<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly report under section 13 or 15(d) of the Securities Exchange Act
of 1934. For the period ended September 30, 1999.
or
[ ] Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934. For the transition period from _____________ to
_____________ .
Commission File Number 1-10760
MUTUAL RISK MANAGEMENT LTD.
- --------------------------------------------------------------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
BERMUDA NOT APPLICABLE
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
44 Church Street,
HAMILTON HM 12, BERMUDA
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip code)
(441) 295-5688
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Not applicable
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if
changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES [X] NO [ ]
The number of outstanding shares of the registrant's Common Stock, $0.01 par
value, as of September 30, 1999 was 43,705,464.
<PAGE>
MUTUAL RISK MANAGEMENT LTD.
I N D E X
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements:
<S> <C> <C>
Unaudited Consolidated Statements of Income and Comprehensive Income
for the quarter and nine month periods ended September 30, 1999 and 1998 3
Unaudited Consolidated Balance Sheets at September 30, 1999
and December 31, 1998 4
Unaudited Consolidated Statements of Cash Flows for the
nine month periods ended September 30, 1999 and 1998 5
Unaudited Consolidated Statements of Changes in Shareholders'
Equity for the periods ended September 30, 1999 and December 31, 1998 6
Notes to Unaudited Consolidated Financial Statements at
September 30, 1999 7-9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL 10-15
CONDITION AND RESULTS OF OPERATIONS
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT 15
MARKET RISK
PART II. OTHER INFORMATION:
ITEM 5. OTHER INFORMATION 16
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 16
SIGNATURES 17
EXHIBITS
Exhibit 11 - Computation of Net Earnings per Common
Share and Common Share Equivalents
Exhibit 27 - Financial Data Schedule
</TABLE>
-2-
<PAGE>
MUTUAL RISK MANAGEMENT LTD. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
AND COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
Quarter ended Sept. 30, Nine months ended Sept. 30,
1999 1998 (a) 1999 1998 (a)
REVENUES
<S> <C> <C> <C> <C>
Fee income $ 45,697,290 $41,985,629 $136,975,318 $115,697,318
Premiums earned 50,552,591 24,186,718 139,570,418 73,993,101
Net investment income 8,555,846 6,578,801 25,219,284 21,802,147
Realized capital (losses) gains (2,194,823) 58,321 (3,224,397) (1,098,925)
Other income (losses) 12,483 125,471 (208,003) 168,971
------------ ----------- ------------ ------------
Total Revenues 102,623,387 72,934,940 298,332,620 210,562,612
------------ ----------- ------------ ------------
EXPENSES
Losses and loss expenses incurred 48,131,182 17,759,474 115,923,720 51,636,828
Acquisition costs 16,826,623 7,150,223 40,240,360 24,042,015
Operating expenses 33,392,307 26,499,740 92,929,317 73,516,888
Interest expense 1,537,445 1,684,923 4,660,791 5,129,594
Other expenses 670,720 531,128 1,994,534 1,337,522
------------ ----------- ------------ ------------
Total Expenses 100,558,277 53,625,488 255,748,722 155,662,847
------------ ----------- ------------ ------------
INCOME BEFORE INCOME TAXES AND
MINORITY INTEREST 2,065,110 19,309,452 42,583,898 54,899,765
Income tax (benefit) expense (3,300,523) 2,254,784 329,060 6,578,991
------------ ----------- ------------ ------------
INCOME BEFORE MINORITY INTEREST 5,365,633 17,054,668 42,254,838 48,320,774
Minority interest (4,551) 42,687 424 42,687
------------ ----------- ------------ ------------
Net income available to common shareholders 5,361,082 17,097,355 42,255,262 48,363,461
Other comprehensive income, net of tax:
Unrealized (losses) gains on investments, net
of reclassification adjustment (3,611,993) 1,802,015 (14,436,104) 1,240,936
------------ ----------- ------------ ------------
COMPREHENSIVE INCOME $ 1,749,089 $18,899,370 $ 27,819,158 $ 49,604,397
============ =========== ============ ============
EARNINGS PER COMMON SHARE:
Net income available to Common Shareholders:
Basic EPS $0.12 $0.41 $0.98 $1.18
============ =========== ============ ============
Diluted EPS $0.12 $0.37 $0.93 $1.06
============ =========== ============ ============
Dividends per share $0.06 $0.05 $0.18 $0.15
============ =========== ============ ============
Weighted average number of Common
Shares outstanding - basic 43,583,086 41,730,688 43,214,037 41,026,217
============ =========== ============ ============
Weighted average number of Common
Shares outstanding - diluted 44,452,265(b) 50,439,947 50,397,988 50,153,240
============ =========== ============ ============
</TABLE>
(a) Prior period results have been restated to reflect a pooling of interests
following the acquisition of Captive Resources, Inc.,CompFirst, Inc. and
the International Advisory Services Group of Companies.
