<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 June 30, 1997.
or
[_] Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934. For the transition period from _____________ to
_____________ .
Commission File Number 1-10760
MUTUAL RISK MANAGEMENT LTD.
- --------------------------------------------------------------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
BERMUDA NOT APPLICABLE
- --------------------------------------------------------------------------------
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
44 CHURCH STREET,
HAMILTON HM 12, BERMUDA
- --------------------------------------------------------------------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(441) 295-5688
- --------------------------------------------------------------------------------
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
NOT APPLICABLE
- --------------------------------------------------------------------------------
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED SINCE LAST
REPORT)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES [X} NO [ ]
The number of outstanding shares of the registrant's Common Stock, $0.01 par
value, as of June 30, 1997 was 19,166,562.
<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 quarter and
six month periods ended June 30, 1997 and 1996 3
Consolidated Balance Sheets at June 30, 1997 (unaudited)
and December 31, 1996 4
Unaudited Consolidated Statements of Cash Flows for the
six month periods ended June 30, 1997 and 1996 5
Consolidated Statements of Shareholders' Equity at
June 30, 1997 (unaudited) and December 31, 1996 6
Notes to Unaudited Consolidated Financial Statements at
June 30, 1997 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL 8-12
CONDITION AND RESULTS OF OPERATIONS
PART II. OTHER INFORMATION:
ITEM 4. SUBMISSION OF MATTER TO A VOTE OF SECURITY HOLDERS 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
<PAGE>
MUTUAL RISK MANAGEMENT LTD. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
QUARTER ENDED JUNE 30 SIX MONTHS ENDED JUNE 30
1997 1996 1997 1996
<S> <C> <C> <C> <C>
REVENUES
Fee income $24,996,802 $19,800,110 $48,933,431 $39,466,858
Premiums earned 17,230,635 15,964,575 35,183,242 27,718,549
Net investment income 6,985,856 5,402,974 12,973,768 10,592,653
Realized capital losses (696,994) (616,901) (1,471,262) (611,933)
Other (losses) income (35,991) 57,952 48,281 135,388
----------- ----------- ----------- -----------
TOTAL REVENUES 48,480,308 40,608,710 95,667,460 77,301,515
----------- ----------- ----------- -----------
EXPENSES
Losses and loss expenses incurred 11,552,875 8,969,099 19,216,255 16,109,023
Acquisition costs 6,083,686 7,027,929 16,688,427 11,699,053
Operating expenses 15,115,134 11,871,721 29,245,468 23,122,061
Interest expense 1,618,880 1,549,474 3,210,030 3,071,647
Other expenses 261,184 176,957 497,607 285,188
----------- ----------- ----------- -----------
TOTAL EXPENSES 34,631,759 29,595,180 68,857,787 54,286,972
----------- ----------- ----------- -----------
INCOME FROM CONTINUING
OPERATIONS BEFORE INCOME
TAXES 13,848,549 11,013,530 26,809,673 23,014,543
Income taxes 2,639,725 1,947,674 4,915,825 4,559,896
----------- ----------- ----------- -----------
INCOME FROM CONTINUING
OPERATIONS 11,208,824 9,065,856 21,893,848 18,454,647
Minority interest 0 (33,869) 0 (241,055)
----------- ----------- ----------- -----------
NET INCOME 11,208,824 9,031,987 21,893,848 18,213,592
Preferred share dividends 41,510 40,587 83,020 81,175
----------- ----------- ----------- -----------
NET INCOME AVAILABLE TO
COMMON SHAREHOLDERS $11,167,314 $ 8,991,400 $21,810,828 $18,132,417
=========== =========== =========== ===========
EARNINGS PER COMMON SHARE
Primary EPS $0.57 $0.47 $1.11 $0.95
=========== =========== =========== ===========
Fully diluted EPS $0.55 $0.47 $1.08 $0.94
=========== =========== =========== ===========
Dividends per share $0.09 $0.08 $0.18 $0.15
=========== =========== =========== ===========
Weighted average number of Common
Shares outstanding 19,753,250 19,146,510 19,682,469 19,093,232
----------- ----------- ----------- -----------
</TABLE>
See Accompanying Notes to Unaudited Consolidated Financial Statements
