-----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, SinPnCBz8suOIbmNQhM3xiZIscDVoDB4+3E8xYef5mJF8Q0/kezFxHRR+b5nQ3YO CNwM7BaIa2CT3ABInscwbA== 0001036050-01-500881.txt : 20010815 0001036050-01-500881.hdr.sgml : 20010815 ACCESSION NUMBER: 0001036050-01-500881 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20010630 FILED AS OF DATE: 20010814 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MUTUAL RISK MANAGEMENT LTD CENTRAL INDEX KEY: 0000826918 STANDARD INDUSTRIAL CLASSIFICATION: FIRE, MARINE & CASUALTY INSURANCE [6331] STATE OF INCORPORATION: D0 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-10760 FILM NUMBER: 1709008 BUSINESS ADDRESS: STREET 1: 44 CHURCH ST STREET 2: BERMUDA CITY: HAMILTON HM 12 BERMU STATE: D0 BUSINESS PHONE: 4412955688 MAIL ADDRESS: STREET 1: PO BOX 2064 STREET 2: BERMUDA CITY: HAMILTON HM HX STATE: D0 10-Q 1 d10q.txt MRM 2ND QUARTER FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] Quarterly report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934. For the quarterly period ended June 30, 2001. or [_] Transition report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934. For the transition period from _____________ to _____________. Commission File Number 1-10760 MUTUAL RISK MANAGEMENT LTD. - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) BERMUDA NOT APPLICABLE - -------------------------------------------------------------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 44 Church Street, Hamilton HM 12, Bermuda - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip code) (441) 295-5688 - -------------------------------------------------------------------------------- (Registrant's telephone number, including area code) Not applicable - -------------------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [_] The number of outstanding shares of the registrant's Common Stock, $0.01 par value, as of June 30, 2001 was 41,623,198. MUTUAL RISK MANAGEMENT LTD. I N D E X Part I. Financial Information: Item 1. Financial Statements:
Unaudited Consolidated Statements of Income and Comprehensive Income for the quarter and six month periods ended June 30, 2001 and 2000 3 Unaudited Consolidated Balance Sheets at June 30, 2001 and December 31, 2000 4 Unaudited Consolidated Statements of Cash Flows for the six month periods ended June 30, 2001 and 2000 5 Unaudited Consolidated Statements of Changes in Shareholders' Equity at June 30, 2001 and December 31, 2000 6 Notes to Unaudited Consolidated Financial Statements at June 30, 2001 7-11 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 12-20 Item 3. Quantitative and Qualitative Disclosures about Market Risk 20 Part II. Other Information: Item 2. Changes in Securities and Use of Proceeds 20 Item 6. Exhibits and Reports on Form 8-K 20 Signatures 21
PART I. FINANCIAL INFORMATION ITEM I. FINANCIAL STATEMENTS MUTUAL RISK MANAGEMENT LTD. AND SUBSIDIARIES UNAUDITED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
Three Months Ended Six Months Ended (In thousands, except share and per share data) June 30, June 30, 2001 2000 2001 2000 REVENUES Fee income $ 33,789 $ 23,844 $ 65,649 $ 46,783 Premiums earned 83,887 63,999 147,322 119,872 Net investment income 6,941 8,544 13,346 21,110 Realized capital losses (686) (341) (1,677) (1,964) Other income 385 590 770 603 ----------- ----------- ----------- ----------- Total Revenues 124,316 96,636 225,410 186,404 ----------- ----------- ----------- ----------- EXPENSES Losses and loss expenses incurred 49,789 41,760 93,556 76,080 Acquisition and underwriting expenses 31,704 18,263 48,284 37,797 Operating expenses 24,167 17,937 47,026 35,591 Interest expense 5,041 4,301 9,579 10,297 Other expenses 883 1,404 1,846 2,116 ----------- ----------- ----------- ----------- Total Expenses 111,584 83,665 200,291 161,881 ----------- ----------- ----------- ----------- INCOME BEFORE INCOME TAXES, 12,732 12,971 25,119 24,523 MINORITY INTEREST AND EXTRAORDINARY LOSS Income taxes 1,109 940 1,780 1,934 ----------- ----------- ----------- ----------- INCOME BEFORE MINORITY INTEREST AND EXTRAORDINARY LOSS 11,623 12,031 23,339 22,589 Minority interest (447) (63) (700) 636 ----------- ----------- ----------- ----------- INCOME BEFORE EXTRAORDINARY LOSS 11,176 11,968 22,639 23,225 Extraordinary loss on extinguishment of debt, net of tax 949 - 949 4,327 ----------- ----------- ----------- ----------- NET INCOME 10,227 11,968 21,690 18,898 Other comprehensive income, net of tax: Unrealized (losses) gains on investments, net of reclassification adjustment (3,321) (1,894) 2,536 (3,052) ----------- ----------- ----------- ----------- COMPREHENSIVE INCOME $ 6,906 $ 10,074 $ 24,226 $ 15,846 =========== =========== =========== =========== EARNINGS PER COMMON SHARE: Net income available to Common Shareholders: Basic $ 0.25 $ 0.29 $ 0.52 $ 0.46 =========== =========== =========== =========== Diluted $ 0.23 $ 0.29 $ 0.50 $ 0.46 =========== =========== =========== =========== Dividends per Common Share $ 0.01 $ 0.07 $ 0.02 $ 0.14 =========== =========== =========== =========== Weighted average number of Common Shares Shares outstanding - basic 41,623,198 41,181,750 41,619,770 41,195,162 =========== =========== =========== =========== Weighted average number of Common Shares Shares outstanding - diluted 51,645,062 42,136,014 46,661,012 41,399,754 =========== =========== =========== ===========
See Accompanying Notes to Unaudited Consolidated Financial Statements 3 MUTUAL RISK MANAGEMENT LTD. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
(In thousands, except share data) June 30, December 31, 2001 2000 (unaudited) (audited) ASSETS Cash and cash equivalents $ 288,893 $ 202,015 Investments: Held as available for sale at fair value (Amortized cost $367,361; 2000 - $381,911) 359,061 371,074 ---------- ---------- Total marketable investments 647,954 573,089 Other investments 35,139 35,201 Investment income due and accrued 5,529 5,948 Accounts receivable 693,011 592,852 Reinsurance recoverable 2,492,182 2,307,466 Deferred expenses 99,132 67,461 Prepaid reinsurance premiums 315,110 346,223 Deferred tax benefit 40,687 34,503 Other assets 123,109 97,129 Assets held in separate accounts 861,755 799,777 ---------- ---------- Total Assets $5,313,608 $4,859,649 ========== ========== LIABILITIES & SHAREHOLDERS' EQUITY LIABILITIES Unpaid losses and loss expenses $2,733,434 $2,529,183 Unearned premiums 434,516 426,069 Pension fund reserves 48,609 56,191 Claims deposit liabilities 24,931 25,407 Accounts payable 351,721 310,590 Taxes payable 25,578 24,139 Loans payable 180,000 220,000 Other loans payable 18,448 3,595 Debentures 156,532 13,673 Other liabilities 103,075 99,492 Liabilities related to separate accounts 861,755 799,777 ---------- ---------- Total Liabilities $4,938,599 $4,508,116 ---------- ---------- SHAREHOLDERS' EQUITY Common Shares - Authorized 180,000,000 (par value $0.01) Issued 41,623,198 (excluding 2,728,816 shares held in treasury) (2000 - 41,614,649 excluding 2,728,816 shares held in treasury) 416 416 Additional paid-in capital 117,270 117,188 Accumulated other comprehensive loss (8,300) (10,836) Retained earnings 265,623 244,765 ---------- ---------- Total Shareholders' Equity 375,009 351,533 ---------- ---------- Total Liabilities & Shareholders' Equity $5,313,608 $4,859,649 ========== ==========
See Accompanying Notes to Unaudited Consolidated Financial Statements 4 MUTUAL RISK MANAGEMENT LTD. AND SUBSIDIARIES UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands) Six Months Ended June 30, 2001 2000 CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 21,690 $ 18,898 Items not affecting cash: Depreciation 7,517 5,461 Amortization of investments (193) (258) Net loss on sale of investments 1,684 592 Amortization of convertible debentures 359 1,046 Deferred tax benefit (5,674) 70 Extraordinary loss on extinguishment of debt 949 4,327 Other items 1,068 568 Net change in non-cash balances relating to operations: Accounts receivable (100,160) (54,354) Reinsurance recoverable (184,716) (236,590) Investment income due and accrued 419 (800) Deferred expenses (25,077) (16,554) Prepaid reinsurance premiums 31,113 (20,248) Other assets 326 (202) Unpaid losses and loss expenses 204,251 230,969 Prepaid fees 6,220 4,756 Unearned premium 8,447 46,176 Accounts payable 41,130 25,662 Taxes payable 1,440 (11,483) Other liabilities (138) 5,958 --------- --------- NET CASH FLOWS FROM OPERATING ACTIVITIES 10,655 3,994 --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from sale of investments - available for sale 26,098 285,192 Proceeds for maturity of investments - available for sale 16,425 19,086 Investments purchased - available for sale (29,462) (291,582) Acquisitions and other investments (11,797) (7,508) Fixed assets purchased (23,272) (8,800) Other items 238 167 --------- --------- NET CASH FLOWS APPLIED TO INVESTING ACTIVITIES (21,770) (3,445) --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES Debentures issued 134,445 - Other loans received (repaid) (25,148) 99,747 Extinguishment of convertible debentures - (101,325) Proceeds from shares issued 82 612 Purchase of treasury shares - (1,387) Claims deposit liabilities (475) 2,698 Pension fund reserves (7,582) (7,949) Dividends paid (3,329) (5,770) --------- --------- NET CASH FLOWS FROM (APPLIED TO) FINANCING ACTIVITIES 97,993 (13,374) --------- --------- Net increase (decrease) in cash and cash equivalents 86,878 (12,825) Cash and cash equivalents at beginning of period 202,015 155,387 --------- --------- Cash and cash equivalents at end of period $ 288,893 $ 142,562 ========= ========= Supplemental cash flow information: Interest paid $ 8,853 $ 9,251 ========= ========= Income taxes paid, net $ - $ 5,484 ========= =========
