-----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, M9ANsJ7xv9GYk0ckkIEWvxMpmIvvRxuxTUG3VZ6trVURdBbLG5Iez25QjRCdIWlw fhez3v0J85OJpGupjuC5VQ== 0001036050-98-001941.txt : 19981116 0001036050-98-001941.hdr.sgml : 19981116 ACCESSION NUMBER: 0001036050-98-001941 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981113 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MUTUAL RISK MANAGEMENT LTD CENTRAL INDEX KEY: 0000826918 STANDARD INDUSTRIAL CLASSIFICATION: FIRE, MARINE & CASUALTY INSURANCE [6331] IRS NUMBER: 000000000 STATE OF INCORPORATION: D0 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-10760 FILM NUMBER: 98748024 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 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 period ended September 30, 1998. 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 September 30, 1998 was 39,969,240. 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 nine month periods ended September, 1998 and 1997 3 Consolidated Balance Sheets at September 30, 1998 (unaudited) and December 31, 1997 4 Unaudited Consolidated Statements of Cash Flows for the nine month periods ended September 30, 1998 and 1997 5 Consolidated Statements of Shareholders' Equity at September 30, 1998 (unaudited) and December 31, 1997 6 Notes to Unaudited Consolidated Financial Statements at September 30, 1998 7-8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9-15 Item 3. Quantitative and Qualitative Disclosures about Market Risk 15 PART II. Other Information: Item 1. Legal Proceedings 16 Item 2. Changes in Securities 16 Item 6. Exhibits and Reports on Form 8-K 16-17 Signatures 17 Exhibits Exhibit 11 - Computation of Net Earnings per Common Share and Common Share Equivalents Exhibit 27 - Financial Data Schedule MUTUAL RISK MANAGEMENT LTD. AND SUBSIDIARIES UNAUDITED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
Quarter Ended September 30 Nine Months Ended September 30 1998 1997 1998 1997 REVENUES Fee income $ 38,031,551 $ 27,931,042 $ 102,389,116 $ 76,864,473 Premiums earned 24,186,718 27,346,953 73,993,101 62,530,195 Net investment income 6,511,221 6,551,411 21,519,933 19,525,178 Realized capital gains (losses) 58,321 388,665 (1,098,925) (1,082,598) Other income (losses) 125,471 (10,007) 168,971 38,275 ------------- ------------- ------------- ------------- Total Revenues 68,913,282 62,208,064 196,972,196 157,875,523 ------------- ------------- ------------- ------------- EXPENSES Losses and loss expenses incurred 17,759,474 17,908,590 51,636,828 37,124,845 Acquisition costs 7,150,223 9,723,610 24,042,015 26,412,037 Operating expenses 23,431,474 16,465,276 63,216,463 45,710,744 Interest expense 1,647,208 1,631,846 4,979,592 4,841,876 Other expenses 531,128 301,897 1,331,265 799,503 ------------- ------------- ------------- ------------- Total Expenses 50,519,507 46,031,219 145,206,163 114,889,005 ------------- ------------- ------------- ------------- INCOME BEFORE INCOME TAXES 18,393,775 16,176,845 51,766,033 42,986,518 Income taxes 2,248,884 3,071,259 6,553,102 7,987,085 ------------- ------------- ------------- ------------- INCOME FROM CONTINUING OPERATIONS 16,144,891 13,105,586 45,212,931 34,999,433 Minority interest 42,687 -- 42,687 -- ------------- ------------- ------------- ------------- NET INCOME 16,187,578 13,105,586 45,255,618 34,999,433 Preferred share dividends -- (21,908) -- (104,929) ------------- ------------- ------------- ------------- Net income available to common shareholders 16,187,578 13,083,678 45,255,618 34,894,504 Other comprehensive income, net of tax: Unrealized gain on investments 1,802,015 1,092,616 1,240,936 1,757,739 ------------- ------------- ------------- ------------- COMPREHENSIVE INCOME $ 17,989,593 $ 14,176,294 $ 46,496,554 $ 36,652,243 ============= ============= ============= ============= EARNINGS PER COMMON SHARE: Net Income available to Common Shareholders: Basic EPS $ 0.41 $ 0.35 $ 1.16 $ 0.94 ============= ============= ============= ============= Diluted EPS $ 0.37 $ 0.31 $ 1.04 $ 0.85 ============= ============= ============= ============= Dividends per share $ 0.05 $ 0.05 $ 0.15 $ 0.14 ============= ============= ============= ============= Weighted average number of Common Shares outstanding - basic 39,783,739 37,422,524 39,042,380 37,298,504 ============= ============= ============= ============= Weighted average number of Common Shares outstanding - diluted 48,492,998 47,050,770 48,169,403 46,580,110 ============= ============= ============= =============
See Accompanying Notes to Unaudited Consolidated Financial Statements 3 MUTUAL RISK MANAGEMENT LTD. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
September 30, DECEMBER 31, 1998 1997 (Unaudited) ASSETS Cash and cash equivalents $ 89,225,013 $ 78,938,489 Investments : Held in available for sale account at fair value (Amortized cost $480,038,927; 1997 - $389,292,297) 487,796,712 395,143,321 -------------- -------------- Total marketable investments 577,021,725 474,081,810 Other investments 8,567,704 9,428,142 Investment income due and accrued 6,608,988 3,768,168 Accounts receivable 251,831,863 160,364,395 Reinsurance receivables 758,154,444 630,696,642 Deferred expenses 29,315,461 29,992,266 Prepaid reinsurance premiums 194,964,842 156,017,482 Fixed assets 16,533,013 13,373,439 Deferred tax benefit 2,604,375 4,607,251 Goodwill 53,117,876 32,915,932 Other assets 3,456,213 6,698,466 Assets held in separate accounts 690,280,035 625,216,561 -------------- -------------- Total Assets $2,592,456,539 $2,147,160,554 ============== ============== LIABILITIES, REDEEMABLE COMMON SHARES & SHAREHOLDERS' EQUITY LIABILITIES Reserve for losses and loss expenses $ 853,604,991 $ 715,699,133 Reserve for unearned premiums 234,222,221 188,388,666 Pension fund reserves 87,908,453 -- Claims deposit liabilities 37,523,630 42,444,900 Accounts payable 180,793,994 135,145,220 Accrued expenses 10,529,956 7,398,174 Taxes payable 17,060,922 14,994,581 Loans payable 1,845,113 -- Prepaid fees 20,941,488 19,268,277 Debentures 126,177,207 128,711,279 Other liabilities 10,735,571 8,166,599 Liabilities related to separate accounts 690,280,035 625,216,561 -------------- -------------- Total Liabilities 2,271,623,581 1,885,433,390 -------------- -------------- REDEEMABLE COMMON SHARES Common shares subject to redemption - 937,168 Common Shares par value $0.01, redemption value $1.75 less subscription loans receivable - $383,761, plus interest received) -- 1,929,032 -------------- -------------- Total Redeemable Common Shares -- 1,929,032 -------------- -------------- SHAREHOLDERS' EQUITY Common Shares - Authorized 60,000,000 (par value $0.01) Issued 39,969,240 (1997 - 37,876,883) 399,692 378,769 Additional paid-in capital 108,993,971 87,101,966 Other comprehensive income - unrealized gain on investments - net of tax 5,276,333 4,035,397 Retained earnings 206,162,962 168,282,000 -------------- -------------- Total Shareholders' Equity 320,832,958 259,798,132 -------------- -------------- Total Liabilities, Redeemable Common Shares & Shareholders' Equity $2,592,456,539 $2,147,160,554 ============== ==============
See Accompanying Notes to Unaudited Consolidated Financial Statements 4 MUTUAL RISK MANAGEMENT LTD. AND SUBSIDIARIES UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended September 30, 1998 1997 NET CASH FLOW FROM OPERATING Net income $ 45,255,618 $ 34,999,433 Items not affecting cash: Depreciation 4,109,637 2,877,733 Amortization of investments (1,316,067) (4,388,471) Net loss on sales of investments 95,583 1,378,710 Other investment gains (599,114) 0 Amortization of Convertible Debentures 4,966,955 4,839,885 Deferred tax benefit 1,249,778 (2,459,071) Other items (231,084) 687,720 Net changes in non-cash balances relating to operations: Accounts receivable (91,467,468) (11,146,990) Reinsurance receivables (127,457,802) (103,238,252) Investment income due and accrued (2,840,820) 1,545,229 Deferred expenses 676,805 (2,294,906) Prepaid reinsurance premiums (38,947,360) (53,724,010) Other assets 3,242,253 522,598 Reserve for losses and loss expenses 137,905,858 118,837,785 Prepaid fees 1,673,211 3,530,443 Reserve for unearned premium 45,833,555 73,022,138 Accounts payable 45,648,774 (17,735,038) Taxes payable 2,066,341 2,634,777 Accrued expenses 3,131,782 1,056,606 Other liabilities 2,110,458 515,617 ------------- ------------- NET CASH FLOW FROM OPERATING ACTIVITIES 35,106,893 51,461,936 ------------- ------------- CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from sale of investments - Available for sale 79,179,129 194,432,130 Proceeds from maturity of investments - Available for sale 48,139,858 46,666,903 Fixed assets purchased (7,269,150) (5,806,410) Investments purchased - Available for sale (216,845,134) (213,023,789) Investment in affiliates and other investments (939,270) (6,387,331) Proceeds from sale of other investments 2,928,891 0 Goodwill purchased (16,039,692) (14,798,596) Other items 2,582 23,047 ------------- ------------- NET CASH FLOW (APPLIED TO) FROM INVESTING ACTIVITIES (110,842,786) 1,105,954 ------------- ------------- CASH FLOWS FROM FINANCING ACTIVITIES Loan repayment & interest received 388,683 413,591 Loan received 1,845,113 0 Proceeds from shares issued 6,698,169 4,002,026 Redemption of preferred shares 0 (2,951,835) Claims deposit liabilities (4,921,270) (7,763,914) Pension fund reserves 87,908,453 0 Dividends paid (5,896,731) (5,263,648) ------------- ------------- NET CASH FLOW FROM (APPLIED TO) FINANCING ACTIVITIES 86,022,417 (11,563,780) ------------- ------------- Net increase in cash and cash equivalents 10,286,524 41,004,110 Cash and cash equivalents at beginning of period 78,938,489 52,242,353 ------------- ------------- Cash and cash equivalents at end of period $ 89,225,013 $ 93,246,463 ============= ============= Supplemental cash flow information: Interest paid $ 12,637 $ 1,991 ============= ============= Income taxes paid, net $ 5,622,774 $ 9,217,001 ============= =============
See Accompanying Notes to Unaudited Consolidated Financial Statements 5 MUTUAL RISK MANAGEMENT LTD. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Common Change in Shares Issued Opening Shares Unrealized Net In relation to Balance Issued Gain (Loss) Income Acquisitions(4) Nine Months Ended September 30, 1998 (unaudited) - ------------------------------------------------ Common Shares $ 378,769 $ 19,857 $ -- $ -- $ 1,066 Additional paid-in capital 87,101,966 21,892,005 -- -- -- Unrealized gain on investments 4,035,397 -- 1,240,936 -- -- Retained earnings 168,282,000 -- -- 45,255,618 (1,019,408) ------------ ------------ ----------- ----------- ----------- Total Shareholders' Equity at September 30, 1998 $259,798,132 $21,911,862 $1,240,936 $45,255,618 $(1,018,342) ============= ============ =========== =========== =========== Year Ended December 31, 1997 (3) - -------------------------------- Common Shares $ 371,265 $ 7,504 $ -- $ -- $ -- Additional paid-in capital 79,812,287 7,289,679 -- -- -- Unrealized gain on investments 47,682 -- 3,987,715 -- -- Retained earnings 127,759,654 -- -- 47,938,424 -- ------------ ------------ ----------- ----------- ----------- Total Shareholders' Equity at December 31, 1997 $207,990,888 $ 7,297,183 $3,987,715 $47,938,424 $ -- ============= ============ ========== =========== =========== Series B Preferred Common Share Share Dividends Dividends Closing Declared (1) Declared (2) Balance Nine Months Ended September 30, 1998 (unaudited) - ------------------------------------------------ Common Shares $ -- $ -- $ 399,692 Additional paid-in capital -- -- 108,993,91 Unrealized gain on investments -- -- 5,276,333 Retained earnings -- (6,355,248) 206,162,962 ---------- ----------- ------------ Total Shareholders' Equity at September 30, 1998 $ -- $(6,355,248) $320,832,958 ========== =========== ============ Year Ended December 31, 1997 (3) - -------------------------------- Common Shares $ -- $ -- $ 378,769 Additional paid-in capital -- -- 87,101,966 Unrealized gain on investments -- -- 4,035,397 Retained earnings (104,929) (7,311,149) 168,282,000 ---------- ----------- ------------ Total Shareholders' Equity at December 31, 1997 $ (104,929) $(7,311,149) $259,798,132 ========== =========== ============
(1) Dividend per share amounts were $ nil for the nine months ended September 30, 1998 and $.04 for the year ended December 31, 1997. (2) Dividend per share amounts were $ .15 for the nine months ended September 30, 1998 and $.19 for the year ended December 31, 1997 (restated for stock split). (3) Effective September 28, 1997 the Company effected a two-for-one stock split recorded in the form of a stock dividend. 18,741,121 Common Shares were issued in respect of this split. Prior periods have been restated. (4) See Note 2A. See Accompanying Notes to Unaudited Consolidated Financial Statements 6 MUTUAL RISK MANAGEMENT LTD. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS September 30, 1998 1. INTERIM ACCOUNTING POLICY In the opinion of management of the Company, the accompanying unaudited consolidated financial statements include all adjustments, consisting only of normal recurring adjustments, necessary to present fairly the financial position of the Company and the results of operations and cash flows for the nine months ended September 30, 1998 and 1997. Although the Company believes that the disclosure in these financial statements is adequate to make the information presented not misleading certain information and footnote information normally included in financial statements prepared in accordance with generally accepted accounting principles has been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission. Results of operations for the nine months ended September 30, 1998 are not necessarily indicative of what operating results may be for the full year. 2. ACQUISITIONS A. On July 10, 1998 the Company acquired all of the outstanding shares of CompFirst, Inc. by issuing 106,640 shares of its Common Shares. This combination has been accounted for as a pooling-of-interests. However, the Company's consolidated financial statements have not been restated due to immateriality. B. The Company acquired various other companies during the year for an aggregate purchase price of $26 million. These acquisitions have been accounted for as purchases. None of these acquisitions is individually material to the Company. Cost in excess of net assets acquired is an aggregate of $21 million which has been recorded as goodwill. The purchases made during the third quarter included the following: The Company acquired Avreco Corp, a specialty brokerage operation based in Chicago. Its principal lines of business are Medical Malpractice, Excess Property and Professional Liability. Avreco will operate as part of Mutual Risk's Professional Underwriters Corp. program management subsidiary. Avreco had 1997 revenues of approximately $4 million. The acquisition will allow Mutual Risk to develop its program business in these specialty markets. During the quarter the Company also acquired Capital Management of Bermuda Ltd., a company which issues pension and annuity products primarily for so called third country nationals. Capital Management has a portfolio of $80 million relating to its pension products and will complement the Company's other initiatives in the offshore variable life and annuity business. (See Note 4. Below) 3. COMPREHENSIVE INCOME During the first quarter of 1998 the Company adopted Statement of Financial Accounting Standards No. 130, Reporting Comprehensive Income. Comprehensive income is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from nonowner sources. It includes all changes in equity during a period except those resulting from investments by owners and distributions to owners. Specifically, the Company has reported the change in unrealized gains and losses on investments as an increase in Net income to arrive at Comprehensive income of $18.0 million and $14.2 million for the third quarter of 1998 and 1997, and $46.5 million and $36.7 million for the nine months ended September 30, 1998 and 1997. 7 The movements in unrealized gains and losses are net of tax of $.8 million and $.2 million in the third quarter of 1998 and 1997, and $.8 million and $.1 million in the nine months ended September 30, 1998 and 1997. 