<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 quarterly period ended September 30, 2000.
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)
<TABLE>
<CAPTION>
<S> <C>
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)
</TABLE>
(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 [GRAPHIC OMITTED] NO [GRAPHIC OMITTED]
The number of outstanding shares of the registrant's Common Stock, $0.01 par
value, as of September 30, 2000 was 41,229,920.
<PAGE>
MUTUAL RISK MANAGEMENT LTD.
I N D E X
<TABLE>
<CAPTION>
<S> <C>
Part I. Financial Information:
Item 1. Financial Statements:
Unaudited Consolidated Statements of Income and Comprehensive Income
for the quarter and nine month periods ended September 30, 2000 and
1999 3
Unaudited Consolidated Balance Sheets at September 30, 2000
and December 31, 1999 4
Unaudited Consolidated Statements of Cash Flows for the
nine month periods ended September 30, 2000 and 1999 5
Unaudited Consolidated Statements of Changes in Shareholders' Equity for
the periods ended September 30, 2000 and December 31, 1999 6
Notes to Unaudited Consolidated Financial Statements at
September 30, 2000 7-20
Item 2. Management's Discussion and Analysis of Financial 21-25
Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures about 26
Market Risk
PART II. Other Information:
Item 1. Legal Proceedings 26
Item 6. Exhibits and Reports on Form 8-K 26
Signatures 27
</TABLE>
Exhibits
A. Exhibits
4.1 Senior Indenture, dated as of September 21, 2000, by and among
Mutual Group Ltd., Mutual Risk Management Ltd. and The Chase
Manhattan Bank, as trustee.
4.2 First Supplemental Indenture, dated as of September 21, 2000, by
and among Mutual Group Ltd., Mutual Risk Management Ltd. and The
Chase Manhattan Bank, as trustee.
4.3 Guarantee Agreement, dated as of September 21, 2000, by and
among Mutual Risk Management Ltd., Mutual Group Ltd. and The
Chase Manhattan Bank, as trustee.
4.4 Common Securities Guarantee Agreement, dated as of September 21,
2000, by Mutual Group Ltd. and Mutual Risk Management Ltd.
4.5 Amended and Restated Trust Agreement, dated as of September 21,
2000, of MRM Capital Trust I.
10.1 Senior Note Purchase Agreement, dated as of September 21, 2000,
by and between Mutual Group Ltd. and MRM Capital Trust I.
10.2 Purchase Agreement, dated as of September 21, 2000, by and among
MRM Capital Trust I, Mutual Group Ltd., Mutual Risk Management
Ltd. and Intrepid Funding Master Trust.
10.3 Remarketing and Contingent Purchase Agreement, dated as of
September 21, 2000, by and among Mutual Group Ltd., Mutual Risk
Management Ltd., MRM Capital Trust I and Banc of America
Securities LLC.
10.4 Forward Underwriting Agreement, dated as of September 21, 2000,
by and between Banc of America Securities LLC and Mutual Risk
Management Ltd.
10.5 Subscription Agreement, dated as of September 21, 2000, by and
between MRM Capital Trust I and Mutual Group Ltd.
27.1 Financial Data Schedule
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MUTUAL RISK MANAGEMENT LTD. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
AND COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
Quarter ended September 30, Nine months ended September 30,
2000 1999 2000 1999
<S> <C> <C> <C> <C>
REVENUES
Fee income $ 55,808,565 $ 45,697,290 $ 151,518,726 $ 136,975,318
Premiums earned 72,059,645 50,552,591 191,931,247 139,570,418
Net investment income 9,182,578 8,555,846 30,292,827 25,219,284
Realized capital losses (204,163) (2,194,823) (2,167,959) (3,224,397)
Other income (losses) 38,033 12,483 641,045 (208,003)
------------------------------------------------------------------
Total Revenues 136,884,658 102,623,387 372,215,886 298,332,620
------------------------------------------------------------------
EXPENSES
Losses and loss expenses incurred 56,616,816 48,131,182 132,696,400 115,923,720
Acquisition costs 20,108,792 16,826,623 70,063,823 40,240,360
Operating expenses 39,975,444 33,392,307 112,335,164 92,929,317
Interest expense 4,339,701 1,537,445 14,637,156 4,660,791
Other expenses 1,059,845 670,720 3,176,420 1,994,534
------------------------------------------------------------------
Total Expenses 122,100,598 100,558,277 332,908,963 255,748,722
------------------------------------------------------------------
INCOME BEFORE INCOME TAXES, MINORITY
INTEREST AND EXTRAORDINARY LOSS 14,784,060 2,065,110 39,306,923 42,583,898
Income taxes 1,484,737 (3,300,523) 3,418,111 329,060
------------------------------------------------------------------
INCOME BEFORE MINORITY INTEREST AND
EXTRAORDINARY LOSS 13,299,323 5,365,633 35,888,812 42,254,838
Minority interest (70,478) (4,551) 565,257 424
------------------------------------------------------------------
INCOME BEFORE EXTRAORDINARY LOSS 13,228,845 5,361,082 36,454,069 42,255,262
Extraordinary loss on extinguishment of debentures, net
of tax -- -- (4,327,242) --
------------------------------------------------------------------
NET INCOME 13,228,845 5,361,082 32,126,827 42,255,262
Other comprehensive income, net of tax:
Unrealized gains (losses) on investments, net of
reclassification adjustment 3,667,104 (3,611,993) 614,987 (14,436,104)
------------------------------------------------------------------
COMPREHENSIVE INCOME $ 16,895,949 $ 1,749,089 $ 32,741,814 $ 27,819,158
==================================================================
EARNINGS PER COMMON SHARE:
Net income available to Common Shareholders:
Basic EPS $ 0.32 $ 0.12 $ 0.78 $ 0.98
============= ============= ============= =============
Diluted EPS $ 0.32 $ 0.12 $ 0.77 $ 0.93
============= ============= ============= =============
Dividends per Common Share $ 0.07 $ 0.06 $ 0.21 $ 0.18
============= ============= ============= =============
Weighted average number of Common
Shares outstanding - basic 41,177,527 43,583,086 41,189,407 43,214,037
============= ============= ============= =============
Weighted average number of Common
Shares outstanding - diluted 42,521,034 (a)44,452,265 (a)41,558,653 50,397,988
============= ============= ============= =============
</TABLE>
(a) 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>
UNAUDITED
SEPTEMBER 30, DECEMBER 31,
2000 1999
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 168,953,402 $ 155,387,061
Investments :
Held in available for sale account at fair value
(Amortized cost $403,404,882; 1999 - $466,858,482) 389,082,742 451,921,349
--------------- ---------------
Total marketable investments 558,036,144 607,308,410
Other investments 36,183,847 28,425,474
Investment income due and accrued 5,123,051 5,172,711
Accounts receivable 554,686,609 564,590,025
Reinsurance receivables 1,932,304,384 1,729,935,575
Deferred expenses 74,063,523 30,406,066
Prepaid reinsurance premiums 352,949,375 281,077,921
Fixed assets 33,094,896 28,880,015
Deferred tax benefit 10,345,377 4,232,826
Goodwill 50,953,593 52,924,459
Other assets 7,096,555 6,829,547
Assets held in separate accounts 787,408,051 693,390,317
