<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 June 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)
BERMUDA NOT APPLICABLE
-------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
44 Church Street,
Hamilton HM 12, Bermuda
-------------------------------------------------------------------------------
(Address of principal executive offices) (Zip code)
(441) 295-5688
-------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Not applicable
-------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES [X] NO [_]
The number of outstanding shares of the registrant's Common Stock, $0.01 par
value, as of June 30, 2000 was 41,137,169.
<PAGE>
MUTUAL RISK MANAGEMENT LTD.
I N D E X
<TABLE>
<S> <C>
Part I. Financial Information:
Item 1. Financial Statements:
Unaudited Consolidated Statements of Income and Comprehensive Income
for the quarter and six month periods ended June 30, 2000 and 1999 3
Unaudited Consolidated Balance Sheets at June 30, 2000
and December 31, 1999 4
Unaudited Consolidated Statements of Cash Flows for the
six month periods ended June 30, 2000 and 1999 5
Unaudited Consolidated Statements of Changes in Shareholders'
Equity for the periods ended June 30, 2000 and December 31, 1999 6
Notes to Unaudited Consolidated Financial Statements at
June 30, 2000 7-18
Item 2. Management's Discussion and Analysis of Financial 19-23
Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures about 23
Market Risk
PART II. Other Information:
Item 1. Legal Proceedings 23
Item 4. Submission of Matters to a Vote of Security Holders 23
Item 6. Exhibits and Reports on Form 8-K 24
Signatures 25
Exhibits
Exhibit 27 - Financial Data Schedules
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
MUTUAL RISK MANAGEMENT LTD. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
AND COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
Quarter ended June 30 Six months ended June 30
2000 1999 2000 1999
<S> <C> <C> <C> <C>
REVENUES
Fee income $ 50,449,461 $ 45,784,153 $ 95,710,161 $ 91,278,028
Premiums earned 63,999,019 50,233,190 119,871,601 89,017,827
Net investment income 8,543,753 9,442,791 21,110,250 16,663,438
Realized capital losses (341,100) (1,531,951) (1,963,796) (1,029,574)
Other income (losses) 590,312 (111,545) 603,012 (220,485)
------------ ------------ ------------ -------------
Total Revenues 123,241,445 103,816,638 235,331,228 195,709,234
------------ ------------ ------------ -------------
EXPENSES
Losses and loss expenses incurred 41,759,786 41,563,127 76,079,584 67,792,538
Acquisition costs 25,093,165 9,918,526 49,955,031 23,413,737
Operating expenses 37,711,986 30,436,875 72,359,720 59,537,010
Interest expense 4,301,017 1,521,272 10,297,456 3,123,346
Other expenses 1,404,563 663,646 2,116,574 1,323,814
------------ ------------ ------------ -------------
Total Expenses 110,270,517 84,103,446 210,808,365 155,190,445
------------ ------------ ------------ -------------
INCOME BEFORE INCOME TAXES, MINORITY
INTEREST AND EXTRAORDINARY LOSS 12,970,928 19,713,192 24,522,863 40,518,789
Income Taxes 940,178 1,615,299 1,933,375 3,629,584
------------ ------------ ------------ -------------
INCOME BEFORE MINORITY INTEREST AND
EXTRAORDINARY LOSS 12,030,750 18,097,893 22,589,488 36,889,205
Minority interest (63,250) (2,650) 635,735 4,975
------------ ------------ ------------ -------------
INCOME BEFORE EXTRAORDINARY LOSS 11,967,500 18,095,243 23,225,223 36,894,180
Extraordinary loss on extinguishment of
debentures, net of tax - - (4,327,242) -
------------ ------------ ------------ -------------
NET INCOME $ 11,967,500 $ 18,095,243 $ 18,897,981 $ 36,894,180
Other Comprehensive income, net of tax:
Unrealized losses on investments, net of
reclassification adjustment ($1,893,970) ($7,332,063) ($3,052,117) ($10,824,111)
------------ ------------ ------------ -------------
COMPREHENSIVE INCOME $ 10,073,530 $ 10,763,180 $ 15,845,864 $ 26,070,069
============ ============ ============ =============
EARNINGS PER COMMON SHARE
Net income available to Common Shareholders
Basic EPS $0.29 $0.42 $0.46 $0.86
===== ===== ===== =====
Diluted EPS $0.29 $0.39 $0.46 $0.79
===== ===== ===== =====
Dividends per Common Share $0.07 $0.06 $0.14 $0.12
===== ===== ===== =====
Weighted average number of Common
Shares outstanding - basic 41,181,750 43,411,317 41,195,162 43,024,869
============ ============ ============ =============
Weighted average number of Common
Shares outstanding - diluted 42,136,014 50,600,829 41,399,754 50,507,111
============ ============ ============ =============
</TABLE>
See Accompanying Notes to Unaudited Consolidated Financial Statements
3
<PAGE>
<TABLE>
<CAPTION>
MUTUAL RISK MANAGEMENT LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
UNAUDITED
JUNE 30, DECEMBER 31,
2000 1999
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 142,561,889 $ 155,387,061
Investments:
Held in available for sale account at fair value
(Amortized cost $452,419,232 1999 - $466,858,482) 434,429,998 451,921,349
-------------- --------------
Total marketable investments 576,991,887 607,308,410
Other investments 36,190,264 28,425,474
Investment income due and accrued 5,973,182 5,172,711
Accounts receivable 618,943,593 564,590,025
Reinsurance receivables 1,966,526,001 1,729,935,575
Deferred expenses 46,960,083 30,406,066
Prepaid reinsurance premiums 301,326,167 281,077,921
Fixed assets 32,084,880 28,880,015
Deferred tax benefit 4,163,044 4,232,826
Goodwill 51,853,419 52,924,459
Other assets 7,031,720 6,829,547
Assets held in separate accounts 738,281,043 693,390,317
-------------- --------------
Total Assets $4,386,325,283 $4,033,173,346
============== ==============
LIABILITIES & SHAREHOLDERS' EQUITY
LIABILITIES
Reserve for losses and loss expenses $2,091,089,881 $1,860,120,483
