<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, 1998.
or
[ ] Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934. For the transition period from _____________ to
_____________ .
Commission File Number 1-10760
MUTUAL RISK MANAGEMENT LTD.
- ---------------------------------------------------------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
BERMUDA NOT APPLICABLE
- ---------------------------------------------------------------------------
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
44 CHURCH STREET,
HAMILTON HM 12, BERMUDA
- ---------------------------------------------------------------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(441) 295-5688
- ---------------------------------------------------------------------------
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
NOT APPLICABLE
- ---------------------------------------------------------------------------
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED SINCE LAST
REPORT)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES [X] NO [ ]
The number of outstanding shares of the registrant's Common Stock, $0.01 par
value, as of June 30, 1998 was 39,676,789.
<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, 1998 and 1997 3
Consolidated Balance Sheets at June 30, 1998 (unaudited)
and December 31, 1997 4
Unaudited Consolidated Statements of Cash Flows for the
six month periods ended June 30, 1998 and 1997 5
Consolidated Statements of Shareholders' Equity at
June 30, 1998 (unaudited) and December 31, 1997 6
Notes to Unaudited Consolidated Financial Statements at
June 30, 1998 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL 8-12
CONDITION AND RESULTS OF OPERATIONS
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK 12
PART II. OTHER INFORMATION:
ITEM 2. CHANGES IN SECURITIES 13
ITEM 4. SUBMISSION OF MATTER TO A VOTE OF SECURITY HOLDERS 14
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 14
SIGNATURES 15
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
AND COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
QUARTER ENDED JUNE 30 SIX MONTHS ENDED JUNE 30
1998 1997 1998 1997
<S> <C> <C> <C> <C>
REVENUES
Fee income $32,802,055 $24,996,802 $64,357,565 $48,933,431
Premiums earned 20,877,189 17,230,635 49,806,383 35,183,242
Net investment income 7,061,419 6,985,856 15,008,712 12,973,768
Realized capital losses (944,594) (696,994) (1,157,246) (1,471,262)
Other income (losses) 174,803 (35,991) 43,500 48,281
-------------- -------------- -------------- -------------
TOTAL REVENUES 59,970,872 48,480,308 128,058,914 95,667,460
-------------- -------------- -------------- -------------
EXPENSES
Losses and loss expenses incurred 12,378,364 11,552,875 33,877,354 19,216,255
Acquisition costs 8,795,924 6,083,686 16,891,793 16,688,427
Operating expenses 20,112,944 15,115,134 39,784,989 29,245,468
Interest expense 1,657,702 1,618,880 3,332,384 3,210,030
Other expenses 436,953 261,184 800,136 497,607
-------------- -------------- -------------- -------------
TOTAL EXPENSES 43,381,887 34,631,759 94,686,656 68,857,787
-------------- -------------- -------------- -------------
INCOME BEFORE INCOME TAXES 16,588,985 13,848,549 33,372,258 26,809,673
Income taxes 2,052,379 2,639,725 4,304,218 4,915,825
-------------- -------------- -------------- -------------
NET INCOME 14,536,606 11,208,824 29,068,040 21,893,848
Preferred share dividends - 41,510 - 83,020
-------------- -------------- -------------- -------------
NET INCOME AVAILABLE TO
COMMON SHAREHOLDERS 14,536,606 11,167,314 29,068,040 21,810,828
Other comprehensive income, net of tax:
Unrealized (loss) gain on investments (332,609) 4,936,841 (561,079) 665,123
