanding under the bridge loan facility were refinanced with a $180.0 million, three year syndicated bank facility and a private placement of $40.0 million of 33-month floating rate trust preferred securities, known as Rhinos, with a trust organized by Banc of America Securities LLC. The Company is required to make quarterly interest payments on the bank facility and Rhinos at contractually agreed upon rates. As mentioned previously, the Company is involved in ongoing arbitration. Some of the Company's business has been unprofitable to reinsurers and certain of these reinsurers have chosen to dispute their obligation to pay the Company. As a result, it has experienced delays in recovering reinsurance payments in its Program Business segment. At December 31, 2000, the Company was involved in five arbitration proceedings to collect disputed balances due from reinsurers. The Company had paid $56.1 million in losses and loss expenses, for which it had not been reimbursed. In addition, the Company estimates that it will ultimately pay another $83.3 million in 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 and accounted for $37.4 million of the unreimbursed paid losses and an estimated $7.0 million of the unpaid losses. The Company received a good-faith payment from the reinsurers of $12.3 million in February 2001. This dispute involves a number of syndicates at Lloyd's, 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. Two of the arbitration proceedings, involving a number of reinsurance treaties, are with U.S. life insurance companies that wrote workers' compensation reinsurance. These life insurance companies are no longer writing workers' compensation reinsurance and are believed by the Company to be disputing similar obligations to other property casualty insurers. Both of these disputes will be arbitrated in Philadelphia, Pennsylvania. The first arbitration is scheduled for April 2001 and the second for July 2001. At December 31, 2000, these disputes involved $13.6 million in paid claims and an estimated $47.6 million in unpaid claims. 28 The two remaining arbitration proceedings involve claims under individual reinsurance agreements with two reinsurers and involve $5.1 million of paid claims and an estimated $28.7 million of unpaid claims. In each of these disputes, the Company is in settlement discussions with the reinsurers and arbitration panels have 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, where 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 will be subject to arbitration. In addition, one of the Company's quota share reinsurers, representing approximately 6% of the Company's quota share reinsurance, is questioning certain ceded claims, and this dispute will also be the subject of arbitration. These disputes have adversely affected operating cash flow, however the Company still produced positive cash flow from operations of $12.9 million during 2000, as compared to $20.6 million in 1999 and $62.4 million in 1998. The inability of the Company 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. Insurance Operations At the end of 2000 and 1999, 64% and 61% respectively of the Company's total marketable investments were held by the Company's policy-issuing subsidiaries in the United States. These companies are restricted by regulation in the amount of dividends they can pay without prior regulatory approval to $46.0 million in 2001 (based on 2000 results) and will continue to face these restrictions in the future. During 2000, they paid a dividend of $8.0 million. They are also required to maintain certain deposits with, or supply letters of credit to, regulatory authorities which totaled $190.6 million at December 31, 2000 ($63.8 million of deposits and $126.8 million of letters of credit) as compared to $166.4 million at December 31, 1999 ($59.6 million of deposits and $106.8 million of letters of credit). On December 26, 2000, A. M. Best Company ("A.M. Best") lowered its financial strength rating of Legion from A to A-. This rating also applies to the five members of IPC Group. A.M. Best has expressed concerns regarding Legion's exposure to a high level of reinsurance recoverables, operational strain caused by rapid growth in program business over the past few years, the ongoing need to augment capital in support of rapid growth and reduced cash flow stemming from disputed reinsurance recoverables. These issues, combined with A.M. Best's view that the Company's financial flexibility has been reduced, resulted in this rating action. In February 2001, A.M. Best placed their rating under review with negative implications. A.M. Best has indicated that Legion requires additional capital to support its rating and that affirmation of the group's A- rating is dependent on the Company raising and contributing capital to Legion over the near term. The Company believes that a further downgrade by A.M. Best would be detrimental to ongoing business and that it would lead to a significant reduction in the amount of business that the Company would be able to write which, in turn, would reduce the amount of fee income. On March 1, 2001, Standard & Poor's Rating Services ("S&P") lowered its counter party credit and financial strength rating to A- and lowered its counter party credit and senior debt rating to BBB-. S&P also removed its CreditWatch status and gave these ratings a stable outlook. In response to the concerns of the rating agencies, the Company has engaged investment banking firms to review strategic capital raising alternatives. 29 A widely accepted factor used by regulators and rating agencies in evaluating insurance companies is the ratio of net premiums written to policyholders' surplus, which is an indication of the degree to which an insurer is leveraged. Because of the low level of net premiums written, the Company has experienced a relatively low ratio of approximately 0.6:1 in 2000, 0.6:1 in 1999 and 0.5:1 in 1998 and we expect to experience relatively low ratios in the future. Due to the nature of the Company's operations, a more appropriate indication of leverage is the ratio of gross premiums written to policyholders' surplus, which was 3.8:1 in 2000 and 3.6:1 in both 1999 and 1998. The National Association of Insurance Commissioners ("NAIC") has established that an "unusual value" for this ratio would be 9:1 or higher. The Company has adopted a policy that this ratio should not exceed 4:1. NAIC has adopted a risk-based capital ("RBC") formula to be applied to all property/casualty insurance companies. The formula measures capital and surplus needs based on an insurance company's products and investment portfolio and is to be used as a tool to identify weakly capitalized companies. An insurance company that does not meet the threshold RBC measurement standards could be required to reduce the scope of its operations and ultimately could become subject to statutory receivership proceedings. At December 31, 2000, the Company's policy-issuing subsidiaries met the RBC requirements with a combined required risk-based capital of $161.9 million and an actual adjusted capital of $374.8 million (1999--$121.0 million and $347.4 million). Shareholders' Equity Shareholders' equity decreased by 2% to $351.5 million at December 31, 2000 from $358.1 million at December 31, 1999. This decrease was attributable to the net loss in 2000 and dividends paid, less the value of shares issued on the exercise of employee stock options. During 2000, the total number of common shares outstanding increased to 41,614,649 from the 1999 level of 41,205,191, mainly as a result of the exercise of employee stock options. Total Assets Total assets increased to $4.9 billion at December 31, 2000, a 20% increase from $4.0 billion at December 31, 1999. Reinsurance recoverable grew from $1.7 billion in 1999 to $2.3 billion in 2000. This increase, which is largely offset by significant development in the reserve for losses and loss expenses, is due to the greater amount of reinsurance utilized in connection with the Company's Program Business. Assets held in separate accounts accounted for $799.8 million, or 16%, of total assets in 2000 and $693.4 million, or 17%, in 1999. As detailed in note 2A to the Consolidated Financial Statements, these assets are principally managed assets attributable to participants in the Company's IPC Programs. Inflation The Company does not believe its operations have been materially affected by inflation. The potential adverse impacts of inflation include: (a) a decline in the market value of the Company's fixed maturity investment portfolio; (b) an increase in the ultimate cost of settling claims which remain unresolved for a significant period of time; and (c) an increase in the Company's operating expenses. However, the Company generally holds its fixed-income investments to maturity and currently believes that an acceptable amount is included in the yield to compensate the Company for the risk of inflation. In addition, any increase from inflation in the ultimate cost of settling unpaid claims will be borne by the Company's clients and offset by investment income earned for the benefit of the client during the period that the claim is outstanding. Finally, the increase in operating expenses resulting from inflation should generally be matched by similar inflationary increases in the client's premium and the Company's fee income, which includes a fee based upon a percentage of the client's premium. 30 Market Sensitive Instruments Market risk generally represents the risk of loss that may result from potential changes in the value of a financial instrument due to a variety of market conditions. The Company's exposure to market risk is generally limited to potential losses arising from changes in the level or volatility of interest rates on market values of investment holdings and on a credit facility. The Company's exposure to movements in exchange rates and equity prices is limited. The Company does not hold or issue significant derivative financial instruments for trading or speculative purposes. a) Interest Rate Risk Interest rate risk results from the Company' holdings in interest-rate- sensitive instruments. The Company is exposed to potential losses arising from changes in the level or volatility of interest rates on fixed rate instruments held. The Company is also exposed to credit spread risk resulting from possible changes in the issuer's credit rating. To manage its exposure to interest rate risk, the Company attempts to select investments with characteristics that match the characteristics of the related insurance and contract holder liabilities. Additionally, the Company generally only invests in higher-grade interest bearing instruments. The Company is also exposed to interest rate risk on the $180.0 million credit facility, which bears interest at LIBOR plus 0.95%, and on the $40.0 million of floating rate trust preferred securities, on which distributions are payable at LIBOR plus 1.50%. The proceeds of the credit facility were used to refinance the $217.0 million outstanding under a bridge loan facility. b) Foreign Exchange Risk When the Company invests in non-U.S. dollar denominated financial instruments it is subject to exposure from exchange rate movements. This risk arises from the possibility that changes in foreign exchange rates will impact adversely upon the value of financial instruments. Due to the Company's limited holdings of non-U.S. dollar denominated investments, management does not believe the Company is exposed to a material risk from exchange rate movements. c) Equity Price Risk Equity price risk arises from fluctuations in the value of securities held. Changes in the level or volatility of equity prices affect the value of equity securities held by the Company. Management does not believe the Company is exposed to a material risk from changes in equity prices due to its limited investment in equity securities. 31 The tables below provide information about the Company's available for sale investments that are sensitive to changes in interest rates at December 31, 2000 and 1999, respectively. The tables present expected cash flows and related weighted-average interest rates by expected maturity dates. Separate account assets and liabilities are not included in this analysis as gains and losses related to these accounts generally accrue to the program holders. There were no material quantitative changes in market risk exposure between the current and preceding fiscal year with respect to available for sale investments. Year Ended December 31, 2000--Expected Maturity Date
Fair 2001 2002 2003 2004 2005 Thereafter Total Value ---- ----- ----- ----- ----- ---------- ------ ------ (dollars in millions, except average interest rates) Assets Investments available for sale............... $9.8 $35.0 $29.5 $22.8 $15.1 $196.2 $308.4 $304.9 Average interest rate... 5.2% 6.3% 7.0% 6.6% 6.6% 6.4%
Year Ended December 31, 1999--Expected Maturity Date
Fair 2000 2001 2002 2003 2004 Thereafter Total Value ----- ----- ----- ----- ----- ---------- ------ ------ (dollars in millions, except average interest rates) Assets Investments available for sale............... $29.3 $40.5 $50.1 $50.3 $52.3 $137.8 $360.3 $352.3 Average interest rate... 5.9% 6.6% 6.3% 6.7% 7.1% 6.4%
Acquisitions In October 2000, the Company announced the acquisition of certain entities associated with the American Psychiatric Association's professional liability program. The entities acquired include a Barbados insurance company, an onshore risk retention group and Professional Risk Management Services, Inc. ("PRMS"), a Virginia based managing general agent with special expertise in behavioral health-care liability and risk management. PRMS is responsible for the marketing, underwriting and claims administration associated with the professional liability program. Legion has been the program's primary insurance carrier since 1988 and will continue to issue coverage for the program. During the year, the Company also entered into an agreement to acquire Valmet Group Ltd. ("Valmet"). Valmet is an 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 earned revenues of approximately $13.7 million in 2000. This transaction was completed in January 2001. Recent Accounting Pronouncements In June 1998, the Financial Accounting Standards Board issued Statement 133, "Accounting for Derivative Instruments and Hedging Activities" which was amended by Statement 138 in June 2000. The Statement requires the recording of all derivative instruments as assets or liabilities, measured at fair value and is effective for fiscal years beginning after June 15, 2000. The Company has had only limited involvement with derivative financial instruments and does not use them for trading or speculative purposes. They have been used to manage interest rate risk. The Company adopted FAS 133 on January 1, 2001. The Statement has not had a material impact on its financial position or results of operations. 32 The NAIC's codification of statutory accounting practices is effective for fiscal years beginning January 1, 2001. The rules affect the recording of certain assets and liabilities for statutory purposes, and, as a result, will have an impact on statutory surplus. The Company's adoption of this practice on January 1, 2001 has not decreased its statutory surplus. 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 growth of our Program Business during 2001, the size and profitability of existing programs, pricing rates, competition and renewals of programs, our beliefs regarding profit margins in our Corporate Risk Management segment, pricing, the sale of Corporate Risk Management accounts and associated fees, our beliefs regarding the volatility of underwriting profit or loss, the probability of experiencing a severe underwriting loss and the impact of fluctuations in premiums earned on net income, the sufficiency of our loss reserves, the outcome of disputes and arbitrations and our beliefs regarding the impact of inflation. 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." ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK See Item 7. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Our consolidated financial statements for the years ended December 31, 2000, 1999 and 1998 are filed herewith in response to Item 14. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 33 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS ITEM 11. EXECUTIVE COMPENSATION ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Pursuant to General Instructions G(3) of Form 10-K, Items 10 to 13, inclusive, have not been restated or answered since we intend to file within 120 days after the close of our fiscal year with the SEC a definitive proxy statement pursuant to Regulation 14A under the Exchange Act and the information contained in the proxy is hereby incorporated by reference. The information included in the proxy statement pursuant to the requirements of Sections 402(k) and (l) of Regulation S-K is not incorporated by reference in this annual report. 34 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8K A. Exhibits
Exhibit No. Description ------- ----------- 3.1 Memorandum of Association.(1) 3.2 Bye-Laws of Registrant.(4) 3.3 Bye-Laws of IPC Mutual Holdings Ltd.(1) 4.1 Form of Stock Certificate.(1) 4.2 Indenture dated as of October 30, 1995 relating to the Company's Zero Coupon Convertible Exchangeable Subordinated Debentures due 2015.(5) 4.3 Guarantee Agreement, dated as of September 21, 2000, by and among Mutual Risk Management Ltd., Mutual Group Ltd. and The Chase Manhattan Bank, as trustee.(8) 4.4 Common Securities Guarantee Agreement, dated as of September 21, 2000, by Mutual Group Ltd. and Mutual Risk Management Ltd.(8) 4.5 Amended and Restated Trust Agreement, dated as of September 21, 2000, of MRM Capital Trust I.(8) 4.6 Senior Note Purchase Agreement, dated as of September 21, 2000, by and between Mutual Group Ltd. and MRM Capital Trust I.(8) 4.7 Purchase Agreement, dated as of September 21, 2000, by and among MRM Capital Trust I, Mutual Group Ltd., Mutual Risk Management Ltd. and Intrepid Funding Master Trust.(8) 10.1 1991 Long Term Incentive Plan.(2)(3) 10.2 Form of Director's Stock Option Grant Agreement.(2)(3) 10.3 Form of Non-Qualified Stock Option Grant Agreement.(2)(3) 10.4 Form of Shareholders Agreement relating to the IPC Program.(1) 10.5 Agreement between Mutual Risk Management (Bermuda) Ltd. and Robert A. Mulderig relating to Hemisphere Trust Company Limited.(6) 10.6 Directors Deferred Cash Compensation Plan.(3)(5) 10.7 Directors Restricted Stock Plan.(3)(5) 10.8 Deferred Compensation Plan.(7) 10.9 1998 Long Term Incentive Plan.(7) 10.10 Senior Indenture, dated as of September 21, 2000, by and among Mutual Group Ltd., Mutual Risk Management Ltd. and The Chase Manhattan Bank, as trustee.(8) 10.11 First Supplemental Indenture, dated as of September 21, 2000, by and among Mutual Group Ltd., Mutual Risk Management Ltd. and The Chase Manhattan Bank, as trustee.(8) 10.12 Remarketing and Contingent Purchase Agreement, dated as of September 21, 2000, by and among Mutual Group Ltd., Mutual Risk Management Ltd., MRM Capital Trust I and Banc of America Securities LLC.(8)
35
Exhibit No. Description ------- ----------- 10.13 Forward Underwriting Agreement, dated as of September 21, 2000, by and between Banc of America Securities LLC and Mutual Risk Management Ltd.(8) 10.14 Subscription Agreement, dated as of September 21, 2000, by and between MRM Capital Trust I and Mutual Group Ltd.(8) 10.15 Credit Agreement Dated As of September 21, 2000 among Mutual Risk Management Ltd., Mutual Group Ltd. and Lenders party thereto and Bank of America , N.A. as agent. 12.1 Computation of Ratio of Earnings to Fixed Charges. 21.1 List of subsidiaries. 23.1 Consent and Reports of Ernst & Young. 24 Powers of Attorney.
- -------- (1) Incorporated by reference to Form S-1 Registration Statement (No. 33-40152) of Mutual Risk Management Ltd. declared effective June 25, 1991. (2) Incorporated by reference to the 1991 Annual Report on Form 10-K of Mutual Risk Management Ltd. (3) This exhibit is a management contract or compensatory plan or arrangement. (4) Incorporated by reference to Form 10-Q of Mutual Risk Management Ltd. for the period ended June 30, 1996. (5) Incorporated by reference to 1995 Annual Report on Form 10-K of Mutual Risk Management Ltd. (6) Incorporated by reference to 1996 Annual Report on Form 10-K of Mutual Risk Management Ltd. (7) Incorporated by reference to 1998 Annual Report on Form 10-K of Mutual Risk Management Ltd. (8) Incorporated by reference to quarterly report on Form 10-Q for the period ended September 30, 2000 of Mutual Risk Management Ltd. B. Financial Statements and Financial Statement Schedules Independent Auditors' Report......................................... F-1 Consolidated Financial Statement..................................... F-2 Notes to Consolidated Financial Statements........................... F-6 Schedule II--Condensed Financial Information of Registrant........... S-1 Schedule VI--Supplementary Insurance Information..................... S-4
All other schedules required by Article 7 of Regulation S-X are not required under the related instructions, are inapplicable or are included elsewhere in this filing, and therefore have been omitted. C. Reports on Form 8-K The registrant filed a report on Form 8-K on February 15, 2001 concerning the Company's fourth quarter 2000 results. 36 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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, in Hamilton, Bermuda, on April 2, 2001. Mutual Risk Management ltd. /s/ Robert A. Mulderig By: _________________________________ Chairman and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signature Title Date --------- ----- ---- /s/ Robert A. Mulderig Chairman and Chief April 2, 2001 ______________________________________ Executive Officer Robert A. Mulderig /s/ John Kessock, Jr. President, Director and April 2, 2001 ______________________________________ Authorized U.S. John Kessock, Jr. Representative /s/ Richard G. Turner Executive Vice President April 2, 2001 ______________________________________ and Director Richard G. Turner /s/ Glenn R. Partridge Executive Vice President April 2, 2001 ______________________________________ and Director Glenn R. Partridge /s/ Andrew Cook Senior Vice President and April 2, 2001 ______________________________________ Chief Financial Officer Andrew Cook (Principal Financial and Accounting Officer) /s/ Roger E. Dailey Director April 2, 2001 ______________________________________ Roger E. Dailey /s/ David J. Doyle Director April 2, 2001 ______________________________________ David J. Doyle /s/ Arthur E. Engel Director April 2, 2001 ______________________________________ Arthur E. Engel
37
Signature Title Date --------- ----- ---- /s/ Allan W. Fulkerson Director April 2, 2001 ______________________________________ Allan W. Fulkerson /s/ William F. Galtney, Jr. Director April 2, 2001 ______________________________________ William F. Galtney, Jr. /s/ Jerry S. Rosenbloom Director April 2, 2001 _____________________________________ Jerry S. Rosenbloom /s/ Norman L. Rosenthal Director April 2, 2001 ______________________________________ Norman L.Rosenthal /s/ Joseph D. Sargent Director April 2, 2001 ______________________________________ Joseph D. Sargent
38 To The Board of Directors and Shareholders Mutual Risk Management Ltd. We have audited the accompanying consolidated balance sheets of Mutual Risk Management Ltd. and subsidiaries as of December 31, 2000 and 1999, and the related consolidated statements of (loss) income and comprehensive (loss) income, changes in shareholders' equity, and cash flows for each of the three years in the period ended December 31, 2000. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Mutual Risk Management Ltd. and subsidiaries at December 31, 2000 and 1999, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States. /s/ Ernst & Young Hamilton, Bermuda February 15, 2001 F-1 MUTUAL RISK MANAGEMENT LTD. CONSOLIDATED BALANCE SHEETS
At December 31, ---------------------------------- 2000 1999 ---------------- ---------------- (in thousands except share data) ASSETS Cash and cash equivalents................ $202,015 $ 155,387 Investments--Held as available for sale at fair value (Amortized cost $381,910; 1999--$466,857)......................... 371,074 451,920 Total marketable investments............. 573,089 607,307 Other investments........................ 35,201 28,426 Investment income due and accrued........ 5,948 5,173 Accounts receivable...................... 592,852 564,590 Reinsurance recoverable.................. 2,307,466 1,729,936 Deferred expenses........................ 67,461 30,406 Prepaid reinsurance premiums............. 346,223 281,078 Fixed assets............................. 34,152 28,880 Deferred tax benefit..................... 34,503 4,233 Goodwill................................. 56,219 52,924 Other assets............................. 6,758 6,831 Assets held in separate accounts......... 799,777 693,390 ---------------- ---------------- Total Assets............................. $4,859,649 $4,033,174 ================ ================ LIABILITIES & SHAREHOLDERS' EQUITY LIABILITIES Reserve for losses and loss expenses..... $2,529,183 $1,860,120 Reserve for unearned premiums............ 426,069 335,265 Pension fund reserves.................... 56,191 67,981 Claims deposit liabilities............... 25,407 27,924 Accounts payable......................... 310,590 353,966 Accrued expenses......................... 15,655 11,054 Taxes payable............................ 24,139 23,181 Loans payable............................ 220,000 117,000 Other loans payable...................... 3,595 4,049 Prepaid fees............................. 68,529 58,026 Debentures............................... 13,673 110,898 Other liabilities........................ 15,308 12,176 Liabilities related to separate accounts................................ 799,777 693,390 ---------------- ---------------- Total Liabilities........................ 4,508,116 3,675,030 ---------------- ---------------- SHAREHOLDERS' EQUITY Common Shares--Authorized 180,000,000 (par value $0.01) Issued and outstanding 41,614,649 (excluding 2,728,816 cumulative shares held in treasury) (1999--41,205,191) ..................... 416 412 Additional paid-in capital............... 117,188 110,755 Accumulated other comprehensive (loss)... (10,836) (14,937) Retained earnings........................ 244,765 261,914 Total Shareholders' Equity............... 351,533 358,144 ---------------- ---------------- Total Liabilities & Shareholders' Equity.................................. $4,859,649 $4,033,174 ================ ================
See accompanying notes to consolidated financial statements F-2 MUTUAL RISK MANAGEMENT LTD. CONSOLIDATED STATEMENTS OF (LOSS) INCOME AND COMPREHENSIVE (LOSS) INCOME
Year ended December 31, --------------------------------------- 2000 1999 1998 ----------- ----------- ----------- (In thousands except share and per share data) REVENUES Fee income.......................... $ 207,513 $ 177,711 $ 157,271 Premiums earned..................... 254,505 181,798 101,913 Net investment income............... 39,332 33,616 29,590 Realized capital (losses)........... (4,735) (5,199) (1,003) Other income (loss)................. 1,202 (300) 143 ----------- ----------- ----------- Total Revenues...................... 497,817 387,626 287,914 ----------- ----------- ----------- EXPENSES Losses and loss expenses incurred... 227,155 147,705 78,258 Acquisition costs................... 110,226 51,582 26,061 Operating expenses.................. 155,453 128,524 101,687 Interest expense.................... 19,192 6,807 6,819 Other expenses...................... 4,188 2,701 2,119 ----------- ----------- ----------- Total Expenses...................... 516,214 337,319 214,944 ----------- ----------- ----------- (LOSS) INCOME BEFORE INCOME TAXES, MINORITY INTEREST AND EXTRAORDINARY LOSS................................. (18,397) 50,307 72,970 Income Taxes........................ (19,133) (365) 8,536 ----------- ----------- ----------- INCOME BEFORE MINORITY INTEREST AND EXTRAORDINARY LOSS................... 736 50,672 64,434 Minority interest................... 509 (52) 93 ----------- ----------- ----------- INCOME BEFORE EXTRAORDINARY LOSS...... 1,245 50,620 64,527 Extraordinary loss on extinguishment of debt, net of tax.................. 6,827 182 -- ----------- ----------- ----------- NET (LOSS) INCOME..................... (5,582) 50,438 64,527 OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX Unrealized gains (losses) on investments, net of reclassification adjustment........ 4,101 (19,393) 421 ----------- ----------- ----------- COMPREHENSIVE (LOSS) INCOME........... $ (1,481) $ 31,045 $ 64,948 =========== =========== =========== EARNINGS PER COMMON SHARE Net (loss) income: Basic............................... $ (0.14) $ 1.18 $ 1.56 Diluted............................. $ (0.14) $ 1.14 $ 1.42 Dividends per Common Share.......... $ 0.28 $ 0.25 $ 0.21 =========== =========== =========== Weighted average number of Common Shares outstanding--Basic.......... 41,244,621 42,797,133 41,275,156 =========== =========== =========== Weighted average number of Common Shares outstanding--Diluted........ 41,244,621(1) 49,606,913 50,233,147 =========== =========== ===========
(1) Excludes the conversion of convertible debentures and options, which have an anti-dilutive effect. See accompanying notes to consolidated financial statements F-3 MUTUAL RISK MANAGEMENT LTD. CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Change in Common Treasury Unrealized Net Shares Dividend of Opening Shares Shares Gain (loss) Dividends Acquired Closing Balance Issued Purchased (Loss)(1) Income Declared(2) Companies(3) Balance -------- ------- --------- ---------- ------- ----------- ------------ -------- (In thousands) Year ended December 31, 2000 Common Shares........... $ 412 $ 5 $ (1) $ -- $ -- $ -- $ -- $ 416 Additional paid-in capital................ 110,755 7,819 (1,386) -- -- -- -- 117,188 Accumulated other comprehensive (loss) income................. (14,937) -- -- 4,101 -- -- -- (10,836) Retained earnings....... 261,914 -- -- (5,582) (11,567) -- 244,765 -------- ------- -------- -------- ------- -------- ------- -------- Total Shareholders' Equity at December 31, 2000................... $358,144 $ 7,824 $ (1,387) $ 4,101 $(5,582) $(11,567) $ -- $351,533 ======== ======= ======== ======== ======= ======== ======= ======== Year ended December 31, 1999 Common Shares........... $ 422 $ 16 $ (26) $ -- $ -- $ -- $ -- $ 412 Additional paid-in capital................ 114,916 25,626 (29,787) -- -- -- -- 110,755 Accumulated other comprehensive income (loss)................. 4,456 -- -- (19,393) -- -- -- (14,937) Retained earnings....... 223,372 -- -- -- 50,438 (11,005) (891) 261,914 -------- ------- -------- -------- ------- -------- ------- -------- Total Shareholders' Equity at December 31, 1999................... $343,166 $25,642 $(29,813) $(19,393) $50,438 $(11,005) $ (891) $358,144 ======== ======= ======== ======== ======= ======== ======= ======== Year ended December 31, 1998 Common Shares........... $ 399 $ 23 $ -- $ -- $ -- $ -- $ -- $ 422 Additional paid-in capital................ 89,339 25,577 -- -- -- -- -- 114,916 Accumulated other comprehensive income... 4,035 -- -- 421 -- -- -- 4,456 -------- ------- -------- -------- ------- -------- ------- -------- Retained earnings....... 169,801 -- -- -- 64,527 (8,826) (2,130) 223,372 ======== ======= ======== ======== ======= ======== ======= ======== Total Shareholders' Equity at December 31, 1998................... $263,574 $25,600 $ -- $ 421 $64,527 $ (8,826) $(2,130) $343,166 ======== ======= ======== ======== ======= ======== ======= ========
- -------- (1) Net of reclassification adjustment, net of tax (see Note 8). (2) Dividend per share amounts were $0.28, $0.25 and $0.21 for 2000, 1999 and 1998 respectively. (3) Prior to the merger, International Advisory Services paid a cash dividend of $1.51 in 1998 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 in 1998. Captive Resources, Inc. paid cash dividends of $.51 and $2.05 in 1999 and 1998 respectively 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 in 1999. See accompanying notes to consolidated financial statements F-4 MUTUAL RISK MANAGEMENT LTD. CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 31, ------------------------------- 2000 1999 1998 --------- --------- --------- (In thousands) NET CASH FLOWS FROM OPERATING ACTIVITIES Net (loss) income............................. $ (5,582) $ 50,438 $ 64,527 --------- --------- --------- Items not affecting cash: Depreciation................................ 11,900 8,306 6,021 Amortization of investments................. (752) (1,344) (1,907) Net loss on sale of investments............. 4,991 5,587 1,498 Other investment gains...................... -- (361) (599) Amortization of convertible debentures...... 1,396 5,997 6,605 Deferred tax benefit........................ (30,270) (1,004) 3,194 Extraordinary loss on extinguishment of debt....................................... 6,827 182 -- Other items................................. (2,535) 2,072 1,570 Net changes in non-cash balances relating to operations: Accounts receivable......................... (28,262) (210,721) (166,668) Reinsurance recoverable..................... (577,531) (650,373) (448,866) Investment income due and accrued........... (775) 79 (1,452) Deferred expenses........................... (37,055) (3,191) 2,777 Prepaid reinsurance premiums................ (65,145) (74,591) (50,469) Other assets................................ 72 (1,215) 2,050 Reserve for losses and loss expenses........ 669,062 669,694 473,965 Prepaid fees................................ 10,504 10,900 6,414 Reserve for unearned premiums............... 90,804 93,372 53,504 Accounts payable............................ (43,375) 110,548 102,331 Taxes payable............................... 957 8,331 (161) Accrued expenses............................ 4,601 (998) 3,896 Other liabilities........................... 3,104 (1,074) 4,121 --------- --------- --------- NET CASH FROM OPERATING ACTIVITIES............ 12,936 20,634 62,351 --------- --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from sale of investments--Available for sale................................... 369,584 85,312 145,745 Proceeds from maturity of investments-- Available for sale......................... 32,463 53,183 57,175 Fixed assets purchased...................... (17,345) (17,732) (9,890) Investments purchased--Available for sale... (321,338) (153,949) (268,868) Acquisitions and other investments.......... (11,905) (10,130) (28,886) Proceeds from sale of other investments..... -- 577 2,929 Other items................................. 420 104 9 --------- --------- --------- NET CASH FROM (APPLIED TO) INVESTING ACTIVITIES................................... 51,879 (42,635) (101,786) --------- --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES Loan repayment and interest received........ (117,453) -- 389 Proceeds from loans payable................. 220,000 117,000 -- Other loans received........................ -- 511 1,379 Extinguishment of convertible debentures.... (101,325) (6,163) -- Proceeds from shares issued................. 7,824 11,209 8,055 Purchase of treasury shares................. (1,387) (29,813) -- Claims deposit liabilities.................. (2,517) (9,524) (4,997) Pension fund reserves....................... (11,790) (11,773) 79,753 Dividends paid.............................. (11,539) (11,482) (10,427) --------- --------- --------- NET CASH (APPLIED TO) FROM FINANCING ACTIVITIES................................... (18,187) 59,965 74,152 --------- --------- --------- Net increase in cash and cash equivalents..... 46,628 37,964 34,717 Cash and cash equivalents at beginning of year......................................... 155,387 117,423 82,706 --------- --------- --------- Cash and cash equivalents at end of year...... $ 202,015 $ 155,387 $ 117,423 ========= ========= ========= Supplemental cash flow information: Interest paid................................. $ 17,796 $ 810 $ 214 Income taxes paid, net........................ $ 8,597 $ 3,217 $ 5,622
See accompanying notes to consolidated financial statements F-5 MUTUAL RISK MANAGEMENT LTD. NOTES TO CONOSOLIDATED FINANCIAL STATEMENTS--DECEMBER 31, 2000 1. GENERAL Mutual Risk Management Ltd. (the "Company") was incorporated under the laws of Bermuda in 1977. The Company is a holding company engaged, through its subsidiaries, in providing risk management and financial services in the United States, Bermuda, Barbados, the Cayman Islands and Europe. The "IPC Companies" offer the IPC Program, an alternative risk facility for insureds. The Company also provides administrative, accounting and reinsurance services for unaffiliated captive insurers. Legion Insurance Company, a Pennsylvania insurance company, Legion Indemnity Company, an Illinois excess and surplus lines insurance company and Villanova Insurance Company, a Massachusetts insurance company (together "Legion" or the "Legion Companies") act as policy- issuing companies on many of the IPC Programs reinsuring a portion of the liability and premium to one of the IPC Companies. MRM Financial Services Ltd. provides financial services to offshore mutual funds and other companies. Other subsidiaries provide specialty brokerage, proprietary loss control services and underwriting management. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES These Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") and are presented in United States Dollars. A. Consolidation (i) General The Consolidated Financial Statements include the accounts of the Company and all of its subsidiaries. All significant intercompany transactions and balances have been eliminated on consolidation. All of the voting common shares of the IPC companies are owned by wholly owned subsidiaries of the Company. All of the earnings, assets and liabilities of the IPC companies attributable to the common shareholders are consolidated on a line by line basis. All of the non-voting preferred shares of the IPC companies are owned by program holders (see note 2A(ii)). Management is required to make estimates that affect the amounts reported in the Consolidated Financial Statements and accompanying notes. Actual results may differ from those estimates. (ii) Assets Held in and Liabilities Related to Separate Accounts A substantial majority of the assets and liabilities of the IPC Companies represents assets under management and related liabilities of the IPC Programs. The program holders, through their ownership of preferred shares in the IPC Companies, enter into a Preferred Shareholder Agreement. The preferred shares are redeemable after five years. The Preferred Shareholder Agreements provide for the payment of dividends to the preferred shareholders based on premiums earned, investment income, expenses paid and losses and loss expenses incurred in each separate account. The final dividend on a program is determined when all incurred losses in all underwriting years of a program are ultimately paid; the preferred shareholder may not terminate its indemnity obligation under the Preferred Shareholder Agreement before this time. Under the Preferred Shareholder Agreement the program holder assumes investment and underwriting risk and the IPC Company receives an administrative fee for managing the program. Accordingly, the Company treats the premium written in connection with these programs, whether written directly or assumed as reinsurance, as premiums ceded to the separate accounts of the IPC Companies and does not include such amounts in the Company's premiums earned on the ConsolidatedStatement of (Loss) Income and Comprehensive (Loss) Income. This premium ceded amounted to $346.8 million in 2000 (1999--$257.8 million; 1998--$251.4 million) of which over 80% in each year relates to workers' compensation risks. The assets and liabilities of the IPC Companies relating to the preferred shareholders interest are included with "Assets held in and Liabilities related to separate accounts" on the Consolidated Balance Sheets. Included in these assets are cash and marketable investments of $335.4 million at December 31, 2000 (1999--$340.1 million) and other assets of $261.4 million (1999--$220.0 million). F-6 MUTUAL RISK MANAGEMENT LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) B. Investments Investments are comprised of bonds, redeemable preferred shares and mutual funds. All investments are classified as available f or sale in accordance with SFAS 115 and are reported at fair market value with unrealized gains and losses, net of tax, included in accumulated other comprehensive income in shareholders' equity. Realized gains and losses on the sale of investments are recognized in net (loss) income using the specific identification basis for bonds and the average cost method for mutual funds. Investments which incur a decline in value, which is other than temporary, are written down to fair value as a new cost basis with the amount of the write down included in net (loss) income. Investment income is ac crued as earned and includes amortization of market premium and discounts for bonds. C. Revenue Recognition (i) Policy issuing fees earned are recorded as the premium is written and earned over the applicable policy period. The unearned portion is included in prepaid fees on the Consolidated Balance Sheets. (ii) Underwriting fees of the IPC Companies are earned over the applicable policy period. The unearned portion of such fees is included in prepaid fees on the Consolidated Balance Sheets. (iii) Investment fees earned by the IPC Companies are accrued on a daily basis. (iv) Commissions and brokerage fees are recorded and earned when the business is placed with the reinsurance carrier, at which time substantially all of the services have been performed. (v) Premiums written and assumed are recorded on an accrual basis. Premiums earned are calculated on a pro-rata basis over the terms of the applicable underlying insurance policies with the unearned portion deferred on the Consolidated Balance Sheets as reserv e for unearned premiums. Reinsurance premiums ceded are similarly pro-rated with the prepaid portion recorded as an asset in the Consolidated Balance Sheets. Premiums written which are related to the separate accounts of the IPC Companies are included in premiums ceded (see Note 2A(ii)). (vi) Net investment income is included after deducting various items as detailed in Note 5C. D. Losses and Loss Expenses Incurred Losses and related loss adjustment expenses are charged to income as they are incurred and are net of losses recovered and recoverable of $1,175.9 million in 2000 (1999--$1,185.7 million; 1998--$657.8 million). Amounts recoverable from reinsurers are estimated in a manner consistent with the claim liability associated with the reinsured policy. Included in loss reserves are gross loss reserves of $169.6 million and $136.0 million at December 31, 2000 and 1999 which have been discounted by $58.1 million and $39.5 million respectively, assuming interest rates of approximately 6% for medical malpractice reserves and 4% for specific an d aggregate workers' compensation reserves. These reserves are also discounted for regulatory filings. After reinsurance, the net effect of this discounting was to increase net income by $0.2 million and $0.9 million in 2000 and 1998 and decrease net income by $0.8 million in 1999. Discounting also reduced net loss reserves by $4.0 million and $3.8 million at December 31, 2000 and 1999 respectively. Reserves are established for losses and loss adjustment expenses relating to claims which have been reported on the basis of evaluations of independent claims adjusters under the supervision of the Company's claims staff. In addition, reserves are established, in consultation with the Company's independent actuaries, for losses which have occurred but have not yet been reported to the Company and for adverse development of reserves on reported losses. Reinsurance recoverable is shown separately on the Consolidated Balance Sheets. F-7 MUTUAL RISK MANAGEMENT LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Management believes that the resulting estimate of the liability for losses and loss adjustment expenses at December 31, 2000 and 1999 is adequate to cover the ultimate net cost of losses and loss expenses incurred, however such liability is necessarily an estimate and no representation can be made that the ultimate liability will not exceed such estimate. E. Claims Deposit Liabilities The Company records certain programs that do not meet the conditions for reinsurance accounting as claims deposit liabilities on the Consolidated Balance Sheets in accordance with Statement Of Position 98-7, "Deposit Accounting; Accounting for Insurance and Reinsurance Contracts That Do Not Transfer Insurance Risk". F. Income Taxes The Company records its income tax liability and deferred tax asset in accordance with SFAS 109. In accordance with this statement, the Company records deferred income taxes which reflect the net tax effect of the temporary difference between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. G. Depreciation and Amortization Depreciation of furniture and equipment is provided on a straight-line basis over their estimated useful lives ranging from 2 to 10 years. Amortization of leasehold improvements is computed on a straight-line basis over the terms of the leases. Accumulated depreciation at December 31, 2000 amounted to $40.5 million (1999--$29.0 million). Goodwill related to the acquisition of subsidiaries is amortized on a straight-line basis over 20 to 40 years, is evaluated periodically for any impairment in value and is included in other expenses on the Consolidated Statements of (Loss) Income and Comprehensive (Loss) Income. Accumulated amortization at December 31, 2000 amounted to $10.6 million (1999--$7.6 million). H. Deferred Expenses Deferred expenses which consist primarily of policy acquisition costs are deferred and charged to income on a pro-rata basis over the periods of the related policies. I. Earnings per Common Share Basic earnings per share is based on weighted average common shares and excludes any dilutive effects of stock options and conv ertible securities. Diluted earnings per share assumes the conversion of dilutive convertible securities and the exercise of all dilutive stock options (see Note 13). J. Cash and Cash Equivalents Cash and cash equivalents include cash on hand, money market instruments and other debt issues purchased with an original maturity of ninety days or less. K. Zero Coupon Convertible Exchangeable Subordinated Debentures The Debentures are recorded at original issue price plus accrued original issue discount. The current amortization of the original issue discount is included in interest expense on the Consolidated Statements of (Loss) Income and Comprehensive (Loss) Income. F-8 MUTUAL RISK MANAGEMENT LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) L. Stock-Based Compensation The Company applies APB Opinion 25 and related interpretations in accounting for its stock option plans and accordingly, does not recognize compensation cost as all options are issued with an exercise price equal to the market price of the stock on the date of issue. Note 12 contains a summary of the pro-forma effects to reported net (loss) income and earnings per share for 2000, 1999 and 1998 had the Company elected to recognize compensation cost based on the fair value of the options granted at grant date as prescribed by SFAS 123. M. Pension Fund Reserves Pension fund reserves represent receipts from the issuance of pension investment contracts . Such receipts are considered deposits on investment contracts that do not have mortality or morbidity risk. Account balances in the accumulation phase are increased by deposits received and interest credited and are reduced by withdrawals and administrative charges. Calculations of contract holder accou nt balances for investment contracts reflect interest crediting rates ranging from 2.25% to 7.0% at December 31, 2000 (1999--2.75% to 7.25%), based on contract provisions, the Company's experience and industry standards. At December 31, 2000 the amount of pension fund reserves related to products in the accumulation phase was $50.5 million (1999--$62.5 million). Upon retirement, individuals can convert their accumulated pension fund account balances into a benefit stream by purchasing a payout annuity from the Company. Single premium life reserves are established for the payout annuities in amounts adequate to meet the estimated future obligations of the policies in force. The calculation of these reserves involves the use of estimates concerning such factors as mortality rates, interest rates averaging 5.75% at December 31, 2000 (1999--5.82%), and future expense levels applicable to the individual policies. Mortality assumptions are based on various actuarial tables. These assumptions consider Company experience and industry standards. To recognize the uncertainty in the reserve calculation, the reserves include reasonable provisions for adverse deviations from those estimates. At December 31, 2000 the amount of pension fund reserves related to payout annuities was $5.7 million (1999--$5.4 million). 3. REINSURANCE AND CLIENT INDEMNIFICATION A. Reinsurance contracts do not relieve the Company from its obligations to policyholders. Failure of reinsurers to honor their obligations could result in losses to the Company and allowances are established for amounts deemed uncollectible. The Company evaluates the financial condition of its reinsurers to minimize its exposure to losses from reinsurer insolvencies. B. At December 31, 2000, losses recoverable and prepaid reinsurance of $2,653.7 million (1999--$2,011.0 million) had been ceded to reinsurers other than the IPC Companies, $1,942.6 million of this amount (1999--$1,663.2 million) has been ceded to reinsurers licensed in the United States which are not required to provide letters of credit or other collateral to secure their obligation. One such U.S. reinsurer accounted for $271.3 million (1999--$207.6 million). The remaining $711.1 million of reinsurance ceded (1999--$347.8 million) was ceded to reinsurers not licensed in the United States, including $23.0 million ceded to companies managed by the Company (1999--$25.2 million). These non-U.S. reinsurers have provided collateral security to the Company in the form of letters of credit and cash at December 31, 2000 of $104.3 million (1999--$114.0 million). Letters of credit held by the Company are issued by and/or confirmed by member banks of the U.S. Federal Reserve. The Company regularly reviews the credit exposure which it has to each bank, together with the bank's financial position and requires replacement of the collateral security in cases where the exposure to the bank exceeds acceptable levels. The Company's largest exposure to an individual bank amounted to $18. 8 million at December 31, 2000 (1999-- $20.1 million). The IPC Companies F-9 MUTUAL RISK MANAGEMENT LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) have a $350 million (1999--$350 million) Letter of Credit facility pursuant to which letters of credit are issued on their behalf to the Legion Companies and certain other US insurance companies. This facility is fully collateralized by incoming letters of credit and funds on deposit. The facility is guaranteed by the Company. At December 31, 2000 a reserve for uncollectible reinsurance of $0.8 million (1999--$0.2 million) was outstanding. C. The Company's reserve for unearned premiums and reserve for losses and loss expenses exclude reserves related to premiums ceded to the IPC Companies, where the program holders assume the underwriting risk relating to such premium (see Note 2A(ii)). These reserves are included in liabilities related to separate accounts and amounted to $556.6 million at December 31, 2000 (1999--$495.1 million). Clients of the Company's IPC Program generally agree, as part of a Shareholder Agreement, to indemnify the Company against certain underwriting losses on the IPC Program. Clients generally provide letters of credit or cash deposits as collateral for this indemnification, either in the full amount of the potential net loss or to the level of expected losses as projected by the Company. These contractual indemnifications from clients, whether fully or partially secured, amounted to approximately $118.5 million at December 31, 2000 (1999--$104.7 million) of which $57.5 million (1999--$51.5 million) is uncollateralized. The uncollateralized amounts will vary based on the underwriting results of the IPC Programs. Management reviews its collateral security position at the inception and renewal of each IPC Program in order to minimize the risk of loss. In order for the Company to sustain a loss on the portion of such indemnity agreement secured by a letter of credit, the Company would have to be unable to collect from both the client and the bank issuing the letter of credit. The Company has a credit exposure in the event that losses exceed their expected level and the client is unable or unwilling to honor its indemnity to the Company or fails to pay the premium due. For these reasons the Company has established provisions for losses o n certain of these programs. These provisions are net of a reinsurance recovery of $27.0 million under a contingency excess of loss policy at December 31, 2000 (1999-- $14.7 million). These provisions, which total $81.1 million at December 31, 2000 (1999--$18.0 million), reduced the level of risk management fees by $7.0, $3.1 million and $0.9 million for the years ending December 31, 2000, 1999 and 1998 respectively. These provisions also adversely impacted the underwriting results for 2000 by $74.1 million (1999--$7.6 million; 1999--$0.8 million). At December 31, 2000, the Company was involved in arbitration proceedings for the payment of reinsurance recoverables from reinsurers who have withheld payments due to the Company totaling $56.1 million as well as an estimated $83.3 million of reserves. The amounts due to the Company relate primarily to reinsurance on workers' compensation and accident and health coverage. While such reinsurance recoverable amounts are material to the Company's results of operations and financial position, company management believes it will ultimately prevail in such arbitrations and any related actions that may arise. During February 2001, the Company received a payment on one of these disputes of $12.3 million. The Company is involved in other legal actions, arbitrations and contingencies occurring in the normal course of business. In the opinion of management, the outcome of these matters is not expected to have a material adverse effect on the results of operations or financial position of the Company. F-10 MUTUAL RISK MANAGEMENT LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) D. Premiums earned are the result of the following:
Year ended December 31, -------------------------------------------------------------------- 2000 1999 1998 ---------------------- ---------------------- -------------------- Premiums Premiums Premiums ---------------------- ---------------------- -------------------- Written Earned Written Earned Written Earned ---------- ---------- ---------- ---------- --------- --------- (In thousands) Direct.................. $1,388,836 $1,291,110 $1,129,935 $1,018,761 $ 790,776 $ 753,463 Assumed................. 18,629 33,156 64,099 54,724 59,657 48,291 Ceded to IPC Companies(1)........... (346,792) (377,346) (257,848) (233,953) (251,443) (248,335) Ceded to third parties.. (780,516) (692,415) (735,669) (657,734) (494,042) (451,506) ---------- ---------- ---------- ---------- --------- --------- Net Premiums............ $ 280,157 $ 254,505 $ 200,517 $ 181,798 $ 104,948 $ 101,913 ========== ========== ========== ========== ========= =========
- -------- (1) See Note 2A (ii) 4. RESERVE FOR LOSSES AND LOSS EXPENSES The following table sets forth a reconciliation of beginning and ending reserves for losses and loss expenses
Year ended December 31, ---------------------------------- 2000 1999 1998 ---------- ---------- ---------- (In thousands) Gross reserves for losses and loss expenses, beginning of year.............. $1,860,120 $1,190,426 $ 716,461 Recoverable from reinsurers............... 1,729,936 1,079,563 630,697 ---------- ---------- ---------- Net reserves for losses and loss expenses, beginning of year........................ 130,184 110,863 85,764 ========== ========== ========== Provision for losses and loss expenses for claims occurring in: Current year............................ 157,813 140,574 74,476 Prior years(1).......................... 69,342 7,131 3,782 ---------- ---------- ---------- Total losses and loss expenses incurred............................. 227,155 147,705 78,258 ========== ========== ========== Payments for losses and loss expenses for claims occurring in: Current year............................ (29,197) (61,697) (15,039) Prior years............................. (106,425) (66,687) (38,120) ---------- ---------- ---------- Total payments........................ (135,622) (128,384) (53,159) ========== ========== ========== Net reserves for losses and loss expenses, end of year.............................. 221,717 130,184 110,863 Recoverable from reinsurers............... 2,307,466 1,729,936 1,079,563 ---------- ---------- ---------- Gross reserves for losses and loss expenses, end of year.................... $2,529,183 $1,860,120 $1,190,426 ========== ========== ==========
- -------- (1) The increase in the provision for losses and loss expenses for claims occurring in prior years relates primarily to the charge taken in the fourth quarter of 2000 to increase the company's existing provision relating to reinsurance recoverables and a strengthening of net loss reserves. F-11 MUTUAL RISK MANAGEMENT LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 5. INVESTMENTS A. Cash and cash equivalents include amounts invested in commercial paper and discount notes at December 31, 2000 of $Nil (1999--$64.8 million). Substantially all of the remaining amount is invested in money market or interest-bearing bank accounts. B. (i) All investments are held as available for sale. The amortized cost and fair market values are as follows:
Fair Amortized Unrealized Unrealized Market Cost Gain Loss Value --------- ---------- ---------- -------- (In thousands) At December 31, 2000 - -------------------- U.S. Treasury securities and obligations of U.S. government corporations and agencies............ $180,051 $1,947 $ 6,126 $175,872 Corporate debt securities............. 131,180 667 3,968 127,879 Total bonds........................... 311,231 2,614 10,094 303,751 Redeemable preferred shares........... 1,268 -- 159 1,109 312,499 2,614 10,253 304,860 Mutual funds(1)....................... 69,411 2,074 5,271 66,214 -------- ------ ------- -------- Total investments..................... $381,910 $4,688 $15,524 $371,074 ======== ====== ======= ======== At December 31, 1999 - -------------------- U.S. Treasury securities and obligations of U.S. government corporations and agencies............ $180,747 $ 274 $ 3,532 $177,489 Corporate debt securities............. 182,827 102 9,846 173,083 Total bonds........................... 363,574 376 13,378 350,572 Redeemable preferred shares........... 2,068 -- 377 1,691 365,642 376 13,755 352,263 Mutual funds(1) ...................... 101,215 1,814 3,372 99,657 -------- ------ ------- -------- Total investments..................... $466,857 $2,190 $17,127 $451,920 ======== ====== ======= ========
- -------- (1) The Company invests in mutual funds with fair market values of $45.5 million (1999--$87 million) which are administered by MRM Financial Services Ltd., a wholly-owned subsidiary of the Company. The Company does not have any investment in a single corporate security which exceeds 1.6% of total bonds at December 31, 2000 (1999--1.4%). F-12 MUTUAL RISK MANAGEMENT LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The following unrealized gains and losses on available for sale investments have been recorded in Accumulated other comprehensive income in Shareholders' equity:
Gross Unrealized Net Unrealized Gains (Losses) Tax Gains (Losses) ---------------- ------- -------------- (In thousands) January 1, 1998..................... $ 5,851 $(1,816) $ 4,035 Movement............................ 935 (514) 421 December 31, 1998................... 6,786 (2,330) 4,456 Movement............................ (21,723) 2,330 (19,393) December 31, 1999................... (14,937) -- (14,937) Movement............................ 4,101 -- 4,101 -------- ------- -------- December 31, 2000................... $(10,836) $ -- $(10,836) ======== ======= ========
The following table sets forth certain information regarding the investment ratings of the Company's bond and redeemable preferred share portfolio:
December 31, 2000 December 31, 1999 -------------------- -------------------- Amortized Amortized Cost Percentage Cost Percentage --------- ---------- --------- ---------- (In thousands) Ratings(1) AAA................................ $139,685 44.70% $173,132 47.35% AA................................. 47,993 15.36% 46,252 12.65% A.................................. 85,715 27.43% 111,550 30.51% BBB................................ 26,243 8.40% 25,164 6.88% BB................................. 6,697 2.14% 9,544 2.61% B.................................. 6,166 1.97% -- -- -------- ------ -------- ------ Total.............................. $312,499 100.00% $365,642 100.00% ======== ====== ======== ======
- -------- (1) Ratings as assigned by Standard & Poor's Corporation The maturity distribution of investments in bonds and redeemable preferred shares is as follows:
December 31, 2000 December 31, 1999 ------------------ ------------------ Fair Fair Amortized Market Amortized Market Cost Value Cost Value --------- -------- --------- -------- (In thousands) Due in one year or less............... $ 13,562 $ 13,492 $ 27,139 $ 26,996 Due in one year through five years.... 116,316 116,460 111,017 109,728 Due in five years through ten years... 103,671 97,948 82,191 77,758 Due after ten years................... 78,950 76,960 145,295 137,781 -------- -------- -------- -------- Total................................. $312,499 $304,860 $365,642 $352,263 ======== ======== ======== ========
F-13 MUTUAL RISK MANAGEMENT LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (ii) Realized gains and losses:
Year ended December 31, --------------------------- 2000 1999 1998 -------- ------- -------- (In thousands) Proceeds from sale of investments held as available for sale.............................. $369,584 $85,312 $145,745 Realized gains on investments--held as available for sale........................................ 393 $ 932 $ 1,703 Realized losses on investments--held as available for sale........................................ (5,384) (6,519) (3,201) Net realized losses.............................. (4,991) (5,587) (1,498) Other gains...................................... 256 388 495 -------- ------- -------- Realized capital losses.......................... $(4,735) $(5,199) $ (1,003) ======== ======= ========
C. Details of investment income by major categories are presented below:
Year ended December 31, ------------------------- 2000 1999 1998 ------- ------- ------- (In thousands) Cash and cash equivalents............................ $7,500 $ 5,622 $ 6,054 Mutual funds......................................... 13,024 9,872 9,214 Preferred stocks..................................... 461 172 79 Bonds................................................ 22,427 20,502 19,866 Gross investment income.............................. 43,412 36,168 35,213 Claims deposit liabilities, net...................... (2,555) (1,552) (4,314) Contract expenses.................................... (468) (380) (728) Investment expenses.................................. (1,057) (620) (581) ------- ------- ------- Net investment income................................ $39,332 $33,616 $29,590 ======= ======= =======
D. Legion is required by certain states in which it operates to maintain special deposits or provide letters of credit. This obligation amounted to $190.6 million at December 31, 2000 (1999--$166.4 million) and included deposits of $63.8 million (1999--$59.6 million) and letters of credit of $126.8 million (1999--$106.8 million). 6. LOANS PAYABLE During September 2000, as part of its overall refinancing, the Company entered into two separate agreements that together provided $220 million of total financing. The first agreement is a $180 million revolving credit facility with a syndicate of commercial banks (the "credit facility"). The second agreement is a private placement of $40 million of Auction Rate Reset Preferred Securities (the "Rhino Preferred Securities"). The proceeds of these agreements were used to retire $217 million of outstanding indebtedness under the bridging loan agreement (the "bridging loan") the Company had in place with various financial institutions resulting in an extraordinary loss of $2.5 million, net of tax. Credit Facility and Bridging Loan The principal is repayable in full on September 21, 2003. Interest rates on the credit facility are based on LIBOR plus 95 basis points. The credit facility agreement contains certain financial covenants, including the requirement that the Company's total consolidated indebtedness to total capital ratio shall not exceed 0.45:1 during the first 18 months of the facility and 0.40:1 thereafter. Shareholders' equity, as calculated in F-14 MUTUAL RISK MANAGEMENT LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) accordance with U.S. GAAP shall be greater than the sum of $325 million plus 50% of cumulative positive net income post June 30, 2000. For these purposes, shareholders' equity excludes any unrealized gains or losses on the Company's investment portfolio. Prior to the refinancing, the Company had in place $217 million of outstanding indebtedness under the bridging loan with various financial institutions. Interest rates on the bridging loan were based on LIBOR plus 75 basis points. At December 31, 2000 the Company had $180 million outstanding under the credit facility. The Company was in compliance with all the covenants of the credit facility as at December 31, 2000. Interest payments on the credit facility and the bridging loan totaled $14.1 million for the year ending December 31, 2000. The repayment of the credit facility has been guaranteed by the Company and Mutual Group Ltd., a U.S. subsidiary of the Company. Rhino Preferred Securities During September 2000, MRM Capital Trust I, a Delaware statutory business trust (the "Trust"), sold in a private placement $ 40 million of Rhino Preferred Securities. All of the common securities of the Trust are owned by Mutual Group Ltd. The Rhino Preferred Securities mature on September 21, 2003. Distributions on the Rhino Preferred Securities are payable quarterly at LIBOR plus 150 basis points, adjusted quarterly. If the trading price of Mutual Risk Management's Common Shares declines to 65 percent of the closing price of the Common Shares on September 21, 2000, or $13.50 per Common Share, the holders of a majority of the Rhino Preferred Securities will have the option to require Banc of America Securities LLC, as the Remarketing Agent, to remarket the Rhino Preferred Securities. If remarketed, the maturity of the remarketed securities will be reset as the later of September 21, 2002, or one year from the date on which the remarketed securities are issued. The coupon will be reset pursuant to a bid process to value the remarketed securities at 100.25 percent of the face amount thereof. If Banc of America Securities LLC were unable to remarket the securities, the holders of a majority of the Rhino Preferred Securities would have the right to require Mutual Group Ltd. to re purchase them at a purchase price equal to the face amount of the securities plus accrued and unpaid distributions. These obligations are guaranteed by the Company. The Company's common shares have traded below the trigger price described above during and after the year ended December 31, 2000, although the holders of the Rhino Preferred Securities did not exercise their remarketing rights at that time. The sole assets of the Trust consist of $41.24 million principal amount of Auction Rate Reset Senior Notes Series A (the "Senior Notes") issued by Mutual Group Ltd. The Senior Notes mature on September 21, 2003. Interest on the Senior Notes is payable quarterly at LIBOR plus 150 basis points. If under certain circumstances the Trust is dissolved and the holders of the Rhino Preferred Securities directly hold the Senior Notes, then the remarketing provisions described above will be applicable to the Senior Notes. In connection with the issuance of the Rhino Preferred Securities, the Company has agreed with Banc of America Securities LLC to use its reasonable best efforts to complete one or more firm commitment underwritings with an aggregate public offering price of $40 million on or before June 21, 2003. The Company has agreed to commence the necessary action to file and maintain an effective shelf registration statement with availability for the issuance of up to $40 million of Common Shares. F-15 MUTUAL RISK MANAGEMENT LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 7. ZERO COUPON CONVERTIBLE EXCHANGEABLE SUBORDINATED DEBENTURES On October 30, 1995, the Company issued $324.3 million principal amount of Zero Coupon Convertible Exchangeable Subordinated Debentures ("Debentures") with an aggregate issue price of $115.0 million. The issue price of each debenture was $354.71 and there will be no periodic payments of interest. The Debentures will mature on October 30, 2015 at $1,000 per Debenture representing a yield to maturity of 5.25% (computed on a semi-annual bond equivalent basis). The Debentures are subordinated to all existing and future senior indebtedness of the Company. Each Debenture is convertible at the option of the holder at any time on or prior to maturity, unless previously redeemed or otherwise purchased by the Company, into Common Shares of the Company at a conversion rate of 21.52 shares per Debenture or an aggregate of 6,978,800 Common Shares. The Debentures may be purchased by the Company, at the option of the holder, as of October 30, 2005 and October 30, 2010, at the issue price plus accrued original issue discount. The Company, at its option may elect to pay such purchase price on any particular purchase date in cash or Common Shares, or any combination thereof. Each Debenture is redeemable in cash at the option of the Company for an amount equal to the issue price plus accrued original issue discount. The Company will have the right, under certain circumstances, to require the holders to exchange the Debentures for Guaranteed Zero Coupon Exchangeable Subordinated Debentures due 2015 of Mutual Group Ltd. (the "Exchangeable Debentures"), to be guaranteed on a subordinated basis by the Company. The Exchangeable Debentures will be exchangeable for the Company's Common Shares and will otherwise have terms and conditions substantially identical to the Debentures. During the year, no Debentures were converted into Common Shares. In 1999, Debentures representing a principal amount of $34.2 million were converted into 736,606 Common Shares. During the year, Debentures representing a principal amount of $222 million (1999--$14 million) were repurchased in the open market for $101.3 million (1999--$6.3 million), resulting in an extraordinary loss of $4.3 million (1999--$0.2 million), net of tax. 8. COMPREHENSIVE (LOSS) INCOME SFAS 130 requires unrealized gains or losses on the Company's available for sale investments to be included in other comprehensive (loss) income.
Before Tax Net of Tax Amount Tax Amount ---------- ----- ---------- (In thousands) Year ended December 31, 2000 Net unrealized gains on available for sale investments arising during the year............. $ (890) $ 818 $ 72 ------ ----- ------- Less: reclassification adjustment for losses realized in net income.......................... 4,991 (818) 4,173 ------ ----- ------- Other comprehensive income....................... $4,101 $ -- $ 4,101 ====== ===== =======
Amount Tax Amount --------- ------- --------- (In thousands) Year ended December 31, 1999 Net unrealized (losses) gains on available for sale investments arising during the year...... $ (27,310) $ 2,702 $ (24,608) --------- ------- --------- Less: reclassification adjustment for losses realized in net income........................ 5,587 (372) 5,215 --------- ------- --------- Other comprehensive (loss) income.............. $ (21,723) $ 2,330 $ (19,393) ========= ======= =========
F-16 MUTUAL RISK MANAGEMENT LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 9. FAIR VALUE OF FINANCIAL INSTRUMENTS
December 31, 2000 December 31, 1999 ------------------- ------------------- Carrying Fair Carrying Fair Amount Value Amount Value --------- --------- --------- --------- (In thousands) Investments............................ $ 371,074 $ 371,074 $ 451,920 $ 451,920 Other investments...................... $ 35,201 $ 35,201 $ 28,426 $ 28,426 Claims deposit liabilities............. $ 25,407 $ 23,297 $ 27,924 $ 23,850 Debentures............................. $ 13,673 $ 13,418 $ 110,898 $ 115,001 Loans payable.......................... $ 220,000 $ 220,000 $ 117,000 $ 117,000
The following methods and assumptions were used to estimate the fair value of specific classes of financial instruments. The carrying values of all other financial instruments, as defined by SFAS 107, approximate their fair values due to their short term nature. Investments: The fair market value of investments is calculated using quoted market prices. Other Investments: Other investments consist primarily of privately held companies that do not have readily ascertainable market values. These investments are initially recorded at cost and are revalued based principally on substantive events or factors which could indicate a diminution or appreciation in value. Claims Deposit Liabilities: The fair value of claims deposit liabilities is calculated by discounting the actuarially determined ultimate loss payouts at a rate of 6%. Debentures: The fair value of the debentures is calculated using discounted cash flow analyses based on current borrowing rates for similar types of borrowing arrangements. Loans Payable: The loans payable bear interest at a floating rate and as such, the fair value equals the carrying amount. Assets Held in Separate Accounts: (a) Within assets held in separate accounts are cash and marketable investments with a carrying value and fair value of $ 538.8 million (1999: $471.2 million). Fair value is calculated using quoted market prices. (b) Within the $261.0 million of other assets (1999: $222.2 million) $83.2 million (1999: $70.0 million) are financial instruments. The fair market value of other assets approximates carrying value due to the short term nature of these items. F-17 MUTUAL RISK MANAGEMENT LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 10. INCOME TAXES
Current Deferred Total -------- --------- --------- (In thousands) December 31, 2000: U.S. Federal.................................... $ 13,037 $ (33,733) $ (20,696) U.S. State and local............................ 171 -- 171 Foreign......................................... 1,392 -- 1,392 -------- --------- --------- $ 14,600 $ (33,733) $ (19,133) ======== ========= ========= December 31, 1999: U.S. Federal.................................... $ (118) $ (1,004) $ (1,122) U.S. State and local............................ 169 -- 169 Foreign......................................... 588 -- 588 -------- --------- --------- $ 639 $ (1,004) $ (365) ======== ========= ========= December 31, 1998: U.S. Federal.................................... $ 4,603 $ 3,198 $ 7,801 U.S. State and local............................ 171 (4) 167 Foreign......................................... 568 -- 568 -------- --------- --------- $ 5,342 $ 3,194 $ 8,536 ======== ========= =========
The effective total tax rate differed from the statutory U.S. federal tax rate for the following reasons:
2000 1999 1998 ----- ----- ----- Year ended December 31, Statutory U.S. federal tax rate......................... 35.0 % 35.0 % 35.0 % Increase (reduction) in income taxes resulting from: U.S. state taxes........................................ (0.6) 0.2 0.2 Tax-exempt interest income.............................. 4.6 (2.5) (2.1) Foreign income not expected to be taxed in the U.S...... 72.5 (29.3) (18.2) Foreign taxes........................................... (8.2) 1.2 0.8 Options................................................. 1.4 (6.2) (4.4) Other, net.............................................. (0.7) 0.9 0.4 ----- ----- ----- Total................................................... 104.0 % (0.7)% 11.7 % ===== ===== =====
F-18 MUTUAL RISK MANAGEMENT LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 2000 and 1999 are presented below:
2000 1999 -------- -------- (In thousands) Deferred tax assets: Unearned premiums and fees not deducted for tax............. $ 23,068 $ 4,030 Unpaid losses discounted for tax............................ 11,972 10,164 Unrealized losses........................................... -- 3,463 Provisions.................................................. 13,811 2,438 Other....................................................... 3,334 1,149 -------- -------- Total gross deferred tax assets............................. 52,185 21,244 -------- -------- Deferred tax liabilities: Deferred acquisition costs.................................. (13,033) (7,090) Deferred marketing expenses................................. (2,426) (2,577) Deferred market discount.................................... (1,293) (1,039) Other....................................................... (930) (2,842) -------- -------- Total gross deferred tax liabilities........................ (17,682) (13,548) -------- -------- Deferred tax benefit........................................ 34,503 7,696 Valuation allowance on unrealized losses.................... -- (3,463) -------- -------- Net deferred tax benefit.................................... $ 34,503 $ 4,233 ======== ========
The valuation allowance of $3.5 million in 1999 related to unrealized losses and has been accounted for in Accumulated other comprehensive (loss) income. 11. SHAREHOLDERS' EQUITY AND RESTRICTIONS A. The Board of Directors, on October 5, 1999, approved a stock repurchase program to purchase up to three million of its outstanding Common Shares. On October 27, 1999, the Board of Directors authorized the repurchase of an additional two million shares. As of December 31, 2000, a total of 2,636,716 shares had been repurchased at an average price of $11.31. During the first quarter of 2000, the Company sold 325,000 put options for a total consideration of $251,601 which has been recorded directly in additional paid-in capital. The put options entitled the holders to sell Common Shares to the Company if the price of the Company's Common Shares fell below a specified strike price. During the year, 92,100 put options were exercised for consideration of $1,386,105. At December 31, 2000, no put options were outstanding (1999--250,000). B. The Board of Directors is authorized to provide, without shareholder approval, for the issue of up to 20,000,000 of preference shares of such par value as the Board shall determine. C. The Company's ability to pay dividends is subject to certain restrictions including the following: (i) The Company is subject to a 30% U.S. withholding tax on any dividends received from its U.S. subsidiaries and certain of the IPC Companies. (ii) The Legion Companies' ability to pay a dividend is limited by insurance regulation to an annual amount equal to the greater of 10% of the Legion Companies' statutory surplus as regards policyholders, or the Legion Companies' statutory income for the preceding year . The maximum dividend the Legion Companies will be permitted to pay under this restriction in 2001 is $46.0 million based upon 2000 results (2000--$35.0 million based on 1999 results). The Legion Companies' net assets which were restricted by F-19 MUTUAL RISK MANAGEMENT LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) the above were $ 359.0 million at December 31, 2000 (1999--$353.6 million). Loans and advances by the Company or any other subsidiary would require the prior approval of the Pennsylvania insurance department and possibly other states in which they are licensed. D. At December 31, 2000 the Legion Companies' combined risk-based capital was $374.8 million (1999--$347.4 million). Under the risk-based capital tests, the threshold that constitutes the authorized control level, which authorizes the commissioner to take whatever regulatory actions considered necessary to protect the best interest of the policyholders and creditors of the Legion Companies was $161.9 million (1999--$121.0 million). E. Net income and policyholders' surplus of the Legion Companies, as filed with regulatory authorities on the basis of statutory accounting practices, are as follows:
Year ended December 31, -------------------------- 2000 1999 1998 -------- -------- -------- (In thousands) Statutory net income for the year................ $ 13,309 $ 11,269 $ 20,238 Statutory policyholders' surplus at year end..... $378,380 $349,867 $227,664
F. Effective January 1, 2001 the Legion Companies are required to adopt codification of statutory accounting principles. The effect on the Legion Companies is not anticipated to decrease statutory surplus. 12. STOCK OPTIONS Employees have been granted options to purchase Common Shares under the Company's Long Term Incentive Plans. In each case, the option price equals the fair market value of the Common Shares on the day of the grant and an option's maximum term is five to ten years. Options granted vest ratably over a four year period. In accordance with the provisions of SFAS 123, the Company applies APB Opinion 25 and related Interpretations in accounting for its stock option plans and, accordingly, does not recognize compensation cost. If the Company had elected to recognize a compensation cost based on the fair value of the options granted at grant date as prescribed by SFAS 123, net income and earnings per share would have been reduced to the pro forma amounts indicated in the table below:
Year ended December 31, ------------------------- 2000 1999 1998 -------- ------- ------- (In thousands except per share amounts) Net (loss) income--as reported.................... $ (5,582) $50,438 $64,527 Net (loss) income--pro forma...................... $(10,749) $44,465 $60,732 Basic earnings per share--as reported............. $ (0.14) $ 1.18 $ 1.56 Basic earnings per share--pro forma............... $ (0.26) $ 1.04 $ 1.47 Diluted earnings per share--as reported........... $ (0.14) $ 1.14 $ 1.42 Diluted earnings per share--pro forma............. $ (0.26) $ 1.02 $ 1.38
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions: Expected dividend yield.... 1.6% 1.5% 0.6% Expected stock price volatility................ .408-.430 .329-.398 .307-.330 Risk-free interest rate.... 5.1% 5.9% 5.3% Expected life of options... 4 years-9 years 4 years-9 years 4 years-9 years
F-20 MUTUAL RISK MANAGEMENT LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The weighted average fair value of options granted during 2000 is $5.30 per share (1999--$5.74 per share, 1998--$11.35 per share). The pro forma effect on net income for 2000, 1999 and 1998 is not representative of the pro forma effect on net income in future years because it does not take into consideration pro forma compensation expense related to grants made prior to 1995. Options issued and outstanding under the plans are as follows: Summary of Employee Stock Option Plan Activity
Year ended December 31, ------------------------------------------- 2000 1999 1998 ------------- ------------- ------------- Number of Options Outstanding, beginning of year......................... 4,924,273 4,220,580 3,794,925 Granted....................... 1,204,650 1,586,183 1,010,399 Exercised..................... (353,754) (744,223) (563,293) Cancelled..................... (768,803) (138,267) (21,451) ------------- ------------- ------------- Outstanding and exercisable, end of year.................. 5,006,366 4,924,273 4,220,580 ============= ============= ============= Option Price Per Share Granted....................... $13.25-$21.00 $11.44-$39.63 $26.25-$38.31 Exercised..................... $13.97-$15.14 $ 7.97-$26.25 $ 7.97-$26.25 Cancelled..................... $14.25-$39.00 $ 9.52-$39.54 $10.83-$26.25 Outstanding and exercisable, end of year.................. $11.44-$39.63 $11.44-$39.63 $ 7.97-$38.31
Summary of Options Outstanding at December 31, 2000
Weighted Number of Average Number of Shares Exercise Exercise Year of Grant Shares Vested Price Price Range Expiration Date Range ------------- --------- -------- -------- ------------- ------------------------------------- 1996.................... 601,420 601,420 $15.24 $14.25-$16.78 January 2, 2001 to December 17, 2006 1997.................... 844,450 631,147 $25.53 $15.00-$28.63 January 31, 2002 to December 18, 2002 1998.................... 914,286 400,879 $35.24 $29.94-$38.31 January 2, 2003 to December 21, 2003 1999.................... 1,444,560 425,188 $16.93 $11.44-$39.63 February 26, 2004 to December 14,2004 2000.................... 1,201,650 -- $13.59 $13.25-$20.88 March 15, 2000 to December 14, 2005
Options have been granted to each of the outside directors. All options are for five years and become exercisable six months after issuance. Total options granted to directors are as follows:
Number of Shares ------------------- Exercise Year of Grant Granted Outstanding Price Expiration Date ------------- ------- ----------- ------------- ------------------------------- 1996...... 105,000 105,000 $16.69 December 1, 2001 1997...... 75,000 75,000 $19.50-$27.81 May 21, 2002 to December 1,2002 1998...... 60,000 60,000 $37.25 December 1, 2003 1999...... 60,000 60,000 $14.75 December 1, 2004 2000...... 105,000 105,000 $16.50 December 1, 2005
F-21 MUTUAL RISK MANAGEMENT LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 13. EARNINGS PER COMMON SHARE The following table sets forth the computation of basic and diluted earnings per common share.
2000 1999 1998 ----------- ----------- ----------- (In thousands, except share and per share data) Numerator Income before extraordinary loss......... $ 1,245 $ 50,620 $ 64,527 ----------- ----------- ----------- Extraordinary loss on establishment of debt, net of taxes...................... 6,827 182 -- ----------- ----------- ----------- Net (loss) income........................ (5,582) 50,438 64,527 ----------- ----------- ----------- Numerator for basic earnings per common share--Net (loss) income................ (5,582) 50,438 64,527 Effect of dilutive securities: ----------- ----------- ----------- Conversion of Zero Coupon Convertible Exchangeable Subordinated Debentures.... -- 5,997 6,605 ----------- ----------- ----------- Numerator for diluted earnings per common share--Net (loss) income after assumed conversions............................. $ (5,582) $ 56,435 $ 71,132 =========== =========== =========== Denominator Denominator for basic earnings per common share--weighted average shares.......... 41,244,621 42,797,133 41,275,156 Effect of dilutive securities: Stock options............................ -- 991,406 2,223,900 Conversion of Zero Coupon Convertible Exchangeable Subordinated Debentures.... -- 5,818,374 6,734,091 ----------- ----------- ----------- Denominator for diluted earnings per common share-adjusted weighted average shares and assumed conversions.......... 41,244,621 49,606,913 50,233,147 =========== =========== =========== Basic earnings per common share: Income before extraordinary loss......... $ 0.03 $ 1.18 $ 1.56 Extraordinary loss, net of tax........... $ (0.17) $ (0.00) $ -- ----------- ----------- ----------- Basic earnings per common share.......... $ (0.14) $ 1.18 $ 1.56 =========== =========== =========== Diluted earnings per common share: Income before extraordinary loss......... $ 0.03 $ 1.14 $ 1.42 Extraordinary loss, net of tax........... $ (0.17) $ (0.00) $ -- ----------- ----------- ----------- Diluted earnings per common share........ $ (0.14) $ 1.14 $ 1.42 =========== =========== ===========
14. DERIVATIVE FINANCIAL INSTRUMENTS In June 1998, the Financial Accounting Standards Board issued Statement 133, "Accounting for Derivative Instruments and Hedging Activities" which was amended by Statement 138 in June 2000. The Statement requires the recording of all derivative instruments as assets or liabilities, measured at fair value. The Company has had only limited involvement with derivative financial instruments and does not use them for trading or speculative purposes. They have been utilized to manage interest rate risk. F-22 MUTUAL RISK MANAGEMENT LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 15. SEGMENT INFORMATION Selected information by operating segment is summarized in the chart below. Line of Business Financial Information
Year ended December 31, ---------------------------- 2000 1999 1998 -------- -------- -------- (In thousands) Revenue(1) Program Business............................. $118,034 $ 95,132 $ 82,267 Corporate Risk Management.................... 46,689 49,365 51,640 Specialty Brokerage.......................... 14,847 13,692 9,021 Financial Services........................... 27,943 19,522 14,343 Underwriting................................. 254,505 181,798 101,913 Net investment income........................ 34,597 28,417 28,587 Other........................................ 1,202 (300) 143 -------- -------- -------- Total........................................ $497,817 $387,626 $287,914 ======== ======== ======== Income Before Income Taxes and Minority Interest Program Business............................. $ 31,334 $ 26,969 $ 32,620 Corporate Risk Management.................... 11,986 15,694 20,158 Specialty Brokerage.......................... 4,606 5,226 2,264 Financial Services........................... 4,134 1,298 542 Underwriting................................. (82,876) (17,489) (2,406) Net investment income........................ 15,405 21,610 21,768 Other........................................ (2,986) (3,001) (1,976) -------- -------- -------- Total........................................ $(18,397) $ 50,307 $ 72,970 ======== ======== ========
- -------- (1) Fee income from two clients accounted for 3% and 2% of total fee income in 2000 (1999--2% and 2%; 1998--2% and 1%) . Premiums earned from two clients accounted for 12% and 4% of total premiums earned during 2000 (1999--6% and 6%; 1998--4% and 3%). The subsidiaries' accounting records do not capture information by reporting segment sufficient to determine identifiable assets by such reporting segments. F-23 MUTUAL RISK MANAGEMENT LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 16. FOREIGN SALES AND OPERATIONS The Company's non-U.S. operations include Bermuda, Barbados, the Cayman Islands and Europe. Financial Information Relating to Geographic Areas
Year ended December 31, --------------------------------- 2000 1999 1998 ---------- ---------- ---------- (In thousands) Total Revenues U.S. Business............................ $ 327,730 $ 291,458 $ 193,653 Non-U.S. Business........................ 170,087 96,168 94,261 ---------- ---------- ---------- Total.................................... $ 497,817 $ 387,626 $ 287,914 ========== ========== ========== (Loss) Income Before Income Taxes, Minority Interest and Extraordinary Loss U.S. Business............................ $ (57,982) $ 15,911 $ 38,285 Non-U.S. Business........................ 39,585 34,396 34,685 ---------- ---------- ---------- Total.................................... $ (18,397) $ 50,307 $ 72,970 ========== ========== ========== Total Assets U.S. Business............................ $3,749,858 $3,078,861 $2,082,077 Non-U.S. Business(1)..................... 1,109,791 954,313 992,180 ---------- ---------- ---------- Total.................................... $4,859,649 $4,033,174 $3,074,257 ========== ========== ==========
- -------- (1) Includes assets held in separate accounts of $799.8 million, $693.4 million and $722.3 million for 2000, 1999 and 1998 respectively. 17. ACQUISITIONS During 2000 the Company acquired several new businesses for a total of $13.6 million. The excess of the purchase price over net assets acquired was $6.0 million. These acquisitions were accounted for by the purchase method. The pro forma effect on the Company's revenue, net income and earnings per share is not material. On March 1, 1999, the Company acquired Captive Resources, Inc. ("CRI") in a business combination accounted for as a pooling of interests. CRI became a wholly owned subsidiary of the Company through the exchange of 1,058,766 Common Shares for 100% of its outstanding stock. During 1998 the Company acquired several new businesses for a total of $25.6 million. The excess of the purchase price over net assets acquired was $21.9 million. These acquisitions were accounted for by the purchase method. The pro forma effect on the Company's revenue, net income and earnings per share is not material. During 1998 the Company acquired Compfirst, Inc. and IAS in a business combination accounted for as a pooling of interests. These companies became wholly owned subsidiaries of the Company through the exchange of 943,821 Common Shares for 100% of each company's outstanding stock. 18. RELATED PARTY TRANSACTIONS A. Fee income of $0.3 million (1999--$0.8 million; 1998--$0.6 million) and premiums of $3.8 million (1999--$(0.1) million; 1998--$1.4 million) were earned from a certain IPC Program participant associated with a director and shareholder of the Company. F-24 MUTUAL RISK MANAGEMENT LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) B. A number of subsidiaries of the Company have written business involving subsidiaries of The Galtney Group, Inc. ("GGI") of which a director of the Company is the principal shareholder. During 2000 the Company paid fees of $6.2 million on such business to GGI (1999--$3.0 million; 1998--$4.0 million). C. The company and its subsidiaries provide administrative and accounting services to a number of unaffiliated insurance and reinsurance companies. Certain officers, directors and employees of the Company serve as officers and directors of these companies, generally without remuneration. D. In connection with the Company's acquisition of The Hemisphere Group Limited ("Hemisphere") in July 1996, the Company acquired a 40% interest in the Hemisphere Trust Company Limited ("Hemisphere Trust"), a Bermuda "local" trust company, which had formerly been a wholly owned subsidiary of Hemisphere. As a "local" Bermuda company, at least 60% of the shares of Hemisphere Trust must be owned by Bermudians. In compliance with this requirement, Mr. Robert A. Mulderig, Chairman and CEO of the Company, acquired 60% of Hemisphere Trust for $0.2 million at the time of the Company's acquisition of Hemisphere. The amount of the purchase price was equal to 60% of the book value of Hemisphere Trust on the date of acquisition. The Company and Mr. Mulderig have entered into a Shareholders' Agreement relating to Hemisphere Trust which provides, amongst other things, that (i) the Company has the option, subject to regulatory approval, to acquire Mr. Mulderig's interest in Hemisphere Trust at Mr. Mulderig's cost, plus interest at 6% per annum; (ii) the Company has a pre-emptive right, also subject to regulatory approval, over the shares held by Mr. Mulderig and (iii) no dividends or other distributions can be made by Hemisphere Trust without the prior consent of the Company. 19. QUARTERLY FINANCIAL DATA--(UNAUDITED)
Quarters ended ------------------------------------ Dec 31 Sept 30 June 30 March 31 -------- -------- -------- -------- (In thousands, except per share data) 2000 Total revenues........................... $125,601 $136,885 $123,241 $112,090 (Loss) income before income taxes, minority interest and extraordinary loss.................................... (57,704) 14,784 12,971 11,552 (Loss) income before minority interest and extraordinary loss.................. (35,153) 13,299 12,031 10,559 (Loss) income before extraordinary loss.. (35,209) 13,229 11,968 11,257 Net (loss) income........................ (37,709) 13,229 11,968 6,930 -------- -------- -------- -------- Basic earnings per Common Share: Net (loss) income...................... $ (0.91) $ 0.32 $ 0.29 $ 0.17 ======== ======== ======== ======== Quarters ended ------------------------------------ Dec 31 Sept 30 June 30 March 31 -------- -------- -------- -------- (In thousands, except per share data) 1999 Total revenues........................... $ 89,293 $102,623 $103,817 $ 91,893 Income before income taxes, minority interest and extraordinary loss......... 7,723 2,065 19,713 20,806 Income before minority interest and extraordinary loss...................... 8,417 5,366 18,098 18,791 Income before extraordinary loss......... 8,365 5,361 18,095 18,799 Net income............................... 8,183 5,361 18,095 18,799 -------- -------- -------- -------- Basic earnings per Common Share: Net income............................. $ 0.20 $ 0.12 $ 0.42 $ 0.44 ======== ======== ======== ========
F-25 MUTUAL RISK MANAGEMENT LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 20. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION Mutual Group Ltd. ("Mutual Group") is a wholly owned subsidiary of the 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 requirements of Mutual Group's subsidiaries, could limit the ability of Mutual Group to obtain cash from its subsidiaries for the purpose of meeting its debt service obligations. The following financial information presents the condensed consolidated balance sheets of the Parent Company, Mutual Group and other subsidiaries as of December 31, 2000 and 1999 and condensed consolidating statements of (loss) income and cash flows for the years ended December 31, 2000, 1999 and 1998. Investment in subsidiaries are accounted for on the equity method and accordingly, entries necessary to consolidate the Parent 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 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 for purposes of this condensed presentation. Condensed consolidated balance sheets:
At December 31, 2000 -------------------------------------------------------- Parent Mutual Other Company Group Subsidiaries Eliminations Consolidated -------- -------- ------------ ------------ ------------ (In thousands) ASSETS Cash and cash equivalents........... $ 339 $ 884 $ 200,792 $ -- $ 202,015 Investments............ 12,018 -- 359,056 -- 371,074 Other investments...... -- 649 34,552 -- 35,201 Investments in and advances to subsidiaries and affiliates, net....... 422,426 395,516 (575,808) (242,134) -- Accounts receivable.... -- 28 592,824 -- 592,852 Reinsurance recoverable........... -- -- 2,307,466 -- 2,307,466 Prepaid reinsurance premiums.............. -- -- 346,223 -- 346,223 Fixed assets........... -- -- 34,152 -- 34,152 Deferred tax benefit... -- -- 35,578 (1,075) 34,503 Taxes receivable....... -- 10,300 -- (10,300) -- Other assets........... 424 1,887 134,075 -- 136,386 Assets held in separate accounts.............. -- -- 799,777 -- 799,777 -------- -------- ---------- --------- ---------- Total Assets........... $435,207 $409,264 $4,268,687 $(253,509) $4,859,649 ======== ======== ========== ========= ========== LIABILITIES AND SHAREHOLDERS' EQUITY LIABILITIES Reserve for losses and loss expenses......... $-- $-- $2,529,183 $ -- $2,529,183 Reserve for unearned premiums.............. -- -- 426,069 -- 426,069 Pension fund reserves.. -- -- 56,191 -- 56,191 Claims deposit liabilities........... -- -- 25,407 -- 25,407 Accounts payable....... -- -- 310,590 -- 310,590 Accrued expenses....... 1 356 15,298 -- 15,655 Taxes payable.......... -- -- 34,439 (10,300) 24,139 Loans payable.......... 70,000 150,000 -- -- 220,000 Other loans payable.... -- -- 3,595 -- 3,595 Prepaid fees........... -- -- 68,529 -- 68,529 Debentures............. 13,673 -- -- -- 13,673 Deferred tax liability............. -- 1,075 -- (1,075) -- Other liabilities...... -- -- 15,308 -- 15,308 Liabilities related to separate accounts..... -- -- 799,777 -- 799,777 -------- -------- ---------- --------- ---------- Total Liabilities...... 83,674 151,431 4,284,386 (11,375) 4,508,116 -------- -------- ---------- --------- ---------- SHAREHOLDERS' EQUITY 351,533 257,833 (15,699) (242,134) 351,533 -------- -------- ---------- --------- ---------- Total Liabilities and Shareholders' Equity.. $435,207 $409,264 $4,268,687 $(253,509) $4,859,649 ======== ======== ========== ========= ==========
F-26 MUTUAL RISK MANAGEMENT LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Condensed consolidated balance sheets--(continued)
At December 31, 1999 -------------------------------------------------------- Parent Mutual Other Company Group Subsidiaries Eliminations Consolidated -------- -------- ------------ ------------ ------------ (In thousands) 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 recoverable........... -- -- 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 Loans payable.......... 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 liabilities...... -- -- 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 ======== ======== ========== ========= ==========
F-27 MUTUAL RISK MANAGEMENT LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Condensed consolidated statements of (loss) income:
Year ended December 31, 2000 ---------------------------------------------------------- Parent Mutual Other Company Group Subsidiaries Eliminations Consolidated -------- -------- ------------ ------------ ------------ (In thousands) REVENUES Fee Income............. $ -- $ -- $207,513 $ -- $207,513 Premiums earned........ -- -- 254,505 -- 254,505 Net investment income.. 2,599 777 35,956 -- 39,332 Intercompany interest income................ -- -- 28,946 (28,946) -- Realized capital (losses).............. -- -- (4,735) -- (4,735) Other income........... 92 383 727 -- 1,202 Equity in subsidiary earnings.............. 12,451 (5,083) -- (7,368) -- -------- -------- -------- -------- -------- Total Revenues......... 15,142 (3,923) 522,912 (36,314) 497,817 -------- -------- -------- -------- -------- EXPENSES Losses and loss expenses incurred..... -- -- 227,155 -- 227,155 Acquisition costs...... -- -- 110,226 -- 110,226 Operating expenses..... 249 354 154,850 -- 155,453 Interest expense....... 13,648 3,286 2,258 -- 19,192 Intercompany interest expense............... -- 28,946 -- (28,946) -- Other expenses......... -- -- 4,188 4,188 -------- -------- -------- -------- -------- Total Expenses......... 13,897 32,586 498,677 (28,946) 516,214 -------- -------- -------- -------- -------- INCOME (LOSS) BEFORE INCOME TAXES, MINORITY INTEREST AND EXTRAORDINARY LOSS..... 1,245 (36,509) 24,235 (7,368) (18,397) Income taxes........... -- (11,040) (8,093) -- (19,133) -------- -------- -------- -------- -------- INCOME (LOSS) BEFORE MINORITY INTEREST AND EXTRAORDINARY LOSS..... 1,245 (25,469) 32,328 (7,368) 736 Minority interest...... -- -- 509 -- 509 -------- -------- -------- -------- -------- INCOME (LOSS) BEFORE EXTRAORDINARY LOSS..... 1,245 (25,469) 32,837 (7,368) 1,245 Extraordinary loss on extinguishment of debt, net of tax...... 6,827 -- -- -- 6,827 -------- -------- -------- -------- -------- NET (LOSS) INCOME....... $ (5,582) $(25,469) $ 32,837 $ (7,368) $ (5,582) ======== ======== ======== ======== ========
F-28 MUTUAL RISK MANAGEMENT LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Condensed consolidated statements of (loss) income--(continued)