Reserve for unearned premiums 381,441,215 335,265,056
Pension fund reserves 60,031,244 67,980,867
Claims deposit liabilities 30,622,024 27,923,901
Accounts payable 379,628,057 353,965,743
Accrued expenses 13,955,029 11,053,705
Taxes payable 11,698,343 23,181,367
Bridge loan 217,000,000 117,000,000
Other loans payable 3,796,048 4,048,589
Debentures 13,323,008 110,898,002
Prepaid fees 62,780,988 58,025,464
Other liabilities 15,228,561 12,175,828
Liabilities related to separate accounts 738,281,043 693,390,317
-------------- --------------
Total Liabilities 4,018,875,441 3,675,029,322
-------------- --------------
SHAREHOLDERS' EQUITY
Common shares - Authorized 180,000,000 (par value $0.01)
Issued 41,137,169 (excluding 2,728,816 shares held in
treasury) (1999 - 41,205,191) 411,372 412,052
Additional paid-in capital 109,980,709 110,754,758
Accumulated other comprehensive income (loss) (17,989,244) (14,937,127)
Retained earnings 275,047,005 261,914,341
-------------- --------------
Total Shareholders' Equity 367,449,842 358,144,024
-------------- --------------
Total Liabilities & Shareholders' Equity $4,386,325,283 $4,033,173,346
============== ==============
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
4
<PAGE>
MUTUAL RISK MANAGEMENT LTD. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended June 30,
2000 1999
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 18,897,981 $ 36,894,180
Items not affecting cash:
Depreciation 5,460,635 3,228,371
Amortization of investments (258,207) (919,120)
Net loss on sale of investments 592,006 1,392,924
Other investment gains - (360,916)
Amortization of Convertible Debentures 1,046,438 3,028,535
Deferred tax benefit 69,782 718,481
Extraordinary loss on extinguishment of debentures 4,327,242 -
Other items 567,906 1,028,200
Net changes in non-cash balances relating to operations:
Accounts receivable (54,353,568) (115,761,494)
Reinsurance receivables (236,590,426) (140,398,460)
Investment income due and accrued (800,471) 1,084,705
Deferred expenses (16,554,017) (8,676,509)
Prepaid reinsurance premiums (20,248,246) (56,465,096)
Other assets (202,173) (7,532,244)
Reserve for losses and loss expenses 230,969,398 152,178,964
Prepaid fees 4,755,524 4,952,777
Reserve for unearned premiums 46,176,159 67,206,611
Accounts payable 25,662,314 41,987,385
Taxes payable (11,483,024) 5,792,008
Accrued expenses 2,901,324 (3,566,563)
Other liabilities 3,057,796 (5,156,510)
------------- -------------
NET CASH FLOW FROM (APPLIED TO) OPERATING ACTIVITIES 3,994,373 (19,343,771)
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of investments - Available for sale 285,192,129 40,188,085
Proceeds from maturity of investments - Available for sale 19,086,217 33,683,069
Fixed assets purchased (8,800,521) (7,213,937)
Investments purchased - Available for sale (291,581,986) (78,009,960)
Acquisitions and other investments (7,508,589) 924,866
Proceeds from sale of other investments - 576,522
Other items, net 167,487 28,047
------------- -------------
NET CASH FLOW APPLIED TO INVESTING ACTIVITIES (3,445,263) (9,823,308)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Bridge loan received 100,000,000 -
Other loans repaid (252,541) (14,448)
Extinguishment of convertible debentures (101,325,130) -
Proceeds from shares issued 612,297 8,185,147
Purchase of treasury shares (1,387,026) -
Claims deposit liabilities 2,698,123 (4,156,081)
Pension fund reserves (7,949,623) (9,628,409)
Dividends paid (5,770,382) (5,990,211)
------------- -------------
NET CASH FLOW APPLIED TO FINANCING ACTIVITIES (13,374,282) (11,604,002)
------------- -------------
Net decrease in cash and cash equivalents (12,825,172) (40,771,081)
Cash and cash equivalents at beginning of period 155,387,061 117,422,652
------------- -------------
Cash and cash equivalents at end of period $ 142,561,889 $ 76,651,571
============= =============
Supplemental cash flow information:
Interest paid $ 9,251,018 ($94,811)
============= =============
Income taxes paid, net $ 5,484,069 $ 0
============= =============
</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>
Dividend
of
Treasury Change in Common Share Acquired
Opening Shares Shares Unrealized Dividends Companies Closing
Balance Issued Purchased Loss (1) Net Income Declared (2) (3) Balance
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Six months ended
June 30, 2000
Common shares $ 412,052 $ 241 $ (921) - - - - $ 411,372
Additional paid-in
capital 110,754,758 612,056 (1,386,105) - - - - 109,980,709
Accumulated other
comprehensive
income (loss) (14,937,127) - - (3,052,117) - - - (17,989,244)
Retained earnings 261,914,341 - - - 18,897,981 (5,765,317) - 275,047,005
-------------------------------------------------------------------------------------------------------
Total Shareholders'
Equity at
June 30, 2000 $358,144,024 $ 612,297 $ (1,387,026) $ (3,052,117) $18,897,981 $ (5,765,317) - $367,449,842
=======================================================================================================
Year Ended
December 31, 1999
Common shares $ 422,056 $ 16,363 $ (26,367) - - - - 412,052
Additional paid-in
capital 114,916,045 25,626,183 (29,787,470) - - - - 110,754,758
Accumulated other
comprehensive
income (loss) 4,456,781 - - (19,393,908) - - - (14,937,127)
Retained earnings 223,371,116 - - - 50,438,032 (11,003,871) (890,936) 261,914,341
-------------------------------------------------------------------------------------------------------
Total Shareholders'
Equity at
December 31, 1999 $343,165,998 $25,642,546 $(29,813,837) $(19,393,908) $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 $0.14 and $0.25 for the six months ended
June 30, 2000 and the year ended December 31, 1999 respectively.