See Accompanying Notes to Unaudited Consolidated Financial Statements 5 MUTUAL RISK MANAGEMENT LTD. AND SUBSIDIARIES UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Common Shares Treasury Change in Share (In thousands) Opening Issued Shares Unrealized Net Dividends Closing Balance Purchased Loss (1) Income Declared (2) Balance Six Months Ended June 30, 2001 (unaudited) - ------------------------------------------ Common Shares $ 416 $ - $ - $ - $ - $ - $ 416 Additional paid-in capital 117,188 82 - - - - 117,270 Accumulated other comprehensive (loss) income (10,836) - - 2,536 - - (8,300) Retained earnings 244,765 - - - 21,691 (833) 265,623 --------- ------- --------- ---------- ------- ----------- -------- TOTAL SHAREHOLDERS' $ 351,533 $ 82 $ - $ 2,536 $21,691 $ (833) $375,009 EQUITY ========= ======= ========= ========== ======= =========== ======== Year Ended December 31, 2000 (audited) - --------------------------------------- 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' $ 358,144 $ 7,824 $ (1,387) $ 4,101 $(5,582) $ (11,567) $351,533 EQUITY ========= ======= ========= ========== ======= =========== ========
(1) Net of reclassification adjustment, net of tax (See Note 2). (2) Dividend per share amounts were $0.02 and $0.28 for the six months ended June 30, 2001 and the year ended December 31, 2000 respectively. See Accompanying Notes to Unaudited Consolidated Financial Statement 6 MUTUAL RISK MANAGEMENT LTD. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2001 1. INTERIM ACCOUNTING POLICY In the opinion of the management of Mutual Risk Management Ltd. ("the Company"), the accompanying unaudited consolidated financial statements include all adjustments, consisting of normal recurring adjustments, necessary to present fairly the financial position of the Company and the results of operations and cash flows for the quarters and six months ended June 30, 2001 and 2000. Although the Company believes that the disclosure in these financial statements is adequate to make the information presented not misleading, certain information and footnote information normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States has been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission. Results of operations for the quarter and six months ended June 30, 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 reclassified the comparative periods 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. COMPREHENSIVE INCOME SFAS No. 130 requires unrealized gains or losses on the Company's available for sale investments, to be included in other comprehensive income.
Quarter Ended June 30, 2001 Six Months Ended June 30, 2001 Net of Net of (In thousands) Before tax tax Before tax tax amount Tax amount amount Tax amount -------------- ------- -------------- -------------- ------- --------- Net unrealized (losses) gains on available for sale investments arising during the period $(2,633) 15 $(2,618 $ 4,220 16 $4,236 Less: reclassification adjustment for gains realized in net income (688) (15) (703) (1,684) (16) 1,700 ------- ---- ------- ------- ---- ------ Other comprehensive (loss) income $(3,321) $ - $(3,321) $ 2,536 $ - $2,536 ======= ==== ======= ======= ==== ======
7 MUTUAL RISK MANAGEMENT LTD. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS 3. COMPREHENSIVE INCOME (Continued)
Quarter Ended June 30, 2000 Six Months Ended June 30, 2000 Net of Net of (In thousands) Before tax tax Before tax tax amount Tax amount amount Tax amount -------------- ------- -------------- -------------- ------- --------- Net unrealized (losses) gains on available for sale investments arising during the period $(2,262) 33 $(2,229) $(3,669) 57 $(3,612) Less: reclassification adjustment for gains realized in net income 368 (33) 335 617 (57) 560 ------- ---- ------- ------- ---- ------- Other comprehensive loss $(1,894) $ - $(1,894) $(3,052) $ - $(3.052) ======= ==== ======= ======= ==== =======
4. SEGMENT INFORMATION The Company has changed its basis of segmentation from that used in its most recent Annual Report on Form 10-K. Management believes the new basis of segmentation most accurately reflects the Company's operating segments under the definition provided by SFAS No. 131.
