10-Q 1 d10q.txt MUTUAL RISK MANAGEMENT FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] Quarterly report under section 13 or 15(d) of the Securities Exchange Act of 1934. For the quarterly period ended March 31, 2001. or [_] Transition report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934. For the transition period from _____________ to _____________ . Commission File Number 1-10760 MUTUAL RISK MANAGEMENT LTD. -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) BERMUDA NOT APPLICABLE -------------------------------------------------------------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 44 Church Street, Hamilton HM 12, Bermuda -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip code) (441) 295-5688 -------------------------------------------------------------------------------- (Registrant's telephone number, including area code) Not applicable -------------------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [_] The number of outstanding shares of the registrant's Common Stock, $0.01 par value, as of March 31, 2001 was 41,618,331. MUTUAL RISK MANAGEMENT LTD. I N D E X Part I. Financial Information: Item 1. Financial Statements: Unaudited Consolidated Statements of Income and Comprehensive Income for the three month periods ended March 31, 2001 and 2000 3 Consolidated Balance Sheets at March 31, 2001 (unaudited) and December 31, 2000 (audited) 4 Unaudited Consolidated Statements of Cash Flows for the three month periods ended March 31, 2001 and 2000 5 Consolidated Statements of Changes in Shareholders' Equity at March 31, 2001 (unaudited) and December 31, 2000 (audited) 6 Notes to Unaudited Consolidated Financial Statements at March 31, 2001 7-16 Item 2. Management's Discussion and Analysis of Financial 17-22 Condition and Results of Operations Item 3. Quantitative and Qualitative Disclosures about 22 Market Risk PART II.Other Information: Item 6. Exhibits and Reports on Form 8-K 22 Signatures 23
PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS MUTUAL RISK MANAGEMENT LTD. AND SUBSIDIARIES UNAUDITED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(In thousands, except share and per share data) Three Months Ended March 31 2001 2000 REVENUES Fee income $ 31,861 $ 22,939 Premiums earned 63,436 55,873 Net investment income 6,405 12,566 Realized capital losses (991) (1,623) Other income 383 14 ----------- ----------- Total Revenues 101,094 89,769 ----------- ----------- EXPENSES Losses and loss expenses incurred 43,766 34,320 Acquisition and underwriting expenses 16,581 19,534 Operating expenses 22,859 17,655 Interest expense 4,538 5,996 Other expenses 962 712 ----------- ----------- Total Expenses 88,706 78,217 ----------- ----------- INCOME BEFORE INCOME TAXES, MINORITY INTEREST AND EXTRAORDINARY LOSS 12,388 11,552 Income taxes 672 993 ----------- ----------- INCOME BEFORE MINORITY INTEREST AND EXTRAORDINARY LOSS 11,716 10,559 Minority interest (253) 699 ----------- ----------- INCOME BEFORE EXTRAORDINARY LOSS 11,463 11,258 Extraordinary loss on extinguishment of debentures, net of tax - 4,327 ----------- ----------- NET INCOME 11,463 6,931 Other comprehensive income, net of tax: Unrealized losses on investments, net of reclassification adjustment 5,857 (1,158) ----------- ----------- COMPREHENSIVE INCOME $ 17,320 $ 5,773 =========== =========== EARNINGS PER COMMON SHARE: Net income: Basic $ 0.28 $ 0.17 =========== =========== Diluted $ 0.28 $ 0.17 =========== =========== Dividends per Common Share $ 0.01 $ 0.07 =========== =========== Weighted average number of Common Shares outstanding - basic 41,618,331 41,209,071 =========== =========== Weighted average number of Common Shares outstanding - diluted 41,619,826 41,308,945 =========== ===========
See Accompanying Notes to Unaudited Consolidated Financial Statements 3 MUTUAL RISK MANAGEMENT LTD. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
MARCH 31, DECEMBER 31, (In thousands, except share data) 2001 2000 (unaudited) (audited) ASSETS Cash and cash equivalents 189,641 $202,015 Investments: Held as available for sale at fair value (Amortized cost $380,101; 2000 - $381,910) 375,121 371,074 --------- ---------- Total marketable investments 564,762 573,089 Other investments 35,833 35,201 Investment income due and accrued 5,411 5,948 Accounts receivable 625,538 592,852 Reinsurance recoverable 2,395,857 2,307,466 Deferred expenses 81,165 67,461 Prepaid reinsurance premiums 348,465 346,223 Deferred tax benefit 34,858 34,503 Other assets 124,716 97,129 Assets held in separate accounts 827,984 799,777 --------- ---------- Total Assets 5,044,589 $4,859,649 ========= ========== LIABILITIES & SHAREHOLDERS' EQUITY LIABILITIES Unpaid losses and loss expenses 2,615,924 $2,529,183 Unearned premiums 449,419 426,069 Pension fund reserves 55,804 56,191 Claims deposit liabilities 25,327 25,407 Accounts payable 321,005 310,590 Taxes payable 23,907 24,139 Loans payable 220,000 220,000 Other loans payable 18,571 3,595 Debentures 13,851 13,673 Other liabilities 104,310 99,492 Liabilities related to separate accounts 827,984 799,777 --------- ---------- Total Liabilities 4,676,102 4,508,116 --------- ---------- SHAREHOLDERS' EQUITY Common Shares - Authorized 180,000,000 (par value $0.01) Issued 41,618,331 (excluding 2,728,816 shares held in treasury) (2000 - 41,614,649) 416 416 Additional paid-in capital 117,239 117,188 Accumulated other comprehensive loss (4,979) (10,836) Retained earnings 255,811 244,765 --------- ---------- Total Shareholders' Equity 368,487 351,533 --------- ---------- Total Liabilities & Shareholders' Equity 5,044,589 $4,859,649 ========= ==========
