-----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, OMCnumQvfT2J++rVbyfHEV3h4PRZiWAMmCMDtm8w77h6U9I3U8tNzu+jjAlTzXTD VYkS87v6Z4s9UMS0lUzknw== 0001036050-99-002372.txt : 19991115 0001036050-99-002372.hdr.sgml : 19991115 ACCESSION NUMBER: 0001036050-99-002372 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991112 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: 99750811 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 MUTUAL RISK MANAGEMENT LTD 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, 1999. 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, 1999 was 43,705,464. 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 30, 1999 and 1998 3 Unaudited Consolidated Balance Sheets at September 30, 1999 and December 31, 1998 4 Unaudited Consolidated Statements of Cash Flows for the nine month periods ended September 30, 1999 and 1998 5 Unaudited Consolidated Statements of Changes in Shareholders' Equity for the periods ended September 30, 1999 and December 31, 1998 6 Notes to Unaudited Consolidated Financial Statements at September 30, 1999 7-9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL 10-15 CONDITION AND RESULTS OF OPERATIONS ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT 15 MARKET RISK PART II. OTHER INFORMATION: ITEM 5. OTHER INFORMATION 16 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 16 SIGNATURES 17 EXHIBITS Exhibit 11 - Computation of Net Earnings per Common Share and Common Share Equivalents Exhibit 27 - Financial Data Schedule
-2- MUTUAL RISK MANAGEMENT LTD. AND SUBSIDIARIES UNAUDITED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
Quarter ended Sept. 30, Nine months ended Sept. 30, 1999 1998 (a) 1999 1998 (a) REVENUES Fee income $ 45,697,290 $41,985,629 $136,975,318 $115,697,318 Premiums earned 50,552,591 24,186,718 139,570,418 73,993,101 Net investment income 8,555,846 6,578,801 25,219,284 21,802,147 Realized capital (losses) gains (2,194,823) 58,321 (3,224,397) (1,098,925) Other income (losses) 12,483 125,471 (208,003) 168,971 ------------ ----------- ------------ ------------ Total Revenues 102,623,387 72,934,940 298,332,620 210,562,612 ------------ ----------- ------------ ------------ EXPENSES Losses and loss expenses incurred 48,131,182 17,759,474 115,923,720 51,636,828 Acquisition costs 16,826,623 7,150,223 40,240,360 24,042,015 Operating expenses 33,392,307 26,499,740 92,929,317 73,516,888 Interest expense 1,537,445 1,684,923 4,660,791 5,129,594 Other expenses 670,720 531,128 1,994,534 1,337,522 ------------ ----------- ------------ ------------ Total Expenses 100,558,277 53,625,488 255,748,722 155,662,847 ------------ ----------- ------------ ------------ INCOME BEFORE INCOME TAXES AND MINORITY INTEREST 2,065,110 19,309,452 42,583,898 54,899,765 Income tax (benefit) expense (3,300,523) 2,254,784 329,060 6,578,991 ------------ ----------- ------------ ------------ INCOME BEFORE MINORITY INTEREST 5,365,633 17,054,668 42,254,838 48,320,774 Minority interest (4,551) 42,687 424 42,687 ------------ ----------- ------------ ------------ Net income available to common shareholders 5,361,082 17,097,355 42,255,262 48,363,461 Other comprehensive income, net of tax: Unrealized (losses) gains on investments, net of reclassification adjustment (3,611,993) 1,802,015 (14,436,104) 1,240,936 ------------ ----------- ------------ ------------ COMPREHENSIVE INCOME $ 1,749,089 $18,899,370 $ 27,819,158 $ 49,604,397 ============ =========== ============ ============ EARNINGS PER COMMON SHARE: Net income available to Common Shareholders: Basic EPS $0.12 $0.41 $0.98 $1.18 ============ =========== ============ ============ Diluted EPS $0.12 $0.37 $0.93 $1.06 ============ =========== ============ ============ Dividends per share $0.06 $0.05 $0.18 $0.15 ============ =========== ============ ============ Weighted average number of Common Shares outstanding - basic 43,583,086 41,730,688 43,214,037 41,026,217 ============ =========== ============ ============ Weighted average number of Common Shares outstanding - diluted 44,452,265(b) 50,439,947 50,397,988 50,153,240 ============ =========== ============ ============