Quarter Ended June 30, Six Months Ended June 30, Revenue 2001 2000(3) 2001 2000(3) Corporate Risk Management $ 13,720 $11,651 $ 27,097 $ 22,063 Financial Services 13,281 6,396 25,223 12,425 Specialty Brokerage 4,873 4,369 9,250 9,385 Insurance Operations 85,802 65,427 151,401 122,782 Net investment income (1) 6,255 8,203 11,669 19,146 Other 385 590 770 603 -------- ------- -------- -------- Total $124,316 $96,636 $225,410 $186,404 ======== ======= ======== ======== Income before income taxes, minority interest and extraordinary loss Corporate Risk Management $ 3,467 $ 3,179 $ 7,290 $ 5,591 Financial Services 3,320 941 5,954 2,261 Specialty Brokerage 1,532 876 2,601 2,557 Insurance Operations 3,697 4,887 8,261 7,791 Net investment income (2) 1,214 3,902 2,090 8,849 Other (498) (814) (1,077) (2,526) -------- ------- -------- -------- Total $ 12,732 $12,971 $ 25,119 $ 24,523 ======== ======= ======== ========
The subsidiaries' accounting records do not capture information by reporting segment sufficient to determine identifiable assets by such reporting segments. (1) Net of realized capital gains and losses. (2) Net of realized capital gains and losses and interest expense. (3) Certain of the prior year figures have been reclassified to conform with the current year's presentation. 8 MUTUAL RISK MANAGEMENT LTD. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS 5. EARNINGS PER COMMON SHARE The following table sets forth the computation of basic and diluted earnings per common share. (in thousands, except shares and earnings per share) Quarter Ended June 30, Six Months Ended June 30, 2001 2000 2001 2000 Numerator Income before extraordinary loss $ 11,176 $ 11,968 $ 22,639 $ 23,225 Extraordinary loss on extinguishment of debt, net of tax 949 - 949 4,327 ----------- ----------- ----------- ----------- Net income 10,227 11,968 21,690 18,898 ----------- ----------- ----------- ----------- Numerator for basic earnings per common share - Net income available to common shareholders 10,227 11,968 21,690 18,898 Effect of dilutive securities: Conversion of Zero Coupon Convertible Exchangeable Subordinated Debentures - 165 - - Conversion of 9 3/8% Convertible Exchangeable Subordinated Debentures 1,809 - 1,809 - ----------- ----------- ----------- ----------- Numerator for diluted earnings per common share - Net income available to common shareholders after assumed Conversions $ 12,036 $ 12,132 $ 23,499 $ 18,898 =========== =========== =========== =========== Denominator Denominator for basic earnings per common share - Weighted average shares 41,623,198 41,181,750 41,619,770 41,195,162 Effect of dilutive securities: Stock options 1,284 309,311 3,271 204,592 Warrants 177,566 - 89,273 - Conversion of 9 3/8 Convertible exchangeable Subordinated Debentures 9,843,014 - 4,948,698 - Conversion of Zero Coupon Convertible exchangeable Subordinated Debentures -(a) 644,953 -(a) -(a) ----------- ----------- ----------- ----------- Denominator for diluted earnings per common share - Adjusted weighted average shares and assumed conversions 51,645,062 42,136,014 46,661,012 41,399,754 =========== =========== =========== =========== Basic earnings per common share Income before extraordinary loss $ 0.27 $ 0.29 $ 0.54 $ 0.57 Extraordinary loss on extinguishment of debt, net of tax $ (0.02) $ - $ (0.02) $ (0.11) ----------- ----------- ----------- ----------- Basic earnings per common share $ 0.25 $ 0.29 $ 0.52 $ 0.46 =========== =========== =========== =========== Diluted earnings per common share Income before extraordinary loss $ 0.25 $ 0.29 $ 0.52 $ 0.56 Extraordinary loss on extinguishment of debt, net of tax $ (0.02) $ - $ (0.02) $ (0.10) ----------- ----------- ----------- ----------- Diluted earnings per common share $ 0.23 $ 0.29 $ 0.50 $ 0.46 =========== =========== =========== ===========
(a) Excludes the conversion of zero coupon convertible debentures, which have an anti-dilutive effect 9 MUTUAL RISK MANAGEMENT LTD. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS 6. OTHER EVENTS On May 17, 2001, pursuant to a Securities Purchase Agreement, dated May 8, 2001, XL Insurance Ltd. ("XL"), First Union Merchant Banking 2001, LLC ("First Union"), High Ridge Capital Partners II. L.P. ("High Ridge"), Century Capital Partners II, L.P. ("Century Capital II"), Taracay Investors Company ("Taracay") and Robert A. Mulderig purchased $112,500,000 in aggregate principal amount of the Company's convertible exchangeable debentures due 2006 (collectively, "Debentures") and Intrepid Funding Master Trust ("Intrepid") exchanged $30,000,000 of the Company's outstanding Auction Rate Reset Preferred Securities ("RHINOS") for $30,000,000 aggregate principal amount of the Debentures. The Debentures were issued as a unit with voting preferred stock that has nominal economic value. In addition, XL, First Union, Century Capital II and Taracay were issued warrants (the "Warrants") to purchase up to an aggregate of 2,147,601 of the Company's common shares (the "Common Shares"). The Debentures are convertible at any time at the option of the holder into Common Shares at an initial conversion price of $7.00 per share, and the Warrants are exercisable at any time at the option of the holder for Common Shares at an initial exercise price of $7.00 per share. The Debentures are secured by the shares of Mutual Risk Management (Holdings) Ltd. ("MRM Holdings"), a wholly owned subsidiary of the Company. The number of Common Shares currently issuable upon conversion of all of the Debentures and the Warrants is 22,509,085, which represents approximately 54% of the currently outstanding Common Shares. In connection with the issuance of the Debentures and the Warrants, the Company is required to restructure its operating units into two separate holding companies (the "Restructuring"). One holding company will own the Company's insurance operations and general agency entities in the United States and will operate through subsidiaries as a specialty insurer writing a selected book of program business. A second holding company