--------------- ---------------
Total Assets $ 4,402,245,405 $ 4,033,173,346
=============== ===============
LIABILITIES & SHAREHOLDERS' EQUITY
LIABILITIES
Reserve for losses and loss expenses $ 2,046,736,493 $ 1,860,120,483
Reserve for unearned premiums 445,025,593 335,265,056
Pension fund reserves 57,038,675 67,980,867
Claims deposit liabilities 27,598,216 27,923,901
Accounts payable 303,208,101 353,965,743
Accrued expenses 14,032,370 11,053,705
Taxes payable 22,140,328 23,181,367
Loans payable 220,000,000 117,000,000
Other loans payable 3,959,539 4,048,589
Debentures 13,496,356 110,898,002
Prepaid fees 63,100,708 58,025,464
Other liabilities 15,470,787 12,175,828
Liabilities related to separate accounts 787,408,051 693,390,317
--------------- ---------------
Total Liabilities 4,019,215,217 3,675,029,322
--------------- ---------------
SHAREHOLDERS' EQUITY
Common Shares - Authorized 180,000,000 (par value $0.01)
Issued 41,229,920 (excluding 2,728,816 shares held in treasury
1999 - issued 41,205,191, excluding 2,636,716 shares held in treasury 412,299 412,052
Additional paid-in capital 111,362,212 110,754,758
Accumulated other comprehensive income (loss) (14,322,140) (14,937,127)
Retained earnings 285,577,817 261,914,341
--------------- ---------------
Total Shareholders' Equity 383,030,188 358,144,024
--------------- ---------------
Total Liabilities & Shareholders' Equity $ 4,402,245,405 $ 4,033,173,346
=============== ===============
</TABLE>
See Accompanying Notes to Unaudited Consolidated Financial Statements
4
<PAGE>
MUTUAL RISK MANAGEMENT LTD. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Ended September 30,
CASH FLOWS FROM OPERATING ACTIVITIES 2000 1999
<S> <C> <C>
Net income $ 32,126,827 $ 42,255,262
Items not affecting cash:
Depreciation 8,590,801 5,413,141
Amortization of investments (600,989) (454,717)
Net loss on sale of investments 2,211,228 3,607,825
Other investment gains - (360,916)
Amortization of debentures 1,219,786 4,512,975
Deferred tax benefit (6,112,551) 635,181
Extraordinary loss on extinguishment of debentures 4,327,242 -
Other items, net 1,516,290 1,522,817
Net changes in non-cash balances relating to operations:
Accounts receivable 9,903,416 (137,788,236)
Reinsurance receivables (202,368,809) (381,315,879)
Investment income due and accrued 49,660 1,500,930
Deferred expenses (45,281,001) (7,097,207)
Prepaid reinsurance premiums (71,871,454) (57,479,816)
Other assets (267,008) (2,121,864)
Reserve for losses and loss expenses 186,616,010 396,945,597
Prepaid fees 5,075,244 7,159,761
Reserve for unearned premiums 109,760,537 75,852,133
Accounts payable (50,757,642) 57,776,286
Taxes payable (1,041,039) 630,215
Accrued expenses 2,978,665 82,392
Other liabilities 3,482,071 (4,738,379)
----------- -------------
NET CASH (APPLIED TO) FROM OPERATING ACTIVITIES (10,442,716) 6,537,501
------------ -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of investments - Available for sale 336,290,601 71,891,067
Proceeds from maturity of investments - Available for sale 27,002,025 43,724,933
Fixed assets purchased (12,940,674) (11,646,663)
Investments purchased - Available for sale (301,449,272) (105,698,261)
Acquisitions and other investments (7,334,718) (47,330)
Proceeds from sale of other investments - 576,522
Other items, net 165,917 47,417
------------ -------------
NET CASH FROM (APPLIED TO) INVESTING ACTIVITIES 41,733,879 (1,152,315)
------------ -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Loans received 320,000,000 -
Loans repaid (217,000,000) -
Other loans (repaid) received (89,050) 587,624
Extinguishment of convertible debentures (101,325,130) -
Proceeds from shares issued 607,701 10,175,761
Claims deposit liabilities (325,685) (6,821,481)
Pension fund reserves (10,942,192) (9,956,511)
Dividends paid (8,650,466) (8,604,959)
------------ -------------
NET CASH APPLIED TO FINANCING ACTIVITIES (17,724,822) (14,619,566)
------------ -------------
Net increase (decrease) in cash and cash equivalents 13,566,341 (9,234,380)
Cash and cash equivalents at beginning of period 155,387,061 117,422,652
------------ -------------
Cash and cash equivalents at end of period $168,953,402 $ 108,188,272
============ =============
Supplemental cash flow information:
Interest paid $ 13,417,370 $ 147,816
============ =============
Income taxes paid, net $ 5,484,069 $ 3,217,167
============ =============
</TABLE>
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>
Change in
Opening Shares Treasury Shares Unrealized
Balance Issued Purchased Gain (Loss)(1)
<S> <C> <C> <C> <C>
Nine Months Ended September 30, 2000
------------------------------------
Common Shares $ 412,052 $ 1,168 $ (921) $ --
Additional paid-in capital 110,754,758 1,993,559 (1,386,105) --
Accumulated other
Comprehensive income (loss) (14,937,127) -- -- 614,987
Retained earnings 261,914,341 -- -- --
-----------------------------------------------------------------------------
Total Shareholders' Equity
at Sept. 30, 2000 $358,144,024 $ 1,994,727 $ (1,387,026) $ 614,987
=============================================================================
Year Ended December 31, 1999
----------------------------
Common Shares $ 422,056 $ 16,363 $ (26,367) $ --
Additional paid-in capital 114,916,045 25,626,183 (29,787,470) --
Accumulated other
Comprehensive income (loss) 4,456,781 -- -- (19,393,908)
Retained earnings 223,371,116 -- -- --
-----------------------------------------------------------------------------
Total Shareholders' Equity
at December 31, 1999 $343,165,998 $ 25,642,546 $ 29,813,837 (19,393,908)
=============================================================================
<CAPTION>
Common Share Dividend of
Net Dividends Acquired Closing
Income Declared (2) Companies (3) Balance
Nine Months Ended September 30, 2000
------------------------------------
<S> <C> <C> <C> <C>
Common Shares $ -- $ -- $ -- $ 412,299
Additional paid-in capital -- -- -- 111,362,212
Accumulated other
Comprehensive income (loss) -- -- -- (14,322,140)
Retained earnings 32,126,827 (8,463,351) -- 285,577,817
-------------------------------------------------------------------------------------
Total Shareholders' Equity
at Sept. 30, 2000 $32,126,827 $ (8,463,351) -- $ 383,030,188
=====================================================================================
Year Ended December 31, 1999
----------------------------
Common Shares $ -- $ -- $ -- 412,052
Additional paid-in capital -- -- -- 110,754,758
Accumulated other
Comprehensive income (loss) -- -- -- (14,937,127)
Retained earnings 50,438,032 (11,003,871) (890,936) 261,914,341
-------------------------------------------------------------------------------------
Total Shareholders' Equity
at December 31, 1999 $50,438,032 $ (11,003,871) $ (890,936) $ 358,144,024)
======================================================================================
</TABLE>
(1) Net of reclassification adjustment, net of tax (See Note 2).