(b) Excludes the conversion of Convertible Debentures which have an anti-
dilutive effect.
See Accompanying Notes to Unaudited Consolidated Financial Statements
-3-
<PAGE>
MUTUAL RISK MANAGEMENT LTD. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998(a)
ASSETS
<S> <C> <C>
Cash and cash equivalents $ 108,188,272 $ 117,422,652
Investments : Held in available for sale account at fair
value (Amortized cost $442,577,307; 1998 - $455,648,153) 428,692,935 460,624,263
-------------- --------------
Total marketable investments 536,881,207 578,046,915
Other investments 22,135,140 22,473,945
Investment income due and accrued 3,751,411 5,252,341
Accounts receivable 491,657,806 353,869,570
Reinsurance receivables 1,460,878,736 1,079,562,857
Deferred expenses 34,312,592 27,215,385
Prepaid reinsurance premiums 263,966,580 206,486,764
Fixed assets 25,872,294 19,671,107
Deferred tax benefit 4,688,046 898,853
Goodwill 51,546,232 52,901,100
Other assets 7,737,656 5,615,792
Assets held in separate accounts 701,163,252 722,262,819
-------------- --------------
Total Assets $3,604,590,952 $3,074,257,448
============== ==============
LIABILITIES & SHAREHOLDERS' EQUITY
LIABILITIES
Reserve for losses and loss expenses $1,587,371,474 $1,190,425,877
Reserve for unearned premiums 317,745,222 241,893,089
Pension fund reserves 69,796,910 79,753,421
Claims deposit liabilities 30,626,287 37,447,768
Accounts payable 301,194,777 243,418,491
Accrued expenses 12,134,150 12,051,758
Taxes payable 15,480,113 14,849,898
Loans payable 4,125,295 3,537,671
Prepaid fees 54,285,960 47,126,199
Debentures 115,577,776 125,485,201
Other liabilities 8,689,580 12,839,258
Liabilities related to separate accounts 701,163,252 722,262,819
-------------- --------------
TOTAL LIABILITIES 3,218,190,796 2,731,091,450
-------------- --------------
SHAREHOLDERS' EQUITY
Common Shares - Authorized 180,000,000 (par value $0.01)
Issued 43,705,464 (1998 - 42,205,596) 437,055 422,056
Additional paid-in capital 139,509,706 114,916,045
Accumulated other comprehensive (loss) income (9,979,323) 4,456,781
Retained earnings 256,432,718 223,371,116
-------------- --------------
Total Shareholders' Equity 386,400,156 343,165,998
-------------- --------------
Total Liabilities & Shareholders' Equity $3,604,590,952 $3,074,257,448
============== ==============
</TABLE>
(a) Prior period results have been restated to reflect a pooling of interests
following the acquisition of Captive Resources, Inc.
See Accompanying Notes to Unaudited Consolidated Financial Statements
-4-
<PAGE>
MUTUAL RISK MANAGEMENT LTD. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Ended Sept. 30,
NET CASH FLOW FROM OPERATING ACTIVITIES 1999 1998(a)
<S> <C> <C>
Net income $ 42,255,262 $ 48,363,461
Items not affecting cash:
Depreciation 5,413,141 4,400,263
Amortization of investments (454,717) (1,316,067)
Net loss on sale of investments 3,607,825 95,583
Other investment gains (360,916) (599,114)
Amortization of convertible debentures 4,512,975 4,966,955
Deferred tax benefit 635,181 1,249,778
Other items, net 1,522,817 794,581
Net changes in non-cash balances relating to operations:
Accounts receivable (137,788,236) (91,572,165)
Reinsurance receivables (381,315,879) (127,457,802)
Investment income due and accrued 1,500,930 (2,818,125)
Deferred expenses (7,097,207) 676,805
Prepaid reinsurance premiums (57,479,816) (38,947,360)
Other assets (2,121,864) 3,707,398
Reserve for losses and loss expenses 396,945,597 137,707,934
Prepaid fees 7,159,761 4,942,204
Reserve for unearned premium 75,852,133 45,833,555
Accounts payable 57,776,286 40,669,945
Taxes payable 630,215 2,047,200
Accrued expenses 82,392 2,742,463
Other liabilities (4,738,379) 2,319,958
------------- -------------
NET CASH FROM OPERATING ACTIVITIES 6,537,501 37,807,450
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of investments - Available for sale 71,891,067 79,179,129
Proceeds from maturity of investments - Available for sale 43,724,933 48,139,858
Fixed assets purchased (11,646,663) (7,236,134)
Investments purchased - Available for sale (105,698,261) (216,845,134)
Acquisitions and other investments (47,330) (16,666,529)
Proceeds from sale of other investments 576,522 2,928,891
Other items, net 47,417 2,580
------------- -------------
NET CASH APPLIED TO INVESTING ACTIVITIES (1,152,315) (110,497,339)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Loan repayment & interest received - 388,683
Loan received 587,624 1,365,404
Proceeds from shares issued 10,175,761 5,582,113
Claims deposit liabilities (6,821,481) (4,921,270)
Pension fund reserves (9,956,511) 87,908,453
Dividends paid (8,604,959) (7,526,909)
------------- -------------
NET CASH (APPLIED TO) FROM FINANCING ACTIVITIES (14,619,566) 82,796,474
------------- -------------
Net (decrease) increase in cash and cash equivalents (9,234,380) 10,106,585
Cash and cash equivalents at beginning of period 117,422,652 82,706,146
------------- -------------
Cash and cash equivalents at end of period $ 108,188,272 $ 92,812,731
============= =============
Supplemental cash flow information:
Interest paid $ 147,816 $ 162,639
============= =============
Income taxes paid, net $ 3,217,167 $ 5,622,774
============= =============
</TABLE>
(a) Prior period results have been restated to reflect a pooling of interests
following the acquisition of Captive Resources, Inc., CompFirst, Inc. and the
International Advisory Services Group of Companies.