(3) Prior to the merger Captive Resources paid dividends of $0.51 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 Consolidated Financial Statements
6
<PAGE>
MUTUAL RISK MANAGEMENT LTD. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 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 June 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 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 six months ended June 30, 2000 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>
(In thousands) Six months ended June 30, 2000 Quarter ended June 30, 2000
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 ($3,669) 57 ($3,612) ($2,262) 33 ($2,229)
Less: reclassification adjustment for
gains realized in net income 617 (57) 560 368 (33) 335
-------- ------ -------- -------- ------ -------
Other comprehensive income (loss) ($3,052) $ - ($3,052) ($1,894) $ - ($1,894)
======== ====== ======== ======== ====== =======
<CAPTION>
(In thousands) Six months ended June 30, 1999 Quarter ended June 30, 1999
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 ($15,604) $3,403 ($12,201) ($11,100) $2,289 ($8,811)
Less: reclassification adjustment for
losses realized in net income 1,393 (16) 1,377 1,527 (48) 1,479
-------- ------ -------- -------- ------ -------
Other comprehensive income (loss) ($14,211) $3,387 ($10,824) ($9,573) $2,241 ($7,332)
======== ====== ======== ======== ====== =======
</TABLE>
7
<PAGE>
3. SEGMENT INFORMATION
(In thousands)
<TABLE>
<CAPTION>
Quarter ended June 30, Six Months ended June 30,
Revenue 2000 1999 2000 1999
<S> <C> <C> <C> <C>
Program Business $ 28,902 $ 26,047 $ 53,876 $ 48,955
Corporate Risk Management 11,651 11,803 22,064 26,828
Specialty Brokerage 3,500 3,300 7,345 6,441
Financial Services 6,396 4,634 12,425 9,054
Underwriting 63,999 50,233 119,872 89,018
Net investment income (1) 8,203 7,911 19,146 15,633
Other 590 (111) 603 (220)
-------- -------- -------- --------
Total $123,241 $103,817 $235,331 $195,709
-------- -------- -------- --------
</TABLE>
Income before Income taxes, Minority interest and Extraordinary loss
<TABLE>
<S> <C> <C> <C> <C>
Program Business $ 7,755 $ 9,333 $ 14,280 $ 17,499
Corporate Risk Management 3,190 4,553 5,620 11,100
Specialty Brokerage 851 1,264 2,202 2,792
Financial Services 941 197 2,261 349
Underwriting (2,854) (1,249) (6,163) (2,188)
Net investment income (2) 3,902 6,390 8,849 12,511
Other (814) (775) ($2,526) (1,544)
-------- -------- -------- --------
Total $ 12,971 $ 19,713 $ 24,523 $ 40,519
-------- -------- -------- --------
</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>
4. EARNINGS PER COMMON SHARE
The following table sets forth the computation of basic and diluted earnings per
Common Share.
<TABLE>
<CAPTION>
Quarter ended June 30, Six months ended June 30,
2000 1999 2000 1999
<S> <C> <C> <C> <C>
(In thousands, except shares and earnings per share)
Numerator
Income before extraordinary loss $ 11,967 $ 18,095 $ 23,225 $ 36,894
Extraordinary loss on extinguishment of debentures, net of tax - - (4,327) -
----------- ----------- ----------- -----------
Net income 11,967 18,095 18,898 36,894
----------- ----------- ----------- -----------
Numerator for basic earnings per common share -
Net income available to common shareholders 11,967 18,095 18,898 36,894
Effect of dilutive securities:
Conversion of Zero Coupon Convertible Exchangeable
Subordinated Debentures 165 1,476 -(a) 3,029
----------- ----------- ----------- -----------
Numerator for diluted earnings per common share -
Net income available to common shareholders after assumed
conversions $ 12,132 $ 19,571 $ 18,898 $ 39,923
=========== =========== =========== ===========
Denominator
Denominator for basic earnings per common share -
Weighted average shares 41,181,750 43,411,317 41,195,162 43,024,869
Effect of dilutive securities:
Stock options 309,311 1,447,787 204,592 1,537,774
Conversion of Zero Coupon Convertible Exchangeable Subordinated
Debentures 644,953 5,741,725 -(a) 5,944,468
----------- ----------- ----------- -----------
Denominator for diluted earnings per common share -
Adjusted weighted average shares and assumed conversions 42,136,014 50,600,829 41,399,754 50,507,111
=========== =========== =========== ===========
Basic earnings per common share
Income before extraordinary loss $ 0.29 $ 0.42 $ 0.57 $ 0.86
Extraordinary loss on extinguishment of debentures, net of tax $ - $ - $ (0.11) $ -
----------- ----------- ----------- -----------
Basic earnings per common share $ 0.29 $ 0.42 $ 0.46 $ 0.86
=========== =========== =========== ===========
Diluted earnings per common share
Income before extraordinary loss $ 0.29 $ 0.39 $ 0.56 $ 0.79
Extraordinary loss on extinguishment of debentures, net of tax $ - $ - $ (0.10) $ -
----------- ----------- ----------- -----------
Diluted earnings per common share $ 0.29 $ 0.39 $ 0.46 $ 0.79
=========== =========== =========== ===========
</TABLE>
(a) Excludes conversion of convertible debentures which have an anti-dilutive
effect
9
<PAGE>
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 requirement 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 financial information presents the condensed consolidating balance
sheets of the Parent Company, Mutual Group and other subsidiaries as of June 30,
2000 and December 31, 1999 and condensed consolidating statements of income and
cash flows for the periods ended June 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>