Year ended December 31, 1999 ------------------------------------------------------- Parent Mutual Other Company Group Subsidiaries Eliminations Consolidated ------- ------- ------------ ------------ ------------ (In thousands) REVENUES Fee Income............. $ -- $ -- $177,711 $ -- $177,711 Premiums earned........ -- -- 181,798 -- 181,798 Net investment income.. 1,009 759 31,848 -- 33,616 Intercompany interest income................ -- -- 20,831 (20,831) -- Realized capital (losses).............. -- 361 (5,560) -- (5,199) Other (loss)........... -- (114) (186) -- (300) Equity in subsidiary earnings.............. 56,322 22,586 -- (78,908) -- ------- ------- -------- --------- -------- Total Revenues......... 57,331 23,592 406,442 (99,739) 387,626 ------- ------- -------- --------- -------- EXPENSES Losses and loss expenses incurred..... -- -- 147,705 -- 147,705 Acquisition costs...... -- -- 51,582 -- 51,582 Operating expenses..... 141 633 127,750 -- 128,524 Interest expense....... 6,570 -- 237 -- 6,807 Intercompany interest expense............... -- 20,831 -- (20,831) -- Other expenses......... -- -- 2,701 -- 2,701 ------- ------- -------- --------- -------- Total Expenses......... 6,711 21,464 329,975 (20,831) 337,319 ------- ------- -------- --------- -------- INCOME BEFORE INCOME TAXES, MINORITY INTEREST AND EXTRAORDINARY LOSS..... 50,620 2,128 76,467 (78,908) 50,307 Income taxes........... -- (6,743) 6,378 -- (365) ------- ------- -------- --------- -------- INCOME BEFORE MINORITY INTEREST AND EXTRAORDINARY LOSS..... 50,620 8,871 70,089 (78,908) 50,672 Minority interest...... -- -- (52) -- (52) ------- ------- -------- --------- -------- INCOME BEFORE EXTRAORDINARY LOSS..... 50,620 8,871 70,037 (78,908) 50,620 Extraordinary loss on extinguishment of debt, net of tax...... 182 -- -- -- 182 ------- ------- -------- --------- -------- NET INCOME.............. $50,438 $ 8,871 $ 70,037 $(78,908) $ 50,438 ======= ======= ======== ========= ======== Year ended December 31, 1998 ------------------------------------------------------- Parent Mutual Other Company Group Subsidiaries Eliminations Consolidated ------- ------- ------------ ------------ ------------ (In thousands) REVENUES Fee Income............. $ -- $ -- $157,271 $ -- $157,271 Premiums earned........ -- -- 101,913 -- 101,913 Net investment income.. 2,171 606 26,813 -- 29,590 Intercompany interest income................ -- -- 18,600 (18,600) -- Realized capital (losses).............. -- 599 (1,602) -- (1,003) Other income (loss).... -- 390 (247) -- 143 Equity in subsidiary earnings.............. 69,102 38,986 -- (108,088) -- ------- ------- -------- --------- -------- Total Revenues......... 71,273 40,581 302,748 (126,688) 287,914 ------- ------- -------- --------- -------- EXPENSES Losses and loss expenses incurred..... -- -- 78,258 -- 78,258 Acquisition costs...... -- -- 26,061 -- 26,061 Operating expenses..... 141 634 100,912 -- 101,687 Interest expense....... 6,605 -- 214 -- 6,819 Intercompany interest expense............... -- 18,600 -- (18,600) -- Other expenses......... -- -- 2,119 -- 2,119 ------- ------- -------- --------- -------- Total Expenses......... 6,746 19,234 207,564 (18,600) 214,944 ------- ------- -------- --------- -------- INCOME BEFORE INCOME TAXES AND MINORITY INTEREST............... 64,527 21,347 95,184 (108,088) 72,970 Income taxes........... -- (4,759) 13,295 -- 8,536 ------- ------- -------- --------- -------- INCOME BEFORE MINORITY INTEREST............... 64,527 26,106 81,889 (108,088) 64,434 Minority interest...... -- -- 93 -- 93 ------- ------- -------- --------- -------- NET INCOME ............. $64,527 $26,106 $ 81,982 $(108,088) $ 64,527 ======= ======= ======== ========= ========
F-29 MUTUAL RISK MANAGEMENT LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Condensed consolidated statements of cash flows
Year ended December 31, 2000 --------------------------------------------- Parent Mutual Other Company Group Subsidiaries Consolidated -------- -------- ------------ ------------ (In thousands) NET CASH FLOWS (APPLIED TO) FROM OPERATING ACTIVITIES............ $(12,431) $(36,666) $ 62,033 $ 12,936 -------- -------- -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from sale of investments--Available for sale........................... -- -- 369,584 369,584 Proceeds from maturity of investments--Available for sale........................... -- -- 32,463 32,463 Fixed asset purchased........... -- -- (17,345) (17,345) Investments purchased--Available for sale....................... (2,231) -- (319,107) (321,338) Acquisitions and other investments.................... -- -- (11,905) (11,905) Other items..................... -- -- 420 420 Investments in and advances to subsidiaries and affiliates, net............................ 161,706 (113,469) (48,237) -- -------- -------- -------- -------- NET CASH FROM (APPLIED TO) INVESTING ACTIVITIES............ 159,475 (113,469) 5,873 51,879 -------- -------- -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES Loan repayment and interest received....................... (217,000) 99,547 (117,453) Proceeds from loans payable..... 170,000 150,000 (100,000) 220,000 Extinguishment of convertible debentures..................... (101,325) -- -- (101,325) Proceeds from shares issued..... 6,437 -- -- 6,437 Claims deposit liabilities...... -- -- (2,517) (2,517) Pension fund reserves........... -- -- (11,790) (11,790) Dividends paid.................. (11,539) -- -- (11,539) -------- -------- -------- -------- NET CASH (APPLIED TO) FROM FINANCING ACTIVITIES............ (153,427) 150,000 (14,760) (18,187) -------- -------- -------- -------- Net (decrease) increase in cash and cash equivalents............ (6,383) (135) 53,146 46,628 Cash and cash equivalents at beginning of year............... 6,722 1,019 147,646 155,387 -------- -------- -------- -------- Cash and cash equivalents at end of year......................... $ 339 $ 884 $200,792 $202,015 ======== ======== ======== ======== Year ended December 31, 1999 --------------------------------------------- Parent Mutual Other Company Group Subsidiaries Consolidated -------- -------- ------------ ------------ (In thousands) NET CASH FLOWS (APPLIED TO) FROM OPERATING ACTIVITIES $ (533) $(12,326) $ 33,493 $ 20,634 -------- -------- -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from sale of investments--Available for sale........................... -- -- 85,312 85,312 Proceeds from maturity of investments--Available for sale........................... -- -- 53,183 53,183 Fixed asset purchased........... -- -- (17,732) (17,732) Investments purchased--Available for sale....................... -- -- (153,949) (153,949) Acquisitions and other investments.................... -- -- (10,130) (10,130) Proceeds from sale of other investments.................... -- -- 577 577 Other items..................... -- -- 104 104 Investments in and advances to subsidiaries and affiliates, net............................ (74,185) 11,473 62,712 -- -------- -------- -------- -------- NET CASH (APPLIED TO) FROM INVESTING ACTIVITIES............ (74,185) 11,473 20,077 (42,635) -------- -------- -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from loans payable..... 117,000 -- -- 117,000 Other loans received............ -- -- 511 511 Extinguishment of convertible debentures..................... (6,163) -- -- (6,163) Proceeds from shares issued..... 11,209 -- -- 11,209 Purchase of treasury shares..... (29,813) -- -- (29,813) Claims deposit liabilities...... -- -- (9,524) (9,524) Pension fund reserves........... -- -- (11,773) (11,773) Dividends paid.................. (11,482) -- -- (11,482) -------- -------- -------- -------- NET CASH (APPLIED TO) FROM FINANCING ACTIVITIES............ 80,751 -- (20,786) 59,965 -------- -------- -------- -------- Net increase (decrease) in cash and cash equivalents............ 6,033 (853) 32,784 37,964 Cash and cash equivalents at beginning of year............... 689 1,872 114,862 117,423 -------- -------- -------- -------- Cash and cash equivalents at end of year......................... $ 6,722 $ 1,019 $147,646 $155,387 ======== ======== ======== ========
F-30 MUTUAL RISK MANAGEMENT LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Condensed consolidated statements of cash flows--(continued)
Year ended December 31, 1998 -------------------------------------------- Parent Mutual Other Company Group Subsidiaries Consolidated ------- -------- ------------ ------------ (In thousands) NET CASH FLOWS FROM (APPLIED TO) OPERATING ACTIVITIES............. $ 1,073 $(18,363) $ 79,641 $ 62,351 ------- -------- -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from sale of investments--Available for sale............................ 30,476 -- 115,269 145,745 Proceeds from maturity of investments--Available for sale............................ -- -- 57,175 57,175 Fixed asset purchased............ -- -- (9,890) (9,890) Investments purchased--Available for sale........................ (15,943) -- (252,925) (268,868) Acquisitions and other investments..................... -- -- (28,886) (28,886) Proceeds from sale of other investments..................... -- -- 2,929 2,929 Other items...................... -- -- 9 9 Investments in and advances to subsidiaries and affiliates, net............................. (13,958) 15,936 (1,978) -- ------- -------- -------- -------- NET CASH FROM (APPLIED TO) INVESTING ACTIVITIES............. 575 15,936 (118,297) (101,786) ------- -------- -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES Loan repayment and interest received........................ 389 -- -- 389 Other loans received............. -- -- 1,379 1,379 Proceeds from shares issued...... 8,055 -- -- 8,055 Claims deposit liabilities....... -- -- (4,997) (4,997) Pension fund reserves............ -- -- 79,753 79,753 Dividends paid................... (10,427) -- -- (10,427) ------- -------- -------- -------- NET CASH (APPLIED TO) FROM FINANCING ACTIVITIES............. (1,983) -- 76,135 74,152 ------- -------- -------- -------- Net (decrease) increase in cash and cash equivalents............. (335) (2,427) 37,479 34,717 Cash and cash equivalents at beginning of year................ 1,024 4,299 77,383 82,706 ------- -------- -------- -------- Cash and cash equivalents at end of year.......................... $ 689 $ 1,872 $114,862 $117,423 ======= ======== ======== ========
F-31 MUTUAL RISK MANAGEMENT LTD CONDENSED FINANCIAL INFORMATION OF REGISTRANT PARENT COMPANY ONLY BALANCE SHEETS
2000 1999 ------------ ------------ ASSETS Cash and cash equivalents.......................... $ 339,175 $ 6,721,527 Investments........................................ 12,017,747 9,664,914 Investments in subsidiaries and affiliates......... 590,117,374 570,072,530 Due from subsidiaries and affiliates............... -- 542,308 Other assets....................................... 423,968 2,319,150 ------------ ------------ Total Assets....................................... $602,898,264 $589,320,429 ============ ============ LIABILITIES & SHAREHOLDERS' EQUITY LIABILITIES Accounts payable and accrued expenses.............. $ 1,361 $ 393,741 Other liabilities.................................. 2,912,861 2,884,665 Due to subsidiaries and affiliates................. 164,778,873 -- Debentures......................................... 13,672,737 110,898,002 Loans payable...................................... 70,000,000 117,000,000 ------------ ------------ Total Liabilities.................................. 251,365,832 231,176,408 ------------ ------------ SHAREHOLDERS' EQUITY Common Shares--Authorized 180,000,000 (par value $0.01) Issued 41,614,649 (excluding 2,728,816 cumulative shares held in treasury) (1999-- 41,205,191)....................................... 416,146 412,052 Additional paid-in capital......................... 117,187,738 110,754,754 Accumulated other comprehensive (loss)............. (10,836,478) (14,937,127) Retained earnings.................................. 244,765,026 261,914,342 ------------ ------------ Total Shareholders' Equity......................... 351,532,432 358,144,021 ------------ ------------ Total Liabilities & Shareholders' Equity........... $602,898,264 $589,320,429 ============ ============
See Notes to Consolidated Financial Statements S-1 MUTUAL RISK MANAGEMENT LTD CONDENSED FINANCIAL INFORMATION OF REGISTRANT PARENT COMPANY ONLY STATEMENTS OF (LOSS) INCOME
Years ended December 31, ---------------------------------------- 2000 1999 1998 ------------ ------------ ------------ NET INVESTMENT INCOME............... $ 2,599,832 $ 1,008,904 $ 2,171,384 Operating expenses.................. 157,671 141,055 141,140 Interest expense.................... 12,251,935 573,200 -- Amortization of debentures.......... 1,396,167 5,996,459 6,605,238 ------------ ------------ ------------ LOSS BEFORE EXTRAORDINARY LOSS AND EQUITY IN EARNINGS OF SUBSIDIARIES....................... (11,205,941) (5,701,810) (4,574,994) Extraordinary loss on extinguishment of debentures, net of tax.......... (6,827,242) (181,742) -- ------------ ------------ ------------ LOSS BEFORE EQUITY IN EARNINGS OF SUBSIDIARIES....................... (18,033,183) (5,883,552) (4,574,994) Undistributed equity in earnings of subsidiary......................... 12,451,227 56,321,584 69,102,196 ------------ ------------ ------------ NET (LOSS) INCOME AVAILABLE TO COMMON SHAREHOLDERS................ (5,581,956) 50,438,032 64,527,202 OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX......................... Unrealized gains (losses) on investments, net of reclassification adjustment........ 4,100,649 (19,393,912) 421,385 ------------ ------------ ------------ COMPREHENSIVE (LOSS) INCOME......... $ (1,481,307) $ 31,044,120 $ 64,948,587 ============ ============ ============
See Notes to Consolidated Financial Statements S-2 MUTUAL RISK MANAGEMENT LTD CONDENSED FINANCIAL INFORMATION OF REGISTRANT PARENT COMPANY ONLY STATEMENTS OF CASH FLOW
Years ended December 31, ---------------------------------------- 2000 1999 1998 ------------- ------------ ----------- NET CASH FLOW FROM OPERATING ACTIVITIES Net loss before equity in earnings of subsidiaries.................... $ (18,033,183) $ (5,883,552) $(4,574,994) Items not affecting cash: Amortization of debentures........ 1,396,167 5,996,459 6,605,238 Amortization of investments....... -- (1,092,079) (1,188,773) Extraordinary loss on extinguishment of debt........... 6,827,242 -- -- Other items....................... (4,123,544) -- -- Net changes in non-cash balances relating to operations: Other assets...................... 1,895,182 52,755 239,181 Accounts payable and accrued expenses......................... (392,380) 392,815 (6,592) ------------- ------------ ----------- NET CASH FLOW (APPLIED TO) FROM OPERATING ACTIVITIES............... (12,430,516) (533,602) (1,074,060) ------------- ------------ ----------- CASH FLOWS FROM INVESTING ACTIVITIES Cost of investments............... (2,230,750) -- (15,942,997) Proceeds from sale of investments...................... -- -- 30,475,717 Investments in and advances to subsidiaries and affiliates, net.............. 161,706,134 (74,184,650) (13,957,919) ------------- ------------ ----------- NET CASH FROM (APPLIED TO) INVESTING ACTIVITIES......................... 159,475,384 (74,184,650) 574,801 ------------- ------------ ----------- CASH FLOWS FROM FINANCING ACTIVITIES Net proceeds from shares issued... 7,824,179 11,209,642 8,055,217 Purchase of Treasury shares....... (1,387,105) (29,813,837) -- Extinguishment of convertible debentures....................... (101,325,130) (6,163,258) -- Loans payable received (repaid)... (47,000,000) 117,000,000 -- Subscription loans receivable..... -- -- 383,761 Loan interest received............ -- -- 4,922 Dividends paid.................... (11,539,164) (11,482,028) (10,427,321) ------------- ------------ ----------- NET CASH FLOWS (APPLIED TO) FROM FINANCING ACTIVITIES............... (153,427,220) 80,750,519 (1,983,421) ------------- ------------ ----------- Net (decrease) increase in cash and cash equivalents................... (6,382,352) 6,032,267 (334,560) Cash and cash equivalents at beginning of year.................. 6,721,527 689,260 1,023,820 ------------- ------------ ----------- Cash and cash equivalents at end of year............................... $ 339,175 $ 6,721,527 $ 689,260 ============= ============ ===========
See Notes to Consolidated Financial Statements S-3 SCHEDULE VI MUTUAL RISK MANAGEMENT LTD. SUPPLEMENTARY INSURANCE INFORMATION (U.S. DOLLARS IN THOUSANDS)
Gross Reserve for Unpaid Year ended Deferred Claims Gross December 31, Policy and Discount, Gross Nets Net Property- Acquisition Claims if any, Unearned Earned Investment Casualty Costs Expenses Deducted(1) Premiums Premiums Income ------------ ----------- --------- ----------- -------- -------- ---------- 2000............ 52,047 2,447,957 58,087 423,342 245,828 20,955 1999............ 20,531 1,860,120 39,538 335,265 181,798 17,466 1998............ 17,948 1,190,426 36,213 241,893 101,913 16,357
Net Claim and Claims Expenses Incurred Amortization Related to(1) of Deferred Net Paid Year ended -------------- Policy Claims and Net Other December 31, Current Prior Acquisition Claims Premiums Operating Property-Casualty Year Year Cost Expenses Written Expenses ----------------- ------- ------ ------------ ---------- -------- --------- 2000................. 157,813 69,292 101,377 132,529 204,479 43,391 1999................. 146,414 1,291 51,582 128,384 200,517 42,857 1998................. 74,476 3,782 26,061 53,158 104,948 30,164
- -------- (1) Medical malpractice reserves have been discounted at 6%. Workers' compensation reserves have been discounted at 4%. S-4 EX-10.15 2 0002.txt CREDIT AGREEMENT DATED AS OF SEPTEMBER 21, 2000 CREDIT AGREEMENT dated as of September 21, 2000 among MUTUAL RISK MANAGEMENT LTD. and MUTUAL GROUP, LTD., as Borrowers and Guarantors, THE LENDERS PARTY HERETO and BANK OF AMERICA, N.A., as Administrative Agent FLEET NATIONAL BANK, as Syndication Agent FIRST UNION NATIONAL BANK, as Documentation Agent BANC OF AMERICA SECURITIES LLC, as Lead Arranger and Book Manager TABLE OF CONTENTS
Page SECTION 1. DEFINITIONS; RULES OF CONSTRUCTION.......................................................................1 SECTION 1.1 Definitions..........................................................................1 SECTION 1.2 Rules of Construction...............................................................15 SECTION 2. AMOUNT AND TERMS OF LOAN COMMITMENT AND LOANS; NOTES....................................................15 SECTION 2.1 Commitment..........................................................................15 SECTION 2.2 Procedure for Borrowing.............................................................16 SECTION 2.3 Disbursement of Funds...............................................................17 SECTION 2.4 Loan Accounts; Notes................................................................17 SECTION 2.5 Termination of Commitments; Reduction of Commitments................................18 SECTION 2.6 Pro Rata Borrowings.................................................................18 SECTION 2.7 Interest; Utilization Fee; Commitment Fee; Other Fees...............................18 SECTION 2.8 Making of Payments..................................................................19 SECTION 2.9 No Setoff, Counterclaim or Withholding; Gross-Up....................................19 SECTION 2.10 Increased Costs and Reduction of Return.............................................20 SECTION 2.11 Illegality..........................................................................21 SECTION 2.12 Repayment; Optional and Mandatory Prepayments.......................................21 SECTION 2.13 Maximum Rate........................................................................22 SECTION 2.14 Increases of Commitments............................................................22 SECTION 3. REPRESENTATIONS AND WARRANTIES..........................................................................23 SECTION 3.1 Good Standing and Authority.........................................................23 SECTION 3.2 Stock Duly Authorized and Issued....................................................23 SECTION 3.3 Loan Documents Authorized, etc......................................................23 SECTION 3.4 No Consents; No Conflicts...........................................................23 SECTION 3.5 Financial Information Complete......................................................24 SECTION 3.6 No Material Adverse Change..........................................................24 SECTION 3.7 Accuracy and Completeness of Information............................................24 SECTION 3.8 Internal Accounting.................................................................24 SECTION 3.9 No Insolvency.......................................................................25 SECTION 3.10 Subsidiaries; Assets; Liens.........................................................25 SECTION 3.11 No Violations.......................................................................25 SECTION 3.12 No Litigation.......................................................................25 SECTION 3.13 Proceeds............................................................................25 SECTION 3.14 Margin Stock........................................................................25 SECTION 3.15 Tax Returns and Payments............................................................25
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Page SECTION 3.16 ERISA Compliance....................................................................26 SECTION 3.17 Compliance With Laws................................................................27 SECTION 3.18 Government Regulation...............................................................27 SECTION 3.19 Insurance...........................................................................27 SECTION 3.20 Labor...............................................................................27 SECTION 3.21 Environmental Matters...............................................................27 SECTION 3.22 Insurance Regulations...............................................................27 SECTION 3.23 Permits; Licenses...................................................................28 SECTION 4. CONDITIONS TO THE OBLIGATIONS OF THE LENDERS............................................................28 SECTION 4.1 Conditions to Closing...............................................................28 SECTION 4.2 Conditions to each Loan.............................................................30 SECTION 5. AFFIRMATIVE COVENANTS...................................................................................30 SECTION 5.1 Corporate Existence.................................................................30 SECTION 5.2 Compliance With Laws................................................................31 SECTION 5.3 Maintenance of Property; Insurance..................................................31 SECTION 5.4 Payment of Taxes and Other Claims...................................................31 SECTION 5.5 Investment Company Act..............................................................31 SECTION 5.6 Payments in U.S. Dollars............................................................31 SECTION 5.7 Use of Proceeds.....................................................................31 SECTION 5.8 Financial Statements................................................................32 SECTION 5.9 Notice of Litigation and Other Matters..............................................33 SECTION 6. NEGATIVE COVENANTS......................................................................................34 SECTION 6.1 Consolidated Indebtedness to Consolidated Total Capital Ratio.......................34 SECTION 6.2 Shareholders' Equity................................................................34 SECTION 6.3 Negative Pledge.....................................................................34 SECTION 6.4 Limitation on Indebtedness..........................................................34 SECTION 6.5 Limitation on Asset Sales...........................................................35 SECTION 6.6 Merger, Consolidation, Sale of Assets and Liquidation...............................35 SECTION 6.7 Sale and Leaseback..................................................................35 SECTION 6.8 Limitations on Dividend and Other Payment Restrictions Affecting Subsidiaries.......36 SECTION 6.9 Restricted Payments.................................................................36 SECTION 6.10 Transactions with Affiliates........................................................36 SECTION 6.11 Lines of Business...................................................................37 SECTION 6.12 Amendment to Charter Documents......................................................37
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Page SECTION 7. DEFAULTS AND REMEDIES...................................................................................37 SECTION 7.1 Events of Default...................................................................37 SECTION 7.2 Default Remedies....................................................................39 SECTION 8. THE ADMINISTRATIVE AGENT................................................................................39 SECTION 8.1 Appointment.........................................................................39 SECTION 8.2 Delegation of Duties................................................................40 SECTION 8.3 Exculpatory Provisions..............................................................40 SECTION 8.4 Reliance by Administrative Agent....................................................40 SECTION 8.5 Notice of Default...................................................................41 SECTION 8.6 Non-Reliance on Administrative Agent and Other Lenders..............................41 SECTION 8.7 Indemnification.....................................................................41 SECTION 8.8 Administrative Agent in Its Individual Capacity.....................................42 SECTION 8.9 Resignation of the Administrative Agent; Successor Administrative Agent.............42 SECTION 8.10 Other Agents........................................................................42 SECTION 9. GUARANTEE...............................................................................................42 SECTION 9.1 Unconditional Guarantee.............................................................42 SECTION 9.2 Severability........................................................................43 SECTION 9.3 Limitation of Guarantor's Liability.................................................43 SECTION 9.4 Waiver of Stay, Extension or Usury Laws.............................................44 SECTION 10. MISCELLANEOUS...........................................................................................44 SECTION 10.1 Representation of the Lenders.......................................................44 SECTION 10.2 Assignments and Participations......................................................44 SECTION 10.3 Costs and Expense...................................................................46 SECTION 10.4 Indemnity...........................................................................46 SECTION 10.5 Setoff..............................................................................47 SECTION 10.6 Amendments and Waivers..............................................................47 SECTION 10.7 Independence of Covenants...........................................................47 SECTION 10.8 Entirety............................................................................48 SECTION 10.9 Notices.............................................................................48 SECTION 10.10 Survival of Warranties and Certain Agreement........................................48 SECTION 10.11 Failure or Indulgence Not Waiver; Remedies Cumulative...............................48 SECTION 10.12 Severability........................................................................48 SECTION 10.13 Headings............................................................................48 SECTION 10.14 Governing Law; Consent to Jurisdiction; Venue; Waiver of Jury Trial.................49 SECTION 10.15 Successors and Assign...............................................................50
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Page SECTION 10.16 Counterparts: Effectiveness.........................................................50 SECTION 10.17 Payments Pro Rata...................................................................50 SECTION 10.18 Waiver of Stay, Extension or Usury Laws.............................................50 SECTION 10.19 Confidentiality.....................................................................50
iv SCHEDULES AND EXHIBITS Schedule 3.10 - List of Subsidiaries Schedule 6.3 - Existing Liens Schedule 6.4 - Existing Indebtedness Exhibit A - Form of Note Exhibit B-1 - Form of Notice of Borrowing Exhibit B-2 - Form of Notice of Continuation/Conversion Exhibit C- 1 - Form of Legal Opinion of Mayer, Brown & Platt, U.S. Counsel to the Loan Parties Exhibit C-2 - Form of Legal Opinion of Conyers Dill & Pearman, Bermuda Counsel to Mutual Risk Exhibit C-3 - Form of Legal Opinion of Richard O'Brien, Esq. General Counsel to Mutual Risk Exhibit D - Form of Assignment and Assumption Agreement Exhibit E - Section 10.2(b)(ii) Certificate Exhibit F-1 - Form of Commitment Increase Agreement Exhibit F-2 - Form of Joinder Agreement v CREDIT AGREEMENT This Credit Agreement (this "Agreement") is dated as of September 21, 2000, and entered into by and among Mutual Risk Management Ltd., a company incorporated under the laws of Bermuda ("Mutual Risk"), Mutual Group, Ltd., a Delaware corporation ("Mutual Group"), as borrowers (in such capacity, collectively, the "Borrowers" and individually, a "Borrower"), Mutual Risk and Mutual Group, as guarantors (in such capacity, collectively, the "Guarantors" and individually, a "Guarantor"), the banks and financial institutions from time to time party hereto (collectively, the "Lenders" and individually, a "Lender") and Bank of America, N.A., as administrative agent for the Lenders (the "Administrative Agent"). RECITALS WHEREAS, the Borrowers desire that the Lenders extend a credit facility to the Borrowers, guaranteed by the Guarantors, in the amount of $180,000,000 as such amount may be increased up to $210,000,000 in accordance with this Agreement; NOW, THEREFORE, in consideration of the premises and the agreements, provisions and covenants herein contained, the parties hereby agree as follows: SECTION 1. DEFINITIONS; RULES OF CONSTRUCTION SECTION 1.1 Definitions. For all purposes of the Loan Documents (as defined below), the following definitions shall apply: "Accepting Lenders" has the meaning assigned to it in Section 2.1(c). "Administrative Agent" has the meaning assigned to it in the preamble of this Agreement. "Administrative Questionnaire" means, with respect to each Lender, an administrative questionnaire in the form prepared by the Administrative Agent and submitted to the Administrative Agent duly completed by each Lender. "Affiliate" of any specified Person means any other Person, directly or indirectly, controlling or controlled by or under direct or indirect common control with such specified Person. For the purposes of this definition, "control" (including with correlative meaning, the terms "controlling," "controlled by" and "under common control with"), when used with respect to any Person, means (i) the power to direct or cause the direction of the management or policies of such Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise, or (ii) the beneficial ownership of 10% or more of the total voting power of the Voting Stock (on a fully diluted basis) of such Person. "Amount of Unfunded Benefit Liability" means, with respect to any Pension Plan, (i) if set forth on the most recent actuarial valuation report with respect to such Pension Plan, the amount of unfunded benefit liabilities (as defined in Section 4001(a)(18) of ERISA) and (ii) otherwise, the excess of (x) the greater of Credit Agreement the current liability (as defined in Section 412(1)(7) of the Code) or the actuarial present value of the accrued benefits with respect to such Pension Plan over (y) the market value of the assets of such Pension Plan. "Annual Statement" means, with respect to any Insurance Company Subsidiary, the statutory annual financial statement of such Insurance Company Subsidiary as is required to be filed with the applicable Governmental Authority of its state or other jurisdiction of domicile, together with all exhibits and schedules filed therewith. "Asset Sale" means any direct or indirect sale, issuance, conveyance, lease, assignment, transfer or other disposition for value (including, without limitation, pursuant to any amalgamation, merger or consolidation or pursuant to any sale and leaseback transaction) by Mutual Risk or any of its Subsidiaries to any Person other than Mutual Risk or any of its Wholly Owned Subsidiaries (any such transaction, a "disposition") of any asset of Mutual Risk or any of its Subsidiaries, excluding (i) any disposition of Cash Equivalents in the ordinary course of business, (ii) any disposition of Investment Securities in the ordinary course of business the proceeds of which are used to purchase other Investment Securities or invested in Cash Equivalents pending such purchase, and (iii) any disposition of assets the Fair Market Value of which, together with the Fair Market Value of all assets disposed of in the period from the Closing Date to the date of the proposed disposition, does not exceed $10,000,000 in the aggregate. "Bankruptcy Law" means Title 11, United States Code, or any other applicable federal, state, or foreign bankruptcy, insolvency or similar law as now or hereafter constituted. "Base Rate" means a fluctuating rate per annum equal to the higher of (i) the Federal Funds Rate plus 1/2 of 1% and (ii) the rate of interest publicly announced from time to time by Bank of America, N.A. as its prime rate. The prime rate is set by Bank of America, N.A. based upon various factors including its costs and desired return, general economic conditions and other factors, and is used as a reference point for pricing some loans which may be priced at, above or below such announced rate. Any change in the prime rate announced by Bank of America, N.A. shall take effect at the opening of business on the day specified in the public announcement of such change. "Base Rate Loan" means a Loan or portion thereof bearing interest at the time in question at the Base Rate. "Board of Directors" means, in the case of a Person that is a corporation, the board of directors of such person or any committee authorized to act therefor and in the case of any other Person, the board of directors, management committee, or similar governing body or any authorized committee thereof responsible for the management and affairs of such Person. "Borrower" and "Borrowers" have the meanings assigned to them in the preamble of this Agreement. "Broker-Dealer" means any broker or dealer (as defined in Sections 3(a)(4) and 3(a)(5) of the Exchange Act) that is required to be registered under the Exchange Act, or any business entity controlled by a Broker-Dealer (other than a broker or dealer that is not required to be registered under the Exchange Act). "Business Day" means any day excluding Saturday, Sunday and any day on which banking institutions located in New York, New York or Dallas, Texas are authorized or required by law or other governmental action to close; provided, that when used in connection with an interest rate determination, a 2 Credit Agreement notice of borrowing pursuant to Section 2.2 or any payment with respect to the Loans, the term "Business Day" shall also exclude any day on which banks in London, England are not open for dealings in Dollar deposits in the London interbank market. "Capital Adequacy Regulation" means any guideline, request or directive of any central bank or other Governmental Authority, or any other law, rule or regulation, whether or not having the force of law, in each case, regarding capital adequacy of a bank or of any corporation controlling such bank. "Capital Stock" of any Person means any and all shares, interests, rights to purchase, warrants, options, participations or other equivalents of or interests in (however designated) equity of such Person, including any Preferred Stock, but excluding any debt securities convertible into such equity. "Capitalized Lease Obligation" means, as to any Person, the obligations of such Person under a lease that are required to be capitalized and accounted for as capital lease obligations under GAAP and, for purposes of this definition, the amount of such obligations at any date shall be the capitalized amount of such obligations at such date, determined in accordance with GAAP. "Cash Equivalents" means (i) marketable direct obligations issued or unconditionally guaranteed by the United States government or issued by any agency thereof and backed by the full faith and credit of the United States of America, in each case maturing within one year from the date of acquisition thereof; (ii) marketable direct obligations issued by any state of the United States of America or any political subdivision of any such state or any public instrumentality thereof maturing within one year from the date of acquisition thereof and, at the time of acquisition, having the highest rating obtainable from either S&P or Moody's; (iii) commercial paper maturing no more than one year from the date of creation thereof and, at the time of acquisition, having the highest rating obtainable from either S&P or Moody's; (iv) certificates of deposit or bankers' acceptances maturing within one year from the date of acquisition thereof issued by any commercial bank organized under the laws of the United States of America or any state thereof or the District of Columbia that (A) is at least "adequately capitalized" (as defined in the regulations of its primary Federal banking regulator) and (B) has Tier I capital (as defined in such regulations) of not less than $250,000,000; (v) certificates of deposits or banker's acceptances maturing within one year from the date of acquisition thereof issued by the Bank of Bermuda or The Bank of N.T. Butterfield & Son Limited; (vi) shares of any money market mutual fund that (a) has its assets invested continuously in the types of investments referred to in clauses (i) and (ii) above, (b) has net assets of not less than $500,000,000, and (c) has the highest rating obtainable from either S&P or Moody's; and (vii) repurchase agreements with respect to, and which are fully secured by a perfected security interest in, obligations of a type described in clause (i) or clause (ii) above and are with any commercial bank described in clause (iv) above. "Change of Control" means the occurrence of any of the following events: (i) any Person or Group (as defined below) becomes the beneficial owner (as defined below), directly or indirectly, in the aggregate of more than 33% of the total voting power of the Voting Stock of Mutual Risk, or (ii) during any period of two consecutive years, individuals who at the beginning of such period constituted the Board of Directors of Mutual Risk, together with any new directors whose election by such Board of Directors or whose nomination for election by the shareholders of Mutual Risk was approved by a vote of a majority of the directors of Mutual Risk then still in office who were either directors at the beginning of such period or whose election or nomination for election was previously so approved, cease for any reason to constitute a majority of the Board of Directors of Mutual Risk then in office. 3 Credit Agreement For purposes of this definition only: (a) "beneficial owner" and "beneficially own" shall have the meaning specified in Rules 13d-3 and 13d-5 under the Exchange Act, except that any Person or Group shall be deemed to have "beneficial ownership" of all securities that such Person or Group has the right to acquire, whether such right is exercisable immediately, only after the passage of time or upon the occurrence of a subsequent condition; (b) "Person" and "Group" shall have the meanings for "person" and "group" as used in Sections 13(d) and 14(d) of the Exchange Act; and (c) any Person or Group shall be deemed to beneficially own any Voting Stock of a corporation held by any other corporation (the "parent corporation") so long as such other Person or Group, as the case may be, beneficially owns, directly or indirectly, in the aggregate more than 33% of the voting power of the Voting Stock of the parent corporation and no other Person or Group beneficially owns an equal or greater amount of the Voting Stock of the parent corporation. "Closing Date" means the date on which each condition specified in Section 4.1 shall be satisfied or waived in all respects in the sole discretion of the Lenders. "Code" means the Internal Revenue Code of 1986, as amended. "Commitment" means (i) with respect to each Lender listed on the signature pages hereof, the amount set forth opposite its name on the signature pages hereof, as such amount may be changed pursuant hereto, and (ii) with respect to each Eligible Assignee that becomes a Lender pursuant hereto, the amount of the Commitment thereby assumed by it, in each case as such amount may be reduced from time to time pursuant hereto. "Commitment Fee Rate" means a rate per annum determined in accordance with the Pricing Schedule. "Consolidated Indebtedness" means, with respect to Mutual Risk and its Subsidiaries at any date, the Indebtedness of Mutual Risk and its Subsidiaries, determined on a consolidated basis as of such date, including, without limitation, all Indebtedness outstanding under this Agreement. "Consolidated Total Capital" means, with respect to Mutual Risk and its Subsidiaries at any date, the sum, without duplication, of Consolidated Indebtedness and Stockholders' Equity. "Contested Claims" has the meaning assigned to it in Section 3.15. "Contingent Obligation" means, with respect to Mutual Risk and its Subsidiaries, without duplication, any obligation, contingent or otherwise, of any such Person pursuant to which such Person has directly or indirectly guaranteed any Indebtedness or other obligation of any other Person and, without limiting the generality of the foregoing, any obligation, direct or indirect, contingent or otherwise, of any such Person (a) to purchase or pay (or advance or supply funds for the purchase or payment of) such Indebtedness or other obligation (whether arising by virtue of partnership arrangements, by agreement to keep well, to purchase assets, goods, securities or services, to take-or-pay, or to maintain financial statement condition or otherwise) or (b) entered into for the purpose of assuring in any other manner the obligee of such 4 Credit Agreement Indebtedness or other obligation of the payment thereof or to protect such obligee against loss in respect thereof (in whole or in part); provided, that the term Contingent Obligation shall not include (i) obligations under insurance or reinsurance policies or (ii) endorsements for collection or deposit in the ordinary course of business. "Contracts" has the meaning assigned to it in Section 3.4. "Convertible Securities" means Mutual Risk's Zero Coupon Convertible Exchangeable Subordinated Debentures due 2015 issued pursuant to the Indenture dated as of October 30, 1995 by and among Mutual Risk as Issuer, Mutual Group as Guarantor and State Street Bank and Trust Company as Trustee. "Custodian" means any receiver, interim receiver, receiver and manager, trustee, assignee, liquidator, sequestrator, custodian or similar official charged with maintaining possession or control over property for one or more creditors, whether under any Bankruptcy Law or otherwise. "Default" means any event which is, or after notice or passage of time or both would be, an Event of Default. "Derivative Agreement" means any Interest Rate Protection Agreement or any other agreement of Mutual Risk or any of its Subsidiaries relating to a rate swap transaction, basis swap, forward rate transaction, commodity swap, commodity option, equity or equity index swap, equity or equity index option, bond option, interest rate option, foreign exchange transaction, cap transaction, floor transaction, collar transaction, currency swap transaction, cross-currency rate swap transaction, currency option or any other similar transaction (including any option with respect to any of the foregoing transactions) or any combination of any of the foregoing transactions. "Disbursement Date" with respect to any Loan, means the disbursement date for such Loan designated as such by the applicable Borrower in accordance with Section 2.2. "Dollar" or the sign "$" means the lawful money of the United States of America. "EHS Laws" has the meaning assigned to it in Section 3.21. "Eligible Assignee" means (A) (i) a commercial bank, savings and loan association or savings bank organized under the laws of the United States of America or any state thereof and having a combined capital and surplus of at least $250,000,000, (ii) a commercial bank organized under the laws of any other country or a political subdivision thereof and having a combined capital and surplus of at least $250,000,000, provided, that (x) such bank is acting through a branch or agency located in the United States of America or (y) such bank is organized under the laws of a country that is a member of the Organization for Economic Cooperation and Development or a political subdivision of such country, provided, further, that at the time of determination, the Lender making the assignment or transfer to such bank, believes that such bank will be entitled to an exemption from U.S. withholding tax (assuming compliance with the first sentence of Section 10.2(c); and (iii) any other entity which is an "accredited investor" (as defined in Regulation D under the Securities Act) which extends credit or buys loans as one of its businesses including, but not limited to, insurance companies, mutual funds and lease financing companies (but other than a Broker-Dealer), in each case (under clauses (i) through (iii) above) that is reasonably acceptable to the Administrative Agent; and (B) 5 Credit Agreement any Lender and any Affiliate of any Lender (other than a Broker-Dealer). Neither Mutual Risk nor any of its Subsidiaries or Affiliates shall be an Eligible Assignee. "Employee Benefit Plan" means any employee benefit plan within the meaning of Section 3(3) of ERISA which (a) is sponsored, maintained or contributed to by Mutual Risk, any of its Subsidiaries or any of their respective ERISA Affiliates or (b) has at any time within the preceding six years been sponsored, maintained or contributed to by Mutual Risk, any of its Subsidiaries or any of their respective current or former ERISA Affiliates, or for which Mutual Risk, any of its Subsidiaries or any of their respective current or former ERISA Affiliates retains any liability, whether contingent or otherwise. "ERISA" means the Employee Retirement Income Security Act of 1974, and the rules and regulations thereunder, each as amended, supplemented or otherwise modified. "ERISA Affiliate" means any Person who together with Mutual Risk is treated as a single employer within the meaning of Section 414(b), (c), (m) or (o) of the Code or Section 4001(b) of ERISA. "ERISA Event" means (i) a "reportable event" within the meaning of Section 4043 of ERISA and the regulations issued thereunder with respect to any Pension Plan (excluding those for which the provision for 30-day notice to the PBGC has been waived by regulation); (ii) the failure to meet the minimum funding standard of Section 412 of the Code with respect to any Pension Plan (whether or not waived) or the failure to make any required contribution within 10 days of its due date with respect to any Multiemployer Plan; (iii) the provision by the administrator of any Pension Plan pursuant to Section 4041(a)(2) of ERISA of a notice of intent to terminate such plan in a distress termination described in Section 4041(c) of ERISA; (iv) the withdrawal by Mutual Risk, any of its Subsidiaries or any of their respective ERISA Affiliates from any Multiple Employer Plan or the termination of any such Multiple Employer Plan resulting in liability pursuant to Sections 4063 or 4064 of ERISA; (v) the institution by the PBGC of proceedings to terminate any Pension Plan, or the occurrence of any event or condition which might reasonably be expected to constitute grounds under ERISA for the termination of, or the appointment of a trustee to administer, any Pension Plan: (vi) the imposition of liability on Mutual Risk, any of its Subsidiaries or any of their respective ERISA Affiliates pursuant to Section 4062(1) or 4069 of ERISA or by reason of the application of Section 4212(c) of ERISA; (vii) the withdrawal by Mutual Risk, any of its Subsidiaries or any of their respective ERISA Affiliates in a complete or partial withdrawal (within the meaning of Sections 4203 and 4205 of ERISA) from any Multiemployer Plan if there is any potential liability therefor, or the receipt by Mutual Risk, any of its Subsidiaries or any of their respective ERISA Affiliates of notice from any Multiemployer Plan that it is in reorganization or insolvency pursuant to Section 4241 or 4245 of ERISA, or that it intends to terminate or has terminated under Section 4041A or 4042 of ERISA; (viii) the occurrence of an act or omission which could reasonably be expected to give rise to the imposition on Mutual Risk, any of its Subsidiaries or any of their respective ERISA Affiliates of fines, penalties, taxes or related charges under Chapter 43 of the Code or under Section 406, 409 or 502(i) or (1) of ERISA in respect of any Employee Benefit Plan; (ix) receipt from the Internal Revenue Service of notice of the failure of any Pension Plan (or any other Employee Benefit Plan intended to be qualified under Section 401(a) of the Code) to qualify under Section 401(a) of the Code, or the failure of any trust forming part of any Pension Plan or Employee Benefit Plan to qualify for exemption from taxation under Section 501(a) of the Code; or (x) the imposition of a Lien pursuant to Section 401(a)(29) or 412(n) of the Code or pursuant to ERISA with respect to any Pension Plan. "Eurodollar Base Rate" has the meaning set forth in the definition of Eurodollar Rate. 6 Credit Agreement "Eurodollar Margin" means a rate per annum determined in accordance with the Pricing Schedule. "Eurodollar Rate" means for any Interest Period with respect to any Eurodollar Rate Loan, a rate per annum determined by the Administrative Agent pursuant to the following formula: Eurodollar Rate = Eurodollar Base Rate --------------------------------------- 1.00 - Eurodollar Reserve Percentage Where, "Eurodollar Base Rate" (also known as LIBOR) means, for such Interest Period: (a) The rate per annum equal to the rate determined by the Administrative Agent to be the offered rate that appears on the page of the Telerate screen that displays an average British Bankers Association Interest Settlement Rate for deposits in Dollars (for delivery on the first day of such Interest Period) with a term equivalent to such Interest Period, determined as of approximately 11:00 a.m. (London time) two Business Days prior to the first day of such Interest Period, or (b) In the event the rate referenced in the preceding subsection (a) does not appear on such page or service or such page or service shall cease to be available, the rate per annum equal to the rate determined by the Administrative Agent to be the offered rate on such other page or other service that displays an average British Bankers Association Interest Settlement Rate for deposits in Dollars (for delivery on the first day of such Interest Period) with a term equivalent to such Interest Period, determined as of approximately 11:00 a.m. (London time) two Business Days prior to the first day of such Interest Period, or (c) In the event the rates referenced in the preceding subsections (a) and (b) are not available, the rate per annum determined by the Administrative Agent as the rate of interest (rounded upward to the next 1/100th of 1%) at which deposits in Dollars for delivery on the first day of such Interest Period in same day funds in the approximate amount of the Eurodollar Rate Loan being made, continued or converted by the Administrative Agent in its capacity as a Lender and with a term equivalent to such Interest Period would be offered by the London Branch of Bank of America, N.A. to major banks in the applicable offshore Dollar market at their request at approximately 11:00 a.m. (London time) two Business Days prior to the first day of such Interest Period; and "Eurodollar Reserve Percentage" means, for any day during any Interest Period, the reserve percentage (expressed as a decimal, rounded upward to the next 1/100th of 1%) in effect on such day, whether or not applicable to any Lender, under regulations issued from time to time by the FRB for determining the maximum reserve requirement (including any emergency, supplemental or other marginal reserve requirement) for a member bank of the Federal Reserve System in respect of "Eurocurrency liabilities" (or in respect of any other category of liabilities, which includes deposits by reference to which the interest rate on Eurodollar Rate Loans is determined or any category of extensions of credit or other assets, which includes loans by a non-United States office of any Lender to United States residents). The Eurodollar Rate for each outstanding Eurodollar Rate Loan shall 7 Credit Agreement be adjusted automatically as of the effective date of any change in the Eurodollar Reserve Percentage. The determination of the Eurodollar Reserve Percentage and the Eurodollar Base Rate by the Administrative Agent shall be conclusive in the absence of manifest error. "Eurodollar Rate Loan" means a Loan bearing interest based on the Eurodollar Rate. "Event of Default" has the meaning assigned to it in Section 7.1. "Exchange Act" means the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder. "Existing Credit Agreement" means that certain Credit Agreement dated as of December 6, 1999, among Mutual Risk, Mutual Group, certain Affiliates of Mutual Risk, certain lenders and Prudential Securities Credit Corp., as Administrative Agent, as heretofore amended or modified. "Fair Market Value" means, with respect to any Asset Sale, the price (after taking into account any liabilities relating to such asset) which could be negotiated in an arm's-length free market transaction, for cash, between a willing seller and a willing and able buyer, neither of which is under any compulsion to complete the transaction. "FAS 115" means Statement No. 115 ("Accounting for Certain Investments in Indebtedness and Equity Securities") issued by the Financial Accounting Standards Board. "Federal Funds Rate" means, for any day, the rate per annum (rounded upward, if necessary, to the nearest 1/100th of 1%) equal to the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers on such day, as published by the Federal Reserve Bank of New York on the Business Day next succeeding such day in Federal Reserve Board Statistical Release H.15(519) or any successor or substitute publication; provided, that (i) if such day is not a Business Day, the Federal Funds Rate for such day shall be such rate on such transactions on the next preceding Business Day as so published on the next succeeding Business Day, and (ii) if no such rate is so published on such next succeeding Business Day, the Federal Funds Rate for such day shall be the average rate quoted to Bank of America, N.A. for such day on such transactions as determined by the Administrative Agent, which determination shall be conclusive in the absence of manifest error. "Fee Letter" means the confidential fee letter dated July 7, 2000, among Mutual Risk, Bank of America, N.A. and Banc of America Securities LLC. "Foreign Plan" means any employee benefit plan maintained outside the United States by Mutual Risk, any of its Subsidiaries or any of their respective Affiliates for employees substantially all of whom are non-resident aliens of the United States and for which Mutual Risk, any of its Subsidiaries or any of their respective Affiliates may be directly or indirectly liable. "FRB" means the Board of Governors of the Federal Reserve System, or any Governmental Authority succeeding to any of its principal functions. 