<PAGE>
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, 1996.
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, 1996 was 18,739,734.
<PAGE>
MUTUAL RISK MANAGEMENT LTD.
I N D E X
Part I. Financial Information:
Item 1. Financial Statements:
Unaudited Consolidated Statements of Income for the nine month
periods ended September 30, 1996 and 1995 3
Unaudited Consolidated Balance Sheets at September 30, 1996
and December 31, 1995 4
Unaudited Consolidated Statements of Cash Flows for the
nine month periods ended September 30, 1996 and 1995 5
Unaudited Consolidated Statements of Shareholders' Equity at
September 30, 1996 and December 31, 1995 6
Notes to Unaudited Consolidated Financial Statements at
September 30, 1996 7
Item 2. Management's Discussion and Analysis of Financial 8-12
Condition and Results of Operations
PART II.Other Information:
Item 5. Other Information 13
Item 6. Exhibits and Reports on Form 8-K 13
Signatures 14
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
<PAGE>
<TABLE>
<CAPTION>
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
Quarter Ended September 30 Nine Months Ended September 30
1996 1995 1996 1995
<S> <C> <C> <C> <C>
REVENUES
Fee income $20,395,469 $16,717,469 $59,862,326 $47,692,674
Premiums earned 7,288,523 15,336,543 35,007,072 40,647,894
Net investment income 5,662,929 3,556,412 16,255,582 11,072,079
Realized capital losses (559,873) (6,056) (1,171,806) (266,498)
Other (losses) income (7,526) 15,249 127,863 70,336
---------- ---------- ----------- ----------
Total Revenues 32,779,522 35,619,617 110,081,037 99,216,485
---------- ---------- ----------- ----------
EXPENSES
Losses and loss expenses incurred 2,570,997 5,887,889 18,680,020 19,318,450
Acquisition costs 4,685,780 9,683,831 16,384,832 22,112,320
Operating expenses 12,449,908 9,429,686 35,571,969 26,712,851
Interest expense 1,560,224 270,850 4,631,871 617,091
Other expenses 177,234 53,081 462,422 155,245
---------- ---------- ----------- ----------
Total Expenses 21,444,143 25,325,337 75,731,114 68,915,957
---------- ---------- ---------- ----------
INCOME FROM CONTINUING
OPERATIONS BEFORE
INCOME TAXES 11,335,379 10,294,280 34,349,923 30,300,528
Income taxes 1,852,945 2,414,352 6,412,841 7,014,442
---------- ---------- ---------- ----------
INCOME FROM CONTINUING
OPERATIONS 9,482,434 7,879,928 27,937,082 23,286,086
Minority interest (7,034) (139,783) (248,088) (382,482)
---------- ---------- ----------- ----------
NET INCOME 9,475,400 7,740,145 27,688,994 22,903,604
Preferred share dividends 42,432 43,816 123,608 146,208
---------- ---------- ----------- ----------
NET INCOME AVAILABLE TO
COMMON SHAREHOLDERS $9,432,968 $7,696,329 $27,565,386 $22,757,396
========== ========== =========== ===========
EARNINGS PER COMMON SHARE (1)
Primary EPS $0.49 $0.41 $1.44 $1.23
===== ===== ===== =====
Fully diluted EPS $0.49 $0.41 $1.42 $1.23
===== ===== ===== =====
Dividends per share $0.08 $0.06 $0.23 $0.18
===== ===== ===== =====
Weighted average number of Common
Shares outstanding 19,120,043 18,687,410 19,102,653 18,502,561
========== ========== ========== ==========
</TABLE>
(1) Prior periods per share calculations have been restated to reflect the
four-for-three stock split to holders of record at May 31, 1996.