(a) Prior period results have been restated to reflect a pooling of interests following the acquisition of Captive Resources, Inc.,CompFirst, Inc. and the International Advisory Services Group of Companies. (b) Excludes the conversion of Convertible Debentures which have an anti- dilutive effect. See Accompanying Notes to Unaudited Consolidated Financial Statements -3- MUTUAL RISK MANAGEMENT LTD. AND SUBSIDIARIES UNAUDITED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, DECEMBER 31, 1999 1998(a) ASSETS Cash and cash equivalents $ 108,188,272 $ 117,422,652 Investments : Held in available for sale account at fair value (Amortized cost $442,577,307; 1998 - $455,648,153) 428,692,935 460,624,263 -------------- -------------- Total marketable investments 536,881,207 578,046,915 Other investments 22,135,140 22,473,945 Investment income due and accrued 3,751,411 5,252,341 Accounts receivable 491,657,806 353,869,570 Reinsurance receivables 1,460,878,736 1,079,562,857 Deferred expenses 34,312,592 27,215,385 Prepaid reinsurance premiums 263,966,580 206,486,764 Fixed assets 25,872,294 19,671,107 Deferred tax benefit 4,688,046 898,853 Goodwill 51,546,232 52,901,100 Other assets 7,737,656 5,615,792 Assets held in separate accounts 701,163,252 722,262,819 -------------- -------------- Total Assets $3,604,590,952 $3,074,257,448 ============== ============== LIABILITIES & SHAREHOLDERS' EQUITY LIABILITIES Reserve for losses and loss expenses $1,587,371,474 $1,190,425,877 Reserve for unearned premiums 317,745,222 241,893,089 Pension fund reserves 69,796,910 79,753,421 Claims deposit liabilities 30,626,287 37,447,768 Accounts payable 301,194,777 243,418,491 Accrued expenses 12,134,150 12,051,758 Taxes payable 15,480,113 14,849,898 Loans payable 4,125,295 3,537,671 Prepaid fees 54,285,960 47,126,199 Debentures 115,577,776 125,485,201 Other liabilities 8,689,580 12,839,258 Liabilities related to separate accounts 701,163,252 722,262,819 -------------- -------------- TOTAL LIABILITIES 3,218,190,796 2,731,091,450 -------------- -------------- SHAREHOLDERS' EQUITY Common Shares - Authorized 180,000,000 (par value $0.01) Issued 43,705,464 (1998 - 42,205,596) 437,055 422,056 Additional paid-in capital 139,509,706 114,916,045 Accumulated other comprehensive (loss) income (9,979,323) 4,456,781 Retained earnings 256,432,718 223,371,116 -------------- -------------- Total Shareholders' Equity 386,400,156 343,165,998 -------------- -------------- Total Liabilities & Shareholders' Equity $3,604,590,952 $3,074,257,448 ============== ==============
(a) Prior period results have been restated to reflect a pooling of interests following the acquisition of Captive Resources, Inc. See Accompanying Notes to Unaudited Consolidated Financial Statements -4- MUTUAL RISK MANAGEMENT LTD. AND SUBSIDIARIES UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended Sept. 30, NET CASH FLOW FROM OPERATING ACTIVITIES 1999 1998(a) Net income $ 42,255,262 $ 48,363,461 Items not affecting cash: Depreciation 5,413,141 4,400,263 Amortization of investments (454,717) (1,316,067) Net loss on sale of investments 3,607,825 95,583 Other investment gains (360,916) (599,114) Amortization of convertible debentures 4,512,975 4,966,955 Deferred tax benefit 635,181 1,249,778 Other items, net 1,522,817 794,581 Net changes in non-cash balances relating to operations: Accounts receivable (137,788,236) (91,572,165) Reinsurance receivables (381,315,879) (127,457,802) Investment income due and accrued 1,500,930 (2,818,125) Deferred expenses (7,097,207) 676,805 Prepaid reinsurance premiums (57,479,816) (38,947,360) Other assets (2,121,864) 3,707,398 Reserve for losses and loss expenses 396,945,597 137,707,934 Prepaid fees 7,159,761 4,942,204 Reserve for unearned premium 75,852,133 45,833,555 Accounts payable 57,776,286 40,669,945 Taxes payable 630,215 2,047,200 Accrued expenses 82,392 2,742,463 Other liabilities (4,738,379) 2,319,958 ------------- ------------- NET CASH FROM OPERATING ACTIVITIES 6,537,501 37,807,450 ------------- ------------- CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from sale of investments - Available for sale 71,891,067 79,179,129 Proceeds from maturity of investments - Available for sale 43,724,933 48,139,858 Fixed assets purchased (11,646,663) (7,236,134) Investments purchased - Available for sale (105,698,261) (216,845,134) Acquisitions and other investments (47,330) (16,666,529) Proceeds from sale of other investments 576,522 2,928,891 Other items, net 47,417 2,580 ------------- ------------- NET CASH APPLIED TO INVESTING ACTIVITIES (1,152,315) (110,497,339) ------------- ------------- CASH