will be a newly incorporated Bermuda company ("Newco") that will own all of the Company's fee generating businesses that presently comprise its Corporate Risk Management, Specialty Brokerage and Financial Services business segments and all of the Company's insurance operations outside of the United States. In addition, Newco will own the Company's IPC (or "rent-a-captive") companies that are principally dedicated to its Corporate Risk Management business segment, except for Mutual Indemnity (Dublin) Ltd. During the period beginning on September 17, 2001 and ending on November 17, 2001, both XL and the holders of a majority in principal amount of the outstanding Debentures have the right to require the Company to repurchase all of the Debentures if all regulatory and shareholder approvals have not been obtained and the Restructuring has not been completed by the date of such election. The net proceeds from the sale of the Debentures and the Warrants have been pledged to secure this obligation. After the formation of Newco, the Debentures will be secured by the capital stock of Newco and will be exchangeable for common shares of Newco and/or debentures of Newco that are substantially similar to the Debentures. The Company currently estimates that if all of the Debentures were exchanged for Newco common shares, the holder of the Debentures would own approximately 42.4% of Newco. 10 MUTUAL RISK MANAGEMENT LTD. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS On May 8, 2001, Mutual Group, Ltd, a wholly owned subsidiary of the Company, purchased $10,000,000 of outstanding RHINOS from Intrepid. All of the RHINOS, together with the related Auction Rate Reset Common Securities and Auction Rate Reset Senior Notes Series A, were canceled in connection with this purchase and issuance of the Debentures and the Warrants and are no longer outstanding. On May 17, 2001, the Company amended its Credit Agreement, dated as of September 21, 2000 (the "Credit Facility"), to permit the issuance of the Debentures and the Warrants, to make modifications to the covenants contained in the Credit Facility and to provide for a pledge of the capital stock of MRM Holdings and, when formed, Newco to secure the obligations under the Credit Facility on a second priority basis. The net proceeds from the sale of the Debentures and the Warrants also have been pledged to secure these obligations on a second priority basis until the Company is no longer required to repurchase the Debentures or, if later, the end of the Subordination Period as defined in the Subordination Agreement mentioned in the following sentence. The Credit Facility is subordinated to the payment of the Debentures on certain terms as provided in a Subordination Agreement, dated May 17, 2001. 11 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS For the Quarters and Six Months Ended June 30, 2001 and 2000 The results of operations for the quarter and six months ended June 30, 2001 reflect strong growth in fee income and improved profit margins. Net income increased to $21.7 million or $0.50 per common share on a diluted basis for the six months ended June 30, 2001, as compared to $18.9 million or $0.46 per diluted share in the corresponding period in 2000, as shown in the tables below. In 2001, we began a transition from our former Program Business model to a specialty insurance operation. We have amended the income statement presentation and reclassified the comparative quarter and six months to reflect this transition. The resulting income statement reclassifies some line items, but there is no effect on net income. TABLE 1 - EARNINGS PER SHARE
Second Quarter to June 30, 2001 2000 ------------ ------------ (In thousands, except per share data) PER PER COMMON SHARE COMMON SHARE ------------ ------------ Basic Diluted Basic Diluted Income before extraordinary loss $11,176 $ 0.27 $ 0.25 $11,968 $ 0.29 $ 0.29 Extraordinary loss (b) (949) (0.02) (0.02) - 0.00 0.00 ------- ------- ------- ------- ------- ------- Net income $10,227 $ 0.25 $ 0.23 $11,968 $ 0.29 $ 0.29 ======= ======= ======= ======= ======= ======= Average number of shares outstanding (000's) 41,623 51,645 (a) 41,182 42,136 ------- ------- ------- -------
12
Six Months Ended June 30, 2001 2000 ------------ ------------ (In thousands, except per share data) PER PER COMMON SHARE COMMON SHARE ------------ ------------ Basic Diluted Basic Diluted Income before extraordinary loss $22,639 $ 0.54 $ 0.52 $23,225 $ 0.57 $ 0.56 Extraordinary loss (a) (949) (0.02) (0.02) (4,327) (0.11) (0.10) ------- ------- ------ ------- ------- --------- Net income $21,690 $ 0.52 $ 0.50 $18,898 $ 0.46 $ 0.46 ======= ======= ====== ======= ======= ========= Average number of shares outstanding (000's) 41,620 46,661 (b) 41,195 41,400 (b) ------- ------ ------- ---------
(a) Extraordinary loss on extinguishment of debt, net of tax. (b) Excludes the conversion of zero coupon convertible debentures, which have an anti-dilutive effect. REVENUES Total revenues amounted to $124.3 million and $225.4 million for the quarter and six months ended June 30, 2001, representing increases of 29% and 21% over the corresponding 2000 periods. Table II shows the major components of revenues for these periods. TABLE II - REVENUES
Periods to June 30, (In thousands) Second Quarter Six Months 2001 2000 Change 2001 2000 Change -------- ------- ------ --------- -------- ------ Fee income $ 33,789 $23,844 42% $ 65,649 $ 46,783 40% Premiums earned 83,887 63,999 31% 147,322 119,872 23% Net investment income 6,941 8,544 (19%) 13,346 21,110 (37%) Realized capital losses (686) (341) (101%) (1,677) (1,964) 15% Other income 385 590 (35%) 770 603 28% -------- ------- -------- -------- Total $124,316 $96,636 29% $225,410 $186,404 21% ======== ======= ======== ========
FEE INCOME Fee income increased 42% in the second quarter to $33.8 million and 40% to $65.6 million for the first six months of 2001, as compared to $23.8 million and $46.8 million, respectively, in 2000. Pre-tax profit margins were 27% in the second quarter and 28% for 13 the first six months of 2001, up from 25% and 26% in 2000. The components of fee income by business segment are illustrated in Table III. TABLE III - FEE INCOME BY BUSINESS SEGMENT