See Accompanying Notes to Unaudited Consolidated Financial Statements
3
<PAGE>
MUTUAL RISK MANAGEMENT LTD. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
<S> <C> <C>
ASSETS
Cash and cash equivalents $72,198,254 $79,669,981
Investments : Held in available for sale account at fair value
(Amortized cost $386,251,075; 1995 - $350,540,285) 383,593,396 351,917,852
-------------- --------------
Total marketable investments 455,791,650 431,587,833
Investments in affiliates 771,361 202,457
Other investments 2,459,500 2,282,833
Investment income due and accrued 5,117,906 4,487,430
Accounts receivable 86,916,621 82,394,552
Reinsurance receivables 278,995,706 256,678,476
Deferred expenses 22,157,799 19,118,668
Prepaid reinsurance premiums 55,748,439 39,221,053
Fixed assets 8,047,746 5,480,686
Deferred tax benefit 6,002,405 6,182,842
Goodwill 14,887,321 4,874,634
Other assets 3,042,034 1,920,030
Assets held in separate accounts 594,938,900 525,176,516
-------------- --------------
Total Assets $1,534,877,388 $1,379,608,010
============== ==============
LIABILITIES, REDEEMABLE PREFERRED & COMMON SHARES & SHAREHOLDERS' EQUITY
LIABILITIES
Reserve for losses and loss expenses $331,093,877 $314,927,486
Reserve for unearned premiums 74,965,112 59,775,181
Claims deposit liabilities 70,976,215 71,788,775
Accounts payable 109,241,811 93,259,762
Accrued expenses 5,248,275 4,870,979
Taxes payable 8,931,012 4,811,592
Loans payable 480,286 574,022
Prepaid fees 13,419,343 13,125,653
Debentures 120,634,443 116,038,987
Other liabilities 7,177,133 5,729,685
Liabilities related to separate accounts 594,938,900 525,176,516
-------------- --------------
Total Liabilities 1,337,106,407 1,210,078,638
-------------- --------------
REDEEMABLE PREFERRED & COMMON SHARES
Preferred Shares - Series B non-voting Redeemable - authorized
and issued 2,951,835 (par value and redemption value $1.00) 2,951,835 2,951,835
Common Shares subject to redemption - 468,584 Common Shares (par value $0.01,
redemption value $3.50 less subscription loans
receivable - $767,522, plus interest received) 1,500,439 1,074,389
-------------- --------------
Total Redeemable Preferred & Common Shares 4,452,274 4,026,224
-------------- --------------
SHAREHOLDERS' EQUITY
Common Shares - Authorized 60,000,000 (par value $0.01)
Issued 18,271,150 (1995 - 17,805,138) 182,712 178,051
Additional paid-in capital 75,356,332 65,396,652
Unrealized (loss) gain on investments - net of tax (2,228,040) 1,154,823
Retained earnings 120,007,703 98,773,622
-------------- --------------
Total Shareholders' Equity 193,318,707 165,503,148
-------------- --------------
Total Liabilities, Redeemable Preferred & Common Shares
& Shareholders' Equity $1,534,877,388 $1,379,608,010
============== ==============
</TABLE>
See Accompanying Notes to Unaudited Consolidated Financial Statements
4
<PAGE>
MUTUAL RISK MANAGEMENT LTD. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Ended September 30,
1996 1995
<S> <C> <C>
NET CASH FLOW FROM OPERATING ACTIVITIES
Net income $27,688,994 $22,903,604
Items not affecting cash:
Depreciation 2,051,202 1,432,895
Amortization of investments and net gain on sales (92,194) (2,476,817)
Amortization of Convertible Debentures 4,595,456 0
Deferred tax benefit 832,822 (788,596)
Other items 302,447 115,617
Net changes in non-cash balances relating to operations:
Accounts receivable (4,522,069) (24,220,363)
Reinsurance receivables (22,317,230) (45,652,430)
Investment income due and accrued (630,476) 414,624
Deferred expenses (1,087,430) (5,422,899)
Prepaid reinsurance premiums (16,527,386) (22,890,669)
Other assets (1,122,004) 413,451
Reserve for losses and loss expenses 16,166,391 43,612,235
