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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K/A
[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1999
or
[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File No. 1-10760
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MUTUAL RISK MANAGEMENT LTD.
(Exact name of registrant as specified in its charter)
Bermuda Not Applicable
(Jurisdiction of Incorporation) (I.R.S. Employer Identification No.)
44 Church Street
Hamilton HM 12 Bermuda
(441) 295-5688
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices).
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Securities registered pursuant to Section 12(b) of the Act:
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<CAPTION>
Title of Each Class Name of Each Exchange on Which Registered
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Common Shares, $.01 par value............. New York Stock Exchange
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Securities registered pursuant to Section 12(g) of the Act: None
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days, Yes [X] No [_] .
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference into Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
At April 20, 2000, the registrant had outstanding 41,214,579 Common Shares,
the only class of the registrant's common stock outstanding, and the aggregate
market value of voting stock held by non-affiliates at such date was
$700,647,843 (based on the closing price of such Common Shares of $17.00 on
April 20, 2000, as reported on the New York Stock Exchange, Inc., composite
listings).
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of registrant's Proxy Circular relating to its Annual
General Meeting of Shareholders scheduled to be held on May 16, 2000, are
incorporated by reference into Part III of this report.
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This Amendment amends and supplements the Form 10-K filed by the Company on
March 30, 2000 by restating Part I, Item I and Part IV, Item 14, each in its
entirety, and by restating the exhibits included in Part IV, Item 14, in their
entirety.
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PART I
ITEM 1. BUSINESS
The Company
Mutual Risk Management Ltd., also known as MRM, is a Bermuda company
incorporated in 1977. Our principal business is the provision of risk
management services to clients seeking an alternative to traditional
commercial insurance for certain of their risk exposures. Risk management
involves a process of analyzing loss exposures and developing risk financing
methods to reduce exposure to loss and to control associated costs. The use of
such loss financing methods in place of traditional insurance has become known
as the alternative market and involves clients participating in a significant
amount of their loss exposure and transferring only the unpredictable excess
risk to insurers. The benefits of such alternative market techniques typically
include lower and more stable costs, greater control over the client's risk
management program and an increase in the emphasis within the client's
organization on loss prevention and loss control. In addition, MRM provides
financial services to offshore mutual funds and other companies.
Income from fees is derived from four distinct business segments:
Program The largest of our business segments, Program Business
Business: involves us replacing traditional insurers as the conduit
between producers of specialty books of business and
reinsurers wishing to write that business. We provide a
wide range of services for a fee and the underwriting
profit is shared between the producer and the reinsurers.
Corporate Risk Our original business segment, Corporate Risk Management
Management: involves providing services to businesses and
associations seeking to insure a portion of their risk in
a loss sensitive alternative market structure. We earn
our fees by designing and implementing risk financing and
loss control programs for medium-size and large companies
that seek to insure a portion of their insurable risk.
Specialty Our Specialty Brokerage segment specializes in placing
Brokerage: reinsurance for captive insurance companies, placing
coverage with excess liability and corporate officers'
and directors' liability carriers and placing reinsurance
in connection with our Program and Corporate Risk
Management businesses in Bermuda and Europe. The two
components of this segment are MRM Hancock Limited, which
provides access to London and European reinsurers, and
H&H Park International Limited, which brokers to the
Bermuda market.
Financial Our Financial Services segment started in 1996 with the
Services: acquisition of The Hemisphere Group Limited. The
Financial Services 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.
Insurance Services
Our principal source of profits is fees received for the various insurance
and other services provided to clients in connection with our programs. The
structure of our programs places most of the underwriting risk with our
clients or reinsurers. For regulatory and other reasons, however, we are
required to assume a limited amount of risk. We seek to limit this risk to the
minimum level feasible. This approach to risk distinguishes us from typical
property/casualty companies, which assume significant levels of underwriting
risk as part of their business. We do not seek to earn income from
underwriting risk but rather from fees for services provided. We
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market our services exclusively to retail insurance brokers and consultants
representing clients. The services offered to clients in connection with our
products typically include the following:
. design and implementation of a risk financing program;
. issuance of an insurance policy by one of our wholly-owned, licensed
insurance companies, Legion Insurance Company, Legion Indemnity Ltd.,
also referred to as Legion Indemnity, and Villanova Insurance Company,
also referred to as Villanova . These companies are collectively referred
to as the Legion Companies. In December 1997, A.M. Best Company extended
the Legion Insurance group rating of "A ," excellent, to include
Villanova;
. use of our Insurance Profit Center Program, also known as the IPC
Program, as the vehicle within which to fund a chosen portion of the
client's risk or, alternatively, the management by us of the client's
captive insurance company.
. brokering to unaffiliated reinsurers the excess risk which the client
chooses not to fund and, in some cases, arranging for insurers, other
than Legion Insurance, to issue the original insurance policy; and
. coordinating the purchase, on behalf of the client, of loss prevention,
loss control and claims administration services from unaffiliated
providers.
Our major product is the IPC Program. This program allows the client to
retain a significant portion of its own loss exposure without the
administrative costs and capital commitment necessary to establish and operate
its own captive insurance company. The actual amount of underwriting profit
and investment income produced by the client's IPC Program is returned to the
client creating a direct incentive for it to engage in loss prevention and
loss control in order to reduce the overall cost of financing its loss
exposures.
The largest segment of our insurance business is our Program Business, in
which third-parties other than the insured, typically the broker and
reinsurers, finance a portion of the insured's risk and participate in any
underwriting profit or loss. For a discussion of our Corporate Risk Management
and Program Business segments, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
Lines of Business
Our programs can be utilized by clients for many lines of insurance. In
1999, approximately 53% of our fee income was derived from workers'
compensation insurance. During the 1980's and through 1993, workers'
compensation presented many employers with substantial problems due to cost
increases and the limited availability of commercial coverage in certain
states. Workers' compensation costs accelerated rapidly because of: (i) the
general level of medical cost inflation, as medical costs generally amount to
40% or more of all workers' compensation costs; (ii) an increase in the number
of workers' compensation claims which resulted in litigation; (iii) a
broadening of injuries which are considered to be work-related; and (iv) an
increase in state mandated benefit levels. Since 1993, workers' compensation
reforms have been occurring in a number of states, most notably in California,
which have addressed many of these issues in the last five years. A number of
markets have seen a significant decline in premium rates due to new capacity
entering the market subsequent to these reforms. These lower premium rates
have reduced the fees we earn on our programs as fees are based on premiums.
Notwithstanding the changes in the market, workers' compensation continues to
be suitable for the alternative market because many states set rates or
enforce minimum rate laws which prohibit the commercial insurance market from
offering premium discounts to insureds with favorable loss experience. This
causes these clients to seek an alternative method of funding their workers'
compensation exposure, which rewards their status as a preferred risk. In
addition, workers' compensation involves relatively frequent, predictable
levels of loss, which are the type favored by clients for alternative market
insurance programs.
In addition to workers' compensation, our programs have been utilized for
other casualty insurance lines such as medical malpractice, general liability,
commercial auto liability and auto physical damage.
At December 31, 1999, we had a total of 1,143 employees.
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Marketing--Commonwealth Risk Services, L.P.
Our wholly owned subsidiary, Commonwealth Risk Services, L.P., also referred
to as CRS, markets our services in the United States, Canada and Europe to
insurance brokers and consultants representing clients. CRS also designs risk
financing programs for potential clients in conjunction with their insurance
brokers and consultants. Through offices in Philadelphia, California and
London, CRS markets these services using direct mail, advertising, seminars
and trade and industry conventions.
CRS seeks to become actively involved with the insurance broker in the
presentation of our services to potential clients and maintains a direct
relationship with the client after the sale. CRS assists brokers in the design
and implementation of risk financing programs, although the extent of this
involvement depends on the size, experience and resources of the particular
broker. Members of the CRS staff frequently provide supporting promotional
materials and assist in the preparation of financial analyses comparing the
net present value, after-tax cost of an IPC Program with alternative
approaches. Representatives of CRS seek to be present at meetings with
potential clients to explain how the IPC Program works, including how
reinsurance is handled, how funds are invested and how underwriting profits
and investment income are returned.
The Insurance Profit Center Program and Program Business
In 1980, we developed a program which provides clients with a facility for
managing their insurance exposures. This type of structure is frequently
referred to as a "rent-a-captive," although the facility has many significant
differences from a captive insurance company. The facility was designed to
provide certain of the benefits available through captive insurance companies
without the administrative cost and capital commitment necessary to establish
and operate a captive insurance company. Since the IPC Program involves a
retention of risk by the client, it encourages the implementation of risk
management and risk reduction programs to lower the losses incurred.
The IPC Program is appropriate for corporations and associations which
generate $.75 million or more in annual premiums. Typically, clients which use
an IPC Program are profitable and have adequate working capital but generate
insufficient premium to consider, or are otherwise unsuitable for, a wholly-
owned captive. During 1999, the Company increased the number of agency IPC
Programs in which an insurance agent or broker, rather than the insured,
becomes the preferred shareholder and participates in the profit or loss on
the program. These types of programs are referred to as "Program Business" and
are discussed below.
Return on the IPC program is a function of the loss experience of the
insured. The principal benefits of the IPC Program to the client are:
. a reduction of the net present value, after-tax cost of financing the
client's risks;
. a lower commitment of funds than would be necessary to capitalize and
maintain a captive insurance company;
. access to commercial reinsurance markets for the client's excess risk;
and
. program structure that is customized, flexible and relatively easily
implemented.
We operate the IPC Program from offices in Bermuda. The Bermuda office is
involved in designing, negotiating and administering IPC Programs and reviews
each prospective client, negotiates the shareholder's agreement with the
client and the reinsurance agreement with Legion Insurance or another policy-
issuing company. One of the Company's foreign insurance companies, also
referred to as the IPC Companies, receives and invests premiums, administers
policy claims, establishes reserves, provides quarterly financial reports to
clients and, ultimately, returns the underwriting profit and investment income
to the client as preferred share dividends.
The funds of each IPC Program are invested by our subsidiary, Mutual Finance
Ltd. The funds are invested using the services of professional investment
advisors.
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Neither Legion Insurance nor the IPC Companies underwrite risk in the
traditional sense. Rather, their function is to ensure that substantially all
of the underwriting risk of the client is either retained by the client in the
IPC Program or its captive insurance company, as the case may be, or
transferred to unaffiliated reinsurers. In the event that the IPC Company
sustains an underwriting loss on a program which exceeds that program's
investment income, the IPC Company recovers this loss from the client. Since
the client has generally collateralized the IPC Company for at least the
difference between the funds available in that client's IPC Program and the
level of currently expected losses by cash or a letter of credit, the IPC
Company should not be affected by the bankruptcy of a client. In the event,
however, that the IPC Company is unable to recover the full amount of its loss
from the cash collateral or the letter of credit, the IPC Company would seek
to recover from the client pursuant to the indemnity provisions of the
shareholder's agreement. As of December 31, 1999, we maintained a provision of
$10.0 million against losses which may occur on programs where we may be
forced to rely solely on the clients indemnity. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
In addition to programs for corporate clients, we also offer an association
IPC Program, which allows smaller insureds to collectively take advantage of
the financial benefits available to larger corporate insureds individually.