4. PENSION FUND RESERVES Pension fund reserves represent receipts from the issuance of pension investment contracts. Such receipts are considered deposits on investment contracts that do not have mortality or morbidity risk. Account balances in the accumulation phase are increased by deposits received and interest credited and are reduced by withdrawals and administrative charges. Calculations of contract holder account balances for investment contracts reflect interest crediting rates ranging from 3.05% to 7.25% at September 30, 1998, based on contract provisions, the Company's experience and industry standards. At September 30, 1998, the amount of pension fund reserves related to products in the accumulation phase was $ 82,642,157. Upon retirement, individuals can convert their accumulated pension fund account balances into a benefit stream by purchasing a payout annuity from the Company. Single premium life reserves are established for the payout annuities in amounts adequate to meet the estimated future obligations of the policies in force. The calculation of these reserves involves the use of estimates concerning such factors as mortality rates, interest rates averaging 6.85% at September 30, 1998, and future expense levels applicable to the individual policies. Mortality assumptions are based on various actuarial tables. These assumptions consider Company experience and industry standards. To recognize the uncertainty in the reserve calculation, the reserves include reasonable provisions for adverse deviations from those estimates. At September 30, 1998, the amount of pension fund reserves related to payout annuities was $5,266,296. 5. REDEEMABLE COMMON SHARES The loans relating to the Redeemable Common Shares were fully repaid in 1998. The shares are no longer redeemable by the Company and have been included in Shareholders' Equity. 8 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS For the Quarter and Nine Months ended September 30, 1998 and 1997 The results of operations for the quarter and nine months ended September 30, 1998 reflect a continuation of growth in Fee income and Net income due to both the addition of new accounts and the growth of existing accounts. Net income available to common shareholders amounted to $45.3 million or $1.04 per Common Share on a diluted basis for the nine months ended September 30, 1998 representing an increase of 22% on a per share basis over the corresponding 1997 period as shown in the tables below. TABLE 1 - EARNINGS PER SHARE
Third Quarter to September 30, 1998 1997 -------------------------------- ----------------------------- ($ thousands except per share data) PER PER COMMON SHARE COMMON SHARE ------------ ------------ Fully Basic Diluted Basic Diluted Net income excluding realized capital gains $16,149 $0.41 $0.37 $12,773 $0.34 $0.31 Realized capital gains (a) 39 0.00 0.00 311 0.01 0.00 ------- ----- ----- ------- ----- ----- Net income available to Common Shareholders $16,188 $0.41 $0.37 $13,084 $0.35 $0.31 ======= ===== ===== ======= ===== ===== Average number of shares outstanding (000's) 39,784 48,493 37,423 47,051 ------ ------ ------ ------ Nine Months ended September 30, 1998 1997 -------------------------------- ------------------------------ ($ thousands except per share data) PER PER COMMON SHARE COMMON SHARE ------------ ------------ Basic Diluted Basic Diluted Net income excluding realized capital losses $46,000 $1.18 $1.06 $35,710 $0.96 $0.87 Realized capital losses (a) (744) (0.02) (0.02) (815) (0.02) (0.02) ---------- -------- ------- --------- ------- ----- Net income available to Common Shareholders $45,256 $1.16 $1.04 $34,895 $0.94 $0.85 ========= ======= ======= ========= ======= ===== Average number of shares outstanding (000's) 39,042 48,169 37,299 46,580 -------- ------- ------- ------
9 (a) Net of tax. Total revenues amounted to $68.9 million and $197.0 million for the quarter and nine months ended September 30, 1998 representing increases of 11% and 25% over the corresponding 1997 periods. Table II shows the major components of Revenues for these periods. TABLE II - REVENUES
Periods to September 30, Third Quarter Nine Months 1998 1997 Increase 1998 1997 Increase ---- ---- -------- ---- ---- -------- Fee income $38,032 $27,931 36% $102,389 $76,864 33% Premiums earned 24,187 27,347 (12%) 73,993 62,530 18% Net investment income 6,511 6,551 (1%) 21,520 19,526 10% Realized capital gains (losses) 58 389 (85%) (1,099) (1,082) (2%) Other (losses) income 125 (10) N/M 169 38 N/M --------- ---------- --------- -------- Total $68,913 $62,208 11% $196,972 $157,876 25% ========= ========= ========= ========
Fee income grew by 36% in the third quarter to $38.0 million, and 33% to $102.4 million for the first nine months of 1998, as compared to $27.9 million and $76.9 million respectively in 1997. Pre-tax profit margins were 38% for both periods of 1998 as compared to 41% for both the corresponding 1997 periods. SEGMENT ANALYSIS The components of Fee income by business segment are illustrated in Table III. TABLE III - FEE INCOME BY BUSINESS SEGMENT
Periods to September 30, Third Quarter Nine Months 1998 1997 Increase 1998 1997 Increase ---- ---- -------- ---- ---- -------- Program business fees $23,757 $14,200 67% $57,872 $33,953 70% Corporate risk management fees 8,256 9,720 (15%) 28,743 31,947 (10%) Specialty brokerage fees 2,073 1,955 6% 5,711 5,086 12% Financial services fees 3,946 2,056 92% 10,063 5,878 71% ------- ------- -------- ------- Total $38,032 $27,931 36% $102,389 $76,864 33% ======= ======= ======== =======