FLOWS FROM FINANCING ACTIVITIES Loan repayment & interest received - 388,683 Loan received 587,624 1,365,404 Proceeds from shares issued 10,175,761 5,582,113 Claims deposit liabilities (6,821,481) (4,921,270) Pension fund reserves (9,956,511) 87,908,453 Dividends paid (8,604,959) (7,526,909) ------------- ------------- NET CASH (APPLIED TO) FROM FINANCING ACTIVITIES (14,619,566) 82,796,474 ------------- ------------- Net (decrease) increase in cash and cash equivalents (9,234,380) 10,106,585 Cash and cash equivalents at beginning of period 117,422,652 82,706,146 ------------- ------------- Cash and cash equivalents at end of period $ 108,188,272 $ 92,812,731 ============= ============= Supplemental cash flow information: Interest paid $ 147,816 $ 162,639 ============= ============= Income taxes paid, net $ 3,217,167 $ 5,622,774 ============= =============
(a) Prior period results have been restated to reflect a pooling of interests following the acquisition of Captive Resources, Inc., CompFirst, Inc. and the International Advisory Services Group of Companies. See Accompanying Notes to Unaudited Consolidated Financial Statements -5- MUTUAL RISK MANAGEMENT LTD. AND SUBSIDIARIES UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
COMMON CHANGE IN SHARE DIVIDEND OPENING SHARES UNREALIZED NET DIVIDENDS ACQUIRED CLOSING BALANCE ISSUED (LOSS) GAIN (1) INCOME DECLARED (2) COMPANIES (3) BALANCE NINE MONTHS ENDED SEPT. 30, 1999 - ----------------------------------- Common Shares $ 422,056 $ 14,999 $ - $ - $ - $ - $ 437,055 Additional paid-in capital 114,916,045 24,593,661 - - - - 139,509,706 Accumulated other comprehensive income (loss) 4,456,781 - (14,436,104) - - - (9,979,323) Retained earnings 223,371,116 - - 42,255,262 (8,302,724) (890,936) 256,432,718 ------------ ----------- ------------ ----------- ----------- --------- ------------ TOTAL SHAREHOLDERS' EQUITY AT SEPT. 30, 1999 $343,165,998 $24,608,660 $(14,436,104) $42,255,262 $(8,302,724) $(890,936) $386,400,156 ============ =========== ============ =========== =========== ========= ============ YEAR ENDED DECEMBER 31, 1998 (4)(5) - ----------------------------------- Common Shares $ 398,795 $ 23,261 $ - $ - $ - $ - $ 422,056 Additional paid-in capital 89,339,040 25,577,005 - - - - 114,916,045 Accumulated other comprehensive income 4,035,397 - 421,384 - - - 4,456,781 Retained earnings 169,801,514 - - 64,527,198 (8,827,418) (2,130,178) 223,371,116 ------------ ----------- -------- ----------- ----------- ----------- ------------ TOTAL SHAREHOLDERS' EQUITY AT DECEMBER 31, 1998 $263,574,746 $25,600,266 $421,384 $64,527,198 $(8,827,418) $(2,130,178) $343,165,998 ============ =========== ======== =========== =========== =========== ============
(1) Net of reclassification adjustment, net of tax (See Note 2). (2) Dividend per share amounts were $.18 and $.21 for the nine months ended September 30, 1999 and the year ended December 31, 1998, respectively. (3) Prior to the mergers, International Advisory Services and Captive Resources paid dividends of $1.12 and $.84 in 1998 and 1999 respectively based on the equivalent number of Common Shares that would have been outstanding on the dividend dates after giving effect to the pooling of interests. (4) Prior period results have been restated to reflect a pooling of interests following the acquisition of Captive Resources, Inc. (5) See Note 3. See Accompanying Notes to Unaudited Consolidated Financial Statements -6- MUTUAL RISK MANAGEMENT LTD. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 1999 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 quarter and nine months ended September 30, 1999 and 1998. Although the Company believes that the disclosure in these financial statements is adequate to make the information presented not misleading certain information and footnote information normally included in financial statements prepared in accordance with generally accepted accounting principles has been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission. Results of operations for the quarter and nine months ended September 30, 1999 are not necessarily indicative of what operating results may be for the full year. 2. COMPREHENSIVE INCOME Statement 130 requires unrealized gains or losses on the Company's available for sale investments, to be included in Other comprehensive income.