-------------- -------------- -------------- -------------
COMPREHENSIVE INCOME $14,203,997 $16,104,155 $28,506,961 $22,475,951
============== ============== ============== =============
EARNINGS PER COMMON SHARE:
Net Income available to Common Shareholders:
Basic EPS $0.37 $0.30 $0.75 $0.59
===== ===== ===== =====
Diluted EPS $0.33 $0.28 $0.67 $0.54
===== ===== ===== =====
Dividends per share $0.05 $0.05 $0.10 $0.10
===== ===== ===== =====
Weighted average number of Common
Shares outstanding - basic 39,377,171 37,301,998 38,665,550 37,235,452
========== ========== ========== ==========
Weighted average number of Common
Shares outstanding - diluted 48,238,301 46,485,300 48,002,757 46,343,738
========== ========== ========== ==========
</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,
1998 1997
(Unaudited)
ASSETS
<S> <C> <C>
Cash and cash equivalents $71,067,098 $78,938,489
Investments : Held in available for sale account at fair value
(Amortized cost $388,645,218; 1997 - $389,292,297) 393,670,999 395,143,321
-------------- --------------
Total marketable investments 464,738,097 474,081,810
Other investments 7,926,048 9,428,142
Investment income due and accrued 4,161,247 3,768,168
Accounts receivable 238,798,621 160,364,395
Reinsurance receivables 717,408,863 630,696,642
Deferred expenses 26,541,328 29,992,266
Prepaid reinsurance premiums 204,634,513 156,017,482
Fixed assets 16,433,916 13,373,439
Deferred tax benefit 6,538,328 4,607,251
Goodwill 46,972,058 32,915,932
Other assets 5,836,192 6,698,466
Assets held in separate accounts 689,677,210 625,216,561
-------------- --------------
Total Assets $2,429,666,421 $2,147,160,554
============== ==============
LIABILITIES, REDEEMABLE COMMON SHARES & SHAREHOLDERS' EQUITY
LIABILITIES
Reserve for losses and loss expenses $804,817,151 $715,699,133
Reserve for unearned premiums 240,845,125 188,388,666
Claims deposit liabilities 43,420,306 42,444,900
Accounts payable 168,679,830 135,145,220
Accrued expenses 7,630,824 7,398,174
Taxes payable 16,539,831 14,994,581
Prepaid fees 20,349,391 19,268,277
Debentures 126,186,000 128,711,279
Other liabilities 9,389,067 8,166,599
Liabilities related to separate accounts 689,677,210 625,216,561
-------------- --------------
Total Liabilities 2,127,534,735 1,885,433,390
-------------- --------------
REDEEMABLE COMMON SHARES
Common shares subject to redemption - 937,168 Common Shares
par value $0.01, redemption value $1.75 less subscription
loans receivable - $383,761, plus interest received) - 1,929,032
-------------- --------------
Total Redeemable Common Shares - 1,929,032
-------------- --------------
SHAREHOLDERS' EQUITY
Common Shares - Authorized 60,000,000 (par value $0.01)
Issued 39,676,789 (1997 - 37,876,883) 396,768 378,769
Additional paid-in capital 104,865,683 87,101,966
Other comprehensive income - unrealized gain on investments -
net of tax 3,474,318 4,035,397
Retained earnings 193,394,917 168,282,000
-------------- --------------
Total Shareholders' Equity 302,131,686 259,798,132
-------------- --------------
Total Liabilities, Redeemable Common Shares & Shareholders'
Equity $2,429,666,421 $2,147,160,554
============== ==============
See Accompanying Notes to Unaudited Consolidated Financial Statements
</TABLE>
4
<PAGE>
MUTUAL RISK MANAGEMENT LTD. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended June 30,
1998 1997
NET CASH FLOW FROM OPERATING ACTIVITIES
<S> <C> <C>
Net income $29,068,040 $21,893,848
Items not affecting cash:
Depreciation 2,651,794 1,765,564
Amortization of investments and net gain on sales 3,830,180 (897,130)
Amortization of Convertible Debentures 3,332,384 3,208,039
Deferred tax benefit (1,862,355) (1,060,070)
Other items 455,866 400,139