See Accompanying Notes to Unaudited Consolidated Financial Statements
-5-
<PAGE>
MUTUAL RISK MANAGEMENT LTD. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON
CHANGE IN SHARE DIVIDEND
OPENING SHARES UNREALIZED NET DIVIDENDS ACQUIRED CLOSING
BALANCE ISSUED (LOSS) GAIN (1) INCOME DECLARED (2) COMPANIES (3) BALANCE
<S> <C> <C> <C> <C> <C> <C> <C>
NINE MONTHS ENDED SEPT. 30, 1999
- -----------------------------------
Common Shares $ 422,056 $ 14,999 $ - $ - $ - $ - $ 437,055
Additional paid-in capital 114,916,045 24,593,661 - - - - 139,509,706
Accumulated other
comprehensive income (loss) 4,456,781 - (14,436,104) - - - (9,979,323)
Retained earnings 223,371,116 - - 42,255,262 (8,302,724) (890,936) 256,432,718
------------ ----------- ------------ ----------- ----------- --------- ------------
TOTAL SHAREHOLDERS' EQUITY
AT SEPT. 30, 1999 $343,165,998 $24,608,660 $(14,436,104) $42,255,262 $(8,302,724) $(890,936) $386,400,156
============ =========== ============ =========== =========== ========= ============
YEAR ENDED DECEMBER 31, 1998 (4)(5)
- -----------------------------------
Common Shares $ 398,795 $ 23,261 $ - $ - $ - $ - $ 422,056
Additional paid-in capital 89,339,040 25,577,005 - - - - 114,916,045
Accumulated other comprehensive
income 4,035,397 - 421,384 - - - 4,456,781
Retained earnings 169,801,514 - - 64,527,198 (8,827,418) (2,130,178) 223,371,116
------------ ----------- -------- ----------- ----------- ----------- ------------
TOTAL SHAREHOLDERS' EQUITY
AT DECEMBER 31, 1998 $263,574,746 $25,600,266 $421,384 $64,527,198 $(8,827,418) $(2,130,178) $343,165,998
============ =========== ======== =========== =========== =========== ============
</TABLE>
(1) Net of reclassification adjustment, net of tax (See Note 2).
(2) Dividend per share amounts were $.18 and $.21 for the nine months ended
September 30, 1999 and the year ended December 31, 1998, respectively.
(3) Prior to the mergers, International Advisory Services and Captive Resources
paid dividends of $1.12 and $.84 in 1998 and 1999 respectively based on the
equivalent number of Common Shares that would have been outstanding on the
dividend dates after giving effect to the pooling of interests.
(4) Prior period results have been restated to reflect a pooling of interests
following the acquisition of Captive Resources, Inc.
(5) See Note 3.
See Accompanying Notes to Unaudited Consolidated Financial Statements
-6-
<PAGE>
MUTUAL RISK MANAGEMENT LTD. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
1. INTERIM ACCOUNTING POLICY
In the opinion of management of the Company, the accompanying unaudited
consolidated financial statements include all adjustments, consisting only of
normal recurring adjustments, necessary to present fairly the financial position
of the Company and the results of operations and cash flows for the quarter and
nine months ended September 30, 1999 and 1998. Although the Company believes
that the disclosure in these financial statements is adequate to make the
information presented not misleading certain information and footnote
information normally included in financial statements prepared in accordance
with generally accepted accounting principles has been condensed or omitted
pursuant to the rules and regulations of the Securities and Exchange Commission.
Results of operations for the quarter and nine months ended September 30, 1999
are not necessarily indicative of what operating results may be for the full
year.
2. COMPREHENSIVE INCOME
Statement 130 requires unrealized gains or losses on the Company's available for
sale investments, to be included in Other comprehensive income.
