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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1998
or
[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File No. 1-10760
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MUTUAL RISK MANAGEMENT LTD.
(Exact name of registrant as specified in its charter)
Bermuda Not Applicable
(Jurisdiction of Incorporation) (I.R.S. Employer Identification No.)
44 Church Street
Hamilton HM 12 Bermuda
(441) 295-5688
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices).
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Securities registered pursuant to Section 12(b) of the Act:
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<CAPTION>
Name of Each Exchange
Title of Each Class on Which Registered
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Common Shares, $.01 par value............. New York Stock Exchange
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Securities registered pursuant to Section 12(g) of the Act: None
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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 .
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference into Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
At March 22, 1999 registrant had outstanding 41,889,466 Common Shares, the
only class of registrant's common stock outstanding, and the aggregate market
value of voting stock held by non-affiliates at such date was $913,841,490
(based on the closing price of such Common Shares of $39 1/8 on March 22,
1999, as reported on the New York Stock Exchange, Inc., composite listings).
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of registrant's Proxy Circular relating to its Annual
General Meeting of Shareholders scheduled to be held on May 19, 1999, are
incorporated by reference into Part III of this report.
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MUTUAL RISK MANAGEMENT LTD
TABLE OF CONTENTS
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Item Page
---- ----
PART I
<C> <S> <C>
1. Business ......................................................... 3
2. Properties ....................................................... 14
3. Legal Proceedings ................................................ 14
4. Submission of Matters to Security Holders......................... 14
PART II
5. Market for Common Shares and Related Stockholder Matters.......... 16
6. Selected Consolidated Financial Data.............................. 17
7. Management's Discussion and Analysis of Financial Condition and
Results of Operations ............................................ 18
7A. Quantitative and Qualitative Disclosures about Market Risk........ 26
8. Financial Statements and Supplementary Data ...................... 26
9. Changes and Disagreements with Accountants on Accounting
Disclosure........................................................ 26
PART III
10. Management ....................................................... 27
11. Executive Compensation ........................................... 27
12. Security Ownership of Certain Beneficial Owners and Management ... 27
13. Certain Transactions.............................................. 27
PART IV
14. Exhibits, Financial Statement, Schedules and Reports on Form 8K .. 28
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PART I
ITEM 1. BUSINESS
The Company
Mutual Risk Management Ltd. (the "Company") is a Bermuda company
incorporated in 1977. The Company's principal business is the provision of
risk management services to clients seeking an alternative to traditional
commercial insurance for certain of their risk exposures. Risk management
involves a process of analyzing loss exposures and developing risk financing
methods to reduce exposure to loss and to control associated costs. The use of
such loss financing methods in place of traditional insurance has become known
as the alternative market and involves clients participating in a significant
amount of their loss exposure and transferring only the unpredictable excess
risk to insurers. The benefits of such alternative market techniques typically
include lower and more stable costs, greater control over the client's risk
management program and an increase in the emphasis within the client's
organization on loss prevention and loss control.
The Company's insurance business can be divided into three segments:
Program Business: The fastest growing of the Company's business segments,
involves the Company replacing traditional insurers as
the conduit between producers of specialty books of
business and reinsurers wishing to write that business.
The Company provides a wide range of services for a fee
and the underwriting profit is shared between the
producer and the reinsurers.
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.
Specialty Brokerage:
This business segment provides access to Alternative Risk
Transfer insurers and reinsurers in Bermuda and Europe.
The two components of this segment are MRM Hancock
Limited, which provides access to London and European
reinsurers, and Park International Limited which brokers
to the Bermuda market.
In addition to its insurance industry services, in 1996 the Company entered
the financial services business through its acquisition of The Hemisphere
Group Limited ("Hemisphere"). Hemisphere, which is based in Bermuda, provides
administrative and other services to offshore mutual funds and other
companies.
Forward-Looking Statements
This Report may contain certain forward-looking statements within the
meaning of Section 27A of the Securities Act and Section 21E of the Securities
Exchange Act of 1934, as amended, and is subject to the safe-harbor created by
such sections. Such forward-looking statements concern the Company's
operations, economic performance and financial condition, including in
particular its acquisitions and their integration into the Company's existing
operations. Such statements involve known and unknown risks, uncertainties and
other factors that may cause the actual results, performance or achievements
of the Company, or industry results, to be materially different from any
future results, performance or achievements expressed or implied by such
forward-looking statements. Such factors include, among others, the following:
general economic and business conditions; changes in customer preferences;
competition; changes in technology; the integration of acquisitions; changes
in business strategy; the indebtedness of the Company; quality of management,
business abilities and judgment of the Company's personnel; the availability,
terms and deployment of capital; and various other factors referenced in this
report. Such forward-looking statements may be made as of the date of this
Report, and the Company assumes no obligation to update the forward-looking
statements or to update the reasons why actual results could differ from those
projected in the forward-looking statements.
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Insurance Services
The Company's principal source of profits is fees received for the various
insurance and other services provided to clients in connection with the
Company's programs. The structure of the Company's programs places most of the
underwriting risk with the Company's client. For regulatory and other reasons,
however, the Company is required to assume a limited amount of risk. The
Company seeks to limit this risk to the minimum level feasible. This approach
to risk distinguishes the Company from typical property/casualty companies
which assume significant levels of underwriting risk as part of their
business. The Company does not seek to earn income from underwriting risk, but
rather from fees for services provided. The Company markets its services
exclusively to retail insurance brokers and consultants representing clients.
The services offered to clients in connection with the Company's products
typically include the following:
[_]Design and implementation of a risk financing program.
[_]Issuance of an insurance policy by one of the Company's wholly-owned,
licensed insurance companies, Legion Insurance Company ("Legion"),
Legion Indemnity Ltd. ("Legion Indemnity") and Villanova Insurance
Company ("Villanova"). In December 1997, A.M. Best Company extended the
Legion Insurance Group rating of "A" (excellent) to include Villanova.
[_]Use of the Company's Insurance Profit Center Program or IPC Program as
the vehicle within which to fund a chosen portion of the client's risk
or, alternatively, the management by the Company of the client's captive
insurance company.
[_]Brokering to unaffiliated reinsurers the excess risk which the client
chooses not to fund and in some cases arranging for insurers, other than
Legion, to issue the original insurance policy.
[_]Coordinating the purchase, on behalf of the client, of loss prevention,
loss control and claims administration services from unaffiliated
providers.
The Company's major product is the IPC Program. This program allows the
client to retain a significant portion of its own loss exposure without the
administrative costs and capital commitment necessary to establish and operate
its own captive insurance company. The actual amount of underwriting profit
and investment income produced by the client's IPC Program is returned to the
client, creating a direct incentive for it to engage in loss prevention and
loss control in order to reduce the overall cost of financing its loss
exposures. The fastest growing segment of the Company's business is its
Program Business, in which third-parties other than the insured, typically the
broker and re-insurers, finance a portion of the insured's risk and
participate in any underwriting profit or loss. For a discussion of the
Company's Corporate Risk Management and Program Business segments, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Lines of Business
The Company's programs can be utilized by clients for many lines of
insurance. In 1998, approximately 57% of the Company's fee income was derived
from workers' compensation insurance. During the 1980's and through 1993,
workers' compensation presented many employers with substantial problems due
to cost increases and the limited availability of commercial coverage in
certain states. Workers' compensation costs accelerated rapidly due to (a) the
general level of medical cost inflation, since medical costs generally amount
to 40% or more of all workers' compensation costs; (b) an increase in the
number of workers' compensation claims which resulted in litigation; (c) a
broadening of injuries which are considered to be work-related; and (d) an
increase in state mandated benefit levels. Since 1993 workers' compensation
reforms have been occurring in a number of states, most notably in California,
which have addressed many of these issues in the last five years. A number of
markets have seen a significant decline in premium rates due to new capacity
entering the market subsequent to these reforms. These lower premium rates
reduce the fees that the Company earns on its programs as its fees are based
on premiums. Notwithstanding the changes in the market, workers' compensation
continues to be suitable for the alternative market because many states set
rates or enforce minimum rate laws which prohibit the commercial insurance
market from offering premium discounts to insureds with favorable loss
experience. This causes such clients to seek an alternative method of funding
their workers' compensation exposure which
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rewards their status as a preferred risk. In addition, workers' compensation
involves relatively frequent, predictable levels of loss which are the type
favored by clients for alternative market insurance programs.
In addition to workers' compensation, the Company's programs have been
utilized for other casualty insurance lines such as medical malpractice,
general liability, commercial auto liability and auto physical damage.
At December 31, 1998, the Company had a total of 886 employees.
Marketing--CRS
The Company's wholly owned subsidiary, Commonwealth Risk Services, L.P.
("CRS"), markets the Company's services in the United States, Canada and
Europe to insurance brokers and consultants representing clients. CRS also
designs risk financing programs for potential clients in conjunction with
their insurance brokers and consultants. Through offices in Philadelphia,
California and London, CRS markets these services using direct mail,
advertising, seminars and trade and industry conventions.
CRS seeks to become actively involved with the insurance broker in the
presentation of the Company's services to potential clients and maintains a
direct relationship with the client after the sale. CRS assists brokers in the
design and implementation of risk financing programs, although the extent of
this involvement depends on the size, experience and resources of the
particular broker. Members of the CRS staff frequently provide supporting
promotional materials and assist in the preparation of financial analyses
comparing the net present value, after-tax cost of an IPC Program with
alternative approaches. Representatives of CRS seek to be present at meetings
with potential clients to explain how the IPC Program works, including how
reinsurance is handled, how funds are invested, and how underwriting profits
and investment income are returned.
The Insurance Profit Center Program
In 1980 the Company developed a program which provides clients with a
facility for managing their insurance exposures. This type of structure is
frequently referred to as a "rent-a-captive" although the facility has many
significant differences from a captive. The facility was designed to provide
certain of the benefits available through captive insurance companies without
the administrative cost and capital commitment necessary to establish and
operate a captive insurance company. Since the IPC Program involves a
retention of risk by the client, it encourages the implementation of risk
management and risk reduction programs to lower the losses incurred.
The IPC Program is appropriate for corporations and associations which
generate $.75 million or more in annual premiums. Typically clients which use
an IPC Program are profitable and have adequate working capital but generate
insufficient premium to consider or are otherwise unsuitable for a wholly-
owned captive. During 1998, the Company significantly increased the number of
agency IPC Programs in which an insurance agent or broker, rather than the
insured, becomes the preferred shareholder and participates in the profit or
loss on the program. These types of programs are referred to as "Program
Business."
Return on the program is a function of the loss experience of the insured.
The principal benefits of the IPC Program to the client are:
[_]A reduction of the net present value, after-tax cost of financing the
client's risks.
[_]A lower commitment of funds than would be necessary to capitalize and
maintain a captive insurance company.
[_]Access to commercial reinsurance markets for the client's excess risk.
[_]Program structure that is customized, flexible and relatively easily
implemented.
The Company operates the IPC Program from offices in Bermuda. The Bermuda
office is involved in designing, negotiating and administering IPC Programs
and reviews each prospective client, negotiates the
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shareholder's agreement with the client and the reinsurance agreement with
Legion or other policy-issuing company. One of the Company's foreign insurance
companies (the "IPC Companies") receives and invests premiums, administers
policy claims, establishes reserves, provides quarterly financial reports to
clients and, ultimately, returns the underwriting profit and investment income
to the client as preferred share dividends.
The funds of each IPC Program are invested by a subsidiary, Mutual Finance
Ltd. The assets are invested using the services of professional investment
advisors.
Neither Legion nor the IPC Companies underwrite risk in the traditional
sense. Rather, their function is to ensure that substantially all of the
underwriting risk of the client is either retained by the client in the IPC
Program (or its captive insurance company) or transferred to unaffiliated
reinsurers. In the event that the IPC Company sustains an underwriting loss on
a program which exceeds that program's investment income, the IPC Company
recovers this loss from the client. Since the client has generally
collateralized the Company for at least the difference between the funds
available in that client's IPC Program and the level of currently expected
losses by cash or a letter of credit, the Company should not be affected by
the bankruptcy of a client. In the event, however, that the IPC Company is
unable to recover the full amount of its loss from the cash collateral or the
letter of credit, the IPC Company would seek to recover from the client
pursuant to the indemnity provisions of the shareholder's agreement. As of
December 31, 1998 the Company maintained a provision of $6.5 million, against
losses which may occur on programs where it may be forced to rely solely on
the clients indemnity. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
In addition to programs for corporate clients, the Company also offers an
association IPC Program which allows smaller insureds collectively to take
advantage of the financial benefits available to larger corporate insureds
individually.
The Legion Companies
Legion is domiciled in Pennsylvania and is admitted in 50 states of the
United States, the District of Columbia and Puerto Rico. Legion Indemnity is
domiciled in Illinois, is an admitted insurer in Illinois, and an authorized
surplus lines insurer in 42 states, the District of Columbia, Guam and the
Virgin Islands. Villanova is domiciled in Pennsylvania and is admitted in 42
states. (Legion, Legion Indemnity and Villanova are collectively referred to
herein as "Legion" or the "Legion Companies"). In the Company's Corporate Risk
Management business segment, one of the Legion Companies issues an insurance
policy to the client, which either fulfills a legal requirement that the
client have a policy from a licensed insurer or satisfies a business need the
client may have for such an admitted policy. The client and Legion determine
the level of exposure the client wishes to retain and Legion transfers the
specific excess risk and the aggregate excess risk beyond that retention to
unaffiliated reinsurers. Legion then reinsures the client's chosen retention
to one of the IPC Companies or to the client's captive insurance company. In
certain cases Legion may issue a large deductible type policy in which the
client pays claims up to its chosen retention directly. Payments within the
deductible are covered by a deductible reimbursement policy issued by one of
the IPC Companies. In either type of policy Legion retains only a relatively
small portion of the risk on each program for its own account.
In Program Business, Legion replaces traditional insurers as the conduit
between producers of specialty books of business and reinsurers wishing to
write that business. In this line of business, the reinsurer replaces the
insured as the risk-bearing entity. As with the Corporate Risk Management line
of business, Legion negotiates the reinsurance, and performs certain
administrative services in connection with the program. Program Business
differs from the Corporate Risk Management line of business in that policy
underwriting, issuance and premium collection are usually provided by the
general agent, rather than Legion.
Legion analyzes each program prior to inception, arranges for quota share or
specific and aggregate excess reinsurance coverage through its reinsurance
treaties, collects the premium from the client, prepares accounting cessions
for the reinsurers, audits the final premium, supervises the independent
claims adjuster, collects claim reimbursements from reinsurers, and performs
certain other related services for each account.
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For its Corporate Risk Management business, Legion has established several
reinsurance treaties to transfer the specific and aggregate excess risk above
the client's retention. The client's retention is negotiated separately for
each program and reflects the amount of risk the client wishes to retain on a
program on both a specific and aggregate loss occurrence basis. For its
Program Business, Legion has established several reinsurance treaties, both on
a quota share and a specific and aggregate excess of loss occurrence basis.
Legion currently places substantially all of the reinsurance in both lines of
business with unaffiliated commercial reinsurers whose ratings from A.M. Best
Company are A- or higher. At December 31, 1998, the largest reinsurance
recoverables from unaffiliated commercial reinsurers were $177.1 million from
Transatlantic Reinsurance Co., a participant on several layers of specific and
aggregate reinsurance with respect to the Company's Program Business and
substantially all of the Company's American Psychiatric Association program,
$88.9 million from First Excess and Reinsurance Corp., and $78.7 million from
Allianz Life Insurance Company of North America which are both reinsurers on
several current treaties. Transatlantic is rated "A++", First Excess is rated
"A" and Allianz is rated "A+" by A.M. Best Company.
Through its reinsurance arrangements, Legion places significant amounts of
reinsurance with a variety of unaffiliated reinsurance companies. In order to
maintain an acceptable level of net written premium for regulatory purposes,
Legion seeks to develop a level of net written premium which will not involve
a significant degree of underwriting risk. In most Legion programs, Legion
retains liability for a specified amount of losses equal to at least 10% of
gross written premium. The level of losses retained by Legion are set at a
level such that no significant underwriting profit or loss should occur.
In order to take regulatory credit for reinsurance ceded to one of the IPC
Companies or to a captive insurance company, Legion must receive a letter of
credit for the amount of the insurance reserves ceded, since such companies
are not licensed reinsurers in any state of the United States. The letter of
credit must be issued or confirmed by a bank which is a member of the U.S.
Federal Reserve System. At December 31, 1998, the Legion Companies had $308
million of such letters of credit, of which $264 million was supplied by the
IPC Companies. Legion, Legion Indemnity and Villanova are also subject to
other regulation by the insurance departments of Pennsylvania and Illinois and
other states where they are licensed. See "Regulatory Considerations."
As of December 31, 1998, the Legion Companies had 380 accounts, they wrote
gross statutory premiums of $788 million during 1998 and had statutory capital
of $227.7 million at December 31, 1998. See "Management's Discussion and
Analysis of Financial Conditions and Results of Operations."
Specialty Brokerage
In 1991, the Company acquired a 51% interest in a newly-formed London
reinsurance brokerage firm, MRM Hancock Limited ("MRM Hancock"). MRM Hancock
specializes in the placement of reinsurance for captive insurance companies in
the London market, including Lloyds of London. The remaining 49% of MRM
Hancock was owned by management of MRM Hancock and General International Ltd.,
a Bermuda insurance subsidiary of General Motors Corporation. During 1996, the
Company acquired the minority interests in MRM Hancock and it is now a wholly
owned subsidiary.
In July 1992, the Company acquired 100% of Park International Limited, a
Bermuda broker specializing in placing coverage with Bermuda-based excess
liability and corporate officers and directors liability carriers. In 1998,
the Company acquired H&H Reinsurance Brokers, Ltd., a Bermuda-based specialty
reinsurance broker that was part of the IAS Group.
Financial Services
In July 1996, the Company acquired The Hemisphere Group Limited
("Hemisphere"), a Bermuda financial services company. Hemisphere, which has
been in business since 1980, has three active subsidiary operations in Bermuda
providing company management, corporate secretarial, fund administration and
trust management
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services. It also has a wholly-owned Cayman Islands subsidiary. With a total
staff of 133 Hemisphere had approximately 195 mutual fund clients as of
December 31, 1998. In addition Hemisphere administers investment holding
companies, trading companies and trusts. Hemisphere has formed a network of
professional relationships in the major financial centers of the world and
these are the source for significant ongoing referrals of business. During
1997, Hemisphere expanded its trust operations by the acquisition of Hugo
Trust Company ("Hugo") based in Jersey in the Channel Islands. Hugo will
provide a base to develop European-based trust business. Hugo had revenues of
$2.8 million in 1998.
In January 1997, the Company incorporated MRM Life Ltd. in Bermuda to
provide life insurance and related products, including annuities and variable
annuities. The Company began marketing these products in the fourth quarter of
1997.
Competition
The Company's insurance services compete with self-insurance plans, captive
insurance companies managed by others and a variety of risk financing
insurance policies. The Company believes that the IPC Program is the largest
independent alternative market facility that is not affiliated with either a
major retail insurance broker or a major insurance company. However, the
Company faces significant competition in marketing the IPC Program from other
risk management programs offered by U.S. insurance companies, from captive
insurance companies for large insureds, and from rent-a-captives organized by
large insurance companies and brokers.
The primary basis for competition among these alternative risk management
vehicles varies with the financial and insurance needs and resources of each
potential insurance buyer. The principal factors that are considered include
an analysis of the net present-value, after-tax cost of financing the buyer's
expected level of losses, the amount of premium and collateral required, the
attachment point of excess coverage provided in the event losses exceed
expected levels as well as cash flow and tax planning considerations and the
expected quality and consistency of the services to be provided. The Company
believes that for insureds with financial characteristics and loss experience
lending themselves to an IPC Program, the IPC Companies compete effectively
with other risk financing alternatives.
In the present soft insurance market, characterized by excess capital and
competitive pricing, it is generally easier for the Company to structure
programs because of the availability and pricing of reinsurance, but more
difficult to attract potential participants and sell programs because of
competition. In a hard market, such as that experienced during 1985-1987, it
is more difficult to structure programs due to the high price and
unavailability of reinsurance, but the Company experiences less competition in
attracting clients and selling programs.
Regulatory Considerations
The Bermuda-based IPC Companies, Mutual Indemnity Ltd., Mutual Indemnity
(Bermuda) Ltd. and Mutual Indemnity (US) Ltd., are subject to regulation under
the Bermuda Companies Act 1981 and, as insurers, under the Bermuda Insurance
Act 1978 (as amended by the Insurance Amendment Act 1995) and the Regulations
promulgated thereunder and are required, amongst other things, to meet and
maintain certain standards of solvency, to file periodic reports in accordance
with Bermuda statutory accounting rules, to produce annual audited financial
statements and to maintain a minimum level of statutory capital and surplus.
In general, the regulation of insurers in Bermuda relies heavily upon the
auditors, directors and managers of the Bermuda insurer, each of which must
certify that the insurer meets the solvency and capital requirements of the
Bermuda Insurance Act 1978. Mutual Indemnity (Barbados) Ltd. and Mutual
Indemnity (Dublin) Ltd. are subject to similar regulation in Barbados and
Ireland, respectively.
The Legion Companies are subject to regulation and supervision by the
insurance regulatory authorities of the various states in which they conduct
business. Such regulation is intended primarily for the benefit of
policyholders. Legion Insurance is admitted in 50 states, the District of
Columbia and Puerto Rico, and is subject
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to regulation in each jurisdiction. Legion Indemnity is admitted in Illinois,
and is authorized in 42 states, the District of Columbia, Guam and the Virgin
Islands, as a surplus lines insurer. Legion Indemnity is regulated in
Illinois, but is generally not subject to regulation in those states where it
acts as a surplus lines insurer. Villanova is admitted in 42 states and is
subject to regulation in each jurisdiction. State insurance departments have
broad regulatory, supervisory and administrative powers. These powers relate
primarily to the standards of solvency which must be met and maintained; the
licensing of insurers and their agents; the approval of rates and forms and
policies used; the nature of, and limitations on, insurers' investments; the
form and content of periodic and other reports required to be filed; and the
establishment of reserves required to be maintained for unearned premiums,
losses and loss expenses or other purposes.
The Legion Companies are also subject to state laws regulating insurance
holding companies. Under these laws, state insurance departments may examine
Legion at any time, require disclosure of material transactions by the holding
company and require prior approval of certain "extraordinary" transactions,
such as dividends from the insurance subsidiary to the holding company, or
purchases of certain amounts of the insurance subsidiary's capital stock.
These laws also generally require approval of changes of control which are
usually triggered by the direct or indirect acquisition of 10% or more of the
insurer.
Most states require all admitted insurance companies to participate in their
respective guaranty funds, which cover certain claims against insolvent
insurers. Solvent insurers licensed in such states are required to cover the
losses paid on behalf of insolvent insurers by the guaranty funds and are
generally subject to annual assessments in that state by the guaranty fund to
cover such losses. Certain states also require licensed insurance companies to
participate in assigned risk plans which provide coverage for workers'
compensation, automobile insurance and other lines for insureds which, for
various reasons, cannot otherwise obtain insurance in the open market. This
participation may take the form of reinsuring a portion of a pool of such
policies, or the direct issuance of policies to insureds. Generally, Legion
participates as a pool reinsurer, or assigns to other companies the direct
policy issuance obligations. The calculation of an insurer's participation in
such plans is usually based on the amount of premium for that type of coverage
that was written by the insurer on a voluntary basis in a prior year. Assigned
risk pools tend to produce losses, which result in assessments to insurers
writing the same lines on a voluntary basis. Legion also pays a fee to
carriers assuming Legion's direct policy issuance obligations. For each
program Legion writes, Legion estimates the amount of assigned risk and
guaranty fund assessments that Legion will incur as a result of having written
that program. If that estimate proves to be inadequate, Legion is entitled
under its reinsurance agreements with the IPC Companies to recover from the
reinsurer the amount of such assessments in excess of the estimate. The IPC
Companies then are entitled under the terms of the shareholders agreement to
recover this excess from the client. However, the IPC Companies are generally
only able to collateralize this obligation up to the amount of the estimated
assessments.
The National Association of Insurance Commissioners ("NAIC") has established
the Insurance Regulatory Information System ("IRIS") to assist state insurance
departments in their regulation and oversight of insurance companies domiciled
or operating in their respective states. IRIS established a set of twelve
financial ratios and specifies "unusual values" for each ratio. Companies
reporting four or more unusual values on the IRIS ratios may expect inquiries
from individual state insurance commissioners concerning specific aspects of
the insurer's financial position. As of December 31, 1998, Legion Insurance
Company had two unusual values--"Agent's Balances to Surplus" and "Liabilities
to Liquid Assets." The Agent's Balance to Surplus is related to premium growth
on program business. The Liabilities to Liquid Asset value is the direct
result of receiving $75 million in premium prior to receiving policy level
detail to record the written premium. This inflates the ratio as it represents
funds awaiting application to actual policies. Legion Indemnity had one
unusual value for "Agent's Balances to Surplus" for the reasons mentioned
above. Villanova Insurance Company had no unusual values.
The NAIC has also adopted a Risk Based Capital for Insurers Model Act (the
"Risk Based Capital Model Act"). The Risk Based Capital Model Act sets forth a
risk based capital formula for property and casualty insurers. The formula
measures minimum capital and surplus needs based on the risk characteristics
of the company's products and investment portfolio. The formula is part of
each company's annual financial statement
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filings, and is to be used as a tool to identify weakly capitalized companies.
In those states having enacted the Risk Based Capital Model Act, companies
having capital and surplus greater than the minimum required by the formula,
but less than a specified multiple of the minimum may be subject to additional
regulatory scrutiny from domiciliary state insurance departments. To date,
nearly all states have adopted this model act. At December 31, 1998, Legion's
combined risk-based capital was $225.5 million and the threshold requiring the
least regulatory involvement was $78.5 million. Therefore, Legion's capital
exceeds all requirements of the Risk Based Capital Model Act.
In reaction to increasing rates for and decreasing availability of workers'
compensation insurance starting in the early 1990's, many states began to
enact reforms designed to reduce the cost of workers' compensation insurance,
principally through a reduction in benefits or an increase in efficiencies in
the system. In California, a reform package was enacted in 1993 providing, in
part, a reduction of premium rates, an increase in the standard necessary to
prove "stress"-related work injuries, group-self insurance for employers and
the repeal of the minimum rate law effective January 1, 1995. In Florida, the
assigned risk plan was abolished, and replaced by a joint underwriting
authority. Other states have enacted or are considering similar reforms.
Workers' compensation reform, to the extent it reduces premiums and introduces
relative stability in the traditional workers' compensation market, may reduce
the appeal of alternative market products such as those offered by the
Company. This is apparent in California where workers' compensation rates have
declined by more than 50% since mid-1993 while benefit levels actually
increased. This will inevitably lead to significant losses for those
traditional carriers who are writing this business. A number of these carriers
have recently filed for significant rate increases. However, because of open
rating in California, actual rates charged by carriers may vary significantly
from filed base rates due to extensive use of credits.
Legion is permitted to pay dividends only from statutory earned surplus.
Subject to this limitation, the maximum amount of dividends that it is able to
pay in any twelve-month period will be the greater of statutory net income in
the preceding year or 10% of statutory surplus. Based on 1998 results, the
maximum dividend Legion will be permitted to pay in 1999 is $23.6 million.
Losses and Loss Reserves
The Company establishes reserves for losses and loss adjustment expenses
related to claims which have been reported on the basis of the evaluations of
independent claims adjusters under the supervision of Legion's claims staff.
In addition, reserves are established for losses which have occurred but have
not yet been reported and for adverse development of reserves on reported
losses by the Company on a quarterly basis. The estimate of claims arising for
accidents which have not yet been reported is based upon the Company's and the
insurance industry's experience together with statistical information with
respect to the probable number and nature of such claims.
Gross loss reserves of $121.0 million and $95.0 million at December 31, 1998
and 1997 have been discounted by $36.2 million and $28.1 million,
respectively, assuming interest rates of 6% for medical malpractice reserves
and 4% for excess workers' compensation reserves based on the recommended rate
under Pennsylvania law. These reserves are also discounted in the Company's
regulatory filings. In 1993 the Company adopted SFAS 113 and reclassified
substantially all of its net retained medical malpractice reserves as claims
deposit liabilities. On a net basis, therefore, the only discounted reserves
are those relating to the Company's share of the excess reinsurance coverage
provided in connection with each Legion program. After reinsurance, the net
effect of this discounting was to increase net income after tax for 1998 and
1997 by $.9 million and $.1 million, respectively. This discounting reduced
net loss reserves on the Consolidated Balance Sheets by $4.7 million and $3.7
million at December 31, 1998 and 1997, respectively.
Subsequent to 1989, loss development has been generally favorable. The
deficiencies in earlier years primarily relate to the loss development on the
Company's share of the aggregate excess coverage provided in connection with
each Legion program. Estimation of reserves for losses and loss adjustment
expenses on such aggregate excess coverage is more difficult than on primary
insurance coverage because coverage does not attach
10
<PAGE>
until the underlying aggregate retention is exhausted. Commencing in 1990, the
Company (a) reduced its net retention on this coverage; (b) generally
increased its minimum attachment points; and (c) increased pricing so as to
reduce the underwriting loss on this business in the future.
The following table sets forth a reconciliation of beginning and ending
reserves for losses and loss adjustment expenses:
<TABLE>
<CAPTION>
Year ended December 31,
------------------------------
1998 1997(2) 1996(2)
---------- -------- --------
(In thousands)
<S> <C> <C> <C>
Gross reserves for losses and loss adjustment
expenses,
beginning of year............................ $ 716,461 $419,737 $315,689
Recoverable from reinsurers................... 630,697 350,318 256,678
---------- -------- --------
Net reserves for losses and loss adjustment
expenses,
beginning of year ........................... 85,764 69,419 59,011
Less: Other net reserves(1)................... (3,542) (1,008) (1,008)
---------- -------- --------
82,222 68,411 58,003
Provision for losses and loss adjustment
expenses for claims occurring in:
Current year................................ 74,476 50,301 35,456
Prior years................................. 3,782 (444) (3,021)
---------- -------- --------
Total losses and loss adjustment expenses
incurred..................................... 78,258 49,857 32,435
---------- -------- --------
Payments for losses and loss adjustment
expenses for claims occurring in:
Current year................................ (15,039) (10,850) (11,072)
Prior years................................. (44,761) (25,196) (10,955)
---------- -------- --------
Total payments................................ (59,800) (36,046) (22,027)
---------- -------- --------
Net reserves for losses and loss adjustment
expenses, end of year........................ 100,680 82,222 68,411
Other net reserves(1)......................... 10,184 3,542 1,008
---------- -------- --------
110,864 85,764 69,419
Recoverable from reinsurers................... 1,079,562 630,697 350,318
---------- -------- --------
Gross reserves for losses and loss adjustment
expenses, end of year........................ $1,190,426 $716,461 $419,737
========== ======== ========
</TABLE>
- --------
(1) Other reserves represent reinsurance contracts which are being run-off and
which were written in subsidiaries other than Legion, plus reserves for
other run-off business.
(2) Prior periods have been restated to reflect a pooling of interests
following the acquisition of the International Advisory Services Group of
Companies.
The previous table presents a reconciliation of reserves in accordance with
generally accepted accounting principles ("GAAP"). The following table
reconciles the difference between the Legion portion of these reserves and
those contained in regulatory filings made by Legion in accordance with
statutory accounting practices ("SAP").
11
<PAGE>
Reconciliation of SAP and GAAP Reserves
<TABLE>
<CAPTION>
Year ended December 31,
------------------------------
1998 1997(1) 1996(1)
---------- -------- --------
(in thousands)
<S> <C> <C> <C>
Reserves for Legion losses and loss adjustment
expenses,
end of year SAP............................... $ 109,506 $114,211 $105,657
Gross-up for ceded reinsurance reserves........ 1,077,349 629,227 349,218
Provision for reinsurance uncollectible on a
GAAP basis reported as a provision for
unauthorized reinsurance on a SAP basis....... 302 924 924
Reclassification of loss reserves to claims
deposit liabilities........................... (19,163) (29,011) (34,456)
Reclassification of retroactive reinsurance
reserve to receivable from affiliate.......... 8,598 -- --
Elimination of statutory increase in assigned
risk reserves................................. (15,000) (15,000) (15,000)
Reserves for audit premium estimates not
included on SAP basis......................... 2,745 730 1,198
---------- -------- --------
Reserves for Legion losses and loss adjustment
expenses,
end of year GAAP.............................. 1,164,337 701,081 407,541
Other non-US Reserves.......................... 13,813 10,489 10,088
---------- -------- --------
Liabilities for unpaid losses and loss
adjustment expenses........................... 1,178,150 711,570 417,629
Reserves on run-off business................... 12,276 4,891 2,108
---------- -------- --------
Total Reserves for Losses and Loss adjustment
expenses,
end of year GAAP.............................. $1,190,426 $716,461 $419,737
========== ======== ========
</TABLE>
- --------
(1) Prior periods have been restated to reflect a pooling of interests
following the acquisition of the International Advisory Services Group of
Companies.