The Legion Companies
Legion Insurance is domiciled in Pennsylvania and is admitted to write
primary insurance, often called being admitted or writing insurance on an
admitted basis, in all 50 states of the United States, the District of
Columbia and Puerto Rico. Legion Indemnity is domiciled in Illinois, is an
admitted insurer in Illinois and is an authorized surplus lines insurer in 42
states, the District of Columbia, Guam and the Virgin Islands. An authorized
surplus lines insurer writes specialty property and liability coverage when
the specific specialty coverage is unavailable from admitted insurers.
Villanova is domiciled in Pennsylvania and is admitted to write primary
insurance in 43 states.
In our Corporate Risk Management business segment, one of the Legion
Companies issues an insurance policy to the client, which either fulfills a
legal requirement that the client have a policy from a licensed insurer or
satisfies a business need the client may have for an admitted policy. The
client and the Legion Company determine the level of exposure the client
wishes to retain and the Legion Company transfers the specific excess risk and
the aggregate excess risk beyond that retention to unaffiliated reinsurers.
The Legion Company then reinsures the client's chosen retention to one of the
IPC Companies or to the client's captive insurance company. In certain cases
the Legion Company may issue a large deductible type policy through which the
client pays claims up to its chosen retention directly. Payments within the
deductible are covered by a deductible reimbursement policy issued by one of
the IPC Companies. In either type of policy, the Legion Company retains only a
relatively small portion of the risk on each program for its own account.
In Program Business, the Legion Company replaces traditional insurers as the
conduit between producers of specialty books of business and reinsurers
wishing to write that business. In this line of business, the reinsurer
replaces the insured as the risk-bearing entity. As with the Corporate Risk
Management line of business, the Legion Company negotiates the reinsurance and
performs certain administrative services in connection with the program.
Program Business differs from the Corporate Risk Management line of business
in that policy underwriting, issuance and premium collection are usually
provided by the general agent, rather than the Legion Company. The Legion
Company analyzes each program prior to inception, arranges for quota share or
specific and aggregate excess reinsurance coverage through its reinsurance
treaties, collects the premium from the client, prepares accounting cessions
for the reinsurers, audits the final premium, supervises the independent
claims adjuster, collects claim reimbursements from reinsurers and performs
certain other related services for each account.
For the Corporate Risk Management business, the Legion Companies have
established a reinsurance treaty with an unaffiliated reinsurer to transfer
the specific and aggregate excess risk above the client's retention. The
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client's retention is negotiated separately for each program and reflects the
amount of risk the client wishes to retain for its program on both a specific
and aggregate basis. For the Program Business, each Legion Company purchases a
separate reinsurance treaty, both on a quota share and a specific and
aggregate excess of loss basis. The Legion Companies currently place
substantially all reinsurance with unaffiliated commercial reinsurers whose
ratings from A.M. Best Company are A- or higher. At December 31, 1999, the
largest reinsurance recoverables from unaffiliated commercial reinsurers were
$172.6 million from Transatlantic Reinsurance Company, a participant on
several layers of specific and aggregate reinsurance with respect to various
of our Program and Corporate Risk Management business and substantially all of
our American Psychiatric Association program, $161.3 million from First Excess
and Reinsurance Corp. and $145.4 million from American Re-insurance Company,
which are both reinsurers on several current treaties. Transatlantic is rated
"A++," First Excess, now GE Reinsurance Corporation and part of the Employers
Re US Group, is rated "A++" and American Re-insurance is rated "A++" by A.M.
Best Company.
Through its reinsurance arrangements, each Legion Company places significant
amounts of reinsurance with a variety of unaffiliated reinsurance companies.
In order to maintain an acceptable level of net written premium for regulatory
purposes, each Legion Company seeks to develop a level of net written premium
which will not involve a significant degree of underwriting risk. In most
Legion programs, the Legion Company retains liability for a specified amount
of losses equal to at least 10% of the gross written premium. The level of
losses retained by the Legion Company are set at a level such that no
significant underwriting profit or loss should occur.
In order to take regulatory credit for reinsurance ceded to one of the IPC
Companies or to a captive insurance company, the Legion Company must receive a
letter of credit for the amount of the insurance reserves ceded since the
companies to which the reinsurance is ceded are not licensed reinsurers in any
state of the United States. The letter of credit must be issued or confirmed
by a bank which is a member of the U.S. Federal Reserve System. At December
31, 1999, the Legion Companies had $371 million of such letters of credit, of
which $257 million was supplied by the IPC Companies. Legion Insurance, Legion
Indemnity and Villanova are also subject to other regulation by the insurance
departments of Pennsylvania, Illinois and other states where they are
licensed. See "Regulatory Considerations."
As of December 31, 1999, the Legion Companies had 355 accounts, they wrote
gross statutory premiums of $1.2 billion during 1999 and had statutory capital
of $349.9 million. See "Management's Discussion and Analysis of Financial
Conditions and Results of Operations."
Specialty Brokerage
In 1991, we acquired a 51% interest in a newly-formed London reinsurance
brokerage firm, MRM Hancock Limited. MRM Hancock specializes in the placement
of reinsurance for captive insurance companies in the London market, including
Lloyds of London. In 1996, we acquired the remaining 49% of MRM Hancock from
the management of MRM Hancock and General International Ltd., a Bermuda
insurance subsidiary of General Motors Corporation. MRM Hancock is now a
wholly owned subsidiary. In July 1992, we acquired 100% of Park International
Limited, a Bermuda broker specializing in placing coverage with Bermuda-based
excess liability and corporate officers' and directors' liability carriers. In
1998, we acquired H&H Reinsurance Brokers, Ltd., a Bermuda-based specialty
reinsurance broker that was part of the IAS Group, a group of companies that
was acquired by MRM in 1998. During 1999, all of our brokerage business was
combined into one unit to better coordinate the specialty brokerage activities
and to improve customer service.
Segment information relating to our Specialty Brokerage operations is
contained in Note 16 to the Consolidated Financial Statements set forth
herein.
Financial Services
In July 1996, we acquired The Hemisphere Group Limited, a Bermuda financial
services company. Hemisphere, which has been in business since 1980, has three
active subsidiary operations in Bermuda providing
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company management, corporate secretarial, fund administration and trust
management services. It also has a wholly-owned Cayman Islands subsidiary.
With a total staff of 158, Hemisphere had approximately 279 mutual fund
clients as of December 31, 1999. In addition, Hemisphere administers
investment holding companies, trading companies and trusts. Hemisphere has
formed a network of professional relationships in the major financial centers
of the world and this network is the source for significant ongoing referrals
of business. During 1997, Hemisphere expanded its trust operations by the
acquisition of Hugo Trust Company based in Jersey in the Channel Islands.
Hemisphere Trust (Jersey) Limited, which is comprised of Hugo Trust Company
and Augres Trust Company, provides a base to develop European based trust
business and had revenues of $2.8 million in 1999.
In January 1997, we incorporated MRM Life Ltd. in Bermuda to provide life
insurance and related products, including annuities and variable annuities. We
began marketing these products in the fourth quarter of 1997.
In 1998, Hemisphere expanded its operations to Dublin, Ireland and Boston,
Massachusetts in order to service the European offshore and US hedge fund
industries, respectively.
Competition
Our insurance services compete with self-insurance plans, captive insurance
companies managed by others and a variety of risk financing insurance
policies. We believe that the IPC Program is the largest independent
alternative market facility that is not affiliated with either a major retail
insurance broker or a major insurance company. We face significant competition
in marketing the IPC Program from other risk management programs offered by
U.S. insurance companies, from captive insurance companies for large insureds
and from rent-a-captives organized by large insurance companies and brokers.
The primary basis for competition among these alternative risk management
vehicles varies with the financial and insurance needs and resources of each
potential insurance buyer. The principal factors that are considered include
an analysis of the net present-value, after-tax cost of financing the client's
expected level of losses, the amount of premium and collateral required, the
attachment point of excess coverage provided in the event losses exceed
expected levels as well as cash flow and tax planning considerations and the
expected quality and consistency of the services to be provided. We believe
that for insureds with financial characteristics and loss experience lending
themselves to an IPC Program, the IPC Companies compete effectively with other
risk financing alternatives.
In a soft insurance market characterized by excess capital and competitive
pricing, it is generally easier for us to structure programs because of the
availability and pricing of reinsurance but more difficult to attract
potential participants and sell programs because of competition. In a hard
market, such as that experienced during 1985-1987, it is more difficult to
structure programs due to the high price and unavailability of reinsurance but
we experience less competition in attracting clients and selling programs.
Regulatory Considerations
The Bermuda-based IPC Companies, Mutual Indemnity Ltd., Mutual Indemnity
(Bermuda) Ltd. and Mutual Indemnity (US) Ltd., are subject to regulation under
the Bermuda Companies Act of 1981 and as insurers under the Bermuda Insurance
Act of 1978, as amended by the Insurance Amendment Act 1995, and the
regulations promulgated thereunder. They are required, among other things, to
meet and maintain certain standards of solvency, to file periodic reports in
accordance with Bermuda statutory accounting rules, to produce annual audited
financial statements and to maintain a minimum level of statutory capital and
surplus. In general, the regulation of insurers in Bermuda relies heavily upon
the auditors, directors and managers of the Bermuda insurer, each of which
must certify that the insurer meets the solvency and capital requirements of
the Bermuda Insurance Act of 1978. Mutual Indemnity (Barbados) Ltd. and Mutual
Indemnity (Dublin) Ltd. are subject to similar regulation in Barbados and
Ireland, respectively.
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The Legion Companies are subject to regulation and supervision by the
insurance regulatory authorities of the various states of the United States in
which they conduct business. This regulation is intended primarily for the
benefit of policyholders. Legion Insurance is admitted in 50 states, the
District of Columbia and Puerto Rico, and is subject to regulation in each
jurisdiction. Legion Indemnity is admitted in Illinois and is authorized as a
surplus lines insurer in 42 states, the District of Columbia, Guam and the
Virgin Islands. Legion Indemnity is regulated in Illinois but is generally not
subject to regulation in those states where it acts as a surplus lines
insurer. Villanova is admitted in 43 states and is subject to regulation in
each jurisdiction. State insurance departments have broad regulatory,
supervisory and administrative powers. These powers relate primarily to the
standards of solvency which must be met and maintained, the licensing of
insurers and their agents, the approval of rates and forms and policies used,
the nature of, and limitations on, insurers investments, the form and content
of periodic and other reports required to be filed, and the establishment of
reserves required to be maintained for unearned premiums, losses and loss
expenses or other purposes.
The Legion Companies are also subject to state laws regulating insurance
holding companies. Under these laws, state insurance departments may examine
the Legion Companies at any time, require disclosure of material transactions
by the holding company and require prior approval of certain "extraordinary"
transactions, such as dividends from the insurance subsidiary to the holding
company and purchases of certain amounts of the insurance subsidiary's capital
stock. These laws also generally require approval of changes of control, which
are usually triggered by the direct or indirect acquisition of 10% or more of
the insurer.