Claims deposit liabilities (812,560) 1,742,203
Prepaid fees 293,690 887,894
Reserve for unearned premium 15,189,931 30,926,910
Accounts payable 15,982,049 18,643,815
Taxes payable 4,119,420 1,293,573
Accrued expenses 377,296 1,852,997
Other liabilities 1,447,448 639,827
----------- -----------
NET CASH FLOW FROM OPERATING ACTIVITIES 41,935,797 23,427,871
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of investments - Available for sale 87,431,657 48,103,683
Proceeds from maturity of investments - Available for sale 29,154,549 20,094,558
Fixed assets purchased (4,656,497) (1,186,939)
Investments purchased - Available for sale (152,204,802) (82,013,901)
Investment in affiliates and other investments (676,049) (105,879)
Goodwill purchased (4,853,555) (200,000)
Swap expense (1,951,701) (4,480,803)
Other items 68,686 11,982
----------- -----------
NET CASH APPLIED TO INVESTING ACTIVITIES (47,687,712) (19,777,299)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Loans received 0 11,203,274
Loan repaid (93,736) 0
Loan interest received 42,290 61,882
Loan repayment received 383,760 383,760
Proceeds from shares issued 4,402,787 903,714
Dividends paid (6,454,913) (4,032,206)
----------- -----------
NET CASH FLOW (APPLIED TO) FROM FINANCING ACTIVITIES (1,719,812) 8,520,424
----------- -----------
Net (decrease) increase in cash and cash equivalents (7,471,727) 12,170,996
Cash and cash equivalents at beginning of period 79,669,981 44,872,994
----------- -----------
Cash and cash equivalents at end of period $72,198,254 $57,043,990
=========== ===========
Supplemental cash flow information:
Interest paid $36,415 $346,241
========== ==========
Income taxes paid, net $2,160,284 $4,182,002
========== ==========
</TABLE>
See Accompanying Notes to Unaudited Consolidated Financial Statements
5
<PAGE>
MUTUAL RISK MANAGEMENT LTD. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Series B
Preferred Common
Change in Share Share
Opening Shares Unrealized Net Dividends Dividends Closing
Balance Issued Gain (Loss) Income Declared (1) Declared (2) Balance
<S> <C> <C> <C> <C> <C> <C> <C>
Nine Months Ended September 30, 1996
- ------------------------------------
Common Shares $ 178,051 $ 4,661 $ - $ - $ - $ - $ 182,712
Additional paid-in capital 65,396,652 9,959,680 - - - - 75,356,332
Unrealized gain (loss)
on investments 1,154,823 - (3,382,863) - - - (2,228,040)
Retained earnings 98,773,622 - - 27,688,994 (123,608) (6,331,305) 120,007,703
------------ ---------- ----------- ----------- ---------- ------------ ------------
Total Shareholders' Equity
at September 30, 1996 $165,503,148 $9,964,341 $ (3,382,863) 27,688,994 $(123,608) (6,331,305) $193,318,707
============ ========== =========== =========== ========== ============ ============
Year Ended December 31, 1995 (3)
- --------------------------------
Common Shares $ 176,560 $ 1,491 $ - $ - $ - $ - $ 178,051
Additional paid-in capital 63,779,856 1,616,796 - - - - 65,396,652
Unrealized (loss) gain
on investments (12,913,950) - 14,068,773 - - - 1,154,823
Retained earnings 73,950,774 - - 30,354,371 (190,024) (5,341,499) 98,773,622
------------ ---------- ----------- ----------- ---------- ------------ ------------
Total Shareholders' Equity
at December 31, 1995 $124,993,240 $1,618,287 $14,068,773 $30,354,371 $(190,024) $(5,341,499) $165,503,148
============ ========== =========== =========== ========== ============ ============
</TABLE>
(1) Dividend per share amounts were $.04 for the nine months ended September 30,
1996 and $.06 for the year ended December 31, 1995.
(2) Dividend per share amounts were $.32 for the nine months ended September 30,
1996 and $.26 for the year ended December 31, 1995.