The following table presents the development of the Company's ongoing net
reserves for 1988 through 1998. The top line of the table shows the estimated
reserve for unpaid losses and loss adjustment expenses recorded at the balance
sheet date for each of the indicated years. This amount represents the
estimated amount of losses and loss adjustment expenses for claims that are
unpaid at the balance sheet date, including losses that have been incurred but
not yet reported to the Company. The table also shows the re-estimated amount
of the previously recorded reserve based on experience as of the end of each
succeeding year. The estimate changes as more information becomes known about
the frequency and severity of claims for individual years. The "Cumulative
redundancy (deficiency)" represents the aggregate change in the estimates over
all prior years. It should be noted that the following table presents a "run-
off" of balance sheet reserves, rather than accident or policy year loss
development. Therefore, each amount in the table includes the effects of
changes in reserves for all prior years.
12
<PAGE>
ANALYSIS OF LOSS AND LOSS EXPENSE DEVELOPMENT
(Net of Reinsurance Recoverable)
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------------------------------------------------------------
1988(4) 1989(4) 1990(4) 1991(4) 1992(4) 1993(4) 1994(4) 1995(4) 1996(4) 1997(4)
------- -------- -------- -------- --------- --------- --------- --------- --------- ---------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Gross reserve for
losses and loss
adjustment
expenses(1)..... $19,649 $ 43,339 $ 88,437 $142,605 $ 191,772 $ 205,272 $ 242,189 $ 315,689 $ 419,737 $ 716,461
Reinsurance
reserves........ (9,525) (22,221) (52,321) (89,295) (113,075) (148,637) (178,002) (256,678) (350,318) (630,697)
------- -------- -------- -------- --------- --------- --------- --------- --------- ---------
Net reserve for
losses and loss
adjustment
expenses........ 10,124 21,118 36,116 53,310 78,700 56,635 64,187 59,011 69,419 85,764
Other
reserves(3)..... (3,961) (2,540) (1,357) (1,464) (1,531) (1,118) (1,006) (1,008) (1,008) (3,542)
------- -------- -------- -------- --------- --------- --------- --------- --------- ---------
6,163 18,578 34,759 51,846 77,169 55,517 63,181 58,003 68,411 82,222
Reclassification
of reserves to
claim deposit
liabilities(2).. (4,793) (12,560) (20,796) (28,322) (36,078) -- -- -- -- --
------- -------- -------- -------- --------- --------- --------- --------- --------- ---------
Reserve for
losses and loss
adjustment
expenses
restated for the
effects of SFAS
113: 1,370 6,018 13,963 23,524 41,091 55,517 63,181 58,003 68,411 82,222
Reserve re-
estimated as of:
One year later.. 6,741 20,220 35,453 53,193 40,443 55,131 60,917 54,982 67,966 86,002
Two years
later.......... 7,640 20,476 34,953 24,269 41,433 52,381 56,767 54,328 70,502
Three years
later.......... 8,213 20,434 13,131 23,298 39,351 47,657 56,291 56,576
Four years
later.......... 7,737 6,328 12,132 22,010 36,330 47,740 57,760
Five years
later.......... 2,042 6,397 12,268 20,390 36,424 48,162
Six years
later.......... 2,218 5,993 10,649 20,500 36,652
Seven years
later.......... 2,110 4,737 10,700 20,689
Eight years
later.......... 1,859 4,768 10,750
Nine years
later.......... 1,862 4,672
Ten years
later.......... 1,850
Cumulative
Redundancy
(Deficiency).... (480) 1,346 3,213 2,835 4,439 7,355 5,421 1,427 (2,091) (3,780)
Percentage....... -35% 22% 23% 12% 11% 13% 9% 2% -3% -5%
Reserve for
Losses and Loss
Adjustment
Expenses without
the effect of
Discounting:
Discounted
reserve......... $ 6,163 $ 18,578 $ 34,759 $ 51,846 $ 77,169 $ 55,517 $ 63,181 $ 58,003 $ 68,411 $ 82,222
Total Discount... 1,919 4,144 6,091 8,345 10,785 1,387 2,905 3,291 3,547 3,671
------- -------- -------- -------- --------- --------- --------- --------- --------- ---------
Ultimate Reserve
Liability....... 8,082 22,722 40,850 60,191 87,954 56,904 66,086 61,294 71,958 85,893
Reclassification
of reserves to
claim deposit
liabilities(2).. (6,712) (16,704) (26,889) (36,667) (46,862) -- -- -- -- --
------- -------- -------- -------- --------- --------- --------- --------- --------- ---------
Ultimate reserve
liability
restated for the
effects of SFAS
113............. 1,370 6,018 13,961 23,524 41,092 56,904 66,086 61,294 71,958 85,893
Reserve re-
estimated as of:
One year later.. 8,364 23,493 41,084 60,820 40,443 56,272 63,480 57,866 71,008 89,347
Two years
later.......... 8,827 23,760 39,668 24,269 41,433 53,410 59,186 57,097 73,790
Three years
later.......... 9,494 23,025 13,131 23,298 39,351 48,499 58,558 59,456
Four years
later.......... 8,743 6,328 12,132 22,010 36,330 48,400 60,096
Five years
later.......... 2,042 6,397 12,268 20,390 36,424 48,854
Six years
later.......... 2,218 5,993 10,649 20,500 36,652
Seven years
later.......... 2,110 4,737 10,700 20,689
Eight years
later.......... 1,859 4,768 10,750
Nine years
later.......... 1,862 4,672
Ten years
later.......... 1,850
Cumulative
Redundancy
(Deficiency)
without
discount effect.. (480) 1,346 3,211 2,835 4,440 8,050 5,990 1,838 (1,832) (3,454)
Percentage....... -35% 22% 23% 12% 11% 14% 9% 3% -3% -4%
Cumulative Amount
of Reserve Paid
through:
One year later.. $ 432 $ 1,768 $ 4,705 $ 9,647 $ 15,972 $ 17,909 $ 19,720 $ 10,955 $ 25,196 $ 44,761
Two years
later.......... 807 2,590 4,986 13,158 21,121 25,306 21,054 22,422 43,068
Three years
later.......... 1,115 3,541 6,077 15,104 24,991 27,134 28,547 31,925
Four years
later.......... 1,452 3,857 6,859 16,897 25,510 31,972 34,398
Five years
later.......... 1,637 4,093 7,533 17,311 28,110 35,967
Six years
later.......... 1,723 4,322 7,381 17,943 30,793
Seven years
later.......... 1,899 3,842 7,484 19,494
Eight years
later.......... 1,713 3,662 8,304
Nine years
later.......... 1,633 4,010
Ten years
later.......... 1,813
<CAPTION>
1998
------------
<S> <C>
Gross reserve for
losses and loss
adjustment
expenses(1)..... $ 1,190,426
Reinsurance
reserves........ (1,079,562)
------------
Net reserve for
losses and loss
adjustment
expenses........ 110,864
Other
reserves(3)..... (10,184)
------------
100,680
Reclassification
of reserves to
claim deposit
liabilities(2).. --
------------
Reserve for
losses and loss
adjustment
expenses
restated for the
effects of SFAS
113: 100,680
Reserve re-
estimated as of:
One year later..
Two years
later..........
Three years
later..........
Four years
later..........
Five years
later..........
Six years
later..........
Seven years
later..........
Eight years
later..........
Nine years
later..........
Ten years
later..........
Cumulative
Redundancy
(Deficiency)....
Percentage.......
Reserve for
Losses and Loss
Adjustment
Expenses without
the effect of
Discounting:
Discounted
reserve......... $ 100,680
Total Discount... 4,667
------------
Ultimate Reserve
Liability....... 105,347
Reclassification
of reserves to
claim deposit
liabilities(2).. --
------------
Ultimate reserve
liability
restated for the
effects of SFAS
113............. 105,347
Reserve re-
estimated as of:
One year later..
Two years
later..........
Three years
later..........
Four years
later..........
Five years
later..........
Six years
later..........
Seven years
later..........
Eight years
later..........
Nine years
later..........
Ten years
later..........
Cumulative
Redundancy
(Deficiency)
without
discount effect..
Percentage.......
Cumulative Amount
of Reserve Paid
through:
One year later..
Two years
later..........
Three years
later..........
Four years
later..........
Five years
later..........
Six years
later..........
Seven years
later..........
Eight years
later..........
Nine years
later..........
Ten years
later..........
</TABLE>
- -------
(1) Medical malpractice reserves have been discounted at 8% in 1998, 8.25% in
1989 and 1990, and 6% in 1991, 1992, 1993, 1994, 1995, 1996, 1997 and
1998.
(2) The re-classification of reserves to claims deposit liablilties is a
result of the adoption of SFAS 113.
(3) Other reserves represent reinsurance contracts which are being run-off and
which were written in subsidiaries other than Legion, plus reserves on
other run-off business.
(4) Prior periods have been restated to reflect a pooling of interests
following the acquisition of the International Advisory Services Group of
Companies.
13
<PAGE>
Investments and Investment Results
For a complete description of the Company's Investments and investment
results See Note 5 to Consolidated Financial Statements.
ITEM 2. PROPERTIES
The Company and its subsidiaries operate out of leased premises the most
significant of which are in Philadelphia and Bermuda.
ITEM 3. LEGAL PROCEEDINGS
In October 1998, the Company was advised by Scott Wetzel Services Inc.
("SWS"), a third-party administrator based in Tampa, Florida, that it had
filed for Chapter 11 Bankruptcy protection. SWS acts as a claims administrator
for a number of Alternative Market policy-issuing companies, including the
Company's subsidiary, Legion Insurance Company. SWS advised Legion that it
owed about $8 million in connection with Legion clients.
In November 1998, the business of SWS was sold to a third-party pursuant to
an order of the U.S. Bankruptcy court in Tampa, Florida. In connection with
this sale the buyer of the business assumed an obligation of SWS to pay Legion
$5 million. The Company has recorded $3.0 million as incurred losses relating
to the remaining amount due from SWS. A recoverable of $2.3 million has been
recorded in respect of amounts expected to be recovered under reinsurance
coverage, there is no dispute concerning coverage and some of the insurers
have already made payment for their share of the loss.
ITEM 4. SUBMISSION OF MATTERS TO SECURITY HOLDERS
Not applicable.
14
<PAGE>
EXECUTIVE OFFICERS
<TABLE>
<CAPTION>
Officer Principal Occupation
Name Age Since & Business Experience
---- --- ------- ---------------------
<S> <C> <C> <C>
Robert A. Mulderig...... 46 1982 Chief Executive Officer of the Company since 1982;
Chairman of Legion Insurance Co., ("Legion");
Director of Professional Risk Management Services,
Inc., The Galtney Group, Inc., and The Bank of N.T.
Butterfield & Sons Ltd. Also serves as a director or
officer of a number of unaffiliated captive
insurance companies to which the Company provides
management services.
John Kessock, Jr........ 50 1979 President of the Company, Mutual Group Ltd. and
Legion; primarily responsible for marketing the
Company's programs since 1979; Chairman of
Commonwealth Risk Services, L.P. ("CRS") and the IPC
Companies. Director, Ward North America, Inc.
Richard G. Turner....... 48 1984 Executive Vice President of the Company; President
of CRS since 1984; Vice President of Marketpac
International, a subsidiary of American
International Group, from 1979 to 1984. Director of
Colonial Penn Insurance Company.
Glenn R. Partridge...... 45 1983 Executive Vice President of the Company; Senior Vice
President of Legion Insurance Co.; primarily
responsible for Legion's underwriting function since
1987; Vice President of CRS from 1983 to 1987.
James C. Kelly.......... 44 1985 Senior Vice President and Chief Financial Officer of
the Company; Vice President and Chief Financial
Officer since March 1991; Vice President &
Controller since 1985.
Paul D. Watson.......... 40 1986 Senior Vice President and Chief Operating Officer of
the Company; Vice President of the Company since
March 1991; President of the IPC Companies from July
1992 until December 1998; held various management
and accounting positions since joining the Company
in 1986.
Richard E. O'Brien...... 41 1995 Senior Vice President, Secretary and General Counsel
since March 1995. Prior thereto partner in the law
firm of Dunnington, Bartholow & Miller, New York.
</TABLE>
All Executive Officers are appointed by the Company's Board of Directors and
serve until the next annual general meeting of the shareholders or until their
successors are appointed.
15
<PAGE>
PART II
ITEM 5. MARKET FOR COMMON SHARES AND RELATED STOCKHOLDER MATTERS
The Company's Common Shares have been listed on the New York Stock Exchange
under the symbol MM since June 25, 1991. The Common Shares were listed in
connection with the Company's initial public offering completed in July 1991.
There were 388 holders of record of the Company's Common Shares as of February
26, 1999.
The following table sets forth the high and low closing sale prices for the
Common Shares during 1997 and 1998 for the calendar quarters indicated as
reported by the New York Stock Exchange Composite Tape.
<TABLE>
<CAPTION>
High Low
-------- -------
<S> <C> <C>
Year Ended December 31, 1997
First Quarter............................................. 19 11/16 17 1/2
Second Quarter............................................ 22 15/16 16 3/4
Third Quarter............................................. 25 3/4 22 7/8
Fourth Quarter............................................ 29 15/16 25 3/32
Year Ended December 31, 1998
First Quarter............................................. 34 7/16 28 3/16
Second Quarter............................................ 36 3/4 31 1/2
Third Quarter............................................. 38 15/16 30
Fourth Quarter............................................ 39 7/8 27 1/2
Year Ending December 31, 1999
First Quarter (through March 22).......................... 42 5/8 32 7/8
</TABLE>
The last reported closing price per share of the Common Shares on the New
York Stock Exchange Composite Tape on March 22, 1999 was $39 1/8.
During 1998 and 1997 the Company paid dividends of $.21 and $.19 per Common
Share, respectively. Dividends are paid quarterly.
The Company's ability to pay dividends is restricted due to certain
insurance regulations. See "Management's Discussion and Analysis of Financial
Conditions and Results of Operations" and Note 11 to Consolidated Financial
Statements.
During the quarter ended December 31, 1998, the Company 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: 837,181 Common Shares of the Company on November
13, 1998.
(b)No underwriters participated in the sale of the Common Shares.
The Common Shares were issued to each of the following:
<TABLE>
<CAPTION>
Name Number of Shares
---- ----------------
<S> <C>
Shalfleet Ltd. ....................................... 488,508
David Pickering....................................... 91,537
Terence Power......................................... 141,298
Monterey Limited...................................... 115,838
</TABLE>
(c)The Common Shares were issued at a deemed purchase price of $34
per share (aggregate price $28,464,154), based upon the market
value on the date of issuance. The Common Shares were issued as
consideration in connection with the acquisition by the Company
of International Advisory Services Group of Companies, pursuant
to a Stock Purchase Agreement dated November 4, 1998.
(d)An exemption from registration under the Act was claimed based
upon Section 4(2) as a sale by an issuer not involving a public
offering.
16
<PAGE>
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
INCOME STATEMENT DATA:
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------
1998 1997(3) 1996(3) 1995(3) 1994(3)
-------- -------- -------- -------- --------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Revenues......................... $279,396 $223,826 $165,573 $133,764 $138,268
-------- -------- -------- -------- --------
Income before income taxes and
minority interest............... 72,045 59,418 46,309 40,158 34,301
-------- -------- -------- -------- --------
Income before minority interest.. 63,539 48,811 38,172 31,296 26,287
-------- -------- -------- -------- --------
Net income....................... 63,632 48,811 37,916 30,821 26,028
-------- -------- -------- -------- --------
Net income available to common
shareholders.................... 63,632 48,706 37,750 30,631 25,899
-------- -------- -------- -------- --------
Net income available to common
shareholders--Basic............. $ 1.58 $ 1.27 $ 1.01 $ .84 $ .73
--Diluted....................... $ 1.43 $ 1.16 $ .95 $ .81 $ .70
-------- -------- -------- -------- --------
Diluted weighted average number
of common shares
outstanding(1)--Basic........... 40,216 38,320 37,311 36,383 35,576
--Diluted............... 49,174 47,726 46,222 39,254 36,882
-------- -------- -------- -------- --------
Dividends per common share....... $ .21 $ .19 $ .16 $ .13 $ .11
-------- -------- -------- -------- --------
</TABLE>
BALANCE SHEET DATA:
<TABLE>
<CAPTION>
As at December 31,
------------------------------------------------------
1998 1997(3) 1996(3) 1995(3) 1994(3)
---------- ---------- ---------- ---------- ----------
(In thousands)
<S> <C> <C> <C> <C> <C>
Total assets............ $3,041,481 $2,182,015 $1,668,513 $1,403,217 $1,041,366
---------- ---------- ---------- ---------- ----------
Reserve for losses and
loss expenses.......... 1,190,426 716,461 419,737 315,689 242,189
---------- ---------- ---------- ---------- ----------
Long-term debt(2)....... 125,485 128,711 122,211 116,039 3,400
---------- ---------- ---------- ---------- ----------
Redeemable preferred and
common shares.......... -- 1,929 4,462 4,026 3,564
---------- ---------- ---------- ---------- ----------
Shareholders' equity.... 341,674 263,289 211,524 168,962 127,477
---------- ---------- ---------- ---------- ----------
</TABLE>
- --------
(1) See Note 2 I of Notes to Consolidated Financial Statements for an
explanation of the method used to determine the number of shares used to
compute per share amounts.
(2) See Note 6 of Notes to Consolidated Financial Statements.
(3) All prior period results have been restated to reflect the pooling of
interests following the acquisition of CompFirst, Inc. and International
Advisory Services Group of Companies.
17
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
CONSOLIDATED RESULTS OF OPERATIONS
For the Years Ended December 31, 1998, 1997 and 1996
Consolidated Net Income increased by 31% to $63.6 million in 1998 from $48.7
million in 1997 which was in turn a 29% increase over the $37.8 million earned
in 1996. The increase in 1998 earnings was primarily attributable to the
growth experienced in the Program Business and Financial Services segments.
1997 earnings growth was also a result of the growth in the Program Business
segment, as well as the acquisition of Small Business Underwriters ("SBU") and
the expansion of Professional Underwriters Corporation into New York State.
All prior period results have been restated to reflect a pooling of
interests following the acquisitions of CompFirst, Inc. and International
Advisory Services Group of Companies.
Set forth in Table I is an analysis of the components of the Company's
revenues for each of the last three years.
TABLE I--REVENUES
(In thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------
1998 Growth 1997 Growth 1996
-------- ------ -------- ------ --------
<S> <C> <C> <C> <C> <C>
Fee income.......................... $148,988 30% $114,670 30% $ 88,412
Premiums earned..................... 101,913 21 84,200 49 56,413
Net investment income............... 29,467 11 26,507 17 22,612
Realized capital losses............. (1,003) 38 (1,608) 19 (1,983)
Other income........................ 31 (46) 57 (52) 119
-------- -------- --------
Total........................... $279,396 25% $223,826 35% $165,573
======== ======== ========
</TABLE>
The growth of Fee income and Premiums earned over the past three years has
been primarily due to the strong growth in Program Business and Financial
Services which have compensated for the decline in Corporate Risk Management
business.
Overall, pre-tax profit margins on Fee income continue to remain steady at
37% in 1998 compared to 38% in 1997 and 37% in 1996.
SEGMENT ANALYSIS
The components of Fee income by business segment are illustrated in Table
II.
TABLE II--FEE INCOME BY BUSINESS SEGMENT
(In thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------
1998 Growth 1997 Growth 1996
-------- ------ -------- ------ -------
<S> <C> <C> <C> <C> <C>
Program Business fees................... $ 82,358 67% $ 49,362 137% $20,845
Corporate Risk
Management fees....................... 43,266 (10) 48,213 (11) 54,473
Specialty Brokerage fees.............. 9,021 8 8,351 18 7,035
Financial Services fees............... 14,343 64 8,744 44 6,059
-------- -------- -------
Total............................... $148,988 30% $114,670 30% $88,412
======== ======== =======
</TABLE>
18
<PAGE>
Program Business
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 55% of total Fees for 1998 compared to 43% in
1997 and 24% in 1996. This growth has resulted from the continued expansion of
this business as a result of reinsurers increased appetite for premium volume
in the current soft market and the acquisition of SBU on February 1, 1997.
Fees earned on individual Program accounts are more likely to grow compared to
Corporate accounts because new policy holders can potentially be added in each
program, also Program Business has historically had a higher retention rate
than Corporate Risk Management. Pre-tax margins in this segment were 40% for
1998 compared to 39% in 1997 and 34% in 1996.
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,
which accounted for 29% of total Fee income for 1998 compared to 42% in 1997
and 62% in 1996, has been the most affected by the extremely soft insurance
market cycle for commercial risks Corporate Risk Management fees decreased in
1997 for the first time due to these soft market conditions. The number of
Corporate Risk Management accounts decreased in 1998 to 118 from 154 in 1997
which was in turn down from 180 in 1996. Profit margins increased, despite the
difficult market, to 45% in 1998 compared to 41% in 1997 and 40% in 1996.
Historically, workers' compensation has been the major line of business
written by the Company in both its Corporate Risk Management and Program
Business segments. Competition for workers' compensation business has
increased in recent years, as a result of generally improved reported
underwriting results and workers' compensation reform legislation. The
resulting under pricing of workers' compensation risks by traditional insurers
reduces the incentive for insureds to enter "Alternative Market" vehicles such
as those offered by the Company in its Corporate Risk Management segment.
Despite these competitive forces, the Company was successful in increasing
its business as a result of the attractiveness of Program Business in this
soft reinsurance market. The Company continued to diversify its business to
reduce its reliance on the workers' compensation market and was successful in
doing so. As a percentage of Total Fee income, workers' compensation accounts
decreased from over 80% at December 31, 1994 to 57% at December 31, 1998 as a
result of the Company writing accounts comprising other lines of coverage such
as commercial, auto liability, auto physical damage and other liability
coverages as well as the expansion of the Company's Financial Services
segment.
Specialty Brokerage
The Company's Specialty Brokerage business segment provides access to
Alternative Risk Transfer insurers and reinsurers in Bermuda and Europe. Fees
in this segment continued to grow despite declines in premium on new and
renewal policies. Renewal rates remained high at 88% for 1998 compared to 85%
for 1997 and 86% for 1996. Profit margins decreased to 25% from 31% in 1997
and 33% in 1996 primarily as a result of the declines in premium.
Financial Services
Financial Services, the Company's newest business segment, is being built on
the 1996 acquisition of The Hemisphere Group which provides administrative
services to offshore mutual funds and other companies. The Financial Services
segment also includes the Company's family of proprietary mutual funds and MRM
Life. MRM Life was incorporated in 1997 to issue variable insurance products
in Bermuda. This segment accounted for 10% of total Fee income for 1998, up
from 8% for 1997 and 7% in 1996. Fees from Financial Services increased
primarily as a result of an increase in the number of mutual funds under
management from 85 in 1996
19
<PAGE>
and 129 in 1997, to 195 in 1998 as well as relatively high renewal rates of
80% in 1996, 93% in 1997 and 80% in 1998. Profit margins decreased from 20% in
1996 and 26% in 1997 to 4% in 1998. Margins in the Financial Services segment
were adversely affected due to a revised Executive Incentive Plan implemented
at Hemisphere in 1998. The effect of this revised Executive Incentive Plan
will continue through 2000. Excluding the effect of the revised Executive
Incentive Plan, the profit margins in this segment would have been 18% for the
year ended December 31, 1998.
UNDERWRITING
The Company generally requires each Corporate Risk Management client to
indemnify it against an underwriting loss and the client normally provides
collateral for at least the difference between the funds available in that
client's account and the level of expected losses as actuarially determined by
the Company, although in certain circumstances the collateral level is below
the level of expected losses. The Company faces a credit exposure in the event
that losses exceed their expected level and the client is unable or unwilling
to honor its indemnity to the Company. The Company also faces credit exposure
on both Program Business and Corporate Risk Management Business if its clients
or brokers fail to pay the premium due, through failure of the program manager
or broker to properly administer the program and through failure of reinsurers
to honor their obligations.
The Company has established provisions for losses as a result of these
exposures for certain clients and reinsurers. These provisions, which totaled
$6.5 million at December 31, 1998, $5.6 million in 1997 and $4.5 million in
1996, reduced the level of Fee income in each year by $.9 million, $1.1
million and $.5 million, respectively. The increase in the number of accounts
and their inherent growth in premium volume, the increase in the clients'
aggregate retentions since 1991, the amounts recoverable from reinsurers,
which amounted to $1,286 million at December 31, 1998 and $787 million at
December 31, 1997, in addition to competitive factors which have limited the
amount of collateral that clients are willing to provide, have significantly
increased the Company's exposure to such losses. The Company evaluates the
financial condition of its clients, brokers and reinsurers to minimize its
exposure to losses from insolvencies.
Premiums earned increased by 21% in 1998 and 49% in 1997. These increases
are attributable to the shift in business from the Corporate Risk Management
segment to the Program Business segment and the strong growth within this
segment. Program Business usually involves higher premiums than business
derived from the Corporate Risk Management segment. Premiums earned represent
the net premiums retained by the Company on which it bears underwriting risk.
The Company believes that both the volatility of underwriting profit or loss
and the probability of experiencing a severe underwriting loss are less than
would ordinarily be expected for a traditional property/casualty insurer, due
to the nature of the business written by the Company and the structure of its
reinsurance. In the past, the level of Premiums earned has been closely
matched by the level of Total insurance costs, resulting in small amounts of
underwriting loss as a percentage of Premiums earned. The fact that Premiums
earned are generally matched by Total insurance costs means that even a
significant fluctuation in Premiums earned will have a relatively
insignificant impact on the Company's Net income.
Included in Premiums earned are assigned risk premiums of $2.5 million in
1998 as compared to $8.4 million in 1997 and $7.8 million in 1996. The
underwriting losses associated with these assigned risk premiums, together
with other charges imposed by certain states on voluntary insurers, such as
Legion, to support involuntary market losses ("residual market loads"), are
passed on by Legion to clients' accounts.
The Company's principal exposure to underwriting loss exists in relation to
the premium associated with the Company's retention of a portion of the
specific and aggregate excess risk on each Corporate Risk Management client's
account. It is on this retained excess risk that the Company may experience
the most significant volatility in underwriting results. The portion of the
Company's Premiums earned which relate to this risk was $2.1 million in 1998
as compared to $2.2 million in 1997 and $3.3 million in 1996, representing 2%,
3% and 6% of Premiums earned in 1998, 1997 and 1996 respectively. The Company
incurred an underwriting loss of $2.4 million in 1998, $1.5 million in 1997
and $.2 million in 1996 as a result of the retained risk on its
20
<PAGE>
treaties. The Company takes 100% of the risk within the first $1.25 million
layer of the aggregate excess exposure on its main treaty up to a deductible
amount equal to 1.5% of the Company's gross premiums (as defined) and 10% of
the risk over a loss ratio of 120%, in the event that the loss ratio for the
first layer exceeds 120%. The Company takes no share of the risk in the layer
$3.75 million excess of $1.25 million per account. The maximum retention for
specific excess losses is 10% of $.75 million excess of $.25 million per
occurrence. On other treaties the Company has decreased its exposure for
excess losses.
INVESTMENT INCOME
Gross investment income increased by $5.0 million or 17% to $34.9 million in
1998 from $29.9 million in 1997 and $27.6 million in 1996 as a result of
increases in gross invested assets. Net investment income after adjusting for
investment income which is payable to others, increased by 11% to $29.5
million in 1998 from $26.5 million in 1997 and $22.6 million in 1996. Net
invested assets increased $36 million or 9% to $437 million in 1998 from $401
million in 1997 and $392 million in 1996. The yield on these assets increased
to 6.9% in 1998 from 6.7% in 1997 and 6.1% in 1996. The Company's investment
income is produced through the investment of its capital funds, long term
debt, other funds held representing amounts due others and reserves held by
the Company for unearned premiums and unpaid losses. The Company carries $37.4
million at December 31, 1998 and $42.4 million at December 31, 1997 on its
Consolidated Balance Sheets as Claims deposit liabilities. These liabilities
relate to loss obligations which, under SFAS 113, are not classified as
insurance. Investment income on these funds of $2.2 million in 1998, $2.5
million in 1997 and $4.0 million in 1996 is credited directly to the Claims
deposit liability account.
The breakdown of expenses for each of 1998, 1997 and 1996 is set forth in
Table III.
TABLE III--EXPENSES
(In thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------
1998 Growth 1997 Growth 1996
-------- ------ -------- ------ --------
<S> <C> <C> <C> <C> <C>
Losses incurred........................ $ 78,258 57% $ 49,857 54% $ 32,435
Acquisition costs...................... 26,061 (27) 35,816 48 24,185
-------- --- -------- --- --------
Total insurance costs.................. 104,319 22 85,673 51 56,620
Operating expenses..................... 94,253 33 71,014 27 55,765
Interest expense....................... 6,660 2 6,552 5 6,258
Other expenses......................... 2,119 81 1,169 88 621
-------- -------- --------
Total................................ $207,351 26% $164,408 38% $119,264
======== ======== ========
</TABLE>
The increases in Total insurance costs were the direct result of the
increases in Premiums earned during these periods. Losses incurred increased
as a direct result of the decreased use of large deductible policies and the
increase in Program Business. The Company discounts its specific and aggregate
workers' compensation reserves using a 4% rate recommended under Pennsylvania
law where Legion is domiciled. The net effect of this discounting was to
increase Net income after tax for the years ended December 31, 1998, 1997 and
1996 by $.9 million, $.1 million and $.2 million, respectively. Discounting
also reduced net loss reserves by $4.7 million, $3.7 million and $3.5 million
at December 31, 1998, 1997 and 1996, respectively. The 27% decrease in
Acquisition costs from 1997 to 1998 is due to the reduction in the number of
deductible programs, which have high expense levels; the loss of one large
account that was fully retained; and reduction in expenses charged by the
assigned risk pools. The 48% increase from 1996 to 1997 is a direct result of
the 49% increase in Premiums earned.
The primary factors responsible for the increases in Operating expenses
were: (a) the increased cost of administering the Company's highly regulated
policy-issuing subsidiaries, as the volume of policies issued
21
<PAGE>
increased; (b) increased personnel costs in all areas, caused by an increase
in the number of full time employees from 515 in 1996 to 700 in 1997 to 886 in
1998, resulting from the growth of the Company's businesses as well as the
impact of the Company's growth in revenues and profits on employee bonus
plans; and (c) the acquisitions of SBU, Hugo Trust, Avreco, Capital Management
and the Hemisphere expansion to Boston and Ireland.
The charges for Income taxes represent effective tax rates of 17.6%, 17.9%
and 11.8% in 1996 through 1998, respectively. The reduced tax rate in 1998 is
primarily due to increased earnings outside of the United States. This, plus
the Company's investment in tax-exempt municipal securities, offset by state
income taxes and foreign taxes, are the major causes of the difference between
the expected federal income tax rate in the United States of 35% plus state
income taxes and the Company's effective rates in each year. The Legion
Companies, as insurance companies in the United States, are subject to income
tax on an accelerated basis and, as a result, a deferred tax benefit was
carried on the Consolidated Balance Sheets of $1.5 million in 1998 and $4.6
million in 1997.
LIQUIDITY AND CAPITAL RESOURCES
Investments
At December 31, 1998, the market value of the Company's Total marketable
investments was $575 million, as compared to $477 million at December 31,
1997. In accordance with SFAS 115, Investments available for sale are reported
at fair market value with unrealized gains and losses included as a separate
component of Shareholders' equity. These Investments generally consist of
investment grade fixed-income securities which the Company believes are
readily marketable and could be liquidated to meet cash requirements, if
necessary.
Cash flow
Cash flow from operations has historically provided the Company its
principal source of liquidity. The Company has continued to produce a positive
cash flow with $59.6 million of cash provided from operations during 1998, as
compared to $55.3 million in 1997 and $63.5 million in 1996.
The Company believes that it will continue to maintain a positive cash flow
from operations in the foreseeable future and will be able to meet its
liquidity requirements. Excess cash flow from operations has principally been
used in each year to increase the Company's investment portfolio.