(2) Dividend per share amounts were $0.21 and $0.25 for the nine months ended
September 30, 2000 and the year ended December 31, 1999 respectively.
(3) Prior to the merger Captive Resources, Inc. paid dividends of $.51 in 1999,
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.
See Accompanying Notes to Unaudited Consolidated Financial Statements
6
<PAGE>
MUTUAL RISK MANAGEMENT LTD. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
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 periods
ended September 30, 2000 and 1999. 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 accounting
principles generally accepted in the United States 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, 2000
are not necessarily indicative of what operating results may be for the full
year.
2. COMPREHENSIVE INCOME
Statement of Financial Accounting Standard 130 requires unrealized gains or
losses on the Company's available for sale investments, to be included in Other
comprehensive income.
<TABLE>
<CAPTION>
Quarter ended September 30, 2000 Nine Months ended September 30, 2000
(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 (losses) on
available for sale investments
arising during the period $3,457 $ 9 $3,466 $(212) $ 66 $(146)
Less: reclassification adjustment
for gains realized in net income 210 (9) 201 827 (66) 761
------ ------- ------ ----- ---- -----
Other comprehensive income $3,667 $ - $3,667 $ 615 $ - $ 615
====== ======= ====== ===== ==== =====
<CAPTION>
Quarter ended September 30, 1999 Nine Months ended September 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) gains on
available for sale investments
arising during the period $(6,864) $1,259 $(5,605) $(22,468) $4,661 $(17,807)
Less: reclassification adjustment
for losses realized in net income 2,215 (221) 1,994 3,608 (237) 3,371
------- ------ ------- -------- ------ --------
Other comprehensive income (loss) $(4,649) $1,038 $(3,611) $(18,860) $4,424 $(14,436)
======= ====== ======= ======== ====== ========
</TABLE>
7
<PAGE>
MUTUAL RISK MANAGEMENT LTD. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (continued)
3. SEGMENT INFORMATION
Selected information by operating segment is summarized in the chart below.
Line of Business Financial Information
<TABLE>
<CAPTION>
Quarter ended September 30, Nine Months ended September 30,
2000 1999 2000 1999
(In thousands)
<S> <C> <C> <C> <C>
Revenue
Program Business $ 33,283 $ 26,806 $ 87,160 $ 75,761
Corporate Risk Management 11,532 10,608 33,595 37,436
Specialty Brokerage 3,562 3,274 10,907 9,715
Financial Services 7,432 5,009 19,857 14,063
Underwriting 72,060 50,553 191,931 139,570
Net investment income (1) 8,978 6,361 28,125 21,995
Other 38 12 641 (207)
-------- -------- -------- --------
Total $136,885 $102,623 $372,216 $298,333
======== ======== ======== ========
Income before income taxes, minority interest and extraordinary loss
Program Business $10,272 $ 7,915 $ 24,554 $ 25,415
Corporate Risk Management 2,943 2,964 8,562 14,064
Specialty Brokerage 1,043 1,074 3,245 3,866
Financial Services 1,575 352 3,835 701
Underwriting (4,666) (14,405) (10,829) (16,594)
Net investment income (2) 4,639 4,824 13,488 17,334
Other (1,022) (659) (3,548) (2,202)
------- -------- -------- --------
Total $14,784 $ 2,065 $ 39,307 $ 42,584
======== ======== ======== ========
</TABLE>
(1) Net of realized capital gains and losses.
(2) Net of realized capital gains and losses and interest expense.
The subsidiaries' accounting records do not capture information by reporting
segment sufficient to determine identifiable assets by such reporting
segments.
8
<PAGE>
MUTUAL RISK MANAGEMENT LTD. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (continued)
4. EARNINGS PER COMMON SHARE
The following table sets forth the computation of basic and diluted earnings
per common share.
<TABLE>
<CAPTION>
Quarter ended September 30, Nine months ended September 30,
2000 1999 2000 1999
<S> <C> <C> <C> <C>
(In thousands, except shares and earnings per share)
Numerator
Income before extraordinary loss $ 13,229 $ 5,361 $ 36,454 $ 42,255
Extraordinary loss on extinguishment of debentures, net of tax - - (4,327) -
-----------------------------------------------------------
Net income 13,229 5,361 32,127 42,255
-----------------------------------------------------------
Numerator for basic earnings per common share -
Net income available to common shareholders 13,229 5,361 32,127 42,255
Effect of dilutive securities:
Conversion of Zero Coupon Convertible Exchangeable
Subordinated Debentures 174 - - 4,513
-----------------------------------------------------------
Numerator for diluted earnings per common share -
Net income available to common shareholders after assumed
conversions $ 13,403 $ 5,361 (a) $ 32,127 (a) $ 46,768
===========================================================
Denominator
Denominator for basic earnings per common share -
Weighted average shares 41,177,527 43,583,086 41,189,407 43,214,037
Effect of dilutive securities:
Stock options 698,554 869,179 369,246 1,314,909
Conversion of Zero Coupon Convertible Exchangeable
Subordinated Debentures 644,953 - - 5,869,042
-----------------------------------------------------------
Denominator for diluted earnings per common share -
Adjusted weighted average shares and assumed conversions 42,521,034 44,452,265 (a) 41,558,653 (a) 50,397,988
===========================================================
Basic earnings per common share
Income before extraordinary loss $ 0.32 $ 0.12 $ 0.88 $ 0.98
Extraordinary loss on extinguishment of debentures, net of tax - - $ (0.10) -
-----------------------------------------------------------
Basic earnings per common share $ 0.32 $ 0.12 $ 0.78 $ 0.98
===========================================================
Diluted earnings per common share
Income before extraordinary loss $ 0.32 $ 0.12 $ 0.87 $ 0.93
Extraordinary loss on extinguishment of debentures, net of tax - - $ (0.10) -
-----------------------------------------------------------
Diluted earnings per common share $ 0.32 $ 0.12 $ 0.77 $ 0.93
===========================================================
</TABLE>
(a) Excludes conversion of convertible debentures which have an anti-dilutive
affect
9
<PAGE>
MUTUAL RISK MANAGEMENT LTD. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (continued)
5. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION
Mutual Group Ltd. ("Mutual Group") is a wholly owned subsidiary of the Parent
Company. Substantially all of Mutual Group's income and cash flow is generated
by its subsidiaries. As a result, funds necessary to meet Mutual Group's debt
service obligations are provided in part by distributions or advances from its
subsidiaries. Under certain circumstances, contractual and legal restrictions,
as well as the financial condition and operating requirements of Mutual Group's
subsidiaries, could limit the ability for Mutual Group to obtain cash from its
subsidiaries for the purpose of meeting its debt service obligations.