Nine Months ended Sept. 30, 1999 Quarter ended Sept. 30, 1999 (In thousands) Before tax Net of tax Before tax Net of tax Amount Tax Amount Amount Tax Amount ----------- ----------- ----------------- ------------------ ------------ ------------- Net unrealized losses on available for sale investments arising during the period. $(22,468) $4,661 $(17,807) $(6,864) $1,259 $(5,605) Reclassification adjustment for losses realized in net income 3,608 (237) 3,371 2,215 (221) 1,994 -------- ------ -------- ------- ------ ------- Other comprehensive income $(18,860) $4,424 $(14,436) $(4,649) $1,038 $(3,611) ======== ====== ======== ======= ====== ======= Nine Months ended Sept. 30, 1999 Quarter ended Sept. 30, 1999 (In thousands) Before tax Net of tax Before tax Net of tax Amount Tax Amount Amount Tax Amount ----------- ----------- ----------------- ------------------ ------------ ------------- Net unrealized gains on available for sale investments arising during the period. $ 397 $ (191) $ 206 $ 2,733 $ (841) $ 1,892 Reclassification adjustment for losses (gains) realized in net income 1,597 (562) 1,035 (109) 19 (90) -------- ------ -------- ------- ------ ------- Other comprehensive income $ 1,994 $ (753) $ 1,241 $ 2,624 $ (822) $ 1,802 ======== ====== ======== ======= ====== =======
-7- 3. ACQUISITIONS On March 1, 1999, the Company acquired Captive Resources, Inc. ("CRI") in a business combination accounted for as a pooling of interests. CRI became a wholly owned subsidiary of the Company through the exchange of 1,058,766 Common Shares for 100% of its outstanding stock.
(In thousands) Quarter ended Nine Months ended Sept. 30, 1998 Sept. 30, 1998 -------------- ----------------- Revenues MRM (1) $70,718 $204,453 Acquired company 2,217 6,110 ------- -------- As restated $72,935 $210,563 ======= ======== NET INCOME AVAILABLE TO COMMON SHAREHOLDERS MRM (1) $16,426 $ 46,821 Acquired company 671 1,542 ------- -------- As restated $17,097 $ 48,363 ======= ======== (1) As previously-reported in footnote 19 of the December 31, 1998 Form 10-K. Shareholders' equity at January 1, 1998 was restated as follows: (In thousands) As previously Acquired As restated reported company Common shares $ 388 $ 11 $ 399 Additional paid-in capital 89,349 (10) 89,339 Accumulated other comprehensive income 4,035 - 4,035 Retained earnings 169,517 285 169,802 -------- ---- -------- Total shareholders' equity $263,289 $286 $263,575 ======== ==== ========
-8-
4. SEGMENT INFORMATION QUARTER ENDED SEPT ENDED SEPT 30, NINE MONTHS ENDED SEPT 30, (In thousands) 1999 1998 1999 1998 REVENUE Program Business $ 26,806 $24,278 $ 75,761 $ 60,021 Corporate Risk Management 10,608 11,463 37,436 38,856 Specialty Brokerage 3,274 2,299 9,715 6,757 Financial Services 5,009 3,946 14,063 10,063 Underwriting 50,553 24,187 139,570 73,993 Net investment income(1) 6,361 6,637 21,995 20,703 Other 12 125 (207) 170 ----------------------------- --------------------------------- Total $102,623 $72,935 $298,333 $210,563 ----------------------------- --------------------------------- INCOME BEFORE INCOME TAXES AND MINORITY INTEREST Program Business $ 7,915 $10,578 $ 25,415 $ 24,332 Corporate Risk Management 2,964 4,160 14,064 16,079 Specialty Brokerage 1,074 609 3,866 1,738 Financial Services 352 139 701 31 Underwriting (14,405) (722) (16,594) (1,686) Net investment income(2) 4,824 4,952 17,334 15,573 Other (659) (406) (2,202) (1,167) ----------------------------- --------------------------------- Total $ 2,065 $19,310 $ 42,584 $ 54,900 ----------------------------- ---------------------------------
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. 5. SUBSEQUENT EVENTS The Board of Directors, on October 5, 1999, approved a stock repurchase program to purchase up to three million of its outstanding Common Shares. On October 27, 1999, the Board of Directors authorized the repurchase of an additional two million shares. As of November 10, 1999, a total of 2,634,900 shares has been repurchased at an average price of $12.43. -9- 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, 1999 AND 1998 The results of operations for the quarter and nine months ended September 30, 1999 reflect slower growth and lower margins in the Program Business segment during the quarter. Net income available to common shareholders, excluding previously announced provisions for losses on terminated programs, amounted to $50.3 million or $1.00 per Common Share on a diluted basis for the nine months ended September 30, 1999, representing a decrease of 6% on a per share basis over the corresponding period as shown in the tables below.