(3) Effective May 31, 1996 the Company effected a four-for-three stock split
recorded in the form of a stock dividend. 4,438,974 Common Shares were
issued in respect of this split. Prior periods have been restated.
See Accompanying Notes to Unaudited Consolidated Financial Statements
6
<PAGE>
MUTUAL RISK MANAGEMENT LTD. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996
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, 1996 and 1995. 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, 1996 are not necessarily indicative of what
operating results may be for the full year.
2. FOUR-FOR-THREE STOCK SPLIT
In May 1996 the Company announced a four-for-three stock split of its
Common Shares. The record date for the stock split was May 31, 1996 and a
dividend of additional Common Shares was distributed to shareholders on June 19,
1996. The consolidated financial statements have been adjusted to reflect the
effects of the Common Stock split on earnings per share for all periods
presented.
7
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of Operations for the Quarter and Nine months ended September 30, 1996
and 1995
The results of operations for the quarter and nine months ended September
30, 1996, reflect a continuation of growth in Fee income and Net income due to
the addition of new accounts, increased investment income and the inclusion of
Professional Underwriters Corp. ("PUC") for the first time in 1996. The results
for all periods reflect the acquisition of The Hemisphere Group Limited
("Hemisphere") in a pooling of interests transaction. Net income available to
common shareholders amounted to $9.4 million or $0.48 per Common Share for the
third quarter and $27.6 million or $1.42 per Common Share for the nine months
ended September 30, 1996 on a fully diluted basis representing increases of 23%
and 21% over the corresponding periods as shown in the tables below.
<TABLE>
<CAPTION>
Third Quarter to September 30,
1996 1995
------------------------------ -----------------------------
($ thousands except per share data)
PER PER
COMMON SHARE COMMON SHARE
------------------- -----------------
Fully Fully
Primary Diluted Primary Diluted
<S> <C> <C> <C> <C> <C> <C>
Net income excluding
realized capital losses (a) $9,813 $0.51 $0.50 $7,762 $0.41 $0.41
Realized capital losses (b) (380) (0.02) (0.02) (66) (0.00) (0.00)
----- ------ ----- ------- ----- -----
Net income available to
Common Shareholders $9,433 $0.49 $0.48 $7,696 $0.41 $0.41
====== ===== ===== ====== ===== =====
Average number of
shares outstanding (000's) 19,120 22,609 18,687 18,687
------ ------ ------ ------
Nine Months Ending September 30,
1996 1995
------------------------------ -----------------------------
($ thousands except per share data)
PER PER
COMMON SHARE COMMON SHARE
------------------- -----------------
Fully Fully
Primary Diluted Primary Diluted
Net income excluding
realized capital losses (a) $28,442 $1.49 $1.46 $23,001 $1.24 $1.24
Realized capital losses (b) (877) (0.05) (0.04) (244) (0.01) (0.01)
----- ----- ----- --------- ----- -----
Net income available to
Common Shareholders $27,565 $1.44 $1.42 $22,757 $1.23 $1.23
======= ===== ===== ======= ===== =====
Average number of
shares outstanding (000's) 19,103 22,592 18,503 18,503
------ ------ ------ ------
</TABLE>
(a) 1995 results have been restated to reflect a pooling of interests following
the acquisition of The Hemisphere Group Limited.
(b) Net of tax.
(c) All per share amounts have been adjusted to reflect the four-for-three
stock split which was effected May 31, 1996.
8
<PAGE>
Total revenues amounted to $32.8 million and $110.1 million for the quarter
and nine months ended September 30, 1996 representing a decrease of 8% and an
increase of 11% over the corresponding 1995 periods. The following table shows
the major components of Revenues for these periods.