8 Credit Agreement "GAAP" means generally accepted accounting principles, as recognized by the American Institute of Certified Public Accountants and the Financial Accounting Standards Board, consistently applied and maintained on a consistent basis for Mutual Risk throughout the period indicated and consistent with the prior financial practice of Mutual Risk. "Governmental Authority" means any nation, province, state or political subdivision thereof, and any government or any Person exercising executive, legislative, regulatory or administrative functions of or pertaining to government, and any corporation or other entity owned or controlled, through stock or capital ownership or otherwise, by any of the foregoing. "Guarantee" has the meaning assigned to it in Section 9.1. "Guarantor" and "Guarantors" have the meanings assigned to them in the preamble of this Agreement. "Hazardous Substances" has the meaning assigned to it in Section 3.21. "Increasing Lender" has the meaning assigned to it in Section 2.14. "Indebtedness" means, with respect to Mutual Risk and its Subsidiaries at any date and without duplication, the sum of the following calculated in accordance with GAAP: (a) all liabilities, obligations and indebtedness for borrowed money, including but not limited to obligations evidenced by bonds, debentures, notes or other similar instruments of any such Person, (b) all obligations to pay the deferred purchase price of property or services of any such Person (other than trade payables due from such Person and arising in the ordinary course of business for not more than 90 days not subject to (a) above), (c) all Capitalized Lease Obligations of any such Person, (d) all Indebtedness of any other Person secured by a Lien on any asset of any such Person, (e) all obligations, contingent or otherwise, of any such Person relating to the face amount of letters of credit, whether or not drawn, and banker's acceptances issued for the account of any such Person, but excluding any obligation relating to an undrawn letter of credit if the undrawn letter of credit is issued in connection with a liability for which a reserve has been established by such Person in accordance with GAAP, (f) all obligations incurred by any such Person pursuant to Interest Rate Protection Agreements which are due and payable, (g) all obligations and liabilities arising under or in connection with the RHINOS, whether or not such obligations and liabilities are considered indebtedness or debt under GAAP and (h) all Contingent Obligations of any such Person with respect to Indebtedness referred to in clauses (a) through (g) of this definition. "Indemnified Liabilities" has the meaning assigned to it in Section 10.4. "Indemnitees" has the meaning assigned to it in Section 10.4. "Insurance Company Subsidiary" means a Subsidiary of Mutual Risk which is a licensed insurance company. "Interest Payment Date" means the last day of each Interest Period and, if such Interest Period is more than three months in duration, the date that is three months after the first day of such Interest Period. 9 Credit Agreement "Interest Period" means, with respect to any Eurodollar Rate Loan and subject to Section 2.8(a), (a) the period beginning on the Disbursement Date of such Eurodollar Rate Loan or the date a Loan otherwise becomes such Eurodollar Rate Loan in accordance herewith and ending on the day numerically corresponding to such Disbursement Date or date in the first, second, third or sixth month next following such Disbursement Date or date and (b) each subsequent period beginning on the last day of the next preceding Interest Period and ending on the day numerically corresponding to the first day of such Interest Period in the first, second, third or sixth month thereafter. "Interest Rate Determination Date" means, with respect to any Interest Period, the second Business Day prior to the first Business Day of such Interest Period. "Interest Rate Protection Agreement" of any Person means any interest rate protection agreement (including, without limitation, interest rate swaps, caps, floors, collars, derivative instruments and similar agreements), and/or other types of interest hedging agreements in support of such Person's business and not of a speculative nature. "Investment Securities" means "securities" classified as "trading securities" or "available-for-sale securities" for purposes of FAS 115, in each case within the meaning of FAS 115. "Laws" has the meaning assigned to it in Section 3.4. "Lender" has the meaning assigned to it in the preamble of this Agreement. "Lien" has the meaning assigned to it in Section 3.4. "Loan" with respect to any Lender at any time, means (a) any loan to be made hereunder by such Lender after such time or (b) any loan made by such Lender hereunder in the principal amount outstanding at such time, and "Loans," at any time, means the aggregate of the Loans of all the Lenders at such time. "Loan Documents" means this Agreement (which includes the Guarantee) and the Notes. "Loan Party" means each of Mutual Risk and Mutual Group, and "Loan Parties" means, collectively, Mutual Risk and Mutual Group. "Margin Stock" has the meaning specified in Regulation U. "Material Adverse Effect" means (i) a material adverse effect upon the business, operations, properties, assets, condition (financial or otherwise) or prospects of Mutual Risk and its Subsidiaries, taken as a whole, or (ii) a material impairment of the ability of Mutual Risk or Mutual Group to perform any material obligations under the Loan Documents. "Material Subsidiary" means a Subsidiary of Mutual Risk which, as of the last day of the most recently ended fiscal year, either held five percent (5%) or more of the consolidated total assets, or contributed five percent (5%) or more to the consolidated total revenues, of Mutual Risk and its consolidated Subsidiaries for the fiscal year ending on such date (or, in the case of any Subsidiary acquired or created during any fiscal year, which would have met either of such tests on a pro forma basis as of the last day of the preceding fiscal year). 10 Credit Agreement "Maturity Date" means the earlier of (a) the third anniversary of the Closing Date, as such date may be extended pursuant to Section 2.1(c), or if any such date is not a Business Day, the next preceding Business Day and (b) the date the Loans are accelerated or the Total Commitment is terminated pursuant to Section 7.2. "Maximum Amount" and "Maximum Rate", respectively, mean, for each Lender, the maximum non-usurious amount and the maximum non-usurious rate of interest, which under applicable laws, such Bank is permitted to contract for, charge, take, reserve or receive on the Loans. "Moody's" means Moody's Investors Service, Inc. or its successor, or if it is dissolved or liquidated or no longer performs the functions of a securities rating agency, such other nationally recognized securities rating agency agreed upon by Mutual Risk and the Administrative Agent and approved by the Required Lenders. "Multiemployer Plan" means a "multiemployer plan" as defined in Section 4001(a)(3) of ERISA to which Mutual Risk, any of its Subsidiaries or any of their respective ERISA Affiliates is making or is accruing an obligation to make contributions or has within the preceding six years made or accrued an obligation to make contributions. "Multiple Employer Plan" means a "single employer plan" as defined in Section 4001(a)(15) of ERISA that (i) is or was sponsored, maintained or contributed to by Mutual Risk, any of its Subsidiaries or any of their respective ERISA Affiliates and at least one Person other than Mutual Risk, any of its Subsidiaries or any of their respective ERISA Affiliates or (ii) was so sponsored, maintained or contributed to and in respect of which Mutual Risk, any of its Subsidiaries or any of their respective ERISA Affiliates could incur liability under Section 4064 or 4069 of ERISA in the event such plan has been or were to be terminated. "Mutual Risk" has the meaning assigned to it in the preamble of this Agreement. "Mutual Group" has the meaning assigned to it in the preamble of this Agreement. "Net Cash Proceeds" means, with respect to a Permitted Debt Issuance, cash received by Mutual Risk from, and on or after, the incurrence of such Permitted Debt Issuance, after payment of all reasonable attorneys' fees and usual and customary underwriting commissions, closing costs and other reasonable expenses associated with such Permitted Debt Issuance. "Note" has the meaning assigned to it in Section 2.4. "Obligations" means all obligations of every nature of the Borrowers and the Guarantors from time to time owed to the Lenders and the Administrative Agent under the Loan Documents, whether for principal, reimbursements, interest, fees, expenses, indemnities or otherwise, and whether primary, secondary, direct, indirect, contingent, fixed or otherwise (including obligations of performance). "Officer" means, with respect to any Person, the President, an Executive Vice President, the Chief Operating Officer, a Senior Vice President, the General Manager, the Chief Financial Officer, the Treasurer or the Secretary of such Person. 11 Credit Agreement "Officers' Certificate" means a certificate signed by two Officers. "PBGC" means the Pension Benefit Guaranty Corporation or any Governmental Authority succeeding to any of its principal functions. "Pension Plan" means a Single Employer Plan or a Multiple Employer Plan. "Permitted Business" means (i) with respect to Mutual Risk, the business of acting as a holding company the only material assets of which are the Capital Stock of its Subsidiaries and (ii) with respect to any of Mutual Risk's Subsidiaries, the business carried on by such Subsidiary on the Closing Date; it being understood that the term "Permitted Business" shall include the business of any Person acquired by Mutual Risk or any of its Subsidiaries subsequent to the Closing Date which is engaged in the same or a substantially similar business as the business carried on by Mutual Risk or such Subsidiary on the Closing Date. "Permitted Debt Issuance" means unsecured Indebtedness of Mutual Risk for borrowed money issued or incurred after the Closing Date not to exceed $200,000,000, in the aggregate, at any time outstanding; provided that such Indebtedness does not mature or require any principal payments or sinking fund payments prior to the date which is 120 days after the fifth anniversary of the Closing Date and that the terms and conditions of such Indebtedness are not more onerous or restrictive on Mutual Risk and its Subsidiaries than the terms and conditions of the Loan Documents. "Permitted Liens" means (i) Purchase Money Liens; (ii) any Lien on any asset securing Indebtedness incurred or assumed for the purpose of financing all or any part of the cost of acquiring such asset, provided, that such Indebtedness does not exceed such cost, such Lien attaches only to such asset and such Lien attaches to such asset concurrently with or within ninety (90) days after the acquisition thereof; (iii) any Lien existing on any asset of any corporation at the time such corporation becomes a Subsidiary of Mutual Risk and not created in contemplation of such event; (iv) any Lien on any asset of any corporation existing at the time such corporation is merged or consolidated with or into Mutual Risk or a Subsidiary of Mutual Risk and not created in contemplation of such event; (v) any Lien existing on any asset prior to the acquisition thereof by Mutual Risk or a Subsidiary of Mutual Risk and not created in contemplation of such acquisition; (vi) any Lien arising out of the refinancing, extension, renewal or refunding of any Indebtedness secured by any Lien permitted by any of the foregoing clauses, provided, that such Indebtedness is not increased and is not secured by any additional assets; (vii) Liens arising in the ordinary course of business of Mutual Risk and its Subsidiaries (including Liens arising in the ordinary course of the insurance business of Mutual Risk and its Subsidiaries) which do not secure Indebtedness and do not in the aggregate materially detract from or impair the use or value of the asset or assets subject thereto; (viii) Liens on cash and Cash Equivalents securing obligations under Derivative Agreements entered into for bona fide hedging purposes as long as the aggregate amount of cash and Cash Equivalents subject to such Liens does not at any time exceed $10,000,000; (ix) any Liens on securities securing repurchase obligations of Mutual Risk or a Subsidiary of Mutual Risk relating to those securities as long as such Liens arise in the ordinary course of business and as long as such Liens are in amounts and otherwise are on terms consistent with then existing practices in the repurchase agreement market; (x) any Liens on securities or cash of any Insurance Company Subsidiary which secure its obligations as an insurer or reinsurer; (xi) the Liens described in Schedule 6.3; (xii) until, but not after, the initial borrowing of Loans hereunder, the Liens securing the Indebtedness owing under the Existing Credit Agreement; and (xiii) any Liens not otherwise permitted by the foregoing clauses securing Indebtedness in an aggregate principal amount at any time outstanding not to exceed $10,000,000. 12 Credit Agreement "Person" means any individual, corporation, partnership, joint venture, association, joint stock company, trust, unincorporated organization, government or any agency or political subdivision thereof or any other entity. "Preferred Stock" of any Person means any Capital Stock of such Person that has preferential rights over any other Capital Stock of such Person with respect to dividends, distributions or redemptions or upon liquidation. "Pricing Schedule" means the Schedule hereto identified as such. "Property" means, with respect to any Person, any interest of such Person in any kind of property or asset, whether real, personal or mixed, tangible or intangible. "Purchase Money Lien" means (i) any mortgage, pledge, hypothecation, lien, encumbrance, charge or security interest of any kind upon any Capital Stock of any Insurance Company Subsidiary of Mutual Risk acquired after the date hereof, if such purchase money lien is given for the purpose of financing, and does not exceed, the cost to Mutual Risk or any Subsidiary of acquiring the Capital Stock or Property of the acquired Insurance Company Subsidiary and such financing is effected concurrently with, or within six months after, the date of such acquisition, and (ii) any extension, renewal or refinancing of any such Purchase Money Lien as long as the principal amount of obligations secured thereby does not exceed the principal amount of obligations secured immediately prior to such extension, renewal or refinancing. "Purchasing Lenders" has the meaning assigned to it in Section 2.1(c). "Quarterly Statement" means, with respect to any Insurance Company Subsidiary, the statutory quarterly financial statement of such Insurance Company Subsidiary as is required to be filed with the applicable Governmental Authority of its state or other jurisdiction of domicile, with all exhibits and schedules filed therewith. "Regulations T, U and X" mean Regulations T, U and X of the FRB, as in effect from time to time. "Rejected Amount" has the meaning assigned to it in Section 2.1(c). "Rejecting Lenders" has the meaning assigned to it in Section 2.1(c). "Required Lenders" means, (i) at any time that any Lender holds more than 1/3 of the Total Commitment, three-fourths (3/4) or more of the Lenders by number, and (ii) at any other time, the Lenders holding at least 66-2/3% of the Total Commitment at such time or if the Total Commitment has been terminated, holding at least 66-2/3% of the outstanding principal amount of all Loans at such time. "RHINOS" means Redeemable Hybrid Income Overnight Shares issued by either Mutual Risk or Mutual Group to an affiliate of Bank of America, N.A., in an aggregate principal or face amount not to exceed $40,000,000 and having terms and conditions acceptable to the Administrative Agent in its sole discretion. 13 Credit Agreement "SAP" means, with respect to any Insurance Company Subsidiary, the accounting practices and procedures required to be complied with by such Insurance Company Subsidiary under the statutes of its state of domicile and under the rules and regulations of the applicable Governmental Authority of that state. "SEC" means the Securities and Exchange Commission, or any Governmental Authority succeeding to any of its principal functions. "Securities Act" means the Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder. "Single Employer Plan" means a "single-employer plan", as defined in Section 4001(a)(15) of ERISA, that (i) is or was sponsored, maintained or contributed to by Mutual Risk, any of its Subsidiaries or any of their respective ERISA Affiliates and no Person other than Mutual Risk, any of its Subsidiaries or any of their respective ERISA Affiliates or (ii) was so sponsored, maintained or contributed to by and in respect of which Mutual Risk, any of its Subsidiaries or any of their respective ERISA Affiliates could have liability under Section 4069 of ERISA in the event such plan has been or were to be terminated. "S&P" means Standard & Poor's Ratings Group or its successor, or if it is dissolved or liquidated or no longer performs the functions of a securities rating agency, such other nationally recognized securities rating agency agreed upon by Mutual Risk and the Administrative Agent and approved by the Required Lenders. "Stockholders' Equity" means, with respect to Mutual Risk and its Subsidiaries at any date, the stockholders' equity of Mutual Risk and its Subsidiaries determined on a consolidated basis in accordance with GAAP; provided that, for purposes hereof, Stockholders' Equity shall be determined without regard to the requirements of FAS 115; and provided, further, that the principal or face amount of the RHINOS shall not be considered to be Stockholders' Equity for purposes of this Agreement. "Subsidiary" means, in respect of any Person, any corporation, association, partnership or other business entity of which more than 50% of the total voting power of the Voting Stock is at the time owned or controlled, directly or indirectly, by (i) such Person, (ii) such Person and one or more Subsidiaries of such Person or (iii) one or more Subsidiaries of such Person. "Tax Return" means a report, return or other information (including any amendments) required to be supplied with respect to Taxes including, where permitted or required, combined or consolidated returns for any group of entities that includes Mutual Risk or any of its Subsidiaries. "Taxes" means any present or future taxes, assessments, fees, levies, imposts, duties, deductions, liabilities, withholdings or other charges of any nature whatsoever, including interest, penalties and additions thereto from time to time or at any time imposed by any Law or any Governmental Authority. "Total Commitment" means the sum of the Commitments of the Lenders at the time in question, which is $180,000,000 on the Closing Date and may be increased up to $210,000,000 in accordance with Section 2.14. "Transactions" means the execution, delivery and performance of the Loan Documents and the issuance or incurrence of the Loans, the Notes and the Guarantee pursuant to the Loan Documents. 14 Credit Agreement "Utilization Fee Rate" means a rate per annum determined in accordance with the Pricing Schedule. "Voting Stock" of a Person means all classes of Capital Stock or other interests (including partnership interests) of such Person then outstanding and normally entitled (without regard to the occurrence of any contingency) to vote in the election of directors, managers or trustees thereof. "Wholly Owned Subsidiary" means a Subsidiary, all the Capital Stock of which (other than directors' qualifying shares) is owned by Mutual Risk or one or more Wholly Owned Subsidiaries. SECTION 1.2 Rules of Construction. Unless the context otherwise requires: (i) a term has the meaning assigned to it herein; (ii) an accounting term not otherwise defined has the meaning assigned to it in accordance with GAAP; (iii) "or" is not exclusive; (iv) "including" means including without limitation; (v) words in the singular include the plural and words in the plural include the singular; (vi) the words "herein", "hereof", and "hereunder" and other words of similar import refer to this Agreement as a whole and not to any particular Section or other subdivision; (vii) section references refer to Sections of this Agreement unless otherwise indicated; (viii) the headings in this Agreement are for purposes of reference only and shall not be considered in construing this Agreement; and (ix) any reference to this Agreement hereunder shall mean this Credit Agreement, as the same may be modified, amended or supplemented. SECTION 2. AMOUNT AND TERMS OF LOAN COMMITMENT AND LOANS; NOTES SECTION 2.1 Commitment. (a) Subject to the terms and conditions of this Agreement and in reliance upon the representations and warranties of the Loan Parties herein set forth, the Lenders hereby severally agree to make Loans to either Borrower from time to time prior to the Maturity Date in an aggregate principal amount for each Lender not exceeding its Commitment; provided that the aggregate principal balance of Loans made by a Lender to Mutual Group shall not exceed 60% of such Lender's Commitment; and provided, further, that the aggregate principal balance of Loans made to the Borrowers shall not exceed the Total Commitment. 15 Credit Agreement (b) This Agreement is in the nature of a revolving credit facility, and amounts borrowed and repaid hereunder may, subject to the terms and conditions hereof, be reborrowed. (c) The Maturity Date may be extended annually, subject to the terms and conditions set forth in this Section 2.1(c) and in Section 2.1(d), on the first and second anniversaries of the Closing Date, in each case for a period of one year from the Maturity Date then in effect. If the Borrowers wish to request an extension of the Maturity Date then in effect, Mutual Risk shall give notice to that effect to the Administrative Agent not less than 60 nor more than 90 days prior to the first or second anniversary of the Closing Date, as the case may be. The Administrative Agent shall promptly notify each Lender of such request, and each Lender shall endeavor to respond to such request, whether affirmatively or negatively (such determination to be in the sole discretion of such Lender), by notice to Mutual Risk and the Administrative Agent within 30 days of receipt of such request. A Lender that has not affirmatively responded within such 30- day period shall be deemed to have responded negatively. The Administrative Agent shall promptly notify Mutual Risk of Lenders' responses (or deemed responses) and the aggregate amount (the "Rejected Amount") of the Commitments of the Lenders (the "Rejecting Lenders") that have not agreed to the requested extension. If the Rejected Amount exceeds 50% of the Total Commitment, the Maturity Date then in effect shall not be extended. If the Rejected Amount does not exceed 50% of the Total Commitment, Mutual Risk shall have the right, in consultation with and through the Administrative Agent, prior to such first or second anniversary of the Closing Date, as the case may be, to request one or more Lenders that have agreed to the requested extension (the "Accepting Lenders") to increase their Commitments by an aggregate amount not to exceed the Rejected Amount. Each Accepting Lender shall have the right, but not the obligation, to offer to increase its Commitment by an amount not to exceed the amount requested by Mutual Risk, which offer shall be made by notice from such Accepting Lender to the Administrative Agent, not later than ten days after such Accepting Lender is notified of such request by the Administrative Agent, specifying the amount of the offered increase in such Accepting Lender's Commitment. Such increase shall be effected on the applicable anniversary date of the Closing Date by a pro rata assignment of a Rejecting Lender's or Rejecting Lenders' Loans and Commitments pursuant to Section 10.2 (without regard to the minimum assignment amount set forth therein), which each Rejecting Lender agrees to make. If the aggregate amount of the offered increases in the Commitments of all Accepting Lenders does not equal the Rejected Amount, Mutual Risk shall have the right, prior to such first or second anniversary of the Closing Date, as the case may be, to require the Rejecting Lender or Rejecting Lenders to assign on a pro rata basis its or their Loans and Commitments to one or more Eligible Assignees (the "Purchasing Lenders") pursuant to Section 10.2, each of which Purchasing Lenders shall have a Commitment not less than $5,000,000, and which Purchasing Lenders shall have aggregate Commitments not greater than the Rejected Amount less any increases in the Commitments of the Accepting Lenders. Such assignment shall be effected on the applicable anniversary date of the Closing Date. Each Purchasing Lender shall be deemed to have consented to the extension of the Maturity Date then in effect. If there remains any Rejected Amount after giving effect to the assignments to the Accepting Lenders and the Purchasing Lenders described in this Section 2.1(c), on or before such first or second anniversary of the Closing Date, as the case may be, Mutual Risk may, by notice to the Administrative Agent, elect to reduce the Total Commitment by such remaining Rejected Amount, and, if Mutual Risk so elects, on such first or second anniversary of the Closing Date, as the case may be, the Borrowers shall cause all Obligations owing to the applicable Rejecting Lender or Rejecting Lenders to be repaid, and upon such repayment, the Total Commitment shall be reduced by the amount of such remaining Rejected Amount. (d) The Maturity Date shall be extended pursuant to Section 2.1(c) only if (i) all Accepting Lenders and Purchasing Lenders have consented thereto, (ii) the Borrowers shall have performed their 16 Credit Agreement obligations under the last sentence of Section 2.1(c), and (iii) after giving effect to the transactions contemplated by Section 2.1(c), no Lender has a Commitment that is 66-2/3% or more of the Total Commitment. If so extended, the Maturity Date shall be extended, without further action by the Borrowers, the Lenders or the Administrative Agent (other than notice by the Administrative Agent to the Borrowers and the Lenders that the Maturity Date has been extended), for a period of one year from the Maturity Date then in effect. SECTION 2.2 Procedure for Borrowing. (a) Either Borrower may request a Loan hereunder by a notice substantially in the form set forth in Exhibit B-1, with all blank spaces appropriately completed in compliance with Section 2.2(b), specifying the aggregate principal amount of the Loan to be made on the applicable Disbursement Date, which shall be $5,000,000 or a whole multiple of $1,000,000 in excess thereof. The notice must be given to the Administrative Agent not later than 11:00 a.m. (New York City time) on the (i) third Business Day before such Disbursement Date, if any part of such Loan is requested to be a Eurodollar Rate Loan, and (ii) first Business Day before such Disbursement Date if such Loan is requested to be a Base Rate Loan. (b) A notice of borrowing pursuant to this Section 2.2 shall specify the Disbursement Date and the account to which the applicable Borrower wishes the proceeds of the Loan to be credited. The Disbursement Date so specified must be a Business Day before the Maturity Date. The giving of a notice as provided in this Section 2.2 shall constitute the applicable Borrower's irrevocable commitment to borrow an amount equal to the Loan specified therein on such Disbursement Date. SECTION 2.3 Disbursement of Funds. No later than noon (New York time) on the relevant Disbursement Date, each Lender will make available its pro rata share of the Loan requested to be made on such date in the manner provided below. All amounts shall be made available to the Administrative Agent in Dollars and immediately available funds by deposit to the Administrative Agent's account specified in Section 2.8(b) and the Administrative Agent promptly will make available to the applicable Borrower by depositing to its account specified pursuant to Section 2.2(b) the aggregate of the amounts so made available in the type of funds received. Unless the Administrative Agent shall have been notified by any Lender prior to such Disbursement Date that such Lender does not intend to make available to the Administrative Agent its pro rata share of the Loan to be made on such date, the Administrative Agent may assume that such Lender has made such amount available to the Administrative Agent on such date, and the Administrative Agent, in reliance upon such assumption, may (in its sole discretion and without any obligation to do so) make available to the applicable Borrower a corresponding amount. If such corresponding amount is not in fact made available to the Administrative Agent by such Lender and the Administrative Agent has made available same to the applicable Borrower, the Administrative Agent shall be entitled to recover such corresponding amount from such Lender. If such Lender does not pay such corresponding amount forthwith upon the Administrative Agent's demand therefor the Administrative Agent shall promptly notify the applicable Borrower, and the applicable Borrower shall immediately pay such corresponding amount to the Administrative Agent. The Administrative Agent shall also be entitled to recover from such Lender or such Borrower, as the case may be, interest on such corresponding amount in respect of each day from the date such corresponding amount was made available by the Administrative Agent to such Borrower to the date such corresponding amount is recovered by the Administrative Agent, at a rate per annum equal to (x) if paid by such Lender, the Federal Funds Rate or (y) if paid by such Borrower, the then applicable rate of interest on the relevant Loan. 17 Credit Agreement SECTION 2.4 Loan Accounts; Notes. Loans made by each Lender shall be evidenced by one or more loan accounts or records maintained by such Lender in the ordinary course of business. Upon the request of any Lender made through the Administrative Agent, the applicable Borrower shall execute and deliver to such Lender a note substantially in the form of Exhibit A and with appropriate insertions, to evidence each Loan made to such Borrower, and each payment of principal, interest or other amounts due by such Borrower under the Loan Documents (each a "Note"). Each Lender is hereby authorized to endorse on the schedule attached to the Note held by such Lender (or on a continuation of any such schedule attached to any such Note and made a part thereof) an appropriate notation evidencing the date and amount of each Loan made by it, and each payment of principal, interest or other amounts due under the Loan Documents, in respect thereof. Such schedule shall constitute prima facie evidence of the accuracy of the information contained therein. The failure of any Lender to make a notation on the schedule to the Note or Notes held by such Lender as aforesaid or the making of an incorrect notation by any Lender shall not affect the obligations of the Loan Parties hereunder or under any of the Notes or any other Loan Document in any respect. SECTION 2.5 Termination of Commitments; Reduction of Commitments. The several Commitments of the Lenders hereunder shall terminate at 5:00 p.m. (New York City time) on the Business Day preceding the Maturity Date. The several Commitments of the Lenders shall be permanently reduced on a pro rata basis (and the aggregate principal balance of Loans that may be borrowed by Mutual Group pursuant to Section 2.1(a) shall be proportionately reduced) by the Net Cash Proceeds of each Permitted Debt Issuance applied to prepay the Loans pursuant to Section 2.12(c). Commitments may also be terminated as provided in Section 2.1(c). SECTION 2.6 Pro Rata Borrowings. The Loans made under this Agreement shall be made by the Lenders pro rata on the basis of their respective Commitments. It is understood that no Lender shall be responsible for any default by any other Lender of its obligation to make its portion of any Loan hereunder and that each Lender shall be obligated to make its portion of any Loan hereunder, regardless of the failure of any other Lender to fulfill its commitments hereunder. SECTION 2.7 Interest; Utilization Fee; Commitment Fee; Other Fees. (a) The applicable Borrower promises to pay interest on the unpaid principal amount of each Eurodollar Rate Loan made to it during each Interest Period, from and including the first day of that Interest Period to but excluding the last day thereof, at a rate per annum equal to the lesser of (i) the Maximum Rate and (ii) the Eurodollar Rate plus the Eurodollar Margin, payable on each Interest Payment Date and on the Maturity Date. The applicable Borrower promises to pay interest on the unpaid principal amount of each Base Rate Loan made to it at a rate per annum equal to the lesser of (i) the Maximum Rate and (ii) the Base Rate, payable on the last day of each calendar quarter hereafter, commencing September 30, 2000, and on the Maturity Date. (b) Upon the occurrence of an Event of Default and until it no longer exists, the unpaid principal amounts of each Loan shall bear interest at a rate which is 2.00% per annum in excess of the rate of interest otherwise payable on such principal amount under this Agreement but not in excess of the Maximum Rate. (c) Subject to limitations imposed by the Maximum Rate, interest on each Loan and the fees payable pursuant to Sections 2.7(e) and (f) shall be calculated on the basis of a 360-day year (365 or 366-day year, as the case may be, if interest is being calculated based on the prime rate of Bank of America, N.A.) and the actual number of days elapsed in the period during which it accrues. 18 Credit Agreement (d) By notice to the Administrative Agent given in accordance with Section 2.2, either Borrower may elect to continue a Eurodollar Rate Loan for a new Interest Period, to convert a Base Rate Loan into a Eurodollar Rate Loan or to convert a Eurodollar Rate Loan into a Base Rate Loan on the last day of the Interest Period for such Eurodollar Rate Loan as if such continuation or conversion constituted a new borrowing of the Eurodollar Rate Loan to be continued or the Loan to be outstanding after such conversion; provided, that a Eurodollar Rate Loan may not be continued for a new Interest Period (and such Eurodollar Rate Loan shall instead be converted to a Base Rate Loan on the last day of the applicable Interest Period) and a Base Rate Loan may not be converted into a Eurodollar Rate Loan if an Event of Default exists. Such notice shall be substantially in the form of Exhibit B-2, with all blanks appropriately completed. If the applicable Borrower fails to give notice of the continuation of a Eurodollar Rate Loan for a new Interest Period in accordance with Section 2.2, such Eurodollar Rate Loan shall automatically be converted into a Base Rate Loan on the last day of the expiring Interest Period. (e) Subject to limitations imposed by the Maximum Rate, for each day on which the aggregate outstanding principal amount of the Loans exceeds 30% of the Total Commitment, each Borrower shall pay to the Administrative Agent for the pro rata account of the Lenders a utilization fee at the Utilization Fee Rate on the aggregate outstanding principal amount of the Loans to such Borrower on such day. Such utilization fee shall be payable on the last day of each calendar quarter hereafter, commencing September 30, 2000, and on the Maturity Date. (f) The Borrowers shall pay to the Administrative Agent, for the pro rata account of the Lenders in accordance with their respective Commitments, a commitment fee at the Commitment Fee Rate on the daily unused amount of the Total Commitment. Such commitment fee shall be payable in arrears on the last day of each calendar quarter hereafter, commencing September 30, 2000, and on the Maturity Date. (g) Mutual Risk shall pay the other fees set forth in the Fee Letter. SECTION 2.8 Making of Payments. (a) Any payment stated to be due in respect of any Loan, and any Interest Period stated to end, on a given day in a specified month shall instead be made or end (as the case may be) (i) if there is no such day in that month, on the last Business Day of that month or (ii) if that day is not a Business Day, on the following Business Day, unless that following Business Day falls in a different calendar month, in which case that payment shall be made or that Interest Period shall end (as the case may be) on the preceding Business Day. (b) Each payment by the Borrowers or the Guarantors under the Loan Documents shall be made in Dollars and in immediately available funds, by 11:00 a.m. New York City time on the date such payment is due, to such account as is designated by the Administrative Agent by notice to the Borrowers and the Guarantors. SECTION 2.9 No Setoff, Counterclaim or Withholding; Gross-Up. (a) Each payment by a Borrower or a Guarantor under this Agreement or the Notes shall be made without setoff or counterclaim and without withholding on account of any present or future Taxes imposed by or within Bermuda or any political subdivision or taxing authority thereof or therein or any other jurisdiction from or through which such Borrower or such Guarantor makes payment hereunder; provided, however, that, if such Taxes are required to be withheld or deducted from any such payment, such Borrower or such Guarantor shall make such withholding or deduction, make payment of the amount withheld or deducted to the appropriate Governmental Authority and forthwith pay such additional amount as may be necessary to ensure that the 19 Credit Agreement net amount actually received by each Lender and the Administrative Agent free and clear of such Taxes is equal to the amount that such Lender or the Administrative Agent would have received had no such Taxes been withheld or deducted; and provided, further, that no such additional amounts shall be payable in respect of (i) in the case of each Lender and the Administrative Agent, any Taxes imposed on its net income and franchise Taxes imposed on it by the jurisdiction under the laws of which such Person is organized (unless such Taxes are imposed solely because the payment was made by a Guarantor and would not have been imposed had such payment instead been made by a Borrower) or (ii) any Taxes imposed on a payee by reason of such payee's failure or inability to comply with the provisions of Section 10.2(c) of this Agreement. All such Taxes shall be paid by the applicable Borrower or Guarantor prior to the date on which penalties attach thereto or interest accrues thereon; provided, however, that, if any such penalties or interest become due, such Borrower or such Guarantor shall make prompt payment thereof to the appropriate Governmental Authority. If the Administrative Agent or any Lender pays any amount in respect of such Taxes, penalties or interest, the applicable Borrower or Guarantor shall reimburse the Administrative Agent or such Lender in Dollars for such payment on demand together with interest thereon from and including the date of payment to but excluding the date of reimbursement at a rate per annum equal to the then applicable rate of interest on the relevant Loan. If such Borrower or such Guarantor pays any such Taxes, penalties or interest, it shall deliver official tax receipts evidencing such payment or certified copies thereof to the Administrative Agent on or before the thirtieth day after payment. (b) The Administrative Agent and each Lender agrees to comply with any certification, identification, information, documentation or other reporting requirement if (i) such compliance is required by law, regulation, administrative practice or an applicable treaty as a precondition to exemption from, or reduction in the rate of, deduction or withholding of any Taxes for which a Borrower or a Guarantor is required to pay additional amounts pursuant to Section 2.9(a) hereof and (ii) at least 30 days prior to the first Interest Payment Date with respect to which a Borrower or a Guarantor shall apply this clause (b), such Borrower or such Guarantor shall have notified the Administrative Agent or such Lender that the Administrative Agent or such Lender will be required to comply with such requirement, provided, however, that the exclusion set forth in this clause (b) shall not apply in respect of any certification, identification, information, documentation or other reporting requirement if such requirement would be materially more onerous, in form, in procedure or in the substance of information disclosed, to the Administrative Agent or such Lender than comparable information or other reporting requirements imposed under U.S. tax law, regulation and administrative practice (such as IRS Forms W-8ECI, W-8BEN, W-8 and W-9 or predecessor or successor forms). (c) The Borrowers shall pay any present or future documentary, transfer or stamp Taxes or any other excise or property Taxes, charges or similar levies, and any penalties, additions to Tax or interest that may be due with respect thereto, that may be imposed by any jurisdiction in connection with this Agreement or the Notes. If the Administrative Agent or any Lender pays any amount in respect of any such taxes, duties, levies, penalties or interest, the Borrowers shall reimburse the Administrative Agent or such Lender for such payment in Dollars on demand, together with interest thereon from and including the date of payment to, but excluding, the date of reimbursement at a rate per annum equal to the then applicable rate of interest on the relevant Loan. SECTION 2.10 Increased Costs and Reduction of Return. (a) If any Lender determines that, due to either (i) the introduction of or any change (other than any change by way of imposition of or increase in reserve requirements included in the calculation of the Eurodollar Rate) in or in the interpretation of any Law or (ii) compliance by such Lender with any guideline or request from any central bank or other Governmental 20 Credit Agreement Authority (whether or not having the force of law), there shall be any increase in the cost to such Lender of agreeing to make or making, funding or maintaining Loans, then the Borrowers shall be liable for, and shall from time to time upon demand (with a copy of such demand to be sent to the Administrative Agent) pay to the Administrative Agent for the account of such Lender, additional amounts as are sufficient to compensate such Lender for such increased cost. (b) If any Lender shall have determined that (i) the introduction of any Capital Adequacy Regulation, (ii) any change in any Capital Adequacy Regulation, (iii) any change in the interpretation or administration of any Capital Adequacy Regulation by any central bank or other Governmental Authority charged with the interpretation or administration thereof, or (iv) compliance by such Lender or any corporation controlling such Lender with any Capital Adequacy Regulation affects or would affect the amount of capital required or expected to be maintained by such Lender or any corporation controlling such Lender and (taking into consideration such Lender's or such corporation's policies with respect to capital adequacy and such Lender's desired return on capital) determines that the amount of such capital is increased as a consequence of its Commitment or Loans, then the Borrowers shall be liable for, and shall from time to time upon demand (with a copy of such demand to be sent to the Administrative Agent) pay to the Administrative Agent for the account of such Lender, additional amounts as are sufficient to compensate such Lender for such increase. SECTION 2.11 Illegality. If any Lender determines at any time that any Law or treaty or any change therein or in the interpretation or application thereof makes or will make it unlawful for such Lender to fulfill its commitment pursuant to Section 2.1 to maintain a Eurodollar Rate Loan or to claim or receive any amount payable to it hereunder, such Lender shall give notice of such determination to the Borrowers and the Administrative Agent, whereupon the obligations of such Lender hereunder with respect to the making and maintenance of Eurodollar Rate Loans shall terminate. If any such notice is given after the disbursement of any Eurodollar Rate Loans, the applicable Borrower shall prepay the Eurodollar Rate Loans of such Lender in full on the last day of the Interest Periods applicable thereto (or on such earlier date as such Lender determines and certifies to be necessary in order to enable it to comply with such Law, treaty or change), without premium but together with interest accrued to the date of prepayment of such Eurodollar Rate Loans and all other amounts then payable to such Lender by the applicable Borrower hereunder. SECTION 2.12 Repayment; Optional and Mandatory Prepayments. (a) All Loans shall mature and the applicable Borrower promises to pay in full the outstanding principal amount thereof and accrued interest thereon on the Maturity Date. (b) Either Borrower may at any time and from time to time, upon not less than three Business Days prior written or telephonic notice confirmed in writing to the Administrative Agent, prepay the outstanding principal amount of its Loans, in whole or in part. Such notice shall constitute the applicable Borrower's irrevocable commitment to prepay, in whole or in part, the full outstanding principal amount of such Loans on that date, together with accrued and unpaid interest on such amount to but excluding such prepayment date. (c) Within two Business Days after the receipt thereof, Mutual Risk shall (and, if the outstanding principal balance of the Loans owing by Mutual Risk is less than the amount of such Net Cash Proceeds, Mutual Risk shall cause Mutual Group to) prepay the outstanding principal balance of the Loans in an amount equal to the Net Cash Proceeds of each Permitted Debt Issuance. 