Most states require all admitted insurance companies to participate in their
respective guaranty funds, which cover certain claims against insolvent
insurers. Solvent insurers licensed in these states are required to cover the
losses paid on behalf of insolvent insurers by the guaranty funds and are
generally subject to annual assessments in the state by its guaranty fund to
cover these losses. Some states also require licensed insurance companies to
participate in assigned risk plans which provide coverage for workers'
compensation, automobile insurance and other lines for insureds which, for
various reasons, cannot otherwise obtain insurance in the open market. This
participation may take the form of reinsuring a portion of a pool of policies
or the direct issuance of policies to insureds. Generally, the Legion
Companies participates as a pool reinsurer or assigns to other companies the
direct policy issuance obligations. The calculation of an insurer's
participation in these plans is usually based on the amount of premium for
that type of coverage that was written by the insurer on a voluntary basis in
a prior year. Assigned risk pools tend to produce losses which result in
assessments to insurers writing the same lines on a voluntary basis. The
Legion Companies also pay a fee to carriers assuming their direct policy
issuance obligations. For each program a Legion Company writes, it estimates
the amount of assigned risk and guaranty fund assessments that it will incur
as a result of having written that program. If that estimate proves to be
inadequate, the Legion Company is entitled under its reinsurance agreements
with the IPC Companies to recover from the reinsurer the amount of any
assessments in excess of the estimate. The IPC Companies are then entitled
under the terms of each shareholder's agreement to recover this excess from
the client. However, the IPC Companies are generally only able to
collateralize this obligation up to the amount of the estimated assessments.
The National Association of Insurance Commissioners, ("NAIC") has
established the Insurance Regulatory Information System, ("IRIS") to assist
state insurance departments in their regulation and oversight of insurance
companies domiciled or operating in their respective states. IRIS has
established a set of twelve financial ratios with specified "unusual values"
for each ratio. Companies reporting four or more unusual values on the IRIS
ratios may expect inquiries from individual state insurance departments
concerning specific aspects of the insurer's financial position. As of
December 31, 1999, Legion Insurance Company, Villanova Insurance Company and
Legion Indemnity Company, had six, four and three unusual values,
respectively. Four of the Legion Insurance Company's ratios, Change in Net
Writings, Surplus Aid to Surplus, Agent's Balance to Surplus and Estimated
Current Reserve Deficiency to Surplus are directly related to premium growth.
Change in Surplus was unusual due to the $143.0 million of additional capital
contributed during 1999. The final ratio, Liabilities to Liquid Assets, was
unusual on account of receiving $35 million in premium prior to receiving
policy level detail to record the written premium. This inflates the ratio as
it represents funds awaiting application to actual policies.
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Villanova had two unusual values related to premium growth, Change in Net
Writings and Estimated Current Reserve Deficiency to Surplus. It also had an
unusual value for a low investment yield. The low value for investment yield
is the result of actual investments made late in the year while the ratio is
calculated assuming investments were made evenly throughout the year. The last
unusual value for Villanova was a decrease in surplus. This was the result of
the dividends to its parent and the sharing of receivables write-offs under
the Company's pooling arrangement.
Legion Indemnity had three unusual values, all premium growth related. They
were Change in Net Writings, Surplus Aid to Surplus and Agent's Balance to
Surplus.
The NAIC has also adopted a Risk Based Capital for Insurers Model Act. The
Risk Based Capital Model Act sets forth a risk based capital formula for
property and casualty insurers. The formula measures minimum capital and
surplus needs based on the risk characteristics of a company's products and
investment portfolio. The formula is part of each company's annual financial
statement filings and is to be used as a tool to identify weakly capitalized
companies. In those states having enacted the Risk Based Capital Model Act,
companies having capital and surplus greater than the minimum required by the
formula but less than a specified multiple of the minimum may be subject to
additional regulatory scrutiny from domiciliary state insurance departments.
To date, nearly all states have adopted the Risk Based Capital Model Act. At
December 31, 1999, the Legion Companies combined risk-based capital was $347.4
million. Under the risk-based capital tests, the threshold that constitutes
the authorized control level which authorizes the commissioner to take
whatever regulatory action considered necessary to protect the best interest
of the policyholders and creditors of the Legion Companies, was $121 million.
Therefore, the Legion Companies capital exceeds all requirements of the Risk
Based Capital Model Act.
In reaction to increasing rates for and decreasing availability of workers'
compensation insurance starting in the early 1990's, many states began to
enact reforms designed to reduce the cost of workers' compensation insurance,
principally through a reduction in benefits or an increase in efficiencies in
the system. In California, a reform package was enacted in 1993 providing for,
in part, a reduction of premium rates, an increase in the standard necessary
to prove "stress-related" work injuries, group-self insurance for employers
and the repeal of the minimum rate law effective January 1, 1995. In Florida,
the assigned risk plan was abolished and replaced by a joint underwriting
authority. Other states have enacted or are considering similar reforms.
Workers' compensation reform, together with the effects of competition and
other factors, has led to reduced premiums in many states. This has reduced
the appeal of alternative market products such as those offered by us. This is
apparent in California where workers' compensation rates have declined by more
than 50% since mid-1993 while benefit levels have increased. This will
inevitably lead to significant losses for those traditional carriers who are
writing this business. A number of these carriers have recently filed for
significant rate increases.
The Legion Companies are permitted to pay dividends only from statutory
earned surplus. Subject to this limitation, the maximum amount of dividends
that it is able to pay in any twelve-month period will be the greater of
statutory net income in the preceding year or 10% of statutory surplus. Based
on 1999 results, the maximum dividend the Legion Companies would be permitted
to pay in 2000 is $35.0 million.
Losses and Loss Reserves
We establish reserves for losses and loss adjustment expenses related to
claims that have been reported on the basis of the evaluations of independent
claims adjusters under the supervision of each Legion Company's claims staff.
In addition, reserves are established for losses which have occurred but have
not yet been reported and for adverse development of reserves on reported
losses by us on a quarterly basis. The estimate of claims arising for
accidents which have not yet been reported is based upon our and the insurance
industry's experience together with statistical information with respect to
the probable number and nature of these claims.
Gross loss reserves of $136.0 million and $121.0 million at December 31,
1999 and 1998 have been discounted by $39.5 million and $36.2 million,
respectively, assuming interest rates of 6% for medical
10
<PAGE>
malpractice reserves and 4% for excess workers' compensation reserves based on
the recommended rate under Pennsylvania law. These reserves are also
discounted in our regulatory filings. In 1993, we adopted SFAS 113 and
reclassified substantially all of our net retained medical malpractice
reserves as claims deposit liabilities. On a net basis, therefore, the only
discounted reserves are those relating to the Company's share of the excess
reinsurance coverage provided in connection with each program. This
discounting reduced net loss reserves on our consolidated balance sheets by
$3.8 million and $4.7 million at December 31, 1999 and 1998, respectively.
Prior to 1995, loss development had been generally favorable. The adverse
development in recent years has principally been a result of losses on
terminated programs.
The following table sets forth a reconciliation of beginning and ending
reserves for losses and loss adjustment expenses in accordance with generally
accepted accounting principles, also referred to as GAAP:
<TABLE>
<CAPTION>
Year ended December 31,
--------------------------------
1999 1998 1997
---------- ---------- --------
(In thousands)
<S> <C> <C> <C>
Gross reserves for losses and loss
adjustment expenses,
beginning of year.......................... $1,190,426 $ 716,461 $419,737
Recoverable from reinsurers................. 1,079,562 630,697 350,318
---------- ---------- --------
Net reserves for losses and loss adjustment
expenses,
beginning of year.......................... 110,864 85,764 69,419
Less: Other net reserves(1)................. (10,184) (3,542) (1,008)
---------- ---------- --------
100,680 82,222 68,411
Provision for losses and loss adjustment
expenses for claims occurring in:
Current year.............................. 140,574 74,476 50,301
Prior years............................... 7,131 3,782 (444)
---------- ---------- --------
Total losses and loss adjustment expenses
incurred................................... 147,705 78,258 49,857
---------- ---------- --------
Payments for losses and loss adjustment
expenses for claims occurring in:
Current year.............................. (61,697) (15,039) (10,850)
Prior years............................... (64,562) (44,761) (25,196)
---------- ---------- --------
Total payments.............................. (126,259) (59,800) (36,046)
---------- ---------- --------
Net reserves for losses and loss adjustment
expenses, end of year...................... 122,126 100,680 82,222
Other net reserves(1)....................... 8,058 10,184 3,542
---------- ---------- --------
130,184 110,863 85,764
---------- ---------- --------
Recoverable from reinsurers................. 1,729,936 1,079,563 630,697
---------- ---------- --------
Gross reserves for losses and loss
adjustment expenses,
end of year................................ $1,860,120 $1,190,426 $716,461
========== ========== ========
</TABLE>
- --------
(1) Other reserves represent reinsurance contracts which are being run-off and
which were written in subsidiaries other than Legion, plus reserves for
other run-off business.
11
<PAGE>
The following table reconciles the difference between the Legion Companies'
portion of the GAAP reserves and those contained in regulatory filings made by
the Legion Companies' in accordance with statutory accounting practices, also
referred to as SAP.
Reconciliation of SAP and GAAP Reserves
<TABLE>
<CAPTION>
Year ended December 31,
--------------------------------
1999 1998 1997
---------- ---------- --------
(in thousands)
<S> <C> <C> <C>
Reserves for Legion losses and loss
adjustment expenses,
end of year SAP............................. $ 141,709 $ 109,506 $114,211
Gross-up for ceded reinsurance reserves...... 1,728,988 1,077,349 629,227
Provision for reinsurance uncollectible on a
GAAP basis reported as a provision for
unauthorized reinsurance on a SAP basis..... -- 302 924
Reclassification of loss reserves to claims
deposit liabilities......................... (13,853) (19,163) (29,011)
Reclassification of retroactive reinsurance
reserve to receivable from affiliate........ 2,777 8,598 --
Elimination of statutory increase in assigned
risk reserves............................... (15,000) (15,000) (15,000)
Reserves for audit premium estimates not
included on SAP basis....................... 4,260 2,745 730
---------- ---------- --------
Reserves for Legion losses and loss
adjustment expenses......................... 1,840,361 1,164,337 701,081
Other non-US Reserves........................ 11,567 13,813 10,489
---------- ---------- --------
Liabilities for unpaid losses and loss
adjustment expenses......................... 1,851,928 1,178,150 711,570
Reserves on run-off business................. 8,192 12,276 4,891
---------- ---------- --------
Total Reserves for Losses and Loss adjustment
expenses,
end of year GAAP............................ $1,860,120 $1,190,426 $716,461
========== ========== ========
</TABLE>
The following table presents the development of the Company's ongoing net
reserves for 1989 through 1999. The top line of the table shows the estimated
reserve for unpaid losses and loss adjustment expenses recorded at the balance
sheet date for each of the indicated years. This amount represents the
estimated amount of losses and loss adjustment expenses for claims that are
unpaid at the balance sheet date, including losses that have been incurred but
not yet reported to the Company. The table also shows the re-estimated amount
of the previously recorded reserve based on experience as of the end of each
succeeding year. The estimate changes as more information becomes known about
the frequency and severity of claims for individual years. The "cumulative
redundancy (deficiency)" represents the aggregate change in the estimates over
all prior years. It should be noted that the following table presents a "run-
off" of balance sheet reserves, rather than accident or policy year loss
development. Therefore, each amount in the table includes the effects of
changes in reserves for all prior years.