Insurance Operations
At the end of 1998 and 1997, 56% and 69% of the Company's Total marketable
investments were held by the Company's policy-issuing subsidiaries in the
United States. These companies are restricted by regulation in the amount of
dividends they can pay without prior regulatory approval to $23.6 million in
1999 (based on 1998 results) and will continue to face these restrictions in
the future. During 1998 they paid a dividend of $12 million. They are also
required to maintain certain deposits with or supply letters of credit to
regulatory authorities which totaled $152 million at December 31, 1998 ($60
million of deposits and $92 million of letters of credit) as compared to $135
million at December 31, 1997 ($51 million of deposits and $84 million of
letters of credit).
A widely accepted factor used by regulators and rating agencies in
evaluating insurance companies is the ratio of net premiums written to
policyholders' surplus which is an indication of the degree to which an
insurer is leveraged. Because of the low level of net premiums written, they
have produced a relatively low ratio on this basis of approximately 0.5:1 in
1998, 0.4:1 in 1997 and 0.3:1 in 1996 and should continue to produce
relatively low ratios in the future. Due to the nature of the Company's
operations, a more appropriate indication of leverage is the ratio of gross
premiums written to policyholders' surplus, which amounted to 3.6:1 in 1998,
3.0:1 in 1997, and 2.4:1 in 1996. The NAIC has established that an "unusual
value" for this ratio would be 9:1 or higher. The Company has adopted a policy
that this ratio should not exceed 4:1.
22
<PAGE>
The National Association of Insurance Commissioners ("NAIC") has adopted a
risk-based capital ("RBC") formula to be applied to all property/casualty
insurance companies. The formula measures capital and surplus needs based on
an insurance company's products and investment portfolio and is to be used as
a tool to identify weakly capitalized companies. An insurance company that
does not meet the threshold RBC measurement standards could be required to
reduce the scope of its operations and ultimately could become subject to
statutory receivership proceedings. At December 31, 1998 the Company's policy-
issuing subsidiaries met the RBC requirements with a combined required risk-
based capital of $78.5 million and an actual adjusted capital of $225.5
million.
Shareholders' Equity
Shareholders' equity increased 30% to $342 million at December 31, 1998 from
$263 million at December 31, 1997. This increase was attributable to Net
income in 1998, less dividends paid, plus the value of shares issued on the
exercise of employee stock options, the conversion of redeemable common shares
and debenture conversions. During 1998 the total number of Common Shares
outstanding increased to 41,146,830 from the 1997 level of 38,820,704, mainly
as a result of the exercise of employee stock options, conversion of
redeemable common shares and debenture conversions.
Total Assets
Total assets increased to $3.0 billion at December 31, 1998, a 40% increase
from $2.2 billion at December 31, 1997. $722.3 million, or 24% of Total assets
in 1998 and $649.2 million, or 30%, in 1997 related to Assets held in separate
accounts. As detailed in Note 2A to the Consolidated Financial Statements,
such assets are principally managed assets attributable to participants in the
Company's IPC Programs. Total assets also increased due to the increase in
Reinsurance receivables from $630.7 million in 1997 to $1,079.6 million in
1998, this increase, which is largely offset by corresponding increases in the
Reserve for losses and loss expenses and Accounts payable, is due to the
greater amount of reinsurance utilized in connection with the Company's
Program Business segment.
Inflation
The Company does not believe its operations have been materially affected by
inflation. The potential adverse impacts of inflation include: (a) a decline
in the market value of the Company's fixed maturity investment portfolio; (b)
an increase in the ultimate cost of settling claims which remain unresolved
for a significant period of time; and (c) an increase in the Company's
Operating expenses. However, the Company generally holds its fixed maturity
investments to maturity and currently believes that an acceptable amount is
included in the yield to compensate the Company for the risk of inflation. In
addition, any increase from inflation in the ultimate cost of settling unpaid
claims will be borne by the Company's clients and offset by investment income
earned for the benefit of the client during the period that the claim is
outstanding. Finally, the increase in Operating expenses resulting from
inflation should generally be matched by similar inflationary increases in the
client's premium and the Company's fee income, which includes a fee based upon
a percentage of the client's premium.
Market Sensitive Instruments
Market risk generally represents the risk of loss that may result from
potential changes in the value of a financial instrument due to a variety of
market conditions. The Company's exposure to market risk is generally limited
to potential losses arising from changes in the level or volatility of
interest rates on market values of investment holdings. The Company's exposure
to movements in exchange rates and equity prices is limited. The Company does
not hold or issue derivative financial instruments for trading or speculative
purposes.
(a) Interest Rate Risk
Interest rate risk results from the Company's holdings in interest-rate-
sensitive instruments. The Company is exposed to potential losses arising
from changes in the level or volatility of interest rates on
23
<PAGE>
fixed rate instruments held. The Company is also exposed to credit spread
risk resulting from possible changes in the issuer's credit rating. To
manage its exposure to interest rate risk the Company attempts to select
investments with characteristics that match the characteristics of the
related insurance and contract holder liabilities. Additionally, the
Company generally only invests in higher-grade interest bearing
instruments.
(b) Foreign Exchange Risk
When the Company invests in non-U.S. dollar denominated financial
instruments it is subject to exposure from exchange rate movements. This
risk arises from the possibility that changes in foreign exchange rates
will impact adversely upon the value of financial instruments. Due to the
Company's limited holdings of non-U.S. dollar denominated investments,
management does not believe the Company is exposed to a material risk from
exchange rate movements.
(c) Equity Price Risk
Equity price risk arises from fluctuations in the value of securities
held. Changes in the level or volatility of equity prices affect the value
of equity securities held by the Company. Management does not believe the
Company is exposed to a material risk from changes in equity prices due to
its limited investment in equity securities.
The table below provides information about the Company's available for sale
investments that are sensitive to changes in interest rates at December 31,
1998. The table presents expected cash flows and related weighted-average
interest rates by expected maturity dates. Separate account assets and
liabilities are not included in this analysis as gains and losses related to
these accounts generally accrue to the program holders.
<TABLE>
<CAPTION>
Expected Maturity Date
-----------------------------
1999 2000 2001 2002 2003 Thereafter Total Fair Value
----- ----- ----- ----- ----- ---------- ------ ----------
(dollars in millions, except average interest rates)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Assets
Investments
Available for Sale.... $45.4 $34.6 $45.2 $50.2 $32.4 $139.1 $346.9 $352.5
Average Interest
Rate................. 6.6% 5.8% 6.5% 6.3% 7.1% 6.4%
</TABLE>
Impact of Year 2000
The Company began assessing the impact of the Year 2000 issue on its
computer hardware and software systems in 1997. Certain systems have been
identified for replacement before year-end 1999 due to normal business
requirements. The replacement systems will be assessed for Year 2000-related
problems. Remediation is expected to continue through the end of the 1999
third quarter at a cost that is not expected to be material to the Company.
Currently, management has inventoried and is conducting a review of all such
systems. As of December 31, 1998, the Company's historical Year 2000
remediation costs have not been material. The Company's lack of legacy systems
is fortunate, most of its applications are PC databases, some networked but
most from a programming stand point, easily corrected. As of this disclosure
date, management has not identified any hardware or software computer system
within the Company with a significant Year 2000 compliance problem that is
expected to have a materially adverse effect on the Company's financial
condition or results of operations. As the Company regularly updates its
hardware and software, the pure additional cost for Year 2000 compliance
should not be material.
The Company continues to assess the Year 2000 compliance of its critical
business operations and products that could potentially be affected by the
Year 2000 problem. The purpose of this review is to determine what impact, if
any, the Year 2000 issue may have on the Company and its significant
customers, suppliers, and others, and whether that impact will be material to
the Company's financial condition or results of operations. The Company is in
the process of contacting its critical customers, reinsurance intermediaries,
managing general
24
<PAGE>
agents, suppliers, and others to determine the nature and extent of their Year
2000 compliance efforts and to assess whether their failure to resolve their
own Year 2000 issues would have a material adverse affect on the Company's
financial condition or results of operations. Based on these assessments,
management will take such further action as they deem appropriate including,
but not limited to, the development of contingency plans.
The extent to which the Company's financial condition or results of
operations may be materially affected by the Year 2000 problems of third
parties depends on a variety of factors including, but not limited to, whether
these third parties can resolve their own Year 2000 issues; whether their
remediated systems remain compatible with the Company's systems; and the
nature and extent to which the Company's systems may be affected by the third-
party's non-compliant systems. Significant failures of certain essential
services including, but not limited to, the telecommunications, utility,
banking, securities, and transportation industries, due to their own Year 2000
problems are generally beyond the Company's control and could have an adverse
material impact on the Company's financial condition or results of operations.
Acquisitions
The Company has acquired all of the outstanding shares of CompFirst, Inc.
("CompFirst"), a Georgia-based managing general agent, specializing in
workers' compensation and excess medical stop loss. CompFirst places special
emphasis on managed care and provides extensive managed care services in
addition to producing and underwriting business.
During the third quarter of 1998, the Company, through its subsidiary
Professional Underwriters Corporation, acquired all of the assets and goodwill
of Avreco Corp. ("Avreco"). Avreco is a specialty brokerage operation based in
Chicago. Its principal lines of business are Medical Malpractice, Excess
Property and Professional Liability. This acquisition will assist in the
development of the takeout Company's business in these specialty markets.
The Company also acquired Capital Management of Bermuda Ltd. ("Capital
Management"), a company which issues pension and annuity products primarily
for so called third country nationals. Capital Management has an investment
portfolio of approximately $80 million relating to its pension products and
will complement the Company's other initiatives in the offshore variable life
and annuity business.
In the fourth quarter of 1998, the Company acquired the International
Advisory Services Group ("IAS") of Companies. The principal companies within
the IAS Group are International Advisory Services Ltd., a Bermuda company
which provides management services to insurance companies, Hurst Holme
Insurance Company Ltd., a Bermuda based rent-a-captive facility, and H & H
Reinsurance Brokers Ltd., a Bermuda broker primarily providing reinsurance
support for the managed companies and rent-a-captive clients of the IAS Group.
International Advisory Services Ltd. is the largest independent insurance
manager in Bermuda with over 100 clients having annual premiums in excess of
$1.1 billion.
On March 1, 1999, the Company acquired Captive Resources, Inc. ("CRI"), a
provider of services to member-owned group captive insurance companies. CRI
has long-term contracts with more than 20 well established captives.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement 133,
"Accounting for Derivative Instruments and Hedging Activities." The Statement
requires recording all derivative instruments as assets or liabilities,
measured at fair value. The Statement is effective for fiscal years beginning
after June 15, 1999. The Company does not expect the Statement to have a
material impact on its financial position or results of operations.
Safe Harbor Disclosure For Forward-Looking Statements
In connection with the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995 (the "1995 Act"), the Company sets forth below
cautionary statements identifying important factors that could
25
<PAGE>
cause the Company's actual results to differ materially from those which might
be projected, forecasted, or estimated or otherwise implied in the Company's
forward-looking statements, as defined in the 1995 Act, made by or on behalf
of the Company in press releases, written statements or documents filed with
the Securities and Exchange Commission, or in its communications and
discussions with investors and analysts in the normal course of business
through meetings, telephone calls and conference calls. Such statements may
include, but are not limited to, projections of Fee income, Premiums earned,
Net investment income, Other income, Losses and loss expenses incurred,
Acquisition costs, Operating expenses, Other expenses, earnings (including
earnings per share), cash flows, plans for future operations, Shareholders'
equity, financing needs, capital plans, dividends, plans relating to products
or services of the Company, and estimates concerning the effects of litigation
or other disputes, as well as assumptions for any of the foregoing and are
generally expressed with words such as "believes", "estimates", "expects",
"anticipates", "could have", "may have", and similar expressions.
Forward-looking statements are inherently subject to risks and
uncertainties. The Company cautions that factors which may cause the Company's
results to differ materially from such forward-looking statements include, but
are not limited to, the following: (a) Changes in the level of competition in
the reinsurance or primary insurance markets that adversely affect the volume
or profitability of the Company's business. These changes include, but are not
limited to, the intensification of price competition, the entry of new
competitors, existing competitors exiting the market, and the development of
new products by new and existing competitors; (b) Changes in the demand for
reinsurance, including changes in ceding companies' retentions, and changes in
the demand for primary and excess and surplus lines insurance coverages; (c)
The ability of the Company to execute its business strategies and its reliance
on key personnel; (d) Adverse development on claims and claims expense
liabilities related to business and the failure of clients, reinsurers or
others to meet their obligations to the Company in connection with such
losses.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See Item 7.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's consolidated financial statements for the years ended December
31, 1998, 1997 and 1996 are filed herewith in response to Item 14.
ITEM 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING DISCLOSURE
None.
26
<PAGE>
PART III
ITEM 10. MANAGEMENT
See Part I for information relating to the Company's executive officers.
ITEM 11. EXECUTIVE COMPENSATION
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
ITEM 13. CERTAIN TRANSACTIONS
Pursuant to General Instructions G(3) of Form 10-K, Items 10 to 13,
inclusive, have not been restated or answered since the Company intends to file
within 120 days after the close of its fiscal year with the Securities and
Exchange Commission a definitive proxy statement pursuant to Regulation 14A
under the Securities Exchange Act of 1934 and the information contained therein
is hereby incorporated by reference. The information included in such proxy
statement pursuant to the requirements of Sections 402(k) and (l) of Regulation
S-K is not incorporated by reference herein.
27
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8K
A. Exhibits
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<C> <S>
3.1 Memorandum of Association(1)
3.2 Bye-Laws of Registrant(4)
3.3 Bye-Laws of IPC Mutual Holdings Ltd.(1)
4.1 Form of Stock Certificate(1)
4.2 Indenture dated as of October 30, 1995 relating to the Company's
Zero Coupon Convertible Exchangeable Subordinated Debentures due
2015.(5)
10.1 Exchange Agreement between The Galtney Group Inc. and Mutual Group
Ltd. with respect to shares of common stock of Professional Risk
Management Services, Inc.(1)
10.2 Share Purchase Agreements with Messrs. Partridge, Turner and
Kelly(1)(3)
10.3 Mutual Risk Management Ltd. 1988 Stock Option Plan(1)(3)
10.4 1991 Long Term Incentive Plan(2)(3)
10.5 Form of Director's Stock Option Grant Agreement(2)(3)
10.6 Form of Non-Qualified Stock Option Grant Agreement(2)(3)
10.7 Form of Shareholders Agreement relating to the IPC Program(1)
10.8 Agreement between Mutual Risk Management (Bermuda) Ltd. and Robert
A. Mulderig relating to Hemisphere Trust Company Limited.(6)
10.9 Directors Deferred Cash Compensation Plan(3)(5)
10.10 Directors Restricted Stock Plan(3)(5)
10.11 Deferred Compensation Plan
10.12 1998 Long Term Incentive Plan
11.1 Computation of Earnings Per Share
21.1 List of subsidiaries
23.1 Consent and Reports of Ernst & Young
27.1 Financial Data Schedule for (current) fiscal year ended Dec-31-
1998
27.2 Restated FDS for quarter ended Sep-30-1998
27.3 Restated FDS for quarter ended June-30-1998
27.4 Restated FDS for quarter ended Mar-31-1998
27.5 Restated FDS for fiscal year ended Dec-31-1997
27.6 Restated FDS for quarter ended Sep-30-1997
27.7 Restated FDS for quarter ended Jun-30-1997
27.8 Restated FDS for quarter ended Mar-31-1997
27.9 Restated FDS for fiscal year ended Dec-31-1996
</TABLE>
- --------
(1) Incorporated by reference to Form S-1 Registration Statement (No. 33-40152)
of Mutual Risk Management Ltd. declared effective June 25, 1991.
(2) Incorporated by reference to the 1991 Annual Report on Form 10-K of Mutual
Risk Management Ltd.
(3) This exhibit is a management contract or compensatory plan or arrangement.
(4) Incorporated by reference to Form 10-Q of Mutual Risk Management Ltd. for
the period ended June 30, 1996.
(5) Incorporated by reference to 1995 Annual Report on Form 10-K of Mutual Risk
Management Ltd.
(6) Incorporated by reference to 1996 Annual Report on Form 10-K of Mutual Risk
Management Ltd.
28
<PAGE>
B. Financial Statements and Financial Statement Schedules
<TABLE>
<S> <C>
Consolidated Financial Statement...................................... F-1
Notes to Consolidated Financial Statements............................ F-5
Independent Auditors' Report.......................................... F-21
Schedule IICondensed Financial Information of Registrant.............. S-1
Schedule VISupplementary Insurance Information........................ S-4
</TABLE>
All other schedules required by Article 7 of Regulation S-X are not required
under the related instructions, are inapplicable or are included elsewhere in
this filing, and therefore have been omitted.
C. Reports on Form 8-K
None.
29
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, in Hamilton,
Bermuda, on March 17, 1999.
Mutual Risk Management Ltd.
/s/ Robert A. Mulderig
By: _________________________________
Robert A. Mulderig
Chairman and Chief Executive
Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Robert A. Mulderig Chairman and Chief March 17, 1999
______________________________________ Executive Officer
Robert A. Mulderig (Principal Executive
Officer)
/s/ John Kessock, Jr. President, Director and March 17, 1999
______________________________________ Authorized U.S.
John Kessock, Jr. Representative
/s/ Richard G. Turner Executive Vice President March 17, 1999
______________________________________ and Director
Richard G. Turner
/s/ Glenn R. Partridge Executive Vice President March 17, 1999
______________________________________ and Director
Glenn R. Partridge
/s/ James C. Kelly Senior Vice President and March 17, 1999
______________________________________ Chief Financial Officer
James C. Kelly (Principal Financial and
Accounting Officer)
/s/ Roger E. Dailey Director March 17, 1999
______________________________________
Roger E. Dailey
/s/ David J. Doyle Director March 17, 1999
______________________________________
David J. Doyle
/s/ Arthur E. Engel Director March 17, 1999
______________________________________
Arthur E. Engel
</TABLE>
30
<PAGE>
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Allan W. Fulkerson Director March 17, 1999
______________________________________
Allan W. Fulkerson
/s/ William F. Galtney, Jr. Director March 17, 1999
______________________________________
William F. Galtney, Jr.
/s/ Beverly H. Patrick Director March 17, 1999
______________________________________
Beverly H. Patrick
/s/ Jerry S. Rosenbloom Director March 17, 1999
______________________________________
Jerry S. Rosenbloom
/s/ Norman L. Rosenthal Director March 17, 1999
______________________________________
Norman L. Rosenthal
/s/ Joseph D. Sargent Director March 17, 1999
______________________________________
Joseph D. Sargent
</TABLE>
31
<PAGE>
SCHEDULE II
MUTUAL RISK MANAGEMENT LTD
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
PARENT COMPANY ONLY BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
1998 1997(1)
ASSETS
<S> <C> <C>
Cash and cash equivalents $ 689,260 $ 1,023,820
Investments 8,594,316 22,130,143
Investments in subsidiaries and affiliates 423,521,476 347,028,416
Due from subsidiaries and affiliates 34,455,222 23,085,085
Other Assets 2,371,905 2,611,086
----------------- ---------------
Total Assets $ 469,632,179 $ 395,878,550
================= ===============
LIABILITIES, REDEEMABLE COMMON SHARES & SHAREHOLDERS' EQUITY
LIABILITIES
Accounts payable and accrued expenses $ 926 $ 7,518
Other liabilities 2,471,885 1,941,610
Debentures 125,485,201 128,711,279
----------------- ---------------
Total Liabilities 127,958,012 130,660,407
----------------- ---------------
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) 0 1,929,032
----------------- ---------------
SHAREHOLDERS' EQUITY
Common Shares - Authorized 60,000,000 (par value $0.01)
- Issued 41,146,830 (1997 - 38,820,704) 411,468 388,207
Additional paid-in capital 114,925,633 89,348,629
Accumulated other comprehensive income 3,279,746 4,035,397
Retained earnings 223,057,320 169,516,878
----------------- ---------------
Total Shareholders' Equity 341,674,167 263,289,111
----------------- ---------------
Total Liabilities, Redeemable Common Shares & Shareholders' Equity $ 469,632,179 $ 395,878,550
================= ===============
</TABLE>
(1) Prior period results have been restated to reflect a pooling of interests
following the acquisition of CompFirst, Inc. and International Advisory Services
Group of Companies.
See Notes to Consolidated Financial Statements
S-1
<PAGE>
MUTUAL RISK MANAGEMENT LTD
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
PARENT COMPANY ONLY STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
Years Ended December 31,
1998 1997(1) 1996(1)
INCOME
<S> <C> <C> <C>
Fee income $ -- $ -- $ 1,093,993
Net investment income 2,171,384 2,928,791 3,808,090
Equity in earnings of affiliates -- -- (101,128)
------------ ------------ ------------
TOTAL INCOME 2,171,384 2,928,791 4,800,955
Operating expenses 141,140 140,943 2,104,297
Amortization of debentures 6,605,238 6,500,288 6,172,004
------------ ------------ ------------
NET INCOME BEFORE EQUITY IN EARNINGS OF SUBSIDIARIES (4,574,994) (3,712,440) (3,475,346)
Dividend from subsidiaries -- 11,922,627 135,000
Undistributed equity in earnings of subsidiaries 68,206,854 40,600,587 41,256,678
------------ ------------ ------------
NET INCOME 63,631,860 48,810,774 37,916,332
Preferred share dividends -- (104,929) (166,041)
------------ ------------ ------------
NET INCOME AVAILABLE TO COMMON SHAREHOLDERS 63,631,860 48,705,845 37,750,291
OTHER COMPREHENSIVE INCOME, NET OF TAX
Unrealized (losses) gains on investments, net of
reclassification adjustment (755,651) 3,987,716 (1,107,142)
------------ ------------ ------------
COMPREHENSIVE INCOME $ 62,876,209 $ 52,693,561 $ 36,643,149
============ ============ ============
</TABLE>
(1) Prior period results have been restated to reflect a pooling of interests
following the acquisition of CompFirst, Inc. and International Advisory Services
Group of Companies.
See Notes to Consolidated Financial Statements
S-2
<PAGE>
<TABLE>
<CAPTION>
MUTUAL RISK MANAGEMENT LTD
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
PARENT COMPANY ONLY STATEMENTS OF CASH FLOW
Years Ended December 31,
1998 1997(1)
NET CASH FLOW FROM OPERATING ACTIVITIES
<S> <C> <C>
Net income before dividend and equity in earnings of subsidiaries $ (4,574,994) $ (3,712,440)
Items not affecting cash
Depreciation - -
Amortization of debentures 6,605,238 6,500,288
Amortization of investments (1,188,773) (166,292)
Loss (gain) on disposal of fixed assets - -
Equity in earnings of affiliates - -
Net changes in non-cash balances relating to operations
Other assets 239,181 5,229,028
Accounts payable and accrued expenses (6,592) (1,348,741)
Other liabilities - (85,145)
Due from subsidiaries and affiliates (11,370,137) (20,698,928)
---------------- ----------------
NET CASH FLOW APPLIED TO OPERATING ACTIVITIES (10,296,077) (14,282,230)
---------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES
Fixed assets purchased - -
Proceeds from sale of fixed assets - 1,265,818
Cost of investments (15,942,997) (18,753,904)
Proceeds from sale of investments 30,475,717 56,556,009
Cost of investments in affiliates and subsidiaries (3,453,961) (37,511,234)
Dividends received from subsidiaries - 11,922,627
---------------- ----------------
NET CASH FROM (APPLIED TO) INVESTING ACTIVITIES 11,078,759 13,479,316
---------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from shares issued 8,055,217 7,297,184
Redemption of preferred shares - (2,951,835)
Subscription loans receivable 383,761 383,761
Loan interest received 4,922 34,727
Dividends paid (9,561,142) (7,187,338)
---------------- ----------------
NET CASH FLOWS (APPLIED TO) FROM FINANCING ACTIVITIES (1,117,242) (2,423,501)
---------------- ----------------
Net (decrease) increase in cash and cash equivalents (334,560) (3,226,415)
Cash and cash equivalents at beginning of year 1,023,820 4,250,235
---------------- ----------------
Cash and cash equivalents at end of year $ 689,260 $ 1,023,820
================ ================
</TABLE>
(1) Prior period results have been restated to reflect a pooling of interests
following the acquisition of CompFirst, Inc. and International Advisory Services
Group of Companies.
<TABLE>
<CAPTION>
1996(1)
NET CASH FLOW FROM OPERATING ACTIVITIES
<S> <C>
Net income before dividend and equity in earnings of subsidiaries $ (3,475,346)
Items not affecting cash
Depreciation 649,409
Amortization of debentures 6,172,004
Amortization of investments (13,588)
Loss (gain) on disposal of fixed assets 2,893
Equity in earnings of affiliates 101,128
Net changes in non-cash balances relating to operations
Other assets (3,860,219)
Accounts payable and accrued expenses 25,378
Other liabilities (4,686)
Due from subsidiaries and affiliates (854,620)
---------------
NET CASH FLOW FROM (APPLIED TO) OPERATING ACTIVITIES (1,257,647)
---------------
CASH FLOWS FROM (APPLIED TO) INVESTING ACTIVITIES
Fixed assets purchased (991,336)
Proceeds from sale of fixed assets 15,587
Cost of investments (1,520,088)
Proceeds from sale of investments 20,197,989
Cost of investments in affiliates and subsidiaries (18,928,487)
Dividends received from subsidiaries 135,000
---------------
NET CASH FROM (APPLIED TO) INVESTING ACTIVITIES (1,091,335)
---------------
CASH FLOWS FROM (APPLIED TO) FROM FINANCING ACTIVITIES
Net proceeds from shares issued 9,047,295
Redemption of preferred shares -
Subscription loans receivable 383,761
Loan interest received 52,394
Dividends paid (6,060,488)
---------------
NET CASH FLOWS FROM (APPLIED TO) FROM FINANCING ACTIVITIES 3,422,962
---------------
Net (decrease) increase in cash and cash equivalents 1,073,980
Cash and cash equivalents at beginning of year 3,176,255
---------------
Cash and cash equivalents at end of year $ 4,250,235
===============
</TABLE>
See Notes to Consolidated Financial Statements
S-3
<PAGE>
SCHEDULE VI
MUTUAL RISK MANAGEMENT LTD.
SUPPLEMENTARY INSURANCE INFORMATION
(U.S. DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Gross
Deferred Reserve for Gross
Policy Unpaid Claims Discount, Gross Net Net
Year Ended December 31, Acquisition and if any, Unearned Earned Investment
Property-Casualty Costs Claims Expenses Deducted (1) Premiums Premiums Income
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1998 17,948 1,190,426 36,213 241,893 101,913 16,357
1997(2) 19,204 716,461 28,083 188,389 84,200 16,879
1996(2) 9,731 419,737 23,338 93,741 56,413 13,253
<CAPTION>
Net Claim and Claims Net
Expenses Incurred Amortization Paid
Related to (1) of Deferred Claims
----------------------- -------- Policy and Net Other
Year Ended December 31, Current Prior Acquisition Claims Premiums Operating
Property-Casualty Year Year Costs Expenses Written Expenses
- ----------------------- ----------------------- -------- ------------ -------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
1998 74,476 3,782 26,061 53,158 104,948 30,164
1997(2) 50,301 (444) 35,816 33,512 96,170 19,559
1996(2) 35,456 (3,021) 24,185 22,027 55,048 15,810
</TABLE>
(1) Medical malpractice reserves have been discounted at 6% in 1998, 1997 and
1996. Workers' compensation reserves have been discounted at 4% in 1998, 1997
and 1996.
(2) Prior periods have been restated to reflect a pooling of interests following
the acquisition of the International Advisory Services Group of Companies.
S-4
<PAGE>
- --------------------------------------------------------------------------------
Consolidated balance sheets
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
At December 31, (In thousands) 1998 1997(1)
- ----------------------------------------------------------------------------------------------------
ASSETS
<S> <C> <C>
Cash and cash equivalents $ 114,800 $ 81,700
--------------------------------------------------------------------------------------------
Investments - Held in available for sale account at fair value
(Amortized cost $455,648; 1997 - $389,292) 460,624 395,143
--------------------------------------------------------------------------------------------
Total marketable investments 575,424 476,843
--------------------------------------------------------------------------------------------
Other investments 20,485 10,188
--------------------------------------------------------------------------------------------
Investment income due and accrued 5,252 3,800
--------------------------------------------------------------------------------------------
Accounts receivable 327,066 166,063
--------------------------------------------------------------------------------------------
Reinsurance receivables 1,079,563 630,697
--------------------------------------------------------------------------------------------
Deferred expenses 27,215 29,992
--------------------------------------------------------------------------------------------
Prepaid reinsurance premiums 206,487 156,018
--------------------------------------------------------------------------------------------
Fixed assets 17,966 14,060
--------------------------------------------------------------------------------------------
Deferred tax benefit 1,533 4,607
--------------------------------------------------------------------------------------------
Goodwill 52,901 32,985
--------------------------------------------------------------------------------------------
Other assets 5,326 7,534
--------------------------------------------------------------------------------------------
Assets held in separate accounts 722,263 649,228
--------------------------------------------------------------------------------------------
Total Assets $3,041,481 $2,182,015
============================================================================================
<CAPTION>
LIABILITIES, REDEEMABLE COMMON SHARES & SHAREHOLDERS' EQUITY
LIABILITIES
<S> <C> <C>
Reserve for losses and loss expenses $1,190,426 $ 716,461
--------------------------------------------------------------------------------------------
Reserve for unearned premiums 241,893 188,389
--------------------------------------------------------------------------------------------
Pension fund reserves 79,753 -
--------------------------------------------------------------------------------------------
Claims deposit liabilities 37,448 42,445
--------------------------------------------------------------------------------------------
Accounts payable 242,409 140,343
--------------------------------------------------------------------------------------------
Accrued expenses 10,536 8,056
--------------------------------------------------------------------------------------------
Taxes payable 14,884 14,995
--------------------------------------------------------------------------------------------
Loans payable 1,845 466
--------------------------------------------------------------------------------------------
Prepaid fees 20,026 19,536
--------------------------------------------------------------------------------------------
Debentures 125,485 128,711
--------------------------------------------------------------------------------------------
Other liabilities 12,839 8,167
--------------------------------------------------------------------------------------------
Liabilities related to separate accounts 722,263 649,228
--------------------------------------------------------------------------------------------
Total Liabilities 2,699,807 1,916,797
============================================================================================
<CAPTION>
REDEEMABLE COMMON SHARES
<S> <C> <C>
Common Shares subject to redemption - 937,168 Common Shares
(par value $0.01, redemption value $1.75 less subscription
loans receivable - $384 plus interest received) - 1,929
--------------------------------------------------------------------------------------------
<CAPTION>
SHAREHOLDERS' EQUITY
<S> <C> <C>
Common Shares - Authorized 60,000,000 (par value $0.01)
Issued 41,146,830 (1997 - 38,820,704) 411 388
--------------------------------------------------------------------------------------------
Additional paid-in capital 114,926 89,349
--------------------------------------------------------------------------------------------
Accumulated other comprehensive income 3,280 4,035
--------------------------------------------------------------------------------------------
Retained earnings 223,057 169,517
--------------------------------------------------------------------------------------------
Total Shareholders' Equity 341,674 263,289
--------------------------------------------------------------------------------------------
Total Liabilities, Redeemable Common Shares & Shareholders' Equity $3,041,481 $2,182,015
============================================================================================
</TABLE>
(1) Prior periods have been restated to reflect a pooling of interests
following the acquisition of CompFirst, Inc. and International
Advisory Services Group of Companies.