The following unaudited financial information presents the condensed
consolidating balance sheets of the Parent Company, Mutual Group and other
subsidiaries as of September 30, 2000 and December 31, 1999 and condensed
consolidating statements of income and cash flows for the periods ended
September 30, 2000 and 1999. Investments in subsidiaries are accounted for on
the equity method and accordingly, entries necessary to consolidate the Company,
Mutual Group and all other subsidiaries are reflected in the eliminations
column. This information should be read in conjunction with the consolidated
financial statements and footnotes of the Parent Company. Certain balances have
been reclassified from the Mutual Risk Management Ltd. Parent Company Only
Financial Information presented in Item 14B Schedule II of Form 10-K/A for
purposes of this condensed presentation.
10
<PAGE>
MUTUAL RISK MANAGEMENT LTD. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (continued)
5. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (continued)
UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000
<TABLE>
<CAPTION>
Parent Mutual Other
(In thousands) Company Group Subsidiaries Eliminations Consolidated
<S> <C> <C> <C> <C> <C>
Revenues
Fee Income $ - $ - $151,519 $ - $ 151,519
Premiums earned - - 191,931 - 191,931
Net investment income 2,058 516 27,718 - 30,292
Intercompany interest income - - 24,474 (24,474) -
Realized capital losses - - (2,167) - (2,167)
Other income 92 30 519 - 641
Equity in subsidiary earnings 46,601 30,503 - (77,104) -
-----------------------------------------------------------------------
Total revenues 48,751 31,049 393,994 (101,578) 372,216
-----------------------------------------------------------------------
Expenses
Losses and loss expenses incurred - - 132,696 - 132,696
Acquisition costs - - 70,064 - 70,064
Operating expenses 166 409 111,761 - 112,336
Interest expense 12,131 - 2,506 - 14,637
Intercompany interest expense - 24,474 - (24,474) -
Other expenses - - 3,176 - 3,176
-----------------------------------------------------------------------
Total Expenses 12,297 24,883 320,203 (24,474) 332,909
-----------------------------------------------------------------------
INCOME BEFORE INCOME TAXES, MINORITY INTEREST
AND EXTRAORDINARY LOSS 36,454 6,166 73,791 (77,104) 39,307
Income taxes - (8,777) 12,195 - 3,418
INCOME BEFORE MINORITY INTEREST AND EXTRAORDINARY LOSS 36,454 14,943 61,596 (77,104) 35,889
Minority interest - - 565 - 565
INCOME BEFORE EXTRAORDINARY LOSS 36,454 14,943 62,161 (77,104) 36,454
Extraordinary loss on extinguishment of
debentures, net of tax (4,327) - - - (4,327)
-----------------------------------------------------------------------
NET INCOME $ 32,127 $ 14,943 $ 62,161 $ (77,104) $ 32,127
=======================================================================
</TABLE>
11
<PAGE>
MUTUAL RISK MANAGEMENT LTD. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (continued)
5. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (continued)
UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF INCOME
FOR THE QUARTER ENDED SEPTEMBER 30, 2000
<TABLE>
<CAPTION>
Parent Mutual Other
(In thousands) Company Group Subsidiaries Eliminations Consolidated
<S> <C> <C> <C> <C> <C>
Revenues
Fee Income $ - $ - $ 55,809 $ - $ 55,809
Premiums earned - - 72,059 - 72,059
Net investment income 1,106 190 7,887 - 9,183
Intercompany interest income - - 8,146 (8,146) -
Realized capital losses - - (204) - (204)
Other income - (156) 194 - 38
Equity in subsidiary earnings 16,104 10,502 - (26,606) -
-------------------------------------------------------------------
Total revenues 17,210 10,536 143,891 (34,752) 136,885
-------------------------------------------------------------------
Expenses
Losses and loss expenses incurred - - 56,616 - 56,616
Acquisition costs - - 20,109 - 20,109
Operating expenses 63 82 39,831 - 39,976
Interest expense 3,918 - 422 - 4,340
Intercompany interest expense - 8,146 - (8,146) -
Other expenses - - 1,060 - 1,060
-------------------------------------------------------------------
Total Expenses 3,981 8,228 118,038 (8,146) 122,101
-------------------------------------------------------------------
INCOME BEFORE INCOME TAXES AND MINORITY INTEREST 13,229 2,308 25,853 (26,606) 14,784
Income taxes - (3,029) 4,514 - 1,485
INCOME BEFORE MINORITY INTEREST 13,229 5,337 21,339 (26,606) 13,299
Minority interest - - (70) - (70)
-------------------------------------------------------------------
NET INCOME $13,229 $ 5,337 $ 21,269 $(26,606) $ 13,229
===================================================================
</TABLE>
12
<PAGE>
MUTUAL RISK MANAGEMENT LTD. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (continued)
5. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (continued)
UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
Parent Mutual Other
(In thousands) Company Group Subsidiaries Eliminations Consolidated
<S> <C> <C> <C> <C> <C>
Revenues
Fee Income $ - $ - $136,975 $ - $136,975
Premiums earned - - 139,570 - 139,570
Net investment income (114) 583 24,750 - 25,219
Intercompany interest income - - 15,300 (15,300) -
Realized capital losses - 361 (3,585) - (3,224)
Other income - (99) (108) - (207)
Equity in subsidiary earnings 46,988 5,349 - (52,337) -
------------------------------------------------------------------
Total revenues 46,874 6,194 312,902 (67,637) 298,333
------------------------------------------------------------------
Expenses
Losses and loss expenses incurred - - 115,924 - 115,924
Acquisition costs - - 40,240 - 40,240
Operating expense 106 518 92,305 - 92,929
Interest expense 4,513 - 148 - 4,661
Intercompany interest expense - 15,300 - (15,300) -
Other expenses - - 1,995 - 1,995
------------------------------------------------------------------
Total Expenses 4,619 15,818 250,612 (15,300) 255,749
------------------------------------------------------------------
INCOME BEFORE INCOME TAXES AND MINORITY INTEREST 42,255 (9,624) 62,290 (52,337) 42,584
Income taxes - (4,088) 4,417 - 329
INCOME BEFORE MINORITY INTEREST 42,255 (5,536) 57,873 (52,337) 42,255
Minority interest - - - - -
------------------------------------------------------------------
NET INCOME $42,255 $(5,536) $ 57,873 $(52,337) $ 42,255
==================================================================
</TABLE>
13
<PAGE>
MUTUAL RISK MANAGEMENT LTD. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (continued)
5. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (continued)
UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF INCOME
FOR THE QUARTER ENDED SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
Parent Mutual Other
(In thousands) Company Group Subsidiaries Eliminations Consolidated
<S> <C> <C> <C> <C> <C>
Revenues
Fee Income $ - $ - $ 45,697 $ - $ 45,697
Premiums earned - - 50,553 - 50,553
Net investment income (682) 218 9,020 - 8,556
Intercompany interest income - - 5,100 (5,100) -
Realized capital losses - - (2,195) - (2,195)
Other income - (55) 67 - 12
Equity in subsidiary earnings 7,563 (563) - (7,000) -
------------------------------------------------------------------
Total revenues 6,881 (400) 108,242 (12,100) 102,623
------------------------------------------------------------------
Expenses
Losses and loss expenses incurred - - 48,131 - 48,131
Acquisition costs - - 16,827 - 16,827