(In thousands)
<TABLE>
<CAPTION>
TOTAL REVENUES
Periods to September 30,
Third Quarter Nine Months
1996 1995 Increase 1996 1995 Increase
---- ---- -------- ---- ---- --------
<S> <C> <C> <C> <C> <C> <C>
Fee income $20,395 $16,717 22% $59,862 $47,693 26%
Premiums earned 7,289 15,337 (52%) 35,007 40,648 (14%)
Net investment income 5,663 3,556 59% 16,256 11,072 47%
Realized capital losses (560) (6) N/M (1,172) (267) N/M
Other (losses) income (7) 15 N/M 128 70 82%
---------- ----------- -------- ----------
$32,780 $35,619 (8%) $110,081 $99,216 11%
======= ======= ======== =======
</TABLE>
Fee income increased 22% and 26% for the quarter and nine months ended
September 30, 1996 to $20.4 million and $59.9 million as compared to $16.7
million and $47.7 million in the corresponding 1995 periods. The components of
Fee income are illustrated by company and by business segment in the following
tables:
(In thousands)
<TABLE>
<CAPTION>
FEE INCOME BY COMPANY
Periods to September 30,
Third Quarter Nine Months
1996 1995 Increase 1996 1995 Increase
---- ---- -------- ---- ---- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Legion policy-issuing fees $7,590 37% $7,115 43% 7% $22,325 37% $20,386 43% 10%
IPC Program fees 4,324 21% 3,635 22% 19% 12,462 21% 10,652 22% 17%
CRS fees 2,842 14% 2,524 15% 13% 8,143 14% 7,020 15% 16%
Underwriting management fees 1,239 6% - -% N/M 4,098 7% - -% N/M
Captive management fees 1,053 5% 878 5% 20% 3,145 5% 2,650 6% 19%
Financial services fees 1,554 8% 986 6% 58% 4,477 7% 3,035 6% 48%
Other fees 1,793 9% 1,579 9% 14% 5,212 9% 3,950 8% 32%
------- ---- ------- ---- ------- ---- -------- ----
Total $20,395 100% $16,717 100% 22% $59,862 100% $47,693 100% 26%
======= ==== ======= ==== ======= ==== ======= ====
(In thousands)
<CAPTION>
FEE INCOME BY BUSINESS SEGMENT
Periods to September 30,
Third Quarter Nine Months
1996 1995 Increase 1996 1995 Increase
---- ---- -------- ---- ---- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Corporate risk
management fees $12,417 61% $11,645 70% 7% $38,082 64% $35,373 74% 8%
Program business fees $4,920 24% $2,807 17% 75% $12,870 21% $5,954 12% 116%
Specialty brokerage fees $1,504 7% $1,279 8% 18% $4,433 7% $3,331 7% 33%
Financial services fees $1,554 8% $986 6% 58% $4,477 7% $3,035 6% 48%
------- ---- ------- ---- ------- ---- -------- ----
Total $20,395 100% $16,717 100% 22% $59,862 100% $47,693 100% 26%
======= ==== ======= ==== ======= ==== ======= ====
</TABLE>
9
<PAGE>
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
business segment, which accounted for 64% of total Fee income for the first nine
months of 1996 compared to 74% in the corresponding 1995 period, has been the
most affected by the extremely soft insurance market cycle for commercial risks.
Corporate risk management fees increased by 7% in the quarter to $12.4 million
and 8% in the first nine months of 1996 to $38.1 million compared to the
corresponding 1995 periods. Profit margins remained steady at 41% for the
quarter and 44% for the nine months compared to 41% and 43% in the corresponding
1995 periods.
Program Business, the fastest growing segment of the Company's business,
involves replacing traditional insurers as the conduit between producers of
specialty books of business and reinsurers wishing to write that business.
Program Business accounted for 21% of total Fee income for the first nine months
of 1996 compared to 12% in the corresponding 1995 period. Program Business fees
increased by 75% in the third quarter to $4.9 million and 116% for the first
nine months of 1996 to $12.9 million. Program Business fee growth was assisted
by the acquisition of PUC in 1996 since its results are not included in the 1995
comparatives. Adjusting for this, Program Business fee growth would have been
37% in the quarter and 35% for the nine months. Profit margins excluding the
underwriting management business of PUC were 51% for the quarter and 49% for the
nine months. Including PUC's underwriting management business profit margins
were 41% for the quarter and 39% for the first nine months of 1996.