See accompanying notes to consolidated financial statements
F-1
<PAGE>
- --------------------------------------------------------------------------------
Consolidated statements of income and comprehensive income
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year ended December 31, (In thousands except per share data) 1998 1997(2) 1996(2)
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues
Fee income $ 148,988 $ 114,670 $ 88,412
----------------------------------------------------------------------------------------------------
Premiums earned 101,913 84,200 56,413
----------------------------------------------------------------------------------------------------
Net investment income 29,467 26,507 22,612
----------------------------------------------------------------------------------------------------
Realized capital losses (1,003) (1,608) (1,983)
----------------------------------------------------------------------------------------------------
Other income 31 57 119
----------------------------------------------------------------------------------------------------
Total Revenues 279,396 223,826 165,573
----------------------------------------------------------------------------------------------------
EXPENSES
Losses and loss expenses incurred 78,258 49,857 32,435
----------------------------------------------------------------------------------------------------
Acquisition costs 26,061 35,816 24,185
----------------------------------------------------------------------------------------------------
Operating expenses 94,253 71,014 55,765
----------------------------------------------------------------------------------------------------
Interest expense 6,660 6,552 6,258
----------------------------------------------------------------------------------------------------
Other expenses 2,119 1,169 621
----------------------------------------------------------------------------------------------------
Total Expenses 207,351 164,408 119,264
----------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES and minority interest 72,045 59,418 46,309
----------------------------------------------------------------------------------------------------
Income taxes 8,506 10,607 8,137
----------------------------------------------------------------------------------------------------
INCOME before minority interest 63,539 48,811 38,172
----------------------------------------------------------------------------------------------------
Minority interest 93 - (256)
----------------------------------------------------------------------------------------------------
NET INCOME 63,632 48,811 37,916
----------------------------------------------------------------------------------------------------
Preferred share dividends - (105) (166)
----------------------------------------------------------------------------------------------------
NET INCOME AVAILABLE TO COMMON SHAREHOLDERS 63,632 48,706 37,750
OTHER COMPREHENSIVE INCOME, NET OF TAX
Unrealized (losses) gains on investments,
net of reclassification adjustment (755) 3,987 (1,107)
----------------------------------------------------------------------------------------------------
COMPREHENSIVE INCOME $ 62,877 $ 52,693 $ 36,643
----------------------------------------------------------------------------------------------------
EARNINGS PER COMMON SHARE(1)
Net income available to Common Shareholders:
Basic $ 1.58 $ 1.27 $ 1.01
----------------------------------------------------------------------------------------------------
Diluted $ 1.43 $ 1.16 $ .95
----------------------------------------------------------------------------------------------------
Dividends per Common Share $ .21 $ .19 $ .16
----------------------------------------------------------------------------------------------------
Weighted average number of Common Shares
outstanding - Basic 40,216,390 38,320,356 37,310,691
----------------------------------------------------------------------------------------------------
Weighted average number of Common Shares
outstanding - Diluted 49,174,381 47,726,486 46,221,887
----------------------------------------------------------------------------------------------------
</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, and the two-for-one stock split to holders of record at
September 26, 1997.
(2) Prior period results have been restated to reflect a pooling of
interests following the acquisition of CompFirst, Inc. and
International Advisory Services Group of Companies.
See accompanying notes to consolidated financial statements
F-2
<PAGE>
Consolidated statements of changes in shareholders' equity
<TABLE>
<CAPTION>
Series B
Preferred Common Dividend
Change in Share Share of
Opening Shares Unrealized Net Dividends Dividends Acquired Closing
(In thousands) Balance Issued Gain (Loss)(5) Income Declared(1) Declared(2) Company(7) Balance
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Year Ended
December 31, 1998
Common Shares $388 $23 $ - $ - $ - $ - $ - $411
- ------------------------------------------------------------------------------------------------------------------------------------
Additional paid-in capital 89,349 25,577 - - - - - 114,926
- ------------------------------------------------------------------------------------------------------------------------------------
Accumulated other
comprehensive income 4,035 - (755) - - - - 3,280
- ------------------------------------------------------------------------------------------------------------------------------------
Retained earnings 169,517 - - 63,632 - (8,828) (1,264) 223,057
- ------------------------------------------------------------------------------------------------------------------------------------
Total Shareholders' Equity
at December 31, 1998 $263,289 $25,600 $(755) $63,632 $- $(8,828) $(1,264) $341,674
====================================================================================================================================
Year Ended
December 31, 1997(4)(6)
Common Shares $381 $7 $- $- $- $- $- $388
- ------------------------------------------------------------------------------------------------------------------------------------
Additional paid-in capital 82,059 7,290 - - - - - 89,349
- ------------------------------------------------------------------------------------------------------------------------------------
Accumulated other
comprehensive income 48 - 3,987 - - - - 4,035
- ------------------------------------------------------------------------------------------------------------------------------------
Retained earnings 129,036 - - 48,811 (105) (7,311) (914) 169,517
- ------------------------------------------------------------------------------------------------------------------------------------
Total Shareholders' Equity
at December 31, 1997 $211,524 $7,297 $3,987 $48,811 $(105) $(7,311) $(914) $263,289
====================================================================================================================================
Year Ended
December 31,1996(3)(4)(6)(8)
Common Shares $366 $15 $- $- $- $- $- $381
- ------------------------------------------------------------------------------------------------------------------------------------
Additional paid-in capital 67,465 14,594 - - - - - 82,059
- ------------------------------------------------------------------------------------------------------------------------------------
Accumulated other
comprehensive income 1,155 - (1,107) - - - - 48
- ------------------------------------------------------------------------------------------------------------------------------------
Retained earnings 99,976 - - 37,916 (166) (8,046) (644) 129,036
- ------------------------------------------------------------------------------------------------------------------------------------
Total Shareholders' Equity
at December 31, 1996 $168,962 $14,609 $(1,107) $37,916 $(166) $(8,046) $(644) $211,524
====================================================================================================================================
</TABLE>
(1) Dividend per share amounts were $.04 for 1997 and $.06 for 1996.
(2) Dividend per share amounts were $.21, $.19 and $.16 for 1998, 1997 and
1996 respectively (prior periods restated for stock splits).
(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.
(4) Effective September 26, 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.
(5) Net of reclassification adjustment, net of tax (See note 7)
(6) Prior periods have been restated to reflect a pooling of interests
following the acquisition of CompFirst, Inc. and International Advisory
Services Group of Companies.
(7) Prior to the merger, International Advisory Services paid cash dividends
of $1.51, $1.09 and $.77 in 1998, 1997 and 1996 respectively based on
the equivalent number of Common Shares that would have been outstanding
on the dividend dates after giving effect to the pooling of interests in
1998.
(8) See note 17
See accompanying notes to consolidated financial statements
F-3
<PAGE>
- --------------------------------------------------------------------------------
Consolidated statements of cash flows
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year ended December 31, (In thousands) 1998 1997(1) 1996(1)
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET CASH FLOW FROM OPERATING ACTIVITIES
Net income $ 63,632 $ 48,811 $ 37,916
- --------------------------------------------------------------------------------------------------------
Items not affecting cash
Depreciation 5,925 4,279 2,993
------------------------------------------------------------------------------------------------
Amortization of investments (1,907) (1,609) (1,693)
------------------------------------------------------------------------------------------------
Net loss on sale of investments 1,498 1,619 1,862
------------------------------------------------------------------------------------------------
Other investment (gains) losses (599) - 97
------------------------------------------------------------------------------------------------
Amortization of convertible debentures 6,605 6,500 6,172
------------------------------------------------------------------------------------------------
Deferred tax benefit 3,194 (2,789) 2,772
------------------------------------------------------------------------------------------------
Other items 1,570 1,002 449
------------------------------------------------------------------------------------------------
Net changes in non-cash balances relating to operations :
Accounts receivable (161,003) (36,989) (42,245)
------------------------------------------------------------------------------------------------
Reinsurance receivables (448,866) (280,379) (93,639)
------------------------------------------------------------------------------------------------
Investment income due and accrued (1,452) 1,191 (477)
------------------------------------------------------------------------------------------------
Deferred expenses 2,777 (9,380) 1,753
------------------------------------------------------------------------------------------------
Prepaid reinsurance premiums (50,469) (82,430) (34,367)
------------------------------------------------------------------------------------------------
Other assets 2,208 (1,632) (3,428)
------------------------------------------------------------------------------------------------
Reserve for losses and loss expenses 473,965 296,724 104,048
------------------------------------------------------------------------------------------------
Prepaid fees 490 6,161 186
------------------------------------------------------------------------------------------------
Reserve for unearned premium 53,504 94,648 33,966
------------------------------------------------------------------------------------------------
Accounts payable 102,066 1,281 41,899
------------------------------------------------------------------------------------------------
Taxes payable (111) 5,737 4,446
------------------------------------------------------------------------------------------------
Accrued expenses 2,480 2,038 789
------------------------------------------------------------------------------------------------
Other liabilities 4,141 516 11
- --------------------------------------------------------------------------------------------------------
NET CASH FLOW FROM OPERATING ACTIVITIES 59,648 55,299 63,510
- --------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of investments - Available for sale 145,745 209,745 119,662
------------------------------------------------------------------------------------------------
Proceeds from maturity of investments - Available for sale 57,175 44,685 40,158
------------------------------------------------------------------------------------------------
Fixed assets purchased (9,838) (8,413) (7,092)
------------------------------------------------------------------------------------------------
Investments purchased - Available for sale (268,867) (243,861) (209,319)
------------------------------------------------------------------------------------------------
Acquisitions and other investments (28,719) (25,792) (5,490)
------------------------------------------------------------------------------------------------
Proceeds from sale of other investments 2,929 - -
------------------------------------------------------------------------------------------------
Swap expense - - (3,247)
------------------------------------------------------------------------------------------------
Other items 9 21 100
- --------------------------------------------------------------------------------------------------------
NET CASH APPLIED TO INVESTING ACTIVITIES (101,566) (23,615) (65,228)
- --------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Loan repaid - - (574)
------------------------------------------------------------------------------------------------
Loan received 1,379 - 294
------------------------------------------------------------------------------------------------
Loan repayment & interest received 389 418 436
------------------------------------------------------------------------------------------------
Redemption of preferred shares - (2,952) -
------------------------------------------------------------------------------------------------
Proceeds from shares issued 8,055 7,298 9,047
------------------------------------------------------------------------------------------------
Claims deposit liabilities (4,997) (3,244) (26,100)
------------------------------------------------------------------------------------------------
Pension fund reserves 79,753 - -
------------------------------------------------------------------------------------------------
Dividends paid (9,561) (8,101) (7,350)
- --------------------------------------------------------------------------------------------------------
NET CASH FLOW FROM (APPLIED TO)
FINANCING ACTIVITIES 75,018 (6,581) (24,247)
- --------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 33,100 25,103 (25,965)
- --------------------------------------------------------------------------------------------------------
Cash and cash equivalents at beginning of year 81,700 56,597 82,562
- --------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 114,800 $ 81,700 $ 56,597
- --------------------------------------------------------------------------------------------------------
Supplemental cash flow information:
Interest paid $ 55 $ 52 $ 86
- --------------------------------------------------------------------------------------------------------
Income taxes paid, net $ 9,486 $ 11,848 $ 4,902
- --------------------------------------------------------------------------------------------------------
</TABLE>
(1) Prior periods have been restated to reflect a pooling of interests
following the acquisition of CompFirst, Inc. and International Advisory
Services Group of Companies.
See accompanying notes to consolidated financial statements
F-4
<PAGE>
- --------------------------------------------------------------------------------
Notes to consolidated statements - December 31, 1998
- --------------------------------------------------------------------------------
1. GENERAL
Mutual Risk Management Ltd. (the "Company") was incorporated under the laws
of Bermuda in 1977. The Company is a holding company engaged, through its
subsidiaries, in providing risk management and financial services in the
United States, Bermuda, Barbados, the Cayman Islands and Europe. The "IPC
Companies" offer the IPC Program, an alternative risk facility for
insureds. The Company also provides administrative, accounting and
reinsurance services for unaffiliated captive insurers. Legion Insurance
Company, a Pennsylvania insurance company, Legion Indemnity Company, an
Illinois excess and surplus lines insurance company and Villanova Insurance
Company, a Massachusetts insurance company (together "Legion" or the
"Legion Companies") act as policy-issuing companies on many of the IPC
Programs reinsuring a portion of the liability and premium to one of the
IPC Companies. MRM Financial Services Ltd provides financial services to
offshore mutual funds and other companies. Other subsidiaries provide
specialty brokerage, proprietary loss control services and underwriting
management.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
These Consolidated Financial Statements have been prepared in accordance
with generally accepted accounting principles prevailing in the United
States ("GAAP") and are presented in United States Dollars.
A. Consolidation
(i) General
The Consolidated Financial Statements include the accounts of the Company
and all of its subsidiaries. All significant intercompany transactions and
balances have been eliminated on consolidation. Prior period results have
been restated to reflect a pooling of interests following the acquisition
of CompFirst Inc. and International Advisory Services Group of Companies
("IAS") (See note 17). All of the voting common shares of the IPC companies
are owned by wholly owned subsidiaries of the Company. All of the earnings,
assets and liabilities of the IPC companies attributable to the common
shareholders are consolidated on a line by line basis. All of the
non-voting preferred shares of the IPC companies are owned by program
holders (see note 2A(ii)). Management is required to make estimates that
affect the amounts reported in the Consolidated Financial Statements and
accompanying notes. Actual results may differ from those estimates.
(ii) Assets Held in and Liabilities Related to Separate Accounts
A substantial majority of the assets and liabilities of the IPC Companies
represents assets under management and related liabilities of the IPC
Programs. The program holders, through their ownership of preferred shares
in the IPC Companies enter into a Preferred Shareholder Agreement. The
preferred shares are redeemable after five years. The Preferred Shareholder
Agreements provide for the payment of dividends to the preferred
shareholders based on Premiums earned, investment income, expenses paid and
losses and loss expenses incurred in each separate account. The final
dividend on a program is determined when all incurred losses in all
underwriting years of a program are ultimately paid, the preferred
shareholder may not terminate its indemnity obligation under the Preferred
Shareholder Agreement before this time. Under the Preferred Shareholder
Agreement the program holder assumes investment and underwriting risk and
the IPC Company receives an administrative fee for managing the program.
Accordingly, the Company treats the Premium written in connection with
these programs, whether written directly or assumed as reinsurance, as
Premiums ceded to the separate accounts of the IPC Companies and does not
include such amounts in the Company's Premiums earned on the Consolidated
Statements of Income and Comprehensive Income. This Premium ceded amounted
to $251.4 million in 1998 (1997 - $277.4 million; 1996 - $195.2 million) of
which over 80% in each year relates to workers' compensation risks. The
assets and liabilities of the IPC Companies relating to the preferred
shareholders interest are shown separately on the Consolidated Balance
Sheets as "Assets held in and Liabilities related to separate accounts".
Included in these assets are cash and marketable investments of $381.8
million at December 31, 1998 (1997 - $390.7 million) and other assets of
$243.5 million (1997 - $212.5 million).
B. Investments
Investments are comprised of bonds, redeemable preferred shares and mutual
funds. All Investments are classified as available for sale in accordance
with SFAS 115 and are reported at fair market value with unrealized gains
and losses, net of tax, included in Accumulated other comprehensive income
in Shareholders' Equity.
Realized gains and losses on the sale of Investments are recognized in Net
income using the specific identification basis for Bonds and the average
cost method for Mutual Funds. Investments which incur a decline in value,
which is other than temporary, are written down to fair value as a new cost
basis with the amount of the write down included in Net income. Investment
income is accrued as earned and includes amortization of premium and
discount relative to bonds acquired at amounts other than their par value.
F-5
<PAGE>
C. Revenue Recognition
(i) Policy issuing fees earned are recorded as the premium is written and
earned over the applicable policy period. The unearned portion is included
in Prepaid fees on the Consolidated Balance Sheets.
(ii) Underwriting fees of the IPC Companies are earned over the applicable
policy period. The unearned portion of such fees is included in Prepaid
fees on the Consolidated Balance Sheets.
(iii) Investment fees earned by the IPC Companies are accrued on a daily
basis.
(iv) Commissions and brokerage fees are recorded and earned when the
business is placed with the reinsurance carrier, at which time
substantially all of the services have been performed.
(v) Premiums written and assumed are recorded on an accrual basis. Premiums
earned are calculated on a pro-rata basis over the terms of the applicable
underlying insurance policies with the unearned portion deferred on the
Consolidated Balance Sheets as Reserve for unearned premiums. Reinsurance
premiums ceded are similarly pro-rated with the prepaid portion recorded as
an asset in the Consolidated Balance Sheets. Premiums written which are
related to the separate accounts of the IPC Companies are included in
Premiums ceded (see Note 2A(ii)).
(vi) Net investment income is included after deducting various items as
detailed in Note 5C.
(vii) Realized capital (losses) gains include gains and losses on the sale
of investments available for sale, other investments and fixed assets (see
Note 5B(ii)).
D. Losses and Loss Expenses Incurred
Losses and related loss adjustment expenses are charged to income as they
are incurred and are net of losses recovered and recoverable of $657.8
million in 1998 (1997 - $521.9 million; 1996 - $203.9 million). Amounts
recoverable from reinsurers are estimated in a manner consistent with the
claim liability associated with the reinsured policy. Included in loss
reserves are gross loss reserves of $121.0 million and $95.0 million at
December 31, 1998 and 1997 which have been discounted by $36.2 million and
$28.1 million respectively, assuming interest rates of approximately 6% for
medical malpractice reserves and 4% for specific and aggregate workers'
compensation reserves. These reserves are also discounted for regulatory
filings. After reinsurance, the net effect of this discounting was to
increase Net income by $.9 million, $.1 million and $.2 million in 1998,
1997 and 1996 respectively. Discounting also reduced net loss reserves by
$4.7 million and $3.7 million at December 31, 1998 and 1997 respectively.
Reserves are established for losses and loss adjustment expenses relating
to claims which have been reported on the basis of evaluations of
independent claims adjusters under the supervision of the Company's claims
staff. In addition, reserves are established, in consultation with the
Company's independent actuaries, for losses which have occurred but have
not yet been reported to the Company and for adverse development of
reserves on reported losses. Reinsurance receivables are shown separately
on the Consolidated Balance Sheets. Management believes that the resulting
estimate of the liability for losses and loss adjustment expenses at
December 31, 1998 and 1997 is adequate to cover the ultimate net cost of
losses and loss expenses incurred, however, such liability is necessarily
an estimate and no representation can be made that the ultimate liability
will not exceed such estimate.
E. Claims Deposit Liabilities
The Company records certain programs that do not meet the conditions for
reinsurance accounting as Claims deposit liabilities on the Consolidated
Balance Sheets.
F. Income Taxes
The Company records its income tax liability and deferred tax asset in
accordance with SFAS 109. In accordance with this statement, the Company
records deferred income taxes which reflect the net tax effect of the
temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used for
income tax purposes.
G. Depreciation and Amortization
Depreciation of furniture and equipment is provided on a straight-line
basis over their estimated useful lives ranging from 2 to 10 years.
Amortization of leasehold improvements is computed on a straight-line basis
over the terms of the leases. Accumulated depreciation at December 31, 1998
amounted to $20.5 million (1997 - $12.4 million). Goodwill related to the
acquisition of subsidiaries is amortized on a straight-line basis over 25
to 40 years, is evaluated periodically for any impairment in value and is
included in Other expenses on the Consolidated Statements of Income and
Comprehensive Income. Accumulated amortization at December 31, 1998
amounted to $4.9 million (1997 - $2.9 million).
F-6
<PAGE>
- --------------------------------------------------------------------------------
Notes to consolidated statements - December 31, 1998
- --------------------------------------------------------------------------------
H. Deferred Expenses
Deferred expenses which consist primarily of policy acquisition costs are
deferred and charged to income on a pro-rata basis over the periods of the
related policies.
I. Earnings per Common Share
Basic earnings per share is based on weighted average common shares and
excludes any dilutive effects of options and convertible securities.
Diluted earnings per share assumes the conversion of dilutive convertible
securities and the exercise of all dilutive stock options (see Note 13).
Earnings per share, for 1997 and 1996, have been restated to reflect the
four-for-three stock split effective May 31, 1996 and the two-for-one stock
split effective September 26, 1997 (see Note 11). All earnings per share
have been restated to reflect the pooling of interests following the
acquisition of CompFirst, Inc. and International Advisory Services Group of
Companies.
J. Cash and Cash Equivalents
Cash and cash equivalents include cash on hand, money market instruments
and other debt issues purchased with an original maturity of ninety days or
less.
K. Zero Coupon Convertible Exchangeable Subordinated Debentures
The Debentures are recorded at original issue price plus accrued original
issue discount. The current amortization of the original issue discount is
included in Interest expense on the Consolidated Statements of Income.
L. Stock-Based Compensation
The Company applies APB Opinion 25 and related interpretations in
accounting for its stock option plans and accordingly, does not recognize
compensation cost as all options are issued with an exercise price equal to
the market price of the stock on the date of issue. Note 12 contains a
summary of the pro-forma effects to reported Net income and earnings per
share for 1998, 1997 and 1996 had the Company elected to recognize
compensation cost based on the fair value of the options granted at grant
date as prescribed by SFAS 123.
M. Pension Fund Reserves
Pension fund reserves represent receipts from the issuance of pension
investment contracts. Such receipts are considered deposits on investment
contracts that do not have mortality or morbidity risk. Account balances in
the accumulation phase are increased by deposits received and interest
credited and are reduced by withdrawals and administrative charges.
Calculations of contract holder account balances for investment contracts
reflect interest crediting rates ranging from 3.05% to 7.25% at December
31, 1998, based on contract provisions, the Company's experience and
industry standards. At December 31, 1998, the amount of pension fund
reserves related to products in the accumulation phase was $74.6 million.
Upon retirement, individuals can convert their accumulated pension fund
account balances into a benefit stream by purchasing a payout annuity from
the Company. Single premium life reserves are established for the payout
annuities in amounts adequate to meet the estimated future obligations of
the policies in force. The calculation of these reserves involves the use
of estimates concerning such factors as mortality rates, interest rates
averaging 6.85% at December 31, 1998, and future expense levels applicable
to the individual policies. Mortality assumptions are based on various
actuarial tables. These assumptions consider Company experience and
industry standards. To recognize the uncertainty in the reserve
calculation, the reserves include reasonable provisions for adverse
deviations from those estimates. At December 31, 1998, the amount of
pension fund reserves related to payout annuities was $5.2 million.
F-7
<PAGE>
- --------------------------------------------------------------------------------
Notes to consolidated statements - December 31, 1998
- --------------------------------------------------------------------------------
3. REINSURANCE AND CLIENT INDEMNIFICATION
A. Reinsurance contracts do not relieve the Company from its obligations to
policyholders. Failure of reinsurers to honor their obligations could
result in losses to the Company and allowances are established for amounts
deemed uncollectible. The Company evaluates the financial condition of its
reinsurers to minimize its exposure to losses from reinsurer insolvencies.
B. At December 31, 1998, Losses recoverable and Prepaid reinsurance of
$1,286.1 million (1997 - $786.7 million) had been ceded to reinsurers other
than the IPC Companies. $1,122.4 million of this amount (1997 - $761.6
million) has been ceded to reinsurers licensed in the United States which
are not required to provide letters of credit or other collateral to secure
their obligations. One such U.S. reinsurer accounted for $191.0 million
(1997 - $144.6 million). The remaining $163.7 million of reinsurance ceded
(1997 - $25.1 million) was ceded to reinsurers not licensed in the United
States, including $12.4 million ceded to companies managed by the Company
(1997 - $10.9 million). These non-U.S. reinsurers have provided collateral
security to the Company in the form of letters of credit and cash at
December 31, 1998 of $42.2 million (1997 - $31.3 million). Letters of
credit held by the Company are issued by and/or confirmed by member banks
of the U.S. Federal Reserve. The Company regularly reviews the credit
exposure which it has to each bank, together with that bank's financial
position and requires replacement of the collateral security in cases where
the exposure to the bank exceeds acceptable levels. The Company's largest
exposure to an individual bank amounted to $7.5 million at December 31,
1998 (1997 - $10.3 million). The IPC Companies have a $320 million (1997 -
$290 million) Letter of Credit facility pursuant to which letters of credit
are issued on their behalf to the Legion Companies and certain other US
insurance companies. This facility is fully collateralized by incoming
letters of credit and funds on deposit. The facility is guaranteed by the
Company. At December 31, 1998 a reserve for uncollectible reinsurance of
$.3 million was outstanding.
C. The Company's Reserve for unearned premiums and Reserve for losses and loss
expenses exclude reserves related to Premiums ceded to the IPC Companies,
where the program holders assume the underwriting risk relating to such
premium (see Note 2A(ii)). These reserves are included in Liabilities
related to separate accounts and amounted to $450.3 million at December 31,
1998 (1997 - $468.3 million). Clients of the Company's IPC Program
generally agree, as part of a Shareholder Agreement, to indemnify the
Company against certain underwriting losses on the IPC Program. Clients
generally provide letters of credit or cash deposits as collateral for this
indemnification, either in the full amount of the potential net loss or to
the level of expected losses as projected by the Company. These contractual
indemnifications from clients, whether fully or partially secured, amounted
to approximately $90.6 million at December 31, 1998 (1997 - $102.2 million)
of which $36.3 million (1997 - $38.1 million) is uncollateralized. The
uncollateralized amounts will vary based on the underwriting results of the
IPC Programs. Management reviews its collateral security position at the
inception and renewal of each IPC Program in order to minimize the risk of
loss. In order for the Company to sustain a loss on the portion of such
indemnity agreement secured by a letter of credit, the Company would have
to be unable to collect from both the client and the bank issuing the
letter of credit. The Company has a credit exposure in the event that
losses exceed their expected level and the client is unable or unwilling to
honor its indemnity to the Company or fails to pay the premium due. For
these reasons the Company has established provisions for losses on certain
of these programs. These provisions, which totalled $6.5 million at
December 31, 1998 (1997 - $5.6 million), reduced the level of Risk
management fees by $.9 million, $1.1 million and $.5 million for the years
ending December 31, 1998, 1997 and 1996 respectively.
D. Premiums earned are the result of the following:
<TABLE>
<CAPTION>
Year ended December 31, 1998 1997 1996
Premiums Premiums Premiums
(In thousands) Written Earned Written Earned Written Earned
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Direct $790,776 $753,463 $642,511 $542,907 $392,659 $349,223
- -------------------------------------------------------------------------------------------------------------------------
Assumed 59,657 48,291 12,917 15,492 13,232 15,514
- -------------------------------------------------------------------------------------------------------------------------
Ceded to IPC Companies(1) (251,443) (248,335) (277,448) (195,665) (195,244) (183,679)
- -------------------------------------------------------------------------------------------------------------------------
Ceded to third parties (494,042) (451,506) (281,810) (278,534) (155,599) (124,645)
- -------------------------------------------------------------------------------------------------------------------------
Net Premiums $104,948 $101,913 $96,170 $84,200 $55,048 $56,413
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) See Note 2A(ii)
F-8
<PAGE>
- --------------------------------------------------------------------------------
Notes to consolidated statements - December 31, 1998
- --------------------------------------------------------------------------------
4. RESERVE FOR LOSSES AND LOSS EXPENSES
The following table sets forth a reconciliation of beginning and ending
reserves for losses and loss expenses.
<TABLE>
<CAPTION>
Year ended December 31, (In thousands) 1998 1997 1996
-------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Gross reserves for losses and loss adjustment
expenses, beginning of year $716,461 $419,737 $315,689
-------------------------------------------------------------------------------------------
Recoverable from reinsurers 630,697 350,318 256,678
-------------------------------------------------------------------------------------------
Net reserves for losses and loss adjustment
expenses, beginning of year 85,764 69,419 59,011
-------------------------------------------------------------------------------------------
Provision for losses and loss adjustment
expenses for claims occurring in:
Current year 74,476 50,301 35,456
-------------------------------------------------------------------------------------------
Prior years 3,782 (444) (3,021)
-------------------------------------------------------------------------------------------
Total losses and loss adjustment expenses incurred 78,258 49,857 32,435
-------------------------------------------------------------------------------------------
Payments for losses and loss adjustment expenses
for claims occurring in:
Current year (15,039) (10,850) (11,072)
-------------------------------------------------------------------------------------------
Prior years (38,119) (22,662) (10,955)
-------------------------------------------------------------------------------------------
Total payments (53,158) (33,512) (22,027)
-------------------------------------------------------------------------------------------
Net reserves for losses and loss
adjustment expenses, end of year 110,864 85,764 69,419
-------------------------------------------------------------------------------------------
Recoverable from reinsurers 1,079,562 630,697 350,318
-------------------------------------------------------------------------------------------
Gross reserves for losses and
loss adjustment expenses, end of year $1,190,426 $716,461 $419,737
===========================================================================================
</TABLE>
5. INVESTMENTS
A. Cash and cash equivalents include amounts invested in commercial paper and
discount notes at December 31, 1998 of $29.1 million (1997 - $23.4
million). Substantially all of the remaining amount is invested in money
market or interest-bearing bank accounts.
B. (i) All Investments are held as available for sale. The amortized cost and
fair market value are as follows:
<TABLE>
<CAPTION>
Amortized Unrealized Unrealized Fair Market
At December 31, 1998 (In thousands) Cost Gain Loss Value
------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury Securities and Obligations of
U.S. Government Corporations and Agencies $189,236 $4,499 $10 $193,725
------------------------------------------------------------------------------------------------------
Corporate debt securities 155,613 2,519 1,457 156,675
------------------------------------------------------------------------------------------------------
Total Bonds 344,849 7,018 1,467 350,400
------------------------------------------------------------------------------------------------------
Redeemable Preferred Shares 2,108 46 6 2,148
------------------------------------------------------------------------------------------------------
346,957 7,064 1,473 352,548
------------------------------------------------------------------------------------------------------
Mutual Funds(1) 108,691 444 1,059 108,076
------------------------------------------------------------------------------------------------------
Total Investments $455,648 $7,508 $2,532 $460,624
======================================================================================================
At December 31, 1997 (In thousands)
------------------------------------------------------------------------------------------------------
U.S. Treasury Securities and Obligations of
U.S. Government Corporations and Agencies $201,204 $3,501 $341 $204,364
------------------------------------------------------------------------------------------------------
Corporate debt securities 98,694 2,041 12 100,723
------------------------------------------------------------------------------------------------------
Total Bonds 299,898 5,542 353 305,087
------------------------------------------------------------------------------------------------------
Redeemable Preferred Shares 800 - 5 795
------------------------------------------------------------------------------------------------------
300,698 5,542 358 305,882
------------------------------------------------------------------------------------------------------
Mutual Funds(1) 88,594 983 316 89,261
------------------------------------------------------------------------------------------------------
Total Investments $389,292 $6,525 $674 $395,143
======================================================================================================
</TABLE>
(1) The Company invests in Mutual Funds with fair market values of $102 million
(1997 - $84 million) which are administered by MRM Financial Services Ltd.,
a wholly-owned subsidiary of the Company.
The Company does not have any investment in a single corporate security
which exceeds 1.4% of total bonds at December 31, 1998 (1997 - 1.3%).
F-9
<PAGE>
- --------------------------------------------------------------------------------
Notes to consolidated statements - December 31, 1998
- --------------------------------------------------------------------------------
The following unrealized gains and losses on available for sale investments
have been recorded in Accumulated other comprehensive income in
Shareholders' equity:
<TABLE>
<CAPTION>
Gross Unrealized Net Unrealized
(In thousands) Gains (losses) Tax Gains (losses)
---------------------------------------------------------------------------
<S> <C> <C> <C>
January 1, 1996 $1,378 $(223) $1,155
---------------------------------------------------------------------------
Movement (1,058) (49) (1,107)
---------------------------------------------------------------------------
December 31, 1996 320 (272) 48
---------------------------------------------------------------------------
Movement 5,531 (1,544) 3,987
---------------------------------------------------------------------------
December 31, 1997 5,851 (1,816) 4,035
---------------------------------------------------------------------------
Movement (875) 120 (755)
---------------------------------------------------------------------------
December 31, 1998 $4,976 $(1,696) $3,280
===========================================================================
</TABLE>
The following table sets forth certain information regarding the investment
ratings of the Company's Bond and Redeemable Preferred Share portfolio.
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1997
Amortized Amortized
(In thousands) Cost Percentage Cost Percentage
---------------------------------------------------------------------------
Ratings/(1)/
<S> <C> <C> <C> <C>
AAA $202,561 58.39% $229,597 76.36%
---------------------------------------------------------------------------
AA 46,567 13.42 20,197 6.72
---------------------------------------------------------------------------
A 74,448 21.46 36,006 11.97
---------------------------------------------------------------------------
BBB 11,952 3.44 14,801 4.92
---------------------------------------------------------------------------
BB 10,929 3.15 97 .03
---------------------------------------------------------------------------
B 500 .14 - -
---------------------------------------------------------------------------
$346,957 100.00% $300,698 100.00%
===========================================================================
</TABLE>
/(1)/ Ratings as assigned by Standard & Poor's Corporation.