3
<PAGE>
MUTUAL RISK MANAGEMENT LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
(UNAUDITED)
ASSETS
<S> <C> <C>
Cash and cash equivalents $ 59,903,617 $ 52,242,353
Investments : Held in available for
sale account at fair value
(Amortized cost $400,592,407; 1996 -
$399,871,107) 401,508,018 400,191,211
-------------- --------------
TOTAL MARKETABLE INVESTMENTS 461,411,635 452,433,564
Other investments 5,153,454 2,967,829
Investment income due and accrued 3,460,727 4,976,145
Accounts receivable 134,061,918 123,956,477
Reinsurance receivables 401,462,742 350,317,706
Deferred expenses 21,019,474 20,612,715
Prepaid reinsurance premiums 124,153,663 73,587,920
Fixed assets 12,102,466 9,382,000
Deferred tax benefit 4,491,258 3,361,571
Goodwill 22,783,576 14,956,786
Other assets 4,489,324 5,406,177
Assets held in separate accounts 616,858,097 576,711,687
-------------- --------------
TOTAL ASSETS $1,811,448,334 $1,638,670,577
============== ==============
LIABILITIES, REDEEMABLE PREFERRED &
COMMON SHARES & SHAREHOLDERS' EQUITY
LIABILITIES
Reserve for losses and loss expenses $ 480,533,334 $ 418,975,493
Reserve for unearned premiums 151,258,816 93,741,088
Claims deposit liabilities 40,552,451 45,688,793
Accounts payable 124,406,061 133,265,076
Accrued expenses 5,122,059 5,708,286
Taxes payable 11,868,711 9,261,685
Prepaid fees 14,613,443 13,231,468
Debentures 125,419,030 122,210,991
Other liabilities 6,640,953 7,422,743
Liabilities related to separate 616,858,097 576,711,687
accounts -------------- --------------
TOTAL LIABILITIES 1,577,272,955 1,426,217,310
-------------- --------------
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) 1,530,921 1,510,544
-------------- --------------
TOTAL REDEEMABLE PREFERRED & COMMON 4,482,756 4,462,379
SHARES -------------- --------------
SHAREHOLDERS' EQUITY
Common Shares - Authorized 60,000,000
(par value $0.01)
Issued 18,697,978 (1996 -
18,563,269) 186,980 185,633
Additional paid-in capital 82,668,209 79,997,919
Unrealized (loss) gain on investments
- net of tax 712,805 47,682
Retained earnings 146,124,629 127,759,654
-------------- --------------
TOTAL SHAREHOLDERS' EQUITY 229,692,623 207,990,888
-------------- --------------
TOTAL LIABILITIES, REDEEMABLE
PREFERRED & COMMON SHARES
& SHAREHOLDERS' EQUITY $1,811,448,334 $1,638,670,577
============== ==============
</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>
SIX MONTHS ENDED JUNE 30,
1997 1996
<S> <C> <C>
NET CASH FLOW FROM OPERATING ACTIVITIES
Net income $ 21,893,848 $ 18,213,592
Items not affecting cash:
Depreciation 1,765,564 1,314,567
Amortization of investments and net
gain on sales (897,130) (166,645)
Amortization of Convertible
Debentures 3,208,039 3,046,023
Deferred tax benefit (1,060,070) 2,070,997
Other items 400,139 134,655
Net changes in non-cash balances
relating to operations:
Accounts receivable (10,105,441) (6,901,673)
Reinsurance receivables (51,145,036) (11,827,951)
Investment income due and accrued 1,515,418 (1,160,656)
Deferred expenses (406,759) 199,377
Prepaid reinsurance premiums (50,565,743) (28,192,938)
Other assets 916,853 (2,695,277)
Reserve for losses and loss expenses 61,557,841 9,878,533
Prepaid fees 1,381,975 198,191
Reserve for unearned premium 57,517,728 26,621,937
Accounts payable (8,859,015) 9,743,765
Taxes payable 2,607,026 5,959,712
Accrued expenses (586,227) (1,324,005)
Other liabilities (794,159) 1,252,165
------------- -------------
NET CASH FLOW FROM OPERATING ACTIVITIES 28,344,851 26,364,369
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of investments -
Available for sale 127,892,478 50,024,043
Proceeds from maturity of
investments - Available for sale 14,897,981 20,099,427
Fixed assets purchased (4,493,210) (3,122,094)
Investments purchased - Available
for sale (142,614,629) (104,679,468)
Other investments (2,136,488) (676,049)
Goodwill purchased (8,284,396) (4,826,310)
Swap expense 0 (2,743,546)
Other items 15,509 48,379
------------- -------------
NET CASH FLOW APPLIED TO INVESTING (14,722,755) (45,875,618)
ACTIVITIES ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Loan repaid 0 (61,918)
Loan repayment & interest received 20,377 199,559
Proceeds from shares issued 2,671,637 5,120,507