See Accompanying Notes to Unaudited Consolidated Financial Statements 4 MUTUAL RISK MANAGEMENT LTD. AND SUBSIDIARIES UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended March 31, (In thousands) 2001 2000 NET CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 11,463 $ 6,931 Items not affecting cash: Depreciation 3,632 2,585 Amortization of investments (177) (28) Net loss (gain) on sale of investments 996 (248) Amortization of convertible debentures 178 881 Deferred tax benefit (355) (659) Extraordinary loss on extinguishment of debentures - 4,327 Other items 466 (1,054) Net changes in non-cash balances relating to operations: Accounts receivable (32,686) 38,157 Reinsurance recoverable (88,391) (13,088) Investment income due and accrued 537 (1,310) Deferred expenses (13,704) (300) Prepaid reinsurance premiums (2,243) (25,867) Other assets 8,077 4,310 Unpaid losses and loss expenses 86,741 3,046 Unearned premiums 23,350 38,548 Accounts payable 10,414 (54,915) Taxes payable (231) (4,495) Other liabilities (2,033) 3,281 --------- --------- NET CASH FLOWS FROM OPERATING ACTIVITIES 6,034 102 ========= ========= CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from sale of investments - available for sale 14,283 10,266 Proceeds from maturity of investments - available for sale 9,208 223,924 Fixed assets purchased (18,415) (4,399) Investments purchased - available for sale (22,499) (262,021) Acquisitions and other investments (12,849) 1,083 Other items 217 (137) --------- --------- NET CASH FLOW APPLIED TO INVESTING ACTIVITIES (30,055) (31,284) ========= ========= CASH FLOWS FROM FINANCING ACTIVITIES Loans received 14,976 99,993 Extinguishment of convertible debentures - (101,325) Proceeds from shares issued 51 317 Claims deposit liabilities (80) 1,697 Pension fund reserves (387) (471) Dividends paid (2,913) (2,885) --------- --------- NET CASH FLOW FROM (APPLIED TO) FINANCING ACTIVITIES 11,647 (2,674) ========= ========= Net decrease in cash and cash equivalents (12,374) (33,856) Cash and cash equivalents at beginning of period 202,015 155,387 --------- --------- Cash and cash equivalents at end of period $ 189,641 $ 121,531 ========= ========= Supplemental cash flow information: Interest paid $ 4,469 $ 5,115 ========= ========= Income taxes paid, net $ - $ - ========= =========
See Accompanying Notes to Unaudited Consolidated Financial Statements 5 MUTUAL RISK MANAGEMENT LTD. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Treasury Opening Shares Shares Unrealized Balance Issued Purchased Gain (Loss)(1) Three Months Ended March 31, 2001 (unaudited) --------------------------------------------- Common shares $ 416 $ - $ - $ - Additional paid-in capital 117,187 1,437 (1,386) - Accumulated other comprehensive (loss) income (10,836) - - 5,857 Retained earnings 244,765 - - - -------------------------------------------------------------- TOTAL SHAREHOLDERS' EQUITY $ 351,532 $ 1,437 $ (1,386) $ 5,857 ============================================================== Year Ended December 31, 2000 (audited) ---------------------------- Common shares $ 412 $ 5 $ (1) $ - Additional paid-in capital 110,755 7,819 (1,386) - Accumulated other comprehensive (loss) income (14,937) - - 4,101 Retained earnings 261,914 - - - -------------------------------------------------------------- TOTAL SHAREHOLDERS' EQUITY $ 358,144 $ 7,824 $ (1,387) $ 4,101 ============================================================== Common Share Net Dividends Closing Income Declared (2) Balance Three Months Ended March 31, 2001 (unaudited) --------------------------------------------- Common shares $ - $ - $ 416 Additional paid-in capital - - 117,239 Accumulated other comprehensive (loss) income - - (4,979) Retained earnings 11,463 (417) 255,811 -------------------------------------------------- TOTAL SHAREHOLDERS' EQUITY $ 11,463 $ (417) $ 368,487 ================================================== Year Ended December 31, 2000 (audited) ---------------------------- Common shares $ - $ - $ 416 Additional paid-in capital - 117,188 Accumulated other comprehensive (loss) income - (10,836) Retained earnings (5,852) (11,567) 244,765 -------------------------------------------------- TOTAL SHAREHOLDERS' EQUITY $ (5,582) $ (11,567) $ 351,533 ==================================================
(1) Net of reclassification adjustment, net of tax (See Note 2). (2) Dividend per share amounts were $0.01 and $0.28 for the quarter ended March 31, 2001 and the year ended December 31, 2000 respectively. See Accompanying Notes to Unaudited Consolidated Financial Statements 6 MUTUAL RISK MANAGEMENT LTD. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS March 31, 2001 1. INTERIM ACCOUNTING POLICY In the opinion of the management of Mutual Risk Management ("the Company"), the accompanying unaudited consolidated financial statements include all adjustments, consisting of normal recurring adjustments, necessary to present fairly the financial position of the Company and the results of operations and cash flows for the three months ended March 31, 2001 and 2000. Although the Company believes that the disclosure in these financial statements is adequate to make the information presented not misleading certain information and footnote information normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States has been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission. Results of operations for the three months ended March 31, 2001 are not necessarily indicative of what operating results may be for the full year. 2. FINANCIAL STATEMENT PRESENTATION The Company has amended the income statement presentation and restated the comparative quarter to reflect this. The resulting income statement reclassification affected fee income, acquisition and underwriting expenses and operating expenses. There is no effect on net income. 3. SFAS 133, "ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES" The Company adopted SFAS 133 on January 1, 2001. The Statement did not have an impact on the Company's financial position or results of operations. 4. COMPREHENSIVE INCOME Statement 130 requires unrealized gains or losses on the Company's available for sale investments, to be included in other comprehensive income.