CONDENSED CONSOLIDATED STATEMENT OF INCOME
FOR THE SIX MONTHS ENDED JUNE 30, 2000
<TABLE>
<CAPTION>
Parent Mutual Other
(In thousands) Company Group Subsidiaries Eliminations Consolidated
<S> <C> <C> <C> <C> <C>
Revenues
Fee Income $ - $ - $ 95,710 $ - $ 95,710
Premiums earned - - 119,872 - 119,872
Net investment income 952 326 19,832 - 21,110
Intercompany interest income - - 16,328 (16,328) -
Realized capital losses - - (1,964) - (1,964)
Other income 92 186 325 - 603
Equity in subsidiary earnings 30,497 20,001 - (50,498) -
-----------------------------------------------------------------------------------
Total revenues 31,541 20,513 250,103 (66,826) 235,331
-----------------------------------------------------------------------------------
Expenses
Losses and loss expenses incurred - - 76,080 - 76,080
Acquisition costs - - 49,955 - 49,955
Operating expenses 103 327 71,930 - 72,360
Interest expenses 8,213 - 2,084 - 10,297
Intercompany interest expense - 16,328 - (16,328) -
Other expenses - - 2,116 - 2,116
-----------------------------------------------------------------------------------
Total Expenses 8,316 16,655 202,165 (16,328) 210,808
-----------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES, MINORITY
INTEREST AND EXTRAORDINARY LOSS 23,225 3,858 47,938 (50,498) 24,523
Income taxes - (5,748) 7,682 - 1,934
INCOME BEFORE MINORITY
INTEREST AND EXTRAORDINARY LOSS 23,225 9,606 40,256 (50,498) 22,589
Minority interest - - 636 - 636
INCOME BEFORE EXTRAORDINARY LOSS 23,225 9,606 40,892 (50,498) 23,225
Extraordinary loss on extinguishment
of debentures, net of tax (4,327) - - - (4,327)
-----------------------------------------------------------------------------------
NET INCOME $ 18,898 $ 9,606 $ 40,892 $ (50,498) $ 18,898
-----------------------------------------------------------------------------------
</TABLE>
11
<PAGE>
CONDENSED CONSOLIDATED STATEMENT OF INCOME
FOR THE QUARTER ENDED ENDED JUNE 30, 2000
<TABLE>
<CAPTION>
Parent Mutual Other
(In thousands) Company Group Subsidiaries Eliminations Consolidated
<S> <C> <C> <C> <C> <C>
Revenues
Fee Income $ - $ - $ 50,449 $ - $ 50,449
Premiums earned - - 63,999 - 63,999
Net investment income 232 168 8,144 - 8,544
Intercompany interest income - - 8,164 (8,164) -
Realized capital losses - - (341) - (341)
Other income - 54 536 - 590
Equity in subsidiary earnings 15,987 14,153 - (30,140) -
-----------------------------------------------------------------------------------
Total revenues 16,219 14,375 130,951 (38,304) 123,241
-----------------------------------------------------------------------------------
Expenses
Losses and loss expenses incurred - - 41,760 - 41,760
Acquisition costs - - 25,093 - 25,093
Operating expenses 51 238 37,423 - 37,712
Interest expenses 4,201 - 100 - 4,301
Intercompany interest expense - 8,164 - (8,164) -
Other expenses - - 1,404 - 1,404
-----------------------------------------------------------------------------------
Total Expenses 4,252 8,402 105,780 (8,164) 110,270
-----------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES, MINORITY
INTEREST AND EXTRAORDINARY LOSS 11,967 5,973 25,171 (30,140) 12,971
Income taxes - (3,007) 3,948 - 941
INCOME BEFORE MINORITY
INTEREST AND EXTRAORDINARY LOSS 11,967 8,980 21,223 (30,140) 12,030
Minority interest - - (63) - (63)
INCOME BEFORE EXTRAORDINARY LOSS 11,967 8,980 21,160 (30,140) 11,967
Extraordinary loss on extinguishment
of debentures, net of tax - - - - -
-----------------------------------------------------------------------------------
NET INCOME $ 11,967 $ 8,980 $ 21,160 $ (30,140) $ 11,967
-----------------------------------------------------------------------------------
</TABLE>
12
<PAGE>
CONDENSED CONSOLIDATED STATEMENT OF INCOME
FOR THE SIX MONTHS ENDED JUNE 30, 1999
<TABLE>
<CAPTION>
Parent Mutual Other
(In thousands) Company Group Subsidiaries Eliminations Consolidated
<S> <C> <C> <C> <C> <C>
Revenues
Fee Income $ - $ - $ 91,278 $ - $ 91,278
Premiums earned - - 89,018 - 89,018
Net investment income 568 365 15,730 - 16,663
Intercompany interest income - - 10,200 (10,200) -
Realized capital gains (losses) - 361 (1,391) - (1,030)
Other losses - (44) (176) - (220)
Equity in subsidiary earnings 39,425 5,912 - (45,337) -
-----------------------------------------------------------------------------------
Total revenues 39,993 6,594 204,659 (55,537) 195,709
-----------------------------------------------------------------------------------
Expenses
Losses and loss expenses incurred - - 67,793 - 67,793
Acquisition costs - - 23,414 - 23,414
Operating expenses 70 454 59,013 - 59,537
Interest expenses 3,029 - 94 - 3,123
Intercompany interest expense - 10,200 - (10,200) -
Other expenses - - 1,323 - 1,323
-----------------------------------------------------------------------------------
Total Expenses 3,099 10,654 151,637 (10,200) 155,190
-----------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES, MINORITY
INTEREST AND EXTRAORDINARY LOSS 36,894 (4,060) 53,022 (45,337) 40,519
Income taxes - (1,921) 5,551 - 3,630
INCOME BEFORE MINORITY
INTEREST AND EXTRAORDINARY LOSS 36,894 (2,139) 47,471 (45,337) 36,889
Minority interest - - 5 - 5
INCOME BEFORE EXTRAORDINARY LOSS 36,894 (2,139) 47,476 (45,337) 36,894
Extraordinary loss on extinguishment of
debentures, net of tax - - - - -
-----------------------------------------------------------------------------------