21 Credit Agreement (d) Upon the demand of any Lender made through the Administrative Agent, the applicable Borrower shall promptly compensate such Lender for and hold such Lender harmless from any loss, cost or expense incurred by it as a result of: (i) any continuation, conversion, payment or prepayment of a Eurodollar Rate Loan on any day other than the last day of the Interest Period applicable thereto (whether voluntary, mandatory, automatic, by reason of acceleration or otherwise); or (ii) any failure by such Borrower (for a reason other than the failure of such Lender to make a Eurodollar Rate Loan) to prepay, borrow, continue or convert any Eurodollar Rate Loan on the date or in the amount notified by such Borrower; including any loss of anticipated profits and any loss or expense arising from the liquidation or reemployment of funds obtained by it to maintain such Eurodollar Rate Loan or from fees payable to terminate the deposits from which such funds were obtained. SECTION 2.13 Maximum Rate. Regardless of any provision contained in any Loan Document, no Lender shall ever be entitled to contract for, charge, take, reserve, receive, or apply, as interest on the Obligations, or any part thereof, any amount in excess of the Maximum Rate, and, if a Lender ever does so, then such excess shall be deemed a partial prepayment of principal and treated hereunder as such and any remaining excess shall be refunded to the applicable Borrower. In determining if the interest paid or payable exceeds the Maximum Rate, the Loan Parties and Lenders shall, to the maximum extent permitted under applicable Law, (a) characterize any nonprincipal payment otherwise payable under the Loan Documents as an expense, fee, or premium, rather than as interest, (c) exclude voluntary prepayments and the effects thereof, and (d) amortize, prorate, allocate, and spread the total amount of interest throughout the entire contemplated term of the Obligations; provided that, if the Obligations are paid and performed in full prior to the end of the full contemplated term thereof, and if the interest received by a Lender for the actual period of existence thereof exceeds the Maximum Amount, such Lender shall refund such excess, and, in such event, such Lender shall not, to the extent permitted by Law, be subject to any penalties provided by any Laws for contracting for, charging, taking, reserving, or receiving interest in excess of the Maximum Amount. SECTION 2.14 Increases of Commitments. The Borrowers may from time to time request one or more Lenders to increase their respective Commitments or request one or more Eligible Assignees to agree to a Commitment, in each case in a minimum amount of $5,000,000; provided that the Total Commitment may not exceed $210,000,000. Such increase or agreement shall be effected by a Commitment increase agreement substantially in the form of Exhibit F-1 or a joinder agreement substantially in the form of Exhibit F-2, as applicable. In the event the Total Commitment is increased, the Borrowers shall execute and deliver to each Lender extending such additional Commitment a Note in the stated amount of its new or increased Commitment, upon the request of such Lender. No Lender is obligated to increase its Commitment under any circumstances, and no Lender's Commitment may be increased pursuant to this Section 2.14 except by its execution of an agreement substantially in accordance with this Section 2.14. Each Eligible Assignee providing such additional Commitment shall be a "Lender" hereunder, entitled to the rights and benefits, and subject to the duties, of a Lender under the Loan Documents. Each Lender responsible for an additional Commitment (an "Increasing Lender") shall, on the Business Day designated by the Administrative Agent, make Loans pro rata to the Borrowers, through the Agent, in an aggregate amount equal to such Increasing Lender's pro rata share (after giving effect to the increase in the Total Commitment) 22 Credit Agreement of the Loans outstanding to the Borrowers on such Business Day, and the Agent shall distribute the proceeds of such Loans to the other Lenders in repayment of their Loans, so that after giving effect to such Loans and repayment, the Loans are held by the Lenders according to their respective pro rata shares of the Total Commitment, as increased pursuant to this Section 2.14. SECTION 3. REPRESENTATIONS AND WARRANTIES The Loan Parties, jointly and severally, hereby represent and warrant to the Lenders and the Administrative Agent as follows: SECTION 3.1 Good Standing and Authority. Each of Mutual Risk and its Subsidiaries is duly organized and validly existing and (other than with respect to Mutual Indemnity (Dublin) Ltd., given the inapplicability thereof under Irish law) in good standing under the laws of its jurisdiction of incorporation. Each of Mutual Risk and its Subsidiaries has the corporate power and authority to own and operate its properties and to carry on its business as now conducted and as proposed to be conducted following the consummation of the Transactions, and is duly qualified as a foreign corporation and in good standing in all jurisdictions in which it is doing business and is proposed to be doing business following the consummation of the Transactions, except where failure to be so qualified or in good standing, singly or in the aggregate, would not have a Material Adverse Effect. Mutual Risk has no place of business in the United States of America. SECTION 3.2 Stock Duly Authorized and Issued. (a) The Capital Stock of each of Mutual Risk and its Subsidiaries is duly authorized, validly issued and fully paid and nonassessable. (b) There are no outstanding stock purchase warrants, subscriptions, options, securities, instruments or other rights of any type or nature whatsoever, which are convertible into, exchangeable for or otherwise provide for or permit the issuance of Capital Stock of Mutual Risk or its Subsidiaries, except as disclosed in the applicable filings of Mutual Risk with the SEC. SECTION 3.3 Loan Documents Authorized, etc. Each of the Loan Documents and each other document or instrument to be delivered in connection therewith has been duly authorized by all necessary action of each Loan Party that is a party thereto, each of this Agreement and the other Loan Documents and each other document or instrument to be executed and delivered in connection herewith or therewith on or prior to the date hereof has been duly executed and delivered by each Loan Party that is a party hereto or thereto and constitutes, and each of the Loan Documents and each other document or instrument to be executed and delivered in connection therewith by such Loan Party that is a party thereto after the date hereof will constitute upon its execution and delivery, the legal, valid and binding obligation of such Loan Party, enforceable against such Loan Party in accordance with its terms, except to the extent that the enforceability thereof may be limited by applicable bankruptcy, insolvency, reorganization, fraudulent conveyance or similar laws affecting the enforcement of creditors' rights generally or by general principles of equity. SECTION 3.4 No Consents; No Conflicts The execution, delivery and performance of the Loan Documents, and the consummation of the transactions contemplated or described therein (including, without 23 Credit Agreement limitation, the issuance and performance of the Guarantee by the Guarantors) do not and will not (i) require the consent, approval, authorization, registration or qualification of or with any Governmental Authority (including, without limitation, any insurance authority, commission or other insurance regulatory body), (ii) violate any statute, law, rule, regulation, order, judgment or decree (singly, "Law" and collectively, "Laws") applicable to Mutual Risk or any of its Subsidiaries of any court, Governmental Authority, arbitrator or other authority having jurisdiction over Mutual Risk or any of its Subsidiaries or any of their respective Properties, (iii) conflict with, result in a breach or violation of or constitute a default under the certificate of incorporation and by-laws or similar organizational documents of Mutual Risk or any of its Subsidiaries or any indenture, mortgage, deed of trust, contract, undertaking, loan agreement, lease or other agreement or instrument to which Mutual Risk or any of its Subsidiaries is a party or by which Mutual Risk or any of its Subsidiaries or any of their respective Properties are bound ("Contracts") or (iv) result in or require the creation or imposition of any mortgage, pledge, assignment, security interest, charge or encumbrance of any kind (including any conditional sale or other title retention agreement, any lease in the nature thereof, and any agreement to give any security interest) and any option, trust or other preferential arrangement having the practical effect of any of the foregoing ("Lien"). SECTION 3.5 Financial Information Complete. The audited and unaudited consolidated balance sheets of Mutual Risk and its Subsidiaries dated December 31, 1999, and June 30, 2000, respectively, together with the consolidated statements of earnings, changes in stockholders' equity and cash flows of Mutual Risk and its Subsidiaries for the fiscal year and fiscal quarter, respectively, ended on such dates, heretofore delivered by Mutual Risk to the Administrative Agent and the Lenders, including the related schedules and notes thereto, have been prepared in accordance with GAAP (except for the absence of footnotes in the case of the June 30, 2000 financial statements) and are complete and correct and fairly present in all material respects (subject to year-end audit adjustments in the case of the June 30, 2000 financial statements) the assets, liabilities and financial position of Mutual Risk and its consolidated Subsidiaries as at such dates, and the results of operations and changes of financial position for the periods then ended. Mutual Risk and its consolidated Subsidiaries have no debt, obligation or other forward or long-term commitment required to be reflected in the foregoing financial statements or in the notes thereto which is not fairly reflected in all material respects therein. SECTION 3.6 No Material Adverse Change. From and after December 31, 1999, there has been no material adverse change in the business, Properties, operations, condition (financial or otherwise), results of operations or prospects of Mutual Risk and its Subsidiaries, taken as a whole, and no event has occurred or condition arisen that would have a Material Adverse Effect. SECTION 3.7 Accuracy and Completeness of Information. (a) No written information, written statements, reports and other papers and data produced by or on behalf of Mutual Risk or any of its Subsidiaries and furnished to the Administrative Agent or any of the Lenders in connection with the Transactions (including, without limitation, any statement or report filed by Mutual Risk with the SEC under the Exchange Act) taken as a whole contain or will contain any untrue statement of fact material to the creditworthiness of Mutual Risk or any of its Subsidiaries or omit or will omit to state a material fact necessary in order to make the statements contained therein not misleading in the circumstances in which made. (b) The Loan Parties are not aware of any fact with respect to Mutual Risk or any of its Subsidiaries or the Transactions that would have a Material Adverse Effect that has not been previously disclosed in writing to the Administrative Agent and the Lenders. 24 Credit Agreement SECTION 3.8 Internal Accounting. Each of Mutual Risk and its Subsidiaries maintains a system of internal accounting controls sufficient to provide reasonable assurance that (i) transactions are executed in accordance with management's general or specific authorizations, (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles and to maintain asset accountability, (iii) access to assets is permitted only in accordance with management's general or specific authorization and (iv) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences. SECTION 3.9 No Insolvency. As of the date hereof and after giving effect to the consummation of the Transactions: (a) The aggregate value of the assets of each of Mutual Risk and its Subsidiaries, at fair value and present fair salable value, exceeds (i) its total liabilities (including contingent, subordinated, unmatured and unliquidated liabilities) and (ii) the amount required to pay such liabilities as they become absolute and matured in the normal course of business; (b) Each of Mutual Risk and its Subsidiaries has the ability to pay its debts and liabilities (including contingent, subordinated, unmatured and unliquidated liabilities) as they become absolute and matured in the normal course of business; and (c) Neither Mutual Risk nor any of its Subsidiaries has an unreasonably small amount of capital with which to conduct its business. SECTION 3.10 Subsidiaries; Assets; Liens. Schedule 3.10 sets forth all Subsidiaries of Mutual Risk as of the date of this Agreement. Each of Mutual Risk and its Subsidiaries has good, sufficient and legal title to all of its Properties, free and clear of any Liens other than Permitted Liens. SECTION 3.11 No Violations. Each of Mutual Risk and its Subsidiaries is not, and after the consummation of the Transactions will not be, in violation of its charter, by-laws or other organizational documents, and no default or event that but for the giving of notice or the lapse of time, or both, would constitute a default on the part of Mutual Risk or any of its Subsidiaries exists or will exist under any Contracts which would have a Material Adverse Effect. SECTION 3.12 No Litigation. There are no actions, suits or proceedings pending nor, to the knowledge of the Loan Parties, threatened against or in any other way relating adversely to or affecting Mutual Risk or any of its Subsidiaries or any of their respective Properties or the Transactions in any court or before any arbitrator of any kind or before or by any Governmental Authority which would have a Material Adverse Effect. SECTION 3.13 Proceeds. The Borrowers will apply the net proceeds from the Loans solely for the purposes specified in Section 5.7 hereof. Neither the incurrence of any Loan nor the application of the proceeds thereof by the Borrowers will violate Regulations T, U and X of the FRB. SECTION 3.14 Margin Stock. At no time, including following application of the proceeds of any Loan, shall more than 25% of the value of the assets (either of Mutual Risk or Mutual Group or of Mutual Risk and its Subsidiaries on a consolidated basis), (i) subject to the provisions of Section 6.3 and 6.5 or (ii) subject to any restriction contained in any agreement or instrument between 25 Credit Agreement either Borrower and any Lender or any Affiliate of any Lender relating to any Indebtedness and within the scope of Section 7.1(h), consist of Margin Stock. SECTION 3.15 Tax Returns and Payments. All Tax Returns, foreign and domestic, required to be filed by or on behalf of Mutual Risk and each of its Subsidiaries in any jurisdiction have been timely filed, or caused to be filed, and all material Taxes (whether or not actually shown on such Tax Returns) for which they are directly or indirectly liable or to which any of their respective Properties and assets is subject have been paid, or caused to be paid, other than any Tax (i) the validity or amount of which is being contested in good faith, (ii) for which adequate reserve, or other appropriate provision, if any, as required in conformity with GAAP shall have been made, and (iii) with respect to which any right to execute upon or sell any assets of Mutual Risk or any of its Subsidiaries has not matured or has been and continues to be effectively enjoined, superseded or stayed ("Contested Claims"); all such Tax Returns are true, correct and complete in all material respects. As of the Closing Date, there is no material proposed tax assessment with respect to Taxes due by, or on behalf of, Mutual Risk or any of its Subsidiaries, and to the best knowledge of the Loan Parties there is no basis for such assessment, except for Contested Claims. To the best knowledge of the Loan Parties, there is no tax, levy, impost, duty, charge, fee, deduction or withholding imposed by (i) Bermuda or any political subdivision or taxing authority thereof or therein or (ii) by any other jurisdiction from or through which Mutual Risk or Mutual Group makes payment on or by virtue of the execution, delivery, enforcement or performance of this Agreement or in connection with the Notes. SECTION 3.16 ERISA Compliance. (a) As of the Closing Date, neither Mutual Risk, any of its Subsidiaries nor any of their respective ERISA Affiliates sponsor, maintain or contribute to, or have any obligation under, any Pension Plan or Multiemployer Plan. (b) Mutual Risk, each of its Subsidiaries and each of their respective ERISA Affiliates is in material compliance with all applicable provisions of ERISA and the regulations material thereunder with respect to all Employee Benefit Plans except for any required amendments for which the remedial amendment period as defined in Section 401(b) of the Code has not yet expired. The Internal Revenue Service has issued a favorable determination letter with respect to the form of the plan document of each Employee Benefit Plan that is intended to be qualified under Section 401(a) of the Code and nothing has occurred, whether by action or failure to act, that could reasonably be expected to cause the loss of such qualification. (c) No ERISA Event has occurred or is reasonably expected to occur which, alone or together with all other ERISA Events, has resulted, or is reasonably expected to result, in any material liability to Mutual Risk or any of its Subsidiaries. (d) No proceeding, claim (other than claims for benefits made in the ordinary course of the operation of any Employee Benefit Plan), lawsuit and/or investigation is existing, or, to the best knowledge of the Loan Parties after due inquiry, threatened concerning or involving any Employee Benefit Plan currently sponsored, maintained or contributed to by Mutual Risk, any of its Subsidiaries or any of their respective ERISA Affiliates. (e) In accordance with the most recent actuarial valuations, the Amount of Unfunded Benefit Liabilities individually or in the aggregate for all Pension Plans (excluding for purposes of such computation any Pension Plans which have a negative Amount of Unfunded Benefit Liabilities), does not exceed $1,000,000. 26 Credit Agreement (f) Neither Mutual Risk nor any of its Subsidiaries has incurred or is reasonably expected to incur any material liability with respect to any Foreign Plan or Foreign Plans. SECTION 3.17 Compliance With Laws. Each of Mutual Risk and its Subsidiaries is in compliance with all Laws, except where the failure to comply, singly or in the aggregate, would not have a Material Adverse Effect. SECTION 3.18 Government Regulation. No Loan Party is subject to regulation under the Public Utility Holding Company Act of 1935, as amended, the Federal Power Act, as amended, or other Law which would regulate the incurrence of Indebtedness by such Loan Party, including, but not limited to, Laws relating to common contract carriers or the sale of electricity, gas, steam, water or other public utility services. No Loan Party is, and after consummation of the Transactions will be, an "investment company" or an entity "controlled" by an "investment company," as such terms are defined in the Investment Company Act of 1940, as amended. SECTION 3.19 Insurance. Each of Mutual Risk and its Subsidiaries carries or is entitled to the benefits of insurance (including self-insurance) in such amounts and covering such risks as is generally maintained by companies of established repute engaged in the same or similar businesses, and all such insurance is (and will be following consummation of the Transactions) in full force and effect, except where the failure to carry such insurance or be entitled to the benefits of such insurance would not, singly or in the aggregate, have a Material Adverse Effect. SECTION 3.20 Labor. No labor disturbance by the employees of Mutual Risk or any of its Subsidiaries exists or, to the best knowledge of the Loan Parties, is threatened and the Loan Parties are not aware of any existing or imminent labor disturbance by the employees of the principal suppliers, manufacturers or customers of Mutual Risk or any of its Subsidiaries which would have a Material Adverse Effect. SECTION 3.21 Environmental Matters. Mutual Risk and its Subsidiaries have been and are in compliance with all applicable laws, statutes, ordinances, codes, orders, decisions, judgments, permits, approvals, rules, regulations or requirements, including without limitation common law, relating to: (i) protection, preservation or cleanup of the environment or natural resources; (ii) chemical substances or toxic, hazardous or deleterious materials, wastes or agents (hereinafter "Hazardous Substances"), including without limitation petroleum or any fraction thereof, asbestos, and polychlorinated biphenyls; or (iii) health and safety (hereinafter "EHS Laws"), except in each case for such noncompliance which would not have a Material Adverse Effect; there has been no proceeding, claim, notice or complaint pending or, to the best knowledge of the Loan Parties, threatened against any of Mutual Risk or its Subsidiaries relating to: (i) noncompliance with EHS Laws; or (ii) liabilities or obligations arising from Hazardous Substances or pursuant to EHS Laws; and there are no conditions or circumstances, including without limitation the presence or release of any Hazardous Substances (whether or not on the property of Mutual Risk or any of its Subsidiaries), reasonably anticipated to result in liabilities or obligations to Mutual Risk or any of its Subsidiaries pursuant to EHS Laws. SECTION 3.22 Insurance Regulations. Mutual Risk is a holding company and is not subject to Bermuda insurance regulations. Mutual Risk and each of its Subsidiaries are in compliance with all other insurance laws and regulations of the jurisdictions that apply to them, including laws that relate to companies that control insurance companies, except where the failure to comply would not have a Material Adverse 27 Credit Agreement Effect. Neither Mutual Risk nor any of its Subsidiaries has received any notification from any Bermuda, U.S. federal, state or foreign insurance authority, commission or other insurance regulatory body to the effect that Mutual Risk or such Subsidiary is not in compliance with any insurance law or regulation, which noncompliance can reasonably be expected to have a Material Adverse Effect. SECTION 3.23 Permits; Licenses. Each of Mutual Risk and its Subsidiaries possesses all certificates, authorizations and permits issued by the appropriate Bermuda, U.S. federal, state or foreign Governmental Authority necessary to conduct their respective businesses, and neither Mutual Risk nor any of its Subsidiaries has received any notice of proceedings relating to the revocation or modification of any such certificate, authorization or permit which, singly or in the aggregate, if the subject of an unfavorable decision, ruling or finding, would result in a Material Adverse Effect. Any certificate signed by any Officer of a Loan Party and delivered to the Administrative Agent or any Lender pursuant to the Loan Documents shall be deemed to be a representation and warrant by such Loan Party to the Administrative Agent or such Lender as to the matters covered thereby. SECTION 4. CONDITIONS TO THE OBLIGATIONS OF THE LENDERS SECTION 4.1 Conditions to Closing. The obligations of the Lenders to make Loans hereunder shall be subject to the satisfaction on or before September 29, 2000 of the following conditions precedent: (a) The Administrative Agent shall have received on behalf of the Lenders the following items, each of which shall be in form and substance satisfactory to the Administrative Agent and, unless otherwise noted, dated the Closing Date: (1) An Officers' Certificate from each Loan Party, certifying as to (i) resolutions of such Loan Party's Board of Directors approving and authorizing the execution, delivery and performance of this Agreement, each of the other Loan Documents and any other documents, instruments and certificates required to be executed by such Loan Party in connection herewith and therewith and approving and authorizing the consummation of the Transactions, (ii) the incumbency and specimen signatures of the Officers of such Loan Party authorized to execute and deliver this Agreement and the other Loan Documents, and (iii) the charter or certificate of incorporation and bylaws of such Loan Party; (2) An original counterpart of this Agreement; (3) Originally executed copies of an opinion of (i) Mayer, Brown & Platt, U.S. counsel to the Loan Parties, substantially in the form of Exhibit C-1, (ii) Conyers Dill & Pearman, Bermuda counsel to Mutual Risk, substantially in the form of Exhibit C-2, and (iii) Richard O'Brien, Esq., General Counsel to Mutual Risk, substantially in the form of Exhibit C-3; (4) A certificate, executed by the Chief Executive Officer or President and the Chief Financial or Accounting Officer of Mutual Risk, stating that, after giving effect to the consummation of the Transactions, the fair saleable value of the assets of each of Mutual Risk and its Subsidiaries 28 Credit Agreement will not be less than the probable liability on their debts, that each of Mutual Risk and its Subsidiaries will be able to pay its debts as they mature and that each of Mutual Risk and its Subsidiaries will not have unreasonably small capital to conduct its business, and the Administrative Agent shall have received such opinions of value, other appropriate factual information and expert advice supporting the conclusions reached in such letter as the Administrative Agent may reasonably request; (5) An Officers' Certificate from each Loan Party, certifying as to (i) (A) the due organization and good standing of such Loan Party in its jurisdiction of organization and (B) the absence of any proceeding for the dissolution or liquidation of such Loan Party; (ii) the completeness and accuracy in all material respects of all of the representations and warranties made by such Loan Party in this Agreement and the other Loan Documents to which it is or is to be a party, before and after giving effect to the Transactions; (iii) the absence of any Default or Event of Default; and (iv) the satisfaction of all conditions specified in this Section 4.1; (6) The most recent audited and unaudited consolidated financial statements of Mutual Risk and its consolidated Subsidiaries; (7) An irrevocable acceptance by Corporation Service Company of its appointment as each Loan Party's agent to receive service of process pursuant to Section 10.14 hereof; and (8) Such further information, certificates and documents as the Administrative Agent may reasonably request. (b) No Default or Event of Default shall have occurred and be continuing, and no default or event of default shall have occurred and be continuing under any material Contract of Mutual Risk or any of its Subsidiaries. (c) No action, proceeding, investigation, regulation or legislation shall have been instituted, threatened or proposed before any court or other Governmental Authority to enjoin, restrain, or prohibit, or to obtain substantial damages in respect of, or which is related to or arises out of the Transactions, or which, if adversely determined, would have a Material Adverse Effect. There shall be no material pending or threatened litigation, bankruptcy or insolvency, injunction, order, decree or claim with respect to Mutual Risk or any of its Subsidiaries or the Transactions, which would have a Material Adverse Effect. (d) Each of the Loan Documents to be executed and delivered on or prior to the Closing Date (including any amendments thereto) shall have been duly authorized, executed and delivered by each of the parties thereto, and the Administrative Agent shall have received copies of each such document (including any amendments thereto) as so executed and delivered in the form provided to the Administrative Agent on or before the Closing Date except for changes approved by the Administrative Agent and the Lenders. (e) All notices to, filings with, and consents and approvals of, all Governmental Authorities necessary or desirable in connection with the Transactions shall have been given, made or obtained. (f) The Borrowers shall have paid all costs and expenses payable hereunder to the extent then due and payable on the Closing Date, including any such costs and expenses arising under or referenced in Section 10.3. 29 Credit Agreement (g) No event shall have occurred that has had, or would have, a Material Adverse Effect. (h) The Administrative Agent shall have received assurances satisfactory to it that the Existing Credit Agreement and all guaranties, liens and security interests created pursuant thereto shall be terminated and all amounts due and owing thereunder shall be paid in full concurrently with the making of the initial Loans. (i) Mutual Risk shall have paid all fees due and owing on or before the Closing Date pursuant to the Fee Letter. (j) Neither Borrower shall have received notice from Moody's or S&P that the credit rating of Mutual Risk is under review with negative implications or notice from A.M. Best Company that the claims paying rating of any of the Insurance Company Subsidiaries that are rated by A.M. Best Company is under review with negative implications, and neither Moody's, S&P nor A.M. Best Company shall have taken any actions to reduce any such rating. SECTION 4.2 Conditions to each Loan. The obligations of the Lenders to make any Loan hereunder shall be subject to the satisfaction of the following conditions precedent on or prior to the Disbursement Date on which such Loan is scheduled to be made: (a) The representations and warranties on the part of the Loan Parties contained herein and in any certificates pursuant to the provisions hereof shall be true and complete on and as of such Disbursement Date as if made on such date, and the Loan Parties shall have performed all of their respective obligations hereunder to be performed on or prior to such date; (b) The Administrative Agent on behalf of the Lenders shall have received, in form and substance satisfactory to the Administrative Agent, (i) an originally executed notice of borrowing pursuant to Section 2.2 hereof and (ii) one or several Notes, as applicable, evidencing the Loans, duly executed and delivered and drawn to the order of the Lender or Lenders requesting Notes and with appropriate insertions; and (c) No Default or Event of Default shall have occurred and be continuing. SECTION 5. AFFIRMATIVE COVENANTS Until all Obligations shall have been paid in full and no Lender shall have any Commitment hereunder, the Loan Parties, jointly and severally, covenant and agree with the Lenders and the Administrative Agent that: SECTION 5.1 Corporate Existence. Subject to the provisions hereof, Mutual Risk shall do or cause to be done all things necessary to preserve and keep in full force and effect the corporate existence, rights (charter and statutory) and licenses of Mutual Risk and each of its Subsidiaries, provided, that subject to Section 6.6 hereof, Mutual Risk and any such Subsidiary shall not be required to preserve the corporate existence of any such Subsidiary (other than Mutual Group) or any such right or license if the Board of Directors of Mutual Risk shall determine that the preservation thereof is no longer desirable in the conduct 30 Credit Agreement of the business of Mutual Risk and that the loss thereof is not disadvantageous in any material respect to the Lenders. SECTION 5.2 Compliance With Laws. Mutual Risk will, and will cause each of its Subsidiaries to, comply with all applicable Laws to the extent noncompliance would have a Material Adverse Effect. SECTION 5.3 Maintenance of Property; Insurance. Mutual Risk shall cause all Property used or useful in the conduct of its business or the business of any of its Subsidiaries to be maintained and kept in good condition, repair and working order and supplied with all necessary equipment and shall cause to be made all necessary repairs, renewals, replacements, betterments and improvements thereof, all as, in the judgment of Mutual Risk, may be necessary so that the business carried on in connection therewith may be properly and advantageously conducted at all times; provided, that nothing in this Section 5.3 shall prevent Mutual Risk from discontinuing the operation or maintenance of any of such Property if such discontinuance is, in the judgment of Mutual Risk, desirable in the conduct of its business or the business of any of its Subsidiaries and not disadvantageous in any material respect to the Lenders. Mutual Risk will maintain or cause to be maintained, with financially sound and reputable insurers or with self insurance programs, in each case to the extent consistent with prudent business practices and customary in its industry, insurance with respect to its Properties and business and the Properties and businesses of its Subsidiaries against loss or damage of the kinds (including, in any event, business interruption insurance) and in the amounts customarily carried or maintained under similar circumstances by corporations of established reputation engaged in similar businesses and owning similar Properties in the same general respective areas in which Mutual Risk and its Subsidiaries operate. SECTION 5.4 Payment of Taxes and Other Claims. Mutual Risk shall pay or discharge and will cause each of its Subsidiaries to pay or discharge, before the same shall become delinquent, (a) all Taxes, assessments and other governmental charges levied or imposed upon Mutual Risk or any of its Subsidiaries or upon the income, profits or Property of Mutual Risk or any of its Subsidiaries and (b) all lawful claims including, without limitation, for labor, services, materials and supplies which have become due and payable and, if unpaid, might by law become a Lien upon the Property of Mutual Risk or any of its Subsidiaries; provided, that Mutual Risk shall not be required to pay or discharge, or cause to be paid or discharged, any such Tax, assessment, charge or claim whose amount, applicability or validity is being diligently contested in good faith by appropriate proceedings and for which adequate reserves in accordance with GAAP or other appropriate provision has been made. Mutual Risk and each of its Subsidiaries, as the case may be, will, promptly upon any of its officers obtaining knowledge that a charge or claim described in the previous sentence has not been paid, other than as permitted by the proviso in the previous sentence, deliver notice to the Administrative Agent (which will provide a copy of such notice to each Lender) of such failure to pay. SECTION 5.5 Investment Company Act. No Loan Party shall become an investment company subject to registration under the Investment Company Act of 1940, as amended (without giving effect to any exemption based upon the number or status of the holders of its securities). SECTION 5.6 Payments in U.S. Dollars. All payments of principal, interest and other amounts to be made hereunder or under the Notes shall be made solely in U.S. Dollars or such other currency as is then legal tender for public and private debts in the United States of America. SECTION 5.7 Use of Proceeds. The Borrowers shall use the proceeds of the Loans solely to repay amounts owing under the Existing Credit Agreement and then as follows: 31 Credit Agreement (a) Mutual Risk may use such proceeds to repurchase Convertible Securities in open market or privately negotiated transactions; provided, that any Convertible Securities so repurchased shall be immediately canceled; (b) The Borrowers may use such proceeds for lawful general corporate purposes; provided that none of such proceeds shall be used by the Borrowers or any of their Subsidiaries, directly or indirectly, for the purpose, whether immediate, incidental or ultimate, of purchasing or "carrying" (within the meaning of Regulation U) any Margin Stock; and provided further that none of such proceeds shall be used in connection with the acquisition of ten percent (10%) or more of the Voting Stock of any Person if such acquisition is opposed by the board of directors or other management of such Person. SECTION 5.8 Financial Statements. Mutual Risk will furnish or cause to be furnished to the Administrative Agent and to each of the Lenders: (a) as soon as available, but in no event more than forty-five (45) days after the last day of each of the first three (3) fiscal quarters in each fiscal year of Mutual Risk, a copy of the consolidated balance sheet and statements of earnings, changes in stockholders' equity and cash flows of Mutual Risk and its Subsidiaries and of the consolidating balance sheet and statement of earnings of Mutual Risk and its Subsidiaries, prepared in accordance with GAAP (except for the absence of footnotes), as of, and for the fiscal quarter and portion of the fiscal year ending on, such last day, together with the quarterly report of Mutual Risk on Form 10-Q (or other applicable form) for such fiscal quarter filed with the SEC, a certificate of the Chief Financial Officer of Mutual Risk stating whether, to his best knowledge and belief, any Default or Event of Default has occurred or exists hereunder, and, if any such Default or Event of Default has occurred and is continuing or otherwise exists, stating the facts with respect thereto, and a copy of any presentation made by Mutual Risk or any of its Subsidiaries to S&P, Moody's, A.M. Best Company or any other rating agency during such fiscal quarter; (b) as soon as available, but in no event more than ninety (90) days after the last day of each fiscal year of Mutual Risk, a copy of the consolidated balance sheet and statements of earnings, changes in stockholders' equity and cash flows of Mutual Risk and its Subsidiaries and the consolidating balance sheet and statement of earnings of Mutual Risk and its Subsidiaries, prepared in accordance with GAAP, as of, and for the fiscal year ending on, such last day, together with (i) the audit report on the consolidated portions thereof of Ernst & Young or other independent certified public accountants selected by Mutual Risk and reasonably satisfactory to the Administrative Agent, which audit report shall be without material qualification, (ii) a copy of the annual report of Mutual Risk on Form 10-K (or other applicable form) for such fiscal year filed with the SEC, and (iii) a certificate of the Chief Financial Officer of Mutual Risk stating whether, to his best knowledge and belief, any Default or Event of Default has occurred or exists hereunder, and, if any such Default or Event of Default has occurred and is continuing or otherwise exists, stating the facts with respect thereto; (c) as soon as available, but in no event more than one hundred and twenty (120) days after the last day of each fiscal year of each unconsolidated Subsidiary or Affiliate of Mutual Risk (whose operations are accounted for in the consolidated financial statements of Mutual Risk on the equity method), if any, a copy of the consolidated balance sheet and statements of earnings, changes in stockholders' equity and cash flows of such unconsolidated Subsidiary or Affiliate and its Subsidiaries and of the consolidating balance sheet and statement of earnings of such unconsolidated Subsidiary or Affiliate and its Subsidiaries, prepared in accordance with GAAP (or SAP in the case of a regulated insurance company) as of, and for the fiscal year 32 Credit Agreement ending on, such last day, together with the audit report on the consolidated portions thereof of a firm of independent certified public accountants of recognized standing, which audit report shall be without material qualification. (d) promptly upon their becoming available but in no event (i) more than ninety (90) days after the end of each calendar year in the case of the Annual Statements or (ii) more than forty-five (45) days after the end of each calendar quarter in the case of the Quarterly Statements, a copy of each Annual Statement and Quarterly Statement of each Insurance Company Subsidiary prepared in accordance with SAP, a copy of each externally-prepared actuarial analysis of each Insurance Company Subsidiary obtained by Mutual Risk or any of its Subsidiaries and, in the case of the Annual Statements, a copy of the management discussion and analysis submitted with such Annual Statements; (e) promptly upon their becoming available, copies of all financial statements, reports, notices as to material matters, and proxy statements sent by Mutual Risk or any of its Subsidiaries (which is not a Wholly Owned Subsidiary) to public stockholders, of all regular, periodic and special reports filed by Mutual Risk or any of its Subsidiaries with any securities exchange or with the SEC and of all regular, periodic and special reports filed by any Insurance Company Subsidiary with Governmental Authorities having jurisdiction over it; (f) together with the items described in clauses (a) and (b) above, written calculations in form reasonably satisfactory to the Administrative Agent demonstrating compliance by Mutual Risk with the covenants contained in Sections 6.1 and 6.2; and (g) such additional information, reports or statements (financial or otherwise) as the Administrative Agent or any Lender through the Administrative Agent may from time to time reasonably request. SECTION 5.9 Notice of Litigation and Other Matters. Mutual Risk will furnish or cause to be furnished to the Administrative Agent and to each of the Lenders promptly (but in no event later than ten (10) days after an Officer of Mutual Risk obtains knowledge thereof) telephonic and written notice of: (a) the commencement of all proceedings and investigations by or before any Governmental Authority and all actions and proceedings in any court or before any arbitrator against or involving Mutual Risk or any of its Subsidiaries or any of their respective Properties, assets or businesses which in any given case or in the aggregate would have a Material Adverse Effect; (b) any notice of any violation received by Mutual Risk or any of its Subsidiaries, from any Governmental Authority, including, without limitation, any notice of violation of EHS Laws, which in any such case would have a Material Adverse Effect; (c) any attachment, judgment, lien, levy or order exceeding $5,000,000 that may be assessed against or threatened against Mutual Risk or any of its Subsidiaries, other than normal insurance claims adjustment matters involving Insurance Company Subsidiaries; (d) any Default or Event of Default, or any other event which constitutes or which with the passage of time or giving of notice or both would constitute a default or event of default under any Contract to which Mutual Risk or any of its Subsidiaries is a party or by which Mutual Risk or any of its Subsidiaries 33 Credit Agreement or any of their respective Properties may be bound, which default or event of default would have a Material Adverse Effect; (e) any unfavorable determination letter from the Internal Revenue Service regarding the qualification of an Employee Benefit Plan under Section 401(a) of the Code (along with a copy thereof), (ii) any fact or circumstance that has resulted, or could reasonably be expected to result in an ERISA Event, (iii) the Amount of Unfunded Benefit Liabilities exceeds $1,000,000, and (iv) any event or events in respect of any Foreign Plan or Foreign Plans occur that, or are reasonably expected to occur which, individually or together with all other similar events, result or would reasonably be expected to result in an aggregate liability to Mutual Risk or any of its Subsidiaries in excess of $1,000,000; and (f) any event which makes any of the representations set forth in Section 3 inaccurate in any material respect. SECTION 6. NEGATIVE COVENANTS Until all Obligations shall have been paid in full and no Lender shall have any Commitment hereunder, the Loan Parties, jointly and severally, covenant and agree with the Lenders and the Administrative Agent that: SECTION 6.1 Consolidated Indebtedness to Consolidated Total Capital Ratio. Mutual Risk shall not permit the ratio of Consolidated Indebtedness to Consolidated Total Capital to exceed (a) 0.45 to 1 at any time from the date of this Agreement to the date that is 18 months after the date of this Agreement, or (b) 0.40 to 1 at any time thereafter. SECTION 6.2 Shareholders' Equity. Mutual Risk shall maintain a Stockholders' Equity which is not at any time less than the sum of (a) $325,000,000 plus (b) 50% of cumulative positive consolidated net income (without deduction for any net loss for any period) of Mutual Risk and its Subsidiaries after June 30, 2000. SECTION 6.3 Negative Pledge. Mutual Risk shall not create, incur, assume or suffer to exist any Lien upon any of its assets or Properties (including, without limitation, the Capital Stock of any Subsidiary, whether such Capital Stock is owned on the date of this Agreement or hereafter acquired), or permit any of its Subsidiaries to create, incur, assume or suffer to exist any Lien upon any of its assets or Properties (including, without limitation, the Capital Stock of any Subsidiary, whether such Capital Stock is owned on the date of this Agreement or hereafter acquired), except for Permitted Liens and Liens on the home office building of Mutual Risk securing the Indebtedness permitted by Section 6.4(d). SECTION 6.4 Limitation on Indebtedness. Mutual Risk shall not create, incur, assume or suffer to exist in any manner any Indebtedness other than, without duplication, (a) that outstanding on the date of this Agreement and described on Schedule 6.4 (provided, that the Indebtedness owing under the Existing Credit Agreement may not remain outstanding after the initial borrowing of Loans hereunder), (b) Indebtedness under the Loan Documents, (c) Indebtedness arising under or in connection with the RHINOS and any unsecured Indebtedness of Mutual Risk in an aggregate principal amount not to exceed $40,000,000 34 Credit Agreement incurred in connection with any replacement, refinancing or remarketing thereof, (d) Indebtedness in an amount not in excess of $13,000,000 incurred in connection with the purchase by Mutual Risk or its nominee of its home office building, (e) unsecured Indebtedness in an amount not in excess of $5,000,000 incurred in connection with the acquisition of Valmet Group Ltd., (f) Indebtedness of Mutual Risk permitted under Section 6.7, (g) Indebtedness secured by the Liens described in clauses (i) and (ii) of the definition of Permitted Liens, and (h) Permitted Debt Issuances. Mutual Risk shall not permit any of its Subsidiaries to create, incur, assume or suffer to exist in any manner any Indebtedness other than that outstanding on the date of this Agreement and described on Schedule 6.4; provided, that nothing contained in this Section 6.4 shall prohibit (i) any Indebtedness of any Subsidiary of Mutual Risk outstanding at the time such Subsidiary becomes a Subsidiary of Mutual Risk and not incurred in contemplation thereof, as long as the outstanding amount of the Indebtedness remains the sole obligation of such Subsidiary and as long as the outstanding amount of such Indebtedness is not voluntarily increased by such Subsidiary after the date such Subsidiary becomes a Subsidiary of Mutual Risk, (ii) any Indebtedness of any Subsidiary of Mutual Risk permitted under Section 6.7, (iii) any Indebtedness of any Subsidiary secured by a Permitted Lien, provided that such Indebtedness does not exceed the value of the assets or property subject to such Permitted Lien, (iv) any Indebtedness owing directly or indirectly to Mutual Risk by a Subsidiary of Mutual Risk, (v) any Indebtedness of Mutual Group under the Loan Documents, (vi) any Indebtedness of Mutual Group arising under or in connection with the RHINOS and any unsecured Indebtedness of Mutual Group in an aggregate principal amount not to exceed $40,000,000 incurred in connection with any replacement, refinancing or remarketing thereof, and (vii) any Indebtedness not otherwise permitted by the foregoing clauses; provided, that the aggregate amount at any time outstanding for all Subsidiaries of Mutual Risk of (A) the Indebtedness incurred under the preceding clause (iii) and (B) the Indebtedness incurred under the preceding clause (vii) shall not exceed $10,000,000 in the aggregate at any time outstanding. SECTION 6.5 Limitation on Asset Sales. Mutual Risk, will not, and will not permit any of its Subsidiaries to, consummate an Asset Sale unless (a) such Asset Sale is in the ordinary course of business, (b) Mutual Risk or the applicable Subsidiary, as the case may be, receives consideration at the time of such Asset Sale at least equal to the Fair Market Value of the assets sold or otherwise disposed of, and (c) the consideration received for the assets sold by Mutual Risk or such Subsidiary, as the case may be, in such Asset Sale are in the form of cash or Cash Equivalents, in each case received at the time of such Asset Sale. SECTION 6.6 Merger, Consolidation, Sale of Assets and Liquidation. Mutual Risk shall not enter into any merger or consolidation with any Person, or sell, lease, assign, distribute or otherwise dispose of all or substantially all of its assets, or liquidate in whole or in part, or permit any Subsidiary to enter into any merger or consolidation with any Person, or sell, lease, assign, distribute or otherwise dispose of all or substantially all of its assets, or liquidate in whole or in part, except that (i) Mutual Risk may merge or consolidate with any Subsidiary or other Person incorporated under the laws of Bermuda or a state of the United States, if Mutual Risk is the surviving corporation and continues to be a Bermuda company and immediately after giving effect thereto no Default or Event of Default shall have occurred and be continuing, and (ii) any Subsidiary may be merged or consolidated into, or may be liquidated into, or may sell, lease or transfer all or substantially all of its assets to, Mutual Risk or a Wholly Owned Subsidiary (provided that Mutual Group may merge or consolidate into, or liquidate into, or sell, lease or transfer all or substantially all of its assets to Mutual Risk only), if, in the case of a merger or consolidation, (y) Mutual Risk or such Wholly Owned Subsidiary is the surviving corporation (and, if Mutual Risk is the surviving corporation, it continues to be a Bermuda company), and (z) immediately after giving effect thereto no Default or Event of Default shall have occurred and be continuing. 