(In thousands) Before tax Tax Net of Tax --- Three months ended March 31, 2001 Amount Amount --------------------------------- ------ ------ Net unrealized gains on available for sale investments arising during the period $ 6,853 $ 1 $ 6,854 Less: reclassification adjustment for gains realized in net income (996) (1) (997) ------- ---- ------- Other comprehensive income $ 5,857 $ - $ 5,857 ======= ==== ======= Three months ended March 31, 2000 Before tax Tax Net of Tax ----------------------------------- --- Amount Amount ------ ------ Net unrealized losses on available for sale investments arising during the period $(1,406) $ 24 $(1,382) Less: reclassification adjustment for gains realized in net income 248 (24) 224 ------- ---- ------- Other comprehensive loss $(1,158) $ - $(1,158) ======= ==== =======
7 5. SEGMENT INFORMATION The Company has changed its basis of segmentation from that used in the Annual Report on Form 10-K. Management believes the new basis of segmentation most accurately reflects the Company's operating segments under the definition provided by SFAS No. 131.
Quarter ended March 31 2001 2000\\(3)\\ Revenue Insurance Operations $ 65,600 $57,354 Corporate Risk Management $ 13,377 $10,413 Specialty Brokerage $ 4,378 $ 5,016 Financial Services $ 11,942 $ 6,029 Net investment income (1) $ 5,414 $10,943 Other $ 383 $ 14 -------- ------- Total $101,094 $89,769 -------- -------
Income before income taxes, minority interest and extraordinary items Insurance Operations $ 4,565 $ 2,904 Corporate Risk Management $ 3,823 $ 2,412 Specialty Brokerage $ 1,069 $ 1,681 Financial Services $ 2,634 $ 1,320 Net investment income (2) $ 876 $ 4,947 Other $ (579) $(1,712) -------- ------- Total $ 12,388 $11,552 ------- -------
The subsidiaries' accounting records do not capture information by reporting segment sufficient to determine identifiable assets by such reporting segments. (1) Net of realized capital gains and losses. (2) Net of realized capital gains and losses and interest expense. (3) Certain of the prior year figures have been restated to conform with the current year's presentation. 8 6. EARNINGS PER COMMON SHARE The following table sets forth the computation of basic and diluted earnings per common share.
Quarter ended March 31, (In thousands, except shares and earnings per share) 2001 2000 Numerator Income before extraordinary loss $ 11,463 $ 11,258 Extraordinary loss on extinguishment of debentures, net of tax - (4,327) ----------- ----------- Net income 11,463 6,931 ----------- ----------- Numerator for basic and fully diluted earnings per common share - Net income $ 11,463 $ 6,931 Denominator Denominator for basic earnings per common share - Weighted average shares 41,618,331 41,209,071 Effect of dilutive securities: Stock options 1,495 99,873 ----------- ----------- Denominator for diluted earnings per common share - Adjusted weighted average shares and assumed conversions(a) 41,619,826 41,308,944 =========== =========== Basic earnings per common share Income before extraordinary loss $ 0.28 $ 0.28 Extraordinary loss on extinguishment of debentures, net of tax $ - $ (0.11) ----------- ----------- Basic earnings per common share $ 0.28 $ 0.17 =========== =========== Diluted earnings per common share Income before extraordinary loss $ 0.28 $ 0.27 Extraordinary loss on extinguishment of debentures, net of tax $ - $ (0.10) ----------- ----------- Diluted earnings per common share $ 0.28 $ 0.17 =========== ===========
(a) Excludes the conversion of Convertible Debentures which have an anti- dilutive effect. 9 7. SUBSEQUENT EVENTS On April 18, 2001, the Company announced that a group of investors led by XL Capital Ltd. had agreed to invest $112.5 million through the purchase of a newly created class of Senior Convertible Exchangeable Debentures. The Debentures carry a 9 3/8% annual coupon, have a five-year term and are convertible into Common Shares at a conversion price of $7.00 per share. If not converted, the Debentures are subject to mandatory redemption by the Company in five years. The holders will also have the right to exchange the Debentures into comparable term Senior Convertible debentures or Common Stock of a new subsidiary of the Company, which will be organized to hold the businesses that currently comprise the Corporate Risk Management, Specialty Brokerage and Financial Services segments. The Debentures will have an attached voting preferred stock that will give the holders of the Debentures voting rights on an as converted basis. In addition, the investors will be granted warrants to purchase 2,147,601 Common Shares at $7.00 per share. The principal use of the proceeds from the investment will be to increase the statutory capital of the U.S. insurance companies, the Legion Companies. The investment is conditioned upon regulatory and lender approvals, definitive documentation and customary closing conditions. In connection with the investment, the Company also agreed to pay down $10 million principal amount of its outstanding Rhino Preferred Securities ("RHINOs") facility. The holders of the remaining $30 million principal amount of RHINOs have agreed to defer their remarketing rights pending completion of the regulatory approvals relating to the Debentures and have the right to convert the remaining RHINOs into a corresponding principal amount of Debentures. 8. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION Mutual Group Ltd. ("Mutual Group") is a wholly owned subsidiary of the Parent Company. Substantially all of Mutual Group's income and cash flow is generated by its subsidiaries. As a result, funds necessary to meet Mutual Group's debt service obligations are provided in part by distributions or advances from its subsidiaries. Under certain circumstances, contractual and legal restrictions, as well as the financial condition and operating requirement of Mutual Group's subsidiaries, could limit the ability for Mutual Group to obtain cash from its subsidiaries for the purpose of meeting its debt service obligations. The following unaudited financial information presents the condensed consolidating balance sheets of the Parent Company, Mutual Group and other subsidiaries as of March 31, 2001 and December 31, 2000 and condensed consolidating statements of income and cash flows for the quarters ended March 31, 2001 and 2000. Investment in subsidiaries are accounted for on the equity method and accordingly, entries necessary to consolidate the Company, Mutual Group and all other subsidiaries are reflected in the elimination's column. This information should be read in conjunction with the consolidated financial statements and footnotes of the Parent Company. Certain balances have been reclassified from the Mutual Risk Management Ltd. Parent Company Only Financial Information present in Item 14B Schedule II of Form 10-K for purposes of this condensed presentation. 10 CONDENSED CONSOLIDATED STATEMENTS OF INCOME FOR THE PERIOD ENDED MARCH 31, 2001 (In thousands)
Parent Mutual Other Company Group Subsidiaries Eliminations Consolidated Revenues Fee income $ - $ - $ 31,861 $ - $ 31,861 Premiums earned - - 63,436 - 63,436 Net investment income (417) 254 6,568 - 6,405 Intercompany interest income - - 6,814 (6,814) - Realized capital losses - - (991) - (991) Other income - 133 250 - 383 Equity in subsidiary earnings 13,451 (6,260) - (7,191) - ------- -------- -------- -------- -------- Total revenues 13,034 (5,873) 107,938 (14,005) 101,094 ------- -------- -------- -------- -------- Expenses Losses and loss expenses incurred - - 43,766 - 43,766 Acquisition and underwriting expenses - - 16,581 - 16,581 Operating expenses 40 480 22,339 - 22,859 Interest expense 1,531 2,918 89 - 4,538 Intercompany interest expense - 6,814 - (6,814) - Other expenses - - 962 - 962 ------- -------- -------- -------- -------- Total expenses 1,571 10,212 83,737 (6,814) 88,706 ------- -------- -------- -------- -------- INCOME (LOSS) BEFORE INCOME TAXES MINORITY INTEREST 11,463 (16,085) 24,201 (7,191) 12,388 Income taxes - (3,464) 4,136 - 672 ------- -------- -------- -------- -------- INCOME (LOSS) BEFORE MINORITY 11,463 (12,621) 20,065 (7,191) 11,716 Minority interest - - (253) - (253) ------- -------- -------- -------- -------- NET INCOME (LOSS) $11,463 $(12,621) 19,812 $ (7,191) $ 11,463 ======= ======== ======== ======== ========
11 CONDENSED CONSOLIDATED STATEMENTS OF INCOME FOR THE PERIOD ENDED MARCH 31, 2000\\(1)\\ (In thousands)
Parent Mutual Other Company Group Subsidiaries Eliminations Consolidated Revenues Fee income $ - $ - $22,939 $ - $22,939 Premiums earned - - 55,873 - 55,873 Net investment income 720 158 11,688 - 12,566 Intercompany interest income - - 8,164 (8,164) - Realized capital losses - - (1,623) - (1,623) Other income (losses) 92 132 (210) - 14 Equity in subsidiary earnings 14,510 5,848 - (20,358) - ------- ------- ------- -------- ------- Total revenues 15,322 6,138 96,831 (28,522) 89,769 ------- ------- ------- -------- ------- Expenses Losses and loss expenses incurred - - 34,320 - 34,320 Acquisition and underwriting expenses - - 19,534 - 19,534 Operating expenses 52 89 17,514 - 17,655 Interest expense 4,012 - 1,984 - 5,996 Intercompany interest expense - 8,164 - (8,164) - Other expenses - - 712 - 712 ------- ------- ------- -------- ------- Total expenses 4,064 8,253 74,064 (8,164) 78,217 ------- ------- ------- -------- ------- INCOME (LOSS) BEFORE INCOME TAXES, MINORITY INTEREST AND EXTRAORDINARY LOSS 11,258 (2,115) 22,768 (20,358) 11,552 Income taxes - (2,741) 3,734 - 993 ------- ------- ------- -------- ------- INCOME BEFORE MINORITY INTEREST AND EXTRAORDINARY LOSS 11,258 626 19,034 (20,358) 10,559 Minority interest - - 699 - 699 ------- ------- ------- -------- ------- INCOME BEFORE EXTRAORDINARY LOSS 11,258 626 19,733 (20,358) 11,258 Extraordinary loss on extinguishment of debt, net of tax 4,327 - - - 4,327 ------- ------- ------- -------- ------- NET INCOME $ 6,931 $ 626 $19,732 $(20,358) $ 6,931 ======= ======= ======= ======== =======
\\(1)\\ Certain of the prior year figures have been restated to conform with the current year's presentation. 12 CONDENSED CONSOLIDATED BALANCE SHEETS MARCH 31, 2001 (In thousands)