NET INCOME $ 36,894 $ (2,139) $ 47,476 $ (45,337) $ 36,894
-----------------------------------------------------------------------------------
</TABLE>
13
<PAGE>
CONDENSED CONSOLIDATED STATEMENT OF INCOME
FOR THE QUARTER ENDED JUNE 30, 1999
<TABLE>
<CAPTION>
Parent Mutual Other
(In thousands) Company Group Subsidiaries Eliminations Consolidated
<S> <C> <C> <C> <C> <C>
Revenues
Fee Income $ - $ - $ 45,784 $ - $ 45,784
Premiums earned - - 50,233 - 50,233
Net investment income 556 170 8,716 - 9,442
Intercompany interest income - - 5,100 (5,100) -
Realized capital losses - - (1,532) - (1,532)
Other losses - (44) (67) - (111)
Equity in subsidiary earnings 19,050 (3,852) - (15,198) -
-----------------------------------------------------------------------------------
Total revenues 19,606 (3,726) 108,234 (20,298) 103,816
-----------------------------------------------------------------------------------
Expenses
Losses and loss expenses incurred - - 41,563 - 41,563
Acquisition costs - - 9,919 - 9,919
Operating expenses 35 250 30,152 - 30,437
Interest expenses 1,476 - 45 - 1,521
Intercompany interest expense - 5,100 - (5,100) -
Other expenses - - 663 - 663
-----------------------------------------------------------------------------------
Total Expenses 1,511 5,350 82,342 (5,100) 84,103
-----------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES, MINORITY
INTEREST AND EXTRAORDINARY LOSS 18,095 (9,076) 25,892 (15,198) 19,713
Income taxes - (1,347) 2,962 - 1,615
INCOME BEFORE MINORITY
INTEREST AND EXTRAORDINARY LOSS 18,095 (7,729) 22,930 (15,198) 18,098
Minority interest - - (3) - (3)
INCOME BEFORE EXTRAORDINARY LOSS 18,095 (7,729) 22,927 (15,198) 18,095
Extraordinary loss on extinguishment
of debentures, net of tax - - - - -
-----------------------------------------------------------------------------------
NET INCOME $ 18,095 $ (7,729) $ 22,927 $ (15,198) $ 18,095
-----------------------------------------------------------------------------------
</TABLE>
14
<PAGE>
CONDENSED CONSOLIDATED BALANCE SHEETS
JUNE 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 $ 5,310 $ 705 $ 136,547 $ - $ 142,562
Investments 11,166 - 423,264 - 434,430
Other Investments - 513 35,677 - 36,190
Investments in and advances to
subsidiaries and affiliates, net 582,411 229,544 (435,970) (375,985) -
Accounts receivable - 1,007 617,937 - 618,944
Reinsurance receivables - - 1,966,526 - 1,966,526
Prepaid reinsurance premiums - - 301,326 - 301,326
Fixed assets - - 32,085 - 32,085
Deferred tax benefit - - 5,238 (1,075) 4,163
Taxes receivable - 11,553 - (11,553) -
Other assets 251 66 111,501 - 111,818
Assets held in separate accounts - - 738,281 - 738,281
-------- -------- ---------- ---------- -----------
Total Assets $599,138 $243,388 $3,932,412 $ (388,613) $ 4,386,325
======== ======== ========== ========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Reserve for losses and loss expenses $ - - $2,091,090 $ - $ 2,091,090
Reserve for unearned premiums - - 381,441 - 381,441
Pension fund reserves - - 60,031 - 60,031
Claims deposit liabilities - - 30,622 - 30,622
Accounts payable - - 379,628 - 379,628
Accrued expenses 1,365 295 12,295 - 13,955
Taxes payable - - 23,251 (11,553) 11,698
Bridging loan 217,000 - - - 217,000
Other loans payable - - 3,796 - 3,796
Prepaid fees - - 62,781 - 62,781
Debentures 13,323 - - - 13,323
Deferred tax liability - 1,075 - (1,075) -
Other liability - - 15,229 - 15,229
Liabilities related to
separate accounts - - 738,281 - 738,281
-------- -------- ---------- ---------- -----------
Total liabilities 231,688 1,370 3,798,445 (12,628) 4,018,875
-------- -------- ---------- ---------- -----------
SHAREHOLDERS' EQUITY 367,450 242,018 133,967 (375,985) 367,450
-------- -------- ---------- ---------- -----------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $599,138 $243,388 $3,932,412 $ (388,613) $ 4,386,325
======== ======== ========== ========== ===========
</TABLE>
15
<PAGE>
CONDENSED CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999
<TABLE>
<CAPTION>
Parent Mutual Other
(In thousands) Company Group Subsidiaries Eliminations Consolidated
<S> <C> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents $ 6,722 $ 1,019 $ 147,646 $ - $ 155,387
Investments 9,665 - 442,255 - 451,920
Other Investments 1,006 474 26,946 - 28,426
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 92,989 - 95,334
Assets held in separate accounts - - 693,390 - 693,390
-------- -------- ---------- ---------- -----------
Total Assets $586,436 $247,118 $3,584,090 $ (384,470) $ 4,033,174
======== ======== ========== ========== ===========
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 - - 58,026 - 58,026
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 3,446,491 (1,075) 3,675,030
-------- -------- ---------- ---------- -----------
SHAREHOLDERS' EQUITY 358,144 245,796 137,599 (383,395) 358,144
-------- -------- ---------- ---------- -----------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $586,436 $247,118 $3,584,090 $ (384,470) $ 4,033,174
======== ======== ========== ========== ===========
</TABLE>
16
<PAGE>
CONDENSED CONSOLIDATED CASH FLOW
JUNE 30, 2000
<TABLE>
<CAPTION>
Parent Mutual Other
In thousands Company Group Subsidiaries Consolidated
<S> <C> <C> <C> <C>
NET CASH FLOW FROM OPERATING ACTIVITIES $ (4,810) $(22,459) $ 31,263 $ 3,994
----------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of investment -