TABLE 1 - EARNINGS PER SHARE THIRD QUARTER TO SEPTEMBER 30, 1999 1998 (a) ------------------- ----------------- ($ thousands except per share data) PER PER COMMON SHARE COMMON SHARE ------------------- ----------------- BASIC DILUTED BASIC DILUTED Net income available to Common Shareholders $ 5,361 $ 0.12 $ 0.12 $17,097 $ 0.41 $ 0.37 Provisions - net of tax 8,003 0.19 0.18 - - - ------- ------- ------- ------- ------- ------- $13,364 $ 0.31 $ 0.30 $17,097 $ 0.41 $ 0.37 ======= ======= ======= ======= ======= ======= Average number of shares outstanding (000's) 43,583 44,452(b) 41,731 50,440 ------- ------- ------- ------- NINE MONTHS ENDED SEPTEMBER 30, 1999 1998 (a) ------------------- ----------------- ($ thousands except per share data) PER PER COMMON SHARE COMMON SHARE ------------------- ----------------- BASIC DILUTED BASIC DILUTED Net income available to Common Shareholders $42,255 $ 0.98 $ 0.93 $48,363 $ 1.18 $ 1.06 Provisions - net of tax 8,003 0.18 0.07 - - - ------- ------- ------- ------- ------- ------- $50,258 $ 1.16 $ 1.00 $48,363 $ 1.18 $ 1.06 ======= ======= ======= ======= ======= ======= Average number of shares outstanding (000's) 43,214 50,398 41,026 50,153 ------- ------- ------- -------
(a) Prior period results have been restated to reflect a pooling of interests following the acquisitions of Captive Resources, Inc., CompFirst, Inc. and the International Advisory Services Group of Companies. (b) Excludes the conversion of Convertible Debentures which have an anti- dilutive effect. Total revenues amounted to $102.6 million and $298.3 million for the quarter and nine months ended September 30, 1999 representing increases of 41% and 42% over the corresponding 1998 periods. Table II shows the major components of Revenues for these periods. -10-
TABLE II - REVENUES PERIODS TO SEPTEMBER 30, (In thousands) THIRD QUARTER NINE MONTHS 1999 1998 INCREASE 1999 1998 INCREASE -------- ------- -------- -------- -------- -------- Fee income $ 45,697 41,986 9% $136,975 $115,697 18% Premiums earned 50,553 24,187 109% 139,570 73,993 89% Net investment income 8,556 6,579 30% 25,219 21,802 16% Realized capital (losses) gains (2,195) 58 NM (3,224) (1,099) NM Other income (losses) 12 125 (90%) (207) 170 (222%) -------- ------- -------- -------- Total $102,623 $72,935 41% $298,333 $210,563 42% ======== ======= ======== ========
Fee income grew by 9% in the third quarter to $45.7 million and 18% to $137.0 million for the first nine months of 1999, as compared to $42.0 million and $115.7 million respectively in 1998. 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, (In thousands) THIRD QUARTER NINE MONTHS 1999 1998 INCREASE 1999 1998 INCREASE ------- ------- ---------- -------- -------- ---------- Program business fees $26,806 $24,278 10% $ 75,761 $ 60,021 26% Corporate risk management fees 10,608 11,463 (7%) 37,436 38,856 (4%) Specialty brokerage fees 3,274 2,299 42% 9,715 6,757 44% Financial services fees 5,009 3,946 27% 14,063 10,063 40% ------- ------- -------- -------- Total $45,697 $41,986 9% $136,975 $115,697 18% ======= ======= ======== ========
PROGRAM BUSINESS Program Business involves replacing traditional insurers and acting as a conduit between producers of specialty books of business and reinsurers wishing to write that business. The segment accounted for 59% of total Fee Income in the quarter and 55% for the first nine months of 1999 compared to 58% and 52% in the corresponding 1998 periods. Fees from Program Business increased 10% in the third quarter to $26.8 million and 26% to $75.8 million in the first nine months as compared to $24.3 million and $60.0 million respectively in 1998. Profit margins declined to 30% for the quarter and 34% for the nine months of 1999, down from 44% for the third quarter of 1998 and 41% for the nine months ending September 30, 1998. The decline in the Program Business growth rate and margins in the quarter was due to