Parent Mutual Other Company Group Subsidiaries Eliminations Consolidated ASSETS Cash and cash equivalents $ 312 $ 737 $ 188,592 $ - $ 189,641 Investments 8,986 - 366,135 - 375,121 Other investments - 782 35,051 - 35,833 Investments in and advances to subsidiaries and affiliates, net 443,065 392,994 (564,884) (271,175) - Accounts receivable - 16 625,522 - 625,538 Reinsurance recoverable - - 2,395,857 - 2,395,857 Prepaid reinsurance premiums - - 348,465 - 348,465 Deferred tax benefit - - 35,933 (1,075) 34,858 Taxes receivable - 13,765 - (13,765) - Other assets 393 1,572 209,327 - 211,292 Assets held in separate accounts - - 827,984 - 827,984 -------- -------- ---------- --------- ---------- Total Assets $452,756 $409,866 $4,467,982 (286,015) $5,044,589 ======== ======== ========== ========= ========== LIABILITIES AND SHAREHOLDERS' EQUITY LIABILITIES Unpaid losses and loss expenses $ - $ - $2,615,924 $ - $2,615,924 Unearned premiums - - 449,419 - 449,419 Pension fund reserves - - 55,804 - 55,804 Claims deposit liabilities - - 25,327 - 25,327 Accounts payable - 402 320,603 - 321,005 Taxes payable - - 37,672 (13,765) 23,907 Loans payable 70,000 150,000 - - 220,000 Other loans payable - - 18,571 - 18,571 Debentures 13,851 - - - 13,851 Deferred tax liability - 1,075 - (1,075) - Other liability 418 - 103,892 - 104,310 Liabilities related to separate accounts - - 827,984 - 827,984 -------- -------- ---------- --------- ---------- Total liabilities 84,269 151,477 4,455,196 (14,840) 4,676,102 -------- -------- ---------- --------- ---------- SHAREHOLDERS' EQUITY 368,487 258,389 12,786 (271,175) 368,487 -------- -------- ---------- --------- ---------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $452,756 $409,866 $4,467,982 $(286,015) $5,044,589 ======== ======== ========== ========= ==========
13 CONDENSED CONSOLIDATED BALANCE SHEETS DECEMBER 31, 2000 (In thousands)
Parent Mutual Other Company Group Subsidiaries Eliminations Consolidated ASSETS Cash and cash equivalents $ 339 $ 884 $ 200,792 $ - $ 202,015 Investments 12,018 - 359,056 - 371,074 Other investments - 649 34,522 - 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 Deferred tax benefit - - 35,578 (1,075) 34,503 Taxes receivable - 10,300 - (10,300) - Other assets 424 1,887 168,227 - 170,538 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 Unpaid losses and loss expenses $ - $ - $2,529,183 $ - $2,529,183 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 Taxes payable - - 34,439 (10,300) 24,139 Loans payable 70,000 150,000 - - 220,000 Other loans payable - - 3,595 - 3,595 Debentures 13,673 - - - 13,673 Deferred tax liability - 1,075 - (1,075) - Other liabilities 1 356 99,135 - 99,492 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 ======== ======== ========== ========= ==========
14 CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE PERIOD ENDED MARCH 31, 2001 (In thousands)
Parent Mutual Other Company Group Subsidiaries Consolidated NET CASH FLOW (APPLIED TO) FROM OPERATING ACTIVITIES (1,778) (8,814) 16,626 6,034 ------ ------ ------- ------- CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from sale of investments - available for sale 2,604 - 14,283 16,887 Proceeds from maturity of investments - available for sale - - 9,208 9,208 Fixed asset purchases - - (18,415) (18,415) Investments purchased - available for sale - - (25,103) (25,103) Acquisitions and other investments - - (12,849) (12,849) Other items - - 217 217 Investments in and advances to subsidiaries and affiliates net 2,009 8,667 (10,676) - ------ ------ ------- ------- NET CASH FLOWS FROM (APPLIED TO) INVESTING ACTIVITIES 4,613 8,667 (43,335) (30,055) ------ ------ ------- ------- CASH FLOWS FROM FINANCING ACTIVITIES Loans received - - 14,976 14,976 Extinguishment of convertible debentures - - - - Proceeds from shares issued 51 - - 51 Claims deposit liabilities - - (80) (80) Pension fund reserves - - (387) (387) Dividend paid (2,913) - - (2,913) ------ ------ ------- ------- NET CASH FLOW (APPLIED TO) FROM FINANCING ACTIVITIES (2,862) - 14,509 11,647 ------ ------ ------- ------- Net decrease in cash and cash equivalents (27) (147) (12,200) (12,374) Cash and cash equivalents at beginning of period 339 884 200,792 202,015 ------ ------ ------- ------- Cash and cash equivalents at end of period 312 737 188,592 189,641 ====== ====== ======= =======
15 CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE PERIOD ENDED MARCH 31, 2000 (In thousands)