Periods to June 30, (In thousands) Second Quarter Six Months 2001 2000 Change 2001 2000 Change ---- ---- ------ ---- ---- ------ Corporate Risk Management fees $13,720 $11,651 18% $27,097 $22,063 23% Financial Services fees 13,281 6,396 108% 25,223 12,425 103% Specialty Brokerage fees 4,873 4,369 12% 9,250 9,385 (1%) Insurance Operations 1,915 1,428 34% 4,079 2,910 40% ------- ------- ------- ------- Total $33,789 $23,844 42% $65,649 $46,783 40% ======= ======= ======= =======
Corporate Risk Management Corporate Risk Management involves providing services to businesses and associations seeking to insure a portion of their risk in a loss sensitive Alternative Market structure. This segment accounted for 41% of total fee income in both the second quarter and the first six months of 2001. Corporate Risk Management fees increased by 18% in the second quarter to $13.7 million, and by 23% in the first six months to $27.1 million. Profit margins were 25% in the second quarter and 27% for the first six months of 2001, compared to 27% and 25%, respectively, in the corresponding 2000 periods. 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 generate the sale of Corporate Risk Management accounts and associated fees. Financial Services The Financial Services business segment provides administrative services to offshore mutual funds and other companies, provides trust and private client services, and offers a proprietary family of mutual funds as well as asset accumulation life insurance products for the high net worth market. This segment accounted for 39% of total fee income for the second quarter and 38% for the first six months of 2001. Fees from Financial Services increased in the quarter by 108% to $13.3 million and by 103% to $25.2 million for the half-year as a result of an increase in mutual fund assets under administration, which exceeded $45 billion at June 30, 2001. Mutual Trust Management also spurred this growth, contributing $3.9 million of fees in the quarter and $7.1 million for the first six months. Profit margins improved to 22% in the second quarter and 21% for the first six months of 2001 from 15% and 18%, respectively, in the corresponding 2000 periods. 14 Specialty Brokerage The Company's Specialty Brokerage business segment provides access to insurers and reinsurers in Bermuda, Europe and the United States. The segment produced $4.9 million of fee income for the second quarter and $9.3 million for the first six months of 2001, representing 14% of total fee income in both the second quarter and the first six months. Specialty Brokerage fees increased by 12% in the second quarter from $4.4 million in 2000, but decreased by 1% in the first six months of 2001 from $9.4 million in the corresponding 2000 period. This was primarily due to the timing of certain renewals and the decreased purchase of reinsurance by the Company's Insurance Operations. Profit margins improved to 31% in the second quarter and to 28% for the first six months from 20% and 27%, respectively, in the corresponding 2000 periods. Insurance Operations Insurance Operations represents the Company's former Program Business segment which is being transitioned into a specialty insurance operation in which the Company will retain a more significant portion of the underwriting risk over time. Fee income earned in this segment is comprised of fees for rent-a-captive services performed and accounted for 6% of total fee income for the second quarter and six months of 2001 and 2000. Insurance Operations fees increased by 34% for the second quarter to $1.9 million and by 40% for the six months to $4.1 million from $1.4 million and $2.9 million for the corresponding 2000 periods. Profit margins improved to 68% in the second quarter and six months of 2001 as compared to 64% and 62%, respectively, in 2000. NET PREMIUMS EARNED Gross premiums written, which includes premium from the Company's Insurance Operations and Corporate Risk Management segments, increased 11% to $728.1 million for the first six months of 2001 as compared to $656.1 million for the corresponding period in 2000. Net premiums earned increased 31% to $83.9 million in the second quarter and 23% to 147.3 million for the first six months of 2001, as compared to $64.0 million and $119.9 million, respectively, in the corresponding 2000 periods. This was primarily due to the corresponding increase in gross premiums written and an improved rating environment. INVESTMENT INCOME Gross investment income decreased by $7.4 million to $16.0 million for the first six months of 2001 versus the corresponding 2000 period. Net investment income decreased by 19% to $6.9 million for the second quarter and by 37% to $13.3 million for the first six months of 2001. Investment yields declined to 5.2% and 4.9% for the second quarter and first six months of 2001, respectively, as compared to 6.7% in both corresponding periods of 2000. The 2000 yields of 6.7% exclude $3.7 million from a special purpose entity, Endeavour Real Estate Securities Ltd. Net investment income was affected by lower interest rates, a change in the portfolio mix to include more invested cash and generally lower net invested assets. 15
EXPENSES TABLE IV - EXPENSES Periods to June 30, (In thousands) Second Quarter Six Months 2001 2000 Change 2001 2000 Change -------- ------- ------ -------- -------- ------ Operating expenses $ 24,167 $17,937 35% $ 47,026 $ 35,591 32% Total insurance costs 81,493 60,023 36% 141,840 113,877 25% Interest expense 5,041 4,301 17% 9,579 10,297 (7%) Other expenses 883 1,404 (37%) 1,846 2,116 (13%) -------- ------- -------- -------- Total $111,584 $83,665 33% $200,291 $161,881 24% ======== ======= ======== ========