<TABLE>
<CAPTION>
Nine Months ended Sept. 30, 1999 Quarter ended Sept. 30, 1999
(In thousands) Before tax Net of tax Before tax Net of tax
Amount Tax Amount Amount Tax Amount
----------- ----------- ----------------- ------------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Net unrealized losses on available
for sale investments arising during
the period. $(22,468) $4,661 $(17,807) $(6,864) $1,259 $(5,605)
Reclassification adjustment
for losses realized in net income 3,608 (237) 3,371 2,215 (221) 1,994
-------- ------ -------- ------- ------ -------
Other comprehensive income $(18,860) $4,424 $(14,436) $(4,649) $1,038 $(3,611)
======== ====== ======== ======= ====== =======
Nine Months ended Sept. 30, 1999 Quarter ended Sept. 30, 1999
(In thousands) Before tax Net of tax Before tax Net of tax
Amount Tax Amount Amount Tax Amount
----------- ----------- ----------------- ------------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Net unrealized gains on available for
sale investments arising during the
period. $ 397 $ (191) $ 206 $ 2,733 $ (841) $ 1,892
Reclassification adjustment
for losses (gains) realized in
net income 1,597 (562) 1,035 (109) 19 (90)
-------- ------ -------- ------- ------ -------
Other comprehensive income $ 1,994 $ (753) $ 1,241 $ 2,624 $ (822) $ 1,802
======== ====== ======== ======= ====== =======
</TABLE>
-7-
<PAGE>
3. ACQUISITIONS
On March 1, 1999, the Company acquired Captive Resources, Inc. ("CRI") in a
business combination accounted for as a pooling of interests. CRI became a
wholly owned subsidiary of the Company through the exchange of 1,058,766 Common
Shares for 100% of its outstanding stock.
<TABLE>
<CAPTION>
(In thousands) Quarter ended Nine Months ended
Sept. 30, 1998 Sept. 30, 1998
-------------- -----------------
<S> <C> <C>
Revenues
MRM (1) $70,718 $204,453
Acquired company 2,217 6,110
------- --------
As restated $72,935 $210,563
======= ========
NET INCOME AVAILABLE TO COMMON SHAREHOLDERS
MRM (1) $16,426 $ 46,821
Acquired company 671 1,542
------- --------
As restated $17,097 $ 48,363
======= ========
(1) As previously-reported in footnote 19 of the December 31, 1998 Form 10-K.
Shareholders' equity at January 1, 1998 was restated as follows:
(In thousands) As previously Acquired As restated
reported company
Common shares $ 388 $ 11 $ 399
Additional paid-in capital 89,349 (10) 89,339
Accumulated other
comprehensive income 4,035 - 4,035
Retained earnings 169,517 285 169,802
-------- ---- --------
Total shareholders' equity $263,289 $286 $263,575
======== ==== ========
</TABLE>
-8-
<PAGE>
<TABLE>
<CAPTION>
4. SEGMENT INFORMATION QUARTER ENDED SEPT ENDED SEPT 30, NINE MONTHS ENDED SEPT 30,
(In thousands) 1999 1998 1999 1998
REVENUE
<S> <C> <C> <C> <C>
Program Business $ 26,806 $24,278 $ 75,761 $ 60,021
Corporate Risk Management 10,608 11,463 37,436 38,856
Specialty Brokerage 3,274 2,299 9,715 6,757
Financial Services 5,009 3,946 14,063 10,063
Underwriting 50,553 24,187 139,570 73,993
Net investment income(1) 6,361 6,637 21,995 20,703
Other 12 125 (207) 170
----------------------------- ---------------------------------
Total $102,623 $72,935 $298,333 $210,563
----------------------------- ---------------------------------
INCOME BEFORE INCOME TAXES AND MINORITY INTEREST
Program Business $ 7,915 $10,578 $ 25,415 $ 24,332
Corporate Risk Management 2,964 4,160 14,064 16,079
Specialty Brokerage 1,074 609 3,866 1,738
Financial Services 352 139 701 31
Underwriting (14,405) (722) (16,594) (1,686)
Net investment income(2) 4,824 4,952 17,334 15,573
Other (659) (406) (2,202) (1,167)
----------------------------- ---------------------------------
Total $ 2,065 $19,310 $ 42,584 $ 54,900
----------------------------- ---------------------------------
</TABLE>
The subsidiaries' accounting records do not capture information by reporting
segment sufficient to determine identifiable assets by such reporting
segments.
(1) Net of realized capital gains and losses.
(2) Net of realized capital gains and losses and interest expense.
5. SUBSEQUENT EVENTS
The Board of Directors, on October 5, 1999, approved a stock repurchase program
to purchase up to three million of its outstanding Common Shares. On October 27,
1999, the Board of Directors authorized the repurchase of an additional two
million shares. As of November 10, 1999, a total of 2,634,900 shares has been
repurchased at an average price of $12.43.