Parent Mutual Other Company Group Subsidiaries Consolidated NET CASH FLOW (APPLIED TO) FROM OPERATING ACTIVITIES $ (1,385) $(13,974) $ 15,461 $ 102 --------- -------- --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from sale of investments - available for sale - - 10,266 10,266 Proceeds from maturity of investments - available for sale - - 223,924 223,924 Fixed asset purchases - - (4,399) (4,399) Investments purchased - available for sale (1,331) - (260,690) (262,021) Acquisitions and other investments - - 1,083 1,083 Other items - - (137) (137) Investments in and advances to subsidiaries and affiliates, net 6,537 14,284 (20,821) - --------- -------- --------- --------- NET CASH FLOWS FROM (APPLIED TO) INVESTING ACTIVITIES 5,206 14,284 (50,774) (31,284) --------- -------- --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES Loans received 100,000 - (7) 99,993 Extinguishment of convertible debentures (101,325) - - (101,325) Proceeds from shares issued 317 - - 317 Claims deposit liabilities - - 1,697 1,697 Pension fund reserves - - (471) (471) Dividend paid (2,885) - - (2,885) --------- -------- --------- --------- NET CASH FLOW (APPLIED TO) FROM FINANCING ACTIVITIES (3,893) - 1,219 (2,674) --------- -------- --------- --------- Net (decrease) increase in cash and cash equivalents (72) 310 (34,094) (33,856) Cash and cash equivalents at beginning of period 6,722 1,019 147,646 155,387 --------- -------- --------- --------- Cash and cash equivalents at end of period $ 6,650 $ 1,329 $ 113,552 $ 121,531 ========= ======== ========= =========
16 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS For the Quarters Ended March 31, 2001 and 2000 The results of operations for the quarter ended March 31, 2001 reflect strong growth in fee income, improved profit margins and a 65% increase in net income. Net income improved to $11.5 million or $0.28 per common share on a diluted basis for the three months ended March 31, 2001, as compared to $6.9 million or $0.17 per diluted share in the corresponding period in 2000, as shown in the tables below. This quarter marks the beginning of the transition of our former Program Business segment to a specialty insurance operation. We have amended the income statement presentation and restated the comparative quarter to reflect this transition. The resulting income statement reclassifies some line items, but there is no effect on net income. TABLE 1 - EARNINGS PER SHARE
First Quarter to March 31, 2001 2000 -------------------------------- ---------------------------------- (In thousands, except per share data) PER PER COMMON SHARE COMMON SHARE ------------ ------------ Basic Diluted Basic Diluted Income before extraordinary loss $11,463 $ 0.28 $ 0.28 $11,258 $ 0.28 $ 0.28 Extraordinary loss (b) - - - (4,327) (0.11) (0.11) ------- ------- ------ ------- ------- ------ Net income $11,463 $ 0.28 $ 0.28 $ 6,931 $ 0.17 $ 0.17 ======= ======= ====== ======= ======= ====== Average number of shares outstanding (000's) 41,618 41,620 (a) 41,209 41,309 (a) ------- ------ ------- ------
(a) Excludes the conversion of convertible debentures, which have an anti- dilutive effect. (b) Extraordinary loss on extinguishment of debt, net of tax. REVENUES Total revenues amounted to $101.1 million for the quarter ended March 31, 2001, representing an increase of 13% over the corresponding 2000 period. Table II shows the major components of revenues for these periods. 17 TABLE II - REVENUES
First Quarter to March 31, (In thousands) 2001 2000 Change ---- ---- ------ Fee income $ 31,861 $22,939 39% Net premiums earned 63,436 55,873 14% Net investment income 6,405 12,566 -49% Realized capital losses (991) (1,623) -39% Other income 383 14 N/M -------- ------- --- Total $101,094 $89,769 13% ======== ======= ===
FEE INCOME Fee income grew by 39% in the first quarter of 2001 to $31.9 million as compared to $22.9 million in 2000. Pre-tax profit margins were 28% in the first quarter of 2001, up slightly from 27% in 2000. The components of fee income by business segment are illustrated in Table III. TABLE III - FEE INCOME BY BUSINESS SEGMENT
First Quarter to March 31, (In thousands) 2001 2000 Change ---- ---- ------ Corporate Risk Management fees 13,377 10,413 28% Specialty Brokerage fees 4,378 5,016 -13% Financial Services fees 11,942 6,029 98% Insurance Operation fees 2,164 1,481 46% ------- ------- --- Total $31,861 $22,939 39% ======= ======= ===
Corporate Risk Management Corporate Risk Management, the Company's original business segment, involves providing services to businesses and associations seeking to insure a portion of their risk in a loss sensitive alternative market structure. This segment accounted for 42% of total fee income in the first three months of 2001, down from 45% in 2000. Corporate Risk Management fees increased by 28% to $13.4 million in the first quarter from $10.4 million in 2000. Profit margins improved to 29% in the first quarter as compared to 23% in 2000 as a result of the increased fees. The Company expects that a continuing firming of prices generally and the affirmation of the Legion Companies' A- (Excellent) rating by A.M. Best will continue to improve the sale of Corporate Risk Management accounts and associated fees. 18 Specialty Brokerage The Company's Specialty Brokerage business segment provides access to Alternative Risk Transfer insurers and reinsurers in the United States, Bermuda and Europe. The segment produced $4.4 million of fee income in the first three months of 2001, representing 14% of total fee income. Specialty Brokerage fees fell by 13% in the first quarter primarily due to the cancellation of a number of the Company's programs and the timing of certain renewals. Profit margins declined to 24% in the first quarter, as compared to 34% in the corresponding 2000 period as a result of the decreased fees. Financial Services The Financial Services