The Company's Specialty Brokerage business segment provides access to
Alternative Risk Transfer insurers and reinsurers in Bermuda and Europe.
Specialty Brokerage accounted for 7% of total Fee income in both the third
quarter and nine months at $1.5 million and $4.4 million respectively. Specialty
Brokerage fees grew by 18% in the quarter and 33% in the nine months over the
corresponding 1995 periods. The lower third quarter growth rate reflects the
seasonal nature of this business segment and the fact that the first half of
1995 does not include the results of HJF International which was acquired on
July 1, 1995. Renewal rates remained high in this segment at 90% for the first
nine months of 1996. Profit margins decreased to 35% for the quarter and 39% for
the nine months as opposed to 41% and 43% for the same periods last year
primarily as a result of the Company's acquisition of substantially all of the
minority interest in one of these businesses. Although immediately accretive to
earnings per share, this acquisition lowered the business's profit margin by
replacing a charge for minority interest, which is not part of the profit margin
calculation, with a bonus expense which is part of the calculation.
Financial Services is the Company's newest business segment and will be
built on the recent acquisition of The Hemisphere Group Limited which provides
administrative services to offshore mutual funds and other companies. Financial
Services fees accounted for 8% of total Fee income for the quarter and 7% for
the nine months as opposed to 6% in both 1995 periods. Fees from Financial
Services increased in the quarter by 58% to $1.6 million and 48% for the nine
months to $4.5 million over the 1995 corresponding periods primarily as a result
of an increase in the number of mutual funds under management from 52 at
September 30, 1995 to 83 a year later. Renewal rates remained very high in this
business segment at 97% for the quarter and 93% for the first nine months of
1996. Profit margins improved somewhat in 1996 to 21% in the quarter and 18% in
the first nine months as opposed to 2% and 16% in the corresponding 1995
periods.
Legion Insurance Company and Legion Indemnity, the Company's policy-issuing
subsidiaries, added 26 new accounts in the third quarter as compared to 21 in
1995 bringing the total of new accounts added for the first nine months of 1996
to 81 as compared to 61 in 1995. Legion's renewal rate was 75% for the third
quarter and 72% for the nine months of 1996 as compared to 83% and 82% in the
corresponding 1995 periods. In California the Legion companies have added 6 new
accounts in 1996 as compared to 5 in 1995 and their renewal rate is unchanged at
74% for the nine months of 1996 and 1995. The Legion companies had 267 active
accounts at September 30, 1996 including 25 in California as compared to 228 at
September 30, 1995 of which 25 were in California.
10
<PAGE>
Gross premiums written decreased 27% to $61.1 million for the third quarter
and 0.2% to $218.6 million for the first nine months of 1996 as compared to
$84.1 million and $219.1 million in 1995. Premiums earned decreased 52% to $7.3
million in the third quarter and 14% to $35.0 million for the first nine months,
as compared to $15.3 million and $40.6 million in 1995. These decreases are
primarily due to a reversal of an overaccrual of gross written premium booked
earlier in the year and a significant drop in premium from assigned risk pools.
The Company passes on the financial result of premium from these assigned risk
pools to its clients so this drop has no direct effect on the Company's net
income and is offset by a corresponding 53% and 15% decrease in Total insurance
costs.
Gross investment income increased by $2.3 million and $5.9 million or 50.5%
and 42.1% to $6.9 million and $20.0 million in the quarter and nine months of
1996 over the corresponding 1995 periods as a result of an increase of 42.2% in
gross invested assets to $458.4 million. Net investment income, after adjusting
for investment income which is not included in the earnings of the Company,
increased by 59% and 47% in the quarter and nine months as a result of an
increase of 56.8% in net invested assets to $373.4 million offset by a decrease
in the yield on these assets to 5.9% from 6.6% in the first nine months of 1995.