Net changes in non-cash balances relating to operations:
Accounts receivable (78,434,226) (10,105,441)
Reinsurance receivables (86,712,221) (51,145,036)
Investment income due and accrued (393,079) 1,515,418
Deferred expenses 3,450,938 (406,759)
Prepaid reinsurance premiums (48,617,031) (50,565,743)
Other assets 862,274 916,853
Reserve for losses and loss expenses 89,118,018 61,557,841
Prepaid fees 1,081,114 1,381,975
Reserve for unearned premium 52,456,459 57,517,728
Accounts payable 33,534,610 (8,859,015)
Taxes payable 1,545,250 2,607,026
Accrued expenses 232,650 (586,227)
Other liabilities 1,179,263 (794,159)
----------- -----------
NET CASH FLOW FROM OPERATING ACTIVITIES 6,779,928 28,344,851
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of investments - Available for sale 52,307,121 127,892,478
Proceeds from maturity of investments - Available for sale 26,622,831 14,897,981
Fixed assets purchased (5,715,245) (4,493,210)
Investments purchased - Available for sale (82,712,167) (142,614,629)
Investment in affiliates and other investments (355,307) (2,136,488)
Proceeds from sale of other investments 2,928,891 -
Goodwill purchased (9,690,246) (8,284,396)
Other items 5,309 15,509
----------- -----------
NET CASH FLOW APPLIED TO INVESTING ACTIVITIES (16,608,813) (14,722,755)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Loan repayment & interest received 388,683 20,377
Proceeds from shares issued 4,505,321 2,671,637
Claims deposit liabilities 975,406 (5,136,342)
Dividends paid (3,911,916) (3,516,504)
----------- -----------
NET CASH FLOW FROM (APPLIED TO) FINANCING ACTIVITIES 1,957,494 (5,960,832)
----------- -----------
Net (decrease) increase in cash and cash equivalents (7,871,391) 7,661,264
Cash and cash equivalents at beginning of period 78,938,489 52,242,353
----------- -----------
Cash and cash equivalents at end of period $71,067,098 $59,903,617
=========== ===========
Supplemental cash flow information:
Interest paid $0 $1,991
=========== ===========
Income taxes paid, net $4,063,973 $3,115,756
=========== ===========
</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
SIX MONTHS ENDED JUNE 30, 1998 (UNAUDITED)
- ------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Common Shares $ 378,769 $ 17,999 $ - $ - $ - $ - $ 396,768
Additional paid-in capital 87,101,966 17,763,717 - - - - 104,865,683
Unrealized gain
on investments 4,035,397 - (561,079) - - - 3,474,318
Retained earnings 168,282,000 - - 29,068,040 - (3,955,123) 193,394,917
------------ ----------- ---------- ----------- --------- ----------- ------------
TOTAL SHAREHOLDERS' EQUITY
AT JUNE 30, 1998 $259,798,132 $17,781,716 $ (561,079) $29,068,040 $ $(3,955,123) $302,131,686
============ =========== ========== =========== ========= =========== ============
YEAR ENDED DECEMBER 31, 1997 (3)
- ----------------------------------
Common Shares $ 371,265 $ 7,504 $ - $ - $ - $ - $ 378,769
Additional paid-in capital 79,812,287 7,289,679 - - - - 87,101,966
Unrealized gain
on investments 47,682 - 3,987,715 - - - 4,035,397
Retained earnings 127,759,654 - - 47,938,424 (104,929) (7,311,149) 168,282,000
------------ ----------- ---------- ----------- --------- ----------- ------------
TOTAL SHAREHOLDERS' EQUITY
AT DECEMBER 31, 1997 $207,990,888 $ 7,297,183 $3,987,715 $47,938,424 $(104,929) $(7,311,149) $259,798,132
============ =========== ========== =========== ========= =========== ============
</TABLE>
(1) Dividend per share amounts were $nil for the six months ended June 30, 1998
and $.04 for the year ended December 31, 1997.
(2) Dividend per share amounts were $.10 for the six months ended June 30,
1998 and $.19 for the year ended December 31, 1997 (restated for stock
split).