The maturity distribution of Investments in Bonds and Redeemable Preferred
Shares is as follows:
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1997
Amortized Fair Market Amortized Fair Market
(In thousands) Cost Value Cost Value
---------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Due in one
year or less $23,836 $24,035 $15,947 $15,854
---------------------------------------------------------------------------
Due in one
year through
five years 84,372 85,895 52,621 53,669
---------------------------------------------------------------------------
Due in five
years through
ten years 76,871 78,331 42,362 43,296
---------------------------------------------------------------------------
Due after
ten years 161,878 164,287 189,768 193,063
---------------------------------------------------------------------------
Total $346,957 $352,548 $300,698 $305,882
===========================================================================
</TABLE>
<TABLE>
<CAPTION>
(ii) Realized gains and losses:
Year ended December 31, (In thousands) 1998 1997 1996
---------------------------------------------------------------------------
<S> <C> <C> <C>
Proceeds from sale of Investments
- held as available for sale $145,745 $209,745 $119,662
---------------------------------------------------------------------------
Realized gains on Investments
- held as available for sale $1,703 $1,636 $808
---------------------------------------------------------------------------
Realized losses on Investments
- held as available for sale (3,201) (3,255) (2,670)
---------------------------------------------------------------------------
Net realized losses (1,498) (1,619) (1,862)
---------------------------------------------------------------------------
Other gains (losses) 495 11 (121)
---------------------------------------------------------------------------
Realized capital losses $(1,003) $(1,608) $(1,983)
===========================================================================
</TABLE>
F-10
<PAGE>
- --------------------------------------------------------------------------------
Notes to consolidated statements - December 31, 1998
- --------------------------------------------------------------------------------
C. Details of investment income by major categories are presented below:
<TABLE>
<CAPTION>
Year ended December 31, (In thousands) 1998 1997 1996
----------------------------------------------------------------------
<S> <C> <C> <C>
Cash and cash equivalents $5,931 $7,873 $11,721
----------------------------------------------------------------------
Mutual funds 9,214 4,729 -
----------------------------------------------------------------------
Preferred stock 79 349 453
----------------------------------------------------------------------
Bonds 19,866 16,875 15,910
----------------------------------------------------------------------
Gross investment income 35,090 29,826 28,084
----------------------------------------------------------------------
Claims deposit liabilities (4,314) (2,450) (4,023)
----------------------------------------------------------------------
Contract expense (728) (396) (930)
----------------------------------------------------------------------
Investment expenses (581) (473) (519)
----------------------------------------------------------------------
Net investment income $29,467 $26,507 $22,612
======================================================================
</TABLE>
Net investment income is reported after deducting investment income
earned on assets related to Claims deposit liabilities. Contract
expense represents investment income where the Company has contracted
to pay this income to the insured. Investment expenses consisting of
investment advisory fees and custodian charges have been deducted from
Net investment income.
D. Legion is required by certain states in which it operates to maintain
special deposits or provide letters of credit. This obligation
amounted to $152.2 million at December 31, 1998 (1997 - $135.3
million) and included deposits of $60.5 million (1997 - $51.3 million)
and letters of credit of $91.7 million (1997 - $84.0 million).
6. ZERO COUPON CONVERTIBLE EXCHANGEABLE SUBORDINATED DEBENTURES
On October 30, 1995, the Company issued $324.3 million principal
amount of Zero Coupon Convertible Exchangeable Subordinated Debentures
("Debentures") with an aggregate issue price of $115.0 million. The
issue price of each Debenture was $354.71 and there will be no
periodic payments of interest. The Debentures will mature on October
30, 2015 at $1,000 per Debenture representing a yield to maturity of
5.25% (computed on a semi-annual bond equivalent basis). The
Debentures are subordinated to all existing and future senior
indebtedness of the Company.
Each Debenture is convertible at the option of the holder at any time
on or prior to maturity, unless previously redeemed or otherwise
purchased by the Company, into Common Shares of the Company at a
conversion rate of 21.52 shares per Debenture or an aggregate of
6,978,800 Common Shares. The Debentures may be purchased by the
Company, at the option of the holder, as of October 30, 2000, October
30, 2005 and October 30, 2010, at the issue price plus accrued
original issue discount. The Company, at its option, may elect to pay
such purchase price on any particular purchase date in cash or Common
Shares, or any combination thereof. After October 30, 2000, each
Debenture is redeemable in cash at the option of the Company for an
amount equal to the issue price plus accrued original issue discount.
Prior to October 30, 2000 the Debentures will be purchased for cash by
the Company, at the option of the holder, in the event of a
Fundamental Change (as defined). In addition, the Company will have
the right, under certain circumstances, to require the holders to
exchange the Debentures for Guaranteed Zero Coupon Exchangeable
Subordinated Debentures due 2015 of Mutual Group Ltd. (the
"Exchangeable Debentures"), to be guaranteed on a subordinated basis
by the Company. The Exchangeable Debentures will be exchangeable for
the Company's Common Shares and will otherwise have terms and
conditions substantially identical to the Debentures. During the year
Debentures representing a principal amount of $24.1 million were
converted into 518,503 Common Shares.
F-11
<PAGE>
- --------------------------------------------------------------------------------
Notes to consolidated statements - December 31, 1998
- --------------------------------------------------------------------------------
7. COMPREHENSIVE INCOME
As of January 1, 1998, the Company adopted Statement 130, Reporting
Comprehensive Income. Statement 130 establishes new rules for the
reporting and display of comprehensive income and its components;
however, the adoption of this Statement had no impact on the Company's
Net income or Shareholders' Equity. Statement 130 requires unrealized
gains or losses on the Company's available for sale investments, which
prior to adoption were reported separately in Shareholders' Equity, to
be included in Other comprehensive income. Prior year financial
statements have been reclassified to conform to the requirements of
Statement 130.
<TABLE>
<CAPTION>
Before Tax Net of Tax
Year Ended December 31, 1998 (In thousands) Amount Tax Amount
--------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net unrealized (losses) gains on available for sale
investments arising during the year $(2,373) $697 $(1,676)
--------------------------------------------------------------------------------------
Less: reclassification adjustment for losses
realized in net income 1,498 (577) 921
--------------------------------------------------------------------------------------
Other comprehensive income $(875) $120 $(755)
--------------------------------------------------------------------------------------
</TABLE>
8. FAIR VALUE OF FINANCIAL INSTRUMENTS
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1997
Carrying Carrying
(In thousands) Amount Fair Value Amount Fair Value
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Investments $460,624 $460,624 $395,143 $395,143
--------------------------------------------------------------------------------------
Other investments $20,485 $20,485 $10,188 $10,188
--------------------------------------------------------------------------------------
Claims deposit liabilities $37,448 $32,624 $42,445 $38,542
--------------------------------------------------------------------------------------
Debentures $125,485 $144,252 $128,711 $135,561
--------------------------------------------------------------------------------------
</TABLE>
The following methods and assumptions were used to estimate the fair
value of specific classes of financial instruments. The carrying
values of all other financial instruments, as defined by SFAS 107,
approximate their fair values due to their short term nature.
Investments:
The fair market value of Investments is calculated using quoted market
prices.
Other investments:
Other investments consist primarily of privately held companies that
do not have readily ascertainable market values. These investments are
initially recorded at cost and are revalued based principally on
substantive events or factors which could indicate a diminution or
appreciation in value.
Claims deposit liabilities:
The fair value of Claims deposit liabilities is calculated by discounting
the actuarially determined ultimate loss payouts at a rate of 6%.
Debentures:
The fair value of the Debentures is calculated using discounted cash
flow analyses based on current borrowing rates for similar types of
borrowing arrangements.
Assets held in separate accounts:
(a) Within Assets held in separate accounts are cash and marketable
investments with a carrying value and fair value of $381.8 million
(1997: $390.7 million). Fair value is calculated using quoted market
prices (see Note 2A(ii)).
(b) Within the $243.5 million of other assets (1997: $212.5 million)
$78.5 million (1997: $61.4 million) are financial instruments. The
fair market value of other assets approximates carrying value due to
the short term nature of these items (see Note 2A(ii)).
F-12
<PAGE>
- --------------------------------------------------------------------------------
Notes to consolidated statements - December 31, 1998
- --------------------------------------------------------------------------------
9. INCOME TAXES
The Company is incorporated under the laws of Bermuda and, under current
Bermuda law, is not obligated to pay any taxes in Bermuda based upon income
or capital gains. The Company has received an undertaking from the Minister
of Finance in Bermuda pursuant to the provisions of the Exempted
Undertakings Tax Protection Act, 1966, which exempts the Company and its
shareholders, other than shareholders ordinarily resident in Bermuda, from
any Bermuda taxes computed on profits, income or any capital asset, gain or
appreciation, or any tax in the nature of estate duty or inheritance tax,
at least until the year 2016.
The Company does not consider itself to be engaged in a trade or business
in the United States and accordingly does not expect to be subject to
direct United States income taxation.
The United States subsidiaries of the Company file a consolidated U.S.
federal income tax return. Mutual Indemnity (U.S.) Ltd. and Premium
Securities Ltd., Bermuda subsidiaries of the Company, have made irrevocable
elections to be taxed as domestic United States corporations.
Income tax expense consists of:
<TABLE>
<CAPTION>
(In thousands) Current Deferred Total
------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
December 31, 1998:
U.S. federal $ 4,603 $ 3,198 $ 7,801
------------------------------------------------------------------------------------------------------------
U.S. state and local 141 (4) 137
------------------------------------------------------------------------------------------------------------
Foreign 568 - 568
------------------------------------------------------------------------------------------------------------
$ 5,312 $ 3,194 $ 8,506
============================================================================================================
December 31, 1997:
U.S. federal $ 11,103 $ (2,763) $ 8,340
------------------------------------------------------------------------------------------------------------
U.S. state and local 1,135 (26) 1,109
------------------------------------------------------------------------------------------------------------
Foreign 1,158 - 1,158
------------------------------------------------------------------------------------------------------------
$ 13,396 $ (2,789) $ 10,607
============================================================================================================
December 31, 1996:
U.S. federal $ 3,064 $ 2,556 $ 5,620
------------------------------------------------------------------------------------------------------------
U.S. state and local 1,163 9 1,172
------------------------------------------------------------------------------------------------------------
Foreign 1,345 - 1,345
------------------------------------------------------------------------------------------------------------
$ 5,572 $ 2,565 $ 8,137
============================================================================================================
<CAPTION>
The effective total tax rate differed from the statutory U.S. federal tax rate for the following reasons:
<S> <C> <C> <C>
Year ended December 31, 1998 1997 1996
------------------------------------------------------------------------------------------------------------
Statutory U.S. federal tax rate 35.0% 35.0% 35.0%
------------------------------------------------------------------------------------------------------------
Increase (reduction) in income taxes resulting from:
U.S. state taxes 0.1 1.2 1.7
------------------------------------------------------------------------------------------------------------
Tax-exempt interest income (2.1) (3.2) (5.9)
------------------------------------------------------------------------------------------------------------
Foreign income not expected to be taxed in the U.S. (18.4) (13.8) (12.9)
------------------------------------------------------------------------------------------------------------
Foreign taxes 0.8 2.0 2.9
------------------------------------------------------------------------------------------------------------
Other, net (3.6) (3.4) (3.2)
------------------------------------------------------------------------------------------------------------
11.8% 17.8% 17.6%
============================================================================================================
</TABLE>
F-13
<PAGE>
- --------------------------------------------------------------------------------
Notes to consolidated statements - December 31, 1998
- --------------------------------------------------------------------------------
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
December 31, 1998 and 1997 are presented below:
<TABLE>
<CAPTION>
<S> <C> <C>
(In thousands) 1998 1997
-----------------------------------------------------------------------------
Deferred tax assets:
Unearned premiums and fees not deducted for tax $7,355 $ 7,860
-----------------------------------------------------------------------------
Unpaid losses, discounted for tax 11,870 9,855
-----------------------------------------------------------------------------
Interest rate swap 704 -
-----------------------------------------------------------------------------
Other 154 108
-----------------------------------------------------------------------------
Total gross deferred tax assets 20,083 17,823
-----------------------------------------------------------------------------
Deferred tax liabilities:
Deferred acquisition costs (5,913) (7,544)
-----------------------------------------------------------------------------
Deferred marketing expenses (2,198) (1,076)
-----------------------------------------------------------------------------
Deferred market discount (923) -
-----------------------------------------------------------------------------
Unrealized gains (1,696) (1,816)
-----------------------------------------------------------------------------
Interest rate swap - (67)
-----------------------------------------------------------------------------
Other (7,820) (2,713)
-----------------------------------------------------------------------------
Total gross deferred tax liabilities (18,550) (13,216)
-----------------------------------------------------------------------------
Deferred tax benefit $ 1,533 $ 4,607
=============================================================================
</TABLE>
The movement in deferred tax benefit of $3.1 million for the year ended
December 31, 1998 consists of a $3.2 million charge attributable to income
for the year and a $.1 million credit attributable to unrealized gains on
investments.
10. REDEEMABLE PREFERRED AND COMMON SHARES
A. Series B Non-Voting Redeemable Preferred Shares - Authorized and issued
2,951,835, par value $1.00 per share. These shares were issued to one of
the IPC Companies as the holder of record for the benefit of the IPC
Program participants and were entitled to fixed, cumulative, preferential,
semi-annual dividends calculated at the six month LIBOR rate based on the
redemption price of $2.95 million. The Series B Non-Voting Redeemable
Preferred Shares were redeemed for their $1.00 par value or $2.95 million
in 1997. The average effective annual interest rate on these shares was
5.0% in 1997 (1996 - 5.6%).
B. Common Shares Subject to Redemption - Issued 937,168 at $1.75 per share.
These shares were issued to four executive officers of the Company. The
Company had the right to reacquire these shares if the employees defaulted
on the loans used for the purchase. Two subsidiaries of the Company made
loans to these executive officers during 1990 for the purchase of the
Common Shares Subject to Redemption. These loans have been repaid and the
Common Shares included in Shareholders' Equity.
11. SHAREHOLDERS' EQUITY AND RESTRICTIONS
A. In September 1997 the company announced a two-for-one stock split of its
Common Shares. In connection with this split the Company issued an
additional 18,741,121 Common Shares and 468,584 Common Shares subject to
redemption.
F-14
<PAGE>
- --------------------------------------------------------------------------------
Notes to consolidated statements - December 31, 1998
- --------------------------------------------------------------------------------
B. In May 1996 the Company announced a four-for-three stock split of its
Common Shares. In connection with this split the Company issued an
additional 4,438,974 Common Shares and 117,146 Common Shares subject to
redemption.
C. The Company's ability to pay dividends is subject to certain restrictions
including the following:
(i) The Company is subject to a 30% U.S. withholding tax on any dividends
received from its U.S. subsidiaries and certain of the IPC Companies.
(ii) The Company's ability to cause the Legion Companies to pay a dividend
is limited by insurance regulation to an annual amount equal to the greater
of 10% of the Legion Companies' statutory surplus as regards policyholders,
or the Legion Companies' statutory income for the preceding year. The
maximum dividend the Legion Companies will be permitted to pay under this
restriction in 1999 is $23.6 million based upon 1998 results (1998 - $21.9
million based on 1997 results). The Legion Companies' net assets which were
restricted by the above were $236.9 million at December 31, 1998 (1997 -
$208.4 million). Loans and advances by the Legion Companies to the Company
or any other subsidiary would require the prior approval of the
Pennsylvania insurance department and possibly other states in which they
are licensed.
D. At December 31, 1998 the Legion Companies' combined risk-based capital was
$225.5 million (1997 - $196.8 million). Under the risk-based capital tests,
the threshold requiring the least regulatory involvement was $78.5 million
(1997 - $45.6 million).
E. Net income and policyholders' surplus of the Legion Companies, as filed
with regulatory authorities on the basis of statutory accounting practices,
are as follows:
<TABLE>
<CAPTION>
Year ended December 31,(In thousands) 1998 1997 1996
-----------------------------------------------------------------------------
<S> <C> <C> <C>
Statutory net income for the year $ 20,238 $ 21,947 $ 19,903
-----------------------------------------------------------------------------
Statutory policyholders' surplus at year end $227,664 $200,249 $150,911
-----------------------------------------------------------------------------
</TABLE>
12. STOCK OPTIONS
Employees have been granted options to purchase Common Shares under the
Company's Long Term Incentive Plans. In each case, the option price equals
the fair market value of the Common Shares on the day of the grant and an
option's maximum term is five to ten years. Options granted vest ratably
over a four year period.
In accordance with the provisions of SFAS 123, the Company applies APB
Opinion 25 and related Interpretations in accounting for its stock option
plans and, accordingly, does not recognize compensation cost. If the
Company had elected to recognize compensation cost based on the fair value
of the options granted at grant date as prescribed by SFAS 123, net income
and earnings per share would have been reduced to the pro forma amounts
indicated in the table below:
<TABLE>
<CAPTION>
Year ended December 31, (In thousands
except per share amounts) 1998 1997 1996
------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income - as reported $ 63,632 $ 48,706 $ 37,750
------------------------------------------------------------------------------------
Net income - pro forma $ 59,836 $ 46,526 $ 36,572
------------------------------------------------------------------------------------
Basic earnings per share - as reported $ 1.58 $ 1.27 $ 1.01
------------------------------------------------------------------------------------
Basic earnings per share - pro forma $ 1.49 $ 1.21 $ .98
------------------------------------------------------------------------------------
Diluted earnings per share - as reported $ 1.43 $ 1.16 $ .95
------------------------------------------------------------------------------------
Diluted earnings per share - pro forma $ 1.36 $ 1.12 $ .93
------------------------------------------------------------------------------------
<CAPTION>
The fair value of each option grant is estimated on the date of grant using the Black-Scholes
option-pricing model with the following assumptions:
<S> <C> <C> <C>
Expected dividend yield 0.6% 0.5% 0.5%
-------------------------------------------------------------------------------------------------
Expected stock price volatility .307 - .330 .283 - .329 .283 - .329
-------------------------------------------------------------------------------------------------
Risk-free interest rate 5.3% 5.0% 5.0%
-------------------------------------------------------------------------------------------------
Expected life of options 4 years - 9 years 4 years - 9 years 4 years - 9 years
-------------------------------------------------------------------------------------------------
</TABLE>
F-15
<PAGE>
- --------------------------------------------------------------------------------
Notes to consolidated statements - December 31, 1998
- --------------------------------------------------------------------------------
The weighted average fair value of options granted during 1998 is $11.35
per share (1997 - $7.83 per share, 1996 - $4.10 per share).
The pro forma effect on net income for 1998, 1997 and 1996 is not
representative of the pro forma effect on net income in future years
because it does not take into consideration pro forma compensation expense
related to grants made prior to 1995.
Options issued and outstanding under the plans are as follows:
<TABLE>
<CAPTION>
Summary of Employee Stock Option Plan Activity
Year ended December 31, 1998 1997 1996
---------------------------------------------------------------------------------
Number of Options
<S> <C> <C> <C>
Outstanding, beginning of year 3,794,925 3,442,322 2,998,496
---------------------------------------------------------------------------------
Granted 1,010,399 1,015,100 1,469,834
---------------------------------------------------------------------------------
Exercised (563,293) (615,189) (986,478)
---------------------------------------------------------------------------------
Cancelled (21,451) (47,308) (39,530)
---------------------------------------------------------------------------------
Outstanding and exercisable, end of year 4,220,580 3,794,925 3,442,322
---------------------------------------------------------------------------------
<CAPTION>
Option Price Per Share
<S> <C> <C> <C>
Granted $26.25 - $38.31 $15.00 - $28.63 $14.25 - $16.78
-------------------------------------------------------------------------------------------
Exercised $7.97 - $26.25 $7.97 - $15.14 $7.75 - $10.83
-------------------------------------------------------------------------------------------
Cancelled $10.83 - $26.25 $7.97 - $19.38 $7.75 - $15.14
-------------------------------------------------------------------------------------------
Outstanding and
exercisable, end of year $7.97 - $38.31 $7.97 - $28.63 $7.75 - $16.78
-------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Summary of Options Outstanding at December 31, 1998
Weighted
Year of Number Number of Average Exercise
Grant of Shares Shares Vested Exercise Price Price Range Expiration Date Range
----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1994 312,635 312,635 $8.80 $7.97 - $9.56 March 15, 1999 to December 14, 1999
----------------------------------------------------------------------------------------------------------------------------
1995 502,537 360,684 $14.53 $9.52 - $15.14 February 3, 2000 to December 1, 2000
----------------------------------------------------------------------------------------------------------------------------
1996 1,400,234 404,057 $15.09 $14.25 - $16.78 January 2, 2001 to December 17, 2006
----------------------------------------------------------------------------------------------------------------------------
1997 994,775 257,158 $25.60 $15.00 - $28.63 January 31, 2002 to December 18, 2002
----------------------------------------------------------------------------------------------------------------------------
1998 1,010,399 - $35.24 $29.94 - $38.31 February 2, 2003 to December 16, 2003
----------------------------------------------------------------------------------------------------------------------------
4,220,580 1,334,534 $21.86
============================================================================================================================
</TABLE>
All options vest 25% annually commencing one year after issuance, except
for 770,000 of the options issued in 1996 at a grant price of $15, which
were issued to executives of the Company. These options are for 10 years
and 75% have vesting schedules tied to the conversion of the Zero Coupon
Convertible Exchangeable Subordinated Debentures (see Note 6) and other
performance benchmarks.
Options have been granted to each of eight outside directors. All options
are for five years and become exercisable six months after issuance.
Total options granted to directors are as follows:
<TABLE>
<CAPTION>
Year of Number of Shares Exercise Expiration
Grant Granted Outstanding Price Date
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1994 140,000 120,000 $9.19 December 1, 1999
--------------------------------------------------------------------------------
1995 140,000 140,000 $15.14 December 1, 2000
--------------------------------------------------------------------------------
1996 105,000 105,000 $16.69 December 1, 2001
--------------------------------------------------------------------------------
1997 75,000 75,000 $19.50-$27.81 May 21,2002 to December 1, 2002
--------------------------------------------------------------------------------
1998 60,000 60,00 $37.25 December 1, 2003
--------------------------------------------------------------------------------
520,000 500,000
================================================================================
</TABLE>
F-16
<PAGE>
- --------------------------------------------------------------------------------
Notes to consolidated statements - December 31, 1998
- --------------------------------------------------------------------------------
13. EARNINGS PER COMMON SHARE
The following table sets forth the computation of basic and diluted
earnings per common share.
<TABLE>
<CAPTION>
(In thousands, except shares and earnings per share) 1998 1997 1996
-------------------------------------------------------------------------------------------------
Numerator
<S> <C> <C> <C>
Net Income $63,632 $48,811 $37,916
-------------------------------------------------------------------------------------------------
Preferred share dividends - 105 166
-------------------------------------------------------------------------------------------------
Numerator for basic earnings per common share
- Net income available to common shareholders 63,632 48,706 37,750
-------------------------------------------------------------------------------------------------
Effect of dilutive securities:
Conversion of Zero Coupon
Convertible Exchangeable Subordinated Debentures 6,605 6,500 6,172
-------------------------------------------------------------------------------------------------
Numerator for diluted earnings per common share
- Net income available to common shareholders
after assumed conversions $70,237 $55,206 $43,922
=================================================================================================
Denominator
Denominator for basic earnings per common share
- weighted average shares 40,216,390 38,320,356 37,310,691
-------------------------------------------------------------------------------------------------
Effect of dilutive securities:
Stock options 2,223,900 1,565,950 1,108,484
-------------------------------------------------------------------------------------------------
Common shares subject to Redemption - 861,380 823,912
-------------------------------------------------------------------------------------------------
Conversion of Zero Coupon
Convertible Exchangeable Subordinated Debentures 6,734,091 6,978,800 6,978,800
-------------------------------------------------------------------------------------------------
Denominator for diluted earnings per common share
- adjusted weighted average shares
and assumed conversions 49,174,381 47,726,486 46,221,887
=================================================================================================
Basic earnings per common share $1.58 $1.27 $1.01
-------------------------------------------------------------------------------------------------
Diluted earnings per common share $1.43 $1.16 $.95
-------------------------------------------------------------------------------------------------
</TABLE>
14. DERIVATIVE FINANCIAL INSTRUMENTS
The Company has had only limited involvement with derivative financial
instruments and does not use them for trading or speculative purposes. They
are utilized to manage interest rate risk.
Interest rate swaps have been utilized to reduce the potential impact of
increases in interest rates on the market value of the fixed income
portfolio. At December 31, 1998 and 1997 the Company has no interest rate
swaps outstanding.
In June 1998, the Financial Accounting Standards Board issued Statement
133, "Accounting of Derivative Instruments and Hedging Activities". The
Statement requires recording all derivative instruments as assets or
liabilities, measured at fair value. The Statement is effective for fiscal
years beginning after June 15, 1999. The Company does not expect the
Statement to have a material impact on its financial position or results of
operations.
F-17
<PAGE>
- --------------------------------------------------------------------------------
Notes to consolidated statements - December 31, 1998
- --------------------------------------------------------------------------------
15. SEGMENT INFORMATION
Selected information by operating segment is summarized in the chart below.
Line of Business Financial Information
<TABLE>
<CAPTION>
Year ended December 31, (In thousands) 1998 1997 1996
--------------------------------------------------------------------------------------
Revenue(1)
<S> <C> <C> <C>
Program Business $82,358 $49,362 $20,845
--------------------------------------------------------------------------------------
Corporate Risk Management 43,266 48,213 54,473
--------------------------------------------------------------------------------------
Specialty Brokerage 9,021 8,351 7,035
--------------------------------------------------------------------------------------
Financial Services 14,343 8,744 6,059
--------------------------------------------------------------------------------------
Underwriting 101,913 84,200 56,413
--------------------------------------------------------------------------------------
Net investment income 28,464 24,899 20,629
--------------------------------------------------------------------------------------
Other 31 57 119
--------------------------------------------------------------------------------------
Total $279,396 $223,826 $165,573
======================================================================================
Income Before Income Taxes
and Minority Interest
Program Business $19,268 $19,692 $7,077
--------------------------------------------------------------------------------------
Corporate Risk Management 32,661 19,080 22,033
--------------------------------------------------------------------------------------
Specialty Brokerage 2,264 2,594 2,315
--------------------------------------------------------------------------------------
Financial Services 542 2,290 1,221
--------------------------------------------------------------------------------------
Underwriting (2,406) (1,472) (207)
--------------------------------------------------------------------------------------
Net investment income 21,804 18,346 14,371
--------------------------------------------------------------------------------------
Other (2,088) (1,112) (501)
--------------------------------------------------------------------------------------
Total $72,045 $59,418 $46,309
======================================================================================
</TABLE>
(1) Fee income from two clients accounted for 2% and 1% of total Fee
income in 1998 (1997 - 2% and 2%; 1996 - 3% and 2%). Premiums earned
from two clients accounted for 4% and 3% of total Premiums earned
during 1998 (1997 - 5% and 4%; 1996 - 5% and 4%). The subsidiaries'
accounting records do not capture information by reporting segment
sufficient to determine identifiable assets by such reporting
segments.
16. FOREIGN SALES AND OPERATIONS
The Company's non-U.S. operations include Bermuda, Barbados, the Cayman
Islands and Europe.
Financial Information Relating to Geographic Areas
<TABLE>
<CAPTION>
Year ended December 31, (In thousands) 1998 1997 1996
--------------------------------------------------------------------------------------------
Total Revenues
<S> <C> <C> <C>
U.S. Business $185,135 $155,039 $98,972
--------------------------------------------------------------------------------------------
Non-U.S. Business 94,261 68,787 66,601
--------------------------------------------------------------------------------------------
Total $279,396 $223,826 $165,573
============================================================================================
Income Before Income Taxes
and Minority Interest
U.S. Business $37,360 $37,825 $27,039
--------------------------------------------------------------------------------------------
Non-U.S. Business 34,685 21,593 19,270
--------------------------------------------------------------------------------------------
Total $72,045 $59,418 $46,309
============================================================================================
Total Assets
U.S. Business $2,049,301 $1,387,846 $891,855
--------------------------------------------------------------------------------------------
Non-U.S. Business(1) 992,180 794,169 776,658
--------------------------------------------------------------------------------------------
Total $3,041,481 $2,182,015 $1,668,513
============================================================================================
</TABLE>
(1) Includes Assets held in separate accounts of $722.3 million, $649.2
million and $595.6 million for 1998, 1997 and 1996 respectively.
F-18
<PAGE>
- --------------------------------------------------------------------------------
Notes to consolidated statements - December 31, 1998
- --------------------------------------------------------------------------------
17. ACQUISITIONS
During 1998 the Company acquired several new businesses for a total of
$25.6 million (1997 - $19.6 million). The excess of the purchase price over
net assets acquired was $21.9 million (1997 - $18.7 million). These
acquisitions were accounted for by the purchase method. The pro forma
effect on the Company's revenue, net income and earnings per share is not
material.
During 1998 the Company acquired CompFirst, Inc. and IAS in a business
combination accounted for as a pooling of interests. These companies became
wholly owned subsidiaries of the Company through the exchange of 943,821
Common Shares for 100% of each company's outstanding stock.
<TABLE>
<CAPTION>
Nine months ended Year ended Year ended
(In thousands) September 30, 1998 December 31, 1997 December 31, 1996
------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues
------------------------------------------------------------------------------------
MRM(1) $196,972 $214,786 $157,702
------------------------------------------------------------------------------------
Acquired companies 7,481 9,040 7,871
------------------------------------------------------------------------------------
As restated $204,453 $223,826 $165,573
====================================================================================
Net Income
------------------------------------------------------------------------------------
MRM(1) $ 45,256 $ 47,938 $ 37,198
------------------------------------------------------------------------------------
Acquired companies 1,565 873 718
------------------------------------------------------------------------------------
As restated $ 46,821 $ 48,811 $ 37,916
====================================================================================
</TABLE>
(1) As previously reported
Shareholders' equity at January 1, 1996 was restated as follows:
(In thousands) As previously reported Acquired companies As restated
-------------------------------------------------------------------------
Common shares $ 356 $ 10 $ 366
-------------------------------------------------------------------------
Additional paid-in capital 65,218 2,247 67,465
-------------------------------------------------------------------------
Accumulated other
comprehensive income 1,155 - 1,155
-------------------------------------------------------------------------
Retained earnings 98,774 1,202 99,976
-------------------------------------------------------------------------
Total shareholders' equity $165,503 $ 3,459 $168,962
=========================================================================
18. RELATED PARTY TRANSACTIONS
A. $6 million (1997 - $.9 million; 1996 - $.6 million) of fee income and $1.4
million (1997 - $4.2 million; 1996 - $2.9 million) of premiums were earned
from a certain IPC Program participant associated with a director and
shareholder of the Company.
B. A number of subsidiaries of the Company have written business involving
subsidiaries of The Galtney Group, Inc. ("GGI") of which a director of the
Company is the principal shareholder. During 1998 the Company paid fees of
$4.0 million on such business to GGI (1997 - $4.3 million; 1996 - $3.5
million).
C. The Company and its subsidiaries provide administrative and accounting
services to a number of unaffiliated insurance and reinsurance companies.
Certain officers, directors and employees of the Company serve as officers
and directors of these companies, generally without remuneration.
F-19
<PAGE>
- --------------------------------------------------------------------------------
Notes to consolidated statements - December 31, 1998
- --------------------------------------------------------------------------------
D. In connection with the Company's acquisition of The Hemisphere Group
Limited ("Hemisphere") in July 1996, the Company acquired a 40% interest in
the Hemisphere Trust Company Limited ("Hemisphere Trust"), a Bermuda
"local" trust company, which had formerly been a wholly owned subsidiary of
Hemisphere. As a "local" Bermuda company, at least 60% of the shares of
Hemisphere Trust must be owned by Bermudians. In compliance with this
requirement, Mr. Robert A. Mulderig, Chairman and CEO of the Company,
acquired 60% of Hemisphere Trust for $.2 million at the time of the
Company's acquisition of Hemisphere. The amount of the purchase price was
equal to 60% of the book value of Hemisphere Trust on the date of
acquisition.
The Company and Mr. Mulderig have entered into a Shareholders' Agreement
relating to Hemisphere Trust which provides, amongst other things, that (i)
the Company has the option, subject to regulatory approval to acquire Mr.
Mulderig's interest in Hemisphere Trust at Mr. Mulderig's cost, plus
interest at 6% per annum; (ii) the Company has a pre-emptive right, also
subject to regulatory approval, over the shares held by Mr. Mulderig and
(iii) no dividends or other distributions can be made by Hemisphere Trust
without the prior consent of the Company.