the continued decline in premium rates, especially at the Company's underwriting management subsidiary, Small Business Underwriters, which was hurt by increased competition and lower rates. In Massachusetts, an important state for SBU, workers' compensation rates declined by 20% effective September 1, 1999. -11- Gross premiums written increased 39% to $850.8 million for the first nine months of 1999 as compared to $614.1 million in 1998, primarily as a result of the continued growth within the Program Business segment. Program Business generally involves greater premium volume per unit than Corporate Risk Management business. Premiums earned increased 109% to $50.6 million in the third quarter and increased 89% to $139.6 million in the first nine months of 1999, as compared to $24.2 million and $74.0 million in the corresponding 1998 periods. The increases in Premiums earned were also due to the continued growth of 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 23% of total Fee income in the third quarter and 28% for the first nine months of 1999, down from 27% and 33% in the corresponding 1998 periods. Corporate Risk Management fees decreased by 7% in the third quarter to $10.6 million, and by 4% in the first nine months to $37.4 million, reflecting the continuation of the soft insurance market cycle for commercial risks. Profit margins dropped to 28% in the third quarter compared to 36% in the third quarter of 1998 and decreased to 38% for the first nine months of 1999 from 41% in the first nine months of 1998. SPECIALTY BROKERAGE The Company's Specialty Brokerage business segment provides access to Alternative Risk Transfer insurers and reinsurers in Bermuda and Europe. The segment produced $3.3 million of total Fee income in the third quarter and $9.7 million in the first nine months of 1999, representing 7% of total Fee income in both the third quarter and first nine months of 1999. Specialty Brokerage fees grew by 42% in the third quarter and 44% in the first nine months of 1999 as a result of increased business placed in Bermuda and London. Profit margins increased to 33% in the third quarter, and to 40% for the first nine months from 26% in both of the corresponding 1998 periods as a result of the increased revenues. FINANCIAL SERVICES Financial Services, the Company's newest business segment, provides administrative services to offshore mutual funds and other companies and offers a proprietary family of mutual funds as well as asset accumulation life insurance products for the high net worth market. The segment accounted for 11% of total Fee income for the third quarter and 10% for the nine months of 1999. Fees from Financial Services increased in the quarter by 27% to $5.0 million, and by 40% to $14.1 million for the nine months, primarily as a result of an increase in the number of mutual funds under administration from 193 at September 30, 1998 to 245. Profit margins in the Financial Services segment have been adversely affected in 1998 and 1999 by the previously announced revised executive incentive plan and staff expansion costs to service new business, but increased to 7% in the third quarter and 5% for the first nine months of 1999. Excluding the effect of the revised executive incentive plan, the profit margins in this segment would have been 17% for the quarter and 16% for the nine months as compared to 16% and 15% for the corresponding 1998 periods. INVESTMENT INCOME Gross investment income increased by $0.9 million or 4% to $26.6 million in the first nine months of 1999 over the corresponding 1998 period as a result of an increase in the yield on invested assets. Net investment income increased by 30% to $8.6 million in the third quarter and by 16% to $25.2 million for the first nine months. The increase in Investment income is due to the inclusion of investment income from one of the Company's programs accounted for as Claims deposit liabilities, which added $1.8 million in the quarter and $2.8 million for the first nine months of 1999. Investment yields excluding this income were 6.0% in the third quarter and 6.8% for the first nine months of 1999 as compared to 6.3% -12- and 7.0% in 1998. The increase in Investment income was offset by Realized capital losses in the portfolio.