available for sale -- -- 285,192 285,192
Proceeds from maturity of investment -
available for sale -- -- 19,086 19,086
Fixed asset purchases -- -- (8,801) (8,801)
Investments purchased - available for sale (1,495) -- (290,087) (291,582)
Acquisitions and other investments -- -- -- (7,509)
Proceeds from other investments -- -- -- --
Other items -- -- 169 169
Investments in and advances to subsidiaries
and affiliates, net 12,763 22,145 (34,908) --
----------------------------------------------------------------
NET CASH FLOWS FROM (APPLIED TO)
INVESTING ACTIVITIES 11,268 22,145 (36,858) (3,445)
----------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Bridging loan received 100,000 -- -- 100,000
Other loans received -- -- (253) (253)
Extinguishment of convertible debentures (101,325) -- -- (101,325)
Proceeds from shares issued (775) -- -- (775)
Claims deposit liabilities -- -- 2,699 2,699
Pension fund reserves -- -- (7,950) (7,950)
Dividend paid (5,770) -- -- (5,770)
----------------------------------------------------------------
NET CASH FLOW FROM (APPLIED TO)
FINANCING ACTIVITIES (7,870) -- (5,504) (13,374)
----------------------------------------------------------------
Net decrease in cash and cash
equivalents (1,412) (314) (11,099) (12,825)
Cash and cash equivalents at beginning of year 6,722 1,019 147,646 155,387
----------------------------------------------------------------
Cash and cash equivalents at end of year $ 5,310 $ 705 $136,547 $142,562
================================================================
</TABLE>
17
<PAGE>
CONDENSED CONSOLIDATED CASH FLOW
JUNE 30, 1999
<TABLE>
<CAPTION>
Parent Mutual Other
In thousands Company Group Subsidiaries Consolidated
<S> <C> <C> <C> <C>
NET CASH FLOW FROM OPERATING ACTIVITIES $ 331 $(9,159) $(10,516) $(19,344)
---------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of investment -
available for sale - - 40,188 40,188
Proceeds from maturity of investment -
available for sale - - 33,683 33,683
Fixed asset purchases - - (7,214) (7,214)
Investments purchased - available for sale (871) - (77,139) (78,010)
Acquisitions and other investments - - 925 925
Proceeds from other investments - - 577 577
Other items - - 28 28
Investments in and advances to subsidiaries
and affiliates, net (2,209) 7,372 (5,163) -
---------------------------------------------------
NET CASH FLOWS FROM (APPLIED TO)
INVESTING ACTIVITIES (3,080) 7,372 (14,115) (9,823)
---------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Bridging loan received - - - -
Other loans received - - (14) (14)
Extinguishment of convertible debentures - - - -
Proceeds from shares issued 8,185 - - 8,185
Claims deposit liabilities - - (4,156) (4,156)
Pension fund reserves - - (9,629) (9,629)
Dividend paid (5,990) - - (5,990)
---------------------------------------------------
NET CASH FLOW FROM (APPLIED TO)
FINANCING ACTIVITIES 2,195 - (13,799) (11,604)
---------------------------------------------------
Net decrease in cash and cash
equivalents (554) (1,787) (38,430) (40,771)
Cash and cash equivalents at beginning of year 689 1,872 114,862 117,423
---------------------------------------------------
Cash and cash equivalents at end of year 135 85 76,432 76,652
===================================================
</TABLE>
18
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
For the Quarter and Six Months ended June 30, 2000 and 1999
The results of operations for the quarter and six months ended June 30, 2000
reflect substantial improvement in Fees, Operating income, Profit margins and
Return on equity compared to the Company's last three quarters. However,
comparisons to the first half of 1999 continue to reflect the decline in
operating results that took place in the 1999 third quarter. Net income
available to common shareholders was $18.9 million or $0.46 per Common Share on
a diluted basis for the six months ended June 30, 2000, as compared to $36.9 or
$0.79 per diluted share in the corresponding period in 1999, as shown in the
tables below.
TABLE 1 - EARNINGS PER SHARE
<TABLE>
<CAPTION>
Second Quarter to June 30,
2000 1999
----------------------------------- -------------------------------------
($ 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 $11,968 $0.29 $0.29 $18,095 $0.42 $0.39
======= ===== ===== ======= ===== =====
Average number of
shares outstanding (000's) 41,182 42,136 43,411 50,601
------ ------ ------ ------
</TABLE>
<TABLE>
<CAPTION>
Six Months ended June 30,
2000 1999
----------------------------------- -------------------------------------
($ 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 $23,225 $0.57 $0.56 $36,894 $0.86 $0.79
Extraordinary Loss (a) (4,427) (0.11) (0.10) - - -
------- ----- ----- ------- ----- -----
Net income available to Common
Shareholders $18,898 $0.46 $0.46 $36,894 $0.86 $0.79
======= ===== ===== ======= ===== =====
Average number of
shares outstanding (000's) 41,195 41,400(b) 43,025 50,507
------ ------ ------ ------
</TABLE>
(a) Extraordinary loss on extinguishment of Convertible Debentures, net of tax.
(b) Excludes the conversion of Convertible Debentures which have an anti-
dilutive effect.
Total revenues amounted to $123.2 million and $235.3 million for the quarter and
six months ended June 30, 2000, representing increases of 19% and 20% over the
corresponding 1999 periods. Table II shows the major components of Revenues for
these periods.