Operating expenses increased 35% to $24.2 million for the quarter, compared to $17.9 million in the second quarter of 2000, and increased 32% to $47.0 million for the first six months of 2001, compared to $35.6 million for the first six months of 2000. The increase in operating expenses was attributable to growth in personnel and other expenses to service the Company's existing businesses. Recent acquisitions also contributed an additional $4.5 million and $9.0 million for the quarter and six months ended June 30, 2001. Excluding the effect of recent acquisitions, operating expenses increased by 9% in the quarter and 7% for the first six months ended June 30, 2001. The movement in total insurance costs, which includes losses and loss expenses and acquisition and underwriting expenses, is the direct result of the fluctuations in net premiums earned. Losses and loss expenses increased to $49.8 million and $93.6 million for the second quarter and first six months ended June 30, 2001 for loss ratios of 59.3% and 63.5% respectively, as compared to $41.8 million and $76.1 million for loss ratios of 65.3% and 63.5%, respectively, in the corresponding 2000 periods. 16 Acquisition and underwriting expenses amounted to $31.7 million and $48.3 million for the quarter and six months ended June 30, 2001 for expense ratios of 37.8% and 32.8% respectively, as compared to $18.3 million and $37.8 million for expense ratios of 28.5% and 31.5%, respectively, in the corresponding 2000 periods. The components of acquisition and underwriting expenses are shown below:
Second Quarter to June 30, (In thousands) 2001 2000 ---------------- ---------------- Acquisition costs $ 35,783 42.7% $ 25,093 39.2% Excess ceding commissions (28,239) (33.7%) (26,605) (41.6%) Operating expenses 24,160 28.8% 19,775 30.9% -------- ----- -------- ----- Acquisition and underwriting expenses $ 31,704 37.8% $ 18,263 28.5% ======== ===== ======== ===== Six Months Ended June 30, (In thousands) 2001 2000 ---------------- ---------------- Acquisition costs $ 58,426 39.7% $ 49,955 41.7% Excess ceding commissions (58,461) (39.7%) (48,927) (40.8%) Operating expenses 48,319 32.8% 36,769 30.6% -------- ----- -------- ----- Acquisition and underwriting expenses $ 48,284 32.8% $ 37,797 31.5% ======== ===== ======== =====
Acquisition costs, which include all external costs associated with the production of net premiums, amounted to $35.8 million for the second quarter of 2001 and $58.4 million for the six months ended June 30, 2001, as compared to $25.1 million and $50.0 million, respectively, in the corresponding 2000 periods. Acquisition costs are reduced by the excess of the ceding commissions received from reinsurers over the related acquisition costs on ceded premium. These excess ceding commissions, which were previously recorded as Program Business fees, amounted to $28.2 million and $58.5 million for the quarter and the six months, ended June 30, 2001, as compared to $26.6 million and $48.9 million, respectively, for the corresponding 2000 periods. Acquisition costs and excess ceding commissions are expensed and earned respectively over the life of the underlying contract. Operating expenses for this segment, which were previously recorded as Program Business operating expenses, amounted to $24.2 million for the quarter and $48.3 million, respectively, for the first six months ended June 30, 2001 as compared to $19.8 million and $36.8 million, respectively, for the corresponding 2000 periods. The Company believes that, given its move to retain more underwriting risk, this new presentation is more consistent with insurance company disclosure. 17 The Company had a combined ratio of 96.3% for the first six months of 2001, as compared to 95.0% in 2000. Insurance Operations contributed $8.3 million of operating income, a 6% increase from $7.8 million in 2000. Interest expense decreased by 7% to $9.6 million for the first six months of 2001, as compared to $10.3 million for the corresponding period in 2000. The decrease from the prior year was 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 8.7% in the quarter and 7.1% for the first six months of 2001, compared to 7.3% and 7.9%, respectively, for the corresponding period 2000 periods. The effective rate was lower than the expected federal tax rate in the United States of 35% plus state income taxes due to earnings outside of the United States. LIQUIDITY AND CAPITAL RESOURCES Total assets increased to $5.3 billion at June 30, 2001 from $4.9 billion at December 31, 2000. Assets held in separate accounts, which are principally managed assets attributable to participants in the Company's IPC Programs, accounted for approximately 16% of total assets at June 30, 2001 and December 31, 2000. Total shareholders' equity increased to $375.0 million at June 30, 2001 from $351.5 million at December 31, 2000, primarily as a result of net income and a decrease in the change in unrealized losses within other comprehensive income for the six months ended June 30, 2001. Return on equity, before the extraordinary loss in each year, was 12.5% for the first six months of 2001, as compared to 12.8% for the corresponding period in 2000. CASH FLOW As of June 30, 2001, the Company was involved in four reinsurance disputes in arbitration to collect disputed balances due from reinsurers. The Company has paid approximately $51 million of losses and loss expenses for which it has not been reimbursed. In addition, the Company estimates that it will ultimately pay another $62 million of unpaid losses and loss expenses in relation to the disputed business. One of these arbitration proceedings involves a series of accident and health programs written by the Company from 1997 through 1999. The Company received a good-faith payment from the reinsurers of $12.3 million during the first quarter, reducing the unreimbursed paid losses to $29.7 million on these programs, with an estimated $2.4 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. At the beginning of the quarter, two of the arbitration proceedings, involving a number of reinsurance treaties, were 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. During the quarter, 