Program Business 10 Program Business involves replacing traditional insurers and acting as a conduit between producers of specialty books of business and reinsurers wishing to write that business. The segment accounted for 62% of total Fee Income in the quarter and 56% for the first nine months of 1998 compared to 51% and 44% in the corresponding 1997 periods. Fees from Program Business increased 67% in the third quarter to $23.8 million and by 70% to $57.9 million in the first nine months as compared to $14.2 million and $34.0 million respectively in 1997. This resulted from the continued expansion of this business segment both through the growth of existing programs and the addition of new programs. Profit margins were 42% for the quarter and 40% for the nine months of 1998, up from 41% for the third quarter of 1997 and 38% for the nine months ending September 30, 1997. Gross premiums written increased 33% to $614 million for the first nine months of 1998 as compared to $463 million in 1997, primarily as a result of the growth within the Program Business segment. Program Business generally involves greater premium volume per unit than Corporate Risk Management business. Premiums earned decreased 12% to $24.2 million in the third quarter and increased 18% to $74.0 million in the first nine months of 1998, as compared to $27.3 million and $62.5 million in the corresponding 1997 periods. The decrease in earned premium in the third quarter of 1998 was due to a decline of $7.2 million in premiums related to involuntary workers' compensation business which the Company is required to assume. Such premiums have no financial impact on the Company because any gain or loss on these premiums are credited or charged to client accounts. Adjusting for the decline in these premiums, Premiums earned for the third quarter would have increased by 20%. These increases in Premiums earned were primarily due to the growth within the Program Business segment. 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 22% of total Fee income in the third quarter and 28% for the first nine months of 1998, down from 35% and 41% in the corresponding 1997 periods. Corporate Risk Management fees decreased by 15% in the third quarter to $8.3 million, and by 10% in the first nine months to $28.7 million as a result of a continuation of the extremely soft commercial insurance market. Profit margins remained consistent at 46% in the third quarter compared to 47% in the third quarter of 1997 and increased to 50% for the first nine months of 1998 from 46% for the first nine months of 1997. The Company added 5 new accounts in the third quarter compared to 3 in 1997 and 18 in the first nine months compared to 22 in 1997. Renewal rates increased to 81% for the third quarter compared to 71% in 1997 and decreased to 67% in the first nine months compared to 73% in 1997. Specialty Brokerage The Company's Specialty Brokerage business segment provides access to Alternative Risk Transfer insurers and reinsurers in Bermuda and Europe. The segment produced $2.1 million of total Fee income in the third quarter and $5.7 million in the first nine months of 1998 representing 6% of total Fee income in the third quarter and first nine months of 1998. Specialty Brokerage fees grew by 6% in the third quarter and 12% in the first nine months of 1998. Renewal rates remained high in this segment at 89% for the first nine months of 1998 as compared to 83% in 1997. Profit margins decreased to 32% in the third quarter, and to 28% for the first nine months from 33% and 35% in the corresponding 1997 periods, primarily as a result of declining premium rates in Bermuda on new and renewal business and the effects of a small startup operation in the U.S. Financial Services 11 Financial Services, the Company's newest business segment, is being built on the acquisition of Hemisphere which provides administrative services to offshore mutual funds and other companies. The segment accounted for 10% of total Fee income for both the third quarter and nine month periods of 1998. Fees from Financial Services increased in the quarter by 92% to $3.9 million, over the 1997 corresponding period, and by 71%, to $10.1 million, for the nine month period, primarily as a result of an increase in the number of mutual funds under administration from 124 at September 30, 1997 to 193 in 1998. Renewal rates remained very high in this business segment at 93% for the first nine months of 1998 as compared to 96% in 1997. As previously announced, profit margins were adversely affected in 1998 by a revised executive incentive plan and staff expansion costs to service new business and declined to 4% in the third quarter and 0% for the first nine months. Excluding the effect of the revised executive incentive plan, the profit margins in this segment would have been 19% in both periods ending September 30, 1998. Investment Income Gross investment income increased by $3.8 million or 17% to $25.4 million in the first nine months of 1998 over the corresponding 1997 period as a result of an increase in the yield on invested assets and an increase in the underlying assets resulting from the acquisition of an annuity portfolio of approximately $80 million in the third quarter of 1998. Net investment income after adjusting for investment income which is payable to others, decreased by 1% to $6.5 million in the third quarter and increased by 10% to $21.5 million for the first nine months. The third quarter of 1997 included non-recurring investment income of $0.5 million in respect of one client. Without this, the third quarter increase in investment income would have been 7% and the nine month increase would have been 15%. Investment yields were 6.2% in the third quarter and 6.9% for the first nine months of 1998 as compared to 6.5% and 6.6% in the corresponding 1997 periods. TABLE IV - EXPENSES