Operating expense 36 64 33,292 - 33,392
Interest expense 1,484 - 53 - 1,537
Intercompany interest expense - 5,100 - (5,100) -
Other expenses - - 671 - 671
------------------------------------------------------------------
Total Expenses 1,520 5,164 98,974 (5,100) 100,558
------------------------------------------------------------------
INCOME BEFORE INCOME TAXES AND
MINORITY INTEREST 5,361 (5,564) 9,268 (7,000) 2,065
Income taxes - (2,167) (1,134) - (3,301)
INCOME BEFORE MINORITY INTEREST 5,361 (3,397) 10,402 (7,000) 5,366
Minority interest - - (5) - (5)
------------------------------------------------------------------
NET INCOME $5,361 $(3,397) $ 10,397 $ (7,000) $ 5,361
==================================================================
</TABLE>
14
<PAGE>
MUTUAL RISK MANAGEMENT LTD. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (continued)
5. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (continued)
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2000
<TABLE>
<CAPTION>
Parent Mutual Other
(In thousands) Company Group Subsidiaries Eliminations Consolidated
<S> <C> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents $ 5,575 $ (4,237) $ 167,615 $ - $ 168,953
Investments 12,153 - 376,930 - 389,083
Other investments - 297 35,887 - 36,184
Investments in and advances to subsidiaries
and affiliates, net 447,667 363,173 (574,342) (236,498) -
Accounts receivable - 39 554,648 - 554,687
Reinsurance receivables - - 1,932,304 - 1,932,304
Prepaid reinsurance premiums - - 352,949 - 352,949
Fixed assets - - 33,095 - 33,095
Deferred tax benefit - - 11,420 (1,075) 10,345
Taxes receivable - 14,581 - (14,581) -
Other assets 1,288 3,535 132,414 - 137,237
Assets held in separate accounts - - 787,408 - 787,408
------------------------------------------------------------------
Total Assets $466,683 $377,388 $3,810,328 $(252,154) $4,402,245
==================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Reserve for losses and loss expenses $ - $ - $2,046,736 $ - $2,046,736
Reserve for unearned premiums - - 445,026 - 445,026
Pension fund reserves - - 57,039 - 57,039
Claims deposit liabilities - - 27,598 - 27,598
Accounts payable - - 303,208 - 303,208
Accrued expenses 157 655 13,220 - 14,032
Taxes payable - - 36,721 (14,581) 22,140
Loans payable 70,000 150,000 - - 220,000
Other loans payable - - 3,960 - 3,960
Prepaid fees - - 63,101 - 63,101
Debentures 13,496 - - - 13,496
Deferred tax liability - 1,075 - (1,075) -
Other liability - - 15,471 - 15,471
Liabilities related to separate accounts - - 787,408 - 787,408
------------------------------------------------------------------
Total liabilities 83,653 151,730 3,799,488 (15,656) 4,019,215
------------------------------------------------------------------
SHAREHOLDERS' EQUITY 383,030 225,658 10,840 (236,498) 383,030
------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $466,683 $377,388 $3,810,328 $(252,154) $4,402,245
==================================================================
</TABLE>
15
<PAGE>
MUTUAL RISK MANAGEMENT LTD. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (continued)
5. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (continued)
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999
<TABLE>
<CAPTION>
Parent Mutual Other
(In thousands) Company Group Subsidiaries Eliminations Consolidated
ASSETS
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents $ 6,722 $ 1,019 $ 147,646 $- $ 155,387
Investments 9,665 - 442,256 - 451,921
Other investments 1,006 474 26,945 - 28,425
Investments in and advances to subsidiaries and
affiliates, net 566,724 244,693 (428,022) (383,395) -
Accounts receivable - 906 563,684 - 564,590
Reinsurance receivables - - 1,729,936 - 1,729,936
Prepaid reinsurance premiums - - 281,078 - 281,078
Fixed assets - - 28,880 - 28,880
Deferred tax benefit - - 5,308 (1,075) 4,233
Other assets 2,319 26 92,988 - 95,333
Assets held in separate accounts - - 693,390 - 693,390
----------------------------------------------------------------
Total Assets $586,436 $247,118 $3,584,089 $(384,470) $4,033,173
================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Reserve for losses and loss expenses $- $- $1,860,120 $- $1,860,120
Reserve for unearned premiums - - 335,265 - 335,265
Pension fund reserves - - 67,981 - 67,981
Claims deposit liabilities - - 27,924 - 27,924
Accounts payable 394 247 353,325 - 353,966
Accrued expenses - - 11,054 - 11,054
Taxes payable - - 23,181 - 23,181
Bridging loan 117,000 - - - 117,000
Other loans payable - - 4,049 - 4,049
Prepaid fees - - 58,025 - 58,025
Debentures 110,898 - - - 110,898
Deferred tax liability - 1,075 - (1,075) -
Other liability - - 12,176 - 12,176
Liabilities related to separate accounts - - 693,390 - 693,390
----------------------------------------------------------------
Total liabilities 228,292 1,322 3,446,490 (1,075) 3,675,029
----------------------------------------------------------------
SHAREHOLDERS' EQUITY 358,144 245,796 137,599 (383,395) 358,144
----------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $586,436 $247,118 $3,584,089 $(384,470) $4,033,173
================================================================
</TABLE>
16
<PAGE>
MUTUAL RISK MANAGEMENT LTD. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (continued)
5. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (continued)
UNAUDITED CONDENSED CONSOLIDATED CASH FLOW
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000
<TABLE>
<CAPTION>
Parent Mutual Other
(In thousands) Company Group Subsidiaries Consolidated
<S> <C> <C> <C> <C>
CASH FLOWS (APPLIED TO) FROM OPERATING ACTIVITIES
$ (9,756) $ (39,688) $ 39,001 $ (10,443)
-----------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of investment - available for sale - - 336,291 336,291
Proceeds from maturity of investment - available for sale - - 27,002 27,002
Fixed asset purchases - - (12,941) (12,941)
Investments purchased - available for sale (2,454) - (298,995) (301,449)
Acquisitions and other investments - - (7,335) (7,335)
Proceeds from other investments - - - -
Other items - - 166 166
Investments in and advances to subsidiaries and
affiliates, net 167,430 (115,568) (51,862) -
-----------------------------------------------------
NET CASH FROM (APPLIED TO) INVESTING ACTIVITIES 164,976 (115,568) (7,674) 41,734
-----------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Loans received 170,000 150,000 - 320,000
Loans repaid (217,000) - - (217,000)
Other loans received - - (90) (90)
Extinguishment of convertible debentures (101,325) - - (101,325)
Proceeds from shares issued 608 - - 608
Claims deposit liabilities - - (326) (326)
Pension fund reserves - - (10,942) (10,942)
Dividends paid (8,650) - - (8,650)
-----------------------------------------------------
NET CASH FROM (APPLIED TO) FINANCING ACTIVITIES (156,367) 150,000 (11,358) (17,725)
-----------------------------------------------------
Net (decrease) increase in cash and cash equivalents (1,147) (5,256) 19,969 13,566
Cash and cash equivalents at beginning of year 6,722 1,019 147,646 155,387
-----------------------------------------------------
Cash and cash equivalents at end of year $ 5,575 $ (4,237) $ 167,615 $ 168,953
=====================================================
</TABLE>
17
<PAGE>
MUTUAL RISK MANAGEMENT LTD. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (continued)
5. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (continued)
CONDENSED CONSOLIDATED CASH FLOW
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
(In thousands) Parent Mutual Other
Company Group Subsidiaries Consolidated
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES $ (100) $(11,820) $ 18,458 $ 6,538
---------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of investment - available for sale - - 71,891 71,891
Proceeds from maturity of investment - available for sale - - 43,725 43,725
Fixed asset purchases - - (11,647) (11,647)
Investments purchased - available for sale (35) - (105,663) (105,698)
Acquisitions and other investments - - (47) (47)
Proceeds from other investments - - 577 577
Other items - - 47 47
Investments in and advances to subsidiaries and
affiliates, net (2,474) 12,843 (10,369) -
---------------------------------------------------
NET CASH FROM (APPLIED TO) INVESTING ACTIVITIES (2,509) 12,843 (11,486) (1,152)
---------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Other loans received - - 588 588
Extinguishment of convertible debentures - - - -
Proceeds from shares issued 10,176 - - 10,176
Claims deposit liabilities - - (6,823) (6,823)
Pension fund reserves - - (9,957) (9,957)
Dividends paid (7,714) - (891) (8,605)
---------------------------------------------------
NET CASH FROM (APPLIED TO) FINANCING ACTIVITIES 2,462 - (17,083) (14,621)
---------------------------------------------------
Net (decrease) increase in cash and cash equivalents (147) 1,023 (10,111) (9,235)
Cash and cash equivalents at beginning of year 689 1,872 114,862 117,423
---------------------------------------------------
Cash and cash equivalents at end of year $ 542 $ 2,895 $ 104,751 $ 108,188
===================================================
</TABLE>
18
<PAGE>
MUTUAL RISK MANAGEMENT LTD. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (continued)
6. LOANS PAYABLE
During September 2000, as part of its overall refinancing, the Company entered
into two separate agreements that together provided $220 million of total
financing. The first agreement is a $180 million revolving credit facility with
a syndicate of commercial banks (the "credit facility"). The second agreement is
a private placement of $40 million of Auction Rate Reset Preferred Securities
(the "Rhino Preferred Securities"). The proceeds of these agreements were used
to retire $217 million of outstanding indebtedness under the bridging loan
agreement (the "bridging loan") the Company had in place with various financial
institutions.
Credit Facility and Bridging Loan
Interest rates on the credit facility are based on LIBOR plus 95 basis points.
The credit facility agreement contains certain financial covenants, including
the requirement that the Company's total consolidated indebtedness to total
capital ratio shall not exceed 0.45:1 during the first 18 months of facility and
0.40:1 thereafter. Shareholders' equity, as calculated in accordance with U.S.
GAAP, shall be greater than the sum of $325 million plus 50% of cumulative
positive net income post June 30, 2000. For these purposes, Shareholders' equity
excludes any unrealized gains or losses on the Company's investment portfolio.
Prior to the refinancing, the Company had in place $217 million of outstanding
indebtedness under the bridging loan with various financial institutions.
Interest rates on the bridging loan were based on LIBOR plus 75 basis points.
At September 30, 2000 the Company had $180 million outstanding under the credit
facility. The Company was in compliance with all the covenants of the credit
facility as at September 30, 2000. Interest payments on the credit facility and
the bridging loan totaled $10.7 million for the nine month period ended
September 30, 2000. The repayment of the credit facility has been guaranteed by
the Company and Mutual Group Ltd., a U.S. subsidiary of the Company.
Rhino Preferred Securities
During September 2000, MRM Capital Trust I, a Delaware statutory business trust
(the "Trust"), sold in a private placement $40 million of Rhino Preferred
Securities. All of the common securities of the Trust are owned by Mutual Group
Ltd.
The Rhino Preferred Securities mature on September 21, 2003. Distributions on
the Rhino Preferred Securities are payable quarterly at LIBOR plus 150 basis
points, adjusted quarterly. If the trading price of Mutual Risk Management's
Common Shares declines to 65 percent of the closing price of the Common Shares
on September 21, 2000, or $13.50 per Common Share, the holders of a majority of
the Rhino Preferred Securities will have the option to require Banc of America
Securities LLC as the Remarketing Agent to remarket the Rhino Preferred
Securities. If remarketed, the maturity of the remarketed securities will be
reset as the later of September 21, 2002, or one year from the date on which the
remarketed securities are issued. The coupon will be reset pursuant to a bid
process to value the remarketed securities at 100.25 percent of the face amount
thereof. If Banc of America were unable to remarket the securities, the holders
of a majority of the Rhino Preferred Securities would have the right to require
Mutual Group Ltd. to repurchase them at a purchase price equal to the face
amount of the securities plus accrued and unpaid distributions. These
obligations are guaranteed by the Company. The Company's Common Shares did not
trade below the trigger price described above during the quarter ended September
30, 2000.
The sole assets of the Trust consist of $41.24 million principal amount of
Auction Rate Reset Subordinated Notes Series A (the "Subordinated Notes") issued
by Mutual Group Ltd. The Subordinated Notes mature on September 21, 2003.
Interest on the Subordinated Notes is payable quarterly at LIBOR plus 150 basis
points. If under certain circumstances the Trust is dissolved and the holders of
the Rhino Preferred Securities directly hold the Subordinated Notes, then the
remarketing provisions described above will be applicable to the Subordinated
Notes.
19
<PAGE>
MUTUAL RISK MANAGEMENT LTD. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (continued)
In connection with the issuance of the Rhino Preferred Securities, the Company
has agreed with Banc of America Securities LLC to use its reasonable best
efforts to complete one or more firm commitment underwritings with an aggregate
public offering price of $40 million on or before June 21, 2003. The Company has
agreed to commence the necessary action to file and maintain an effective shelf
registration statement with availability for the issuance of up to $40 million
of Common Shares.
20
<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, 2000 and 1999
The results of operations for the quarter ended September 30, 2000 reflect
strong growth in Fee income across all of our business segments, improved profit
margins and a significant increase in Net income. However, comparisons to the
prior year nine months continue to reflect the decline in operating results that
took place in the 1999 third quarter. Net income available to common
shareholders was $32.1 million or $0.77 per Common Share on a diluted basis for
the nine months ended September 30, 2000, as compared to $42.3 million or $0.93
per diluted share in the corresponding period in 1999, as shown in the tables
below.