Claims deposit liabilities (5,136,342) 386,428
Dividends paid (3,156,504) (4,725,816)
------------- -------------
NET CASH FLOW (APPLIED TO) FROM
FINANCING ACTIVITIES
(5,960,832) 918,760
------------- -------------
Net increase (decrease) in cash and
cash equivalents 7,661,264 (18,592,489)
Cash and cash equivalents at
beginning of period 52,242,353 79,669,981
------------- -------------
CASH AND CASH EQUIVALENTS AT END OF
PERIOD $ 59,903,617 $ 61,077,492
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 1,991 $ 25,624
============= =============
Income taxes paid, net $ 3,115,756 $ 3,246,992
============= =============
</TABLE>
See Accompanying Notes to Unaudited Consolidated Financial Statements
5
<PAGE>
MUTUAL RISK MANAGEMENT LTD. AND SUBSIDIARIES
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>
SIX MONTHS ENDED JUNE 30,
1997 (UNAUDITED)
- ----------------
Common Shares $ 185,633 $ 1,347 $ - $ - $ - $ - $ 186,980
Additional paid-in capital 79,997,919 2,670,290 - - - - 82,668,209
Unrealized gain
on investments 47,682 - 665,123 - - - 712,805
Retained earnings 127,759,654 - - 21,893,848 (83,020) (3,445,853) 146,124,629
------------ ----------- ----------- ----------- -------- ----------- ------------
TOTAL SHAREHOLDERS' EQUITY
AT JUNE 30, 1997 $207,990,888 $ 2,671,637 $ 665,123 $21,893,848 $ (83,020) $(3,445,853) $229,692,623
============ =========== =========== =========== ========= =========== ============
YEAR ENDED DECEMBER 31,
1996
- ---------------------------
Common Shares $ 178,051 $ 7,582 $ - $ - $ - $ - $ 185,633
Additional paid-in capital 65,396,652 14,601,267 - - - - 79,997,919
Unrealized gain
on investments 1,154,823 - (1,107,141) - - - 47,682
Retained earnings 98,773,622 - - 37,198,137 (166,041) (8,046,064) 127,759,654
------------ ----------- ----------- ----------- --------- ----------- ------------
TOTAL SHAREHOLDERS' EQUITY
AT DECEMBER 31, 1996 $165,503,148 $14,608,849 $(1,107,141) $37,198,137 $(166,041) $(8,046,064) $207,990,888
============ =========== =========== =========== ========= =========== ============
</TABLE>
(1) Dividend per share amounts were $.02 for the six months ended June 30, 1997
and $.06 for the year ended December 31, 1996.
(2) Dividend per share amounts were $.18 for the six months ended June 30, 1997
and $.32 for the year ended December 31, 1996.
See Accompanying Notes to Unaudited Consolidated Financial Statements
6
<PAGE>
MUTUAL RISK MANAGEMENT LTD. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
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 six months
ended June 30, 1997 and 1996. 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 six
months ended June 30, 1997 are not necessarily indicative of what operating
results may be for the full year.
2. NEW ACCOUNTING PRONOUNCEMENT
In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, Earnings per Share, which is required to be adopted for interim and
annual periods ending after December 15, 1997. At that time, the Company will
be required to change the method currently used to compute earnings per share
and to restate all prior periods. Under the new requirements, primary earnings
per share will be replaced by basic earnings per share, which will exclude the
dilutive effect of stock options. If implemented in the accompanying interim
financial statements, basic earnings per share would exceed primary earnings per
share for the quarters and six months ended June 30, 1997 and June 30, 1996 by
$.03, $.06, $.02 and $.05 respectively. Statement No. 128 has no impact on the
calculation of fully diluted earnings per share for these periods.
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS FOR THE QUARTER AND SIX MONTHS ENDED JUNE 30, 1997 AND
1996
The results of operations for the quarter and six months ended June 30, 1997,
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 Small
Business Underwriters (ASBU@) for the first time in 1997. Net income available
to common shareholders amounted to $21.8 million or $1.08 per Common Share for
the six months ended June 30, 1997 on a fully diluted basis representing an
increase of 15% over the corresponding period as shown in the tables below.