TABLE IV - EXPENSES TOTAL EXPENSES PERIODS TO SEPTEMBER 30, (In thousands) Third Quarter Nine Months 1999 1998 INCREASE 1999 1998 INCREASE -------- ------- ---------- -------- -------- --------- Operating expenses $ 33,392 $26,500 26% $ 92,929 $ 73,517 26% Total insurance costs 64,958 24,909 161% 156,164 75,679 106% Interest expense 1,537 1,685 (9%) 4,661 5,130 (9%) Other expenses 671 531 26% 1,995 1,337 49% -------- ------- -------- -------- Total $100,558 $53,625 88% $255,749 $155,663 64% ======== ======= ======== ========
Operating expenses increased 26% to $33.4 million for the quarter, compared to $26.5 million in the third quarter of last year, and increased 26% to $92.9 million for the first nine months of 1999, compared to $73.5 million in the first nine months of 1998. The increase in Operating expenses is attributable to growth in personnel and other expenses resulting from the increased business as well as recent acquisitions. Excluding these acquisitions, the increase in operating expenses would have been 25% for the third quarter and 22% for the nine months over the corresponding 1998 periods. The fluctuations in Total insurance costs are typically the direct result of the fluctuations in Premiums earned during the relevant period. However, total insurance costs during the third quarter exceeded the increase in Premiums earned. During the quarter, the Company established a provision related to net losses incurred on a number of terminated programs of $8 million net of tax or $0.18 per diluted share. This provision is net of a reinsurance recovery of $14.7 million under a contingency excess of loss policy. This resulted in a $12.3 million increase in Losses and loss expenses incurred during the quarter offset by a $4.3 million reduction in Income taxes. The effective tax rate was (159.8%) in the quarter and 0.8% for the nine months compared to 11.7% and 12.0% in the corresponding 1998 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 a reduction in taxes due to the provision on net losses incurred established during the quarter. LIQUIDITY AND CAPITAL RESOURCES Total assets increased to $3.6 billion at September 30, 1999 from $3.1 billion at December 31, 1998. Assets held in separate accounts which are principally managed assets attributable to participants in the Company's IPC Programs accounted for approximately 19% of Total assets at September 30, 1999 and 23% at December 31, 1998. Total Shareholders' equity increased to $386 million at September 30, 1999 from $343 million at December 31, 1998 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, excluding provisions for losses on terminated programs, was 18% for the first nine months of 1999. Cash flow from operations has historically provided the Company its principal source of liquidity. Cash flow was positive in the nine months and in the quarter and improved from the first and second quarters where negative cash flow resulted from the Company's Program Business segment not producing the expected levels of cash flow. The Company believes it will continue to show positive cash flow for the remainder of the year and will be able to meet its liquidity requirements. -13- 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 have been assessed for Year 2000-related problems and remediation is now complete. As of September 30, 1999, the Company's historical Year 2000 remediation costs have not been material and total costs are not expected to exceed $.5 million. 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. As the Company regularly updates its hardware and software the pure additional cost for Year 2000 compliance should not be material. 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 has contacted 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. SAFE HARBOR DISCLOSURE FOR FORWARD-LOOKING STATEMENTS In connection with the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995 (the "1995 Act"), the Company sets forth below cautionary statements identifying important factors that could cause the Company's actual results to differ materially from those which might be projected, forecasted, or estimated or otherwise implied in the Company's forward-looking statements, as defined in the 1995 Act, made by or on behalf of the Company in press releases, written statements or documents filed with the Securities and Exchange Commission, or in its communications and discussions with investors and analysts in