19. QUARTERLY FINANCIAL DATA - (UNAUDITED)
<TABLE>
<CAPTION>
1998 - Quarters Ended Dec 31 Sept 30 June 30 March 31
(In thousands, except per share data)
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues $74,943 $70,718 $63,120 $70,615
----------------------------------------------------------------------------------------
Income before income taxes
and minority interest 18,713 18,633 17,542 17,157
----------------------------------------------------------------------------------------
Income before minority interest 16,760 16,384 15,490 14,905
----------------------------------------------------------------------------------------
Net income 16,811 16,426 15,490 14,905
----------------------------------------------------------------------------------------
Net income available to
common shareholders 16,811 16,426 15,490 14,905
----------------------------------------------------------------------------------------
Basic earnings per Common Share:
Net income available to
common shareholders $ .41 $ .40 $ .39 $ .38
----------------------------------------------------------------------------------------
<CAPTION>
<S> <C> <C> <C> <C>
1997 - Quarters Ended Dec 31 Sept 30 June 30 March 31
(In thousands, except per share data)
----------------------------------------------------------------------------------------
Revenues $59,174 $64,518 $50,751 $49,383
----------------------------------------------------------------------------------------
Income before income taxes
and minority interest 15,495 16,516 14,205 13,202
----------------------------------------------------------------------------------------
Income before minority interest 12,875 13,445 11,565 10,926
----------------------------------------------------------------------------------------
Net income 12,875 13,445 11,565 10,926
----------------------------------------------------------------------------------------
Net income available to common shareholders 12,875 13,423 11,524 10,884
----------------------------------------------------------------------------------------
Basic earnings per Common Share:(1)(2)
Net income available to common shareholders $ .33 $ .35 $ .30 $ .29
----------------------------------------------------------------------------------------
</TABLE>
(1) The first three quarters of 1997 earnings per share amounts have been
restated to comply with SFAS 128 (see Note 2I).
(2) Prior periods per share calculations have been restated to reflect the
two-for-one stock split to holders of record at September 26, 1997.
(3) Prior period results have been restated to reflect a pooling of
interests following the acquisition of CompFirst, Inc. and
International Advisory Services Group of Companies.
F-20
<PAGE>
- --------------------------------------------------------------------------------
Independent auditors' report
- --------------------------------------------------------------------------------
[LOGO OF ERNST & YOUNG APPEARS HERE]
To the Board of Directors and Shareholders
Mutual Risk Management Ltd.
We have audited the accompanying consolidated balance sheets of Mutual Risk
Management Ltd. and subsidiaries as of December 31, 1998 and 1997, and the
related consolidated statements of income and comprehensive income, changes in
shareholders' equity, and cash flows for each of the three years in the period
ended December 31, 1998. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Mutual Risk
Management Ltd. and subsidiaries at December 31, 1998 and 1997, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1998, in conformity with accounting
principles generally accepted in the United States.
/s/ Ernst & Young
Hamilton, Bermuda
February 15, 1999
F-21
<PAGE>
EXHIBIT 10.11
MUTUAL RISK MANAGEMENT LTD.
---------------------------
DEFERRED COMPENSATION PLAN
--------------------------
1. ESTABLISHMENT OF PLAN
---------------------
MUTUAL RISK MANAGEMENT LTD., a Bermuda corporation, hereby establishes
the Mutual Risk Management Ltd. Deferred Compensation Plan (the "Plan"),
effective as of December 1, 1998, to permit eligible employees to defer the
receipt of compensation otherwise payable to such eligible employees in
accordance with the terms of the Plan. The Plan is unfunded and is maintained
primarily for the purpose of providing deferred compensation to a select group
of management or highly compensated employees.
2. DEFINITIONS
-----------
2.1 "Account" means the bookkeeping accounts established pursuant to
-------
Section 6.1 and maintained by the Administrator in the names of the respective
Participants, to which all amounts deferred, Company Contributions, and
earnings allocated under the Plan shall be credited, and from which all amounts
distributed under the Plan shall be debited.
2.2 "Administrator" means the Board or the person or person(s)
-------------
appointed by the Board.
2.3 "Affiliate" means, with respect to a Person, a Person that
---------
directly or indirectly controls, or is controlled by, or is under common control
with such Person.
2.4 "Annual Bonus" means the amount identified by the Company as a
------------
cash bonus earned by an Eligible Employee based on achievement of individual and
Participating Company performance goals.
2.5 "Base Salary" means an Eligible Employee's regular salary.
-----------
2.6 "Board" means the Board of Directors of the Company.
-----
2.7 "Code" means the Internal Revenue Code of 1986, as amended.
----
2.8 "Company" means Mutual Risk Management Ltd.
-------
2.9 "Compensation" means the Base Salary, Quarterly Bonus and Annual
------------
Bonus earned by an Eligible Employee.
<PAGE>
2.10 "Earnings Rate" means the investment gains and losses, as
-------------
determined by the Administrator, that are applied to a Participant's Account no
less frequently than annually.
2.11 "Election" means a written election on a form provided by the
--------
Administrator, filed with the Administrator in accordance with Article 3,
pursuant to which an Eligible Employee (a) elects to defer a percentage of the
Compensation earned for the performance of services as an Eligible Employee
following the time that such Election is filed and (b) elects the manner in
which payments under the Plan shall be made.
2.12 "Eligible Employee" means each employee of a Participating
-----------------
Company who is classified by the Participating Company as a management or highly
compensated employee eligible for participation in the Plan on the date on which
an Election is filed with the Administrator.
2.13 "Hardship" means a Participant's serious financial hardship, as
--------
determined by the Administrator on a uniform and nondiscriminatory basis
pursuant to the Participant's request under Section 5.3.
2.14 "Parent Company" means any corporation that, at the time in
--------------
question, is a parent corporation of the Company within the meaning of section
424(e) of the Code.
2.15 "Participant."
------------
2.15.1 "Participant" means each individual who has an
-----------
undistributed amount credited to an Account under the Plan.
2.15.2 "Active Participant" means each Participant who is
------------------
actively employed by a Participating Company as an Eligible Employee.
2.16 "Participating Company" means the Company and each other Parent
---------------------
Company or Subsidiary Company which participates in the Plan with the approval
of the Administrator.
2.17 "Period of Service" means an individual's period of service from
-----------------
such individual's date of hire by the Company, a Parent Company or a Subsidiary
Company to the date of termination of employment with the Company and all Parent
Companies and Subsidiary Companies.
2.18 "Person" means an individual, a corporation, a partnership, an
------
association, a trust or any other entity or organization.
-2-
<PAGE>
2.19 "Plan" means the Mutual Risk Management Ltd. Deferred
----
Compensation Plan.
2.20 "Plan Year" means the calendar year.
---------
2.21 "Severance Pay" means any amount identified by a Participating
-------------
Company as severance pay, or any amount which is payable on account of periods
beginning after the last date on which an employee (or former employee) is
required to report for work for a Participating Company.
2.22 "Subsidiary Company" means any corporation that, at the time in
------------------
question, is a subsidiary corporation of the Company within the meaning of
section 424(f) of the Code.
2.23 "Terminating Event" means the liquidation of the Company or a
-----------------
change of control, as determined by the Board.
3. ELECTION TO DEFER COMPENSATION
------------------------------
3.1 General.
-------
3.1.1 Elections. Each Eligible Employee shall have the right
---------
to defer a percentage of the aggregate Compensation which he or she may earn in
a Plan Year by filing an Election at the time and in the manner described in
this Article 3; provided that Severance Pay shall not be included as
"Compensation" for purposes of this Article 3 and provided further that an
Eligible Employee may file separate Elections for Base Salary and Annual Bonus.
In addition, on the first such Election (unless the Company shall provide
otherwise), the Eligible Employee shall elect the form in which benefits payable
under the Plan shall be paid, as further set forth in Section 5.1.
3.1.2 Withholding of Compensation Subject to an Election.
--------------------------------------------------
Except as the Participating Company may otherwise provide, the amount of
Compensation deferred by a Participant for a Plan Year pursuant to an Election
shall be withheld on a pro-rata basis from each periodic payment of the
Participant's Compensation (in accordance with the general pay practices of the
Participating Company) and credited to the Participant's Account in accordance
with Section 6.1, provided that separate Elections may apply to Base Salary and
Annual Bonus.
3.1.3 Irrevocability of Election. Any Election with respect
--------------------------
to a Plan Year filed pursuant to this Article 3 shall be irrevocable; provided
that the form of distribution may be modified in accordance with the rules
prescribed in Section 5.2.
3.2 Filing of Elections. The Election shall be made on the form
-------------------
provided by the Administrator for this purpose. Except as provided in Section
3.3 or otherwise by the
-3-
<PAGE>
Administrator, no Election with respect to Base Salary shall be effective unless
it is filed with the Administrator on or before the close of business on
December 31 preceding the Plan Year as to which the Election applies, and no
Election with respect to Annual Bonus shall be effective unless it is filed with
the Administrator on or before the date the Annual Bonus is paid.
3.3 Filing of Elections for First Year as an Eligible Employee.
----------------------------------------------------------
Notwithstanding Section 3.2, in the Plan Year an employee first becomes an
Eligible Employee, the Eligible Employee may elect to defer all or any portion
of his or her Compensation to be earned in such Plan Year beginning with the
payroll period next following the filing of an Election with the Administrator
and before the close of such Plan Year, by making and filing the Election with
the Administrator within 30 days of the date such employee becomes an Eligible
Employee. Elections by such Eligible Employee for succeeding Plan Years shall
otherwise be made in accordance with Section 3.1 and Section 3.2.
3.4 Plan Years to which Elections May Apply. A separate Election may
---------------------------------------
be made for each Plan Year as to which an Eligible Employee desires to defer all
or any portion of his or her Compensation, but the failure of an Eligible
Employee to make an Election for any Plan Year shall not affect such Eligible
Employee's right to make an Election for any other Plan Year.
4. VESTING
-------
4.1 Vesting in Deferrals. Participants will be immediately vested in
--------------------
their deferrals under Section 3.1.
5. DISTRIBUTIONS
-------------
5.1 Distribution Date and Form of Distribution. The vested amount
------------------------------------------
credited to a Participant's Account shall be distributed beginning as soon as
practicable following the earlier of the date designated by the employee in his
or her Election or the date the employee terminates employment. Distribution
shall be made in either a single lump sum or in installments over not more than
ten years, as elected by the Participant pursuant to the initial Election, in
accordance with Section 3.1.1.
5.2 Modification of Election as to Form of Distribution. Each Active
---------------------------------------------------
Participant who has previously made an Election may elect to change the form of
distribution by filing an Election ("Modification Election") with the
Administrator on or before the close of the Plan Year preceding the Plan Year in
which the distribution would otherwise be made. In the event the Active
Participant terminates employment prior to the end of the Plan Year in which the
Modification Election is made, the form of distribution shall be the form of
distribution elected by the Active Participant prior to the Modification
Election.
-4-
<PAGE>
5.3 Hardship Distributions. Notwithstanding the terms of an
----------------------
Election, if, at the Participant's request, the Administrator determines that
the Participant has incurred a Hardship, the Board may, in its discretion,
authorize the immediate distribution of all or any portion of the Participant's
Account.
6. BOOK ACCOUNTS
-------------
6.1 Establishment of Account. An Account shall be established for
------------------------
each Eligible Employee when such Eligible Employee becomes a Participant.
Compensation deferred pursuant to the Plan shall be credited to the Account on
the date such Compensation would otherwise have been payable to the Participant.
Company Contributions shall be credited to the Accounts as of the last day of
each Plan Year, or more frequently, as determined by the Administrator.
Earnings shall be credited to the Account as provided in Section 6.2.
6.2 Crediting of Earnings on Accounts. The Administrator shall
---------------------------------
credit Accounts, not less frequently than annually, with income, gains and
losses at the Earnings Rate, including during the period extending from a
Participant's employment termination date to the date the Participant's Account
is distributed in full; provided that the Administrator may provide that the
Earnings Rate for the Account of Participants who are receiving installment
distributions may be different from the Earnings Rate applied to the Accounts of
Active Participants.
6.3 Status of Deferred Amounts. Regardless of whether or not the
--------------------------
Company is a Participant's employer, all Compensation deferred under this Plan
shall continue for all purposes to be a part of the general funds of the
Company.
6.4 Participants' Status as General Creditors. Regardless of whether
-----------------------------------------
or not the Company is a Participant's employer, an Account shall at all times
represent the general obligation of the Company. The Participant shall be a
general creditor of the Company with respect to this obligation, and shall not
have a secured or preferred position with respect to his or her Accounts.
Nothing contained herein shall be deemed to create an escrow, trust, custodial
account or fiduciary relationship of any kind. Nothing contained herein shall
be construed to eliminate any priority or preferred position of a Participant in
a bankruptcy matter with respect to claims for wages.
7. NON-ASSIGNABILITY, ETC.
-----------------------
The right of each Participant in or to any Account, benefit or payment
hereunder shall not be subject in any manner to attachment or other legal
process for the debts of such Participant; and no Account, benefit or payment
shall be subject to anticipation, alienation, sale, transfer, assignment or
encumbrance.
-5-
<PAGE>
8. DEATH OF PARTICIPANT
--------------------
8.1 Death Before Commencement of Distributions. If a Participant's
------------------------------------------
employment is terminated by reason of death before the distribution of any
portion of his Account has begun, the Company shall, within ninety (90) days of
the date of such termination, distribute the Account to the beneficiary or
beneficiaries selected by the Participant. Distributions under this Section 8.1
shall be made in a single sum.
8.2 Designation of Beneficiaries. Each Participant shall have the
----------------------------
right to designate one or more beneficiaries to receive distributions in the
event of the Participant's death by filing with the Administrator a beneficiary
designation on the form provided by the Administrator for such purpose. The
designation of beneficiary or beneficiaries may be changed by a Participant at
any time prior to his or her death by the delivery to the Administrator of a new
beneficiary designation form. If no beneficiary shall have been designated, or
if no designated beneficiary shall survive the Participant, the Participant's
estate shall be deemed to be the beneficiary.
9. INTERPRETATION
--------------
The Board shall have full and exclusive authority to construe,
interpret and administer this Plan and the Board's construction and
interpretation thereof shall be binding and conclusive on all persons for all
purposes.
10. TERMINATING EVENT
-----------------
The Administrator shall give Participants at least thirty (30) days'
notice (or, if not practicable, such shorter notice as may be reasonably
practicable) prior to the anticipated date of a Terminating Event. The
Administrator may, in its discretion, provide in such notice that
notwithstanding any other provision of the Plan or the terms of any Election,
upon the consummation of a Terminating Event, the Account balance of each
Participant shall be distributed in full.
11. AMENDMENT OR TERMINATION
------------------------
The Company, by action of the Board or the Administrator, reserves the
right at any time, or from time to time, to amend or modify this Plan. The
Company, by action of the Board, reserves the right at any time, or from time to
time, to terminate this Plan.
-6-
<PAGE>
12. MISCELLANEOUS PROVISIONS
------------------------
12.1 No Right to Continued Employment. Nothing contained herein shall
--------------------------------
be construed as conferring upon any Participant the right to remain in the
employment of a Participating Company as an executive or in any other capacity.
12.2 Governing Law. This Plan shall be interpreted under the laws of
-------------
Pennsylvania and the United States. By executing an Election each Participant
irrevocably and unconditionally consents to submit to the exclusive jurisdiction
of the courts of the Commonwealth of Pennsylvania and of the United States of
America for any actions, suits or proceedings arising out of or relating to this
Plan and the transactions contemplated hereby ("Litigation") and agrees not to
commence any Litigation except in any such court, and further agrees that
service of process, summons, notice or document by U.S. registered mail to his
respective address shall be effective service of process for any Litigation
brought against him in any such court. Each party hereby irrevocably and
unconditionally waives any objection to the laying of venue of any Litigation in
the courts of the Commonwealth of Pennsylvania or of the United States of
America and hereby further irrevocably and unconditionally waives and agrees not
to plead or claim in any such court that any Litigation brought in any such
court has been brought in an inconvenient forum.
13. EFFECTIVE DATE
--------------
The effective date of the Plan is December 1, 1998.
-7-
<PAGE>
EXHIBIT 10.12
MUTUAL RISK MANAGEMENT LTD.
1998 LONG TERM INCENTIVE PLAN
-----------------------------
SECTION 1. Purpose; Definitions. The purpose of the Mutual Risk
--------------------
Management Ltd. 1998 Long Term Incentive Plan (the "Plan") is to offer to
certain employees, Associates and Directors of Mutual Risk Management Ltd. (the
"Company"), a Bermuda corporation and its subsidiaries, equity interests in the
Company, options to acquire equity interests in the Company, and other
performance-based incentive awards, thereby attracting, retaining and motivating
such persons, and strengthening the mutuality of interests between such persons
and the Company's shareholders.
For purposes of the Plan, the following initially capitalized words
and phrases shall be defined as set forth below, unless the context clearly
requires a different meaning:
a. "Affiliate" means, with respect to a person or entity, a person
---------
that directly or indirectly controls, or is controlled by, or is under common
control with such person or entity.
b. "Associate" means a consultant, contractor or other provider of
---------
services to the Company or any of its Affiliates.
c. "Board" means the Board of Directors of the Company, as
-----
constituted from time to time.
d. "Cause" occurs when the Participant, as determined by the Board:
-----
(i) has engaged in any type of disloyalty to the Company,
including without limitation, fraud, embezzlement, theft,
or dishonesty in the course of his employment or
engagement, or has otherwise breached any fiduciary duty
owed to the Company;
(ii) has been convicted of a felony;
(iii) has disclosed trade secrets or confidential information of
the Company; or
(iv) has breached any agreement with or duty to the Company in
respect of confidentiality, non-disclosure, non-competition
or otherwise.
e. "Change of Control" means:
-----------------
(i) the acquisition in one or more transactions by any "Person"
(as the term person is used for purposes of Sections 13(d)
or 14(d) of the
<PAGE>
Exchange Act) of "Beneficial ownership" (within the meaning
of Rule 13d-3 promulgated under the Exchange Act) of
twenty-five percent (25%) or more of the combined voting
power of the Company's then outstanding voting securities
(the "Voting Securities"), provided that for purposes of
this clause (i) Voting Securities acquired directly from
the Company by any Person shall be excluded from the
determination of such Person's Beneficial ownership of
Voting Securities (but such Voting Securities shall be
included in the calculation of the total number of Voting
Securities then outstanding); or
(ii) approval by shareholders of the Company of:
(A) a merger, reorganization or consolidation involving
the Company if the shareholders of the Company
immediately before such merger, reorganization or
consolidation do not or will not own directly or
indirectly immediately following such merger,
reorganization or consolidation, more than fifty
percent (50%) of the combined voting power of the
outstanding voting securities of the company resulting
from or surviving such merger, reorganization or
consolidation in substantially the same proportion as
their ownership of the Voting Securities outstanding
immediately before such merger, reorganization or
consolidation; or
(B) a complete liquidation or dissolution of the Company;
(C) an agreement for the sale or other disposition of all
or substantially all of the assets of the Company; or
(iii) acceptance by shareholders of the Company of shares in a
share exchange if the shareholders of the Company
immediately before such share exchange do not or will not
own directly or indirectly immediately following such share
exchange more than fifty percent (50%) of the combined
voting power of the outstanding voting securities of the
entity resulting from or surviving such share exchange in
substantially the same proportion as their ownership of the
Voting Securities outstanding immediately before such share
exchange.
f. "Code" means the Internal Revenue Code of 1986, as amended from
----
time to time, and any successor thereto.
-2-
<PAGE>
g. "Committee"shall mean the Committee appointed by the Board in
---------
accordance with Section 2 of the Plan, if one is appointed, in which event in
connection with this Plan, the Committee shall possess all of the power and
authority of, and shall be authorized to take any and all actions required to be
taken hereunder by, and make any and all determinations required to be taken
hereunder by, the Board.
h. "Director" means a member of the Board.
--------
i. "Disability"shall mean a disability of an employee or a Director
----------
which renders such employee or Director unable to perform the full extent of his
duties and responsibilities by reason of his illness or incapacity, as
determined by the Board. "Disabled" shall mean having a Disability. The
Board's determination of whether a Participant is Disabled shall be conclusive;
provided that,
- -------- ----
(i) if a Participant is bound by the terms of an employment
agreement between the Participant and the Company, whether
the Participant is "Disabled" for purposes of the Plan shall
be determined in accordance with the procedures set forth in
said employment agreement, if such procedures are therein
provided; and
(ii) a Participant bound by such an employment agreement shall
not be determined to be Disabled under the Plan any earlier
than he would be determined to be disabled under his
employment agreement.
j. "Exchange Act" means the Securities Exchange Act of 1934, as
------------
amended.
k. "Fair Market Value" means, as of any date: (i) the closing price
-----------------
of the Shares as reported on the principal nationally recognized stock exchange
on which the Shares are traded on such date, or if no Share prices are reported
on such date, the closing price of the Shares on the next preceding date on
which there were reported Share prices; or (ii) if the Shares are not listed or
admitted to unlisted trading privileges on a nationally recognized stock
exchange, the closing price of the Shares as reported by The NASDAQ Stock Market
on such date, or if no Share prices are reported on such date, the closing price
of the Shares on the next preceding date on which there were reported Share
prices; or (3) if the Shares are not listed or admitted to unlisted trading
privileges on a nationally recognized stock exchange or traded on The NASDAQ
Stock Market, then the Fair Market Value shall be determined by the Board acting
in its discretion, which determination shall be conclusive.
l. "Incentive Stock Option" means any Option intended to be and
----------------------
designated as an "Incentive Stock Option" within the meaning of Section 422 of
the Code.
-3-
<PAGE>
m. "Long-Term Performance Award" or "Long-Term Award" means an award
--------------------------- ---------------
made pursuant to Section 8 hereof that is payable in cash and/or Shares
(including Restricted Stock, Performance Shares and Performance Units) in
accordance with the terms of the grant, based on Company, business unit and/or
individual performance, in each case as determined by the Committee and as set
forth in the grant letter.
n. "Non-Employee Director" shall have the meaning set forth in Rule
---------------------
16b-3(b)(3) promulgated by the Securities and Exchange Commission under the
Exchange Act, or any successor definition adopted by the Securities and Exchange
Commission; provided, however, that the Board or the Committee may, in its sole
discretion, substitute the definition of "outside director" provided in the
regulations under Section 162(m) of the Code in place of the definition of Non-
Employee Director contained in the Exchange Act.
o. "Non-Qualified Stock Option" means any Option that is not an
--------------------------
Incentive Stock Option.
p. "Participant" means an employee, Director, or Associate of the
-----------
Company or a Subsidiary to whom an award is granted pursuant to the Plan.
q. "Performance Share" means an award made pursuant to Section 9
-----------------
hereof of the right to receive Shares at the end of a specified performance
period.
r. "Performance Unit" means an award made pursuant to Section 10
----------------
hereof of the right to receive cash at the end of a specified performance
period.
s. "Restricted Stock" means an award of Shares that is subject to
----------------
restrictions pursuant to Section 7 hereof.
t. "Retirement" means termination of the employment of a Participant
----------
with the Company, an Affiliate (including parent) or a Subsidiary other than (i)
a termination effected at the direction of the Company or parent (whether or not
the Company effects such termination for Cause), (ii) termination on account of
Disability, or (iii) termination on account of death. With respect to a Director
who is not also an employee of the Company, Retirement shall occur at such time
as the individual ceases to be a Director.
u. "Rules" means Section 16 of the Exchange Act and the regulations
-----
promulgated thereunder.
v. "SAR" means a share appreciation right granted under the Plan and
---
described in Section 6 hereof.
-4-
<PAGE>
w. "Securities Broker" means a registered securities broker
-----------------
acceptable to the Company who agrees to effect the cashless exercise of an
Option pursuant to Section 5(l) hereof.
x. "Share" means a share of stock of the Company, subject to
-----
substitution or adjustment as provided in Section 3(c) hereof.
y. "Stock Option" or "Option" means any option to purchase Shares
------------ ------
(including Restricted Stock, if the Committee so determines) granted pursuant to
Section 5 hereof.
z. "Subsidiary" means, in respect of the Company or parent, a
----------
subsidiary company, whether now or hereafter existing, as defined in Sections
424(f) and (g) of the Code.
SECTION 2. Administration.
--------------
(a) Procedure. The Plan shall be administered by the Board or a
---------
Committee consisting of not less than two (2) persons appointed by the Board,
which shall be the Administrator. In the event the Company has a class of
equity securities registered under the Exchange Act, the Board shall administer
the Plan; provided that it may appoint a Committee in accordance with Section
3(b).
(b) Committees. If a Committee is appointed by the Board, then the
----------
Committee shall possess the power and authority of the Board in administering
the Plan on behalf of the Board, subject to the terms and conditions as the
Board may prescribe.
Members of the Committee shall be members of the Board and shall serve
for such period of time as the Board may determine. From time to time, the
Board may increase the size the Committee and appoint additional members
thereto, remove members (with or without cause) and appoint new members in
substitution therefor, fill vacancies however caused, or remove all members of
the Committee and thereafter directly administer the Plan. Notwithstanding the
foregoing, in the event the Company has a class of equity securities registered
under the Exchange Act, the Committee shall be composed solely of two (2) or
more Non-Employee Directors.
(c) Powers of the Administrator. Subject to the provisions of the
---------------------------
Plan (and, in the case of the Committee, the specific duties delegated by the
Board to such Committee), the Administrator shall have the authority, in its
sole discretion: (i) to make Awards of Options; (ii) to determine, upon review
of relevant information and in accordance with Section 5 of the Plan, the Fair
Market Value per Share; (iii) to determine the exercise price of the Options to
be awarded in accordance with Section 5 of the Plan; (iv) to determine the
Employees to whom, and the time or times at which, Options shall be awarded, and
the number of Shares to be subject to each Option; (v) to prescribe, amend and
rescind rules and regulations relating to the Plan;
-5-
<PAGE>
(vi) to determine the terms and provisions of each Option awarded under the
Plan, each Option Agreement and each Stock Purchase Agreement (which need not be
identical with the terms of other Options, Option Agreements and Stock Purchase
Agreements) and, with the consent of the Optionee, to modify or amend an
outstanding Option, Option Agreement or Stock Purchase Agreement; (vii) to
accelerate the vesting or exercise date of any Option; (viii) to determine
whether any Optionee will be required to execute a stock repurchase agreement or
other agreement as a condition to the exercise of an Option, and to determine
the terms and provisions of any such agreement (which need not be identical with
the terms of any other such agreement) and, with the consent of the Optionee, to
amend any such agreement; (ix) to interpret the Plan or any agreement entered
into with respect to the Award or exercise of Options; (x) to authorize any
person to execute on behalf of the Company any instrument required to effectuate
the Award of an Option previously awarded by the Board or to take such other
actions as may be necessary or appropriate with respect to the Company's rights
pursuant to Options or agreements relating to the Award or exercise thereof; and
(xi) to make such other determinations and establish such other procedures as it
deems necessary or advisable for the administration of the Plan.
(d) Effect of the Board's or Committee's Decision. All decisions,
---------------------------------------------
determinations and interpretations of the Board or the Committee shall be final
and binding with respect to all Options and Optionees.
(e) Limitation of Liability. Notwithstanding anything herein to the
-----------------------
contrary, no member of the Board or of the Committee shall be liable for any
good faith determination, act or failure to act in connection with the Plan or
any Option awarded hereunder
SECTION 3. Shares Subject to the Plan.
--------------------------
a. Shares Subject to the Plan. The Shares to be subject or related
--------------------------
to awards under the Plan shall be authorized and unissued Shares of the Company,
whether or not previously issued and subsequently acquired by the Company. The
maximum number of Shares that may be the subject of awards under the Plan is
5,000,000, or such lesser amount as the Board shall determine, and the Company
shall reserve for the purposes of the Plan, out of its authorized and unissued
Shares, such number of Shares.
b. Effect of the Expiration or Termination of Awards. If and to the
-------------------------------------------------
extent that an award made under the Plan expires, terminates or is canceled or
forfeited for any reason without having been exercised in full, the Shares
associated with the expired, terminated, canceled or forfeited portion of the
award shall again become available for award under the Plan.
c. Other Adjustment. In the event of any merger, reorganization,
----------------
consolidation, recapitalization, Share distribution or dividend, Share split or
combination, or other change in entity structure affecting the Shares, such
substitution or adjustment shall be made in the aggregate number, type and
issuer of the securities reserved for issuance under the Plan, in the
-6-
<PAGE>
number and Option price of securities subject to outstanding Options granted
under the Plan and in the number and price of securities subject to other awards
made under the Plan, as may be determined to be appropriate by the Board in its
sole discretion, provided that the number of securities subject to any award
shall always be a whole number. The Board, in its sole discretion, shall make
appropriate equitable anti-dilution adjustments to the number of then-
outstanding SARs, and to the Fair Market Value upon which the value of such SARs
is based.
SECTION 4. Eligibility. Employees, Directors and Associates of the Company
-----------
or its Subsidiaries are eligible to be granted awards under the Plan. Directors
who are not employees of the Company or a Subsidiary are eligible to be granted
awards under the Plan, but are not eligible to be granted Incentive Stock
Options.
SECTION 5. Options. Options granted under the Plan may be of two types: (i)
-------
Incentive Stock Options or (ii) Non-Qualified Stock Options. Options may be
granted alone, in addition to or in tandem with other awards granted under the
Plan. Any Option granted under the Plan shall be in such form as the Board may
from time to time approve.
The Board shall have the authority to grant any Participant eligible under
Section 4 Incentive Stock Options, Non-Qualified Stock Options, or both types of
Options (in each case with or without SARs). To the extent that any Option does
not qualify as an Incentive Stock Option, it shall constitute a separate Non-
Qualified Stock Option.
Options granted under the Plan shall be subject to the following terms and
conditions and shall contain such additional terms and conditions, not
inconsistent with the terms of the Plan, as the Board shall deem appropriate;
provided, however, that the provisions of Option awards need to be the same with
respect to each Participant:
a. Option Price. The exercise price per Share purchasable under a
------------
Non-Qualified Stock Option shall be determined by the Board. The exercise price
per Share purchasable under an Incentive Stock Option shall be 100% of the Fair
Market Value of the Share on the date of the grant. However, any Incentive
Stock Option granted to any Participant who, at the time the Option is granted,
owns more than 10% of the voting power of all classes of shares of the Company
or of a Subsidiary shall have an exercise price per Share of not less than 110%
of Fair Market Value per Share on the date of the grant.
b. Option Term. The term of each Option shall be fixed by the Board, but
-----------
no Option shall be exercisable more than ten years after the date the Option is
granted. However, any Incentive Stock Option granted to any Participant who, at
the time such Option is granted, owns more than 10% of the voting power of all
classes of shares of the Company or of a Subsidiary may not have a term of more
than five years. No Option may be exercised by any person after expiration of
the term of the Option.
-7-
<PAGE>
c. Exercisability. Options shall vest and be exercisable at such time or
--------------
times and subject to such terms and conditions as shall be determined by the
Board at the time of grant. If the Board provides, in its discretion, that any
Option is exercisable only in installments, the Board may waive such installment
exercise provisions at any time at or after grant, in whole or in part, based on
such factors as the Board shall determine, in its sole discretion.
d. Method of Exercise. Subject to the exercise provisions under
------------------
Section 5(c) and the termination provisions set forth in Sections 5(f) through
(i), Options may be exercised in whole or in part at any time and from time to
time during the term of the Option, by giving written notice of exercise to the
Company specifying the number of Shares to be purchased. Such notice shall be
accompanied by payment in full of the purchase price, either by certified or
bank check, or such other instrument as the Board may accept. As determined by
the Board, in its sole discretion, at or after grant, payment in full or in part
of the exercise price of an Option may be made in the form of unrestricted Stock
based on the Fair Market Value of the Shares on the date the Option is
exercised; provided, however, that, in the case of an Incentive Stock Option,
the right to make a payment in the form of already owned Shares may be
authorized only at the time the Option is granted.