12
<PAGE>
ANALYSIS OF LOSS AND LOSS EXPENSE DEVELOPMENT
(Net of Reinsurance Recoverable)
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------------------------------------------------------------------
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
------- ------- -------- -------- -------- -------- -------- -------- --------- ---------- ----------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Gross reserve
for losses and
loss adjustment
expenses (1) $43,339 $88,437 $142,605 $191,775 $205,272 $242,189 $315,689 $419,737 $ 716,461 $1,190,426 $1,860,120
Reinsurance
reserves (22,221) (52,321) (89,295) (113,075) (148,637) (178,002) (256,678) (350,318) (630,697) (1,079,562) (1,729,936)
------- ------- -------- -------- -------- -------- -------- -------- --------- ---------- ----------
Net reserve for
losses and loss
adjustment
expenses 21,118 36,116 53,310 78,700 56,635 64,187 59,011 69,419 85,764 110,864 130,184
Other reserves
(3) (2,540) (1,357) (1,464) (1,531) (1,118) (1,006) (1,008) (1,008) (3,542) (10,184) (8,058)
------- ------- -------- -------- -------- -------- -------- -------- --------- ---------- ----------
18,578 34,759 51,846 77,169 55,517 63,181 58,003 68,411 82,222 100,680 122,126
Reclassification
of reserves to
claim deposit
liabilities (2) (12,560) (20,796) (28,322) (36,078) -- -- -- -- -- -- --
------- ------- -------- -------- -------- -------- -------- -------- --------- ---------- ----------
Reserve for
losses and loss
adjustment
expenses
restated for
the effects of
SFAS 113: 6,018 13,963 23,524 41,091 55,517 63,181 58,003 68,411 82,222 100,680 122,126
Reserve re-
estimated as of:
One year later 20,220 35,453 53,193 40,443 55,131 60,917 54,982 67,966 86,002 107,811
Two years later 20,476 34,953 24,269 41,433 52,381 56,767 54,328 70,502 91,809
Three years
later 20,434 13,131 23,298 39,351 47,657 56,291 56,576 74,294
Four years later 6,328 12,132 22,010 36,330 47,740 57,760 59,198
Five years later 6,397 12,268 20,390 36,424 48,162 60,762
Six years later 5,993 10,649 20,500 36,652 51,532
Seven years
later 4,737 10,700 20,689 37,515
Eight years
later 4,768 10,750 23,472
Nine years later 4,672 10,757
Ten years later 4,522
Cumulative
Redundancy
(Deficiency) 1,496 3,206 52 3,576 3,985 2,419 (1,195) (5,883) (9,587) (7,131)
Percentage 25% 23% 0% 9% 7% 4% -2% -9% -12% -7%
Reserve for
Losses and
Loss
Adjustment
Expenses
without the
effect of
Discounting:
Discounted
reserve $18,578 $34,759 $ 51,846 $ 77,169 $ 55,517 $ 63,181 $ 58,003 $ 68,411 $ 82,222 $ 100,680 $ 122,126
Total Discount 4,144 6,091 8,345 10,785 1,387 2,905 3,291 3,547 3,671 4,667 3,745
------- ------- -------- -------- -------- -------- -------- -------- --------- ---------- ----------
Ultimate Reserve
Liability 22,722 40,850 60,191 87,954 56,904 66,086 61,294 71,958 85,893 105,347 125,871
Reclassification
of reserves to
claim deposit
liabilities (2) (16,704) (26,889) (36,667) (46,862) -- -- -- -- -- -- --
------- ------- -------- -------- -------- -------- -------- -------- --------- ---------- ----------
Ultimate reserve
liability
restated for
the effects of
SFAS 113 6,018 13,961 23,524 41,092 56,904 66,086 61,294 71,958 85,893 105,347 125,871
Reserve re-
estimated as of:
One year later 23,493 41,084 60,820 40,443 56,272 63,480 57,866 71,008 89,347 111,972
Two years later 23,760 39,668 24,269 41,433 53,410 59,186 57,097 73,790 95,584
Three years
later 23,025 13,131 23,298 39,351 48,499 58,558 59,456 77,490
Four years later 6,328 12,132 22,010 36,330 48,400 60,096 61,943
Five years later 6,397 12,268 20,390 36,424 48,854 62,919
Six years later 5,993 10,649 20,500 36,652 52,031
Seven years
later 4,737 10,700 20,689 37,515
Eight years
later 4,768 10,750 23,472
Nine years later 4,672 10,757
Ten years later 4,522
Cumulative
Redundancy
(Deficiency)
without
discount effect 1,346 3,211 2,835 4,440 8,050 5,990 1,838 (1,832) (3,454) (6,625)
Percentage 22% 23% 12% 11% 14% 9% 3% -3% -4% -6%
Cumulative
Amount of
Reserve Paid
through:
One year later $ 1,768 $ 4,705 $ 9,647 $ 15,972 $ 17,909 $ 19,720 $ 10,955 $ 25,196 $ 44,761 $ 65,931
Two years later 2,590 4,986 13,158 21,121 25,306 21,054 22,422 43,068 62,781
Three years
later 3,541 6,077 15,104 24,991 27,134 28,547 31,925 49,571
Four years later 3,857 6,859 16,897 25,510 31,972 34,398 41,684
Five years later 4,093 7,533 17,311 28,110 35,967 45,706
Six years later 4,322 7,381 17,943 30,793 41,392
Seven years
later 3,842 7,484 19,494 33,432
Eight years
later 3,662 8,304 20,920
Nine years later 4,010 8,845
Ten years later 4,279
</TABLE>
(1) Medical malpractice reserves have been discounted at 8.25% in 1989 and
1990, and 6% in 1991, 1992, 1993, 1994, 1995, 1996, 1997, 1998 and 1999.
(2) The re-classification of reserves to claims deposit liablilties is a
result of the adoption of SFAS 113.
(3) Other reserves represent reinsurance contracts which are being run-off and
which were written in subsidiaries other than Legion, plus reserves on
other run-off business.
13
<PAGE>
Investments and Investment Results
For a complete description of our investments and investment results, see
note 5 to the consolidated financial statements.
Risk Factors
You should carefully consider the risks described below regarding us and our
common shares. The risks and uncertainties described below are not the only
ones we face. There may be additional risks and uncertainties. If any of the
following risks actually occur, our business, financial condition or results
of operations could materially be affected and the trading price of our common
shares could decline significantly.
New insurance legislation in some states has increased competition, which
has reduced our fee revenues and made sales and renewals more difficult.
Beginning in 1993, legislative reforms designed to reduce the cost of
workers' compensation insurance in some important workers' compensation
markets caused competition to increase significantly. This heightened level of
competition has persisted. Increased competition has lowered the premium rates
that we may charge, which has reduced our fee revenue. Increased competition
also has made sales and renewals of our programs more difficult. Workers'
compensation reform, to the extent it reduces premiums and introduces relative
stability in the traditional workers' compensation market, may reduce the
appeal of alternative market products such as those offered by us.
If we are unable to purchase reinsurance and transfer risk to reinsurers,
our net income would be reduced or we could incur a loss.
A significant feature of our risk management programs is the utilization of
reinsurance to transfer all or a portion of risk not retained by the insured.
The availability and cost of reinsurance is subject to market conditions,
which are outside of our control. As a result, we may not be able to
successfully purchase reinsurance and transfer risk through reinsurance
arrangements. A lack of available reinsurance would adversely affect the
marketing of our programs and force us to retain all or a part of the risk
that cannot be reinsured. If we were required to retain these risks and
ultimately pay claims with respect to these risks, our net income would be
reduced or we could incur a loss. In addition, we are subject to credit risk
with respect to our reinsurers because the transfer of risk to a reinsurer
does not relieve us of our liability to the insured. The failure of a
reinsurer to honor its obligations would reduce our net income or could cause
us to incur a loss.
If the issuers of letters of credit and clients fail to honor their
obligations, our net income would be reduced or we could incur a loss.
Each of our clients chooses a level of risk retention, which is reinsured
either by one of our foreign reinsurance subsidiaries or by the client's
captive insurance company. Letters of credit generally also supports this
retention. In addition, we rely extensively on letters of credit issued or
confirmed by a bank in order to secure a portion of the client's obligation to
reimburse us for losses on a program. The failure of a bank to honor its
letter of credit or the inability of a client to honor its uncollateralized
reimbursement obligation would reduce our net income or could cause us to
incur a loss.
If tax laws prevent our IPC Program participants from deducting premiums
paid to us, we would be unable to competitively market this program.
The tax treatment of the IPC Program is not clear and varies significantly
with the circumstances of each IPC Program participant. However, some
participants deduct the premiums paid to us for federal income tax purposes. A
determination that a significant portion of the IPC Program participants are
not entitled to deduct the premiums paid to us, without a similar
determination as to competing products, would adversely affect the
marketability of the IPC Program.
14
<PAGE>
If our loss reserves are inadequate to meet our actual losses, our net
income would be reduced or we could incur a loss.
We are required to maintain reserves to cover our estimated ultimate
liability losses and loss adjustment expenses for both reported and unreported
claims incurred. These reserves are only estimates of what we think the
settlement and administration of claims will cost based on facts and
circumstances then known to us. Because of the uncertainties that surround
estimating loss reserves and loss adjustment expenses, we cannot be certain
that ultimate losses will not exceed these estimates of loss and loss
adjustment reserves. If our reserves are insufficient to cover our actual
losses and loss adjustment expenses, we would have to increase our reserves
and our net income would be reduced or we could incur a loss.
Insurance laws and regulations restrict our ability to operate.
We are subject to extensive regulation under state and foreign insurance
laws. These laws limit the amount of dividends that can be paid by our
operating subsidiaries, impose restrictions on the amount and type of
investments that they can hold, prescribe solvency standards that must be met
and maintained by them and require them to maintain reserves. These laws also
require disclosure of material transactions by MRM and require prior approval
of certain "extraordinary" transactions. These "extraordinary" transactions
include declaring dividends that exceed statutory maximums from operating
subsidiaries to MRM or purchases of an operating subsidiary's capital stock.
These laws also generally require approval of changes of control. Our failure
to comply with these laws could subject us to fines and penalties and restrict
us from conducting business. The application of these laws could affect our
liquidity and could restrict our ability to expand our business operations
through acquisitions involving our insurance subsidiaries.
Our investment objectives may not be realized.
The success of our investment objectives is affected by general economic
conditions that are outside of our control. General economic conditions can
adversely affect the markets for interest-rate-sensitive securities, including
the extent and timing of investor participation in those markets, the level
and volatility of interest rates and, consequently, the value of fixed income
securities. We may not be able to realize our investment objectives, which
could reduce our net income or cause us to incur a loss.
Our industry is highly competitive and we may not be able to compete
successfully in the future.
Our industry is highly competitive and has experienced severe price
competition over the last several years. We compete in the United States and
international markets with domestic and international insurance companies.
Some of these competitors have greater financial resources than we do, have
been operating for longer than we have and have established long-term and
continuing business relationships throughout the industry, which can be a
significant competitive advantage. In addition, we expect to face further
competition in the future. We may not be able to compete successfully in the
future.
We are dependent on our key personnel.
Our success has been, and will continue to be, dependent on our ability to
retain the services of our existing key executive officers and to attract and
retain additional qualified personnel in the future. The loss of the services
of any of our key executive officers or the inability to hire and retain other
highly qualified personnel in the future could adversely affect our ability to
conduct our business.
If U.S. tax law changes, our net income may be reduced.