35 Credit Agreement SECTION 6.7 Sale and Leaseback. Mutual Risk shall not enter into, or permit any of its Subsidiaries to enter into, directly or indirectly, any arrangement under which Mutual Risk or such Subsidiary, as the case may be, sells or transfers any of the fixed assets then owed by it and thereupon or within one year thereafter rents or leases the assets so sold or transferred; provided, that nothing contained in this Section 6.7 shall prohibit (i) a Subsidiary of Mutual Risk from entering into a sale-leaseback transaction involving any real estate owned by such Subsidiary on the date of this Agreement, or (ii) Mutual Risk or any Subsidiary of Mutual Risk from entering into any other sale-leaseback transaction as long as such other sale-leaseback transaction, together with all other such sale-leaseback transactions of Mutual Risk and its Subsidiaries made during the period from the date of this Agreement to the date of such other sale-leaseback transaction, does not involve assets having a value of more than $10,000,000 in the aggregate. SECTION 6.8 Limitations on Dividend and Other Payment Restrictions Affecting Subsidiaries. Mutual Risk will not, and will not permit any of its Subsidiaries to, directly or indirectly, create or otherwise cause or suffer to exist or become effective any consensual encumbrance or restriction of any kind on the ability of any of its Subsidiaries to (a) pay dividends, in cash or otherwise, or make any other distributions on or in respect of its Capital Stock, (b) pay any Indebtedness owed to Mutual Risk or any other Subsidiary, (c) make loans or advances to Mutual Risk or any other Subsidiary or (d) transfer any of its Properties or assets to Mutual Risk or any other Subsidiary, except for such encumbrances or restrictions existing under or by reason of any of the following: (i) This Agreement and any agreement in effect on the date of this Agreement; (ii) Customary non-assignment provisions of any lease governing a leasehold interest of Mutual Risk or any of its Subsidiaries; (iii)Any agreement or other instrument of a Person acquired by Mutual Risk or any of its Subsidiaries in existence at the time of such acquisition (but not created in contemplation thereof), which encumbrance or restriction is not applicable to any person, or properties or assets of any Person, other than the Person, or the Property or assets of the Person, so acquired; and (iv) Any limitations under applicable Laws as to dividends payable by Insurance Company Subsidiaries. SECTION 6.9 Restricted Payments. Mutual Risk shall not, and shall not permit any of its Subsidiaries to, declare or pay any dividend or distribution, either in cash or property, on any shares of its Capital Stock (except dividends or distributions payable solely in shares of Capital Stock) or purchase, redeem or retire any of its Capital Stock or any warrants, rights or options to purchase or acquire any shares of its Capital Stock (other than the RHINOS) (a) in the case of Mutual Risk, if a Default or Event of Default exists at any time thereof or would be caused thereby, (b) in violation of any applicable Laws, (c) in the case of Subsidiaries of Mutual Risk, except for dividends or distributions declared or paid by a Subsidiary of Mutual Risk to Mutual Risk or a Subsidiary of Mutual Risk (provided that if the Subsidiary declaring or paying such dividend or distribution is not a Wholly-Owned Subsidiary, such dividend or distribution is paid pro rata to the stockholders of such Subsidiary), (d) in the case of dividends or distributions by Mutual Risk, in an amount substantially greater than the amount of dividends and distributions historically declared, paid or made by Mutual Risk, and (e) in the case of stock purchases, redemptions, retirements or other acquisitions by Mutual Risk, including in completion of its previously announced and currently pending 36 Credit Agreement stock repurchase program, in an aggregate amount in excess of 10% of Stockholders' Equity on the date of this Agreement. SECTION 6.10 Transactions with Affiliates. Mutual Risk shall not enter into or be a party to, or permit any Subsidiary to enter into or be a party to, any transaction with any Affiliate, except pursuant to the reasonable requirements of its business and upon fair and reasonable terms that are no less favorable to it than it would obtain in a comparable arm's length transaction with an unrelated Person. SECTION 6.11 Lines of Business. Mutual Risk will not, nor will it permit any Subsidiary to, engage in any business other than a Permitted Business. SECTION 6.12 Amendment to Charter Documents. Mutual Risk shall not, and shall not cause or permit any of its Subsidiaries to, amend its certificate of incorporation, by-laws or other organizational documents in any respect which could be materially adverse to the interests of the Lenders. SECTION 7. DEFAULTS AND REMEDIES SECTION 7.1 Events of Default. The term "Event of Default," wherever used herein with respect to the Loans, means any one of the following events (whatever the reason for such event, and whether it shall be voluntary or involuntary, or be effected by operation of law, pursuant to any judgment, decree or order of any court or any order, rule or regulation of any Governmental Authority): (a) Any Loan Party defaults in the payment of the principal of any Loan when the same becomes due and payable whether at the stated maturity thereof, upon voluntary or mandatory repayment, upon acceleration or otherwise. (b) Any Loan Party defaults in any payment of interest on any Loan or any other amount payable hereunder (other than amounts described in Section 7.1(a)) within two (2) Business Days after the same becomes due and payable. (c) Any Loan Party fails to observe or perform any covenant, condition or agreement on the part of such Loan Party to be observed or performed pursuant to Section 5.5, Section 5.7, Section 6.1, Section 6.2, Section 6.3, Section 6.8 or Section 6.9 hereof. (d) Any Loan Party fails to comply with any of its other agreements or covenants hereunder and such failure continues for 30 days. (e) (i) The Guarantee or any provision thereof ceases to be in full force and effect (other than in accordance with its express terms and the terms of this Agreement), or (ii) a Guarantor or any Person acting by or on behalf of a Guarantor denies or disaffirms such Guarantor's obligations under its Guarantee, or (iii) a Guarantor defaults in the due performance or observance of any term, covenant or agreement on its part to be performed or observed, after giving effect to any applicable grace periods, pursuant to its Guarantee. 37 Credit Agreement (f) Any representation or warranty of any Loan Party made in this Agreement or in any other Loan Document proves to have been inaccurate, incomplete or misleading in any material respect at the time it was made. (g) (i) Any ERISA Event occurs or is reasonably expected to occur with respect to any Employee Benefit Plan, including, without limitation, any Pension Plan or Multiemployer Plan, (ii) the Amount of Unfunded Benefit Liabilities, when added to the aggregate Amount of Unfunded Benefit Liabilities with respect to all other Pension Plans, exceeds the aggregate Amount of Unfunded Benefit Liabilities that existed on the Closing Date by $1,000,000, or (iii) any event shall have occurred with respect to any Foreign Plan which results in a liability to Mutual Risk or any of its Subsidiaries which, individually or together with any similar events, exceeds $1,000,000. (h) Mutual Risk or any of its Subsidiaries (i) fails to pay any of its Indebtedness in excess of $5,000,000 as and when such Indebtedness becomes payable or (ii) fails to perform or observe any covenant or agreement to be performed or observed by it contained in any other agreement or in any instrument evidencing any of its Indebtedness in excess of $5,000,000 if, as a result of such failure, any other party to such agreement or instrument is entitled to exercise, and has not irrevocably waived, the right to accelerate the maturity of any amount owing thereunder. (i) A court having jurisdiction in the premises enters (i) a decree or order for relief in respect of any Loan Party or any of Mutual Risk's Material Subsidiaries in an involuntary case or proceeding under any Bankruptcy Law or (ii) a decree or order (A) adjudging any Loan Party or any of Mutual Risk's Material Subsidiaries bankrupt or insolvent, or (B) approving as properly filed a petition seeking reorganization, arrangement, adjustment or composition of, or in respect of, any Loan Party or any of Mutual Risk's Material Subsidiaries under any Bankruptcy Law, or (C) appointing a Custodian of any Loan Party or any of Mutual Risk's Material Subsidiaries or of any substantial part of the Property of such Loan Party or such Material Subsidiary or (D) ordering the winding-up or liquidation of the affairs of any Loan Party or any of Mutual Risk's Material Subsidiaries, and in each case, the continuance of any such decree or order for relief or any such other decree or order unstayed and in effect for a period of thirty (30) consecutive calendar days. (j) (i) Any Loan Party or any of Mutual Risk's Material Subsidiaries commences a voluntary case or proceeding under any Bankruptcy Law or of any other case or proceeding to be adjudicated a bankrupt or insolvent; or (ii) any Loan Party or any of Mutual Risk's Material Subsidiaries consents to the entry of a decree or order for relief in respect of such Loan Party or such Material Subsidiary in an involuntary case or proceeding under any Bankruptcy Law or to the commencement of any bankruptcy or insolvency case or proceeding against such Loan Party or such Material Subsidiary; or (iii) any Loan Party or any of Mutual Risk's Material Subsidiaries files a petition or answer or consent seeking reorganization or relief under any Bankruptcy Law; or (iv) any Loan Party or any of Mutual Risk's Material Subsidiaries consents to the filing of such petition or to the appointment of or taking possession by a Custodian of such Loan Party or such Material Subsidiary or of any substantial part of the Property of such Loan Party or such Material Subsidiary; or (v) any Loan Party or any of Mutual Risk's Material Subsidiaries makes an assignment for the benefit of creditors; or (vi) any Loan Party or any of Mutual Risk's Material Subsidiaries admits in writing its inability to pay its debts generally as they become due; or (vii) the stockholders of any Loan Party or any of Mutual Risk's Material Subsidiaries approve any plan or proposal for the liquidation or dissolution of such Loan Party or such Material Subsidiary; or (viii) any Loan Party or any of Mutual Risk's Material Subsidiaries takes corporate action in furtherance of any such action. 38 Credit Agreement (k) Any judgment or decree for the payment of money involving a liability (to the extent not covered by independent third-party insurance as to which the insurer has not denied coverage) in excess of $5,000,000 or its foreign currency equivalent at the time is entered against Mutual Risk or any of its Subsidiaries and is not discharged, waived or the execution thereof stayed within thirty (30) days after such entry. (1) Any insurance license or other authorization or permit necessary for the conduct by any Insurance Company Subsidiary of its business is revoked or withdrawn or otherwise fails to be in full force and effect, which failure, revocation or withdrawal, in the judgment of the Administrative Agent or the Required Lenders has a Material Adverse Effect. (m) Mutual Risk fails to be the beneficial owner at all times, directly or indirectly, of all of the outstanding Capital Stock of the Mutual Group. (n) A Change of Control occurs. (o) Any Loan Document, at any time after its execution and delivery and for any reason other than the agreement of all Lenders or satisfaction of the Obligations, ceases to be in full force and effect or is declared by a court of competent jurisdiction to be null and void, invalid or unenforceable in any material respect; or any Loan Party denies that it has any further liability or obligation under any Loan Document, or purports to revoke, terminate or rescind any Loan Document. SECTION 7.2 Default Remedies. (a) If any Event of Default shall occur and be continuing, the Administrative Agent shall, upon the request of Required Lenders, by notice to the Borrowers, (a) declare the obligations of each Lender hereunder to be terminated, whereupon such obligations shall terminate, and (b) declare all amounts payable hereunder by the Borrowers that would otherwise be due after the date of such termination to be immediately due and payable, whereupon all such amounts shall become immediately due and payable, all without diligence, presentment, demand of payment, protest or notice of any kind, which are expressly waived by the Borrowers and the Guarantors; provided, however, that if any event of any kind referred to in paragraphs (i) or (j) of Section 7.1 occurs with respect to any Loan Party, the obligations of each Lender hereunder shall immediately terminate, and all amounts payable hereunder by the Borrowers that would otherwise be due after the occurrence of such event shall become immediately due and payable without any such notice or other matter waived by the Borrowers and the Guarantors in this Section 7.2. (b) The rights provided for herein are cumulative and are not exclusive of any other rights, powers, privileges or remedies provided by law. SECTION 8. THE ADMINISTRATIVE AGENT SECTION 8.1 Appointment. Each Lender hereby irrevocably designates and appoints Bank of America, N.A. as Administrative Agent of such Lender to act as specified herein and in the other Loan Documents, and each Lender hereby irrevocably authorizes Bank of America, N.A. as the Administrative Agent to take such action on its behalf under the provisions of this Agreement and the other Loan Documents and to exercise such powers and perform such duties as are expressly delegated to the Administrative Agent by the terms of this Agreement and the other Loan Documents, together with such other powers as are 39 Credit Agreement reasonably incidental thereto. The Administrative Agent agrees to act as such upon the express conditions contained in this Section 8. Without limitation to the foregoing, subject to the provisions of this Section 8, the Administrative Agent shall take, or refrain from taking, such action hereunder as shall be reasonably directed by the Required Lenders (or all Lenders to the extent required by Section 10.6); provided that, as between the Administrative Agent and the Lenders unless and until the Administrative Agent shall have received such directions, the Administrative Agent may (but shall not be obligated to) take such action, or refrain from taking such action, as it shall deem advisable in the best interests of the Lenders. Notwithstanding any provision to the contrary elsewhere in this Agreement or in any other Loan Document, the Administrative Agent shall not have any duties or responsibilities, except those expressly set forth herein or in the other Loan Documents, or any fiduciary relationship with any Lender, and no implied covenants, functions, responsibilities, duties, obligations or liabilities shall be read into this Agreement or otherwise exist against the Administrative Agent. The provisions of this Section 8 are solely for the benefit of the Administrative Agent and the Lenders, and neither Mutual Risk nor any of its Subsidiaries shall have any rights as a third party beneficiary of any of the provisions hereof. In performing its functions and duties under this Agreement, the Administrative Agent shall act solely as agent of the Lenders and the Administrative Agent does not assume and shall not be deemed to have assumed any obligation or relationship of agent or trust with or for Mutual Risk or any of its Subsidiaries. SECTION 8.2 Delegation of Duties. The Administrative Agent may execute any of its duties under this Agreement or any other Loan Document by or through agents or attorneys-in-fact and shall be entitled to advice of counsel concerning all matters pertaining to such duties. The Administrative Agent shall not be responsible for the negligence or misconduct of any agents or attorneys- in-fact selected by it with reasonable care except to the extent otherwise required by Section 8.3. SECTION 8.3 Exculpatory Provisions. Neither the Administrative Agent nor any of its officers, directors, employees, agents, attorneys-in-fact or affiliates shall be (i) liable for any action lawfully taken or omitted to be taken by it or such Person under or in connection with this Agreement or the other Loan Documents (except for its or such Person's own gross negligence or willful misconduct) or (ii) responsible in any manner to any of the Lenders for any recitals, statements, representations or warranties made by Mutual Risk, any of its Subsidiaries or any of their respective officers contained in this Agreement, any other Loan Documents, or in any certificate, report, statement or other document referred to or provided for in, or received by the Administrative Agent under or in connection with, this Agreement or any other Loan Document or for any failure of Mutual Risk, any of its Subsidiaries or any of their respective officers to perform its or their obligations hereunder or thereunder. The Administrative Agent shall not be under any obligation to any Lender to ascertain or to inquire as to the observance or performance of any of the agreements contained in, or conditions of, this Agreement or the other Loan Documents, or to inspect the properties, books or records of Mutual Risk or any of its Subsidiaries. The Administrative Agent shall not be responsible to any Lender for the effectiveness, genuineness, validity, enforceability, collectiblity or sufficiency of this Agreement or any other Loan Document or for any representations, warranties, recitals or statements made herein or therein or made in any written or oral statement or in any financial or other statements, instruments, reports, certificates or any other documents in connection herewith or therewith furnished or made by the Administrative Agent to the Lenders or by or on behalf of Mutual Risk or any of its Subsidiaries to the Administrative Agent or any Lender or be required to ascertain or inquire as to the performance or observance of any of the terms, conditions, provisions, covenants or agreements contained herein or therein or as to the use of the proceeds of the Loans or to the existence or possible existence of any Default or Event of Default. 40 Credit Agreement SECTION 8.4 Reliance by Administrative Agent. The Administrative Agent shall be entitled to rely, and shall be fully protected in relying, upon any note, writing, resolution, notice, consent, certificate, affidavit, letter, cablegram, telegram, facsimile, telex or teletype message, statement, order or other document or conversation believed by them to be genuine and correct and to have been signed, sent or made by the proper Person or Persons, and upon advice and statements of legal counsel (including, without limitation, counsel to Mutual Risk or any of its Subsidiaries), independent accountants and other experts selected by the Administrative Agent. The Administrative Agent shall be fully justified in failing or refusing to take any action under this Agreement or any other Loan Document unless they shall first receive such advice as they deem appropriate or they shall first be indemnified to their satisfaction by the Lenders against any and all liability and expense which may be incurred by it by reason of taking or continuing to take any such action. As between the Administrative Agent and the Lenders, the Administrative Agent shall in all cases be fully protected in acting, or in refraining from acting, under this Agreement and the other Loan Documents in accordance with a request of the Required Lenders (or all Lenders to the extent required by Section 10.6), and such request and any action taken or failure to act pursuant thereto shall be binding upon all the Lenders. SECTION 8.5 Notice of Default. The Administrative Agent shall not be deemed to have knowledge or notice of the occurrence of any Default or Event of Default hereunder unless the Administrative Agent has actually received notice from a Lender or a Borrower referring to this Agreement, describing such Default or Event of Default and stating that such notice is a "notice of default." In the event that the Administrative Agent receives such a notice, the Administrative Agent shall give prompt notice thereof to the Lenders. SECTION 8.6 Non-Reliance on Administrative Agent and Other Lenders. Each Lender expressly acknowledges that neither the Administrative Agent nor any of its respective officers, directors, employees, agents, attorneys-in-fact or affiliates have made any representations or warranties to it and that no act by the Administrative Agent hereinafter taken, including any review of the affairs of Mutual Risk or any of its Subsidiaries, shall be deemed to constitute any representation or warranty by the Administrative Agent to any Lender. Each Lender represents to the Administrative Agent that it has, independently and without reliance upon the Administrative Agent or any other Lender, and based on such documents and information as it has deemed appropriate, made its own appraisal of and investigation into the business, assets, operations, property, financial and other condition, prospects and creditworthiness of Mutual Risk and its Subsidiaries and made its own decision to make Loans hereunder and enter into this Agreement. Each Lender also represents that it will, independently and without reliance upon the Administrative Agent or any other Lender, and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit analysis, appraisals and decisions in taking or not taking action under this Agreement, and to make such investigation as it deems necessary to inform itself as to the business, assets, operations, property, financial and other condition, prospects and creditworthiness of Mutual Risk and its Subsidiaries. The Administrative Agent shall not have any duty or responsibility to provide any Lender with any credit or other information concerning the business, operations, assets, property, financial and other condition, prospects or creditworthiness of Mutual Risk or any of its Subsidiaries which may come into the possession of the Administrative Agent or any of its officers, directors, employees, agents, attorneys-in-fact or affiliates. SECTION 8.7 Indemnification. The Lenders agree to indemnify the Administrative Agent in their capacity as such ratably according to their respective percentages as used in determining the Required Lenders at such time, from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, reasonable expenses or disbursements of any kind whatsoever which may at any time (including, without limitation, at any time following the payment in full of the Obligations) be imposed on, 41 Credit Agreement incurred by or asserted against the Administrative Agent in its capacity as such in any way relating to or arising out of this Agreement or any other Loan Document, or any documents contemplated by or referred to herein or the transactions contemplated hereby or any action taken or omitted to be taken by the Administrative Agent under or in connection with any of the foregoing, but only to the extent that any of the foregoing is not paid by the Borrower or any of its Subsidiaries; provided, that no Lender shall be liable to the Administrative Agent for the payment of any portion of such liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements resulting from the gross negligence or willful misconduct of the Administrative Agent. If any indemnity furnished to the Administrative Agent for any purpose shall, in the opinion of the Administrative Agent, be insufficient or become impaired, the Administrative Agent may call for additional indemnity and cease, or not commence, to do the acts indemnified against until such additional indemnity is furnished. The agreements in this Section 8.7 shall survive the payment in full of all Obligations. SECTION 8.8 Administrative Agent in Its Individual Capacity. The Administrative Agent and its affiliates may make loans to, accept deposits from and generally engage in any kind of business with Mutual Risk and its Subsidiaries as though the Administrative Agent were not the Administrative Agent hereunder. With respect to the Loans to be made by it and all Obligations owing to it, the Administrative Agent shall have the same rights and powers under this Agreement as any Lender and may exercise the same as though it were not the Administrative Agent and the terms "Lender" and "Lenders" shall include the Administrative Agent in its individual capacity as Lender. SECTION 8.9 Resignation of the Administrative Agent; Successor Administrative Agent. The Administrative Agent may resign as Administrative Agent upon 20 days' notice to the Lenders and Mutual Risk. Upon the resignation of the Administrative Agent, the Required Lenders shall appoint from among the Lenders a successor Administrative Agent which is a bank or a trust company for the Lenders subject to prior approval by Mutual Risk (such approval not to be unreasonably withheld or delayed or required if an Event of Default exists), whereupon such successor agent shall succeed to the rights, powers and duties of such Administrative Agent, and the term "Administrative Agent" shall include such successor agent effective upon its appointment, and the resigning Administrative Agent's rights, powers and duties as an Administrative Agent shall be terminated, without any other or further act or deed on the part of such former Administrative Agent or any of the parties to this Agreement. If the Required Lenders fail to appoint a successor Administrative Agent pursuant to the provisions of the preceding sentence, the resigning Administrative Agent shall designate one of the Lenders as successor Administrative Agent. After the resignation of an Administrative Agent hereunder, the provisions of this Section 8 shall inure to its benefit as to any actions taken or omitted to be taken by it while it was Administrative Agent under this Agreement. SECTION 8.10 Other Agents. None of the Lenders (other than Bank of America, N.A.) identified on the cover page of this Agreement as having a title or role other than as a Lender shall have any right, power, obligation, liability, responsibility or duty under this Agreement other than those applicable to all Lenders as such. Without limiting the foregoing, none of the Lenders so identified shall have or be deemed to have any fiduciary relationship with any Lender. 42 Credit Agreement SECTION 9. GUARANTEE SECTION 9.1 Unconditional Guarantee. Each Guarantor hereby unconditionally guarantees (such guarantee to be referred to herein as the "Guarantee") to each of the Lenders and to the Administrative Agent and their respective successors and assigns that (i) the principal of and interest on each Loan not borrowed by it in its capacity as a Borrower will be promptly paid in full when due, subject to any applicable grace period, whether at the Maturity Date, by acceleration or otherwise and interest on the overdue principal, if any, and interest on any interest, to the extent lawful, of each such Loan and all other obligations of the other Borrower to the Lenders or the Administrative Agent hereunder or under the Notes (including, without limitation, for any reimbursements, fees, expenses, indemnities or otherwise) will be promptly paid in full or performed, all in accordance with the terms hereof and thereof, and (ii) in case of any extension of time of payment or renewal of any such Loan or of any such other obligations, the same will be promptly paid in full when due or performed in accordance with the terms of the extension or renewal, subject to any applicable grace period, whether at stated maturity, by acceleration or otherwise. Each Guarantor hereby guarantees that the Obligations will be paid or performed, as applicable, strictly in accordance with the terms of the Loan Documents, regardless of the value, genuineness, validity, regularity or enforceability of the Obligations, and of any Law now or hereafter in effect in any jurisdiction affecting any of such terms or the rights of the Lenders with respect thereto. The liability of each Guarantor to the extent herein set forth shall be absolute and unconditional, not subject to any reduction, limitation, impairment, termination, defense, offset, counterclaim or recoupment whatsoever (all of which are hereby expressly waived by each Guarantor) whether by reason of any claim of any character whatsoever, including, without limitation, any claim of waiver, release, surrender, alteration or compromise, or by reason of any liability at any time to the other Guarantor or otherwise, whether based upon any obligations or any other agreement or otherwise, and howsoever arising, whether out of action or inaction or otherwise and whether resulting from default, willful misconduct, negligence or otherwise, and, without limiting the foregoing, irrespective of : any lack of validity, legality or enforceability of any agreement or instrument relating to the Obligations, any change in the time, manner or place of payment of, or in any other term in respect of, all or any of the Obligations, or any other amendment to or waiver of or consent to any departure from any other agreement relating to any Obligations; any release or amendment or waiver of or consent to any departure from or failure to enforce any other guarantee, for all or any of the Indebtedness; any other circumstance which might otherwise constitute a defense available to, or a discharge of, a Borrower or a Guarantor in respect of the Obligations; the absence of any action on the part of the Lenders to obtain payment of the Obligations from a Borrower; any insolvency, bankruptcy, reorganization or dissolution, or any similar proceeding of a Borrower, including, without limitation, rejection of the Obligations in such bankruptcy; the assignment of the Credit Agreement by the Lenders or a Borrower; or the absence of notice or any delay in any action to enforce any Obligations or to exercise any right or remedy against a Guarantor, whether hereunder, under any Obligations or any agreement or any indulgence, compromise or extension granted. Each Guarantor hereby waives diligence, presentment, demand of payment, filing of claims with a court in the event of insolvency or bankruptcy of a Borrower, any right to require a proceeding first against a Borrower, protest, notice and all demands whatsoever and covenants that this Guarantee will not be discharged except by complete performance of the obligations contained in each Note, this Agreement and in this Guarantee. If any Lender or the Administrative Agent are required by any court or otherwise to return to a Borrower, a Guarantor, or any custodian, trustee, liquidator or other similar official acting in relation to a Borrower or a Guarantor, any amount paid by a Borrower or a Guarantor to the Administrative Agent or such Lender, this Guarantee, to the extent theretofore discharged, shall be reinstated in full force and effect. Each Guarantor further agrees 43 Credit Agreement that, as between such Guarantor, on the one hand, and the Lenders and the Administrative Agent, on the other hand, (x) the maturity of the obligations guaranteed hereby may be accelerated as provided in Section 7 for the purposes of this Guarantee, notwithstanding any stay, injunction or other prohibition preventing such acceleration in respect of the Obligations guaranteed hereby, and (y) in the event of any acceleration of such Obligations as provided in Section 7, such Obligations (whether or not due and payable) shall forthwith become due and payable by such Guarantor for the purpose of this Guarantee. SECTION 9.2 Severability. In case any provision of this Guarantee shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. SECTION 9.3 Limitation of Guarantor's Liability '. Each Guarantor and by its acceptance hereof each of the Lenders hereby confirms that it is the intention of all such parties that the guarantee by a Guarantor pursuant to its Guarantee not constitute a fraudulent transfer or conveyance for purposes of any Bankruptcy Law, the Uniform Fraudulent Conveyance Act, the Uniform Fraudulent Transfer Act or any similar Federal or state law. To effectuate the foregoing intention, the Lenders and each Guarantor hereby irrevocably agree that the obligations of such Guarantor under the Guarantee shall be limited to the maximum amount as will result in the obligations of such Guarantor under the Guarantee not constituting such fraudulent transfer or conveyance. SECTION 9.4 Waiver of Stay, Extension or Usury Laws. Each Guarantor covenants that it will not at any time insist upon, plead, or in any manner whatsoever claim or take the benefit or advantage of, any stay or extension law or any usury law or other law that would prohibit or forgive such Guarantor from performing the Guarantee as contemplated herein, wherever enacted, now or at any time hereafter in force, or which may affect the covenants or the performance of this Agreement; and each Guarantor hereby expressly waives all benefit or advantage of any such law, and covenants that it will not hinder, delay or impede the execution of any power herein granted to the Administrative Agent, but will suffer and permit the execution of every such power as though no such law had been enacted. SECTION 10 MISCELLANEOUS SECTION 10.1 Representation of the Lenders. Each Lender hereby represents that it is a commercial lender which makes loans in the ordinary course of its business and that it will make Loans hereunder for its own account or the account of its Affiliates in the ordinary course of such business. SECTION 10.2 Assignments and Participations. (a) Each Lender shall have the right at any time to assign all or any portion of its Loans or its Commitment in an aggregate amount of not less than $5,000,000 to any Eligible Assignee that is approved by Mutual Risk (so long as no Default or Event of Default exists) and the Administrative Agent, which approvals shall not be unreasonably withheld. In the case of any assignment of all or part of any Loan or any Commitment authorized under this Section 10.2(a), the assignee shall become a party to this Agreement as a Lender by execution of an assignment and assumption agreement substantially in the form of Exhibit D hereto; provided, that (i) at such time Section 2.1 shall be deemed modified to reflect the Commitment of such new Lender and of the existing Lenders, (ii) upon surrender of any Notes evidencing all or any portion of any Loan so assigned, new Notes will be issued, at the Borrowers' expense to such new Lender and to the assigning Lender (if requested by 44 Credit Agreement them), such new Notes to be in conformity with the requirements of Section 2.4 (with appropriate modifications), and (iii) the Administrative Agent shall receive at the time of each such assignment, from the assignor or assignee Lender, the payment of a non-refundable assignment fee of $3,500. To the extent of any assignment pursuant to this Section 10.2(a), the assignor Lender shall be relieved of its obligations hereunder with respect to its assigned Loans or Commitment, and the assignee shall have, to the extent of such assignment, the same rights, benefits and obligations as a Lender with respect to such Loans or Commitment, including, without limitation, the right to approve or disapprove actions which, in accordance with the terms hereof, require the approval of a Lender. At the time of each assignment pursuant to this Section 10.2(a) to an Eligible Assignee which is not already a Lender hereunder and which is not a United States Person (as such term is defined in Section 7701(a)(30) of the Code) for Federal income tax purposes, such Eligible Assignee shall provide to Mutual Risk and the Administrative Agent the appropriate Internal Revenue Service Forms (and, if applicable a Section 10.2(c)(ii) Certificate) described in Section 10.2(c) and to the Administrative Agent an Administrative Questionnaire. (b) Each Lender shall have the right to grant participations to one or more other banks or other financial institutions (including another Lender) in all or any portion of its Commitment and/or Loans; provided however, that (i) such Lender's obligations under this Agreement shall remain unchanged, (ii) such Lender shall remain solely responsible to the other parties hereto for the performance of such obligations, (iii) the participating bank or other financial institution shall not be a Lender hereunder for any purpose except, if the participation agreement so provides, for purposes of Sections 2.9 and 2.10 (but only to the extent that the cost of such benefits to the applicable Borrower does not exceed the cost which such Borrower would have incurred in respect of such Lender absent the participation) and for purposes of Sections 10.05 and 10.17(b), (iv) the Loan Parties, the Administrative Agent and the other Lenders shall continue to deal solely and directly with such Lender in connection with such Lender's rights and obligations under this Agreement, and (v) the consent of the holder of such participation interest shall not be required for amendments or waivers of provisions of the Loan Documents; provided however, that the assigning Lender may, in any agreement with a participant, give such participant the right to consent (as between the assigning Lender and such participant) to any matter which (A) extends the Maturity Date as to such participant or any other date upon which any payment of money is due to such participant, (B) reduces the rate of interest owing to such participant or any fee or any other monetary amount owing to such participant, or (C) reduces the amount of any installment of principal owing to such participant. Any Lender that sells a participation to any Person shall include in its participation agreement with such Person a covenant by such Person that such Person will comply with the provisions of Section 10.2(c) as if such Person were a Lender and provide that the Administrative Agent and the Borrowers shall be third party beneficiaries of such covenant. (c) Each Lender that is an assignee or transferee of an interest under this Agreement pursuant to Section 10.2(a) (unless the respective Lender was already a Lender hereunder immediately prior to such assignment or transfer) and that is not a United States Person (as such term is defined in Section 7701(a)(30) of the Code) agrees to deliver to Mutual Risk and the Administrative Agent, on the date of such assignment or transfer to such Lender, (i) two accurate and complete original signed copies of Internal Revenue Service Form W-8ECI or W- 8BEN Parts I and II (or predecessor or successor forms) including such Lender's U.S. taxpayer identification number and certifying to such Lender's entitlement to a complete exemption from United States withholding tax with respect to payments to be made under this Agreement and under any Note, or (ii) if the Lender is not a "bank" within the meaning of Section 881(c)(3)(A) of the Code and cannot deliver either Internal Revenue Service Form W-8ECI or W-8BEN Parts I and II (or predecessor or successor forms) pursuant to clause (i) above, (X) a certificate substantially in the form of Exhibit E hereto (a "Section 10.2(c)(ii) Certificate") stating that such Lender is not a "bank" within the meaning of 45 Credit Agreement Section 881(c)(3)(A) of the Code and (Y) two accurate and complete original signed copies of Internal Revenue Service Form W-8BEN Part I only (or predecessor or successor form) certifying to such Lender's entitlement to complete exemption from United States withholding tax with respect to payments of interest to be made under this Agreement and under any Note. In addition, each Lender agrees that, when a lapse in time or change in circumstances renders the previous certification obsolete or inaccurate in any material respect, it will deliver to Mutual Risk and the Administrative Agent two new accurate and complete original signed copies of Internal Revenue Service Form W-8ECI or W- 8BEN (or predecessor or successor forms, or a Section 10.2(c)(ii) Certificate and Form W-8BEN Part I only (or predecessor or successor form), as the case may be, and such other forms as may be required in order to confirm or establish the entitlement of such Lender to a continued exemption from or reduction in United States withholding tax with respect to payments under this Agreement and any Note, or it shall immediately notify Mutual Risk and the Administrative Agent of its inability to deliver any such form or certificate; provided, however, that such Lender shall not be obligated to complete and deliver any form requiring disclosure of information or statements that it considers to be confidential or otherwise disadvantageous to disclose. Subject to the immediately succeeding sentence, and notwithstanding Section 2.9, the Borrowers shall be entitled, to the extent they are required to do so by law, to deduct or withhold income or similar taxes imposed by the United States (or any political subdivision or taxing authority thereof or therein) from interest, fees or other amounts payable hereunder or made on any other Loan Document for the account of any Lender which is not a United States Person (as such term is defined in Section 7701(a)(30) of the Code) for U.S. Federal income tax purposes to the extent that such Lender has not provided to Mutual Risk U.S. Internal Revenue Service Forms that establish a complete exemption from such deduction or withholding. Notwithstanding anything to the contrary contained in the preceding sentence or elsewhere in this Section 10.2(c), each Borrower agrees to pay additional amounts and to indemnify and hold harmless each Lender (without regard to the identity of the jurisdiction requiring the deduction or withholding), and reimburse such Lender upon its written request, in respect of any amounts deducted or withheld by it as described in the immediately preceding sentence as a result of any changes after the date of this Agreement in any applicable Law or treaty, or in the interpretation thereof, relating to the deducting or withholding of income or similar taxes. SECTION 10.3 Costs and Expense's. Whether or not the transactions contemplated hereby shall be consummated, the Loan Parties, jointly and severally, agree to pay on demand (i) all reasonable costs and expenses of preparation of the Loan Documents and all the costs of furnishing all opinions by counsel for the Loan Parties (including without limitation any opinions requested by the Lenders as to any legal matters arising hereunder), and of the Loan Parties' performance of and compliance with all agreements and conditions contained herein on their part to be performed or complied with; (ii) the reasonable fees, expenses and disbursements of Haynes and Boone, LLP, counsel to the Administrative Agent, in connection with the negotiation, preparation, execution and administration of the Loan Documents, and any amendments, modifications and waivers thereto and consents to departures from the terms thereof, and (iii) after the occurrence of an Event of Default, all costs and expenses (including reasonable attorneys' fees, including allocated costs of internal counsel, and costs of settlement) incurred by the Lenders or the Administrative Agent in enforcing any Obligations of or in collecting any payments due from the Loan Parties hereunder or under any Notes by reason of such Event of Default (including, without limitation, in connection with the sale of, collection from, or other realization upon, any collateral) or in connection with any refinancing or restructuring of the credit arrangements provided under this Agreement in the nature of a "work-out" or of any insolvency or bankruptcy proceedings. SECTION 10.4 Indemnity. In addition to the payment of expenses pursuant to Section 10.3, whether or not the transactions contemplated hereby shall be consummated, the Loan Parties, jointly and 46 Credit Agreement severally, agree to indemnify, pay and hold each of the Lenders and the Administrative Agent, and each of their respective officers, directors, employees, agents, representatives and affiliates (collectively called the "Indemnitees"), harmless from and against any and all other liabilities, obligations, losses, damages, penalties, actions, judgments, suits, claims, costs, expenses and disbursements of any kind or nature whatsoever (including, without limitation, the reasonable fees and disbursements of counsel for such Indemnitees in connection with any investigative, administrative or judicial proceeding commenced or threatened, whether or not such Indemnitee shall be designated as a party thereto), which may be suffered by, imposed on, incurred by, or asserted against that Indemnitee, in any manner resulting from, connected with, in respect of, relating to or arising out of this Agreement, the other Loan Documents or the Lenders' agreements to make Loans or the use or intended use of any of the proceeds of the Loans hereunder or the breach of any representation, warranty or covenant in this Agreement (the "Indemnified Liabilities"), provided, that the Loan Parties shall have no obligation to an Indemnitee hereunder with respect to Indemnified Liabilities to the extent such liabilities are determined by a court of competent jurisdiction by final and nonappealable judgment to have resulted from the gross negligence or willful misconduct of that Indemnitee. To the extent that the undertaking to indemnify, pay and hold harmless set forth in the preceding sentence may be unenforceable because it is violative of any law or public policy, the Loan Parties shall contribute the maximum portion which they are permitted to pay and satisfy under applicable law to the payment and satisfaction of all Indemnified Liabilities incurred by the Indemnitees or any of them. SECTION 10.5 Setoff. In addition to any rights now or hereafter granted under applicable law and not by way of limitation of any such rights, upon the occurrence and during the continuance of any Event of Default, each Lender and the Administrative Agent is hereby authorized by each Loan Party at any time or from time to time, without notice to such Loan Party or to any other Person, any such notice being hereby expressly waived, to set off and to appropriate and to apply any and all deposits (general or special, including, but not limited to, Indebtedness evidenced by certificates of deposit, whether matured or unmatured but not including trust accounts or any other accounts held for the benefit of another Person) and any other Indebtedness at any time held or owing by such Person to or for the credit or the account of such Loan Party against and on account of the obligations and liabilities of such Loan Party to such Person under this Agreement and the Notes, including, but not limited to, all claims of any nature or description arising out of or connected with this Agreement or the Notes, irrespective of whether or not (a) such Person shall have made any demand hereunder or (b) such Person shall have declared the principal of or the interest on its portion of any Loan to be immediately due and payable and although said obligations and liabilities, or any of them, may be contingent or unmatured. SECTION 10.6 Amendments and Waivers. No amendment, modification, termination or waiver of any term or provision of this Agreement, of the Notes or the Guarantee, or consent to any departure by any Loan Party therefrom, shall in any event be effective without the prior written concurrence of such Loan Party and the Required Lenders, and, upon the request of the Administrative Agent or the Required Lenders, the receipt of a written opinion of counsel of such Loan Party addressed to the Lenders to the effect that such amendment, modification, termination, waiver or consent does not violate or conflict with any of the terms and provisions of any Contract of such Loan Party in respect of Indebtedness for money borrowed or other material agreement of such Loan Party otherwise known to such counsel after reasonable inquiry; provided, that, without the prior written consent of each Lender affected thereby, an amendment, modification, termination or waiver of this Agreement, any Note or the Guarantee or consent to departure from a term or provision hereof or thereof may not: (i) increase or extend the Commitment of such Lender, except as contemplated hereby, or increase the Total Commitment to an amount in excess of $210,000,000; (ii) reduce the principal amount of any Loan; (iii) reduce the rate of or extend the time for payment of principal or 47 Credit Agreement interest on any Loan; (iv) make any Loan payable in money other than that stated herein; (v) make any change to this Section 10.6 or of the definition of Required Lenders or the number or percentage of the Lenders that is required to take any action hereunder; (vi) reduce the rate of or extend the time for payment of fees or other compensation payable to the Lenders hereunder; or (vii) release a Guarantor from the Guarantee; and provided, further, that without the consent of the Administrative Agent, no such amendment, modification, termination or waiver may amend, modify, terminate or waive any provision of Section 8 as the same applies to the Administrative Agent or any other provision of this Agreement as it relates to the rights or obligations of the Administrative Agent. Any waiver or consent shall be effective only in the specific instance and for the specific purpose for which it was given. No notice to or demand on any Loan Party in any case shall entitle such Loan Party to any further notice or demand in similar or other circumstances. SECTION 10.7 Independence of Covenants. All covenants hereunder shall be given independent effect so that if a particular action or condition is not permitted by any of such covenants, the fact that it would be permitted by an exception to, or be otherwise within the limitation of, another covenant shall not avoid the occurrence of an Event of Default or Default if such action is taken or condition exists. SECTION 10.8 Entirety. The Loan Documents (and, as between the Borrowers and the Administrative Agent, the Fee Letter) embody the entire agreement of the parties and supersede all prior agreements and understandings, if any, relating to the subject matter hereof and thereof. SECTION 10.9 Notices. Unless otherwise provided herein, any notice or other communication herein required or permitted to be given shall be in writing and may be personally served, telecopied, telexed or sent by mail and shall be deemed to have been given when delivered in person, upon receipt of telecopy or telex against receipt of answer back or four Business Days after depositing it in the mail, registered or certified, with postage prepaid and properly addressed; provided, that notices to the Administrative Agent pursuant to Section 2 shall not be effective until received. For the purposes hereof, the addresses of the parties hereto (until notice of a change thereof is delivered as provided in this Section 10.9) shall be set forth under each party's name on the signature pages hereto or on the applicable Administrative Questionnaire. SECTION 10.10 Survival of Warranties and Certain Agreement. (a) All agreements, representations and warranties made herein shall survive the execution and delivery of this Agreement, the making of the Loans hereunder and the execution and delivery of the Notes and, notwithstanding the making of the Loans, the execution and delivery of the Notes or any investigation made by or on behalf of any party, shall continue in full force and effect. The closing of the transactions herein contemplated shall not prejudice any right of one party against any other party in respect of anything done or omitted hereunder or in respect of any right to damages or other remedies. (b) Notwithstanding anything in this Agreement or implied by law to the contrary, the agreements of any Loan Party set forth in Sections 2.9, 2.10, 10.3, 10.4, 10.11, 10.14, 10.15, 10.18, and 10.19 shall survive the payment of and the termination of this Agreement. SECTION 10.11 Failure or Indulgence Not Waiver; Remedies Cumulative. No failure or delay on the part of the Administrative Agent or any Lender in the exercise of any power, right or privilege hereunder, under the Guarantee or under the Notes shall impair such power, right or privilege or be construed to be a waiver of any default or acquiescence therein, nor shall any single or partial exercise of any such power, right or privilege preclude other or further exercise thereof or of any other right, power or privilege. All rights 48 Credit Agreement and remedies existing under this Agreement, under the Guarantee or under the Notes are cumulative to and not exclusive of any rights or remedies otherwise available. SECTION 10.12 Severability. In case any provision in or obligation under this Agreement, under the Guarantee or under the Notes shall be invalid, illegal or unenforceable in any jurisdiction, then, to the fullest extent permitted by law, the other provisions hereof shall remain in full force and effect in such jurisdiction and shall be liberally construed in favor of the Lenders in order to carry out intentions of the parties hereto as nearly as may be possible. The invalidity, illegality or unenforceability of any provision hereof in any jurisdiction shall not affect the validity or enforceability of such provision in any other jurisdiction. SECTION 10.13 Headings. Section and Sub-section headings in this Agreement are included herein for convenience of reference only, and shall not constitute a part of this Agreement for any other purpose or be given any substantive effect. SECTION 10.14 Governing Law; Consent to Jurisdiction; Venue; Waiver of Jury Trial. (a) THE LOAN DOCUMENTS HAVE BEEN ENTERED INTO PURSUANT TO SECTION 5-1401 OF THE NEW YORK GENERAL OBLIGATIONS LAW AND THE LOAN DOCUMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK APPLICABLE TO AGREEMENTS MADE AND TO BE PERFORMED ENTIRELY WITHIN SUCH STATE; PROVIDED THAT THE ADMINISTRATIVE AGENT AND EACH LENDER SHALL RETAIN ALL RIGHTS ARISING UNDER FEDERAL LAW. (b) ANY LEGAL ACTION OR PROCEEDING WITH RESPECT TO THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT MAY BE BROUGHT IN THE COURTS OF THE STATE OF NEW YORK SITTING IN THE BOROUGH OF MANHATTAN OR OF THE UNITED STATES FOR THE SOUTHERN DISTRICT OF SUCH STATE, AND BY EXECUTION AND DELIVERY OF THIS AGREEMENT, EACH LOAN PARTY, THE ADMINISTRATIVE AGENT AND EACH LENDER CONSENTS, FOR ITSELF AND IN RESPECT OF ITS PROPERTY, TO THE NON-EXCLUSIVE JURISDICTION OF THOSE COURTS PURSUANT TO SECTION 5-1402 OF THE NEW YORK GENERAL OBLIGATIONS LAW AND EACH AGREES THAT THOSE COURTS SHALL HAVE PERSONAL JURISDICTION OVER EACH LOAN PARTY, THE ADMINISTRATIVE AGENT AND EACH LENDER AND SUBJECT MATTER JURISDICTION OVER SUCH LEGAL ACTION OR PROCEEDING. EACH LOAN PARTY, THE ADMINISTRATIVE AGENT AND EACH LENDER IRREVOCABLY WAIVES ANY OBJECTION, INCLUDING ANY OBJECTION TO THE LAYING OF VENUE OR BASED ON THE GROUNDS OF FORUM NON CONVENIENS, WHICH IT MAY NOW OR HEREAFTER HAVE TO THE BRINGING OF ANY ACTION OR PROCEEDING IN SUCH JURISDICTION IN RESPECT OF ANY LOAN DOCUMENT OR OTHER DOCUMENT RELATED THERETO. EACH LOAN PARTY 49 Credit Agreement IRREVOCABLY APPOINTS CORPORATION SERVICE COMPANY, 80 STATE STREET, ALBANY, NEW YORK 12207-2543, AS ITS AGENT TO RECEIVE SERVICE OF PROCESS OR OTHER LEGAL SUMMONS FOR PURPOSES OF ANY SUCH LEGAL ACTION OR PROCEEDING. EACH LOAN PARTY, THE ADMINISTRATIVE AGENT AND EACH LENDER WAIVES PERSONAL SERVICE OF ANY SUMMONS, COMPLAINT OR OTHER PROCESS, WHICH MAY BE MADE BY THE MAILING OF COPIES THEREOF BY CERTIFIED MAIL, RETURN RECEIPT REQUESTED, POSTAGE PREPAID, TO ITS ADDRESS SPECIFIED HEREIN, OR BY ANY OTHER MEANS PERMITTED BY THE LAWS OF THE STATE OF NEW YORK. EACH LOAN PARTY IRREVOCABLY WAIVES ALL IMMUNITY (WHETHER ON THE BASIS OF SOVEREIGNTY OR OTHERWISE) FROM JURISDICTION, ATTACHMENT (BOTH BEFORE AND AFTER JUDGMENT) AND EXECUTION TO WHICH IT MIGHT BE ENTITLED IN ANY SUCH LEGAL ACTION OR PROCEEDING IN THE COURTS OF ANY JURISDICTION. (c) EACH PARTY TO THIS AGREEMENT HEREBY EXPRESSLY WAIVES ANY RIGHT TO TRIAL BY JURY OF ANY CLAIM, DEMAND, ACTION OR CAUSE OF ACTION ARISING UNDER ANY LOAN DOCUMENT OR IN ANY WAY CONNECTED WITH OR RELATED OR INCIDENTAL TO THE DEALINGS OF THE PARTIES HERETO OR ANY OF THEM WITH RESPECT TO ANY LOAN DOCUMENT, OR THE TRANSACTIONS RELATED THERETO, IN EACH CASE WHETHER NOW EXISTING OR HEREAFTER ARISING, AND WHETHER FOUNDED IN CONTRACT OR TORT OR OTHERWISE; AND EACH PARTY HEREBY AGREES AND CONSENTS THAT ANY SUCH CLAIM, DEMAND, ACTION OR CAUSE OF ACTION SHALL BE DECIDED BY COURT TRIAL WITHOUT A JURY, AND THAT ANY PARTY TO THIS AGREEMENT MAY FILE AN ORIGINAL COUNTERPART OR A COPY OF THIS SECTION WITH ANY COURT AS WRITTEN EVIDENCE OF THE CONSENT OF THE SIGNATORIES HERETO TO THE WAIVER OF THEIR RIGHT TO TRIAL BY JURY. SECTION 10.15 Successors and Assign. This Agreement and the other Loan Documents shall be binding upon and inure to the benefit of the parties hereto and their respective successors and permitted assigns. The Loan Parties' rights or obligations under the Loan Documents may not be assigned without the prior express written consent of each of the Lenders and any such assignment without such consent shall be null and void. SECTION 10.16 Counterparts: Effectiveness. This Agreement and any amendments, waivers, consents or supplements hereto may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed and delivered shall be deemed an original, but all such counterparts together shall constitute but one and the same instrument. SECTION 10.17 Payments Pro Rata. (a) The Administrative Agent agrees that promptly after its receipt of each payment of any interest or principal of the Loans from or on behalf of a Borrower or a Guarantor, it shall, except as otherwise provided in this Agreement, distribute such payment to the Lenders (other than any Lender that has consented in writing to waive its pro rata share of such payment) pro rata based upon their respective pro rata shares, if any, of such payment. (b) Each of the Lenders agrees that, if it should receive any amount hereunder (whether by voluntary payment, by realization upon security, by the exercise of the right of set-off or banker's lien, by counterclaim or cross action, by the enforcement of any right under the Loan Documents, or otherwise) which is applicable to the ratable payment of the Obligations held by the Lenders and which is ratably more than the amount received by any other Lender, then such Lender receiving such excess payment shall purchase for cash without recourse or warranty from the other Lenders an interest in the Obligations of the Borrowers to such other Lenders in such amount as shall result in a ratable sharing by all of the Lenders in such amount; provided, that, if all or any portion of such excess amount is thereafter recovered from such Lender, such purchase shall be rescinded and the purchase price restored to the extent of such recovery, but without interest. 