-9-
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
FOR THE QUARTER AND NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
The results of operations for the quarter and nine months ended September 30,
1999 reflect slower growth and lower margins in the Program Business segment
during the quarter. Net income available to common shareholders, excluding
previously announced provisions for losses on terminated programs, amounted to
$50.3 million or $1.00 per Common Share on a diluted basis for the nine months
ended September 30, 1999, representing a decrease of 6% on a per share basis
over the corresponding period as shown in the tables below.
<TABLE>
<CAPTION>
TABLE 1 - EARNINGS PER SHARE
THIRD QUARTER TO SEPTEMBER 30,
1999 1998 (a)
------------------- -----------------
($ thousands except per share data)
PER PER
COMMON SHARE COMMON SHARE
------------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
BASIC DILUTED BASIC DILUTED
Net income available to
Common Shareholders $ 5,361 $ 0.12 $ 0.12 $17,097 $ 0.41 $ 0.37
Provisions - net of tax 8,003 0.19 0.18 - - -
------- ------- ------- ------- ------- -------
$13,364 $ 0.31 $ 0.30 $17,097 $ 0.41 $ 0.37
======= ======= ======= ======= ======= =======
Average number of
shares outstanding (000's) 43,583 44,452(b) 41,731 50,440
------- ------- ------- -------
NINE MONTHS ENDED SEPTEMBER 30,
1999 1998 (a)
------------------- -----------------
($ thousands except per share data)
PER PER
COMMON SHARE COMMON SHARE
------------------- -----------------
BASIC DILUTED BASIC DILUTED
Net income available to
Common Shareholders $42,255 $ 0.98 $ 0.93 $48,363 $ 1.18 $ 1.06
Provisions - net of tax 8,003 0.18 0.07 - - -
------- ------- ------- ------- ------- -------
$50,258 $ 1.16 $ 1.00 $48,363 $ 1.18 $ 1.06
======= ======= ======= ======= ======= =======
Average number of
shares outstanding (000's) 43,214 50,398 41,026 50,153
------- ------- ------- -------
</TABLE>
(a) Prior period results have been restated to reflect a pooling of interests
following the acquisitions of Captive Resources, Inc., CompFirst, Inc. and
the International Advisory Services Group of Companies.
(b) Excludes the conversion of Convertible Debentures which have an anti-
dilutive effect.
Total revenues amounted to $102.6 million and $298.3 million for the quarter and
nine months ended September 30, 1999 representing increases of 41% and 42% over
the corresponding 1998 periods. Table II shows the major components of Revenues
for these periods.
-10-
<PAGE>
<TABLE>
<CAPTION>
TABLE II - REVENUES
PERIODS TO SEPTEMBER 30,
(In thousands)
THIRD QUARTER NINE MONTHS
1999 1998 INCREASE 1999 1998 INCREASE
-------- ------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Fee income $ 45,697 41,986 9% $136,975 $115,697 18%
Premiums earned 50,553 24,187 109% 139,570 73,993 89%
Net investment income 8,556 6,579 30% 25,219 21,802 16%
Realized capital (losses) gains (2,195) 58 NM (3,224) (1,099) NM
Other income (losses) 12 125 (90%) (207) 170 (222%)
-------- ------- -------- --------
Total $102,623 $72,935 41% $298,333 $210,563 42%
======== ======= ======== ========
</TABLE>
Fee income grew by 9% in the third quarter to $45.7 million and 18% to $137.0
million for the first nine months of 1999, as compared to $42.0 million and
$115.7 million respectively in 1998.
SEGMENT ANALYSIS
The components of Fee income by business segment are illustrated in Table III.
TABLE III - FEE INCOME BY BUSINESS SEGMENT
<TABLE>
<CAPTION>
PERIODS TO SEPTEMBER 30,
(In thousands)
THIRD QUARTER NINE MONTHS
1999 1998 INCREASE 1999 1998 INCREASE
------- ------- ---------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Program business fees $26,806 $24,278 10% $ 75,761 $ 60,021 26%
Corporate risk
management fees 10,608 11,463 (7%) 37,436 38,856 (4%)
Specialty brokerage fees 3,274 2,299 42% 9,715 6,757 44%
Financial services fees 5,009 3,946 27% 14,063 10,063 40%
------- ------- -------- --------
Total $45,697 $41,986 9% $136,975 $115,697 18%
======= ======= ======== ========
</TABLE>
PROGRAM BUSINESS
Program Business involves replacing traditional insurers and acting as a conduit
between producers of specialty books of business and reinsurers wishing to write
that business. The segment accounted for 59% of total Fee Income in the quarter
and 55% for the first nine months of 1999 compared to 58% and 52% in the
corresponding 1998 periods. Fees from Program Business increased 10% in the
third quarter to $26.8 million and 26% to $75.8 million in the first nine months
as compared to $24.3 million and $60.0 million respectively in 1998. Profit
margins declined to 30% for the quarter and 34% for the nine months of 1999,
down from 44% for the third quarter of 1998 and 41% for the nine months ending
September 30, 1998. The decline in the Program Business growth rate and margins
in the quarter was due to the continued decline in premium rates, especially at
the Company's underwriting management subsidiary, Small Business Underwriters,
which was hurt by increased competition and lower rates. In Massachusetts, an
important state for SBU, workers' compensation rates declined by 20% effective
September 1, 1999.