Some members of Congress have recently expressed concern over an alleged
competitive advantage that foreign-controlled insurers and reinsurers may have
over U.S.-controlled insurers and reinsurers due to the purchase of
reinsurance by U.S. insurers from affiliates operating in certain foreign
jurisdictions, including Bermuda. Legislation has been proposed that would
increase the U.S. tax burden on some business ceded from our licensed U.S.
insurance subsidiaries, including Legion Insurance. We do not know whether
this legislation will ever be enacted into law. If it were enacted, the U.S.
tax burden on some business ceded from our licensed U.S. insurance
subsidiaries, including Legion Insurance, Legion Indemnity and Villanova, to
certain offshore reinsurers could be increased. This could reduce our net
income.
15
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8K
A. Exhibits
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<C> <S>
3.1 Memorandum of Association(1)
3.2 Bye-Laws of Registrant(4)
3.3 Bye-Laws of IPC Mutual Holdings Ltd.(1)
4.1 Form of Stock Certificate(1)
4.2 Indenture dated as of October 30, 1995 relating to the Company's Zero
Coupon Convertible Exchangeable Subordinated Debentures due 2015(5)
10.1 Share Purchase Agreements with Messrs. Partridge, Turner and
Kelly(1)(3)
10.2 Mutual Risk Management Ltd. 1988 Stock Option Plan(1)(3)
10.3 1991 Long Term Incentive Plan(2)(3)
10.4 Form of Director's Stock Option Grant Agreement(2)(3)
10.5 Form of Non-Qualified Stock Option Grant Agreement(2)(3)
10.6 Form of Shareholders Agreement relating to the IPC Program(1)
10.7 Agreement between Mutual Risk Management (Bermuda) Ltd. and Robert A.
Mulderig relating to Hemisphere Trust Company Limited.(6)
10.8 Directors Deferred Cash Compensation Plan(3)(5)
10.9 Directors Restricted Stock Plan(3)(5)
10.10 Deferred Compensation Plan(7)
10.11 1998 Long Term Incentive Plan(7)
10.12 Credit Agreement dated December 6, 1999 between Mutual Risk
Management, certain subsidiaries and Prudential Securities Credit
Corporation(8)
12.0 Consolidated Ratio of Earnings to Fixed Charges(8)
21.1 List of subsidiaries(8)
23.1 Consent and Reports of Ernst & Young(8)
23.2 Consent of Ernst & Young
24 Powers of Attorney(8)
27.1 Financial data schedule for (current) fiscal year ended Dec-31-1999(8)
27.2 Restated financial data schedule for quarter ended Sep-30-1999(8)
27.3 Restated financial data schedule for quarter ended June-30-1999(8)
27.4 Restated financial data schedule for quarter ended Mar-31-1999(8)
27.5 Restated financial data schedule for fiscal year ended Dec-31-1998(8)
27.6 Restated financial data schedule for quarter ended Sep-30-1998(8)
27.7 Restated financial data schedule for quarter ended Jun-30-1998(8)
27.8 Restated financial data schedule for quarter ended Mar-31-1998(8)
27.9 Restated financial data schedule for fiscal year ended Dec-31-1997(8)
27.10 Restated financial data schedule for quarter ended Sep-30-1997(8)
27.11 Restated financial data schedule for quarter ended Jun-30-1997(8)
27.12 Restated financial data schedule for quarter ended Mar-31-1997(8)
</TABLE>
- --------
(1) Incorporated by reference to Form S-1 Registration Statement (No. 33-40152)
of Mutual Risk Management Ltd. declared effective June 25, 1991.
16
<PAGE>
(2) Incorporated by reference to the 1991 Annual Report on Form 10-K of Mutual
Risk Management Ltd.
(3) This exhibit is a management contract or compensatory plan or arrangement.
(4) Incorporated by reference to Form 10-Q of Mutual Risk Management Ltd. for
the period ended June 30, 1996.
(5) Incorporated by reference to 1995 Annual Report on Form 10-K of Mutual
Risk Management Ltd.
(6) Incorporated by reference to 1996 Annual Report on Form 10-K of Mutual
Risk Management Ltd.
(7) Incorporated by reference to 1998 Annual Report on Form 10-K of Mutual
Risk Management Ltd.
(8) Incorporated by reference to 1999 Annual Report on Form 10-K of Mutual
Risk Management Ltd.
B. Financial Statements and Financial Statement Schedules
<TABLE>
<S> <C>
Consolidated Financial Statements..................................... F-1
Notes to Consolidated Financial Statements............................ F-5
Independent Auditors' Report.......................................... F-35
Schedule II Condensed Financial Information of Registrant............. S-1
Schedule VI Supplementary Insurance Information....................... S-4
</TABLE>
All other schedules required by Article 7 of Regulation S-X are not required
under the related instructions, are inapplicable or are included elsewhere in
this filing, and therefore have been omitted.
C. Reports on Form 8-K
None
17
<PAGE>
MUTUAL RISK MANAGEMENT LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
At December 31,
----------------------
1999 1998(1)
---------- ----------
(In thousands)
<S> <C> <C>
ASSETS
Cash and cash equivalents............................... $ 155,387 $ 117,423
Investments--Held in available for sale account at fair
value (Amortized cost $466,857; 1998--$455,648)........ 451,920 462,434
---------- ----------
Total marketable investments.......................... 607,307 579,857
Other investments....................................... 28,426 20,664
Investment income due and accrued....................... 5,173 5,252
Accounts receivable..................................... 564,590 353,869
Reinsurance receivables................................. 1,729,936 1,079,563
Deferred expenses....................................... 30,406 27,215
Prepaid reinsurance premiums............................ 281,078 206,487
Fixed assets............................................ 28,880 19,671
Deferred tax benefit.................................... 4,233 899
Goodwill................................................ 52,924 52,901
Other assets............................................ 6,831 5,616
Assets held in separate accounts........................ 693,390 722,263
---------- ----------
Total Assets.......................................... $4,033,174 $3,074,257
========== ==========
LIABILITIES & SHAREHOLDERS' EQUITY
LIABILITIES
Reserve for losses and loss expenses.................... $1,860,120 $1,190,426
Reserve for unearned premiums........................... 335,265 241,893
Pension fund reserves................................... 67,981 79,753
Claims deposit liabilities.............................. 27,924 37,448
Accounts payable........................................ 353,966 243,418
Accrued expenses........................................ 11,054 12,052
Taxes payable........................................... 23,181 14,850
Bridging loan........................................... 117,000 --
Other loans payable..................................... 4,049 3,538
Prepaid fees............................................ 58,026 47,126
Debentures.............................................. 110,898 125,485
Other liabilities....................................... 12,176 12,839
Liabilities related to separate accounts................ 693,390 722,263
---------- ----------
Total Liabilities..................................... 3,675,030 2,731,091
---------- ----------
SHAREHOLDERS' EQUITY
Common Shares--Authorized 180,000,000 (par value $0.01)
Issued and outstanding 41,205,191 (excluding 2,636,716
cumulative shares held in treasury) (1998--
42,205,596)............................................ 412 422
Additional paid-in capital.............................. 110,755 114,916
Accumulated other comprehensive (loss) income........... (14,937) 4,456
Retained earnings....................................... 261,914 223,372
---------- ----------
Total Shareholders' Equity............................ 358,144 343,166
---------- ----------
Total Liabilities & Shareholders' Equity.............. $4,033,174 $3,074,257
========== ==========
</TABLE>
- --------
(1) Prior periods have been restated to reflect a pooling of interests
following the acquisition of Captive Resources, Inc.
See accompanying notes to consolidated financial statements
F-1
<PAGE>
MUTUAL RISK MANAGEMENT LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
Year ended December 31,
----------------------------------
1999 1998(1) 1997(1)
---------- ---------- ----------
(In thousands except per share
data)
<S> <C> <C> <C>
REVENUES
Fee income............................... $ 177,711 $ 157,271 $ 121,258
Premiums earned.......................... 181,798 101,913 84,200
Net investment income.................... 33,616 29,590 26,592
Realized capital losses.................. (5,199) (1,003) (1,608)
Other (losses) income.................... (300) 143 56
---------- ---------- ----------
Total Revenues.......................... 387,626 287,914 230,498
---------- ---------- ----------
EXPENSES
Losses and loss expenses incurred........ 147,705 78,258 49,857
Acquisition costs........................ 51,582 26,061 35,816
Operating expenses....................... 128,524 101,687 76,795
Interest expense......................... 6,807 6,819 6,752
Other expenses........................... 2,701 2,119 1,169
---------- ---------- ----------
Total Expenses.......................... 337,319 214,944 170,389
---------- ---------- ----------
INCOME BEFORE INCOME TAXES AND MINORITY
INTEREST.................................. 50,307 72,970 60,109
Income taxes (benefit)................... (365) 8,536 10,632
---------- ---------- ----------
INCOME BEFORE MINORITY INTEREST............ 50,672 64,434 49,477
Minority interest........................ (52) 93 --
---------- ---------- ----------
INCOME BEFORE EXTRAORDINARY LOSS........... 50,620 64,527 49,477
Extraordinary loss on extinguishment of
debentures, net of tax.................. 182 -- --
---------- ---------- ----------
NET INCOME................................. 50,438 64,527 49,477
Preferred share dividends................ -- -- (105)
---------- ---------- ----------
NET INCOME AVAILABLE TO COMMON
SHAREHOLDERS.............................. 50,438 64,527 49,372
OTHER COMPREHENSIVE INCOME, NET OF TAX
Unrealized (losses) gains on investments,
net of reclassification adjustment...... (19,393) 421 3,987
---------- ---------- ----------
COMPREHENSIVE INCOME....................... $ 31,045 $ 64,948 $ 53,359
========== ========== ==========
EARNINGS PER COMMON SHARE(2)
Net income available to Common
Shareholders:
Basic.................................... $ 1.18 $ 1.56 $ 1.25
Diluted.................................. $ 1.14 $ 1.42 $ 1.15
Dividends per Common Share............... $ 0.25 $ 0.21 $ 0.19
Weighted average number of Common Shares
outstanding--Basic...................... 42,797,133 41,275,156 39,379,122
========== ========== ==========
Weighted average number of Common Shares
outstanding--Diluted.................... 49,606,913 50,233,147 48,785,252
========== ========== ==========
</TABLE>
- --------
(1) Prior periods have been restated to reflect a pooling of interests
following the acquisition of Captive Resources, Inc.
(2) Prior periods' per share calculations have been restated to reflect the
two-for-one stock split to holders of record at September 26, 1997.