business segment provides administrative services to offshore mutual funds and other companies, offers a proprietary family of mutual funds as well as asset accumulation life insurance products for the high net worth market and provides trust and private client services. The segment accounted for 37% of total fee income for the first quarter of 2001. Fees from Financial Services increased in the quarter by 98% to $11.9 million from $6.0 million in 2000, as a result of an increase in mutual fund assets under administration, which exceeded $42 billion at March 31, 2001, and the recent acquisition of the Valmet Group, which added $3.2 million of fees in the quarter. Profit margins remained steady at 22% in the first quarter of both 2000 and 2001. Insurance Operations Insurance Operations represents the Company's former Program Business segment which is being transitioned to a specialty insurance operation in which the Company will retain a more significant portion of the underwriting risk over time. Fee income earned in this segment is comprised of fees for rent-a-captive services performed and accounted for 7% of total fee income for the first quarter of 2001 and 2000. Insurance Operations fees increased by 46% in the first quarter to $2.2 million from $1.5 million in the corresponding 2000 period. Profit margins improved to 68% in the first quarter as compared to 60% in 2000. PREMIUMS EARNED Gross premiums written, which includes premium from the Company's Insurance Operations and Corporate Risk Management segments, increased 17% to $390.5 million for the first quarter of 2001 as compared to $335.2 million in 2000. Net premiums earned increased 14% to $63.4 million in the first quarter of 2001, as compared to $55.9 million in 2000, due to the corresponding increase in gross premiums written and an improved rating environment. INVESTMENT INCOME Gross investment income decreased by $5.7 million or 42% to $7.8 million in the first quarter of 2001 versus the corresponding 2000 period. Net investment income decreased by 49% to $6.4 million in the first three months of 2001, as compared to $12.6 million in 2000. Investment yields were 5.2% in the first quarter of 2001 as compared to 8.0% in the corresponding 2000 period. The primary reason for the decline in investment income and yields was the inclusion of $3.7 million from a special purpose entity, Endeavour Real Estate Securities Ltd. ("Endeavour") in 2000. Excluding Endeavour, the investment yield for 2000 was 6.8%. Net investment income was also affected by a decline in net invested assets and lower interest rates. EXPENSES TABLE IV - EXPENSES
First Quarter to March 31, (In thousands) 2001 2000 Change ---- ---- ------ Operating expenses $22,859 $17,655 29% Total insurance costs 60,347 53,854 12% Interest expense 4,538 5,996 -24% Other expenses 962 712 35% ------- ------- --- Total $88,706 $78,217 13% ======= ======= ===
19 Operating expenses increased 29% to $22.9 million for the quarter, compared to $17.7 million in the first quarter of last year. The increase in operating expenses is attributable to growth in personnel and other expenses to service the Company's existing businesses and the inclusion of operating expenses arising as a result of recent acquisitions. The movement in total insurance costs, which includes losses and loss expenses and acquisition and underwriting expenses, is the direct result of the fluctuations in net premiums earned. Losses and loss expenses increased to $43.8 million in the first quarter for a loss ratio of 69.0%, as compared to $34.3 million for a loss ratio of 61.4% in 2000. Acquisition and underwriting expenses amounted to $16.6 million for an expense ratio of 26.1% in the first quarter of 2001, as compared to $19.5 million for an expense ratio of 35.0% in 2000. The components of acquisition and underwriting expenses are shown below:
First Quarter to March 31, 2001 2000 ------------------ ------------------ (In thousands) Acquisition costs $ 22,643 35.7% $ 24,862 44.5% Excess ceding commissions (30,222) (47.6%) (22,321) (39.9%) Operating expenses 24,160 38.0% 16,993 30.4% -------- ----- -------- ----- Acquisition and underwriting expenses $ 16,581 26.1% $ 19,534 35.0% ======== ===== ======== =====
Acquisition costs, which include all external costs associated with the production of net premiums, amounted to $22.6 million in 2001 as compared to $24.9 million. Acquisition costs are reduced by the excess of the ceding commissions received from reinsurers over the related acquisition costs on ceded premium. These excess ceding commissions, which were previously recorded as Program Business fees, amounted to $30.2 million in 2001 and $22.3 million in 2000. Acquisition costs and excess ceding commissions are expensed and earned respectively over the life of the underlying contract. Operating expenses for this segment, which were previously recorded as Program Business operating expenses, amounted to $24.2 million in 2001 as compared to $17.0 million in 2000. The Company believes that, given its move to retain more underwriting risk, this new presentation is more consistent with