TOTAL EXPENSES Periods to September 30, Third Quarter Nine Months 1998 1997 Increase 1998 1997 Increase ---- ---- -------- ---- ---- -------- Operating expenses $23,431 $16,465 42% $63,216 $45,711 38% Total insurance costs 24,910 27,633 (10%) 75,679 63,537 19% Interest expense 1,647 1,632 (1%) 4,980 4,842 3% Other expenses 531 301 76% 1,331 799 67% ------- -------- -------- ------- Total $50,519 $46,031 10% $145,206 $114,889 26% ======= ======= ======== ========
Operating expenses increased 42% to $23.4 million for the quarter, compared to $16.5 million in the third quarter of last year, and increased 38% to $63.2 million for the first nine months of 1998, compared to $45.7 million in the first nine months of 1997. The increase in Operating expenses is attributable to recent acquisitions, growth in personnel and other expenses resulting from the increased business in each segment, as well as the costs associated with the revised executive incentive plan in the Financial Services segment. Excluding this revised executive bonus plan and the effect of acquisitions, the increase in operating expenses would have been 25% for the quarter and 28% for the nine months over the corresponding 1997 periods. 12 The fluctuations in Total insurance costs are the direct result of the fluctuations in premiums earned during the quarter and nine months. The effective tax rate was 12.2% in the quarter and 12.7% for the nine months compared to 19.0% and 18.6% in the corresponding 1997 periods. The decreases in the rates are due mainly to an increase in earnings outside of the United States, a restructuring of the taxable entities in both the United States and Europe, and the tax benefit derived from the exercise of employee stock options. LIQUIDITY AND CAPITAL RESOURCES Total assets increased to $2.6 billion at September 30, 1998 from $2.1 billion at December 31, 1997. Assets held in separate accounts which are principally managed assets attributable to participants in the Company's IPC Programs accounted for approximately 27% of Total assets at September 30, 1998 and 29% at December 31, 1997. Total Shareholders' equity increased to $321 million at September 30, 1998 from $260 million at December 31, 1997 primarily as a result of Net income in the nine months and the issuance of Common Shares offset by the payment of dividends. Return on equity was 21% for the first nine months of 1998 and 1997. IMPACT OF THE YEAR 2000 ISSUE The Company began assessing the impact of the Year 2000 issue on its computer hardware and software systems in 1997. Certain systems have been identified for replacement before year-end 1999 due to normal business requirements. The replacement systems will be assessed for Year 2000-related problems. Remediation is expected to continue through the end of the 1999 third quarter at a cost that is not expected to be material to the Company. Currently management has inventoried and is conducting a review of all such systems. As of September 30, 1998, the Company's historical Year 2000 Remediation costs have not been material. The Company's lack of legacy systems is fortunate, most of its applications are PC databases, some networked but most from a programming stand point, easily corrected. As of this disclosure date, management has not identified any hardware or software computer system within the Company with a significant Year 2000 compliance problem that is expected to have a materially adverse effect on the Company's financial condition or results of operations. The Company continues to assess the Year 2000 compliance of its critical business operations and products that could potentially be affected by the Year 2000 problem. The purpose of this review is to determine what impact, if any, the Year 2000 issue may have on the Company and its significant customers, suppliers, and others and whether that impact will be material to the Company's financial condition or results of operations. The Company is in the process of contacting its critical customers, reinsurance intermediaries, managing general agents, suppliers, and others to determine the nature and extent of their Year 2000 compliance efforts and to assess whether their failure to resolve their own Year 2000 issues would have a material adverse affect on the Company's financial condition or results of operations. Based on these assessments, management will take such further action as they deem appropriate including, but not limited to, the development of contingency plans. The extent to which the Company's financial condition or results of operations may be materially affected by the Year 2000 problems of third parties depends on a variety of factors including, but not limited to, whether these third parties can resolve their own Year 2000 issues; whether their remediated systems remain compatible with the Company's systems; and the nature and extent to which the Company's systems may be affected by the third party's non compliant systems. Significant failures of certain essential services including, but not limited to, the telecommunications, utility, banking, securities, and transportation industries, due to their own Year 2000 problems are generally beyond the Company's control and could have an adverse material impact on the Company's financial condition or results of operations. 