(3) Effective September 28, 1997 the Company effected a two-for-one stock split
recorded in the form of a stock dividend.
18,741,121 Common Shares were issued in respect of this split. Prior
periods have been restated.
See Accompanying Notes to Unaudited Consolidated Financial Statements
6
<PAGE>
MUTUAL RISK MANAGEMENT LTD. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
1. INTERIM ACCOUNTING POLICY
In the opinion of management of the Company, the accompanying unaudited
consolidated financial statements include all adjustments, consisting only of
normal recurring adjustments, necessary to present fairly the financial position
of the Company and the results of operations and cash flows for the six months
ended June 30, 1998 and 1997. Although the Company believes that the disclosure
in these financial statements is adequate to make the information presented not
misleading certain information and footnote information normally included in
financial statements prepared in accordance with generally accepted accounting
principles has been condensed or omitted pursuant to the rules and regulations
of the Securities and Exchange Commission. Results of operations for the six
months ended June 30, 1998 are not necessarily indicative of what operating
results may be for the full year.
2. COMPREHENSIVE INCOME
During the first quarter of 1998 the Company adopted Statement of Financial
Accounting Standards No. 130, Reporting Comprehensive Income. Comprehensive
income is defined as the change in equity of a business enterprise during a
period from transactions and other events and circumstances from nonowner
sources. It includes all changes in equity during a period except those
resulting from investments by owners and distributions to owners. Specifically,
the Company has reported the change in unrealized gains and losses on
investments as a deduction from or increase to Net income to arrive at
Comprehensive income of $14.2 million and $16.1 million for the second quarter
of 1998 and 1997, and $28.5 million and $22.5 million for the six months ended
June 30, 1998 and 1997. The movements in unrealized gains and losses are net of
tax of $.8 million and $(1.4) million in the second quarter of 1998 and 1997,
and $.1 million in each of the six months ended June 30, 1998 and 1997.
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, 1998 AND 1997
The results of operations for the quarter and six months ended June 30, 1998,
reflect a continuation of growth in Fee income and Net income due to both the
addition of new accounts and the growth of existing accounts. Net income
available to common shareholders amounted to $29.1 million or $0.67 per Common
Share on a diluted basis for the six months ended June 30, 1998 representing an
increase of 24% on a per share basis over the corresponding period as shown in
the tables below.
TABLE 1 EARNINGS PER SHARE
<TABLE>
<CAPTION>
SECOND QUARTER TO JUNE 30,
1998 1997
---------------------------- ----------------------------
($ thousands except per share data)
PER PER
COMMON SHARE COMMON SHARE
---------------- ----------------
BASIC DILUTED BASIC DILUTED
<S> <C> <C> <C> <C> <C> <C>
Net income excluding
realized capital losses $15,204 $ 0.39 $ 0.35 $11,779 $ 0.32 $ 0.29
Realized capital losses (a) (667) (0.02) (0.02) (612) (0.02) (0.01)
------- ------- ------- ------- ------- -------
Net income available to
Common Shareholders $14,537 $ 0.37 $ 0.33 $11,167 $ 0.30 $ 0.28
======= ======= ======= ======= ======= =======
Average number of
shares outstanding (000's) 39,377 48,238 37,302 46,485
------- ------- ------- -------
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDING JUNE 30,
1998 1997
---------------------------- ----------------------------
($ thousands except per share data)
PER PER
COMMON SHARE COMMON SHARE
---------------- ----------------
BASIC DILUTED BASIC DILUTED
<S> <C> <C> <C> <C> <C> <C>
Net income excluding
realized capital losses $29,851 $ 0.77 $ 0.69 $22,937 $ 0.62 $ 0.56
Realized capital losses (a) (783) (0.02) (0.02) (1,126) (0.03) (0.02)
------- ------- ------- ------- ------- -------
Net income available to
Common Shareholders $29,068 $ 0.75 $ 0.67 $21,811 $ 0.59 $ 0.54
======= ======= ======= ======= ======= =======
Average number of
shares outstanding (000's) 38,666 48,003 37,235 46,344
------- ------- ------- -------
</TABLE>
(a) Net of tax.