-11-
<PAGE>
Gross premiums written increased 39% to $850.8 million for the first nine months
of 1999 as compared to $614.1 million in 1998, primarily as a result of the
continued growth within the Program Business segment. Program Business
generally involves greater premium volume per unit than Corporate Risk
Management business. Premiums earned increased 109% to $50.6 million in the
third quarter and increased 89% to $139.6 million in the first nine months of
1999, as compared to $24.2 million and $74.0 million in the corresponding 1998
periods. The increases in Premiums earned were also due to the continued growth
of the Program Business segment.
CORPORATE RISK MANAGEMENT
Corporate Risk Management, the Company's original business segment, involves
providing services to businesses and associations seeking to insure a portion of
their risk in a loss sensitive Alternative Market structure. This segment
accounted for 23% of total Fee income in the third quarter and 28% for the first
nine months of 1999, down from 27% and 33% in the corresponding 1998 periods.
Corporate Risk Management fees decreased by 7% in the third quarter to $10.6
million, and by 4% in the first nine months to $37.4 million, reflecting the
continuation of the soft insurance market cycle for commercial risks. Profit
margins dropped to 28% in the third quarter compared to 36% in the third quarter
of 1998 and decreased to 38% for the first nine months of 1999 from 41% in the
first nine months of 1998.
SPECIALTY BROKERAGE
The Company's Specialty Brokerage business segment provides access to
Alternative Risk Transfer insurers and reinsurers in Bermuda and Europe. The
segment produced $3.3 million of total Fee income in the third quarter and $9.7
million in the first nine months of 1999, representing 7% of total Fee income in
both the third quarter and first nine months of 1999. Specialty Brokerage fees
grew by 42% in the third quarter and 44% in the first nine months of 1999 as a
result of increased business placed in Bermuda and London. Profit margins
increased to 33% in the third quarter, and to 40% for the first nine months from
26% in both of the corresponding 1998 periods as a result of the increased
revenues.
FINANCIAL SERVICES
Financial Services, the Company's newest business segment, provides
administrative services to offshore mutual funds and other companies and offers
a proprietary family of mutual funds as well as asset accumulation life
insurance products for the high net worth market. The segment accounted for 11%
of total Fee income for the third quarter and 10% for the nine months of 1999.
Fees from Financial Services increased in the quarter by 27% to $5.0 million,
and by 40% to $14.1 million for the nine months, primarily as a result of an
increase in the number of mutual funds under administration from 193 at
September 30, 1998 to 245. Profit margins in the Financial Services segment
have been adversely affected in 1998 and 1999 by the previously announced
revised executive incentive plan and staff expansion costs to service new
business, but increased to 7% in the third quarter and 5% for the first nine
months of 1999. Excluding the effect of the revised executive incentive plan,
the profit margins in this segment would have been 17% for the quarter and 16%
for the nine months as compared to 16% and 15% for the corresponding 1998
periods.
INVESTMENT INCOME
Gross investment income increased by $0.9 million or 4% to $26.6 million in the
first nine months of 1999 over the corresponding 1998 period as a result of an
increase in the yield on invested assets.
Net investment income increased by 30% to $8.6 million in the third quarter and
by 16% to $25.2 million for the first nine months. The increase in Investment
income is due to the inclusion of investment income from one of the Company's
programs accounted for as Claims deposit liabilities, which added $1.8 million
in the quarter and $2.8 million for the first nine months of 1999. Investment
yields excluding this income were 6.0% in the third quarter and 6.8% for the
first nine months of 1999 as compared to 6.3%
-12-
<PAGE>
and 7.0% in 1998. The increase in Investment income was offset by Realized
capital losses in the portfolio.
<TABLE>
<CAPTION>
TABLE IV - EXPENSES
TOTAL EXPENSES
PERIODS TO SEPTEMBER 30,
(In thousands)
Third Quarter Nine Months
1999 1998 INCREASE 1999 1998 INCREASE
-------- ------- ---------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Operating expenses $ 33,392 $26,500 26% $ 92,929 $ 73,517 26%
Total insurance costs 64,958 24,909 161% 156,164 75,679 106%
Interest expense 1,537 1,685 (9%) 4,661 5,130 (9%)
Other expenses 671 531 26% 1,995 1,337 49%
-------- ------- -------- --------
Total $100,558 $53,625 88% $255,749 $155,663 64%
======== ======= ======== ========
</TABLE>
Operating expenses increased 26% to $33.4 million for the quarter, compared to
$26.5 million in the third quarter of last year, and increased 26% to $92.9
million for the first nine months of 1999, compared to $73.5 million in the
first nine months of 1998. The increase in Operating expenses is attributable
to growth in personnel and other expenses resulting from the increased business
as well as recent acquisitions. Excluding these acquisitions, the increase in
operating expenses would have been 25% for the third quarter and 22% for the
nine months over the corresponding 1998 periods.