The effective tax rate in the quarter was 16.4% and 18.7% in the first nine
months compared to 23.5% and 23.2% in the corresponding 1995 periods. This
decline was due primarily to the tax benefit derived from the exercise of
employee stock options and an increase in earnings outside of the United States.
(In thousands)
TOTAL EXPENSES
<TABLE>
<CAPTION>
Periods to September 30,
Third Quarter Nine Months
1996 1995 Increase 1996 1995 Increase
---- ---- -------- ---- ---- --------
<S> <C> <C> <C> <C> <C> <C>
Operating expenses $12,450 $9,430 32% $35,572 $26,713 33%
Total insurance costs 7,257 15,571 (53%) 35,065 41,431 (15%)
Interest expense 1,560 271 476% 4,632 617 651%
Other expenses 177 53 234% 462 155 198%
---------- ---------- --------- ---------
Total $21,444 $25,325 15% $75,731 $68,916 10%
======= ======= ======= =======
</TABLE>
Total expenses increased 15% and 10% to $21.4 million and $75.7 million for
the quarter and nine months as compared to $25.3 million and $68.9 million in
1995. Operating expenses increased by 32% and 33% to $12.4 million and $35.6
million for the quarter and nine months from $9.4 million and $26.7 million in
the corresponding 1995 periods as a result of the inclusion of PUC which added
$1.1 million or 12% to operating expenses in the third quarter and $3.3 million
or 12% for the nine months together with the growth in personnel and other
expenses stemming from the increased number of client accounts. The decreases in
Total insurance costs were the result of 52% and 14% decreases in Premiums
earned in the third quarter and first nine months of 1996 over the corresponding
1995 periods. The increase in Interest expense was attributable to the
Convertible Debentures issued October 30, 1995.
Income from continuing operations before income taxes increased by 10% and
13% in the quarter and nine months of 1996 to $11.3 million and $34.3 million as
compared to $10.3 million and $30.3 million in the corresponding 1995 periods as
shown in the following table.
(In thousands)
11
<PAGE>
<TABLE>
<CAPTION>
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES
Periods to September 30,
Third Quarter Nine Months
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Risk management income $8,857 71% $8,278 73% $27,206 72% $23,817 72%
Investment income * 3,543 29% 3,279 29% 10,452 28% 10,188 31%
Underwriting loss 31 -% (235) (2%) (58) -% (782) (3%)
------- ---- ------- ---- ------- --- ------- ----
Sub-total $12,431 100% $11,322 100% $37,600 100% $33,223 100%
==== ==== ==== ====
General corporate expenses (1,096) (1,028) (3,250) (2,922)
------- ------- ------- -------
Total $11,335 $10,294 $34,350 $30,301
======= ======= ======= =======
</TABLE>
* Includes Realized capital gains and losses and Interest expense.
The pre-tax profit margin on Risk management fee income, including General
corporate expenses was 39% and 41% for the quarter and nine months of 1996.
Excluding the results of PUC and Hemisphere pretax profit margins continued to
be strong at 43% for the third quarter and 45% for the first nine months of 1996
compared to 46% for both corresponding periods of 1995.
Financial Condition and Liquidity
Total assets increased to $1,535 million at September 30, 1996 as compared
to $1,380 million at December 31, 1995. Assets held in separate accounts which
are principally managed assets attributable to participants in the Company's IPC
Programs accounted for approximately 39% and 38% of Total assets at September
30, 1996 and December 31, 1995 respectively. Total Shareholders' equity
increased to $193 million at September 30, 1996 from $166 million at December
31, 1995 primarily as a result of Net income in the nine months offset by a
decrease in the unrealized gain on investments net of tax from $1.2 million at
December 31, 1995 to a loss of $2.2 million at September 30, 1996. Return on
equity was 20% for the third quarter and first nine months of 1996 compared to
20% and 22% in the corresponding 1995 periods.