8
<PAGE>
Total revenues amounted to $60.0 million and $128.1 million for the quarter and
six months ended June 30, 1998 representing increases of 24% and 34% over the
corresponding 1997 periods. Table II shows the major components of Revenues for
these periods.
TABLE II - REVENUES
<TABLE>
<CAPTION>
PERIODS TO JUNE 30,
(IN THOUSANDS)
SECOND QUARTER SIX MONTHS
1998 1997 GROWTH 1998 1997 GROWTH
---- ---- ------ ---- ---- ------
<S> <C> <C> <C> <C> <C> <C>
Fee income $32,802 $24,997 31% $ 64,358 $48,933 32%
Premiums earned 20,877 17,230 21% 49,806 35,183 42%
Net investment income 7,062 6,986 1% 15,009 12,974 16%
Realized capital losses (945) (697) (36%) (1,157) (1,471) (21%)
Other income 175 (36) NM 43 48 (10%)
------- ------- -------- -------
$59,971 $48,480 24% $128,059 $95,667 34%
======= ======= ======== =======
</TABLE>
Fee income grew by 31% in the second quarter to $32.8 million, and 32% to $64.4
million for the first six months of 1998, as compared to $25.0 million and $48.9
million respectively in 1997. Pre-tax profit margins were 39% for the second
quarter of 1998 compared to 40% for 1997 and 38% for the first six months of
1998 as compared to 40% for the first six months of 1997.
SEGMENT ANALYSIS
The components of Fee income by business segment are illustrated in Table III.
TABLE III - FEE INCOME BY BUSINESS SEGMENT
<TABLE>
<CAPTION>
PERIODS TO JUNE 30,
SECOND QUARTER SIX MONTHS
1998 1997 GROWTH 1998 1997 GROWTH
---- ---- ------ ---- ---- ------
<S> <C> <C> <C> <C> <C> <C>
Program business $18,598 $10,585 76% $34,115 $19,753 73%
Corporate risk
management 9,143 10,777 (15%) 20,486 22,227 (8%)
Specialty brokerage 1,845 1,543 20% 3,639 3,131 16%
Financial services 3,216 2,092 54% 6,118 3,822 60%
------- ------- ------- -------
Total $32,802 $24,997 31% $64,358 $48,933 32%
======= ======= ======= =======
</TABLE>
9
<PAGE>
PROGRAM BUSINESS
Program Business, the Company's fastest growing business segment, 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 57% of total Fee Income in the quarter and 53% for the
first six months of 1998 compared to 43% and 40% in the corresponding 1997
periods. Fees from Program Business increased 76% in the second quarter to $18.6
million and by 73% to $34.1 million in the first six months as compared to $10.6
million and $19.8 million respectively in 1997. This resulted from the continued
expansion of this business segment both through the growth of existing programs
and the addition of new programs. Profit margins were 41% for the quarter and
39% for the six months of 1998, down from 37% for both periods of 1997.
Gross premiums written increased 56% to $436 million for the first six months of
1998 as compared to $281 million in 1997, primarily as a result of the growth
within the Program Business segment. Program Business generally involves greater
premium volume per unit than Corporate Risk Management business. Premiums earned
increased 21% to $20.9 million in the second quarter and 42% to $49.8 million in
the first six months of 1998, as compared to $17.2 million and $35.2 million in
the corresponding 1997 periods. These increases were also primarily due to the
growth within the Program Business segment.