The fluctuations in Total insurance costs are typically the direct result of the
fluctuations in Premiums earned during the relevant period. However, total
insurance costs during the third quarter exceeded the increase in Premiums
earned. During the quarter, the Company established a provision related to net
losses incurred on a number of terminated programs of $8 million net of tax or
$0.18 per diluted share. This provision is net of a reinsurance recovery of
$14.7 million under a contingency excess of loss policy. This resulted in a
$12.3 million increase in Losses and loss expenses incurred during the quarter
offset by a $4.3 million reduction in Income taxes.
The effective tax rate was (159.8%) in the quarter and 0.8% for the nine months
compared to 11.7% and 12.0% in the corresponding 1998 periods. The decreases in
the rates are due mainly to an increase in earnings outside of the United
States, a restructuring of the taxable entities in both the United States and
Europe and a reduction in taxes due to the provision on net losses incurred
established during the quarter.
LIQUIDITY AND CAPITAL RESOURCES
Total assets increased to $3.6 billion at September 30, 1999 from $3.1 billion
at December 31, 1998. Assets held in separate accounts which are principally
managed assets attributable to participants in the Company's IPC Programs
accounted for approximately 19% of Total assets at September 30, 1999 and 23% at
December 31, 1998. Total Shareholders' equity increased to $386 million at
September 30, 1999 from $343 million at December 31, 1998 primarily as a result
of Net income in the nine months and the issuance of Common Shares offset by the
payment of dividends. Return on equity, excluding provisions for losses on
terminated programs, was 18% for the first nine months of 1999.
Cash flow from operations has historically provided the Company its principal
source of liquidity. Cash flow was positive in the nine months and in the
quarter and improved from the first and second quarters where negative cash flow
resulted from the Company's Program Business segment not producing the expected
levels of cash flow. The Company believes it will continue to show positive
cash flow for the remainder of the year and will be able to meet its liquidity
requirements.
-13-
<PAGE>
IMPACT OF THE YEAR 2000 ISSUE
The Company began assessing the impact of the Year 2000 issue on its computer
hardware and software systems in 1997. Certain systems have been identified for
replacement before year-end 1999 due to normal business requirements. The
replacement systems have been assessed for Year 2000-related problems and
remediation is now complete. As of September 30, 1999, the Company's historical
Year 2000 remediation costs have not been material and total costs are not
expected to exceed $.5 million. The Company's lack of legacy systems is
fortunate, most of its applications are PC databases, some networked but most
from a programming stand point, easily corrected. As of this disclosure date,
management has not identified any hardware or software computer system within
the Company with a significant Year 2000 compliance problem that is expected to
have a materially adverse effect on the Company's financial condition or results
of operations. As the Company regularly updates its hardware and software the
pure additional cost for Year 2000 compliance should not be material.
The Company continues to assess the Year 2000 compliance of its critical
business operations and products that could potentially be affected by the Year
2000 problem. The purpose of this review is to determine what impact, if any,
the Year 2000 issue may have on the Company and its significant customers,
suppliers, and others, and whether that impact will be material to the Company's
financial condition or results of operations. The Company has contacted its
critical customers, reinsurance intermediaries, managing general agents,
suppliers, and others to determine the nature and extent of their Year 2000
compliance efforts and to assess whether their failure to resolve their own Year
2000 issues would have a material adverse affect on the Company's financial
condition or results of operations. Based on these assessments, management will
take such further action as they deem appropriate including, but not limited to,
the development of contingency plans.
The extent to which the Company's financial condition or results of operations
may be materially affected by the Year 2000 problems of third parties depends on
a variety of factors including, but not limited to, whether these third parties
can resolve their own Year 2000 issues; whether their remediated systems remain
compatible with the Company's systems; and the nature and extent to which the
Company's systems may be affected by the third party's non compliant systems.
Significant failures of certain essential services including, but not limited
to, the telecommunications, utility, banking, securities, and transportation
industries, due to their own Year 2000 problems are generally beyond the
Company's control and could have an adverse material impact on the Company's
financial condition or results of operations.
SAFE HARBOR DISCLOSURE FOR FORWARD-LOOKING STATEMENTS
In connection with the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995 (the "1995 Act"), the Company sets forth below
cautionary statements identifying important factors that could cause the
Company's actual results to differ materially from those which might be
projected, forecasted, or estimated or otherwise implied in the Company's
forward-looking statements, as defined in the 1995 Act, made by or on behalf of
the Company in press releases, written statements or documents filed with the
Securities and Exchange Commission, or in its communications and discussions
with investors and analysts in the normal course of business through meetings,
telephone calls and conference calls. Such statements may include, but are not
limited to, projections of Fee income, Premiums earned, Net investment income,
Other income, Losses and loss expenses incurred, Acquisition costs, Operating
expenses, Other expenses, earnings (including earnings per share), cash flows,
plans for future operations, Shareholders' equity, financing needs, capital
plans, dividends, plans relating to products or services of the Company, and
estimates concerning the effects of litigation or other disputes, as well as
assumptions for any of the foregoing and are generally expressed with words such
as "believes", "estimates", "expects", "anticipates", "could have", "may have",
and similar expressions.