12
<PAGE>
MUTUAL RISK MANAGEMENT LTD.
PART II - OTHER INFORMATION
Item 5. Other Information
The United States Internal Revenue Service (the "IRS") has commenced an
examination of the Company's calculation of "Related Party Insurance Income"
("RPII") for 1993 and 1994. The Company calculates RPII on behalf of certain of
its clients participating in its Insurance Profit Center Program in order to
provide those clients with information used in preparing their United States
income tax returns. The Company believes that its calculation of RPII was
materially correct in both years. In addition, any adjustment made by the IRS
would affect the Company's clients and not the Company directly.
The Company believes, however, that as a part of this examination the IRS
may question whether certain clients of the Insurance Profit Center Program
properly deducted all or a portion of the premium paid in connection with their
program. In general, the IRS has challenged the deductibility of premiums paid
to captive insurance companies in a series of rulings and cases since 1977. It
is not presently possible to determine whether the IRS will challenge any
deductions taken by the Company's clients or the outcome of any such challenge.
The Company believes that the particular fact situations of each of its
Insurance Profit Center clients are sufficiently diverse such that no general
determination can be made with respect to the appropriate tax treatment of the
premium paid by participants in the Company's programs.
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, 1996.
13
<PAGE>
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
Date: November, 13, 1996
14
<PAGE>
Exhibit 11
MUTUAL RISK MANAGEMENT LTD.
COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
September 30, September 30,
1996 1995 1996 1995
(in thousands except share and per share amounts)
<S> <C> <C> <C> <C>
Net income available to common shareholders $9,433 $7,696 $27,565 $22,757
====== ====== ======= =======
Weighted Average Common Shares
Common shares outstanding 18,248,477 17,744,501 18,123,989 17,699,345
---------- ---------- ---------- ----------
Common share equivalents associated with
options and Redeemable Common Shares:
Options 1,647,691 1,552,536 1,647,691 1,552,536
Redeemable Common Shares 468,584 468,584 468,584 468,584
---------- ---------- ---------- ----------
2,116,275 2,021,120 2,116,275 2,021,120
Common Shares purchased with
proceeds from options exercised (1,244,709) (1,078,211) (1,137,611) (1,217,904)
---------- ---------- ---------- ----------
871,566 942,909 978,664 803,216
---------- ---------- ---------- ----------
Total Weighted Average Common Shares 19,120,043 18,687,410 19,102,653 18,502,561
========== ========== ========== ==========
Earnings Per Common Share:
Net income available to common shareholders $0.49 $0.41 $1.44 $1.23
===== ===== ===== =====
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM MUTUAL RISK
MANAGEMENT LTD.'S FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 1996 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000826918
<NAME> MUTUAL RISK MANAGEMENT LTD.
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<EXCHANGE-RATE> 1
<DEBT-HELD-FOR-SALE> 383,593
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 0
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 383,593
<CASH> 72,198
<RECOVER-REINSURE> 278,996
<DEFERRED-ACQUISITION> 22,158
<TOTAL-ASSETS> 1,534,877
<POLICY-LOSSES> 331,094
<UNEARNED-PREMIUMS> 74,965
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 70,976
<NOTES-PAYABLE> 121,115
2,952
0
<COMMON> 183
<OTHER-SE> 193,136
<TOTAL-LIABILITY-AND-EQUITY> 1,534,877
35,007
<INVESTMENT-INCOME> 16,256
<INVESTMENT-GAINS> (1,172)
<OTHER-INCOME> 59,990
<BENEFITS> 18,680
<UNDERWRITING-AMORTIZATION> 16,385
<UNDERWRITING-OTHER> 40,666
<INCOME-PRETAX> 34,350
<INCOME-TAX> 6,413
<INCOME-CONTINUING> 27,937
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 27,565
<EPS-PRIMARY> 1.44
<EPS-DILUTED> 1.42
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