See accompanying notes to consolidated financial statements
F-2
<PAGE>
MUTUAL RISK MANAGEMENT LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Series B
Preferred Common Dividend
Treasury Change in Share Share of
Opening Shares Shares Unrealized Net Dividends Dividends Acquired Closing
Balance Issued Purchased Gain (Loss)(4) Income Declared(1) Declared(2) Companies(6) Balance
-------- ------- --------- -------------- ------- ----------- ----------- ------------ --------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Year Ended December 31,
1999
Common Shares.......... $ 422 $ 16 $ (26) $ -- $ -- $ -- $ -- $ -- $ 412
Additional paid-in
capital............... 114,916 25,626 (29,787) -- -- -- -- -- 110,755
Accumulated other
comprehensive income
(loss)................ 4,456 -- -- (19,393) -- -- -- -- (14,937)
Retained earnings...... 223,372 -- -- -- 50,438 -- (11,005) (891) 261,914
-------- ------- -------- -------- ------- ----- -------- ------- --------
Total Shareholders'
Equity at December 31,
1999.................. $343,166 $25,642 $(29,813) $(19,393) $50,438 $ -- $(11,005) $ (891) $358,144
======== ======= ======== ======== ======= ===== ======== ======= ========
Year Ended December 31,
1998(5)
Common Shares.......... $ 399 $ 23 $ -- $ -- $ -- $ -- $ -- $ -- $ 422
Additional paid-in
capital............... 89,339 25,577 -- -- -- -- -- -- 114,916
Accumulated other
comprehensive income.. 4,035 -- -- 421 -- -- -- -- 4,456
Retained earnings...... 169,801 -- -- -- 64,527 -- (8,826) (2,130) 223,372
-------- ------- -------- -------- ------- ----- -------- ------- --------
Total Shareholders'
Equity at December 31,
1998.................. $263,574 $25,600 $ -- $ 421 $64,527 $ -- $ (8,826) $(2,130) $343,166
======== ======= ======== ======== ======= ===== ======== ======= ========
Year Ended December 31,
1997(3)(5)(7)
Common Shares.......... $ 392 $ 7 $ -- $ -- $ -- $ -- $ -- $ -- $ 399
Additional paid-in
capital............... 82,049 7,290 -- -- -- -- -- -- 89,339
Accumulated other
comprehensive income.. 48 -- -- 3,987 -- -- -- -- 4,035
Retained earnings...... 128,854 -- -- -- 49,477 (105) (7,311) (1,114) 169,801
-------- ------- -------- -------- ------- ----- -------- ------- --------
Total Shareholders'
Equity at December 31,
1997.................. $211,343 $ 7,297 $ -- $ 3,987 $49,477 $(105) $ (7,311) $(1,114) $263,574
======== ======= ======== ======== ======= ===== ======== ======= ========
</TABLE>
- --------
(1) Dividend per share amount was $.04 for 1997.
(2) Dividend per share amounts were $.25, $.21 and $.19 for 1999, 1998 and
1997 respectively (prior periods restated for stock splits).
(3) Effective September 26, 1997 the Company effected a two-for-one stock
split recorded in the form of a stock dividend. 18,741,121 Common Shares
were issued in respect of this split. Prior periods have been restated.
(4) Net of reclassification adjustment, net of tax (see Note 8).
(5) Prior periods have been restated to reflect a pooling of interests
following the acquisition of Captive Resources, Inc.
(6) Prior to the merger, International Advisory Services paid cash dividends
of $1.51 and $1.09 in 1998 and 1997 respectively based on the equivalent
number of Common Shares that would have been outstanding on the dividend
dates after giving effect to the pooling of interests in 1998. Captive
Resources, Inc. paid cash dividends of $.51, $2.05 and $2.18 in 1999, 1998
and 1997 respectively based on the equivalent number of Common Shares that
would have been outstanding on the dividend dates after giving effect to
the pooling of interests in 1999.
(7) See Note 18.
See accompanying notes to consolidated financial statements
F-3
<PAGE>
MUTUAL RISK MANAGEMENT LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended December 31,
----------------------------
1999 1998(1) 1997(1)
-------- -------- --------
(In thousands)
<S> <C> <C> <C>
NET CASH FLOW FROM OPERATING ACTIVITIES
Net income....................................... $ 50,438 $ 64,527 $ 49,477
Items not affecting cash
Depreciation.................................... 8,306 6,021 4,372
Amortization of investments..................... (1,344) (1,907) (1,608)
Net loss on sale of investments................. 5,587 1,498 1,619
Other investment gains.......................... (361) (599) --
Amortization of convertible debentures.......... 5,997 6,605 6,500
Deferred tax benefit............................ (1,004) 3,194 (2,789)
Other items..................................... 2,254 1,570 1,002
Net changes in non-cash balances relating to
operations:
Accounts receivable............................. (210,721) (166,668) (38,469)
Reinsurance receivables......................... (650,373) (448,866) (280,379)
Investment income due and accrued............... 79 (1,452) 1,191
Deferred expenses............................... (3,191) 2,777 (9,380)
Prepaid reinsurance premiums.................... (74,591) (50,469) (82,430)
Other assets.................................... (1,215) 2,050 (1,512)
Reserve for losses and loss expenses............ 669,694 473,965 296,724
Prepaid fees.................................... 10,900 6,414 7,498
Reserve for unearned premium.................... 93,372 53,504 94,647
Accounts payable................................ 110,548 102,331 1,843
Taxes payable................................... 8,331 (161) 5,748
Accrued expenses................................ (998) 3,896 2,102
Other liabilities............................... (1,074) 4,121 196
-------- -------- --------
NET CASH FLOW FROM OPERATING ACTIVITIES.......... 20,634 62,351 56,352
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of investments--Available for
sale........................................... 85,312 145,745 209,745
Proceeds from maturity of investments--Available
for sale....................................... 53,183 57,175 44,685
Fixed assets purchased.......................... (17,732) (9,890) (8,483)
Investments purchased--Available for sale....... (153,949) (268,868) (243,861)
Acquisitions and other investments.............. (10,130) (28,886) (25,792)
Proceeds from sale of other investments......... 577 2,929 --
Other items..................................... 104 9 21
-------- -------- --------
NET CASH APPLIED TO INVESTING ACTIVITIES......... (42,635) (101,786) (23,685)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Loan repayment and interest received............ -- 389 419
Bridging loan received.......................... 117,000 -- --
Other loans received............................ 511 1,379 --
Redemption of preferred shares.................. -- -- (2,952)
Extinguishment of convertible debentures........ (6,163) -- --
Proceeds from shares issued..................... 11,209 8,055 7,297
Purchase of Treasury shares..................... (29,813) -- --
Claims deposit liabilities...................... (9,524) (4,997) (3,244)
Pension fund reserves........................... (11,773) 79,753 --
Dividends paid.................................. (11,482) (10,427) (8,301)
-------- -------- --------
NET CASH FLOW FROM (APPLIED TO) FINANCING
ACTIVITIES...................................... 59,965 74,152 (6,781)
-------- -------- --------
Net increase in cash and cash equivalents....... 37,964 34,717 25,886
Cash and cash equivalents at beginning of year.. 117,423 82,706 56,820
-------- -------- --------
Cash and cash equivalents at end of year........ $155,387 $117,423 $ 82,706
======== ======== ========
Supplemental cash flow information:
Interest paid................................... $ 810 $ 214 $ 252
======== ======== ========
Income taxes paid, net.......................... $ 3,217 $ 5,622 $ 11,848
======== ======== ========
</TABLE>
- --------
(1) Prior periods have been restated to reflect a pooling of interests
following the acquisition of Captive Resources, Inc.
See accompanying notes to consolidated financial statements
F-4
<PAGE>
MUTUAL RISK MANAGEMENT LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--DECEMBER 31, 1999
1. GENERAL
Mutual Risk Management Ltd. (the "Company") was incorporated under the laws
of Bermuda in 1977. The Company is a holding company engaged, through its
subsidiaries, in providing risk management and financial services in the
United States, Bermuda, Barbados, the Cayman Islands and Europe. The "IPC
Companies" offer the IPC Program, an alternative risk facility for insureds.
The Company also provides administrative, accounting and reinsurance services
for unaffiliated captive insurers. Legion Insurance Company, a Pennsylvania
insurance company, Legion Indemnity Company, an Illinois excess and surplus
lines insurance company and Villanova Insurance Company, a Massachusetts
insurance company (together "Legion" or the "Legion Companies") act as policy-
issuing companies on many of the IPC Programs reinsuring a portion of the
liability and premium to one of the IPC Companies. MRM Financial Services Ltd.
provides financial services to offshore mutual funds and other companies.
Other subsidiaries provide specialty brokerage, proprietary loss control
services and underwriting management.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
These Consolidated Financial Statements have been prepared in accordance
with generally accepted accounting principles prevailing in the United States
("GAAP") and are presented in United States Dollars.
A. Consolidation
(i) General
The Consolidated Financial Statements include the accounts of the Company
and all of its subsidiaries. All significant intercompany transactions and
balances have been eliminated on consolidation. Prior period results have been
restated to reflect a pooling of interests following the acquisition of
Captive Resources, Inc. ("CRI") (See note 18). All of the voting common shares
of the IPC companies are owned by wholly owned subsidiaries of the Company.
All of the earnings, assets and liabilities of the IPC companies attributable
to the common shareholders are consolidated on a line by line basis. All of
the non-voting preferred shares of the IPC companies are owned by program
holders (see note 2A(ii)). Management is required to make estimates that
affect the amounts reported in the Consolidated Financial Statements and
accompanying notes. Actual results may differ from those estimates.
(ii) Assets Held in and Liabilities Related to Separate Accounts
A substantial majority of the assets and liabilities of the IPC Companies
represents assets under management and related liabilities of the IPC
Programs. The program holders, through their ownership of preferred shares in
the IPC Companies, enter into a Preferred Shareholder Agreement. The preferred
shares are redeemable after five years. The Preferred Shareholder Agreements
provide for the payment of dividends to the preferred shareholders based on
Premiums earned, investment income, expenses paid and losses and loss expenses
incurred in each separate account. The final dividend on a program is
determined when all incurred losses in all underwriting years of a program are
ultimately paid; the preferred shareholder may not terminate its indemnity
obligation under the Preferred Shareholder Agreement before this time. Under
the Preferred Shareholder Agreement the program holder assumes investment and
underwriting risk and the IPC Company receives an administrative fee for
managing the program. Accordingly, the Company treats the Premium written in
connection with these programs, whether written directly or assumed as
reinsurance, as Premiums ceded to the separate accounts of the IPC Companies
and does not include such amounts in the Company's Premiums earned on the
Consolidated Statements of Income and Comprehensive Income. This Premium ceded
amounted to $257.8 million in 1999 (1998--$251.4 million; 1997--$277.4
million) of which over 80% in each year relates to workers' compensation
risks. The assets and liabilities of the IPC Companies relating to the
preferred shareholders interest are included within "Assets held in and
Liabilities related to separate accounts" on the
F-5
<PAGE>
MUTUAL RISK MANAGEMENT LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Consolidated Balance Sheets. Included in these assets are cash and marketable
investments of $340.1 million at December 31, 1999 (1998--$381.8 million) and
other assets of $220.0 million (1998--$243.5 million).
B. Investments
Investments are comprised of bonds, redeemable preferred shares and mutual
funds. All Investments are classified as available for sale in accordance with
SFAS 115 and are reported at fair market value with unrealized gains and
losses, net of tax, included in Accumulated other comprehensive income in
Shareholders' equity.
Realized gains and losses on the sale of Investments are recognized in Net
income using the specific identification basis for Bonds and the average cost
method for Mutual Funds. Investments which incur a decline in value, which is
other than temporary, are written down to fair value as a new cost basis with
the amount of the write down included in Net income. Investment income is
accrued as earned and includes amortization of premium and discount relative
to bonds acquired at amounts other than their par value.
C. Revenue Recognition
(i) Policy issuing fees earned are recorded as the premium is written and
earned over the applicable policy period. The unearned portion is included in
Prepaid fees on the Consolidated Balance Sheets.