-14-
<PAGE>
Forward-looking statements are inherently subject to risks and uncertainties.
The Company cautions that factors which may cause the Company's results to
differ materially from such forward-looking statements include, but are not
limited to, the following: (a) Changes in the level of competition in the
reinsurance or primary insurance markets that adversely affect the volume or
profitability of the Company's business. These changes include, but are not
limited to, the intensification of price competition, the entry of new
competitors, existing competitors exiting the market, and the development of new
products by new and existing competitors; (b) Changes in the demand for
reinsurance, including changes in ceding companies' retentions, and changes in
the demand for primary and excess and surplus lines insurance coverages; (c) The
ability of the Company to execute its business strategies and its reliance on
key personnel; (d) Adverse development on claims and claims expense liabilities
related to business and the failure of clients, reinsurers or others to meet
their obligations to the Company in connection with such losses.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
No material change from the disclosure set forth in the Company's Form 10-K
for the year ended December 31, 1998.
-15-
<PAGE>
PART II - OTHER INFORMATION
ITEM 5. Other Information
The Board of Directors, on October 5, 1999, approved a stock repurchase program
to purchase up to three million of its outstanding Common Shares. On October
27, 1999, the Board of Directors authorized the repurchase of an additional two
million shares. As of November 10, 1999, a total of 2,634,900 shares has been
repurchased at an average price of $12.43.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. EXHIBIT 11 - Computation of Net Earnings Per Common Share and Common
Share Equivalents.
Exhibit 27 - Financial Data Schedule
27 Current quarter ended September 30, 1999.
B. Reports on Form 8-K. No reports on Form 8-K were filed during the
three month period ended September 30, 1999.
-16-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MUTUAL RISK MANAGEMENT LTD.
/s/ James C. Kelly
___________________________________________
JAMES C. KELLY
SENIOR VICE PRESIDENT, CHIEF FINANCIAL OFFICER
AND AUTHORIZED SIGNATORY
DATE: NOVEMBER 12, 1999
-17-
<PAGE>
EXHIBIT 11
MUTUAL RISK MANAGEMENT LTD.
COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
Quarter Ended September, 30 Nine Months Ended September, 30
1999 1998 1999 1998
(in thousands except share and per share amounts)
<S> <C> <C> <C> <C>
Basic
Income Available to Common Shareholders $5,361 $17,097 $42,255 $48,363
---------- ---------- ---------- ----------
Weighted Average Common Shares outstanding 43,583,086 41,730,688 43,214,037 41,026,217
---------- ---------- ---------- ----------
Basic earnings per Common Share $0.12 $0.41 $0.98 $1.18
---------- ---------- ---------- ----------
Diluted
Income Available to Common Shareholders $5,361 $17,097 $42,255 $48,363
Debenture interest 0(a) 1,634 4,513 4,967
---------- ---------- ---------- ----------
$5,361 $18,731 $46,768 $53,330
Weighted Average Common Shares outstanding 43,583,086 41,730,688 43,214,037 41,026,217
Common share equivalents associated with options
and Convertible Debentures:
Net effect of dilutive stock options 869,179 2,062,026 1,314,909 2,322,814
Assumed conversion of Convertible Debentures 0(a) 6,647,233 5,869,042 6,804,209
---------- ---------- ---------- ----------
869,179 8,709,259 7,183,951 9,127,023
Total Weighted Average Common Shares 44,452,265(a) 50,439,947 50,397,988 50,153,240
---------- ---------- ---------- ----------
Diluted earnings per Common Share $0.12 $0.37 $0.93 $1.06
---------- ---------- ---------- ----------
</TABLE>
(a) Excludes the conversion of Convertible Debentures which would have an
anti-dilutive effect.
<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, 1999 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000826918
<NAME> MUTUAL RISK MANAGEMENT LTD.
<MULTIPLIER> 1000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
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<DEBT-HELD-FOR-SALE> 428,693
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<TOTAL-INVEST> 428,693
<CASH> 108,188
<RECOVER-REINSURE> 1,460,879
<DEFERRED-ACQUISITION> 34,313
<TOTAL-ASSETS> 3,604,591
<POLICY-LOSSES> 1,587,371
<UNEARNED-PREMIUMS> 317,745
<POLICY-OTHER> 69,797
<POLICY-HOLDER-FUNDS> 30,626
<NOTES-PAYABLE> 119,703
0
0
<COMMON> 437
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139,570
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</TABLE>