CORPORATE RISK MANAGEMENT
Corporate Risk Management, the Company's original business segment, involves
providing services to businesses and associations seeking to insure a portion of
their risk in a loss sensitive Alternative Market structure. This segment
accounted for 28% of total Fee income in the second quarter and 32% for the
first six months of 1998, down from 43% and 46% in the corresponding 1997
periods. Corporate risk management fees decreased by 15% in the second quarter
to $9.1 million, compared to $10.8 million in the second quarter of 1997, and by
8% in the first six months to $20.5 million, compared to $22.2 million in 1997
as a result of a continuation of the extremely soft commercial insurance market.
Profit margins remained strong at 48% in the second quarter, as compared to 45%
in 1997, and 51% for the first six months of 1998, compared to 46% in 1997. The
Company added 9 new accounts in the second quarter compared to 2 in 1997 and 13
in the first six months compared to 19 in 1997. Renewal rates continued also to
reflect the soft market cycle at 71% for the second quarter compared to 62% in
1997 and 61% in the first six months compared to 74% in 1997.
SPECIALTY BROKERAGE
The Company's Specialty Brokerage business segment provides access to
Alternative Risk Transfer insurers and reinsurers in Bermuda and Europe. The
segment produced $1.8 million of total Fee income in the second quarter and $3.6
million in the first six months of 1998 representing 6% of total Fee income in
both the second quarter and the first six months. Specialty Brokerage fees grew
by 20% in the second quarter and 16% in the first six months of 1998 from $1.5
million and $3.1 million in the corresponding 1997 periods. Renewal rates
remained high in this segment at 89% for the first six months of 1998 as
compared to 82% in 1997. Profit margins decreased to 29% in the second quarter,
and to 26% for the first six months from 34% and 37% in the corresponding 1997
periods, primarily as a result of declining premium rates in Bermuda on new and
renewal business and the effects of a small startup operation in the U.S.
FINANCIAL SERVICES
Financial Services, the Company's newest business segment, is being built on the
acquisition of Hemisphere which provides administrative services to offshore
mutual funds and other companies. The segment accounted for 9% of total Fee
income for both the second quarter and six month periods of 1998. Fees from
Financial Services
10
<PAGE>
increased in the quarter by 54% to $3.2 million, over the 1997 corresponding
period, and by 60%, to $6.1 million, for the half year, primarily as a result of
an increase in the number of mutual funds under administration from 104 at June
30, 1997 to 163. Renewal rates remained very high in this business segment at
97% for the first six months of 1998 as compared to 96% in 1997. As previously
announced, profit margins were adversely affected in 1998 by a revised executive
incentive plan and staff expansion costs to service new business and declined to
2% in the second quarter and negative 2% for the first six months. Excluding the
effect of the revised executive incentive plan, the profit margins in this
segment would have been 21% for the quarter and 19% for the six months.
INVESTMENT INCOME
Gross investment income increased by $2.4 million or 17% to $17.0 million in the
first six months of 1998 over the corresponding 1997 period primarily as a
result of an increase in the yield on invested assets.
Net investment income increased by 1% to $7.1 million in the second quarter and
by 16% to $15.0 million for the first six months of 1998. Investment yields
declined in the second quarter by almost 1% from the first quarter on an
annualized basis primarily due to exceptionally good performance during the
first quarter of 1998 in the Company's Bermuda investment portfolio which was
not repeated in the second quarter.
TABLE IV - EXPENSES
<TABLE>
<CAPTION>
PERIODS TO JUNE 30,
SECOND QUARTER SIX MONTHS
1998 1997 INCREASE 1998 1997 INCREASE
---- ---- -------- ---- ---- --------
<S> <C> <C> <C> <C> <C> <C>
Operating expenses $20,113 $15,115 33% $39,785 $29,245 36%
Total insurance costs 21,174 17,637 20% 50,769 35,904 41%
Interest expense 1,658 1,619 2% 3,332 3,210 4%
Other expenses 437 261 67% 800 498 61%
------- ------- ------- -------
Total $43,382 $34,632 25% $94,687 $68,857 38%
======= ======= ======= =======
</TABLE>
Operating expenses increased 33% to $20.1 million for the quarter, compared to
$15.1 million in the second quarter of last year, and increased 36% to $39.8
million for the first six months of 1998, compared to $29.2 million in the first
six months of 1997. The increase in Operating expenses is attributable to recent
acquisitions, growth in personnel and other expenses resulting from the
increased business in each segment, as well as the costs associated with the
revised executive incentive plan in the Financial Services segment. Excluding
this revised executive bonus plan and the effect of acquisitions, the increase
in operating expenses would have been 25% for the quarter and 28% for the six
months over the corresponding 1997 periods.