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 18 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, which is ongoing, and to defer the arbitration and jointly fund losses pending final resolution of the dispute. At June 30, 2001, this dispute involved $7.4 million in unreimbursed paid claims and an estimated $32.2 million in additional unpaid claims. The two remaining arbitration proceedings involve claims under individual reinsurance agreements with two reinsurers and involve $14.2 million of unreimbursed paid claims and an estimated $27.2 million of additional unpaid claims. In each of these disputes, the Company is in settlement discussions with the reinsurers and arbitration panels have not yet been selected. Subsequent to the quarter-end, the Company reached a preliminary settlement in one of these disputes in arbitration. This settlement will reduce the number of active reinsurance disputes in arbitration to three. In addition to the reinsurance disputes discussed above, the Company was involved in a terminated property program written in 1998 and 1999, in which the Company acted as both a reinsurer and a direct writer of property insurance. In 1999, the Company established a reserve with respect to this terminated program of $4.7 million. The Company and its lead reinsurers, which also issued some of this business directly, are presently investigating this business and negotiating a cooperation agreement. The Company has denied certain reinsurance claims presented to it, which 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 Company's operating cash flow, however the Company still produced positive cash flow from operations of $10.7 million for the six months ended June 30, 2001, as compared to $4.0 million in 2000. The Company expects that its inability to settle these disputes favorably or in a timely manner will continue to strain its operating cash flow. The Company will attempt to aggressively resolve these disputes on acceptable terms. Any future reinsurance disputes could significantly affect future operating cash flow. The Company believes that its cash flow from Corporate Risk Management, Specialty Brokerage and Financial Services will not be affected by these disputes and will assist the Company in financing its current operations and meeting its commitments under its debt facilities. RECENT ACCOUNTING PRONOUNCEMENTS Subsequent to the quarter-end, the Financial Accounting Standards Board issued Statement 142, "Goodwill and Other Intangible Assets". Under Statement 142, goodwill and certain intangible assets are no longer amortized but are reviewed annually for impairment. For goodwill and certain intangible assets existing at June 30, 2001, the new impairment only approach (non-amortization) must be adopted on January 1, 2002. 19 SAFE HARBOR DISCLOSURE FOR FORWARD-LOOKING STATEMENTS The above Management's Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements that reflect management's current views with respect to future events and financial performance and are made pursuant to the safe harbor provision of the Private Securities Litigation Reform Act of 1995. In some cases, readers can identify forward-looking statements by terminology such as "may", "will", "should", "could", "expects", "plans", "anticipates", "believes", "estimates", "predicts", "potential" or "continue". In particular, these statements include our expectations regarding the outcome of disputes and arbitrations, and our beliefs regarding the continuing firming of prices generally and the affirmation of the Legion Companies' A- (Excellent) rating by A.M, Best, which the Company believes will continue to generate the sale of Corporate Risk Management accounts and associated fees. These statements involve known and unknown risks, uncertainties and other factors that could cause actual results, performance or achievements to differ materially from those in the forward-looking statements. Although management believes that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, performance or achievements. The factors that could cause results, performance and achievements to differ materially from these forward-looking statements are discussed in "Business - Risk Factors" in Item 1 of the Company's Annual Report on Form 10-K for the year ended December 31, 2000. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK No material changes since December 31, 2000 on Form 10-K. PART II. OTHER INFORMATION ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS B. and C. As described on the Form 8-K filed by the Company on May 25, 2001, the Company issued U.S. $142.5 million of debentures and 2,147,601 warrants, which are convertible and exercisable, respectively, into the Company's common shares. The holders of the debentures in the aggregate have approximately 35% of the total voting power of the Company and benefit from covenants that affect the Company. As a result, the holders of the debentures have the ability to control many fundamental matters affecting the Company. In addition, if the common shares are issued upon the conversion of the debentures or the exercise of the warrants, the ownership percentage of existing shareholders in the Company may be diluted and market sales of the newly issued common shares could cause downward pressure upon the price of the common shares. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K A. Reports on Form 8-K The Company filed a report on Form 8-K on May 25, 2001 concerning the issuance of $142.5 million of convertible exchangeable debentures and 2,147,601 warrants, and the required restructuring of the Company's operating units in connection with the issuance of the debentures and warrants. 20 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Company has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. MUTUAL RISK MANAGEMENT LTD. /s/ Angus Ayliffe ------------------ Angus Ayliffe Controller and Authorized Signatory August 14, 2001 /s/ Angus Ayliffe ----------------- Angus Ayliffe for conformed copy 21 -----END PRIVACY-ENHANCED MESSAGE-----