<TABLE>
<CAPTION>
SECOND QUARTER TO JUNE 30,
1997 1996
--------------------------- ------------------------------
($ 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 $11,779 $ 0.60 $ 0.58 $ 9,488 $ 0.50 $ 0.49
Realized capital losses (a) (612) (0.03) (0.03) (497) (0.03) (0.02)
------- ------- ------- ------- ------- ------------
Net income available to
Common Shareholders $11,167 $ 0.57 $ 0.55 $ 8,991 $ 0.47 $ 0.47
======= ======= ======= ======= ======= ============
Average number of
shares outstanding (000's) 19,753 23,243 19,147 22,636
------- ------- ------- ------------
<CAPTION>
SIX MONTHS ENDING JUNE 30,
1997 1996
---------------------------- ---------------------------
($ 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 $22,937 $ 1.17 $ 1.13 $18,628 $ 0.98 $ 0.96
Realized capital losses (a) (1,126) (0.06) (0.05) (496) (0.03) (0.02)
------- ------- ------- ------- ------- ------------
Net income available to
Common Shareholders $21,811 $ 1.11 $ 1.08 $18,132 $ 0.95 $ 0.94
======= ======= ======= ======= ======= ============
Average number of
shares outstanding (000's) 19,682 23,172 19,093 22,583
------- ------- ------- ------------
</TABLE>
(a) Net of tax.
Total revenues amounted to $48.5 million and $95.7 million for the quarter and
six months ended June 30, 1997 representing an increase of 19% and 24% over the
corresponding 1996 periods. The following table shows the major components of
Revenues for these periods.
8
<PAGE>
<TABLE>
<CAPTION>
(In thousands)
TOTAL REVENUES
PERIODS TO JUNE 30,
SECOND QUARTER SIX MONTHS
1997 1996 INCREASE 1997 1996 INCREASE
-------- -------- ---------- -------- -------- ------------
<S> <C> <C> <C> <C> <C> <C>
Fee income $24,997 $19,800 26% $48,933 $39,467 24%
Premiums earned 17,230 15,965 8% 35,183 27,719 27%
Net investment income 6,986 5,403 29% 12,974 10,593 22%
Realized capital losses (697) (617) (13%) (1,471) (612) (140%)
Other income (36) 58 (162%) 48 135 (64%)
------- ------- ---- ------- ------- ----
$48,480 $40,609 19% $95,667 $77,302 24%
======= ======= ==== ======= ======= ====
</TABLE>
Total Fee income increased 24% to $48.9 million for the first six months of
1997 as compared to $39.5 million in 1996. Pre-tax profit margins were 40% for
the second quarter of both 1997 and 1996 and 40% for the first six months of
1997 as compared to 41% for the first six months of 1996. Excluding the
underwriting management portion of the Program Business segment and the
Financial Services segment, which generally have lower margins, pre-tax profit
margins were 43% for the quarter as compared to 44% in 1996 and 44% for the half
year as compared to 45% in 1996. The components of Fee income are illustrated
by business segment in the following table:
<TABLE>
<CAPTION>
(In thousands)
FEE INCOME BY BUSINESS SEGMENT
PERIODS TO JUNE 30,
SECOND QUARTER SIX MONTHS
1997 1996 INCREASE 1997 1996 INCREASE
------- ------- ---------- ------- ------- ------------
<S> <C> <C> <C> <C> <C> <C>
Corporate risk
management fees $10,777 $12,629 (15%) $22,227 $25,229 (12%)
Program business fees 10,585 4,252 149% 19,753 8,386 136%
Specialty brokerage fees 1,543 1,504 3% 3,131 2,929 7%
Financial services fees 2,092 1,415 48% 3,822 2,923 31%
------- ------- --- ------- ------- ---
Total $24,997 $19,800 26% $48,933 $39,467 24%
======= ======= === ======= ======= ===
</TABLE>
Program Business, the fastest growing segment, involves the Company
replacing traditional insurers and acting as a conduit between producers of
specialty books of business and reinsurers wishing to write that business.
Program Business accounted for 40% of total Fee income for the first six months
of 1997 compared to 22% in the corresponding 1996 period. Program Business fees
increased by 149% in the second quarter to $10.6 million compared to $4.3
million in the second quarter of 1996 and by 136% to $19.8 million in the first
six months as compared to $8.4 million in 1996 as a result of the continued
expansion in this business and the acquisition of Small Business Underwriters
(ASBU@) on February 1, 1997. Profit margins, excluding underwriting management,
were 47% for the second quarter and the first six months of both 1997 and 1996.