13 All predictions regarding the impact of the Year 2000 issue on the Company and third parties and the attendant costs are inherently subject to risks and uncertainties. The Company cautions that the factors and assumptions described above, as well as unknown factors, may cause the Company's actual Year 2000 compliance costs, and the resultant impact on its business, operations, or financial condition to differ materially from those discussed above. SAFE HARBOR DISCLOSURE FOR FORWARD-LOOKING STATEMENTS In connection with the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995 (the "Act"), the Company sets forth below cautionary statements identifying important factors that could cause the Company's actual results to differ materially from those which might be projected, forecasted, or estimated or otherwise implied in the Company's forward-looking statements, as defined in the Act, made by or on behalf of the Company in press releases, written statements or documents filed with the Securities and Exchange Commission, or in its communications and discussions with investors and analysts in the normal course of business through meetings, telephone calls and conference calls. Such statements may include, but are not limited to, projections of premium revenue, investment income, other revenue, losses, expenses, earnings (including earnings per share), cash flows, plans for future operations, common shareholders' equity, financing needs, capital plans, dividends, plans relating to products or services of the Company, and estimates concerning the effects of litigation or other disputes, as well as assumptions for any of the foregoing and are generally expressed with words such as "believes", "estimates", "expects", "anticipates", "could have", "may have", and similar expressions. Forward-looking statements are inherently subject to risks and uncertainties. The Company cautions that factors which may cause the Company's results to differ materially from such forward-looking statements include, but are not limited to, the following: Changes in the level of competition in the reinsurance or primary insurance markets that adversely affect the volume or profitability of the Company's business. These changes include, but are not limited to, the intensification of price competition, the entry of new competitors, existing competitors exiting the market, and the development of new products by new and existing competitors; Changes in the demand for reinsurance, including changes in ceding companies' retention's, and changes in the demand for primary and excess and surplus lines insurance coverages; The ability of the Company to execute its business strategies and its reliance on key personnel; Adverse development on claims and claims expense liabilities related to business and the failure of clients, reinsurers or others to meet their obligations to the Company in connection with such losses. ACQUISITIONS On July 10, 1998, the Company acquired all of the outstanding shares of CompFirst, Inc. CompFirst is a Georgia based managing general agent, specializing in workers' compensation and excess medical stop loss. CompFirst places special emphasis on managed care and provides extensive managed care services in addition to producing and underwriting business. CompFirst had revenue in 1997 of approximately $3 million. 14 During the third quarter of 1998, the Company acquired all of the assets and goodwill of Avreco Corp. Avreco is a specialty brokerage operation based in Chicago. Its principal lines of business are Medical Malpractice, Excess Property and Professional Liability. Avreco will operate as part of Mutual Risk's Professional Underwriters Corp. program management subsidiary. Avreco had 1997 revenues of approximately $4 million. The acquisition will allow Mutual Risk to develop its program business in these specialty markets. During the quarter the Company also acquired Capital Management of Bermuda Ltd., a company which issues pension and annuity products primarily for so called third country nationals. Capital Management has a portfolio of $80 million relating to its pension products and will complement the Company's other initiatives in the offshore variable life and annuity business. After the third quarter the Company announced that it had agreed to acquire the International Advisory Services (IAS) Group of Companies. The principal companies within the IAS Group are International Advisory Services Ltd., a Bermuda company which provides management services to insurance companies, Hurst Holme Insurance Company Ltd., a Bermuda based rent-a-captive facility and H & H Reinsurance Brokers Ltd., a Bermuda broker primarily providing reinsurance support for the managed companies and rent-a-captive clients of the IAS Group. International Advisory Services Ltd. is the largest independent insurance manager in Bermuda with over 100 clients having annual premiums in excess of $1.1 billion. IAS is expected to have $8 million of annual revenue in 1998. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. Not applicable. 15 PART II. Other Information: Item 1. - Legal Proceedings Subsequent to the end of the third quarter, the Company was advised by Scott Wetzel Services Inc. ("SWS"), a third party administrator based in Tampa, Florida, that it had filed for Chapter 11 Bankruptcy protection. SWS acts as a claims administrator for a number of Alternative Market policy-issuing companies, including the Company's subsidiary, Legion Insurance Company. SWS has advised Legion that it owes about $8 million in connection with Legion clients. SWS assets, which will be available to creditors, are believed to include the value of the SWS claims administration business and a limited amount of insurance coverage. Legion is working with the other insurance companies involved and with another third party administrator which is expected to be appointed as temporary manager of the SWS business, in order to stabilize that business, continue the orderly payment of client claims and arrange a sale of SWS's claims administration business. The Company is presently unable to determine whether it will incur a loss from SWS or what the amount of such loss might be. Any loss that does occur is expected to be substantially mitigated by recoveries from the bankruptcy proceedings and Legion's own reinsurance coverages. Item 2. - Changes in Securities. During the quarter ended September 30, 1998, Registrant issued the following securities in the following transactions which were not registered under the Securities Act of 1933, as amended (the "Act"): 1.