No Shares shall be issued upon exercise of an Option until full payment
therefor has been made. A Participant shall not have the right to distributions
or dividends or any other rights of a shareholder with respect to Shares subject
to the Option until the Participant has given written notice of exercise, has
paid in full for such Shares, and, if requested, has given the representation
described in Section 14(a) hereof.
e. Non-transferability of Options. Except as otherwise provided by the
------------------------------
Board or in any Option agreement, (i) no Option shall be transferable by the
Participant otherwise than by will or by the laws of descent and distribution,
and (ii) all Options shall be exercisable during the Participant's lifetime only
by the Participant or, in the event of his Disability, by his personal
representative.
f. Termination by Reason of Death. Subject to Section 5(j), if a
------------------------------
Participant's service with the Company or any Subsidiary terminates by reason of
death, any Option held by such Participant may thereafter be exercised, to the
extent then exercisable or on such accelerated basis as the Board may determine
at or after grant, by the legal representative of the estate or by the legatee
of the Participant under the will of the Participant, for a period expiring (i)
at such time as may be specified by the Board at or after the time of grant, or
(ii) if not specified by the Board, then one year from the date of death, or
(iii) if sooner than the applicable period specified under (i) or (ii) above,
then upon the expiration of the stated term of such Option.
g. Termination by Reason of Disability. Subject to Section 5(j), if an
-----------------------------------
Participant's service with the Company or any Subsidiary terminates by reason of
Disability, any Option held by such Participant may thereafter be exercised by
the Participant or his personal representative, to the extent it was exercisable
at the time of termination, or on such accelerated basis as the
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<PAGE>
Board may determine at or after grant, for a period expiring (i) at such time as
may be specified by the Board at or after the time of grant, or (ii) if not
specified by the Board, then one year from the date of termination of service,
or (iii) if sooner than the applicable period specified under (i) or (ii) above,
then upon the expiration of the stated term of such Option.
h. Termination for Cause. If the Participant's employment is terminated
---------------------
for Cause, any Option held by such Participant shall immediately expire.
i. Other Termination. Subject to Section 5(j), if a Participant's
-----------------
service with the Company or any Subsidiary terminates for any reason other than
death or Disability, any Option held by such Participant may thereafter be
exercised by the Participant, to the extent it was exercisable at the time of
such termination or on such accelerated basis as the Board may determine at or
after the time of grant, for a period expiring (i) at such time as may be
specified by the Board at or after the time of grant, or (ii) if not specified
by the Board, then ninety (90) days from the date of termination of service, or
(iii) if sooner than the applicable period specified under (i) or (ii) above,
then upon the expiration of the stated term of such Option.
j. Change of Control. In the event of a Change of Control, except
-----------------
to the extent otherwise specifically set forth in any Option agreement, the
Board may, in its sole discretion, cause all outstanding options to immediately
become fully exercisable, may immediately and fully terminate such options
without any further obligation of the Company under such options whatsoever, or
may take any other or further action or combination of actions as it may
determine with respect to the exercisability or other terms of such options.
k. Incentive Stock Option Limitations. To the extent required for
----------------------------------
"incentive stock option" status under Section 422 of the Code, the aggregate
Fair Market Value (determined as of the time of grant) of the Shares with
respect to which Incentive Stock Options are exercisable for the first time by
the Participant during any calendar year under the Plan and/or any other plan of
the Company or any Subsidiary shall not exceed $100,000. For purposes of
applying the foregoing limitation, Incentive Stock Options shall be taken into
account in the order granted.
l. Cashless Exercise. The Company may, in the sole discretion of
-----------------
the Board, cooperate in a "cashless exercise" of an Option. The cashless
exercise shall be effected by the Participant delivering to the Securities
Broker instructions to sell a sufficient number of Shares to cover the costs and
expenses associated therewith.
SECTION 6. Share Appreciation Rights.
-------------------------
a. Grant. SARs may be granted alone ("Stand-Alone SARs") or in
-----
conjunction with all or part of any Option granted under the Plan ("Tandem
SARs"). In the case of a Non-Qualified Stock Option, a Tandem SAR may be granted
either at or after the time of the
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<PAGE>
grant of such Option. In the case of an Incentive Stock Option, a Tandem SAR may
be granted only at the time of the grant of such Option.
b. Exercise.
--------
(i) Tandem SARs. A Tandem SAR or applicable portion
-----------
thereof shall terminate and no longer be exercisable upon the termination or
exercise of the related Option or portion thereof, except that, unless otherwise
determined by the Board, in its sole discretion at the time of grant, a Tandem
SAR granted with respect to less than the full number of Shares covered by a
related Option shall be reduced only after such related Option is exercised or
otherwise terminated with respect to the number of Shares not covered by the
Tandem SAR.
A Tandem SAR may be exercised by a Participant by surrendering the
applicable portion of the related Option, only at such time or times and to the
extent that the Option to which such Tandem SAR relates shall be exercisable in
accordance with the provisions of Section 5 and this Section 6. Options which
have been so surrendered, in whole or in part, shall no longer be exercisable to
the extent the related Tandem SARs have been exercised.
Upon the exercise of a Tandem SAR, a Participant shall be entitled to
receive, upon surrender to the Company of all (or a portion) of an Option in
exchange for cash and/or Shares, an amount equal to the excess of (A) the Fair
Market Value, as of the date such Option (or such portion thereof) is
surrendered, of the Shares covered by such Option (or such portion thereof) over
(B) the aggregate exercise price of such Option (or such portion thereof).
Upon the exercise of a Tandem SAR, the Option or part thereof to which
such Tandem SAR is related, shall be deemed to have been exercised for the
purpose of the limitation set forth in Section 3 of the Plan on the number of
Shares to be issued under the Plan, but only to the extent of the number of
Shares issued under the Tandem SAR at the time of exercise based on the value of
the Tandem SAR at such time.
A Tandem SAR may be exercised only if and when the Fair Market Value
of the Shares subject to the Option exceeds the exercise price of such Option.
(ii) Stand-Alone SARs. A Stand-Alone SAR may be exercised
----------------
by a Participant giving notice of intent to exercise to the Company, provided
that all or a portion of such Stand-Alone SAR shall have become vested and
exercisable as of the date of exercise.
Upon the exercise of a Stand-Alone SAR, a Participant shall be
entitled to receive, in either cash and/or Shares, an amount equal to the
excess, if any, of (A) the Fair Market Value, as of the date such SAR (or
portion of such SAR) is exercised, of the Shares covered by such SAR (or portion
of such SAR) over (B) the Fair Market Value of the Shares covered by such
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<PAGE>
SAR (or a portion of such SAR ) as of the date such SAR (or a portion of such
SAR) was granted.
c. Terms and Conditions. SARs shall be subject to such terms
--------------------
and conditions, not inconsistent with the provisions of the Plan, as shall be
determined from time to time by the Board, in its sole discretion; provided,
however, that the provisions of SAR awards need not be the same with respect to
each Participant. Such terms and conditions include the following:
(i) Non-Transferability. No SAR shall be transferable by
-------------------
the Participant otherwise than by will or by the laws of descent and
distribution and all SARs shall be exercisable, during the Participant's
lifetime, only by the Participant or, in the event of his Disability, by his
personal representative.
(ii) Term of SAR. The term of each SAR shall be fixed by the
-----------
Board, provided that the term of a Tandem SAR shall be determined by the terms
of the applicable Option, and provided further that the term of a Stand-Alone
SAR shall be ten (10) years, unless another term is specified by the Board.
(iii) Exercisability. SARs shall vest and be exercisable at
--------------
such time or times and subject to such terms and conditions as shall be
determined by the Board at the time of grant, provided that the term of a Tandem
SAR shall be determined by the terms of the applicable Option. A Participant
shall not have any rights as a shareholder with respect to any SAR.
(iv) Termination of Employment. Unless otherwise specified
-------------------------
in the terms of an award, SARs shall be subject to the terms of Sections 5(f)-
(i) with respect to exercise upon termination of employment.
(v) Change of Control. In the event of a Change of
-----------------
Control, except to the extent otherwise specifically set forth in any SAR
agreement, the Board may, in its sole discretion, cause all outstanding SARs to
immediately become fully exercisable, may immediately and fully terminate such
SARs without any further obligation of the Company under such SARs whatsoever,
or may take any other or further action or combination of actions as it may
determine with respect to the exercisability or other terms of such SARs.
SECTION 7. Restricted Stock.
----------------
a. Administration. Restricted Stock may be issued either alone
--------------
or in addition to other awards granted under the Plan. The Board shall
determine the persons to whom, and the time or times at which, grants of
Restricted Stock will be made, the number of Shares to be
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<PAGE>
awarded, the price (if any) to be paid by the recipient of Restricted Stock, the
time or times within which such awards may be subject to forfeiture, and all
other conditions of the awards.
The Board may condition the vesting of Restricted Stock upon the
attainment of specified performance goals or such other factors as the Board may
determine, in its sole discretion, at the time of the award.
The provisions of Restricted Stock awards need not be the same with
respect to each Participant.
b. Awards and Certificates. The prospective recipient of a
-----------------------
Restricted Stock award shall not have any rights with respect to such award,
unless and until such recipient has executed an agreement evidencing the award
and has delivered a fully executed copy thereof to the Company, and has
otherwise complied with the applicable terms and conditions of such award. The
purchase price for Restricted Stock may be zero.
Each Participant receiving a Restricted Stock award shall be issued a
share certificate in respect of such Restricted Stock. Such certificate shall
be registered in the name of such Participant, and shall bear an appropriate
legend referring to the terms, conditions, and restrictions applicable to such
award, substantially in the following form:
"The transferability of this certificate and the shares represented
hereby are subject to the terms and conditions (including forfeiture)
of the Mutual Risk Management Ltd. 1998 Long Term Incentive Plan and
an Agreement entered into between the registered owner and Mutual Risk
Management Ltd. Copies of such Plan and Agreement are on file in the
principal offices of Mutual Risk Management Ltd. and will be made
available to any Shareholder without charge upon request to the
Secretary of the Company."
The Board shall require that the share certificates evidencing
Restricted Stock be held in custody by the Company until the restrictions
thereon shall have lapsed, and that, as a condition of any Restricted Stock
award, the Participant shall have delivered to the Company a share power,
endorsed in blank, relating to the Shares covered by such award.
c. Restrictions and Conditions. The Restricted Stock awarded
---------------------------
pursuant to this Section 7 shall be subject to the following restrictions and
conditions:
(i) During a period set by the Board commencing with the
date of such award (the "Restriction Period"), the Participant shall not be
permitted to sell, transfer, pledge, assign or otherwise encumber Restricted
Stock awarded under the Plan. The Board, in its sole discretion, may provide for
the lapse of such restrictions in installments and may accelerate
-12-
<PAGE>
or waive such restrictions in whole or in part, based on service, performance
and/or such other factors or criteria as the Board may determine, in its sole
discretion.
(ii) Except as provided in this paragraph (ii) and Section
7(c)(i), once the Participant has been issued a certificate or certificates for
Restricted Stock, the Participant shall have, with respect to the Restricted
Stock, all of the rights of a shareholder of the Company, including the right to
vote the Shares, and the right to receive any cash distributions or dividends.
The Board, in its sole discretion, as determined at the time of award, may
permit or require the payment of cash distributions or dividends to be deferred
and, if the Board so determines, reinvested in additional Restricted Stock to
the extent Shares are available under Section 3 of the Plan.
(iii) Subject to the applicable provisions of the award
agreement and this Section 7, upon termination of a Participant's service with
the Company for reasons other than death or Disability during the Restriction
Period, all Restricted Stock still subject to restriction shall be forfeited by
the Participant. Subject to the provisions of the Plan, the Board, in its sole
discretion, may provide for the lapse of such restrictions in installments and
may waive such restrictions, in whole or in part, at any time, based on such
factors as the Board shall deem appropriate in its sole discretion. Upon the
death or Disability of a Participant during the Restriction Period, restrictions
will lapse with respect to a percentage of the Restricted Stock award granted to
the Participant that is equal to the percentage of the Restriction Period that
has elapsed as of the date of death or the date on which such Disability
commenced (as determined by the Board in its sole discretion), and a share
certificate or share certificates representing such Shares, without bearing the
restrictive legend described in Section 7(b), shall be delivered by the Company
to the Participant or the Participant's estate, as the case may be, in exchange
for the share certificate or share certificates that contain such restrictive
legend.
(iv) In the event of hardship or other special
circumstances of a Participant whose service with the Company is involuntarily
terminated (other than for Cause), the Board may, in its sole discretion, waive
in whole or in part any or all remaining restrictions with respect to such
Participant's Restricted Stock, based on such factors as the Board may deem
appropriate.
(v) If and when the Restriction Period expires without a
prior forfeiture of the Restricted Stock subject to such Restriction Period, the
certificates for such Shares, without bearing the restrictive legend described
in Section 7(b), shall be promptly delivered by the Company to the Participant,
in exchange for the share certificate or share certificates that contain such
restrictive legend.
(vi) In the event of a Change in Control, except as
otherwise set forth in any Restricted Stock agreement, the Board, in its sole
discretion, may cause all Restricted Stock remaining subject to forfeiture to
immediately cease to be subject to forfeiture and a share
-13-
<PAGE>
certificate or shares certificates representing such Shares, without bearing the
restrictive legend described in Section 7(b), shall be issued by the Company and
delivered to the Participant, in exchange for the share certificate or share
certificates that contain such restrictive legend. Notwithstanding the
foregoing, in the event of a Change of Control, the Board may, in its sole
discretion, cause all outstanding Restricted Stock to immediately become fully
terminable without any further obligation of the Company under such Restricted
Stock whatsoever, or may take any other or further action or combination of
actions as it may determine with respect to the other terms of such Restricted
Stock.
SECTION 8. Long-Term Performance Awards.
----------------------------
a. Awards and Administration. Long-Term Performance Awards may
-------------------------
be awarded either alone or in addition to other awards granted under the Plan.
Prior to award of a Long-Term Performance Award, the Board shall determine the
nature, length and starting date of the performance period (the "performance
period") for each Long-Term Performance Award. Performance periods may overlap
and Participants may participate simultaneously with respect to Long-Term
Performance Awards that are subject to different performance periods and/or
different performance factors and criteria. Prior to award of a Long-Term
Performance Award, the Board shall determine the performance objectives to be
used in awarding Long-Term Performance Awards and determine the extent to which
such Long-Term Performance Awards have been earned. Performance objectives may
vary from Participant to Participant and between groups of Participants and
shall be based upon such Company, business unit and/or individual performance
factors and criteria as the Board may deem appropriate, including, but not
limited to, earnings per Share or return on equity.
At the beginning of each performance period, the Board shall determine
for each Long-Term Performance Award subject to such performance period the
range of dollar values or number of Shares to be awarded to the Participant at
the end of the performance period if and to the extent that the relevant
measure(s) of performance for such Long-Term Performance Award is (are) met.
Such dollar values or number of Shares may be fixed or may vary in accordance
with such performance and/or other criteria as may be specified by the Board, in
its sole discretion.
b. Adjustment of Awards. In the event of special or unusual
--------------------
events or circumstances affecting the application of one or more performance
objectives to a Long-Term Performance Award, the Board may revise the
performance objectives and/or underlying factors and criteria applicable to the
Long-Term Performance Awards affected, to the extent deemed appropriate by the
Board, in its sole discretion, to avoid unintended windfalls or hardship.
c. Termination of Service. Unless otherwise provided in the
----------------------
applicable award agreements, if a Participant terminates service with the
Company during a performance period because of death, Disability or Retirement,
such Participant (or his estate) shall be entitled
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<PAGE>
to a payment with respect to each outstanding Long-Term Performance Award at the
end of the applicable performance period:
(i) based, to the extent relevant under the terms of the award, upon
the Participant's performance for the portion of such performance period ending
on the date of termination and the performance of the applicable business
unit(s) for the entire performance period, and
(ii) pro-rated, where deemed appropriate by the Board, for the
portion of the performance period during which the Participant was employed by
or served on the Board of the Company, all as determined by the Board, in its
sole discretion.
However, the Board may provide for an earlier payment in settlement of
such award in such amount and under such terms and conditions as the Board deems
appropriate, in its sole discretion.
Except as otherwise determined by the Board, if a Participant
terminates service with the Company during a performance period for any other
reason, then such Participant shall not be entitled to any payment with respect
to the Long-Term Performance Awards subject to such performance period, unless
the Board shall otherwise determine, in its sole discretion.
In the event of a Change of Control, except as otherwise set forth in
any further agreement relating to a Long-Term Performance Award, the Board may,
in its sole discretion, cause all conditions applicable to the Long-Term
Performance Award to immediately terminate and a share certificate or share
certificates representing Shares subject to such award, or cash, as the case may
be, to be issued and/or delivered to the Participant. Notwithstanding the
foregoing, in the event of a Change of Control, the Board may, in its sole
discretion, cause all outstanding Long-Term Performance Awards to immediately
become fully terminable without any further obligation of the Company under such
Long-Term Performance Awards whatsoever, or may take any other or further action
or combination of actions as it may determine with respect to the other terms of
such Long-Term Performance Awards.
d. Form of Payment. The earned portion of a Long-Term
---------------
Performance Award may be paid currently or on a deferred basis, together with
such interest or earnings equivalent as may be determined by the Board, in its
sole discretion. Payment shall be made in the form of cash or whole Shares,
including Restricted Stock, either in a lump sum payment or in annual
installments commencing as soon as practicable after the end of the relevant
performance period, all as the Board shall determine at or after grant. If and
to the extent a Long-Term Performance Award is payable in Shares and the full
amount of such value is not paid in Shares, then the Shares representing the
portion of the value of the Long-Term Performance Award not paid in Shares shall
again become available for award under the Plan, subject to Section 3(b). A
Participant whose Long-Term Performance Award is payable in Shares or Restricted
Stock shall
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<PAGE>
not have any rights as a shareholder until such share certificate or share
certificates have been issued to such Participant, and, if requested, the
Participant has given the representation described in Section 13(a) hereof.
Prior to any payment, the Board shall certify that all of the performance goals
or other material terms of the award have been met.
SECTION 9. Performance Shares.
------------------
a. Awards and Administration. The Board shall determine the
-------------------------
persons to whom and the time or times at which Performance Shares shall be
awarded, the number of Performance Shares to be awarded to any such person, the
duration of the period (the "performance period") during which, and the
conditions under which, receipt of the Shares will be deferred, and the other
terms and conditions of the award in addition to those set forth below.
The Board may condition the receipt of Shares pursuant to a
Performance Share award upon the attainment of specified performance goals or
such other factors or criteria as the Board shall determine, in its sole
discretion.
The provisions of Performance Share awards need not be the same with
respect to each Participant, and such awards to individual Participants need not
be the same in subsequent years.
b. Terms and Conditions. Performance Shares awarded pursuant
--------------------
to this Section 9 shall be subject to the following terms and conditions and
such other terms and conditions, not inconsistent with the terms of this Plan,
as the Board shall deem desirable:
(i) Conditions. The Board, in its sole discretion, shall
----------
specify the performance period during which, and the conditions under which, the
receipt of Shares covered by the Performance Share award will be deferred.
(ii) Share Certificate. At the expiration of the
-----------------
performance period, if the Board, in its sole discretion, determines that the
conditions specified in the Performance Share agreement have been satisfied, a
share certificate or share certificates evidencing the number of Shares covered
by the Performance Share award shall be issued and delivered to the Participant.
A Participant shall not be deemed to be the holder of Shares, or to have the
rights of a holder of Shares, with respect to the Performance Shares unless and
until a share certificate or share certificates evidencing such Shares are
issued to such Participant.
(iii) Death, Disability or Retirement. Subject to the
-------------------------------
provisions of the Plan, if a Participant terminates service with the Company
during a performance period because of death, Disability or Retirement, such
Participant (or his estate) shall be entitled to receive, at the expiration of
the performance period, a percentage of Performance Shares that is equal to the
percentage of the performance period that had elapsed as of the date of
termination, provided that
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<PAGE>
the Board, in its sole discretion, determines that the conditions specified in
the Performance Share agreement have been satisfied. In such event, a share
certificate or share certificates evidencing such Shares shall be issued and
delivered to the Participant or the Participant's estate, as the case may be.
(iv) Termination of Service. Unless otherwise determined
----------------------
by the Board at the time of grant, the Performance Shares will be forfeited upon
a termination of service during the performance period for any reason other than
death, Disability or Retirement.
(v) Change of Control. In the event of a Change in
-----------------
Control, except as otherwise specifically set forth in any agreement relating to
Performance Shares, the Board may, in its sole discretion, cause all conditions
applicable to the Performance Shares to immediately terminate and a share
certificate or share certificates evidencing Shares subject to the Share award
to be issued and delivered to the Participant. Notwithstanding the foregoing, in
the event of a Change of Control, the Board may, in its sole discretion, cause
all outstanding Performance Shares to immediately become fully terminable
without any further obligation of the Company under such Performance Shares
whatsoever, or may take any other or further action or combination of actions as
it may determine with respect to the other terms of such Performance Shares.
SECTION 10. Performance Units.
-----------------
a. Awards and Administration. The Board shall determine the
-------------------------
persons to whom and the time or times at which Performance Units shall be
awarded, the number of Performance Units to be awarded to any such person, the
duration of the period (the "performance period") during which, and the
conditions under which, a Participant's right to Performance Units will be
vested, the ability of Participants to defer the receipt of payment of such
Performance Units, and the other terms and conditions of the award in addition
to those set forth below.
A Performance Unit shall have a dollar value, which shall be set from
time to time by the Board.
The Board may condition the vesting of Performance Units upon the
attainment of specified performance goals or such other factors or criteria as
the Board shall determine, in its sole discretion.
The provisions of Performance Unit awards need not be the same with
respect to each Participant, and such awards to individual Participants need not
be the same in subsequent years.
-17-
<PAGE>
b. Terms and Conditions. Performance Units awarded pursuant to
--------------------
this Section 10 shall be subject to the following terms and conditions and such
other terms and conditions, not inconsistent with the terms of this Plan, as the
Board shall deem desirable:
(i) Conditions. The Board, in its sole discretion, shall
----------
specify the performance period during which, and the conditions under which, the
Participant's right to Performance Units will be vested.
(ii) Vesting. At the expiration of the performance period,
-------
the Board, in its sole discretion, shall determine the extent to which the
performance goals have been achieved, and the percentage of the Performance
Units of each Participant that have vested.
(iii) Death, Disability or Retirement. Subject to the
-------------------------------
provisions of this Plan, if a Participant terminates service with the Company
during a performance period because of death, Disability or Retirement, such
Participant (or the Participant's estate) shall be entitled to receive, at the
expiration of the performance period, a cash distribution equal to the value of
a percentage of Performance Units that is equal to the percentage of the
performance period that had elapsed as of the date of termination, provided that
the Board, in its sole discretion, determines that the conditions specified in
the Performance Unit agreement have been satisfied, and payment thereof shall be
made to the Participant or the Participant's estate, as the case may be.
(iv) Termination of Service. Unless otherwise determined
----------------------
by the Board at the time of grant, the Performance Units will be forfeited upon
a termination of service during the performance period for any reason other than
death, Disability or Retirement.
(v) Change of Control. In the event of a Change in
-----------------
Control, except as otherwise set forth in any agreement relating to Performance
Units, the Board, may, in its sole discretion, cause all conditions applicable
to the Performance Units to immediately terminate and cash representing the full
amount of such award to be paid to the Participant. Notwithstanding the
foregoing, in the event of a Change of Control, the Board may, in its sole
discretion, cause all outstanding Performance Units to immediately become fully
terminable without any further obligation of the Company under such Performance
Units whatsoever, or may take any other or further action or combination of
actions as it may determine with respect to the other terms of such Performance
Units.
SECTION 11. Employee Stock Purchase Plan. The Mutual Risk Management
----------------------------
Ltd. Employee Stock Purchase Plan (the "ESPP") as attached hereto at Appendix I
may be adopted and made effective by the Company, and shall be made a part of
this Plan at the time of its adoption. The ESPP shall be administered in
accordance with the terms of this Plan to the extent consistent with the terms
of the ESPP.
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<PAGE>
SECTION 12. Amendments and Termination. The Board may amend, alter
--------------------------
or discontinue the Plan at any time, but no amendment, alteration or
discontinuation shall be made which would impair the rights of a Participant
with respect to an Option, SAR, Restricted Stock, Long-Term Performance Award,
Performance Share or Performance Unit which has been granted under the Plan,
without the Participant's consent, or which, without the approval of such
amendment within one year (365 days) of its adoption by the Board, by a majority
of the votes cast at a duly held shareholder meeting at which a quorum
representing a majority of the Company's outstanding voting shares is present
(either in person or by proxy), would:
a. except as expressly provided in the Plan, increase the total
number of Shares reserved for the purposes of the Plan;
b. change the persons or class of persons eligible to participate in
the Plan; or
c. extend the maximum Option term under Section 5(b) of the Plan.
The Board may substitute new Options for previously granted Options,
including previously granted Options having higher exercise prices.
Subject to the above provisions, the Board shall have broad authority
to amend the Plan to take into account changes in applicable tax laws and
accounting rules, as well as other developments.
SECTION 13. Unfunded Status of Plan. The Plan is intended to
-----------------------
constitute an "unfunded" plan for incentive and deferred compensation. With
respect to any payments not yet made to a Participant by the Company, nothing
contained herein shall give any such Participant any rights that are greater
than those of a general creditor of the Company. In its sole discretion, the
Board may authorize the creation of trusts or other arrangements to meet the
obligations created under the Plan to deliver Shares or payments in lieu of
Shares or with respect to awards hereunder.
SECTION 14. General Provisions.
------------------
a. The Board may require each person acquiring Shares or a
Share-based award under the Plan to represent to and agree with the Company in
writing that the Participant is acquiring the Shares or Share-based award for
investment purposes and without a view to distribution thereof and as to such
other matters as the Board believes are appropriate to ensure compliance with
applicable Federal and state securities laws. The certificate evidencing such
award and any securities issued pursuant thereto may include any legend which
the Board deems appropriate to reflect any restrictions on transfer and
compliance with securities laws.
All certificates for Shares or other securities delivered under the
Plan shall be subject to such share-transfer orders and other restrictions as
the Board may deem advisable
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<PAGE>
under the rules, regulations, and other requirements of the Securities Act of
1933, as amended, the Exchange Act, any stock exchange upon which the Shares are
then listed, and any other applicable Federal or state securities laws, and the
Board may cause a legend or legends to be put on any such certificates to make
appropriate reference to such restrictions.
b. Nothing contained in the Plan shall prevent the Board from
adopting other or additional compensation arrangements, subject to shareholder
approval if such approval is required; and such arrangements may be either
generally applicable or applicable only in specific cases.
c. The adoption of the Plan shall not confer upon any employee
of the Company or a Subsidiary any right to continued employment with the
Company or such Subsidiary, nor shall it interfere in any way with the right of
the Company or such Subsidiary to terminate the employment of any of its
employees at any time.
d. No later than the date as of which an amount first becomes
includable in the gross income of the Participant for Federal income tax
purposes with respect to any award under the Plan, the Participant shall pay to
the Company, or make arrangements satisfactory to the Board regarding the
payment, of any Federal, state or local taxes of any kind required by law to be
withheld with respect to such amount. Unless otherwise determined by the Board,
the minimum required withholding obligations may be settled with Shares,
including Shares that are part of the award that gives rise to the withholding
requirement. The obligations of the Company under the Plan shall be conditional
on such payment or arrangements and the Company shall, to the extent permitted
by law, have the right to deduct any such taxes from any payment of any kind
otherwise due to the Participant.
e. At the time of grant of an award under the Plan, the Board
may provide that the Shares received as a result of such grant shall be subject
to a right of first refusal, pursuant to which the Participant shall be required
to offer to the Company any Shares that the Participant wishes to sell, with the
price being the then Fair Market Value of the Shares, subject to such other
terms and conditions as the Board may specify at the time of grant.
f. The reinvestment of distributions or dividends in additional
Restricted Stock (or in other types of Plan awards) at the time of any
distribution or dividend payment shall only be permissible if sufficient Shares
are available under Section 3 of the Plan for such reinvestment (taking into
account then outstanding Options and other Plan awards).
g. The Board shall establish such procedures as it deems
appropriate for a Participant to designate a beneficiary to whom any amounts
payable in the event of the Participant's death are to be paid.
h. The Plan and all awards made and actions taken thereunder
shall be governed by and construed in accordance with the laws of the
Commonwealth of Pennsylvania.
-20-
<PAGE>
SECTION 15. Effective Date of Plan. This Plan shall become effective
----------------------
December 1, 1998; provided, however, that it shall not be an Incentive Stock
-------- -------
Option Plan if it is not approved, within one year (365 days) following its
effective date, by a majority of the votes cast at a duly held shareholder
meeting at which a quorum representing a majority of Company's outstanding
voting shares is present, either in person or by proxy. The Board may make
awards hereunder prior to approval of the Plan; provided, however, that any and
-------- -------
all Incentive Stock Options so awarded automatically shall be converted into
Non-Qualified Stock Options if the Plan is not approved by shareholders within
365 days of its adoption.
SECTION 16. Term of Plan. No Option, SAR, Restricted Stock, Long-
------------
Term Performance Award, Performance Share or Performance Unit shall be granted
pursuant to the Plan on or after the tenth (10th) anniversary of the date of
shareholder approval of the Plan, but awards granted prior to such tenth (10th)
anniversary may extend beyond that date.
-21-
<PAGE>
MUTUAL RISK MANAGEMENT LTD.
1998 LONG TERM INCENTIVE PLAN
APPENDIX I
----------
-22-
<PAGE>
MUTUAL RISK MANAGEMENT LTD
EMPLOYEE STOCK PURCHASE PLAN
1. PURPOSE.
-------
The Mutual Risk Management Ltd. Employee Stock Purchase Plan (the
"Plan") is intended to encourage and facilitate the purchase of Shares of the
Common Stock of Mutual Risk Management Ltd. (the "Company"), by employees of the
Company and any Participating Companies, thereby providing employees with a
personal stake in the Company and a long range inducement to remain in the
employ of the Company and Participating Companies. It is the intention of the
Company that the Plan qualify as an "employee stock purchase plan" within the
meaning of Section 423 of the Code.
2. DEFINITIONS.
-----------
(a) "Account" means a bookkeeping account established by the Committee on
-------
behalf of a Participant to hold Payroll Deductions.
(b) "Approved Leave of Absence" means a leave of absence that has been
-------------------------
approved by the applicable Participating Company in such a manner as the Board
may determine from time to time.
(c) "Board" means the Board of Directors of the Company.
-----
(d) "Code" means the Internal Revenue Code of 1986, as amended.
----
(e) "Committee" means the Committee appointed pursuant to section 14 of
---------
the Plan.
(f) "Company" means Mutual Risk Management Ltd.
-------
(g) "Compensation" means an Employee's cash compensation payable for
------------
services to a Participating Company.
(h) "Election Form" means the form acceptable to the Committee which an
-------------
Employee shall use to make an election to purchase Shares through Payroll
Deductions pursuant to the Plan.
(i) "Eligible Employee" means an Employee who meets the requirements for
-----------------
eligibility under section 3 of the Plan.
(j) "Employee" means a person who is an employee of a Participating
--------
Company.
(k) "Fair Market Value" means the closing price per Share on the principal
-----------------
national securities exchange on which the shares are listed or admitted to
trading or, if not listed or traded on any such exchange, on the National Market
System of the National Association of Securities Dealers Automated Quotation
System ("NASDAQ"), or if not listed or traded on any such
-1-
<PAGE>
exchange or system, the fair market value as reasonably determined by the Board,
which determination shall be conclusive.
(l) "Five Percent Owner" means an Employee who, with respect to a
------------------
Participating Company, is described in section 423(b) of the Code.
(m) "Offering" means an offering of Shares to Eligible Employees pursuant
--------
to the Plan.
(n) "Offering Commencement Date" means the first day of each January 1,
--------------------------
April 1, July 1 and October 1 beginning on or after adoption of the Plan by the
Board, until the Plan Termination Date, provided that the first Offering
Commencement Date may be delayed until the first day of the second month after
adoption of the Plan, if necessary to permit Participants to make elections in
accordance with section 3(e) of the Plan.
(o) "Offering Period" means the period extending from an Offering
---------------
Commencement Date through the following Offering Termination Date.
(p) "Offering Termination Date" means the last day of each March, June,
-------------------------
September and December following an Offering Commencement Date.
(q) "Option Price" means the 85% of the average Fair Market Value per Share
------------
over the last ten (10) trading days of the Offering Period; provided, however,
the Option Price shall not be less than 85% of the lesser of: (1) the Fair
------
Market Value per Share on the Offering Commencement Date, or if such date is not
a trading day, then on the next trading day thereafter or (2) the Fair Market
Value per Share on the Offering Termination Date, or if such date is not a
trading day, then on the next trading day thereafter.
(r) "Participant" means an Employee who meets the requirements for
-----------
eligibility under section 3 of the Plan and who has timely delivered an Election
Form to the Committee.
(s) "Participating Company" means, as provided in Schedule A, the Company
---------------------
and subsidiaries of the Company, within the meaning of section 424(f) of the
Code, if any, that are approved by the Board from time to time and whose
employees are designated as Employees by the Board.
(t) "Payroll Deductions" means amounts withheld from a Participant's
------------------
Compensation pursuant to the Plan, as described in section 5 of the Plan.
(u) "Plan" means Mutual Risk Management Ltd. Employee Stock Purchase Plan,
----
as set forth in this document, and as may be amended from time to time.
-2-
<PAGE>
(v) "Plan Termination Date" means the earlier of:
---------------------
(1) The Offering Termination Date for the Offering in which the
maximum number of Shares specified in section 5 of the Plan have been issued
pursuant to the Plan; or
(2) The date as of which the Board chooses to terminate the Plan as
provided in section 15 of the Plan.
(w) "Shares" means shares of Common Stock of the Company.