Including underwriting management, profit margins were 40% for both the quarter
and six months of 1997, up from 37% and 39% respectively in 1996. In July 1997
the Company acquired American Policyholders Insurance Company (AAPI@), a
Massachusetts insurance company licensed in most states. The Company intends to
change API=s name to Villanova Insurance Company (AVillanova@). Villanova will
provide the Company with an additional admitted insurance company to accommodate
the growth in Program Business.
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, which accounted for 46% of total Fee income for the first six months of
1997 down from 64% in the
9
<PAGE>
corresponding 1996 period, has been the most affected by the extremely soft
commercial insurance market cycle. Corporate risk management fees decreased by
15% in the second quarter to $10.8 million compared to $12.6 million in the
second quarter of 1996 and by 12% in the first six months to $22.2 million
compared to $25.2 million in 1996 as a result of a continuation of the soft
market and declines in workers= compensation rates. Profit margins decreased to
42% in the quarter as compared to 44% in 1996 and 43% for the first six months
of 1997 compared to 45% in 1996.
Legion Insurance Company and Legion Indemnity, the Company=s policy-issuing
subsidiaries, added 29 new accounts in the second quarter of 1997 bringing the
total new accounts added during the first half of 1997 to 64 as compared to 24
in the 1996 second quarter and 55 for the first six months of 1996. Legion=s
renewal rate was 80% for the first six months of 1997 as compared to 71% in the
corresponding 1996 period. In California these companies added 11 new accounts
in the first six months of 1997 compared to 3 in 1996 and their renewal rate
increased to 87% as compared to 67% in the first six months of 1996. There were
317 active accounts at June 30, 1997, including 36 in California, as compared to
257 at June 30, 1996, of which 22 were in California.
Gross premiums written increased 78% to $280.5 million for the first six
months of 1997 as compared to $157.5 million in 1996 primarily as a result of
the number of Program Business accounts written. Program Business generally
involves greater premium volume per unit than Corporate Risk Management
business. Premiums earned increased 27% to $35.2 million in the first six
months of 1997, as compared to $27.7 million in 1996, this increase was also
primarily due to the expansion in the Program Business segment.
The Company's Specialty Brokerage business segment provides access to
Alternative Risk Transfer insurers and reinsurers in Bermuda and Europe.
Specialty Brokerage produced $1.5 million of total Fee income in the second
quarter and $3.1 million in the first six months representing 6% of total Fee
income. Specialty Brokerage fees grew by only 7% in the first six months of
1997 from $2.9 million in the corresponding 1996 period reflecting declines in
premium on renewal policies and the fact that the 1996 comparatives include one
significant account that was a one-time opportunity and could not be renewed.
Renewal rates remained high in this segment at 82% for the first six months of
1997 as compared to 85% in 1996. Profit margins decreased to 34% in the second
quarter from 37% for the 1996 second quarter and to 37% in the first six months
down from 41% in 1996 primarily as a result of the inclusion of the one large
account in the 1996 comparatives.
Financial Services, the Company=s newest business segment, is being built
on the 1996 acquisition of The Hemisphere Group Limited (AHemisphere@) which
provides administrative services to offshore mutual funds and other companies.
Financial Services fees accounted for 8% of total Fee income for the first six
months of 1997 as opposed to 7% in the corresponding 1996 period. Fees from
Financial Services increased in the quarter by 48% to $2.1 million over the 1996
corresponding period and by 31% to $3.8 million for the half year primarily as a
result of an increase in the number of mutual funds under administration from 76
at June 30, 1996 to 104. Renewal rates remained very high in this business
segment at 96% for the first six months of 1997 as compared to 97% in 1996.
Profit margins improved in 1997 to 30% in the quarter and 27% for the first six
months up from 15% and 17% respectively in 1996. The U.S. budget passed in
August 1997 contains provisions which rescind certain of the so called Aten
commandments@ that stated rules as to when an investment fund will be considered
offshore for U.S. tax purposes. One of the rescinded rules required that the
administration of the fund be offshore. The change in these rules could
adversely affect Hemisphere=s fund administration business.