The increases in Total insurance costs are the direct result of the increases in
premiums earned during the quarter and six months.
The effective tax rate was 12.4% in the quarter and 12.9% for the six months
compared to 19.1% and 18.3% in the corresponding 1997 periods. The decreases in
the quarterly and six month rates are due mainly to an increase in earnings
outside of the United States, a restructuring of the taxable entities in both
the United States and Europe and the tax benefit derived from the exercise of
employee stock options.
11
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Total assets increased to $2.4 billion at June 30, 1998 from $2.1 billion at
December 31, 1997. Assets held in separate accounts which are principally
managed assets attributable to participants in the Company's IPC Programs
accounted for approximately 28 % of Total assets at June 30, 1998 and 29% at
December 31, 1997. Total Shareholders' equity increased to $302 million at June
30, 1998 from $260 million at December 31, 1997 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 21% for the first six months of 1998
compared to 20% in the corresponding 1997 period.
The Company continues to produce a positive cash flow from operating activities
which is used to fund short term requirements. The decline in cash flows to $6.8
million from $28.3 million was mainly due to two factors. First, a large
account, which previously had been retained by the Company on a retrospectively
rated premium basis, was ceded in the second quarter to one of The IPC
Companies. Second, a number of accounts in the Company's Program Business
segment did not produce the expected levels of cash flow during the quarter.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
NOT APPLICABLE
12
<PAGE>
PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
During the quarter ended June 30, 1998, Registrant issued the following
securities in the following transactions which were not registered under the
Securities Act of 1933, as amended (the "Act"):
1. (a) Securities Sold: 99,539 Common Shares of the Registrant on June 8,
1998.
(b) No underwriters participated in the sale of the shares. The shares
were issued to each of the following:
<TABLE>
<CAPTION>
NAME NUMBER
OF SHARES
<S> <C>
Michael P. Miles 62,337
S. Alan Pcsolyar 19,787
Robert Hill 10,780
Diversified Insurance Industries, Inc. 1,272
Edward J. O'Hara, Jr. 1,157
James M. O'Hara, Jr. 1,157
William a. Graham Company 2,313
Matterhorn Insurance Agency, Inc. 736
</TABLE>
(c) The shares were issued at a deemed purchase price of $34.87 per share
(aggregate price $3,471,017), based upon the market value on the date
of issuance. The shares were issued as additional consideration in
connection with the acquisition by the Registrant of Professional
Underwriters Corp. pursuant to an Agreement and Plan of Reorganization
dated December 6, 1995.
(d) An exemption from registration under the Act was claimed based upon
Section 4(2) as a sale by an issuer not involving a public offering.
2. (a) Securities Sold: 48,586 Common Shares on May 14, 1998.
(b) No underwriters participated in the sale of the shares. The shares
were issued to each of the following:
Stephen Friedberg -- 24,293
Mark Ouimette -- 24,293
(c) The shares were issued at a deemed purchase price of $33.55 per share
(aggregate price $1,630,000), based upon the market value on the date
of issuance, in connection with the acquisition by the Registrant of
Livery Management Inc. pursuant to a Plan and Agreement of Merger
dated May 14, 1998
(d) Exemption from registration under the Act was claimed based upon
Section 4(2) as a sale by an issuer not involving a public offering.