the normal course of business through meetings, telephone calls and conference calls. Such statements may include, but are not limited to, projections of Fee income, Premiums earned, Net investment income, Other income, Losses and loss expenses incurred, Acquisition costs, Operating expenses, Other expenses, earnings (including earnings per share), cash flows, plans for future operations, Shareholders' equity, financing needs, capital plans, dividends, plans relating to products or services of the Company, and estimates concerning the effects of litigation or other disputes, as well as assumptions for any of the foregoing and are generally expressed with words such as "believes", "estimates", "expects", "anticipates", "could have", "may have", and similar expressions. -14- Forward-looking statements are inherently subject to risks and uncertainties. The Company cautions that factors which may cause the Company's results to differ materially from such forward-looking statements include, but are not limited to, the following: (a) Changes in the level of competition in the reinsurance or primary insurance markets that adversely affect the volume or profitability of the Company's business. 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; (b) Changes in the demand for reinsurance, including changes in ceding companies' retentions, and changes in the demand for primary and excess and surplus lines insurance coverages; (c) The ability of the Company to execute its business strategies and its reliance on key personnel; (d) 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. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. No material change from the disclosure set forth in the Company's Form 10-K for the year ended December 31, 1998. -15- PART II - OTHER INFORMATION ITEM 5. Other Information The Board of Directors, on October 5, 1999, approved a stock repurchase program to purchase up to three million of its outstanding Common Shares. On October 27, 1999, the Board of Directors authorized the repurchase of an additional two million shares. As of November 10, 1999, a total of 2,634,900 shares has been repurchased at an average price of $12.43. 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 27 Current quarter ended September 30, 1999. B. Reports on Form 8-K. No reports on Form 8-K were filed during the three month period ended September 30, 1999. -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 12, 1999 -17- EX-11 2 COMPUTATION OF EARNINGS PER SHARE EXHIBIT 11 MUTUAL RISK MANAGEMENT LTD. COMPUTATION OF EARNINGS PER SHARE
Quarter Ended September, 30 Nine Months Ended September, 30 1999 1998 1999 1998 (in thousands except share and per share amounts) Basic Income Available to Common Shareholders $5,361 $17,097 $42,255 $48,363 ---------- ---------- ---------- ---------- Weighted Average Common Shares outstanding 43,583,086 41,730,688 43,214,037 41,026,217 ---------- ---------- ---------- ---------- Basic earnings per Common Share $0.12 $0.41 $0.98 $1.18 ---------- ---------- ---------- ---------- Diluted Income Available to Common Shareholders $5,361 $17,097 $42,255 $48,363 Debenture interest 0(a) 1,634 4,513 4,967 ---------- ---------- ---------- ---------- $5,361 $18,731 $46,768 $53,330 Weighted Average Common Shares outstanding 43,583,086 41,730,688 43,214,037 41,026,217 Common share equivalents associated with options and Convertible Debentures: Net effect of dilutive stock options 869,179 2,062,026 1,314,909 2,322,814 Assumed conversion of Convertible Debentures 0(a) 6,647,233 5,869,042 6,804,209 ---------- ---------- ---------- ---------- 869,179 8,709,259 7,183,951 9,127,023 Total Weighted Average Common Shares 44,452,265(a) 50,439,947 50,397,988 50,153,240 ---------- ---------- ---------- ---------- Diluted earnings per Common Share $0.12 $0.37 $0.93 $1.06 ---------- ---------- ---------- ----------
(a) Excludes the conversion of Convertible Debentures which would have an anti-dilutive effect. 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, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0000826918 MUTUAL RISK MANAGEMENT LTD. 1000 U.S. DOLLARS 9-MOS DEC-31-1999 JAN-01-1999 SEP-30-1999 1 428,693 0 0 0 0 0 428,693 108,188 1,460,879 34,313 3,604,591 1,587,371 317,745 69,797 30,626 119,703 0 0 437 385,963 3,604,591 139,570 25,219 (3,224) 136,768 115,924 40,240 99,585 42,584 329 42,255 0 0 0 42,255 0.98 0.93 0 0 0 0 0 0 0
-----END PRIVACY-ENHANCED MESSAGE-----