In July 1997, the Company acquired a twenty percent interest in Tremont
Advisers, Inc. (ATremont@) through the purchase of common shares for a
consideration of $3.1 million. Tremont is a manager of mutual funds and a
consultant to the hedge fund industry. In a related venture, Tremont and the
Company will jointly develop offshore variable annuity and life insurance
products primarily utilising offshore hedge funds as the underlying investment.
Independently of the joint venture, the Company has also formed MRM Life Ltd. in
Bermuda to offer these products utilising investments other than hedge funds.
These new annuity and life products will be introduced during the second half of
1997 but no significant fee income is expected to be earned until 1998.
Gross investment income increased by $1.5 million or 11% to $14.6 million
in the first six months of 1997 over the corresponding 1996 period as a result
of an increase of 3% in gross invested assets to $460.5 million and an increase
10
<PAGE>
in the yield on these assets. Net investment income, after adjusting for
investment income which is not included in the earnings of the Company,
increased by 22% in the first six months as a result of an increase of 12% in
net invested assets to $402.3 million and an increase in the yield on these
assets to 6.6% from 6.0% in the first six months of 1996.
<TABLE>
<CAPTION>
(In thousands)
TOTAL EXPENSES
PERIODS TO JUNE 30,
SECOND QUARTER SIX MONTHS
1997 1996 INCREASE 1997 1996 INCREASE
------- ------- --------- ------- ------- -----------
<S> <C> <C> <C> <C> <C> <C>
Operating expenses $15,115 $11,872 27% $29,245 $23,122 26%
Total insurance costs 17,637 15,997 10% 35,905 27,808 29%
Interest expense 1,619 1,549 4% 3,210 3,072 5%
Other expenses 261 177 48% 498 285 74%
------- ------- -- ------- ------- --
Total $34,632 $29,595 17% $68,858 $54,287 27%
======= ======= == ======= ======= ==
</TABLE>
Total expenses increased 27% to $68.9 million for the first six months as
compared to $54.3 million in 1996. Operating expenses increased by 26% to $29.2
million for the first six months from $23.1 million in the corresponding 1996
period partly as a result of the inclusion of SBU, for the first time in 1997,
which added $1.2 million or 5% of the total increase in Operating expenses in
the first six months together with the growth in personnel and other expenses
stemming from the increased business in each segment. The increase in Total
insurance costs was the result of a 27% increase in Premiums earned in the first
six months of 1997 over the corresponding 1996 period.
The effective tax rate was 19.1% in the quarter and 18.3% for the six
months compared to 17.7% and 19.8% in the corresponding 1996 periods. The
increase in the quarterly rate is due mainly to the Company=s decreased holding
of tax exempt municipal bonds, offset by an increase in earnings outside of the
United States. The decline in the six month rate 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 offset by a decrease in the Company=s
holding of tax exempt municipal bonds.
FINANCIAL CONDITION AND LIQUIDITY
Total assets increased to $1.8 billion at June 30, 1997 from $1.6 billion at
December 31, 1996. Assets held in separate accounts which are principally
managed assets attributable to participants in the Company's IPC Programs
accounted for approximately 34% of Total assets at June 30, 1997 and 35% at
December 31, 1996. Total Shareholders' equity increased to $229.7 million at
June 30, 1997 from $208.0 million at December 31, 1996 primarily as a result of
Net income in the six months and the issuance of Common Shares offset by the
payment of dividends. Return on equity was 20% for the first six months of 1997
compared to 21% in the corresponding 1996 period.
The Company continues to produce a positive cash flow from operating
activities which is used to fund short term requirements.
The Financial Accounting Standards Board has recently issued the following
Statements of Financial Accounting Standards ("SFAS"):
(a) SFAS No. 129 - Disclosure of Information about Capital Structure
(b) SFAS No. 130 - Reporting Comprehensive Income
(c) SFAS No. 131 - Disclosures about Segments of an Enterprise and Related
Information.
11
<PAGE>
SFAS No. 129 is effective for periods ending after December 15, 1997 and SFAS
No. 130 and No. 131 are effective for periods beginning after December 15, 1997.
The Company is currently evaluating the effects of these statements on its
results and disclosures.
12
<PAGE>
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held it's 1997 Annual General Meeting of Shareholders on May 21,
1997. The following are the results of the voting on the various matters
considered at the meeting:
(i) Election of Directors.
NOMINEE FOR WITHHELD
ROGER E. DAILEY 15,266,072 32,042
DAVID J. DOYLE 15,265,471 32,643
ARTHUR E. ENGEL 14,009,054 1,289,060
JOSEPH D. SARGENT 15,254,410 43,704
NORMAN L. ROSENTHAL 15,262,407 35,707
(ii) Appointment of Ernst & Young as the Company's Auditors.