19
<PAGE>
TABLE II - REVENUES
<TABLE>
<CAPTION>
Periods to June 30,
(In thousands)
Second Quarter Six Months
2000 1999 Growth 2000 1999 Growth
-------- -------- ------ -------- -------- ------
<S> <C> <C> <C> <C> <C> <C>
Fee income $ 50,449 $ 45,784 10% $ 95,710 $ 91,278 5%
Premiums earned 63,999 50,233 27% 119,872 89,018 35%
Net investment income 8,544 9,443 -10% 21,110 16,663 27%
Realized capital losses (341) (1,532) -78% (1,964) (1,030) 91%
Other income (losses) 590 (111) NM 603 (220) NM
-------- -------- -------- --------
Total $123,241 $103,817 19% $235,331 $195,709 20%
======== ======== ======== ========
</TABLE>
Fee income increased 10% in the second quarter to $50.4 million and 5% to $95.7
million for the first six months of 2000, as compared to $45.8 million and $91.3
million, respectively, in 1999. Pre-tax profit margins were 25% for both the
second quarter and first six months of 2000 as compared to 34% and 35% in the
corresponding 1999 periods.
SEGMENT ANALYSIS
The components of Fee income by business segment are illustrated in
Table III.
TABLE III - FEE INCOME BY BUSINESS SEGMENT
<TABLE>
<CAPTION>
Periods to June 30,
(In thousands)
Second Quarter Six Months
2000 1999 Growth 2000 1999 Growth
------- ------- ------ ------- ------- ------
<S> <C> <C> <C> <C> <C> <C>
Program business fees $28,902 $26,047 11% $53,876 $48,955 10%
Corporate risk
management fees 11,651 11,803 (1)% 22,064 26,828 (18)%
Specialty brokerage fees 3,500 3,300 6% 7,345 6,441 14%
Financial services fees 6,396 4,634 38% 12,425 9,054 37%
------- ------- ------- -------
Total $50,449 $45,784 10% $95,710 $91,278 5%
======= ======= ======= =======
</TABLE>
20
<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 57% of total Fee income in the quarter
and 56% for the first six months of 2000 compared to 57% and 54% in the
corresponding 1999 periods. Program Business fees increased 11% in the second
quarter to $28.9 million and 10% to $53.9 million in the first six months as
compared to $26.0 million and $49.0 million, respectively, in 1999. This
resulted primarily from the growth of existing programs as a result of premium
increases and decreased competition. Pre-tax margins were 27% for both the
quarter and six months of 2000, down from 36% for the corresponding periods of
1999.
Gross premiums written increased 18% to $656.1 million for the first six months
of 2000 as compared to $556.3 million in 1999, primarily as a result of the
growth within the Program Business segment. Program Business generally involves
greater premium volume per unit than Corporate Risk Management business.
Premiums earned increased 27% to $64.0 million in the second quarter and 35% to
$119.9 million in the first six months of 2000, as compared to $50.2 million and
$89.0 million in the corresponding 1999 periods. These increases in Premiums
earned were also primarily due to the growth within the Program Business segment
and are offset by similar increases in Total insurance costs.
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 second quarter and for the first
six months of 2000, down from 26% and 29% in the corresponding 1999 periods.
Corporate Risk Management fees decreased by 1% in the second quarter to $11.7
million, compared to $11.8 million in the second quarter of 1999, and by 18% in
the first six months to $22.1 million, compared to $26.8 million in 1999. Profit
margins were 27% in the second quarter and 25% for the first six months of 2000,
compared to 39% and 41% in the corresponding 1999 periods. The Company continues
to expect that a firming of prices generally will begin to improve the sale of
Corporate Risk Management accounts in the second half of 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 $3.5 million of Fee income in the second quarter and $7.3
million in the first six months of 2000, representing 7% of total Fee income in
the second quarter and 8% for the first six months. Specialty Brokerage fees
grew by 6% in the second quarter and 14% in the first six months of 2000 from
$3.3 million and $6.4 million in the corresponding 1999 periods as a result of
increased business placed in Bermuda and London. Profit margins decreased to 24%
in the second quarter and to 30% for the first six months from 38% and 43% in
the corresponding 1999 periods, as a result of increased operating expenses.
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 13%
of total Fee income for both the second quarter and six month periods of 2000.
Fees from Financial Services increased in the quarter by 38% to $6.4 million
over the 1999 corresponding period, and by 37% to $12.4 million for the half
year, primarily as a result of an increase in the number of mutual funds under
administration from 237 at June 30, 1999 to 320 at June 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 15% in the second quarter and 18% for
the first six months of 2000 from 4% 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 19% for the
quarter and 23% for the first six months of 2000 as compared to 15% in the
corresponding periods of 1999.
21
<PAGE>
Investment Income
Gross investment income increased by $0.8 million or 4% to $19.6 million in the
first six months of 2000 over the corresponding 1999 period. Net investment
income decreased by 10% to $8.5 million in the second quarter, but increased by
27% to $21.1 million for the first six months of 2000. The first six month
increase includes $3.7 million of investment income from a special purpose
entity, Endeavour Real Estate Securities Ltd. ("Endeavour") in the first quarter
of 2000. Endeavour was established by the Company's Financial Services segment
to offer offshore investors an opportunity to invest in U.S. real estate
investment trusts. The investment income from Endeavour in the first quarter was
offset by $1.4 million of Realized losses, $1.9 million of Interest expense,
$0.9 million of Operating expenses and $(0.8) million of Minority interest. 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. Investment yields declined to 6.7% in the second quarter and
first six months of 2000 as compared to 9.0% and 7.8% in the corresponding
periods in 1999. The higher yields in the 1999 periods were due to higher rates
of return on invested assets in Bermuda and the inclusion of income from one of
the Company's programs accounted for as Claims deposit liabilities.