(a) Securities Sold: 106,640 Common Shares of the Registrant on July 10, 1998. (b) No underwriters participated in the sale of the Common Shares. The Common Shares were issued to each of the following:
NAME NUMBER OF SHARES ---- ---------------- H. Barron Brooks 26,092 Spottswood Dudley 28,225 Tom Pool 533 HUFRUS 3,199 Bill Smith Jr. 1,066 Steven McMullen 533 Love Douglas & Pope 3,199 Inc. Jeffrey McCart 4,266 McCart Insurance 2,132 Services Langsfeld-McKenzie & 2,132 Associates Bob Miller Insurance Co. 2,132 B & G Benefits 2,132 Renaissance Holding Co., 4,909 Inc. David Pennington 24,491 Clinton Matthews & 533 Cathy Matthews Jt. Ten. Christopher Hayes 533 Clay Chambliss 533
(c) The Common Shares were issued at a deemed purchase price of $37.51 per share (aggregate price $4,000,000), based upon the market value on the date of issuance. The Common Shares were issued as consideration in connection with the acquisition by the Registrant of CompFirst Inc., pursuant to an Agreement and Plan of Merger dated July 8, 1998. (d) An exemption from registration under the Act was claimed based upon Section 4(2) as a sale by an issuer not involving a public offering. 2.(a) Securities Sold: 8,020 Common Shares on August 10, 1998. (b) No underwriters participated in the sale of the Common Shares. The Common Shares were issued to each of the following: Diane C. Pratt 4,010 Richard C. Pratt 4,010 (c) The Common Shares were issued at a deemed purchase price of $36.78 per share (aggregate price $295,000), based upon the market value on the date of issuance, in connection with the acquisition by the Registrant of Underwriting Alternatives, Inc., pursuant to a Plan and Agreement of Merger dated August 10, 1998. (d) Exemption from registration under the Act was claimed based upon Section 4(2) as a sale by an issuer not involving a public offering. Item 6. Exhibits and Reports on Form 8-K A. Exhibit 11 - Computation of Net Earnings Per Common Share and Common Share Equivalents. Exhibit 27 - Financial Data Schedule B. Reports on Form 8-K. No reports on Form 8-K were filed during the three month period ended September 30, 1998. 16 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/ James C. Kelly ------------------------------------------- James C. Kelly Senior Vice President, Chief Financial Officer and Authorized Signatory Date: November 11, 1998 17 EX-11 2 COMPUTATION OF EARNINGS PER SHARE Exhibit 11 MUTUAL RISK MANAGEMENT LTD. COMPUTATION OF EARNINGS PER SHARE
Quarter Ended Sept, 30 Nine Months Ended Sept, 30 1998 1997 1998 1997 (in thousands except share and per share amounts) Basic - ----- Income Available to Common Shareholders $ 16,188 $ 13,084 $ 45,256 $ 34,895 ============ ============ ============ ============ Weighted Average Common Shares outstanding 39,783,739 37,422,524 39,042,380 37,298,504 ------------ ------------ ------------ ------------ Basic earnings per Common Share $ 0.41 $ 0.35 $ 1.16 $ 0.94 ============ ============ ============ ============ Diluted - ------- Income Available to Common Shareholders $ 16,188 $ 13,084 $ 45,256 $ 34,895 Debenture interest 1,634 1,632 4,967 4,840 ------------ ------------ ------------ ------------ $ 17,822 $ 14,716 $ 50,223 $ 39,735 ============ ============ ============ ============ Weighted Average Common Shares outstanding 39,783,739 37,422,524 39,042,380 37,298,504 ------------ ------------ ------------ ------------ Common share equivalents associated with options, Redeemable Common Shares and Convertible Debentures: Options 4,008,252 3,824,704 4,008,252 3,824,704 Redeemable Common Shares 0 937,168 0 937,168 Convertible Debentures 6,580,804 6,978,800 6,580,804 6,978,800 ------------ ------------ ------------ ------------ 10,589,056 11,740,672 10,589,056 11,740,672 Common Shares purchased with proceeds from Options exercised (1,879,797) (2,112,426) (1,462,033) (2,459,066) ------------ ------------ ------------ ------------ 8,709,259 9,628,246 9,127,023 9,281,606 ------------ ------------ ------------ ------------ Total Weighted Average Common Shares 48,492,998 47,050,770 48,169,403 46,580,110 ============ ============ ============ ============ Diluted earnings per Common Share $ 0.37 $ 0.31 $ 1.04 $ 0.85 ============ ============ ============ ============
EX-27 3 FINANCIAL DATA SCHEDULE
7 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM MUTUAL RISK MANAGEMENT LTD.'S FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0000826918 MUTUAL RISK MANAGEMENT LTD. 1,000 U.S. DOLLARS 9-MOS DEC-31-1998 JAN-01-1998 SEP-30-1998 1 487,797 0 0 0 0 0 487,797 89,225 758,154 29,315 2,592,457 853,605 234,222 87,908 37,524 128,022 0 0 400 320,433 2,592,457 73,993 21,520 (1,099) 169 51,637 24,042 69,527 51,766 6,553 45,213 0 0 0 45,213 1.16 1.04 0 0 0 0 0 0 0
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