insurance company disclosure. The Company had a combined ratio of 95.1% in the first quarter of 2001, as compared to 96.4% in 2000. Insurance Operations contributed $4.6 million of operating income, a 57% increase from $2.9 million in the 2000 first quarter. Interest expense decreased by $1.5 million to $4.5 million for the first three months of 2001, as compared to $6.0 million in 2000. The decrease from the prior year is primarily as a result of no Endeavour interest in the current year, a reduction in debenture interest due to the decreased number of debentures outstanding and lower market interest rates, offset in part by increased debt. The effective tax rate was 5.4% in the quarter ended March 31, 2001, compared to 8.6% in the corresponding 2000 period. The effective rate was lower than the expected federal tax rate in the United States of 35% plus state income taxes due to increased earnings outside of the United States. LIQUIDITY AND CAPITAL RESOURCES Total assets increased to $5.0 billion at March 31, 2001 from $4.9 billion at December 31, 2000. Assets held in separate accounts, which are principally managed assets attributable to participants in the Company's IPC Programs, accounted for approximately 16% of total assets at March 31, 2001 and December 31, 2000. Total shareholders' equity increased to $368.5 million at March 31, 2001 from $351.5 million at December 31, 2000, primarily as a result of net income and a decrease in the change in unrealized losses within other comprehensive income for the quarter. Return on equity was 12.7% for the first three months of 2001, as compared to 12.5% in 2000 excluding the extraordinary loss. CASH FLOW 20 As of March 31, 2001, the Company was involved in five arbitration proceedings to collect disputed balances due from reinsurers. The Company has paid approximately $57 million of losses and loss expenses for which it has not been reimbursed. In addition, the Company estimates that it will ultimately pay another $70 million of unpaid losses and loss expenses in relation to the disputed business. One of these arbitration proceedings involves a series of accident and health programs written by the Company from 1997 through 1999. The Company received a good-faith payment from the reinsurers of $12.3 million during the quarter, reducing the unreimbursed paid losses to $25.1 million on these programs, with an estimated $7.0 million of unpaid losses. This dispute involves a number of Lloyd's syndicates, as well as a number of other reinsurers, and is presently in non-binding mediation. If this mediation does not resolve the dispute, it will be arbitrated in Philadelphia, Pennsylvania. 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. One of these disputes will be arbitrated in Philadelphia, Pennsylvania in July 2001. At March 31, 2001, these disputes involved $17.5 million in paid claims and an estimated $43.7 million in unpaid claims. Subsequent to the quarter-end, the Company reached a settlement in one of these arbitration disputes with a reinsurer on one of Legion's principal workers' compensation treaties. Under the settlement, the reinsurance contract will remain in force in accordance with its terms. That arbitration proceeding also involved other reinsurance treaties relating to two MGA programs. The parties agreed to conduct a complete audit of these programs and to defer the arbitration and jointly fund losses pending final resolution of the dispute. No new reinsurance disputes occurred during the quarter. The two remaining arbitration proceedings involve claims under individual reinsurance agreements with two reinsurers and involve $14.2 million of paid claims and an estimated $19.6 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, two of the Company's quota share reinsurers, representing approximately 15% of the Company's quota share reinsurance, are questioning certain ceded claims, and this dispute will also be the subject of arbitration. These disputes have adversely affected the operating cash flow, however the Company still produced positive cash flow from operations of $6.0 million for the quarter, as compared to $0.1 million in 2000. 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. ACQUISITIONS In January, the Company completed its acquisition of 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. Valmet will be combined with our existing trust businesses and operate as Mutual Trust Management worldwide. 21 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 Insurance Operations 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 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. No material changes since December 31, 2000 Form 10-K. PART II - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K A. Reports on Form 8-K. The registrant filed a report on Form 8-K on April 18, 2001 concerning a $112.5 million debenture issue. 22 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. MUTUAL RISK MANAGEMENT LTD. /s/ Andrew Cook -------------------------------------------------- Andrew Cook Senior Vice President, Chief Financial Officer and Authorized Signatory Date: May 15, 2001 23