13
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held it's 1998 Annual General Meeting of Shareholders on May 22,
1998. The following are the results of the voting on the various matters
considered at the meeting:
<TABLE>
<CAPTION>
(i) Election of Directors.
NOMINEE FOR WITHHELD
<S> <C> <C>
RICHARD G. TURNER 33,023,451 44,313
ALLAN W. FULKERSON 33,021,787 45,977
WILLIAM F. GALTNEY 31,764,777 1,302,987
JERRY S. ROSENBLOOM 33,016,457 51,307
<CAPTION>
(ii) Appointment of Ernst & Young as the Company's Auditors.
<S> <C>
FOR: 33,039,877
AGAINST: 6,638
ABSTAIN: 21,249
</TABLE>
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, 1998.
14
<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 11, 1998
15
<PAGE>
Exhibit 11
MUTUAL RISK MANAGEMENT LTD.
COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
QUARTER ENDED JUNE, 30 SIX MONTHS ENDED JUNE, 30
1998 1997 1998 1997
(IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)
BASIC
- -----
<S> <C> <C> <C> <C>
Income Available to Common Shareholders $14,537 $11,167 $29,068 $21,811
======= ======= ======= =======
Weighted Average Common Shares outstanding 39,377,171 37,301,998 38,665,550 37,235,452
---------- ---------- ---------- ----------
Basic earnings per Common Share $0.37 $0.30 $0.75 $0.59
===== ===== ===== =====
DILUTED
- -------
Income Available to Common Shareholders $ 14,537 $ 11,167 $ 29,068 $ 21,811
Debenture interest 1,658 1,618 3,333 3,208
----------- ----------- ----------- -----------
$ 16,195 $ 12,785 $ 32,401 $ 25,019
=========== =========== =========== ===========
Weighted Average Common Shares outstanding 39,377,171 37,301,998 38,665,550 37,235,452
----------- ----------- ----------- -----------
Common share equivalents associated with options, Redeemable Common Shares
and Convertible Debentures:
Options 4,065,366 3,895,036 4,065,366 3,895,036
Redeemable Common Shares 0 937,168 0 937,168
Convertible Debentures 6,666,881 6,978,800 6,666,881 6,978,800
----------- ----------- ----------- -----------
10,732,247 11,811,004 10,732,247 11,811,004
Common Shares purchased with proceeds from
Options exercised (1,871,117) (2,627,702) (1,395,040) (2,702,718)
----------- ----------- ----------- -----------
8,861,130 9,183,302 9,337,207 9,108,286
----------- ----------- ----------- -----------
Total Weighted Average Common Shares 48,238,301 46,485,300 48,002,757 46,343,738
=========== =========== =========== ===========
Diluted earnings per Common Share $0.33 $0.28 $0.67 $0.54
=========== =========== =========== ===========
</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, 1998 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-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<EXCHANGE-RATE> 1
<DEBT-HELD-FOR-SALE> 393,671
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 0
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 393,671
<CASH> 71,067
<RECOVER-REINSURE> 717,409
<DEFERRED-ACQUISITION> 26,541
<TOTAL-ASSETS> 2,429,666
<POLICY-LOSSES> 804,817
<UNEARNED-PREMIUMS> 240,845
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 43,420
<NOTES-PAYABLE> 126,186
0
0
<COMMON> 397
<OTHER-SE> 301,735
<TOTAL-LIABILITY-AND-EQUITY> 2,429,666
49,806
<INVESTMENT-INCOME> 15,009
<INVESTMENT-GAINS> (1,157)
<OTHER-INCOME> 43
<BENEFITS> 33,877
<UNDERWRITING-AMORTIZATION> 16,892
<UNDERWRITING-OTHER> 43,918
<INCOME-PRETAX> 33,372
<INCOME-TAX> 4,304
<INCOME-CONTINUING> 29,068
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 29,068
<EPS-PRIMARY> 0.75
<EPS-DILUTED> 0.67
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