50 Credit Agreement SECTION 10.18 Waiver of Stay, Extension or Usury Laws. The Loan Parties covenant (to the extent that they may lawfully do so) that they will not at any time insist upon, plead, or in any manner whatsoever claim or take the benefit or advantage of any stay or extension law or any usury law or other law that would prohibit or forgive the Loan Parties from paying all or any portion of the principal of or interest on the Loans as contemplated herein, wherever enacted, now or at any time hereafter in force, or which may affect the covenants or the performance of this Agreement; and (to the extent that it may lawfully do so) the Loan Parties hereby expressly waive all benefit or advantage of any such law, and covenant that they will not hinder, delay or impede the execution of any power herein granted to the Administrative Agent and the Lenders, but will suffer and permit the execution of every such power as though no such law had been enacted. SECTION 10.19 Confidentiality. Each Lender shall hold all non-public information obtained pursuant to the requirements of or in connection with this Agreement which has been identified as confidential by a Loan Party in accordance with such Lender's customary procedures for handling confidential information of this nature, it being understood and agreed by the Loan Parties that (i) in any event a Lender may make disclosures reasonably required by any bona fide assignee, transferee or participant in connection with the contemplated assignment or transfer by such Lender of any Loan or any participation therein or as required or requested by any governmental agency or representative thereof or pursuant to legal process; provided that unless specifically prohibited by applicable law or court order, each Lender shall notify Mutual Risk of any request by any government agency or representative thereof (other than any such request in connection with any examination of the financial condition of such Lender by such governmental agency) for disclosure of any such non-public information prior to disclosure of such information and (ii) a Lender may share with any of its Affiliates, and such Affiliates may share with any Lender, any information related to the Loan Parties or any of their Affiliates (including information relating to creditworthiness); and provided, further, that in no event shall any Lender be obligated or required to return any materials furnished by the Loan Parties or any of their Affiliates. In connection with any sales, assignments or transfers referred to in Section 10.2(a), a Lender shall obtain agreements from the purchasers, assignees or transferees, as the case may be, reasonably satisfactory to Mutual Risk, that such parties will comply with this Section 10.19. [REMAINDER OF PAGE INTENTIONALLY BLANK. SIGNATURE PAGES FOLLOW.] 51 Credit Agreement WITNESS the due execution hereof by the respective duly authorized officers of the undersigned as of the date first written above. BORROWER AND GUARANTOR: MUTUAL RISK MANAGEMENT LTD. By /s/ James C. Holly ------------------------- Name: James C. Holly -------------------- Senior Vice President Title: and Chief Financial Officer --------------------------- Notice Address 44 Church Street P.O. Box HM 2064 Hamilton, HM HX, Bermuda Attention: Richard O'Brien Telephone: (441) 295-5688 Telecopy: (441) 292-1867 Signature Page to Credit Agreement Among Mutual Risk Management Ltd., Mutual Group, Ltd., the Lenders Party Thereto and Bank of America, N.A., as Administrative Agent BORROWER AND GUARANTOR: MUTUAL GROUP, LTD. By /s/ James C. Holly ------------------------- Name: James C. Holly -------------------- Senior Vice President Title: and Chief Financial Officer --------------------------- Notice Address One Logan Square Suite 1400 P.O. Box 59239 Philadelphia, PA 19103 Attention: Andrew Walsh Telephone: 215-963-1240 Telecopy: 215-963-1210 Signature Page to Credit Agreement Among Mutual Risk Management Ltd., Mutual Group, Ltd., the Lenders Party Thereto and Bank of America, N.A., as Administrative Agent ADMINISTRATIVE AGENT: BANK OF AMERICA, N.A., as Administrative Agent By /s/ D. Keith Thompson ------------------------- Name: D. Keith Thompson -------------------- Title: Principal ------------------- Notice Address: 901 Main Street, 66th Floor Dallas, Texas 75202 Attention: Keith Thompson Telephone: 214-209-0611 Telecopy: 214-209-3742 Signature Page to Credit Agreement Among Mutual Risk Management Ltd., Mutual Group, Ltd., the Lenders Party Thereto and Bank of America, N.A., as Administrative Agent COMMITMENTS: LENDERS: $75,000,000 BANK OF AMERICA, N.A. By /s/ D. Keith Thompson ------------------------- Name: D. Keith Thompson -------------------- Title: Principal ------------------- Notice Address: 901 Main Street, 66th Floor Dallas, Texas 75202 Attention: Keith Thompson Telephone: 214-209-0611 Telecopy: 214-209-3742 Signature Page to Credit Agreement Among Mutual Risk Management Ltd., Mutual Group, Ltd., the Lenders Party Thereto and Bank of America, N.A., as Administrative Agent $50,000,000 FLEET NATIONAL BANK By /s/ Anson T. Harris ------------------------- Name: Anson T. Harris -------------------- Title: Director ------------------- Notice Address: 777 Main Street Hartford, Connecticut 06115 Attention: Laura McDonough Telephone: 860-986-5769 Telecopy: 860-986-1094 Signature Page to Credit Agreement Among Mutual Risk Management Ltd., Mutual Group, Ltd., the Lenders Party Thereto and Bank of America, N.A., as Administrative Agent $35,000,000 FIRST UNION NATIONAL BANK By /s/ Thomas L. Stitchberry ------------------------- Name: Thomas L. Stitchberry ---------------------- Title: Senior Vice President ---------------------- Notice Address: 1339 Chestnut Street 3rd Floor, PA4819 Philadelphia, Pennsylvania 19107 Attention: Mary Albanese Telephone: 215-973-8174 Telecopy: 215-973-7185 Signature Page to Credit Agreement Among Mutual Risk Management Ltd., Mutual Group, Ltd., the Lenders Party Thereto and Bank of America, N.A., as Administrative Agent $20,000,000 NATIONAL WESTMINSTER BANK PLC By /s/ David E.J. Curtis ------------------------- Name: David E.J. Curtis -------------------- Title: Corporate Director ------------------- Notice Address: NatWest Global Financial Markets Kings Cross House 200 Pentonville Road London NI 9HT Attention: Telephone: (020) 7239-8042 Telecopy: (020) 7239-8257 Signature Page to Credit Agreement Among Mutual Risk Management Ltd., Mutual Group, Ltd., the Lenders Party Thereto and Bank of America, N.A., as Administrative Agent PRICING SCHEDULE Each of "Eurodollar Margin," "Commitment Fee Rate" and "Utilization Fee Rate" means, for any date, the rate set forth below in the row opposite such term and in the column corresponding to the "Pricing Level" (and, in the case of the Utilization Fee Rate, the utilization of the Commitments) that applies at such date:
Level I Level II Level III Level IV Level V Eurodollar Margin .50% .75% .95% 1.15% 1.50% Commitment Fee Rate .125% .15% .175% .25% .325% Utilization Fee Rate when 30% (Less than) .05% .10% .125% .125% .15% Utilization (Less than or Equal to) 60% Utilization Fee Rate when 60% (Less than) Utilization .10% .20% .25% .25% .30%
For purposes of this Schedule, the following terms have the following meanings, subject to the last paragraph of this Schedule: "Level I Pricing" applies at any date if, at such date, Mutual Risk is rated A+ or higher by S&P or A1 or higher by Moody's. "Level II Pricing" applies at any date if, at such date, (i) Mutual Risk is rated A or higher by S&P or A2 or higher by Moody's and (ii) Level I Pricing does not apply. "Level III Pricing" applies at any date if, at such date, (i) Mutual Risk is rated BBB+ or higher by S&P or Baa1 or higher by Moody's and (ii) neither Level I Pricing nor Level II Pricing applies. "Level IV Pricing" applies at any date if, at such date, Mutual Risk is rated BBB or higher by S&P or Baa2 or higher by Moody's and (ii) none of Level I Pricing, Level II Pricing or Level III Pricing applies. "Level V Pricing" applies at any date if, at such date, no other Pricing Level applies. "Pricing Level" refers to the determination of which of Level I, Level II, Level III, Level IV, or Level V applies at any date. The credit ratings to be utilized for purposes of this Schedule are those assigned by S&P and Moody's to Mutual Risk as an issuer or to the long-term senior unsecured, non-credit enhanced debt of Mutual Risk. The rating in effect at any date is that in effect at the close of business on such date. In the case of split ratings from S&P or Moody's, the rating to be used to determine which Pricing Level applies is the higher of the two (e.g. BBB/Baa1 results in Level III Pricing); provided that if the split is more than one full rating category, the median rating (or the higher of the two intermediate ratings) will be used (e.g., A+/Baa1 results in Level II Pricing, while A/Baa2 results in Level III Pricing). If the rating system of S&P or Moody's shall change, Mutual Risk and the Administrative Agent shall negotiate in good faith to amend this Pricing Schedule to reflect such changed rating system and, pending the effectiveness of such amendment (which shall require the approval of Required Lenders), the pricing shall be determined by reference to the rating most recently in effect prior to such change. If S&P and Moody's no longer rate Mutual Risk as an issuer Credit Agreement or assign ratings to the long-term senior unsecured, non-credit enhanced debt of Mutual Risk, the rating to be used to determine which Pricing Level applies shall be the "financial strength" rating assigned by S&P or Moody's to the Insurance Company Subsidiaries of Mutual Risk, and the issuer rating of Mutual Risk or the rating assigned to the long-term senior unsecured, non-credit enhanced debt of Mutual Risk shall be deemed to be three ratings below the higher of such "financial strength" ratings (subject to the proviso in the second preceding sentence) (e.g., financial strength ratings of A+/ A2 results in Level III Pricing while A+/Baa1 results in Level IV Pricing). 2 Credit Agreement SCHEDULE 3.10 LIST OF SUBSIDIARIES(1) - ------------------------------------------------------------------------------- JURISDICTION OF SUBSIDIARY ORGANIZATION - ------------------------------------------------------------------------------- Alpine Meadows Bermuda - ------------------------------------------------------------------------------- Capital Management of Bermuda Ltd. Bermuda - ------------------------------------------------------------------------------- Captive Resources, Inc. Delaware - ------------------------------------------------------------------------------- CFM Insurance Managers Ltd. Bermuda - ------------------------------------------------------------------------------- Commonwealth Risk Services, LP Delaware - ------------------------------------------------------------------------------- Commonwealth Risk Services (Europe) Limited United Kingdom - ------------------------------------------------------------------------------- CompFirst, Inc. Georgia - ------------------------------------------------------------------------------- Continental Benefit Company Bermuda - ------------------------------------------------------------------------------- Genesis Holdings Cayman - ------------------------------------------------------------------------------- H&H Reinsurance Brokers, Ltd. Bermuda - ------------------------------------------------------------------------------- Hamilton Management Ltd. Wisconsin - ------------------------------------------------------------------------------- Hemisphere Financial Services, LLC Delaware - ------------------------------------------------------------------------------- Hemisphere Management Ltd. Bermuda - ------------------------------------------------------------------------------- Hugo Trust Company United Kingdom - ------------------------------------------------------------------------------- Hurst Holme Insurance Company Ltd. Bermuda - ------------------------------------------------------------------------------- International Advisory Services, Ltd. Bermuda - ------------------------------------------------------------------------------- IPC Mutual Holdings Ltd. (Bermuda) Bermuda - ------------------------------------------------------------------------------- Kensington Management Group, Ltd. Cayman - ------------------------------------------------------------------------------- Legion Insurance Company Pennsylvania - ------------------------------------------------------------------------------- Credit Agreement - ------------------------------------------------------------------------------- JURISDICTION OF SUBSIDIARY ORGANIZATION - ------------------------------------------------------------------------------- Legion Financial Corporation Missouri - ------------------------------------------------------------------------------- Legion Management Corporation Oklahoma - ------------------------------------------------------------------------------- Legion Indemnity Company Illinois - ------------------------------------------------------------------------------- Livery Management, Inc. Delaware - ------------------------------------------------------------------------------- M&A Holdings Ltd. Bermuda - ------------------------------------------------------------------------------- Market Reinsurance Intermediaries, Inc. California - ------------------------------------------------------------------------------- MG Financial Ltd. Delaware - ------------------------------------------------------------------------------- MGL Investments, Ltd. Delaware - ------------------------------------------------------------------------------- MRM Reinsurance Brokers Bermuda - ------------------------------------------------------------------------------- MRM Financial Services Limited Bermuda - ------------------------------------------------------------------------------- MRM Hancock Limited United Kingdom - ------------------------------------------------------------------------------- MRM Life Ltd. Bermuda - ------------------------------------------------------------------------------- Mutual Finance Ltd. Bermuda - ------------------------------------------------------------------------------- Mutual Group Ltd. Delaware - ------------------------------------------------------------------------------- Mutual Holdings (Bermuda) Ltd. Bermuda - ------------------------------------------------------------------------------- Mutual Holdings Ltd. Delaware - ------------------------------------------------------------------------------- Mutual Holdings (U.S.) Ltd. Delaware - ------------------------------------------------------------------------------- Mutual Indemnity (U.S.) Ltd. Bermuda - ------------------------------------------------------------------------------- Mutual Indemnity (Dublin) Ltd. Ireland - ------------------------------------------------------------------------------- Mutual Indemnity (Barbados) Ltd. Barbados - ------------------------------------------------------------------------------- Mutual Indemnity (Bermuda) Ltd. Bermuda - ------------------------------------------------------------------------------- Mutual Indemnity Ltd Bermuda - ------------------------------------------------------------------------------- Mutual Risk Captive Group Bermuda - ------------------------------------------------------------------------------- Mutual Risk Management (Cayman) Ltd. Cayman - ------------------------------------------------------------------------------- Mutual Risk Management (Barbados) Ltd. Barbados - ------------------------------------------------------------------------------- Credit Agreement - ------------------------------------------------------------------------------- JURISDICTION OF SUBSIDIARY ORGANIZATION - ------------------------------------------------------------------------------- Mutual Risk Management (Holdings) Ltd. Bermuda - ------------------------------------------------------------------------------- Park International Limited Bermuda - ------------------------------------------------------------------------------- Premium Securities Bermuda - ------------------------------------------------------------------------------- Premium Securities (Bermuda) Ltd. Bermuda - ------------------------------------------------------------------------------- Professional Underwriters Corp Delaware - ------------------------------------------------------------------------------- PUC Midwest Acquisition Corp Delaware - ------------------------------------------------------------------------------- Renaissance Underwriting Managers, Inc. Georgia - ------------------------------------------------------------------------------ SBU Southeast, Inc. Delaware - ------------------------------------------------------------------------------- Shoreline Mutual Management (Bermuda) Ltd. Bermuda - ------------------------------------------------------------------------------- Tremont International Insurance Ltd. Cayman - ------------------------------------------------------------------------------- SPDA Bermuda - ------------------------------------------------------------------------------- Utility Management Insurance Services, Inc. Delaware - ------------------------------------------------------------------------------- Villanova Insurance Company Pennsylvania - ------------------------------------------------------------------------------- Worksafe, Inc. Delaware - ------------------------------------------------------------------------------- Credit Agreement SCHEDULE 6.3 EXISTING LIENS Charges against the IPC Companies (Mutual Indemnity Ltd., Mutual Indemnity (Bermuda) Ltd., Mutual Indemnity (US) Ltd., Mutual Indemnity (Barbados) Ltd., and Mutual Indemnity (Dublin) Ltd.): 1. Charge over Deposits in favor of The Bank of N.T. Butterfield & Son Limited, dated February 26, 1993. 2. Custodian Accounts Charge in favor of The Bank of N.T. Butterfield & Son Limited as fiscal and collateral agent etc., dated November 1, 1996. Credit Agreement SCHEDULE 6.4 EXISTING INDEBTEDNESS - ----------------------------------------------------------------------- Amount at 6/30/00 - ----------------------------------------------------------------------- 1. Indebtedness under the Existing Credit $217,000,000 Agreement - ----------------------------------------------------------------------- 2. Convertible Securities 13,323,008 - ----------------------------------------------------------------------- 3. Other Loans Payable 3,796,048 - ----------------------------------------------------------------------- Credit Agreement EXHIBIT A FORM OF NOTE [NAME OF BORROWER] PROMISSORY NOTE $_____________ [DATE] FOR VALUE RECEIVED, [NAME OF BORROWER], a _______ (the "Company"), promises to pay to the order of ___________________ (the "Lender"), on the Maturity Date, the principal amount of ________________ Dollars($____________), or so much thereof as may be advanced by the Lender to the Company pursuant to the hereinafter described Credit Agreement. The Company also promises to pay interest on the unpaid principal amount hereof from the date advanced until paid in full at the rates and at the times which shall be determined in accordance with the provisions of the Credit Agreement dated as of September 21, 2000, as the same may at any time be amended, modified or supplemented and in effect (the "Credit Agreement"), among the Company, [Name of other Loan Party], the Lenders from time to time party thereto and Bank of America, N.A., as Administrative Agent. This Note is issued pursuant to and entitled to the benefits of the Credit Agreement, to which reference is hereby made for a more complete statement of the terms and conditions under which the Loans evidenced hereby are to be made and are to be repaid. Capitalized terms used herein without definition shall have the meanings set forth in the Credit Agreement. The Lender is hereby authorized to endorse on the schedule attached to this Note (or on a continuation of any such schedule attached to this Note and made a part hereof) an appropriate notation evidencing the date and amount of each Loan, and each payment of principal made hereon, which schedule shall constitute prima facie evidence of the accuracy of the information contained therein. The failure of the Lender to make a notation on the schedule to this Note as aforesaid or the making of an incorrect notation by the Lender shall not affect the obligations of the Company hereunder or under the Credit Agreement or any other Loan Document in any respect. This Note is subject to prepayment at the option of the Company as provided in subsection 2.12(b) of the Credit Agreement. The full payment of this Note shall be guaranteed by [Name of other Loan Party], pursuant to Section 9 of the Credit Agreement. THIS NOTE SHALL BE GOVERNED BY, AND SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK. Upon the occurrence of an Event of Default, the unpaid balance of the principal amount of this Note, together with all accrued but unpaid interest thereon, may become, or may be declared to be, due and payable in the manner, upon the conditions and with the effect provided in the Credit Agreement. Exhibit A The terms of this Note are subject to amendment only in the manner provided in the Credit Agreement. No reference herein to the Credit Agreement and no provision of this Note or the Credit Agreement shall alter or impair the obligation of the Company, which is absolute and unconditional, to pay the principal of and interest on this Note at the place, at the respective times, and in the currency herein prescribed. Pursuant to the provisions of the Credit Agreement, the Company promises to pay, after the occurrence of an Event of Default, all costs and expenses incurred by the Lender or the Administrative Agent in enforcing any Obligations of or in collecting any payments due from the Company hereunder or in connection with any refinancing or restructuring of the credit arrangements provided in the Credit Agreement in the nature of a "work-out" or of any insolvency or bankruptcy proceedings. The Company hereby consents to renewals and extensions of time at or after the maturity hereof, without notice, and hereby waive diligence, presentment, protest, demand and notice of every kind and, to the full extent permitted by law, the right to plead any statute of limitations as a defense to any demand hereunder. IN WITNESS WHEREOF, the Company has caused this Note to be executed and delivered by its duly authorized officer, as of the day and year and at the place first above written. [NAME OF BORROWER] By:_______________________________________________ Name:_______________________________________ 2 Exhibit A TRANSACTIONS ON NOTE
Date Amount of Loan Amount of Principal Amount of Interest Notation Made By Paid This Date Paid Through This Date - --------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------
3 Exhibit A EXHIBIT B-1 FORM OF NOTICE OF BORROWING [DATE] Bank of America, N.A., as Administrative Agent 901 Main Street, 66th Floor Dallas, Texas 75202 Attention: Keith Thompson Ladies and Gentlemen: The undersigned, [Name of Borrower] (the "Borrower") refers to the Credit Agreement dated as of September 21, 2000, as amended, supplemented or restated from time to time (the "Credit Agreement"), the terms defined therein being used herein as therein defined, among the Borrowers, the Guarantors, the Lenders from time to time party thereto and Bank of America, N.A., as Administrative Agent, and hereby gives you notice pursuant to Section 2.2(a) of the Credit Agreement that the Borrower wishes to borrow under Section 2.1 of the Credit Agreement and, in that connection, sets forth below the information relating to such borrowing (the "Proposed Borrowing") as required by Section 2.2(a) of the Credit Agreement: (i) The date of the Proposed Borrowing, being a Business Day, is _______________. (ii) The aggregate amount of the Proposed Borrowing is $______________. (iii) The Proposed Borrowing is to be a ________ [Eurodollar Rate or Base Rate] Loan. (iv) If a Eurodollar Rate Loan, the Proposed Borrowing is to have an initial Interest Period of ________ months. (v) The Borrower wishes the proceeds of the Proposed Borrowing to be credit to the following account: Bank:__________________________ Account Number:________________ (vi) The conditions precedent set forth in the Credit Agreement to the Proposed Borrowing will be satisfied on the date thereof. Yours truly, [NAME OF BORROWER] By:_______________________________________________ Name:_______________________________________ Title:______________________________________ Exhibit B-1 EXHIBIT B-2 FORM OF NOTICE OF CONTINUATION/CONVERSION [Date] Bank of America, N.A., as Administrative Agent 901 Main Street, 66th Floor Dallas, Texas 75202 Attention: Keith Thompson Ladies and Gentlemen: The undersigned, [Name of Borrower] (the "Borrower") refers to the Credit Agreement dated as of September 21, 2000, as amended, supplemented or restated from time to time (the "Credit Agreement"), the terms defined therein being used herein as therein defined, among the Borrowers, the Guarantors, the Lenders from time to time party thereto and Bank of America, N.A., as Administrative Agent, and hereby gives you notice pursuant to Section 2.7(d) of the Credit Agreement that the Borrower wishes to continue a Eurodollar Rate Loan for a new Interest Period or convert a Loan to a Eurodollar Rate Loan or a Base Rate Loan and, in that connection, sets forth the information below related to such continuation or conversion: If a continuation of a Eurodollar Rate Loan: (i) Amount of Eurodollar Rate Loan to be continued: $____________ (ii) New Interest Period: _____ months If a conversion of a Loan to a Eurodollar Rate Loan or a Base Rate Loan: (i) Type of Loan to be converted: ______________________ (Eurodollar Rate or Base Rate) (ii) Amount of Loan to be converted: $____________________ (iii) Loan to be converted to: ___________________________ (Eurodollar Rate or Base Rate) (iv) Interest Period for Eurodollar Rate Loan: _____ months Yours truly, [NAME OF BORROWER] By --------------------------- Name:______________________ Title:_____________________ Exhibit B-2 EXHIBIT C- 1 FORM OF LEGAL OPINION OF MAYER, BROWN & PLATT, U.S. COUNSEL TO THE LOAN PARTIES September__, 2000 To the Agent and each of the Lenders party to the Credit Agreement referred to below c/o Bank of America, N.A. 901 Main Street, 66th Floor Dallas, Texas 75202 Ladies and Gentlemen: We have acted as special U.S. counsel to (i) Mutual Risk Management Ltd., a company organized under the laws of Bermuda ("Mutual Risk") and (ii) Mutual Group, Ltd., a Delaware corporation ("Mutual Group"; together with Mutual Risk, each a "Party" and, collectively, the "Parties"), in connection with the Credit Agreement dated as of September __, 2000 (the "Credit Agreement") among the Parties, as Borrowers and Guarantors, the Lenders party thereto and Bank of America, N.A., as agent for the Lenders (the "Agent"). Unless otherwise indicated, capitalized terms used herein but not otherwise defined herein shall have the respective meanings set forth in the Credit Agreement. In connection with this opinion, we have examined originals or copies, certified or otherwise identified to our satisfaction, of the Subject Credit Documents identified in Schedule 1 hereto (the "Subject Credit Documents") and such other documents as we have deemed necessary or appropriate as a basis for the opinions set forth herein. In our examination we have assumed the genuineness of all signatures, the conformity to original documents of all documents submitted to us as certified or photostatic copies and the authenticity of the originals of such copies. As to questions of fact we have relied solely and without independent investigation upon representations and certificates of officers of each Party, public officials and other appropriate persons. For purposes of this opinion the term "Applicable Laws" means those laws, rules and regulations of the State of New York and general corporate law of the State of Delaware and the United States of America which in our experience are normally applicable to transactions of the type contemplated by the Subject Credit Documents. Exhibit C-1 In rendering our opinions set forth below, we have assumed that the parties to the Subject Credit Documents will carry out their respective obligations under the Subject Credit Documents in accordance with the terms of the Subject Credit Documents. In rendering the following opinions, we have further assumed, without independent investigation or verification but with your permission, that: (a) All Subject Credit Documents and other items submitted to us as originals are authentic and the signatures of the individuals signing all documents in connection with which this opinion is rendered are genuine and such individuals have full legal capacity to sign such Subject Credit Documents and other items. (b) All of the parties to the Subject Credit Documents (other than Mutual Group) are duly organized, validly existing, and in good standing under the laws of their respective jurisdictions of organization and have the full corporate power to enter into such Subject Credit Documents. (c) The execution, delivery and performance of the Subject Credit Documents have been duly authorized by all necessary corporate action and other proceedings on the part of all parties thereto (other than Mutual Group). The Subject Credit Documents have been duly executed and delivered by all parties thereto, except that no such assumption is made with respect to the execution and delivery of the Subject Credit Documents by each Party under the laws of the State of New York and the United States of America, and constitute the valid and binding obligations of the parties thereto (other than each Party), enforceable against such parties (other than each Party) in accordance with their respective terms. (d) The execution, delivery and performance of the Subject Credit Documents do not violate the certificate of incorporation or by-laws or other organizational documents of any party thereto (other than Mutual Group) or contravene or result in a default under any contract, court order or decree to which any such party thereto is a party or by which any such party is bound or the laws, rules or regulations of any relevant jurisdiction (other than the State of New York, the United States of America and the general corporate law of the State of Delaware) applicable to each party; and no consent, license, authorization, registration or filing with, or approval or permit of, any governmental authority, agency or instrumentality of any relevant jurisdiction (other than the State of New York, the United States of America and pursuant to the general corporate law of the State of Delaware) is required in connection with the execution, delivery or performance of the Subject Credit Documents by any such party. (e) The Agent and the Lenders will seek to enforce their respective rights under the Subject Credit Documents only in good faith and in a commercially reasonable manner. (f) There are no agreements, course of prior dealing or other arrangements between any of the parties that would alter the agreements set forth in the Subject Credit Documents. (g) There has not been any fraud, duress, undue influence or material mistake of fact in connection with the transactions contemplated by the Subject Credit Documents. Based upon the foregoing, we are of the opinion that: 1. Mutual Group (i) is validly existing and in good standing under the laws of the State of Delaware and (ii) has the power and authority to own and operate its properties and to conduct its business and to execute, deliver and perform its obligations under the Subject Credit Documents. 2 Exhibit C-1 2. Mutual Group has taken all necessary corporate action to authorize the Subject Credit Documents to which it is party, the execution and delivery of the Subject Credit Documents and all other documents to be executed and delivered by it in connection therewith and the performance of its obligations under the Subject Credit Documents. 3. The execution and delivery of the Subject Credit Documents by Mutual Group, the performance by Mutual Group of its obligations thereunder, and the consummation of the transactions contemplated therein do not result in a breach or violation of any the terms and provisions of the charter or by-laws of Mutual Group. 4. Mutual Group has the power to submit, and pursuant to the Credit Agreement and the Notes has legally, validly and effectively submitted, to the jurisdiction of the courts of the State of New York and of the United States for the Southern District of New York (subject to our qualification in A (iii) below) in respect of any action or proceeding relating in any way to the Credit Agreement or the Notes. 5. Each Subject Credit Document has been duly executed and delivered by each Party under the laws of the State of New York. Each Subject Credit Document that is stated to be governed by New York law constitutes the legal, valid and binding obligation of each Party party thereto, enforceable in accordance with its terms. 6. The execution and delivery of the Subject Credit Documents by each Party party thereto, and the performance by each Party of its respective obligations thereunder (a) do not require any consent, approval, authorization, registration or qualification of or with any governmental authority of the State of New York, the general corporate laws of the State of Delaware or the United States insofar as Applicable Laws are concerned and (b) do not result in a breach or violation of any Applicable Laws. 7. None of the transactions contemplated in the Subject Credit Documents (including, without limitation, the making and guarantee of any Loans and the use of the proceeds thereof) will violate or be inconsistent with Section 7 of the Securities Exchange Act of 1934, as amended (or any regulations issued pursuant thereto, including, without limitation, Regulations T, U and X of the Board of Governors of the Federal Reserve System, 12 C.F.R., Chapter II, as amended). 8. Neither Party is an "investment company" within the meaning of the Investment Company Act of 1940, as amended. 9. Neither Party is a "holding company," or a "subsidiary company" of a "holding company", or an "affiliate" of a "holding company" or of a "subsidiary company" of a "holding company" within the meaning of the Public Utility Holding Company Act of 1935, as amended. The foregoing opinions are subject to the following additional qualifications: A. We express no opinion as to the enforceability of (i) any provision of the Subject Credit Documents purporting to waive illegality as a defense to the performance of contract obligations; (ii) any provision of the Subject Credit Documents purporting to waive notice; (iii) any provision of the Subject Credit Documents purporting to waive any right to a trial by jury or waiving the right to object to venue or the defense of forum non conveniens in any action in any United States Federal Court sitting in the State of 3 Exhibit C-1 New York or as to subject matter jurisdiction of any United States federal court to adjudicate any action where jurisdiction based in diversity of citizenship under 28 U.S.C. (S)1332 does not exist; (iv) any provision of the Subject Credit Documents purporting to irrevocably appoint any Person as attorney-in-fact for a Party; (v) the choice of law provisions contained in any Subject Credit Document purporting to be governed by New York law in any court other than a court of the State of New York; (vi) provisions of any Subject Credit Document providing for severability of the provisions thereto; (vii) provisions purporting to waive defenses, rights or remedies which, as a matter of law, cannot be waived; (viii) provisions which provide that any Subject Credit Document can only be amended, modified or waived in writing; (ix) provisions restricting access to legal or equitable remedies or purporting to establish evidentiary standards; (x) provisions stating that all rights or remedies of any party are cumulative and may be enforced in addition to any other right or remedy and that the election of a particular remedy does not preclude recourse to any or more remedies; or (xi) any provision of the Subject Credit Documents purporting to authorize a right of set-off unless there is mutuality of obligations. B. Our opinions are rendered in reliance upon the opinions dated of even date herewith of (i) Richard O'Brien, General Counsel of the Parties and (ii) Conyers, Dill & Pearman, Bermuda Counsel for Mutual Risk (to the extent that such opinions do not relate to the laws of the State of New York or the United States of America or the general corporate laws of the State of Delaware) and are subject to all of the qualifications and assumptions contained in such opinions. C. We express no opinion as to compliance by any party to the Subject Credit Documents, other than the Parties, with any state or Federal laws or regulations applicable to the transactions contemplated by the Subject Credit Documents because of the nature of such party's business. D. Our opinion in paragraph 1 is subject to applicable bankruptcy, reorganization, fraudulent conveyance, insolvency, moratorium, liquidation, readjustment of debt, or other laws relating to or affecting creditors' rights and remedies generally. In addition, our opinion in paragraph 1 is subject to (i) general principles of equity (including without limitation concepts of materiality, reasonableness, good faith and fair dealing), regardless of whether considered in a proceeding in equity or at law, in the discretion of the court before which any such proceeding therefor may be brought, and (ii) limitations imposed by public policy under certain circumstances on the enforceability of provisions indemnifying a party against certain liabilities. Further, certain rights, remedies and waivers contained in the provisions of the Subject Credit Documents may also be ineffective under, or limited by, Applicable Laws or judicial decisions governing such provisions, but such laws and judicial decisions do not, in our opinion, affect the validity of the Subject Credit Documents, and the Subject Credit Documents contain adequate provisions for the practical realization of the rights and benefits intended to be afforded thereby, although we note that the unenforceability of such provisions may result in delays in the enforcement of the rights and remedies of certain parties under certain of the Subject Credit Documents (and we express no opinion as to the economic consequences, if any, of such delays). E. We express no opinion with respect to the effect of the law of any jurisdiction other than New York which limits the rate of interest legally chargeable or collectible. G. Our opinions in paragraphs 1, 2, 3, 4 and 5 are based solely upon a review of (i) Mutual Group's bylaws, (ii) certified copies of Mutual Group's Certificate of Incorporation, (iii) a Certificate of Good Standing, dated September __, 2000, issued by the Delaware Secretary of State and a telephonic 4 Exhibit C-1 confirmation from such Secretary of State on the date hereof, and (iv) the Officer's Certificates of Mutual Group delivered pursuant to Section 4.1(a)(5) of the Credit Agreement. Our opinions are limited to the specific issues addressed herein and are limited in all respects to laws and facts existing on the date hereof. By rendering our opinions, we do not undertake to advise you of any changes in such laws or facts which may occur after the date hereof. We are members of the Bar of the State of New York and we do not hold ourselves out as being conversant with, and express no opinion as to, the laws of any jurisdiction other than those of the United States of America and the State of New York and the general corporate laws of the State of Delaware. This opinion is being furnished only to the addressees and is solely for their benefit, the benefit of their counsel and the benefit of their assigns. This opinion may not be relied upon for any other purpose, or relied upon by any other person, firm or corporation for any purpose, without our prior written consent. Very truly yours, MAYER, BROWN & PLATT MIZ:JTM:meh 5 Exhibit C-1 SCHEDULE 1 List of Subject Credit Documents Credit Agreement Notes 6 Exhibit C-1 EXHIBIT C-2 FORM OF LEGAL OPINION OF CONYERS DILL & PEARMAN, BERMUDA COUNSEL TO MUTUAL RISK September 21, 2000 The Administrative Agent and each of the Lenders parties to the Credit Agreement referred to below c/o Bank of America, N. A. 901 Main Street, 66th Floor Dallas, Texas 75202 U S A Dear Sirs Mutual Risk Management Ltd. (the "Company") We have acted as special legal counsel in Bermuda to the Company, an exempted company incorporated under the laws of Bermuda, in connection with the Credit Agreement, dated as of September 21, 2000, (the "Credit Agreement"), by and among the Company, Mutual Group, Ltd, the financial institutions from time to time party to the Credit Agreement, and Bank of America, N.A., as administrative agent for the Lenders ("Agent"). This opinion is delivered to you pursuant to Section 4.1(a)(3)(ii) of the Credit Agreement. The terms "Notes", "Loan Documents", "Lenders" and "Taxes" when used herein shall have the same meanings set forth in the Credit Agreement. For the purposes of giving this opinion, we have examined an execution version of the Credit Agreement and the Notes. We have also reviewed the memorandum of association and the bye-laws of the Company and minutes of a meeting of the board of directors of the Company held on September 7, 2000 (the "Minutes") and such other documents and made such enquiries as to questions of law as we have deemed necessary in order to render the opinions set forth below. Exhibit C-2 We have assumed (a) the genuineness and authenticity of all signatures and the conformity to the originals of all copies (whether or not certified) examined by us and the authenticity and completeness of the originals from which such copies were taken, (b) that where a document has been examined by us in draft form, it will be or has been executed in substantially the form of that draft, and where a number of drafts of a document have been examined by us, all changes thereto have been marked or otherwise drawn to our attention, (c) the capacity, power and authority of each of the parties to the Credit Agreement, other than the Company, to enter into and perform their respective obligations under the Credit Agreement, (d) the due execution and delivery of the Credit Agreement by each of the parties thereto, other than the Company, (e) the accuracy and completeness of all factual representations made in the Credit Agreement and other documents reviewed by us, (f) that the resolutions contained in the Minutes remain in full force and effect and have not been rescinded or amended, (g) that there is no provision of the law of any jurisdiction, other than Bermuda, which would have any implication in relation to the opinions expressed herein, (h) the validity and binding effect under the laws of the State of New York in the United States of America (the "Foreign Laws") of the Credit Agreement and the Notes which are expressed to be governed by such Foreign Laws in accordance with their respective terms, and (i) that none of the parties to the Loan Documents, other than the Company, carries on or will carry on activities, other than the performance of its obligations under the Loan Documents, which would constitute the carrying on of investment business in or from within Bermuda and that none of the parties to the Loan Documents, other than the Company, will perform its obligations under the Loan Documents, as the case may be, in or from within Bermuda. The obligations of the Company under the Loan Documents (a) will be subject to laws from time to time in effect relating to bankruptcy, insolvency, liquidation, possessory liens, rights of set off, reorganisation, amalgamation, moratorium or any laws or legal procedures, whether of a similar nature or otherwise, generally affecting the rights of creditors, (b) will be subject to the statutory limitation of time within which proceedings may be brought, (c) will be subject to general principles of equity and, as such, specific performance and injunctive relief, being equitable remedies, may not be available and (d) with respect to Section 2.7(b) of the Credit Agreement, may not be given effect to by a Bermuda court, whether or not it was applying the Foreign Laws, if and to the extent that the obligations under Section 2.7(b) as aforesaid were construed by a Bermuda court to constitute payment of an amount which is in the nature of a penalty and not in the nature of liquidated damages. Notwithstanding any contractual submission to the jurisdiction of specific courts, a Bermuda court has inherent discretion to stay or allow proceedings in the Bermuda courts. We express no opinion as to the enforceability of Section 6.12 of the Credit Agreement to the extent that it purports to fetter the statutory powers of the Company. We have made no investigation of and express no opinion in relation to the laws of any jurisdiction other than Bermuda. This opinion is to be governed by and construed in accordance with the laws of Bermuda and is limited to and is given on the basis of the current law and practice in Bermuda. This opinion is issued solely for your benefit and the benefit of your permitted assignees pursuant to the Credit Agreement and is not to be relied upon by any other person, firm or entity in respect 2 Exhibit C-2 of any other matter. We assume no duty to you or to your permitted assignees to update or supplement this opinion after the date hereof to reflect any changes in the law and practice in Bermuda, any developments of whatsoever nature that may effect the Company or otherwise. On the basis of and subject to the foregoing, we are of opinion that: 1. The Company (i) has been duly incorporated and is validly existing under the laws of Bermuda and (ii) has the corporate power and authority to own and operate its properties and to conduct its respective business as set out in its memorandum of association. The Company is in good standing (meaning that it has not failed to make any filing with any Bermuda governmental authority or to pay any Bermuda government fee or tax which might make it liable to be struck off the Register of Companies and thereby cease to exist under the laws of Bermuda) under the laws of Bermuda. The Company is not bound by, or otherwise subject to, the Bermuda Insurance Act 1978. 2. The Company has the necessary corporate power and authority to enter into and perform its obligations under the Loan Documents. The execution and delivery of the Loan Documents by the Company and the performance by the Company of its obligations thereunder will not violate the memorandum of association or bye-laws of the Company nor any applicable law, regulation, order or decree in Bermuda. 3. The Company has taken all corporate action required to authorise its execution, delivery and performance of the Loan Documents. Each Loan Document (other than the Notes) has been duly executed by or on behalf of the Company and constitutes the legal, valid and binding obligations of the Company in accordance with the terms thereof. The Notes, when duly executed and delivered by the Company, will each constitute the legal, valid and binding obligations of the Company. 