------
(x) "Successor-in-Interest" means the Participant's executor or
---------------------
administrator, or such other person or entity to whom the Participant's rights
under the Plan shall have passed by will or the laws of descent and
distribution.
(y) "Termination Form" means the form acceptable to the Committee which an
----------------
Employee shall use to withdraw from an Offering pursuant to section 8 of the
Plan.
3. ELIGIBILITY AND PARTICIPATION.
-----------------------------
(a) Initial Eligibility. Except as provided in section 3(b) of the Plan,
-------------------
each Employee shall be eligible to participate in the Plan.
(b) Ineligibility. An Employee shall not be eligible to participate in
-------------
the Plan if such Employee:
(1) Is a Five Percent Owner;
(2) Is a temporary Employee;
(3) Has been employed by a Participating Company on a full-time basis
for less than a 6-consecutive-month period ending on the last day of the month
immediately preceding the effective date of an election to purchase Shares
pursuant to the Plan;
(4) Has not customarily worked more than 20 hours per week during a
24-consecutive-month period ending on the last day of the month immediately
preceding the effective date of an election to purchase Shares pursuant to the
Plan; or
(5) Is restricted from participating under section 3(d) of the Plan.
(c) Leave of Absence. For purposes of participation in the Plan, an
----------------
Employee on an Approved Leave of Absence shall be deemed to be an Employee for
the first 90 days of such Approved Leave of Absence and such Employee's
employment shall be deemed to have
-3-
<PAGE>
terminated for purposes of participation under the Plan at the close of business
on the 90th day of such Approved Leave of Absence unless such Employee shall
have returned to regular non-temporary employment before the close of business
on such 90th day. Termination by the Participating Company of an Employee's
Approved Leave of Absence, other than termination or return to non-temporary
employment, shall terminate an Employee's employment for all purposes of the
Plan and shall terminate such Employee's participation in the Plan and the right
to exercise any option. An Approved Leave of Absence shall be considered active
employment for purposes of sections 3(b)(3) and 3(b)(4) of the Plan.
(d) Restrictions on Participation. Notwithstanding any provisions of the
-----------------------------
Plan to the contrary, no Employee shall be granted an option to participate in
the Plan if:
(1) Immediately after the grant, such Employee would be a Five
Percent Owner; or
(2) Such option would permit such Employee's rights to purchase stock
under all employee stock purchase plans of the Participating Companies which
meet the requirements of section 423(b) of the Code to accrue at a rate which
exceeds $25,000 in fair market value (as determined pursuant to section
423(b)(8) of the Code) for each calendar year in which such option is
outstanding.
(e) Commencement of Participation. An Employee who meets the
-----------------------------
eligibility requirements of sections 3(a) and 3(b) of the Plan and whose
participation is not restricted under section 3(d) of the Plan shall become a
Participant by completing an Election Form and filing it with the Committee on
or before the 15th day of month immediately preceding the Offering Commencement
Date for the first Offering to which such Election Form applies. Payroll
Deductions for a Participant shall commence on the applicable Offering
Commencement Date when his or her authorization for Payroll Deductions becomes
effective, and shall end on the Plan Termination Date, unless sooner terminated
by the Participant pursuant to section 8 of the Plan.
4. SHARES PER OFFERING.
-------------------
The Plan shall be implemented by a series of Offerings that shall terminate
on the Plan Termination Date. Offerings shall be made with respect to
Compensation payable for each calendar month of the Company's fiscal year for
the period commencing with the first day of the month first occurring on or
after adoption of the Plan by the Board and ending with the Plan Termination
Date. Shares available for any Offering shall be the difference between the
maximum number of Shares that may be issued under the Plan, as determined
pursuant to section 10(a) of the Plan, for all of the Offerings, less the actual
number of Shares purchased by Participants pursuant to prior Offerings. If the
total number of Shares for which options are exercised on any Offering
Termination Date exceeds the maximum number of Shares available, the Committee
shall make a pro rata allocation of Shares available for delivery and
distribution in
-4-
<PAGE>
as nearly a uniform manner as practicable, and as it shall determine to be fair
and equitable, and the unapplied Account balances shall be returned to
Participants as soon as practicable following the Offering Termination Date.
5. PAYROLL DEDUCTIONS.
------------------
(a) Amount of Payroll Deductions. An Eligible Employee who wishes to
----------------------------
participate in the Plan shall file an Election Form with the Committee at least
15 days before the Offering Commencement Date for the first Offering for which
such Election Form is effective on which he or she may elect to have Payroll
Deductions of such amounts designated by the Committee on the Election Form from
time to time made from his or her Compensation on each regular payday during the
time he or she is a Participant in the Plan, provided that the rules established
by the Committee shall be consistent with section 423(b)(5) of the Code.
(b) Participants' Accounts. All Payroll Deductions with respect to a
----------------------
Participant pursuant to section 5(a) of the Plan shall be credited to the
Participant's Account under the Plan.
(c) Changes in Payroll Deductions. A Participant may discontinue his
-----------------------------
participation in the Plan as provided in section 8(a) of the Plan, but no other
change can be made during an Offering, including, but not limited to, changes in
the amount of Payroll Deductions for such Offering. A Participant may change
the amount of Payroll Deductions for subsequent Offerings by giving written
notice of such change to the Committee on or before the 15th day of the month
immediately preceding the Offering Commencement Date for the Offering for which
such change is effective.
(d) Leave of Absence. A Participant who goes on an Approved Leave of
----------------
Absence before the Offering Termination Date after having filed an Election Form
with respect to such Offering may:
(1) Withdraw the balance credited to his or her Account pursuant to
section 8(b) of the Plan;
(2) Discontinue contributions to the Plan but remain a Participant in
the Plan through the Offering Termination Date;
(3) Remain a Participant in the Plan during such Approved Leave of
Absence through the Offering Termination Date and continue the authorization for
the Participating Company to make Payroll Deductions for each payroll period out
of continuing payments to such Participant, if any.
-5-
<PAGE>
6. GRANTING OF OPTIONS.
-------------------
On each Offering Termination Date, each Participant shall be deemed to have
been granted an option to purchase a minimum of one (1) Share and a maximum
number of Shares that shall be a number of whole Shares equal to the quotient
obtained by dividing the balance credited to the Participant's Account as of the
Offering Termination Date, by the Option Price.
7. EXERCISE OF OPTIONS.
-------------------
(a) Automatic Exercise. With respect to each Offering, a Participant's
------------------
option for the purchase of Shares granted pursuant to section 6 of the Plan
shall be deemed to have been exercised automatically on the Offering Termination
Date applicable to such Offering.
(b) Fractional Shares and Minimum Number of Shares. Fractional Shares
----------------------------------------------
shall not be issued under the Plan. Amounts credited to an Account remaining
after the application of such Account to the exercise of options for a minimum
of one (1) full Share shall be credited to the Participant's Account for the
next succeeding Offering, or, at the Participant's election, returned to the
Participant as soon as practicable following the Offering Termination Date,
without interest.
(c) Transferability of Option. No option granted to a Participant pursuant
-------------------------
to the Plan shall be transferable other than by will or by the laws of descent
and distribution, and no such option shall be exercisable during the
Participant's lifetime other than by the Participant.
(d) Certificates for Shares. The Company shall hold the Shares acquired on
-----------------------
the exercise of options during an Offering Period as a credit to the
Participant's Account. However, upon a request by the Participant the Company
shall deliver the Share certificates to the Participant as soon as practicable
following the Offering Termination Date.
(e) Dividends Paid on Shares held in Participant's Account. Dividends
------------------------------------------------------
paid, if any, on a Participant's Shares that are held by the Company shall be
credited to the Participant's Account and shall be accumulated and applied
toward the Participant's exercise of options during the next Offering Period,
or, at the Participant's election, returned to the Participant as soon as
administratively practicable.
8. WITHDRAWALS.
-----------
(a) Withdrawal of Account. A Participant may elect to withdraw the
---------------------
balance credited to the Participant's Account by providing a Termination Form to
the Committee at any time before the Offering Termination Date applicable to any
Offering.
(b) Amount of Withdrawal. A Participant may withdraw all, but not less
--------------------
than all, of the amounts credited to the Participant's Account by giving a
Termination Form to the
-6-
<PAGE>
Committee. All amounts credited to such Participant's Account shall be paid as
soon as practicable following the Committee's receipt of the Participant's
Termination Form, and no further Payroll Deductions will be made with respect to
the Participant.
(c) Effect of Withdrawal on Subsequent Participation. A Participant who
------------------------------------------------
elects to withdraw from an Offering pursuant to section 8(a) of the Plan shall
be deemed to have elected not to participate in each of the four succeeding
Offerings following the date on which the Participant gives a Termination Form
to the Committee.
(d) Termination of Employment. Upon termination of a Participant's
-------------------------
employment for any reason other than death, including termination due to
disability or continuation of a leave of absence beyond 90 days, all amounts
credited to such Participant's Account shall be returned to the Participant. In
the event of a Participant's (1) termination of employment due to death or (2)
death after termination of employment but before the Participant's Account has
been returned, all amounts credited to such Participant's Account shall be
returned to the Participant's Successor-in-Interest.
(e) Leave of Absence. A Participant who is on an Approved Leave of
----------------
Absence shall, subject to the Participant's election pursuant to section 5(d) of
the Plan, continue to be a Participant in the Plan until the end of the first
Offering ending after commencement of such Approved Leave of Absence. A
Participant who has been on an Approved Leave of Absence for more than 90 days
shall not be eligible to participate in any Offering that begins on or after the
commencement of such Approved Leave of Absence so long as such leave of absence
continues.
9. INTEREST.
--------
No interest shall be paid or allowed with respect to amounts paid into the
Plan or credited to any Participant's Account.
10. SHARES.
------
(a) Maximum Number of Shares. No more than 500,000 Shares may be issued
------------------------
under the Plan. Such Shares may be unissued shares or treasury shares of the
Company. The number of Shares available for any Offering and all Offerings
shall be adjusted if the number of outstanding Shares of the Company is
increased or reduced by split-up, reclassification, stock dividend or the like.
All Shares issued pursuant to the Plan shall be validly issued, fully paid and
nonassessable.
(b) Participant's Interest in Shares. A Participant shall have no interest
--------------------------------
in Shares subject to an option until such option has been exercised.
(c) Registration of Shares. Shares to be delivered to a Participant under
----------------------
the Plan shall be registered in the name of the Participant.
-7-
<PAGE>
(d) Restrictions on Exercise. The Board may, in its discretion, require as
------------------------
conditions to the exercise of any option such conditions as it may deem
necessary to assure that the exercise of options is in compliance with
applicable securities laws.
11. EXPENSES.
--------
The Participating Companies shall pay all fees and expenses incurred
(excluding individual Federal, state, local or other taxes) in connection with
the Plan. No charge or deduction for any such expenses will be made to a
Participant upon the termination of his or her participation under the Plan or
upon the distribution of certificates representing Shares purchased with his or
her contributions.
12. TAXES.
-----
The Participating Companies shall have the right to withhold from each
Participant's Compensation an amount equal to all Federal, state, city or other
taxes as the Participating Companies shall determine are required to be withheld
by them. In connection with such withholding, the Participating Companies may
make any such arrangements as are consistent with the Plan as it may deem
appropriate, including the right to withhold from Compensation paid to a
Participant other than in connection with the Plan.
13. PLAN AND CONTRIBUTIONS NOT TO AFFECT EMPLOYMENT.
-----------------------------------------------
The Plan shall not confer upon any Eligible Employee any right to continue
in the employ of the Participating Companies.
14. ADMINISTRATION.
--------------
The Plan shall be administered by the Board, which may delegate
responsibility for such administration to a committee of the Board (the
"Committee"). If the Board fails to appoint the Committee, any references in
the Plan to the Committee shall be treated as references to the Board. The
Board, or the Committee, shall have authority to interpret the Plan, to
prescribe, amend and rescind rules and regulations relating to it, and to make
all other determinations deemed necessary or advisable in administering the
Plan, with or without the advice of counsel. The determinations of the Board or
the Committee on the matters referred to in this paragraph shall be conclusive
and binding upon all persons in interest.
15. AMENDMENT AND TERMINATION.
-------------------------
The Board may terminate the Plan at any time and may amend the Plan from
time to time in any respect; provided, however, that upon any termination of the
Plan, all Shares or Payroll Deductions (to the extent not yet applied to the
purchase of Shares) under the Plan shall be distributed to the Participants,
provided further, that no amendment to the Plan shall affect the
-8-
<PAGE>
right of a Participant to receive his or her proportionate interest in the
Shares or his or her Payroll Deductions (to the extent not yet applied to the
purchase of Shares) under the Plan, and provided further that the Company may
seek shareholder approval of an amendment to the Plan if such approval is
determined to be required by or advisable under the regulations of the
Securities or Exchange Commission or the Internal Revenue Service, the rules of
any stock exchange or system on which the Shares are listed or other applicable
law or regulation.
16. EFFECTIVE DATE.
--------------
The Plan shall be effective on the date it is adopted by the Board, subject
to approval by the Company's shareholders within one year of the adoption of the
Plan by the Board. Any option granted before the approval of the Plan by the
Company's shareholders shall be expressly conditioned upon such approval, and no
Share certificates shall be issued until such approval. If shareholder approval
is not received within 12 months before or after the date of the initial
adoption of the Plan by the Board, no Share certificates shall be issued with
respect to any automatic exercises which may have occurred pursuant to section 7
of the Plan, and all amounts credited to Participants' Accounts with respect to
such Shares shall be returned to Participants as soon as administratively
practicable.
17. GOVERNMENT AND OTHER REGULATIONS.
--------------------------------
(a) In General. The purchase of Shares under the Plan shall be subject to
----------
all applicable laws, rules and regulations, and to such approvals by any
governmental agencies as may be required.
(b) Securities Law. The Committee shall have the power to make each grant
--------------
under the Plan subject to such conditions as it deems necessary or appropriate
to comply with the then-existing requirements of the Securities Act of 1933, as
amended, and the Securities Exchange Act of 1934, as amended, including Rule
16b-3 (or any similar rule) of the Securities and Exchange Commission.
18. NON-ALIENATION.
--------------
No Participant shall be permitted to assign, alienate, sell, transfer,
pledge or otherwise encumber his interest under the Plan prior to the
distribution to him of Share certificates. Any attempt at assignment,
alienation, sale, transfer, pledge or other encumbrance shall be void and of no
effect.
19. NOTICES.
-------
Any notice required or permitted hereunder shall be sufficiently given only
if delivered personally, telecopied, or sent by first class mail, postage
prepaid, and addressed:
-9-
<PAGE>
If to the Company:
-----------------
Secretary
Mutual Risk Management Ltd.
44 Church Street
Hamilton HM HX Bermuda
Or any other address provided pursuant to written notice.
If to the Participant:
---------------------
At the address on file with the Company from time to time, or to such other
address as either party may hereafter designate in writing by notice
similarly given by one party to the other.
20. SUCCESSORS.
----------
The Plan shall be binding upon and inure to the benefit of any successor,
successors or assigns of the Company.
21. SEVERABILITY.
------------
If any part of this Plan shall be determined to be invalid or void in any
respect, such determination shall not affect, impair, invalidate or nullify the
remaining provisions of this Plan which shall continue in full force and effect.
22. ACCEPTANCE.
----------
The election by any Eligible Employee to participate in this Plan
constitutes his or her acceptance of the terms of the Plan and his or her
agreement to be bound hereby.
23. APPLICABLE LAW.
--------------
This Plan shall be construed in accordance with the laws of the Bermuda.
-10-
<PAGE>
SCHEDULE A
PARTICIPATING COMPANIES
-----------------------
All wholly owned subsidiaries of Mutual Risk Management Ltd.
-11-
<PAGE>
EXHIBIT 11.1
MUTUAL RISK MANAGEMENT LTD.
COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
1998 1997(1) 1996(1)
(in thousands except share and per share amounts)
<S> <C> <C> <C>
Basic
- -----
Income Available to Common Shareholders $ 63,632 $ 48,706 $ 37,750
============ ============ ============
Weighted Average Common Shares outstanding 40,216,390 38,320,356 37,310,691
------------ ------------ ------------
Basic earnings per Common Share
$ 1.58 $ 1.27 $ 1.01
============ ============ ============
Diluted
- -------
Income Available to Common Shareholders $ 63,632 $ 48,706 $ 37,750
Debenture interest 6,605 6,500 6,172
------------ ------------ ------------
$ 70,237 $ 55,206 $ 43,922
============ ============ ============
Weighted Average Common Shares outstanding 40,216,390 38,320,356 37,310,691
------------ ------------ ------------
Common share equivalents associated with options, Redeemable
Common Shares and Convertible Debentures :
Options 4,720,580 4,374,925 4,102,314
Redeemable Common Shares 937,168 937,168
Convertible Debentures 6,460,297 6,978,800 6,978,800
------------ ------------ ------------
11,180,877 12,290,893 12,018,282
Common Shares purchased with proceeds from
options exercised (2,222,886) (2,884,763) (3,107,086)
------------ ------------ ------------
8,957,991 9,406,130 8,911,196
------------ ------------ ------------
Total Weighted Average Common Shares 49,174,381 47,726,486 46,221,887
============ ============ ============
Diluted earnings per Common Share $ 1.43 $ 1.16 $ 0.95
============ ============ ============
</TABLE>
(1) Prior periods have been restated to reflect a pooling of interests following
the acquisition of CompFirst, Inc. and International Advisory Services Group of
Companies.
Page 1
<PAGE>
EXHIBIT 21
List of Mutual Risk Management Ltd. Subsidiaries
------------------------------------------------
Jurisdiction of
Subsidiary Organization
---------- ---------------
Alpine Meadows Bermuda
Capital Management of Bermuda Ltd. Bermuda
Captive Resources, Inc. Delaware
CFM Insurance Managers Ltd Bermuda
Commonwealth Risk Services, LP Delaware
Commonwealth Risk Services (Europe) Limited United Kingdom
CompFirst, Inc. Georgia
Continential Benefit Company Bermuda
Genesis Holdings Cayman
H&H Reinsurance Brokers, Ltd. Bermuda
Hamilton Management Ltd Wisconsin
Hemisphere Financial Services, LLC Delaware
Hemisphere Management Ltd. Bermuda
Hugo Trust Company United Kingdom
Hurst Holme Insurance Company Ltd. Bermuda
International Advisory Services, Ltd Bermuda
IPC Mutual Holdings Ltd (Bermuda) Bermuda
Legion Insurance Company Pennsylvania
Legion Financial Corporation Missouri
Legion Management Corporation Oklahoma
Legion Indemnity Company Illinois
Livery Management, Inc. Delaware
<PAGE>
Jurisdiction of
Subsidiary Organization
---------- ---------------
M&A Holdings Ltd. Bermuda
MG Financial Ltd. Delaware
MGL Investments, Ltd. Delaware
MRM Reinsurance Brokers Bermuda
MRM Financial Services Limited Bermuda
MRM Hancock Limited United Kingdom
MRM Life Ltd. Bermuda
Mutual Finance Ltd. Bermuda
Mutual Group Ltd. Delaware
Mutual Holdings (Bermuda) Ltd. Bermuda
Mutual Risk Captive Group Bermuda
Mutual Risk Management (Cayman) Ltd. Cayman
Mutual Risk Management (Barbados) Ltd. Barbados
Mutual Holdings (U.S.) Ltd. Delaware
Mutual Indemnity (U.S.) Ltd. Bermuda
Mutual Indemnity (Dublin) Ltd. Ireland
Mutual Indemnity (Barbados) Ltd. Barbados
Mutual Indemnity (Bermuda) Ltd. Bermuda
Mutual Indemnity Ltd. Bermuda
Mutual Risk Management (Holdings) Ltd. Bermuda
Park International Limited Bermuda
Premium Securities Bermuda
Premium Securities (Bermuda) Ltd. Bermuda
Professional Underwriters Corp Delaware
PUC Midwest Acquisition Corp Delaware
Renaissance Underwriting Managers, Inc. Georgia
SBU Southeast, Inc. Delaware
Shoreline Mutual Management (Bermuda) Ltd. Bermuda
Tremont International Insurance Ltd. Cayman
-2-
<PAGE>
Jurisdiction of
Subsidiary Organization
---------- ---------------
SPDA Bermuda
Utility Management Insurance Services, Inc. Delaware
Villanova Insurance Company Pennsylvania
Worksafe, Inc. Delaware
-3-
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS
MUTUAL RISK MANAGEMENT LTD.
We consent to the incorporation by reference in the Registration Statements on
Form S-8 (Nos. 33-44124, 33-55282 and 333-05008) and Form S-3 (Nos. 33-77850,
33-80153, 333-02742, 333-64419 and 333-11053) of Mutual Risk Management Ltd. of
our report dated February 15, 1999, with respect to the consolidated financial
statements and schedules of Mutual Risk Management Ltd. included in this Annual
Report (Form 10-K) for the year ended December 31, 1998.
/s/ Ernst & Young
Hamilton, Bermuda
March 26, 1999
<PAGE>
To The Board of Directors and Shareholders
Mutual Risk Management Ltd.
We have audited the accompanying consolidated balance sheets of Mutual Risk
Management Ltd. and subsidiaries as of December 31, 1998 and 1997, and the
related consolidated statements of income and comprehensive income, changes in
shareholders' equity, and cash flows for each of the three years in the period
ended December 31, 1998. Our audits also included the financial statement
schedules listed in the Index at Item 14(B). These financial statements and
schedules are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and schedules based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Mutual Risk
Management Ltd. and subsidiaries at December 31, 1998 and 1997, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1998, in conformity with accounting
principles generally accepted in the United States. Also, in our opinion, the
related financial statement schedules, when considered in relation to the basic
financial statements taken as a whole, present fairly in all material respects
the information set forth therein.
/s/ Ernst & Young LLP
Hamilton, Bermuda
February 15, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM MUTUAL RISK
MANAGEMENT LTD.'S FINANCIAL STATEMENTS AS OF DECEMBER 31, 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> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<EXCHANGE-RATE> 1
<DEBT-HELD-FOR-SALE> 460,624
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 0
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 460,624
<CASH> 114,800
<RECOVER-REINSURE> 1,079,563
<DEFERRED-ACQUISITION> 27,215
<TOTAL-ASSETS> 3,041,481
<POLICY-LOSSES> 1,190,426
<UNEARNED-PREMIUMS> 241,893
<POLICY-OTHER> 79,753
<POLICY-HOLDER-FUNDS> 37,448
<NOTES-PAYABLE> 127,330
0
0
<COMMON> 411
<OTHER-SE> 341,263
<TOTAL-LIABILITY-AND-EQUITY> 3,041,481
101,913
<INVESTMENT-INCOME> 29,467
<INVESTMENT-GAINS> (1,003)
<OTHER-INCOME> 149,019
<BENEFITS> 78,258
<UNDERWRITING-AMORTIZATION> 26,061
<UNDERWRITING-OTHER> 103,032
<INCOME-PRETAX> 72,045
<INCOME-TAX> 8,506
<INCOME-CONTINUING> 63,539
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 63,632
<EPS-PRIMARY> 1.58
<EPS-DILUTED> 1.43
<RESERVE-OPEN> 85,764
<PROVISION-CURRENT> 74,476
<PROVISION-PRIOR> 3,782
<PAYMENTS-CURRENT> 15,039
<PAYMENTS-PRIOR> 38,119
<RESERVE-CLOSE> 110,864
<CUMULATIVE-DEFICIENCY> 0
</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 SEPTEMBER 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> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<EXCHANGE-RATE> 1
<DEBT-HELD-FOR-SALE> 487,797
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 0
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 487,797
<CASH> 91,287
<RECOVER-REINSURE> 758,154
<DEFERRED-ACQUISITION> 29,315
<TOTAL-ASSETS> 2,626,053
<POLICY-LOSSES> 854,169
<UNEARNED-PREMIUMS> 234,222
<POLICY-OTHER> 87,908
<POLICY-HOLDER-FUNDS> 37,524
<NOTES-PAYABLE> 128,022
0
0
<COMMON> 408
<OTHER-SE> 324,421
<TOTAL-LIABILITY-AND-EQUITY> 2,626,053
73,993
<INVESTMENT-INCOME> 21,712
<INVESTMENT-GAINS> (1,099)
<OTHER-INCOME> 109,847
<BENEFITS> 51,637
<UNDERWRITING-AMORTIZATION> 24,042
<UNDERWRITING-OTHER> 75,442
<INCOME-PRETAX> 53,332
<INCOME-TAX> 6,553
<INCOME-CONTINUING> 46,778
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 46,821
<EPS-PRIMARY> 1.17
<EPS-DILUTED> 1.05
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</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> 74,730
<RECOVER-REINSURE> 717,409
<DEFERRED-ACQUISITION> 26,541
<TOTAL-ASSETS> 2,471,172
<POLICY-LOSSES> 805,381
<UNEARNED-PREMIUMS> 240,845
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 43,420
<NOTES-PAYABLE> 126,652
0
0
<COMMON> 406
<OTHER-SE> 305,530
<TOTAL-LIABILITY-AND-EQUITY> 2,471,172
49,806
<INVESTMENT-INCOME> 15,166
<INVESTMENT-GAINS> (1,157)
<OTHER-INCOME> 69,920
<BENEFITS> 33,877
<UNDERWRITING-AMORTIZATION> 16,892
<UNDERWRITING-OTHER> 48,267
<INCOME-PRETAX> 34,700
<INCOME-TAX> 4,305
<INCOME-CONTINUING> 30,395
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 30,395
<EPS-PRIMARY> 0.77
<EPS-DILUTED> 0.69
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</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 MARCH 31, 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> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<EXCHANGE-RATE> 1
<DEBT-HELD-FOR-SALE> 404,088
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 0
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 404,088
<CASH> 79,726
<RECOVER-REINSURE> 697,459
<DEFERRED-ACQUISITION> 26,486
<TOTAL-ASSETS> 2,330,591
<POLICY-LOSSES> 796,103
<UNEARNED-PREMIUMS> 198,395
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 42,145
<NOTES-PAYABLE> 130,852
0
0
<COMMON> 400
<OTHER-SE> 280,185
<TOTAL-LIABILITY-AND-EQUITY> 2,330,591
28,929
<INVESTMENT-INCOME> 8,035
<INVESTMENT-GAINS> (213)
<OTHER-INCOME> 33,864
<BENEFITS> 21,499
<UNDERWRITING-AMORTIZATION> 8,096
<UNDERWRITING-OTHER> 23,863
<INCOME-PRETAX> 17,157
<INCOME-TAX> 2,252
<INCOME-CONTINUING> 14,905
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 14,905
<EPS-PRIMARY> 0.38
<EPS-DILUTED> 0.34
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</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 DECEMBER 31, 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> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<EXCHANGE-RATE> 1
<DEBT-HELD-FOR-SALE> 395,143
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 0
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 395,143
<CASH> 81,700
<RECOVER-REINSURE> 630,697
<DEFERRED-ACQUISITION> 29,992
<TOTAL-ASSETS> 2,182,015
<POLICY-LOSSES> 716,461
<UNEARNED-PREMIUMS> 188,398
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 42,445
<NOTES-PAYABLE> 129,177
0
0
<COMMON> 388
<OTHER-SE> 262,901
<TOTAL-LIABILITY-AND-EQUITY> 2,182,015
84,200
<INVESTMENT-INCOME> 26,507
<INVESTMENT-GAINS> (1,609)
<OTHER-INCOME> 114,728
<BENEFITS> 49,857
<UNDERWRITING-AMORTIZATION> 35,816
<UNDERWRITING-OTHER> 78,734
<INCOME-PRETAX> 59,418
<INCOME-TAX> 10,607
<INCOME-CONTINUING> 48,811
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 48,706
<EPS-PRIMARY> 1.27
<EPS-DILUTED> 1.16
<RESERVE-OPEN> 69,419
<PROVISION-CURRENT> 50,301
<PROVISION-PRIOR> (444)
<PAYMENTS-CURRENT> (10,850)
<PAYMENTS-PRIOR> (22,662)
<RESERVE-CLOSE> 85,764
<CUMULATIVE-DEFICIENCY> 0
</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 SEPTEMBER 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> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<EXCHANGE-RATE> 1
<DEBT-HELD-FOR-SALE> 377,031
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 0
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 377,031
<CASH> 97,913
<RECOVER-REINSURE> 453,556
<DEFERRED-ACQUISITION> 22,908
<TOTAL-ASSETS> 1,953,987
<POLICY-LOSSES> 538,575
<UNEARNED-PREMIUMS> 166,763
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 37,925
<NOTES-PAYABLE> 127,517
0
0
<COMMON> 385
<OTHER-SE> 246,739
<TOTAL-LIABILITY-AND-EQUITY> 1,953,987
62,530
<INVESTMENT-INCOME> 19,695
<INVESTMENT-GAINS> (1,083)
<OTHER-INCOME> 83,510
<BENEFITS> 37,125
<UNDERWRITING-AMORTIZATION> 26,412
<UNDERWRITING-OTHER> 57,191
<INCOME-PRETAX> 43,923
<INCOME-TAX> 7,987
<INCOME-CONTINUING> 35,936
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 35,831
<EPS-PRIMARY> 0.94
<EPS-DILUTED> 0.86
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</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> 63,550
<RECOVER-REINSURE> 401,463
<DEFERRED-ACQUISITION> 21,019
<TOTAL-ASSETS> 1,844,005
<POLICY-LOSSES> 481,295
<UNEARNED-PREMIUMS> 151,259
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 40,552
<NOTES-PAYABLE> 125,885
2,952
0
<COMMON> 383
<OTHER-SE> 233,048
<TOTAL-LIABILITY-AND-EQUITY> 1,844,005
35,183
<INVESTMENT-INCOME> 13,096
<INVESTMENT-GAINS> (1,471)
<OTHER-INCOME> 53,326
<BENEFITS> 19,216
<UNDERWRITING-AMORTIZATION> 16,688
<UNDERWRITING-OTHER> 36,823
<INCOME-PRETAX> 27,407
<INCOME-TAX> 4,916
<INCOME-CONTINUING> 22,491
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 22,408
<EPS-PRIMARY> .59
<EPS-DILUTED> .54
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</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 MARCH 31, 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> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<EXCHANGE-RATE> 1
<DEBT-HELD-FOR-SALE> 333,990
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 0
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 333,990
<CASH> 119,611
<RECOVER-REINSURE> 380,766
<DEFERRED-ACQUISITION> 25,151
<TOTAL-ASSETS> 1,763,378
<POLICY-LOSSES> 456,224
<UNEARNED-PREMIUMS> 118,219
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 44,070
<NOTES-PAYABLE> 124,267
2,952
0
<COMMON> 382
<OTHER-SE> 217,186
<TOTAL-LIABILITY-AND-EQUITY> 1,763,378
17,952
<INVESTMENT-INCOME> 6,046
<INVESTMENT-GAINS> (774)
<OTHER-INCOME> 26,159
<BENEFITS> 7,663
<UNDERWRITING-AMORTIZATION> 10,605
<UNDERWRITING-OTHER> 17,913
<INCOME-PRETAX> 13,202
<INCOME-TAX> 2,276
<INCOME-CONTINUING> 10,926
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,884
<EPS-PRIMARY> .29
<EPS-DILUTED> .26
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</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 DECEMBER 31, 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> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<EXCHANGE-RATE> 1
<DEBT-HELD-FOR-SALE> 400,191
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 0
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 400,191
<CASH> 56,597
<RECOVER-REINSURE> 350,318
<DEFERRED-ACQUISITION> 20,613
<TOTAL-ASSETS> 1,668,513
<POLICY-LOSSES> 419,737
<UNEARNED-PREMIUMS> 93,741
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 45,689
<NOTES-PAYABLE> 677
2,952
0
<COMMON> 381
<OTHER-SE> 211,143
<TOTAL-LIABILITY-AND-EQUITY> 1,668,513
56,413
<INVESTMENT-INCOME> 22,612
<INVESTMENT-GAINS> (1,983)
<OTHER-INCOME> 88,531
<BENEFITS> 32,435
<UNDERWRITING-AMORTIZATION> 24,185
<UNDERWRITING-OTHER> 62,644
<INCOME-PRETAX> 46,309
<INCOME-TAX> 8,137
<INCOME-CONTINUING> 38,172
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 37,750
<EPS-PRIMARY> 1.01
<EPS-DILUTED> .95
<RESERVE-OPEN> 59,011
<PROVISION-CURRENT> 35,456
<PROVISION-PRIOR> (3,021)
<PAYMENTS-CURRENT> (11,072)
<PAYMENTS-PRIOR> (10,955)
<RESERVE-CLOSE> 69,419
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