FOR: 15,272,677
AGAINST: 6,348
ABSTAIN: 19,089
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 June 30, 1997.
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
SENIOR VICE PRESIDENT, CHIEF FINANCIAL OFFICER
AND AUTHORIZED SIGNATORY
DATE: AUGUST 13, 1997
14
<PAGE>
Exhibit 11
MUTUAL RISK MANAGEMENT LTD.
COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
QUARTER ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
1997 1996 1997 1996
(IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
PRIMARY
- -------
Net income available to common shareholders $ 11,167 $ 8,991 $ 21,811 $ 18,132
=========== =========== ========== ============
Weighted Average Common Shares
Common shares outstanding 18,650,999 18,213,404 18,617,72 618,061,019
----------- ----------- ---------- ------------
Common share equivalents associated with
options and Redeemable Common Shares:
Options 1,947,518 1,665,741 1,947,518 1,665,741
Redeemable Common Shares 468,584 468,584 468,584 468,584
----------- ----------- ---------- ------------
2,416,102 2,134,325 2,416,102 2,134,325
Common Shares purchased with
proceeds from options exercised (1,313,851) (1,201,219) (1,351,359) (1,102,112)
----------- ----------- ---------- ------------
1,102,251 933,106 1,064,743 1,032,213
----------- ----------- ---------- ------------
Total Weighted Average Common Shares 19,753,250 19,146,510 19,682,469 19,093,232
=========== =========== ========== ============
Primary Earnings Per Common Share:
Net income available to common shareholders $0.57 $0.47 $1.11 $0.95
===== ===== ===== =====
FULLY DILUTED
- -------------
Net income available to common shareholders $11,167 $8,991 $21,811 $18,132
Debenture interest 1,618 1,536 3,208 3,046
------- ------ ------- -------
$12,785 $10,527 $25,019 $21,178
======= ======= ======= =======
Weighted Average Common Shares
Common shares outstanding 18,650,999 18,213,404 18,617,726 18,061,019
----------- ----------- ---------- ------------
Common share equivalents associated with
options, Redeemable Common Shares
and Convertible Debentures:
Options 1,947,518 1,665,741 1,947,518 1,665,741
Redeemable Common Shares 468,584 468,584 468,584 468,584
Convertible Debentures 3,489,400 3,489,400 3,489,400 3,489,400
----------- ----------- ---------- ------------
5,905,502 5,623,725 5,905,502 5,623,725
Common Shares purchased with
proceeds from options exercised (1,313,851) (1,201,219) (1,351,359) (1,102,112)
----------- ----------- ---------- ------------
4,591,651 4,422,506 4,554,143 4,521,613
----------- ----------- ---------- ------------
Total Weighted Average Common Shares 23,242,650 22,635,910 23,171,869 22,582,632
=========== =========== ========== ============
Fully Diluted Earnings Per Common Share:
Net income available to common shareholders $0.55 $0.47 $1.08 $0.94
===== ===== ===== =====
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
MUTUAL RISK MANAGEMENT LTD.'S FINANCIAL STATEMENTS AS OF JUNE 30,
1997 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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<EXCHANGE-RATE> 1
<DEBT-HELD-FOR-SALE> 401,508
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 0
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 401,508
<CASH> 59,904
<RECOVER-REINSURE> 401,463
<DEFERRED-ACQUISITION> 21,019
<TOTAL-ASSETS> 1,811,448
<POLICY-LOSSES> 480,533
<UNEARNED-PREMIUMS> 151,259
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 40,552
<NOTES-PAYABLE> 125,419
2,952
0
<COMMON> 187
<OTHER-SE> 229,506
<TOTAL-LIABILITY-AND-EQUITY> 1,811,448
35,183
<INVESTMENT-INCOME> 12,974
<INVESTMENT-GAINS> (1,471)
<OTHER-INCOME> 48,981
<BENEFITS> 19,216
<UNDERWRITING-AMORTIZATION> 16,688
<UNDERWRITING-OTHER> 32,954
<INCOME-PRETAX> 26,810
<INCOME-TAX> 4,916
<INCOME-CONTINUING> 21,894
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 21,811
<EPS-PRIMARY> 1.11
<EPS-DILUTED> 8
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