TABLE 1 - EARNINGS PER SHARE
<TABLE>
<CAPTION>
Third Quarter to September 30,
2000 1999
------------------------------ -------------------------
($ thousands except per share data)
PER PER
COMMON SHARE COMMON SHARE
------------ ------------
Basic Diluted Basic Diluted
<S> <C> <C> <C> <C> <C> <C>
Net income available to
Common Shareholders $13,229 $ 0.32 $ 0.32 $ 5,361 $ 0.12 $ 0.12
======= ======= ======= ======= ======= =======
Average number of
shares outstanding (000's) 41,178 42,521 43,583 44,452 (a)
------ ------ ------ ------
<CAPTION>
Nine Months ended September 30,
2000 1999
----------------------------------- ------------------------------
($ thousands except per share data)
PER PER
COMMON SHARE COMMON SHARE
------------ ------------
Basic Diluted Basic Diluted
<S> <C> <C> <C> <C> <C> <C>
Income before Extraordinary loss $36,454 $ 0.88 $ 0.87 $42,255 $ 0.98 $ 0.93
Extraordinary loss (b) (4,327) (0.10) (0.10) - (0.00) (0.00)
------- ------- ------ ------- ------- -------
Net income available to
Common Shareholders $32,127 $ 0.78 $ 0.77 $42,255 $ 0.98 $ 0.93
======= ======= ====== ======= ======= =======
Average number of
shares outstanding (000's) 41,189 41,559 (a) 43,214 50,398
------- ------ ------- -------
</TABLE>
(a) Excludes the conversion of Convertible Debentures which have an anti-
dilutive effect.
(b) Extraordinary loss on extinguishment of Convertible Debentures, net of tax.
21
<PAGE>
Total revenues amounted to $136.9 million and $372.2 million for the quarter and
nine months ended September 30, 2000, representing increases of 33% and 25% over
the corresponding 1999 periods. Table II shows the major components of Revenues
for these periods.
TABLE II - REVENUES
<TABLE>
<CAPTION>
Periods to September 30,
(In thousands)
Third Quarter Nine Months
2000 1999 Increase 2000 1999 Increase
---- ---- -------- ---- ---- --------
<S> <C> <C> <C> <C> <C> <C>
Fee income $ 55,809 45,697 22% $151,519 $136,975 11%
Premiums earned 72,060 50,553 43% 191,931 139,570 38%
Net investment income 9,182 8,556 7% 30,293 25,219 20%
Realized capital losses (204) (2,195) 91% (2,168) (3,224) 33%
Other income (losses) 38 12 NM 641 (207) NM
-------- -------- -------- --------
Total $136,885 $102,623 33% $372,216 $298,333 25%
======== ======== ======== ========
</TABLE>
Fee income grew by 22% in the third quarter to $55.8 million and 11% to $151.5
million for the first nine months of 2000, as compared to $45.7 million and
$137.0 million, respectively, in 1999.
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
2000 1999 Increase 2000 1999 Increase
---- ---- -------- ---- ---- --------
<S> <C> <C> <C> <C> <C> <C>
Program business fees $ 33,283 $ 26,806 24% $ 87,160 $ 75,761 15%
Corporate risk
management fees 11,532 10,608 9% 33,595 37,436 (10%)
Specialty brokerage fees 3,562 3,274 9% 10,907 9,715 12%
Financial services fees 7,432 5,009 48% 19,857 14,063 41%
-------- -------- -------- --------
Total $ 55,809 $ 45,697 22% $151,519 $136,975 11%
======== ======== ======== ========
</TABLE>
22
<PAGE>
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 60% of total Fee income in the quarter
and 58% for the nine months of 2000 compared to 59% and 55% in the corresponding
1999 periods. Fees from Program Business increased 24% in the third quarter to
$33.3 million and 15% to $87.2 million for nine months as compared to $26.8
million and $75.8 million, respectively, in 1999. This resulted primarily from
the growth of existing programs due to premium increases and decreased
competition. Profit margins were 31% for the quarter and 28% for the nine
months of 2000, compared to 30% and 34% for the corresponding periods of 1999.
Margins in Program Business have been adversely affected by provisions relating
to terminated programs, of $29 million, pre-tax, at September 30, 2000. This
represents an increase of $7 million since December 31, 1999. In October 2000
the Company received a demand from a ceding insurer seeking payment on claims
that arose under a terminated property program in which the Company acted as
both a policy issuing company and a reinsurer. The provisions referred to in
this paragraph include $4.5 million related to this program. The program in
question involved a large number of insurers and reinsurers and the Company is
continuing to investigate the facts surrounding the alleged claims and as of the
date of this filing the Company has not determined its likely exposure.
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 20% of total Fee income in the third quarter and 22% for the nine
months of 2000, down from 23% and 28% in the corresponding 1999 periods.
Corporate Risk Management fees increased by 9% in the third quarter to $11.5
million aided by changes in market conditions, but decreased by 10% for the nine
months to $33.6 million. Profit margins were 26% in the third quarter and 25%
for the nine months of 2000, compared to 28% and 38% in 1999. The Company
continues to expect that a firming of prices generally will continue to improve
the sale of Corporate Risk Management accounts and fees. This was reflected in
strong unit sales in the month of October 2000.
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 $3.6 million of total Fee income in the third quarter and $10.9
million in the nine months of 2000, representing 7% of total Fee income in both
the third quarter and nine months of 2000. Specialty Brokerage fees grew by 9%
in the third quarter and 12% in the nine months of 2000 as a result of increased
business placed in Bermuda and London. Profit margins decreased to 29% in the
third quarter, and to 30% for the nine months, from 33% and 40% in the
corresponding 1999 periods as a result of increased operating expenses.
Financial Services
The Financial Services business segment provides administrative services to
offshore mutual funds and other companies, offers a proprietary family of mutual
funds as well as asset accumulation life insurance products for the high net
worth market and provides trust and private client services. The segment
accounted for 13% of total Fee income for both the third quarter and nine months
of 2000. Fees from Financial Services increased in the quarter by 48% to $7.4
million, and by 41% to $19.9 million for the nine months, primarily as a result
of an increase in mutual fund assets under administration which exceeded $31
billion at September 30, 2000. Profit margins in the Financial Services segment
have been adversely affected since 1998 by the previously announced revised
executive incentive plan and staff expansion costs to service new business, but
increased to 21% in the third quarter and 19% for the nine months of 2000, as
compared to 7% and 5% in the corresponding 1999 periods. Excluding the effect
of the revised executive incentive plan, which will end in December 2000, the
profit margins in this segment would have been 24% for the quarter and 23% for
the nine months as compared to 17% and 16% for the corresponding 1999 periods.
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Investment Income
Gross investment income increased by $7.2 million or 27% to $33.8 million in the
nine months of 2000 over the corresponding 1999 period. Net investment income
increased by 7% to $9.2 million in the third quarter and by 20% to $30.3 million
for the nine months. Investment yields were 7.4% in the third quarter and 8.0%
for the nine months of 2000 as compared to 6.0% and 6.8% in 1999. The nine
month increase includes $3.7 million of investment income from a special purpose
entity, Endeavour Real Estate Securities Ltd. ("Endeavour") recorded in the
first quarter of 2000. In the second quarter of 2000, the ownership structure
of Endeavour was changed so that it is no longer consolidated on a line by line
basis, but is accounted for on an equity basis.