(ii) Underwriting fees of the IPC Companies are earned over the applicable
policy period. The unearned portion of such fees is included in Prepaid fees
on the Consolidated Balance Sheets.
(iii) Investment fees earned by the IPC Companies are accrued on a daily
basis.
(iv) Commissions and brokerage fees are recorded and earned when the
business is placed with the reinsurance carrier, at which time substantially
all of the services have been performed.
(v) Premiums written and assumed are recorded on an accrual basis. Premiums
earned are calculated on a pro-rata basis over the terms of the applicable
underlying insurance policies with the unearned portion deferred on the
Consolidated Balance Sheets as Reserve for unearned premiums. Reinsurance
premiums ceded are similarly pro-rated with the prepaid portion recorded as an
asset in the Consolidated Balance Sheets. Premiums written which are related
to the separate accounts of the IPC Companies are included in Premiums ceded
(see Note 2A(ii)).
(vi) Net investment income is included after deducting various items as
detailed in Note 5C.
(vii) Realized capital (losses) gains include gains and losses on the sale
of investments available for sale, other investments and fixed assets (see
Note 5B(ii)).
D. Losses and Loss Expenses Incurred
Losses and related loss adjustment expenses are charged to income as they
are incurred and are net of losses recovered and recoverable of $1,185.7
million in 1999 (1998--$657.8 million; 1997--$521.9 million). Amounts
recoverable from reinsurers are estimated in a manner consistent with the
claim liability associated with the reinsured policy. Included in loss
reserves are gross loss reserves of $136.0 million and $121.0 million at
December 31, 1999 and 1998 which have been discounted by $39.5 million and
$36.2 million respectively, assuming interest rates of approximately 6% for
medical malpractice reserves and 4% for specific and aggregate workers'
compensation reserves. These reserves are also discounted for regulatory
filings. After reinsurance, the net effect of this discounting was to decrease
Net income by $.8 million in 1999 and increase Net income by $.9 million and
$.1 million in 1998 and 1997. Discounting also reduced net loss reserves by
$3.8 million and $4.7 million at December 31, 1999 and 1998 respectively.
F-6
<PAGE>
MUTUAL RISK MANAGEMENT LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Reserves are established for losses and loss adjustment expenses relating to
claims which have been reported on the basis of evaluations of independent
claims adjusters under the supervision of the Company's claims staff. In
addition, reserves are established, in consultation with the Company's
independent actuaries, for losses which have occurred but have not yet been
reported to the Company and for adverse development of reserves on reported
losses. Reinsurance receivables are shown separately on the Consolidated
Balance Sheets. Management believes that the resulting estimate of the
liability for losses and loss adjustment expenses at December 31, 1999 and
1998 is adequate to cover the ultimate net cost of losses and loss expenses
incurred, however, such liability is necessarily an estimate and no
representation can be made that the ultimate liability will not exceed such
estimate.
E. Claims Deposit Liabilities
The Company records certain programs that do not meet the conditions for
reinsurance accounting as Claims deposit liabilities on the Consolidated
Balance Sheets. In October 1998, the Accounting Standards Executive Committee
issued Statement Of Position 98-7, "Deposit Accounting: Accounting for
Insurance and Reinsurance Contracts That Do Not Transfer Insurance Risk". The
Statement provides guidance on how to account for insurance and reinsurance
contracts that do not transfer insurance risk under deposit accounting. This
Statement is effective for fiscal years beginning after June 15, 1999 with
early adoption encouraged. The Company does not expect the Statement to have a
material impact on its financial position or results of operations.
F. Income Taxes
The Company records its income tax liability and deferred tax asset in
accordance with SFAS 109. In accordance with this statement, the Company
records deferred income taxes which reflect the net tax effect of the
temporary differences between the carrying amounts of assets and liabilities
for financial reporting purposes and the amounts used for income tax purposes.
G. Depreciation and Amortization
Depreciation of furniture and equipment is provided on a straight-line basis
over their estimated useful lives ranging from 2 to 10 years. Amortization of
leasehold improvements is computed on a straight-line basis over the terms of
the leases. Accumulated depreciation at December 31, 1999 amounted to $29
million (1998--$21.1 million). Goodwill related to the acquisition of
subsidiaries is amortized on a straight-line basis over 25 to 40 years, is
evaluated periodically for any impairment in value and is included in Other
expenses on the Consolidated Statements of Income and Comprehensive Income.
Accumulated amortization at December 31, 1999 amounted to $7.6 million (1998--
$4.9 million).
H. Deferred Expenses
Deferred expenses which consist primarily of policy acquisition costs are
deferred and charged to income on a pro-rata basis over the periods of the
related policies.
I. Earnings per Common Share
Basic earnings per share is based on weighted average common shares and
excludes any dilutive effects of options and convertible securities. Diluted
earnings per share assumes the conversion of dilutive convertible securities
and the exercise of all dilutive stock options (see Note 14). Earnings per
share for 1997 have been restated to reflect the two-for-one stock split
effective September 26, 1997 (see Note 12). All earnings per share have been
restated to reflect the pooling of interests following the acquisition of
Captive Resources, Inc.
F-7
<PAGE>
MUTUAL RISK MANAGEMENT LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
J. Cash and Cash Equivalents
Cash and cash equivalents include cash on hand, money market instruments and
other debt issues purchased with an original maturity of ninety days or less.
K. Zero Coupon Convertible Exchangeable Subordinated Debentures
The Debentures are recorded at original issue price plus accrued original
issue discount. The current amortization of the original issue discount is
included in Interest expense on the Consolidated Statements of Income and
Comprehensive Income.
L. Stock-Based Compensation
The Company applies APB Opinion 25 and related interpretations in accounting
for its stock option plans and accordingly, does not recognize compensation
cost as all options are issued with an exercise price equal to the market
price of the stock on the date of issue. Note 13 contains a summary of the
pro-forma effects to reported Net income and earnings per share for 1999, 1998
and 1997 had the Company elected to recognize compensation cost based on the
fair value of the options granted at grant date as prescribed by SFAS 123.
M. Pension Fund Reserves
Pension fund reserves represent receipts from the issuance of pension
investment contracts. Such receipts are considered deposits on investment
contracts that do not have mortality or morbidity risk. Account balances in
the accumulation phase are increased by deposits received and interest
credited and are reduced by withdrawals and administrative charges.
Calculations of contract holder account balances for investment contracts
reflect interest crediting rates ranging from 2.75% to 7.25% at December 31,
1999 (1998--3.05% to 7.25%), based on contract provisions, the Company's
experience and industry standards. At December 31, 1999, the amount of pension
fund reserves related to products in the accumulation phase was $62.5 million
(1998--$74.6 million).
Upon retirement, individuals can convert their accumulated pension fund
account balances into a benefit stream by purchasing a payout annuity from the
Company. Single premium life reserves are established for the payout annuities
in amounts adequate to meet the estimated future obligations of the policies
in force. The calculation of these reserves involves the use of estimates
concerning such factors as mortality rates, interest rates averaging 5.82% at
December 31, 1999 (1998--5.90%), and future expense levels applicable to the
individual policies. Mortality assumptions are based on various actuarial
tables. These assumptions consider Company experience and industry standards.
To recognize the uncertainty in the reserve calculation, the reserves include
reasonable provisions for adverse deviations from those estimates. At December
31, 1999, the amount of pension fund reserves related to payout annuities was
$5.4 million (1998--$5.2 million).
3. REINSURANCE AND CLIENT INDEMNIFICATION
A. Reinsurance contracts do not relieve the Company from its obligations to
policyholders. Failure of reinsurers to honor their obligations could result
in losses to the Company and allowances are established for amounts deemed
uncollectible. The Company evaluates the financial condition of its reinsurers
to minimize its exposure to losses from reinsurer insolvencies.
B. At December 31, 1999, Losses recoverable and Prepaid reinsurance of
$2,011.0 million (1998--$1,286.1 million) had been ceded to reinsurers other
than the IPC Companies. $1,663.2 million of this amount (1998--$1,122.4
million) has been ceded to reinsurers licensed in the United States which are
not required to
F-8
<PAGE>
MUTUAL RISK MANAGEMENT LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
provide letters of credit or other collateral to secure their obligations. One
such U.S. reinsurer accounted for $207.6 million (1998--$191.0 million). The
remaining $347.8 million of reinsurance ceded (1998--$163.7 million) was ceded
to reinsurers not licensed in the United States, including $25.2 million ceded
to companies managed by the Company (1998--$12.4 million). These non-U.S.
reinsurers have provided collateral security to the Company in the form of
letters of credit and cash at December 31, 1999 of $114.0 million (1998--$42.2
million). Letters of credit held by the Company are issued by and/or confirmed
by member banks of the U.S. Federal Reserve. The Company regularly reviews the
credit exposure which it has to each bank, together with that bank's financial
position and requires replacement of the collateral security in cases where
the exposure to the bank exceeds acceptable levels. The Company's largest
exposure to an individual bank amounted to $20.1 million at December 31, 1999
(1998--$7.5 million). The IPC Companies have a $350 million (1998--$320
million) Letter of Credit facility pursuant to which letters of credit are
issued on their behalf to the Legion Companies and certain other US insurance
companies. This facility is fully collateralized by incoming letters of credit
and funds on deposit. The facility is guaranteed by the Company. At December
31, 1999 a reserve for uncollectible reinsurance of $.2 million (1998--$.3
million) was outstanding.
C. The Company's Reserve for unearned premiums and Reserve for losses and
loss expenses exclude reserves related to Premiums ceded to the IPC Companies,
where the program holders assume the underwriting risk relating to such
premium (see Note 2A(ii)). These reserves are included in Liabilities related
to separate accounts and amounted to $495.1 million at December 31, 1999
(1998--$450.3 million). Clients of the Company's IPC Program generally agree,
as part of a Shareholder Agreement, to indemnify the Company against certain
underwriting losses on the IPC Program. Clients generally provide letters of
credit or cash deposits as collateral for this indemnification, either in the
full amount of the potential net loss or to the level of expected losses as
projected by the Company. These contractual indemnifications from clients,
whether fully or partially secured, amounted to approximately $104.7 million
at December 31, 1999 (1998--$90.6 million) of which $51.5 million (1998--$36.3
million) is uncollateralized. The uncollateralized amounts will vary based on
the underwriting results of the IPC Programs. Management reviews its
collateral security position at the inception and renewal of each IPC Program
in order to minimize the risk of loss. In order for the Company to sustain a
loss on the portion of such indemnity agreement secured by a letter of credit,
the Company would have to be unable to collect from both the client and the
bank issuing the letter of credit. The Company has a credit exposure in the
event that losses exceed their expected level and the client is unable or
unwilling to honor its indemnity to the Company or fails to pay the premium
due. For these reasons the Company has established provisions for losses on
certain of these programs. These provisions are net of a reinsurance recovery
of $14.7 million under a contingency excess of loss policy at December 31,
1999. These provisions, which totaled $18.0 million at December 31, 1999
(1998--$7.3 million), reduced the level of Risk management fees by $3.1
million, $.9 million and $1.1 million for the years ended December 31, 1999,
1998 and 1997 respectively. These provisions also adversely impacted the
underwriting results for 1999 by $7.6 million (1998--$.8 million; 1997--nil).