4. No order, consent, approval, licence, authorisation or validation of or exemption by any government or public body or authority of Bermuda or any sub-division thereof is required to authorise or is required in connection with the execution, delivery, performance and enforcement of the Loan Documents. 5. No Loan Document will be subject to Taxes in Bermuda and no registration, documentary, recording, transfer or other similar tax, fee or charge is payable in Bermuda in connection with the execution, delivery, filing, registration or performance of the Credit Agreement and the Notes. 6. Neither the Lenders nor the Agent are required to be qualified to do business or file any designation for service of process or file any reports in Bermuda or comply with any Bermudian statutory or regulatory rule or requirement solely by reason of the execution, 3 Exhibit C-2 delivery and performance of the Credit Agreement and/or the enforcement of their rights thereunder. 7. No Taxes, including, without limitation, documentary, stamp, mortgage, transfer or recording taxes or similar charges, are payable to or in Bermuda on account of the execution, delivery, performance and/or enforcement of the Credit Agreement and the Notes. 8. The choice of the Foreign Laws as the governing law of the Credit Agreement and the Notes is a valid choice of law and would be recognised and given effect to in any action brought before a court of competent jurisdiction in Bermuda, except for those laws (i) which such court considers to be procedural in nature, (ii) which are revenue or penal laws or (iii) the application of which would be inconsistent with public policy, as such term is interpreted under the laws of Bermuda. 9. The Company has the power to submit, and pursuant to the Credit Agreement and the Notes has legally, validly, effectively and irrevocably submitted, to the non-exclusive jurisdiction of the courts of the State of New York and of the United States for the Southern District of New York in respect of any action or proceeding relating to the Credit Agreement or the Notes. 10. Each Loan Document is in an acceptable legal form under the laws of Bermuda for enforcement thereof in Bermuda. 11. The courts of Bermuda would recognise as a valid judgment, a final and conclusive judgment in personam obtained in the Foreign Courts against the Company based upon the Credit Agreement under which a sum of money is payable (other than a sum of money payable in respect of multiple damages, taxes or other charges of a like nature or in respect of a fine or other penalty) and would give a judgment based thereon provided that (a) such courts had proper jurisdiction over the parties subject to such judgment, (b) such courts did not contravene the rules of natural justice of Bermuda, (c) such judgment was not obtained by fraud, (d) enforcement of the judgment would not be contrary to the public policy of Bermuda, (e) no new admissible evidence relevant to the action is submitted prior to the rendering of judgment by the courts of Bermuda and (f) due compliance with correct procedures under the laws of Bermuda was observed. 12. The Company is not entitled to any immunity under the laws of Bermuda, whether characterised as sovereign immunity or otherwise, from any legal proceedings to enforce any Loan Document in respect of itself or its property. 13. There is no income or other tax of Bermuda imposed by withholding or otherwise on any payment to be made to or by the Company pursuant to the Loan Documents. 4 Exhibit C-2 14. Based solely upon a search of the Cause Book of the Supreme Court of Bermuda conducted at [ ] a.m. on September 20, 2000 (which would not reveal details of proceedings which have been filed but not actually entered in the Cause Book at the time of our search), there are no judgments against the Company, nor any legal or governmental proceedings pending in Bermuda to which the Company is subject. 15. The obligations of the Company under the Credit Agreement and the Notes will rank at least pari passu in priority of payment with all other unsecured unsubordinated indebtedness of the Company, other than indebtedness which is preferred by virtue of any provision of the laws of Bermuda of general application. Yours faithfully CONYERS DILL & PEARMAN 5 Exhibit C-2 EXHIBIT C-3 FORM OF LEGAL OPINION OF RICHARD O'BRIEN, ESQ. GENERAL COUNSEL TO MUTUAL RISK September 21, 2000 To the Administrative Agent and each of the Lenders party to the Credit Agreement referred to below c/o Bank of America, N.A. 901 Main Street, 66th Floor Dallas, Texas 75202 Ladies and Gentlemen: I am the Senior Vice President and General Counsel of (i) Mutual Risk Management Ltd., a company organized under the laws of Bermuda and (ii) Mutual Group, Ltd., a Delaware corporation (each a "Party" and collectively, the "Parties"), in connection with the Credit Agreement, dated as of September 21, 2000 (the "Agreement"), among the Parties, as Borrowers and Guarantors, the financial institutions from time to time party thereto (the "Lenders"), and Bank of America, N.A., as administrative agent for the Lenders (the "Administrative Agent"), and the transactions contemplated thereby. This opinion is delivered to you pursuant to Section 4.1(a)(3)(iii) of the Credit Agreement. Unless otherwise indicated, capitalized terms used herein but not otherwise defined herein shall have the respective meanings set forth in the Credit Agreement. In connection with this opinion, I have examined originals or copies, certified or otherwise identified to my satisfaction, of the Subject Credit Documents identified in Schedule 1 hereto (the "Subject Credit Documents") and such other documents as I have deemed necessary or appropriate as a basis for the opinions set forth herein. In my examination I have assumed the genuineness of all signatures (other than as to either Party), the conformity to original documents of all documents submitted to me as certified or photostatic copies and the authenticity of the originals of such copies. As to questions of fact not independently verified by me, I have relied, to the extent I deemed appropriate, upon representations and certificates of officers of each Party, public officials and other appropriate persons. For purposes of this opinion: (i) the term "Applicable Laws" means those laws, rules and regulations of New York and the United States of America and the general corporate law of the State of Delaware which in my experience are normally applicable to transactions of the type contemplated by the Subject Credit Documents; (ii) the term "Applicable Orders" means those orders or decrees of Governmental Authorities of New York and Delaware and of the United States of America by which any Party is bound, the existence of which I have knowledge; and (iii) the term "Governmental Approval" means any consent, approval, license, authorization or validation of, or filing, recording, or registration with, any governmental authority pursuant to Applicable Laws. Exhibit C-3 In rendering the opinions set forth below, I have assumed that the parties to the Subject Credit Documents will carry out their respective obligations under the Subject Credit Documents in accordance with the terms of the Subject Credit Documents. In rendering the following opinions, I have further assumed, without independent investigation or verification but with your permission, that: (a) All Subject Credit Documents and other items submitted to us as originals are authentic and the signatures of individuals signing all documents in connection with which this opinion is rendered are genuine and such individuals have full legal capacity to sign such Subject Credit Documents and other items. (b) All of the parties to the Subject Credit Documents (other than each Party) are duly organized, validly existing, and in good standing under the laws of their respective jurisdictions of organization and have the full corporate power to enter into such Subject Credit Documents. (c) The execution, delivery and performance of the Subject Credit Documents have been duly authorized by all necessary corporate action and other proceedings on the part of all parties thereto (other than each Party). The Subject Credit Documents have been duly executed and delivered by all parties thereto (other than each Party), constitute the valid and binding obligations of the parties thereto (other than each Party), enforceable against such parties (other than each Party) in accordance with their respective terms. (d) The execution, delivery and performance of the Subject Credit Documents do not violate the certificate of incorporation or by-laws or other organizational documents of any party thereto (other than each Party) or contravene or result in a default under any contract, court order or decree to which any such party (other than each Party) thereto is a party or by which any such party (other than each Party) is bound or the laws, rules of regulations of any relevant jurisdiction applicable to each party (other than each Party); and no consent, license, authorization, registration or filing with, or approval or permit of, any governmental authority, agency or instrumentality of any relevant jurisdiction is required in connection with the execution, delivery or performance of the Subject Credit Documents by any such party (other than each Party). (e) All parties will act in accordance with, and will refrain from taking any action that is forbidden by, the Subject Credit Documents. (f) The Administrative Agent and the Lenders will seek to enforce their respective rights under the Subject Credit Documents only in good faith and in a commercially reasonable manner. (g) There are no agreements, course of prior dealing or other arrangements between any of the parties (other than between the Parties) that would alter the agreements set forth in the Subject Credit Documents. Based upon the foregoing, I am of the opinion that: 2 Exhibit C-3 1. Each Party (i) is a duly organized and validly existing corporation in good standing under the laws of the jurisdiction of its organization and has the corporate power and authority to own its property and assets and to transact the business in which it is engaged and presently proposes to engage and (ii) is duly qualified and is authorized to do business and is in good standing in all jurisdictions where it is required to be so qualified except where failure to be so qualified, individually or in the aggregate, would not have a Material Adverse Effect. 2. Each Party has the corporate power and authority to execute, deliver and perform the terms and provisions of each of the Subject Credit Documents to which it is a party and has taken all necessary corporate action to authorize the execution, delivery and performance by it of each of the Subject Credit Documents to which it is a party. 3. Neither the execution, delivery or performance by any Party of the Subject Credit Documents to which it is a party, nor compliance by such Party with the terms and provisions thereof, nor the consummation of the transactions contemplated therein, (i) will contravene any provision of any Applicable Law (including, without limitation, Regulations T, U and X of the Board of Governors of the Federal Reserve System) or any Applicable Order, (ii) will conflict or be inconsistent with or violate or result in any breach of, any of the terms, covenants, conditions or provisions of, or constitute a default under, or result in the creation or imposition of (or the obligation to create or impose) any Lien upon any of the property or assets of any Party pursuant to the terms of, any indenture, mortgage, deed of trust, credit agreement, loan agreement, agreement, contract or other instrument (including the Material Agreements identified on Schedule 3 hereto) to which such Party is a party of which I have actual knowledge or by which it or any of its property or assets are bound or to which it may be subject as specifically identified on Schedule 3 hereto or (iii) will violate any provision of any governing document of such Party. 4. Except as disclosed in public filings with the SEC, there are no actions, suits or proceedings pending or, to the best of my knowledge after due inquiry, overtly threatened (i) with respect to any Subject Credit Document or (ii) with respect to any Party (including, without limitation, any indebtedness of any Party), that, after giving effect to expected insurance proceeds and indemnity payments, could have a Material Adverse Effect. 5. No order, consent, approval, license, authorization, or validation of, or filing, recording or registration with, or exemption by, any governmental (domestic or foreign) or public body or authority, or any subdivision thereof, or any other third party (except as have been made and obtained prior to the date hereof), is required to authorize, or is required in connection with, the (i) execution, delivery and performance by the Parties of any Subject Credit Document or (ii) legality, validity, binding effect or enforceability of any such Subject Credit Document as against each Party thereto, except for such order, consent, approval, license, authorization, or validation which has been obtained and is in full force and effect on the date hereof. 6. Each Party has good title to its property free and clear of all liens and other encumbrances except for Permitted Liens, and its obligations under the Credit Agreement rank, and its obligations under the Notes will rank, to the extent unsecured, at least pari passu with all its other unsecured Indebtedness. 7. Each Party is duly licensed (or is not required to be licensed) as an insurance company in the jurisdictions in which such Party is organized or conducts its business. Each Party is in compliance 3 Exhibit C-3 with all other insurance laws and regulations of all the jurisdictions in which such Party is organized or conducts its business, including laws that relate to companies that control insurance companies, except where the failure to so comply would not have a Material Adverse Effect. No Party has received any notification from any insurance authority, commission or other insurance regulatory body of any jurisdiction in which it is organized or conducts its business to the effect that such Party is not in compliance with any insurance law or regulation of such jurisdiction, which notification can reasonably be expected to have a material adverse effect on the business of such Party. The foregoing opinions are subject to the following additional qualifications: A. In connection with the opinions expressed in paragraph 1 above, my opinions are based solely on a review of the latest unofficial compilations available to me of the corporation laws of the jurisdictions involved and certificates of public officials. B. My opinions in paragraphs 3 and 5 above are based solely upon Applicable Laws. C. Insofar as my opinion expressed herein relates to or is based on the application of the laws of Bermuda, I have relied exclusively upon an opinion dated the date hereof of Conyers, Dill & Pearman, a copy of which has been delivered to you. My opinions are limited to the specific issues addressed herein and are limited in all respects to laws and facts existing on the date hereof. By rendering these opinions, I do not undertake to advise you of any changes in such laws or facts which may occur after the date hereof. Conyers, Dill & Pearman, Bermuda counsel for the Parties, and Mayer, Brown & Platt, US counsel for the Parties, may rely on this opinion as if this opinion had been addressed to them. I am a member of the Bar of the State of New York and I do not hold myself out as being conversant with, and express no opinion as to, the laws of any jurisdiction other than those of the State of New York and the United States of America, and the general corporate law of the State of Delaware. This opinion is being furnished only to the addressees and is solely for their benefit, the benefit of their counsel, and the benefit of their participants and assigns in connection with the Subject Credit Documents. Except as otherwise stated herein, this opinion may not be relied upon for any other purpose, or relied upon by any other person, firm or corporation for any purpose, without my prior written consent. Very truly yours, Richard E. O'Brien 4 Exhibit C-3 SCHEDULE 1 List of Subject Credit Documents Credit Agreement Notes 5 Exhibit C-3 SCHEDULE 2 Applicable Orders None. 6 Exhibit C-3 SCHEDULE 3 Material Agreements Indenture dated as of October 30, 1995 relating to Mutual Risk's Zero Coupon Convertible Exchangeable Subordinated Debentures due 2015. Mutual Risk's Zero Coupon Convertible Exchangeable Subordinated Debentures due 2015. 7 Exhibit C-3 EXHIBIT D FORM OF ASSIGNMENT AND ASSUMPTION AGREEMENT Reference is made to the Credit Agreement described in Item 2 of Annex I annexed hereto (the "Credit Agreement"). Terms defined in the Credit Agreement are used herein as defined therein. ___________________ (the "Assignor") and _______________________ (the "Assignee") agree as follows: The Assignor hereby sells and assigns to the Assignee without recourse and without representation or warranty except as expressly set forth herein, and the Assignee hereby purchases and assumes from the Assignor, that interest in and to all of the Assignor's rights and obligations under the Credit Agreement and the other Loan Documents as of the date hereof which represents the percentage interest specified in Item 4 of Annex I of all outstanding rights and obligations under the Credit Agreement and the other Loan Documents. The Assignor (i) represents and warrants that it is the legal and beneficial owner of the interest being assigned by it hereunder and that such interest is free and clear of any adverse claim created by the Assignor; (ii) makes no representation or warranty and assumes no responsibility with respect to any statements, warranties or representations made in or in connection with the Loan Documents or the execution, legality, validity, enforceability, genuineness, sufficiency or value of the Loan Documents or any other instrument or document furnished pursuant thereto; and (iii) makes no representation or warranty and assumes no responsibility with respect to the financial condition of any Loan Party or the performance or observance by any Loan Party of any of its obligations under the Loan Documents or any other instrument or document furnished pursuant thereto. The Assignee (i) confirms that it has received a copy of the Credit Agreement, together with copies of the financial statements referred to therein and such other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into the Assignment and Assumption Agreement; (ii) agrees that it will, independently and without reliance upon the Assignor, the Administrative Agent or any other Lender, as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under the Credit Agreement; (iii) confirms that it is an Eligible Assignee under the terms of the Credit Agreement; (iv) appoints and authorizes the Administrative Agent to take such action as agent on its behalf and to exercise such powers under the Credit Agreement as are delegated to the Administrative Agent by the terms thereof, together with such powers as are reasonably incidental thereto; (v) agrees that it will perform in accordance with their terms all of the obligations which by the terms of the Credit Agreement are required to be performed by it as a Lender[; and (vi) attaches the forms prescribed by the Internal Revenue Service of the United States certifying as to the purchasing Lender's status for purposes of determining exemption from United States withholding taxes with respect to all payments to be made to the Assignee under the Credit Agreement or such other documents as are necessary to indicate that all such payments are subject to such rates at a rate reduced by an applicable tax treaty]/1/. _______________________ /1/ Insert bracketed language if the Assignee is organized under the laws of a jurisdiction outside the United States. Exhibit D Following the execution of this Assignment and Assumption Agreement by the Assignor and the Assignee, this Assignment and Assumption Agreement will be delivered to the Administrative Agent for acceptance and recording by the Administrative Agent together with the fee specified in Section 10.2 of the Credit Agreement. The effective date of this Assignment and Assumption Agreement shall be the date of acceptance hereof by the Administrative Agent, unless otherwise specified in Item 5 of Annex I hereto (the "Settlement Date"). Upon such acceptance and recording by the Administrative Agent, as of the Settlement Date, (i) the Assignee shall be a party to the Credit Agreement and, to the extent provided in this Assignment and Assumption Agreement, shall have the rights and obligations of a Lender thereunder and (ii) the Assignor shall, to the extent provided in this Assignment and Assumption Agreement, relinquish its rights and be released from its obligations under the Credit Agreement. Upon such acceptance and recording by the Administrative Agent, from and after the Settlement Date, the Administrative Agent shall make all payments under the Credit Agreement and the Notes in receipt of the interest assigned hereby (including, without limitation, all payments of principal, interest and commitment fees (if applicable) with respect thereto) to the Assignee. On the Settlement Date, the Assignee shall pay to the Assignor the purchase price agreed between them for the interest assigned hereby. The Assignor and Assignee shall make all appropriate adjustments in payments under the Credit Agreement and the Notes for periods prior to the Settlement Date directly between themselves. THE VALIDITY, CONSTRUCTION AND ENFORCEABILITY OF THIS ASSIGNMENT AND ASSUMPTION AGREEMENT SHALL BE GOVERNED BY THE LAWS OF THE STATE OF NEW YORK. IN WITNESS WHEREOF, the parties hereto have caused this Assignment and Assumption Agreement to be executed by their respective officers thereunto duly authorized, as of the date first above written. [Name of Assignor], as Assignor By ____________________________________________ Name:_______________________________________ Title:______________________________________ [Name of Assignee], as Assignee By ____________________________________________ Name:_______________________________________ Title:______________________________________ Acknowledged and Agreed: Bank of America, N.A., as Administrative Agent By _________________________________________ Name:____________________________________ Title:___________________________________ 2 Exhibit D ANNEX I SCHEDULE OF TERMS 1. Borrowers: Mutual Risk Management Ltd and Mutual Group, Ltd. 2. Name and Date of Credit Agreement: Credit Agreement dated as of September 21, 2000 and among the Borrowers, the Guarantors, the Lenders from time to time party thereto and Bank of America, N.A., as Administrative Agent. 3. Date of Assignment and Assumption Agreement: 4. Amounts (as of Date of Item #3 above): (a) Aggregate Amount of Commitment Assigned: $_________ (b) Percentage of total Commitments under Credit Agreement Assigned: _____% 5. Settlement Date:/1/ 6. Payment Instructions: ASSIGNEE: ASSIGNOR: _________________________ _________________________ _________________________ _________________________ _________________________ _________________________ _________________________ _________________________ _________________________ _________________________ 7. Notice Instructions:
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__________________ /1/ Should be no earlier than the date of acceptance by the Administrative Agent. 3 Exhibit D EXHIBIT E SECTION 10.2(c)(ii) CERTIFICATE Reference is hereby made to the Credit Agreement, dated as of September 21, 2000, among Mutual Risk Management Ltd. and Mutual Group, Ltd., as Borrowers and Guarantors, the Lenders from time to time party thereto and Bank of America, N.A., as Administrative Agent (as amended from time to time, the "Credit Agreement"). Pursuant to the provisions of Section 10.2(c)(ii) of the Credit Agreement, the undersigned hereby certifies that it is not a "bank" as such term is used in Section 881(c)(34)(A) of the Code, as amended. [NAME OF LENDER] By ____________________________________________ Name:_______________________________________ Title:______________________________________ Date:________________ Exhibit E EXHIBIT F-1 FORM OF COMMITMENT INCREASE AGREEMENT Reference is made to the Credit Agreement (the "Agreement") dated as of September 21, 2000, and entered into by and among Mutual Risk Management Ltd., a company incorporated under the laws of Bermuda ("Mutual Risk"), Mutual Group, Ltd., a Delaware corporation ("Mutual Group"), as borrowers (in such capacity, collectively, the "Borrowers" and individually, a "Borrower"), Mutual Risk and Mutual Group, as guarantors (in such capacity, collectively, the "Guarantors" and individually, a "Guarantor"), the banks and financial institutions from time to time party hereto (collectively, the "Lenders" and individually, a "Lender") and Bank of America, N.A., as agent for the Lenders (the "Administrative Agent"). Terms defined in the Agreement are used herein with the same meaning. The undersigned Lender agrees with the Borrowers and the Administrative Agent as follows: 1. Pursuant to Section 2.14 of the Credit Agreement, the Lender hereby agrees that its Commitment is increased from $____________ to $____________. 2. [The Lender attaches the Notes held by the Lender and requests that the Administrative Agent exchange such Notes for new Notes payable to the order of the Lender in an amount equal to its increased Commitment.] 3. The Lender (i) confirms that it has received a copy of the Agreement, together with copies of the most recent annual and quarterly financial statements referred to in Section 5.8 thereof and such other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into this Commitment Increase Agreement; and (ii) agrees that it will, independently and without reliance upon the Administrative Agent or any other Lender and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under the Agreement. 4. Following the execution of this Commitment Increase Agreement, it will be delivered to the Administrative Agent for acceptance and recording by the Administrative Agent. The effective date for this Commitment Increase Agreement (the "Effective Date") shall be the date of acceptance hereof by the Administrative Agent, as reflected beneath its signature below. 5. Upon such acceptance and recording by the Administrative Agent, as of the Effective Date, the Lender shall have the increased Commitment contemplated hereby and, pursuant to Section 2.14 of the Agreement, upon notice from the Administrative Agent, shall pay to each other Lender an amount equal to its pro rata share of the Loans outstanding on such date. 6. This Commitment Increase Agreement shall be governed by, and construed in accordance with, the laws of the State of New York. 8. This Commitment Increase Agreement may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. Exhibit F-1 IN WITNESS WHEREOF, the Lender, the Borrowers, and the Administrative Agent have caused this Commitment Increase Agreement to be executed by their officers thereunto duly authorized as ____________, 200__. [NAME OF INCREASING LENDER] By: ____________________________________________ Name:_______________________________________ Title:______________________________________ MUTUAL RISK MANAGEMENT, LTD., as Borrower By: ____________________________________________ Name:_______________________________________ Title:______________________________________ MUTUAL GROUP, LTD., as Borrower By: ____________________________________________ Name:_______________________________________ Title:______________________________________ BANK OF AMERICA, N.A., as Administrative Agent By: ____________________________________________ Name:_______________________________________ Title:______________________________________ Effective Date:________________ 2 Exhibit F-1 EXHIBIT F-2 FORM OF JOINDER AGREEMENT Reference is made to the Credit Agreement (the "Agreement") dated as of September 21, 2000, and entered into by and among Mutual Risk Management Ltd., a company incorporated under the laws of Bermuda ("Mutual Risk"), Mutual Group, Ltd., a Delaware corporation ("Mutual Group"), as borrowers (in such capacity, collectively, the "Borrowers" and individually, a "Borrower"), Mutual Risk and Mutual Group, as guarantors (in such capacity, collectively, the "Guarantors" and individually, a "Guarantor"), the banks and financial institutions from time to time party thereto (collectively, the "Lenders" and individually, a "Lender") and Bank of America, N.A., as agent for the Lenders (the "Administrative Agent"). Terms defined in the Agreement are used herein with the same meaning. The undersigned new Lender, the Borrowers, and the Administrative Agent agree as follows: 1. The Lender hereby assumes a Commitment of $____________ under the Agreement. 2. [The Lender requests that the Borrowers execute and deliver to the Lender new Notes payable to the order of the Lender in an amount equal to the Commitment assumed by the Lender pursuant hereto.] 3. The Lender (i) confirms that it has received a copy of the Agreement, together with copies of the most recent annual and quarterly financial statements referred to in Section 5.8 thereof and such other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into this Joinder Agreement; (ii) agrees that it will, independently and without reliance upon the Administrative Agent, or any other Lender and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under the Agreement; (iii) appoints and authorizes the Administrative Agent to take such action as agent on its behalf and to exercise such powers and discretion under the Agreement as are delegated to the Administrative Agent by the terms thereof, together with such powers and discretion as are reasonably incidental thereto; and (iv) agrees that it will perform in accordance with their terms all of the obligations that by the terms of the Agreement are required to be performed by it as a Lender. 4. Following the execution of this Joinder Agreement, it will be delivered to the Administrative Agent for acceptance and recording by the Administrative Agent. The effective date for this Joinder Agreement (the "Effective Date") shall be the date of acceptance hereof by the Administrative Agent, as reflected beneath its signature below. 5. Upon such acceptance and recording by the Administrative Agent, as of the Effective Date, (i) the new Lender shall be a party to the Agreement and, to the extent provided in this Joinder Agreement, have the rights and obligations of a Lender thereunder, and (ii) pursuant to Section 2.14 of the Credit Agreement, the new Lender, upon notice from the Administrative Agent, shall pay to each other Lender an amount equal to its pro rata share of the Loans outstanding on such date. 6. This Joinder Agreement shall be governed by, and construed in accordance with, the laws of the State of New York. Exhibit F-2 7. This Joinder Agreement may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. IN WITNESS WHEREOF, the Lender, the Borrowers, and the Administrative Agent have caused this Joinder Agreement to be executed by their officers thereunto duly authorized as of ____________, 200__. [NAME OF NEW LENDER] By: ____________________________________________ Name:_______________________________________ Title:______________________________________ Lending Office for Base Rate Loans: Lending Office for Eurodollar Rate Loans: MUTUAL RISK MANAGEMENT LTD., as Borrower By: ____________________________________________ Name:_______________________________________ Title:______________________________________ MUTUAL GROUP, LTD., as Borrower By: ____________________________________________ Name:_______________________________________ Title:______________________________________ BANK OF AMERICA, N.A., as Administrative Agent By: ____________________________________________ Name:_______________________________________ Title:______________________________________ Effective Date:________________ 2 Exhibit F-2 EX-12.1 3 0003.txt COMPUTATION OF EARNINGS PER SHARE Exhibit 12.1 Computation of Ratio of Earnings to Fixed Charges
Year Ended December 31, 2000 1999 1998 1997 1996 -------------------------------------------------------------------- Consolidated pretax income from continuing operations (18,396,488) 50,307,000 72,970,000 60,109,000 46,465,000 Interest 19,192,119 6,807,106 6,819,257 6,751,975 6,444,424 Interest portion of rental expense 2,539,743 2,147,371 1,683,549 1,278,793 959,180 ----------- ----------- ----------- ----------- ----------- Earnings 3,335,374 59,261,477 81,472,806 68,139,768 53,868,604 =========== =========== =========== =========== =========== Interest 19,192,119 6,807,106 6,819,257 6,751,975 6,444,424 Interest portion of rental expense 2,539,743 2,147,371 1,683,549 1,278,793 959,180 Preferred stock dividend requirements -- -- -- 127,478 201,319 ----------- ----------- ----------- ----------- ----------- Fixed Charges 21,731,862 8,954,477 8,502,806 8,158,246 7,604,923 =========== =========== =========== =========== =========== Ratio of Earnings to Fixed Charges 0.15 6.62 9.58 8.35 7.08
EX-21.1 4 0004.txt LIST OF SUBSIDIARIES Exhibit 21.1 List of subsidiaries (1) Subsidiary Jurisdiction of Organization - ---------- ---------------------------- Capital Management of Bermuda Bermuda Captive Resources, Inc Delaware Commonwealth Risk Services LLP Delaware CompFirst LLC Delaware Hemisphere Financial Services LLC Delaware Hemisphere Management Ltd Bermuda International Advisory Services Ltd Bermuda IPC Mutual Holdings, Ltd Bermuda Legion Financial Corp Missouri Legion Indemnity Co Illinois Legion Insurance Company Pennsylvania Legion Management Corp Oklahoma MG Financial Ltd Delaware MGL Investments Ltd Delaware MRM Financial Services Ltd Bermuda MRM Hancock Ltd UK Mutual Finance Ltd Bermuda Mutual Group Ltd Delaware Mutual Holdings (Bermuda) Ltd Bermuda Mutual Holdings (US) Ltd Delaware Mutual Indemnity (Bermuda) Ltd Bermuda Mutual Indemnity (Dublin) Ltd Ireland Mutual Indemnity Ltd Bermuda Mutual Risk Management (Holdings) Ltd Bermuda Villanova Insurance Company Pennsylvania CFM Insurance Manager Bermuda Genesis Holdings Cayman Hurst Holme Insurance Co Bermuda Kensington Management Group Ltd Cayman Mutual Indemnity (Barbados) Ltd Barbados Mutual Indemnity (US) Ltd Bermuda Mutual Risk Captive Group Ltd Bermuda Mutual Risk Management (Cayman) Ltd Cayman Mutual Risk Management(Barbados) Ltd Barbados Premium Securities (Bermuda) Ltd Bermuda Premium Securities Ltd Bermuda Worksafe, Inc Delaware Tremont International Insurance Ltd Cayman Hemisphere Trust (Jersey) Ltd Jersey MRM Securities Ltd Bermuda MRM Specialty Brokerage Ltd Bermuda H&H Park International Bermuda Psychiatrists Mutual Insurance Company, Inc. Barbados MRM Global Captive Group Ltd. Bermuda Hemisphere Management (Ireland) Ltd Ireland Chesapeake Insurance Company Bermuda MRM Life Bermuda SPDA Bermuda (1) The above list is all of the subsidiaries of the Company except for various subsidiaries and investments that would not in the aggregate represent a material subsidiary. For this purpose a "material subsidiary" means a subsidiary that would represent more than 10% of the total assets or net income of the Company. EX-23.1 5 0005.txt CONSENT AND REPORTS OF ERNST & YOUNG [Ernst & Young Logo Appears Here] Exhibit 23.1 To The Board of Directors and Shareholders Mutual Risk Management Ltd. We have audited the accompanying consolidated balance sheets of Mutual Risk Management Ltd. and subsidiaries as of December 31, 2000 and 1999, and the related consolidated statements of (loss) income and comprehensive (loss) income, changes in shareholders' equity, and cash flows for each of the three years in the period ended December 31, 2000. Our audits also included the financial statement schedules listed in the Index at Item 14(B). These financial statements and schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Mutual Risk Management Ltd. and subsidiaries at December 31, 2000 and 1999, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedules, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein. /s/ Ernst & Young Hamilton, Bermuda February 15, 2001 Exhibit 23.1 [ERNST & YOUNG LOGO APPEARS HERE] CONSENT OF INDEPENDENT AUDITORS TO THE BOARD OF DIRECTORS AND SHAREHOLDERS MUTUAL RISK MANAGEMENT LTD. We consent to the incorporation by reference in Registration Statements on Form S-8 (Nos. 33-44124, 33-55282, 333-05008, 333-77359 and 333-80741) and Form S-3 (Nos. 333-64419, 333-11053, 333-75505 and 333-96425) of Mutual Risk Management Ltd. of our report dated February 15, 2001 with respect to the consolidated financial statements and schedules of Mutual Risk Management Ltd. included in this Annual Report (Form 10-K) for the year ended December 31, 2000. /s/ Ernst & Young Hamilton, Bermuda March 30, 2001 EX-24 6 0006.txt POWERS OF ATTORNEY EXHIBIT 24.1 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned Director and/or Officer of Mutual Risk Management Ltd., a company organized under the laws of Bermuda (the "Company"), hereby appoints Andrew Cook, Robert Mulderig and Richard E. O'Brien and each of them, his attorneys and agents to execute on his behalf and in his name and in the capacity set forth below, an Annual Report of the Company for the fiscal year ended December 31, 2000 on Form 10-K, and any amendment or amendments thereto, for filing with the United States Securities and Exchange Commission under the Securities Exchange Act of 1934 (the "Act"), and to do or cause to be done such other acts and to execute such other documents which said attorneys and agents may deem necessary or advisable to enable the Company to comply with the Act and any rules, regulations or requirements of the Securities and Exchange Commission in respect thereof. /s/ John Kessock, Jr. ---------------------------- , 2001 John Kessock, Jr. Director EXHIBIT 24.2 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned Director and/or Officer of Mutual Risk Management Ltd., a company organized under the laws of Bermuda (the "Company"), hereby appoints Andrew Cook, Robert Mulderig and Richard E. O'Brien and each of them, his attorneys and agents to execute on his behalf and in his name and in the capacity set forth below, an Annual Report of the Company for the fiscal year ended December 31, 2000 on Form 10-K, and any amendment or amendments thereto, for filing with the United States Securities and Exchange Commission under the Securities Exchange Act of 1934 (the "Act"), and to do or cause to be done such other acts and to execute such other documents which said attorneys and agents may deem necessary or advisable to enable the Company to comply with the Act and any rules, regulations or requirements of the Securities and Exchange Commission in respect thereof. /s/ Richard O'Brien ---------------------------- , 2001 Richard O'Brien Senior Vice President EXHIBIT 24.3 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned Director and/or Officer of Mutual Risk Management Ltd., a company organized under the laws of Bermuda (the "Company"), hereby appoints Andrew Cook, Robert Mulderig and Richard E. O'Brien and each of them, his attorneys and agents to execute on his behalf and in his name and in the capacity set forth below, an Annual Report of the Company for the fiscal year ended December 31, 2000 on Form 10-K, and any amendment or amendments thereto, for filing with the United States Securities and Exchange Commission under the Securities Exchange Act of 1934 (the "Act"), and to do or cause to be done such other acts and to execute such other documents which said attorneys and agents may deem necessary or advisable to enable the Company to comply with the Act and any rules, regulations or requirements of the Securities and Exchange Commission in respect thereof. /s/ David J. Doyle, J.P. --------------------------- , 2001 David J. Doyle, J.P. Director EXHIBIT 24.4 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned Director and/or Officer of Mutual Risk Management Ltd., a company organized under the laws of Bermuda (the "Company"), hereby appoints Andrew Cook, Robert Mulderig and Richard E. O'Brien and each of them, his attorneys and agents to execute on his behalf and in his name and in the capacity set forth below, an Annual Report of the Company for the fiscal year ended December 31, 2000 on Form 10-K, and any amendment or amendments thereto, for filing with the United States Securities and Exchange Commission under the Securities Exchange Act of 1934 (the "Act"), and to do or cause to be done such other acts and to execute such other documents which said attorneys and agents may deem necessary or advisable to enable the Company to comply with the Act and any rules, regulations or requirements of the Securities and Exchange Commission in respect thereof. /s/ Arthur E. Engel ---------------------------- January 29, 2001 Arthur E. Engel Director EXHIBIT 24.5 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned Director and/or Officer of Mutual Risk Management Ltd., a company organized under the laws of Bermuda (the "Company"), hereby appoints Andrew Cook, Robert Mulderig and Richard E. O'Brien and each of them, his attorneys and agents to execute on his behalf and in his name and in the capacity set forth below, an Annual Report of the Company for the fiscal year ended December 31, 2000 on Form 10-K, and any amendment or amendments thereto, for filing with the United States Securities and Exchange Commission under the Securities Exchange Act of 1934 (the "Act"), and to do or cause to be done such other acts and to execute such other documents which said attorneys and agents may deem necessary or advisable to enable the Company to comply with the Act and any rules, regulations or requirements of the Securities and Exchange Commission in respect thereof. /s/ Roger E. Dailey ---------------------------- , 2001 Roger E. Dailey Director EXHIBIT 24.6 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned Director and/or Officer of Mutual Risk Management Ltd., a company organized under the laws of Bermuda (the "Company"), hereby appoints Andrew Cook, Robert Mulderig and Richard E. O'Brien and each of them, his attorneys and agents to execute on his behalf and in his name and in the capacity set forth below, an Annual Report of the Company for the fiscal year ended December 31, 2000 on Form 10-K, and any amendment or amendments thereto, for filing with the United States Securities and Exchange Commission under the Securities Exchange Act of 1934 (the "Act"), and to do or cause to be done such other acts and to execute such other documents which said attorneys and agents may deem necessary or advisable to enable the Company to comply with the Act and any rules, regulations or requirements of the Securities and Exchange Commission in respect thereof. /s/ Allan W. Fulkerson ---------------------------- January 29, 2001 Allan W. Fulkerson Director EXHIBIT 24.7 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned Director and/or Officer of Mutual Risk Management Ltd., a company organized under the laws of Bermuda (the "Company"), hereby appoints Andrew Cook, Robert Mulderig and Richard E. O'Brien and each of them, his attorneys and agents to execute on his behalf and in his name and in the capacity set forth below, an Annual Report of the Company for the fiscal year ended December 31, 2000 on Form 10-K, and any amendment or amendments thereto, for filing with the United States Securities and Exchange Commission under the Securities Exchange Act of 1934 (the "Act"), and to do or cause to be done such other acts and to execute such other documents which said attorneys and agents may deem necessary or advisable to enable the Company to comply with the Act and any rules, regulations or requirements of the Securities and Exchange Commission in respect thereof. /s/ Glenn R. Partridge ---------------------------- January 31, 2001 Glenn R. Partridge Director EXHIBIT 24.8 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned Director and/or Officer of Mutual Risk Management Ltd., a company organized under the laws of Bermuda (the "Company"), hereby appoints Andrew Cook, Robert Mulderig and Richard E. O'Brien and each of them, his attorneys and agents to execute on his behalf and in his name and in the capacity set forth below, an Annual Report of the Company for the fiscal year ended December 31, 2000 on Form 10-K, and any amendment or amendments thereto, for filing with the United States Securities and Exchange Commission under the Securities Exchange Act of 1934 (the "Act"), and to do or cause to be done such other acts and to execute such other documents which said attorneys and agents may deem necessary or advisable to enable the Company to comply with the Act and any rules, regulations or requirements of the Securities and Exchange Commission in respect thereof. /s/ Norman L. Rosenthal ---------------------------- January 29, 2001 Normal L. Rosenthal Director EXHIBIT 24.9 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned Director and/or Officer of Mutual Risk Management Ltd., a company organized under the laws of Bermuda (the "Company"), hereby appoints Andrew Cook, Robert Mulderig and Richard E. O'Brien and each of them, his attorneys and agents to execute on his behalf and in his name and in the capacity set forth below, an Annual Report of the Company for the fiscal year ended December 31, 2000 on Form 10-K, and any amendment or amendments thereto, for filing with the United States Securities and Exchange Commission under the Securities Exchange Act of 1934 (the "Act"), and to do or cause to be done such other acts and to execute such other documents which said attorneys and agents may deem necessary or advisable to enable the Company to comply with the Act and any rules, regulations or requirements of the Securities and Exchange Commission in respect thereof. /s/ Joseph D. Sargent ---------------------------- January 29, 2001 Joseph D. Sargent Director EXHIBIT 24.10 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned Director and/or Officer of Mutual Risk Management Ltd., a company organized under the laws of Bermuda (the "Company"), hereby appoints Andrew Cook, Robert Mulderig and Richard E. O'Brien and each of them, his attorneys and agents to execute on his behalf and in his name and in the capacity set forth below, an Annual Report of the Company for the fiscal year ended December 31, 2000 on Form 10-K, and any amendment or amendments thereto, for filing with the United States Securities and Exchange Commission under the Securities Exchange Act of 1934 (the "Act"), and to do or cause to be done such other acts and to execute such other documents which said attorneys and agents may deem necessary or advisable to enable the Company to comply with the Act and any rules, regulations or requirements of the Securities and Exchange Commission in respect thereof. /s/ Jerry S. Rosenbloom ---------------------------- , 2001 Jerry S. Rosenbloom Director EXHIBIT 24.11 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned Director and/or Officer of Mutual Risk Management Ltd., a company organized under the laws of Bermuda (the "Company"), hereby appoints Andrew Cook, Robert Mulderig and Richard E. O'Brien and each of them, his attorneys and agents to execute on his behalf and in his name and in the capacity set forth below, an Annual Report of the Company for the fiscal year ended December 31, 2000 on Form 10-K, and any amendment or amendments thereto, for filing with the United States Securities and Exchange Commission under the Securities Exchange Act of 1934 (the "Act"), and to do or cause to be done such other acts and to execute such other documents which said attorneys and agents may deem necessary or advisable to enable the Company to comply with the Act and any rules, regulations or requirements of the Securities and Exchange Commission in respect thereof. /s/ William F. Galtney Jr. ---------------------------- February 1, 2001 William F. Galtney, Jr. Director EXHIBIT 24.12 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned Director and/or Officer of Mutual Risk Management Ltd., a company organized under the laws of Bermuda (the "Company"), hereby appoints Andrew Cook, Robert Mulderig and Richard E. O'Brien and each of them, his attorneys and agents to execute on his behalf and in his name and in the capacity set forth below, an Annual Report of the Company for the fiscal year ended December 31, 2000 on Form 10-K, and any amendment or amendments thereto, for filing with the United States Securities and Exchange Commission under the Securities Exchange Act of 1934 (the "Act"), and to do or cause to be done such other acts and to execute such other documents which said attorneys and agents may deem necessary or advisable to enable the Company to comply with the Act and any rules, regulations or requirements of the Securities and Exchange Commission in respect thereof. /s/ Robert A. Mulderig ---------------------------- , 2001 Robert A. Mulderig Director EXHIBIT 24.13 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned Director and/or Officer of Mutual Risk Management Ltd., a company organized under the laws of Bermuda (the "Company"), hereby appoints Andrew Cook, Robert Mulderig and Richard E. O'Brien and each of them, his attorneys and agents to execute on his behalf and in his name and in the capacity set forth below, an Annual Report of the Company for the fiscal year ended December 31, 2000 on Form 10-K, and any amendment or amendments thereto, for filing with the United States Securities and Exchange Commission under the Securities Exchange Act of 1934 (the "Act"), and to do or cause to be done such other acts and to execute such other documents which said attorneys and agents may deem necessary or advisable to enable the Company to comply with the Act and any rules, regulations or requirements of the Securities and Exchange Commission in respect thereof. /s/ Richard G. Turner ---------------------------- , 2001 Richard G. Turner Director EXHIBIT 24.14 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned Director and/or Officer of Mutual Risk Management Ltd., a company organized under the laws of Bermuda (the "Company"), hereby appoints Andrew Cook, Robert Mulderig and Richard E. O'Brien and each of them, his attorneys and agents to execute on his behalf and in his name and in the capacity set forth below, an Annual Report of the Company for the fiscal year ended December 31, 2000 on Form 10-K, and any amendment or amendments thereto, for filing with the United States Securities and Exchange Commission under the Securities Exchange Act of 1934 (the "Act"), and to do or cause to be done such other acts and to execute such other documents which said attorneys and agents may deem necessary or advisable to enable the Company to comply with the Act and any rules, regulations or requirements of the Securities and Exchange Commission in respect thereof. /s/ Paul D. Watson ---------------------------- January 29, 2001 Paul D. Watson Chief Operating Officer EXHIBIT 24.15 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned Director and/or Officer of Mutual Risk Management Ltd., a company organized under the laws of Bermuda (the "Company"), hereby appoints Andrew Cook, Robert Mulderig and Richard E. O'Brien and each of them, his attorneys and agents to execute on his behalf and in his name and in the capacity set forth below, an Annual Report of the Company for the fiscal year ended December 31, 2000 on Form 10-K, and any amendment or amendments thereto, for filing with the United States Securities and Exchange Commission under the Securities Exchange Act of 1934 (the "Act"), and to do or cause to be done such other acts and to execute such other documents which said attorneys and agents may deem necessary or advisable to enable the Company to comply with the Act and any rules, regulations or requirements of the Securities and Exchange Commission in respect thereof. /s/ Andrew Cook ---------------------------- January 30, 2001 Andrew Cook Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----