TABLE IV - EXPENSES
<TABLE>
<CAPTION>
Periods to September 30,
(In thousands)
Third Quarter Nine Months
2000 1999 Increase 2000 1999 Increase
---- ---- -------- ---- --- --------
<S> <C> <C> <C> <C> <C>
Operating expenses $ 39,975 $ 33,392 20% $112,335 $ 92,929 21%
Total insurance costs 76,726 64,958 18% 202,760 156,164 30%
Interest expense 4,340 1,537 182% 14,637 4,661 214%
Other expenses 1,060 671 58% 3,177 1,995 59%
-------- -------- -------- --------
Total $122,101 $100,558 21% $332,909 $255,749 30%
======== ======== ======== ========
</TABLE>
Operating expenses increased 20% to $40.0 million for the quarter, compared to
$33.4 million in the third quarter of last year, and increased 21% to $112.3
million for the nine months of 2000, compared to $92.9 million in 1999. The
increase in Operating expenses is attributable to growth in personnel and other
expenses to service the Company's business, the effect of recent acquisitions
and $0.9 million of Operating expenses from Endeavour recorded in the first
quarter of 2000.
The fluctuations in Total insurance costs are the direct result of the
fluctuations in Premiums earned. The underwriting loss declined to $4.7 million
for the quarter and $10.8 million for the nine months of 2000, as compared to
$14.4 million and $16.6 million in 1999. However, the 1999 amounts include a
provision related to net losses incurred on a number of terminated programs of
$12.3 million, pre-tax. The 2000 underwriting loss includes legal expenses
related to reinsurance disputes and increased payroll audit expenses. Interest
expense increased by $10.0 million for the nine months of 2000 over the
corresponding 1999 period as a result of increased debt, higher interest rates
and Endeavour interest, offset in part by a reduction in debenture interest.
The effective tax rate was 10% in the quarter and 8.7% for the nine months
compared to (159.8%) and 0.8% in the corresponding 1999 periods. These
effective rates were lower than the expected federal tax rate in the United
States of 35% plus state income taxes due to increased earnings outside of the
United States and the Company's investments in tax-exempt municipal securities,
partially offset by state income taxes and foreign taxes.
LIQUIDITY AND CAPITAL RESOURCES
Total assets increased to $4.4 billion at September 30, 2000 from $4.0 billion
at December 31, 1999. Assets held in separate accounts, which are principally
managed assets attributable to participants in the Company's IPC Programs,
accounted for approximately 18% of Total assets at September 30, 2000 and 17% at
December 31, 1999. Total Shareholders' equity increased to $383 million at
September 30, 2000 from $358 million at December 31, 1999 primarily as a result
of Net income in the nine months, offset by the payment of dividends. Return on
equity, before the extraordinary loss, was 13.1% for the first nine months of
2000.
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<PAGE>
CASH FLOW
During the third quarter, the Company completed the refinancing of its former
bridge loan facility. Amounts outstanding under the bridge loan facility were
refinanced through $180 million, three year syndicated bank facility and by a
private placement of $40 million of 33-month floating rate trust preferred
securities, known as Rhinos, with a trust organized by Banc of America
Securities LLC.
As of September 30, 2000, the Company was involved in arbitration and litigation
to collect balances due from a number of companies and Lloyd's syndicates that
are disputing their obligations to the Company. The Company has paid $47
million in claims on this business for which it has not received reimbursement.
To date, reinsurers have failed to supply any specific facts to support their
non-payment of claims and the Company expects to recover the amounts owed, in
full. One accident and health program accounts for $35 million, or 75%, of the
total un-reimbursed paid claims. There were five such disputes at the end of
the third quarter, as compared to four at the end of the second quarter of 2000.
These disputes have adversely affected the operating cash flow, which was
negative $14.4 million for the third quarter and $10.4 million for the nine
months of 2000 as compared to positive $25.9 million and $6.5 million in 1999.
The Company believes that funds generated from operations and available credit
will be sufficient to finance its current operations and to make payments under
its debt facilities.
ACQUISITIONS
In October, the Company announced the acquisition of certain entities associated
with the American Psychiatric Association's professional liability program. The
entities acquired include a Barbados insurance company, an onshore risk
retention group and Professional Risk Management Services, Inc. (PRMS), a
Virginia based managing general agent with special expertise in behavioral
health-care liability and risk management. PRMS is responsible for the
marketing, underwriting and claims administration associated with the
professional liability program. Legion Insurance Company has been the program's
primary insurance carrier since 1988 and will continue to issue coverage for the
program.
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.
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.
25
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
No material changes since December 31, 1999 Form 10-K.
PART II - OTHER INFORMATION
ITEM 1. Legal proceedings
For a discussion of legal disputes between the Company and certain of its
reinsurers see Item 2. Management's Discussion and Analysis.
ITEM 6. Exhibits and Reports on Form 8-K
A. Exhibits
4.1 Senior Indenture, dated as of September 21, 2000, by and among
Mutual Group Ltd., Mutual Risk Management Ltd. and The Chase
Manhattan Bank, as trustee.
4.2 First Supplemental Indenture, dated as of September 21, 2000, by
and among Mutual Group Ltd., Mutual Risk Management Ltd. and The
Chase Manhattan Bank, as trustee.
4.3 Guarantee Agreement, dated as of September 21, 2000, by and
among Mutual Risk Management Ltd., Mutual Group Ltd. and The
Chase Manhattan Bank, as trustee.
4.4 Common Securities Guarantee Agreement, dated as of September 21,
2000, by Mutual Group Ltd. and Mutual Risk Management Ltd.
4.5 Amended and Restated Trust Agreement, dated as of September 21,
2000, of MRM Capital Trust I.
10.1 Senior Note Purchase Agreement, dated as of September 21, 2000,
by and between Mutual Group Ltd. and MRM Capital Trust I.
10.2 Purchase Agreement, dated as of September 21, 2000, by and among
MRM Capital Trust I, Mutual Group Ltd., Mutual Risk Management
Ltd. and Intrepid Funding Master Trust.
10.3 Remarketing and Contingent Purchase Agreement, dated as of
September 21, 2000, by and among Mutual Group Ltd., Mutual Risk
Management Ltd., MRM Capital Trust I and Banc of America
Securities LLC.
10.4 Forward Underwriting Agreement, dated as of September 21, 2000,
by and between Banc of America Securities LLC and Mutual Risk
Management Ltd.
10.5 Subscription Agreement, dated as of September 21, 2000, by and
between MRM Capital Trust I and Mutual Group Ltd.
27.1 Financial Data Schedule
B. Reports on Form 8-K. No reports on Form 8-K were filed during the
three month period ended September 30, 2000.
26
<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: 13/th/ November, 2000
27