TABLE IV - EXPENSES
<TABLE>
<CAPTION>
Periods to June 30,
(In Thousands)
Second Quarter Six Months
2000 1999 Increase 2000 1999 Increase
-------- ------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Operating expenses $ 37,712 $30,437 24% $ 72,360 $ 59,537 22%
Total insurance costs 66,853 51,482 30% 126,035 91,206 38%
Interest expense 4,301 1,521 183% 10,297 3,123 230%
Other expenses 1,404 664 112% 2,117 1,324 60%
-------- ------- -------- --------
Total $110,270 $84,104 31% $210,809 $155,190 36%
======== ======= ======== ========
</TABLE>
Operating expenses increased 24% to $37.7 million for the quarter, compared to
$30.4 million in the second quarter of last year, and increased 22% to $72.4
million for the first six months of 2000, compared to $59.5 million in the first
six months of 1999. The increase in Operating expenses is attributable to growth
in personnel and other expenses to service the Company's businesses, the effect
of recent acquisitions and $0.9 million of Operating expenses from Endeavour in
the first quarter of 2000. Included in Other expenses are $0.7 million of
expenses related to the Company's shelf registration of Senior Notes.
The fluctuations in Total insurance costs are the direct result of the increases
in Premiums earned. During the quarter and six months ended June 30, 2000,
however, the net underwriting loss increased to $2.9 million and $6.2 million,
respectively, compared to $1.2 million and $2.2 million in the corresponding
1999 periods. The growth over the 1999 periods is a result of increased legal
costs and premium audit costs, as well as an increase in the loss ratio on the
Company's participation in its reinsurance treaty. Interest expense increased by
$7.2 million for the six months ended June 30, 2000 over the corresponding 1999
period as a result of Endeavour interest of $1.9 million, interest on the bridge
loan financing, offset in part by a reduction in debenture interest.
The effective tax rate was 7.3% in the quarter and 7.9% for the six months of
2000 compared to 8.2% and 9.0% in the corresponding 1999 periods. These
effective tax 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 investment 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 June 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 17% of Total assets at June 30, 2000 and at December
31, 1999. Total Shareholders' equity increased to $367 million at June 30, 2000
from $358 million at December 31, 1999 primarily as a result of Net income in
the period, less treasury shares purchased, dividends paid and the change in
unrealized losses. Return on equity, before the extraordinary loss, was 12.8%
for the first six months of 2000.
22
<PAGE>
CASH FLOW
Cash flow from operations has historically provided the Company its principal
source of liquidity. The Company produced a positive operating cash flow for the
six months ended June 30, 2000 of $4.0 million.
Due to market conditions, the Company has decided to refinance its existing
Bridge Loan with a bank syndicated Revolving Credit Facility, rather than
offering Senior Notes. The refinancing is expected to close during the third
quarter.
The company is involved in ongoing arbitration and litigation with two life
insurance companies that wrote workers' compensation reinsurance for the
Company, and in June 2000 commenced action against a number of Lloyd's
syndicates and other companies on a series of related accident and health
accounts (See Part II Item 1. Legal Proceedings). Paid losses owed by these
reinsurers were approximately $38.0 million at June 30, 2000. The company
currently expects to prevail in these disputes. These disputes have adversely
affected the operating cash flow, however, cash flow still improved to $3.9
million for the second quarter and $4.0 million for the first half of 2000 as
compared to negative $0.8 million and $19.3 million in the corresponding periods
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.
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, including 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)
the failure by reinsurers, clients and others to meet their obligations to the
Company; (c) changes in tax laws; (d) the inadequacy of our reserves; (e)
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; (f) the ability of the Company to execute its business
strategies and its reliance on key personnel; and (g) 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.
ACQUISITIONS
The Company has entered into an agreement to acquire Valmet Group Ltd.
("Valmet"). Valmet is a leading independent fiduciary Company, providing trust
and corporate services through offices in the Isle of Man, Amsterdam, Geneva,
Gibraltar, Cyprus, Dublin and Mauritius. Valmet employs 122 people and in 1999
earned revenues of $12.3 million. The acquisition is expected to close in the
third quarter of 2000 and is subject to a number of conditions, including
regulatory approval.
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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
In June 2000, the Company received a favorable award in connection with one
of the three arbitrations that the Company has been engaged in against
reinsurers who have withheld payment under reinsurance agreements with
Legion. The Company continues to pursue additional arbitration proceedings
with two life insurance companies that wrote workers' compensation
reinsurance for the Company. These proceedings are being conducted in
accordance with the arbitration provisions contained in the relevant
reinsurance agreements and will be held before arbitration panels in
Philadelphia. At June 30, 2000, the amount currently owing from these
reinsurers for paid losses was approximately $7.6 million although this
amount will increase if the reinsurers continue to withhold payment of
reinsurance recoveries on future paid losses. These arbitrations are in the
preliminary stages and, to date, none of the reinsurers has produced any
evidence that causes the Company to believe it will not recover all amounts
owing to it under the relevant agreements. In addition, in June 2000,
Legion commenced an action in state court in Philadelphia against a number
of Lloyd's syndicates and other companies who provided reinsurance on a
series of related accident and health accounts. Paid losses owed by these
reinsurers were approximately $30 million at June 30, 2000. The Company
expects to prevail in these disputes and recover these amounts in full.
ITEM 4. Submission of matters to a vote of Security Holders.
The Company held its 2000 Annual General Meeting of Shareholders on May 16,
2000. The following are the results of voting on the various matters
considered at the meeting:
(i) Election of Directors
NOMINEE FOR WITHHELD
Roger E. Dailey 34,929,376 295,443
David J. Doyle 34,893,455 331,364
Arthur E. Engel 34,917,166 307,653
Norman L. Rosenthal 34,931,766 293,053
Joseph D. Sargent 34,907,855 316,964
(ii) Appointment of Ernst & Young as the Company's Auditors
For: 35,175,200
Against: 36,707
Abstain: 12,912
ITEM 6. Exhibits and Reports on Form 8-K
A. Exhibit 27 - Financial Data Schedules
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27.1 Current quarter ended Jun-30-2000
B. Reports on Form 8-K. No reports on Form 8-K were filed during the three
month period ended June 30, 2000.
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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.
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James C. Kelly
Senior Vice President, Chief Financial Officer
and Authorized Signatory
Date: August 10, 2000
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/s/ James C. Kelly
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James C. Kelly
for conformed copy
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