During 1999, the Company initiated binding arbitration proceedings for the
payment of reinsurance recoverables from reinsurers who have withheld payments
due to the Company. The amounts due to the Company relate primarily to
reinsurance on workers' compensation coverage. While such reinsurance
recoverable amounts are material to the Company's results of operations and
financial position, Company management believes it will ultimately prevail in
such arbitrations and any related actions that may arise. As such, no
provision for any adverse determinations in these pending arbitrations has
been made in the consolidated financial statements of the Company.
The Company is involved in other legal actions, arbitrations and
contingencies occurring in the normal course of business. In the opinion of
management, the outcome of these matters is not expected to have a material
adverse effect on the results of operations or financial position of the
Company.
F-9
<PAGE>
MUTUAL RISK MANAGEMENT LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
D. Premiums earned are the result of the following:
<TABLE>
<CAPTION>
Year ended December 31,
--------------------------------------------------------------
1999 1998 1997
Premiums Premiums Premiums
---------------------- ------------------ ------------------
Written Earned Written Earned Written Earned
---------- ---------- -------- -------- -------- --------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Direct.................. $1,129,935 $1,018,761 $790,776 $753,463 $642,511 $542,907
Assumed................. 64,099 54,724 59,657 48,291 12,917 15,492
Ceded to IPC
Companies(1)........... (257,848) (233,953) (251,443) (248,335) (277,448) (195,665)
Ceded to third parties.. (735,669) (657,734) (494,042) (451,506) (281,810) (278,534)
---------- ---------- -------- -------- -------- --------
Net Premiums............ $ 200,517 $ 181,798 $104,948 $101,913 $ 96,170 $ 84,200
========== ========== ======== ======== ======== ========
</TABLE>
- --------
(1) See Note 2A (ii)
4. RESERVE FOR LOSSES AND LOSS EXPENSES
The following table sets forth a reconciliation of beginning and ending
reserves for losses and loss expenses.
<TABLE>
<CAPTION>
Year ended December 31,
--------------------------------
1999 1998 1997
---------- ---------- --------
(In thousands)
<S> <C> <C> <C>
Gross reserves for losses and loss
adjustment expenses, beginning of year..... $1,190,426 $ 716,461 $419,737
Recoverable from reinsurers................. 1,079,563 630,697 350,318
---------- ---------- --------
Net reserves for losses and loss adjustment
expenses, beginning of year................ 110,863 85,764 69,419
Provision for losses and loss adjustment
expenses for claims occurring in:
Current year.............................. 140,574 74,476 50,301
Prior years............................... 7,131 3,782 (444)
---------- ---------- --------
Total losses and loss adjustment
expenses incurred...................... 147,705 78,258 49,857
========== ========== ========
Payments for losses and loss adjustment
expenses for claims occurring in:
Current year.............................. (61,697) (15,039) (10,850)
Prior years............................... (66,687) (38,120) (22,662)
---------- ---------- --------
Total payments.......................... (128,384) (53,159) (33,512)
========== ========== ========
Net reserves for losses and loss adjustment
expenses, end of year...................... 130,184 110,863 85,764
Recoverable from reinsurers................. 1,729,936 1,079,563 630,697
---------- ---------- --------
Gross reserves for losses and loss
adjustment expenses, end of year........... $1,860,120 $1,190,426 $716,461
========== ========== ========
</TABLE>
5. INVESTMENTS
A. Cash and cash equivalents include amounts invested in commercial paper
and discount notes at December 31, 1999 of $64.8 million (1998--$29.1
million). Substantially all of the remaining amount is invested in money
market or interest-bearing bank accounts.
F-10
<PAGE>
MUTUAL RISK MANAGEMENT LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
B. (i) All Investments are held as available for sale. The amortized cost
and fair market value are as follows:
<TABLE>
<CAPTION>
At December 31, 1999
-------------------------------------------
Amortized Unrealized Unrealized Fair Market
Cost Gain Loss Value
--------- ---------- ---------- -----------
(In thousands)
<S> <C> <C> <C> <C>
U.S. Treasury Securities and
Obligations of U.S. Government
Corporations and Agencies......... $180,747 $ 274 $ 3,532 $177,489
Corporate debt securities.......... 182,827 102 9,846 173,083
-------- ------ ------- --------
Total Bonds........................ 363,574 376 13,378 350,572
Redeemable Preferred Shares........ 2,068 -- 377 1,691
-------- ------ ------- --------
365,642 376 13,755 352,263
Mutual Funds(1).................... 101,215 1,814 3,372 99,657
-------- ------ ------- --------
Total Investments................ $466,857 $2,190 $17,127 $451,920
======== ====== ======= ========
<CAPTION>
At December 31, 1998
-------------------------------------------
Amortized Unrealized Unrealized Fair Market
Cost Gain Loss Value
--------- ---------- ---------- -----------
(In thousands)
<S> <C> <C> <C> <C>
U.S. Treasury Securities and
Obligations of U.S. Government
Corporations and Agencies......... $189,236 $4,499 $ 10 $193,725
Corporate debt securities.......... 155,613 2,519 1,457 156,675
-------- ------ ------- --------
Total Bonds........................ 344,849 7,018 1,467 350,400
Redeemable Preferred Shares........ 2,108 46 6 2,148
-------- ------ ------- --------
346,957 7,064 1,473 352,548
Mutual Funds(1).................... 108,691 2,254 1,059 109,886
-------- ------ ------- --------
Total Investments................ $455,648 $9,318 $ 2,532 $462,434
======== ====== ======= ========
</TABLE>
- --------
(1) The Company invests in Mutual Funds with fair market values of $87 million
(1998--$102 million) which are administered by MRM Financial Services
Ltd., a wholly-owned subsidiary of the Company.
The Company does not have any investment in a single corporate security
which exceeds 1.4% of total bonds at December 31, 1999 (1998--1.4%).
The following unrealized gains and losses on available for sale investments
have been recorded in Accumulated other comprehensive income in Shareholders'
equity:
<TABLE>
<CAPTION>
Gross Unrealized Net Unrealized
Gains (losses) Tax Gains (losses)
---------------- ------- --------------
(In thousands)
<S> <C> <C> <C>
January 1, 1997........................ $ 320 $ (272) $ 48
Movement............................... 5,531 (1,544) 3,987
-------- ------- --------
December 31, 1997...................... 5,851 (1,816) 4,035
Movement............................... 935 (514) 421
-------- ------- --------
December 31, 1998...................... 6,786 (2,330) 4,456
Movement............................... (21,723) 2,330 (19,393)
-------- ------- --------
December 31, 1999...................... $(14,937) $ -- $(14,937)
======== ======= ========
</TABLE>
F-11
<PAGE>
MUTUAL RISK MANAGEMENT LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table sets forth certain information regarding the investment
ratings of the Company's Bond and Redeemable Preferred Share portfolio.
<TABLE>
<CAPTION>
December 31, 1999 December 31, 1998
-------------------- --------------------
Amortized Amortized
Cost Percentage Cost Percentage
--------- ---------- --------- ----------
(In thousands)
<S> <C> <C> <C> <C>
Ratings(1)
AAA................................... $173,132 47.35% $202,561 58.39%
AA.................................... 46,252 12.65% 46,567 13.42%
A..................................... 111,550 30.51% 74,448 21.46%
BBB................................... 25,164 6.88% 11,952 3.44%
BB.................................... 9,544 2.61% 10,929 3.15%
B..................................... 0 0.00% 500 0.14%
-------- ------ -------- ------
Total................................. $365,642 100.00% $346,957 100.00%
======== ====== ======== ======
</TABLE>
- --------
(1) Ratings as assigned by Standard & Poor's Corporation.
The maturity distribution of Investments in Bonds and Redeemable Preferred
Shares is as follows:
<TABLE>
<CAPTION>
December 31, 1999 December 31, 1998
--------------------- ---------------------
Amortized Fair Market Amortized Fair Market
Cost Value Cost Value
--------- ----------- --------- -----------
(In thousands)
<S> <C> <C> <C> <C>
Due in one year or less........... $ 27,139 $ 26,996 $ 23,836 $ 24,035
Due in one year through five
years............................ 111,017 109,728 84,372 85,895
Due in five years through ten
years............................ 82,191 77,758 76,871 78,331
Due after ten years............... 145,295 137,781 161,878 164,287
-------- -------- -------- --------
Total............................. $365,642 $352,263 $346,957 $352,548
======== ======== ======== ========
</TABLE>
(ii) Realized gains and losses:
<TABLE>
<CAPTION>
Year ended December 31,
---------------------------
1999 1998 1997
------- -------- --------
(In thousands)
<S> <C> <C> <C>
Proceeds from sale of Investments
--held as available for sale..................... $85,312 $145,745 $209,745
======= ======== ========
Realized gains on Investments
--held as available for sale..................... $ 932 $ 1,703 $ 1,636
Realized losses on Investments
--held as available for sale..................... (6,519) (3,201) (3,255)
------- -------- --------
Net realized losses............................... (5,587) (1,498) (1,619)
Other gains....................................... 388 495 11
------- -------- --------
Realized capital losses........................... $(5,199) $ (1,003) $ (1,608)
======= ======== ========
</TABLE>
F-12
<PAGE>
MUTUAL RISK MANAGEMENT LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
C. Details of investment income by major categories are presented below:
<TABLE>
<CAPTION>
Year ended December 31,
-------------------------
1999 1998 1997
------- ------- -------
(In thousands)
<S> <C> <C> <C>
Cash and cash equivalents............................ $ 5,622 $ 6,054 $ 7,958
Mutual funds......................................... 9,872 9,214 4,729
Preferred stock...................................... 172 79 349
Bonds................................................ 20,502 19,866 16,875
------- ------- -------
Gross investment income.............................. 36,168 35,213 29,911
Claims deposit liabilities, net...................... (1,552) (4,314) (2,450)
Contract expense..................................... (380) (728) (396)
Investment expenses.................................. (620) (581) (473)
------- ------- -------
Net investment income................................ $33,616 $29,590 $26,592
======= ======= =======
</TABLE>
Net investment income is reported after deducting investment income earned
on assets related to Claims deposit liabilities. Contract expense represents
investment income where the Company has contracted to pay this income to the
insured. Investment expenses consisting of investment advisory fees and
custodian charges have been deducted from Net investment income.
D. Legion is required by certain states in which it operates to maintain
special deposits or provide letters of credit. This obligation amounted to
$166.4 million at December 31, 1999 (1998--$152.2 million) and included
deposits of $59.6 million (1998--$60.5 million) and letters of credit of
$106.8 million (1998--$91.7 million).
6. ZERO COUPON CONVERTIBLE EXCHANGEABLE SUBORDINATED DEBENTURES
On October 30, 1995, the Company issued $324.3 million principal amount of
Zero Coupon Convertible Exchangeable Subordinated Debentures ("Debentures")
with an aggregate issue price of $115.0 million. The issue price of each
Debenture was $354.71 and there will be no periodic payments of interest. The
Debentures will mature on October 30, 2015 at $1,000 per Debenture
representing a yield to maturity of 5.25% (computed on a semi-annual bond
equivalent basis). The Debentures are subordinated to all existing and future
senior indebtedness of the Company.
Each Debenture is convertible at the option of the holder at any time on or
prior to maturity, unless previously redeemed or otherwise purchased by the
Company, into Common Shares of the Company at a conversion rate of 21.52
shares per Debenture or an aggregate of 6,978,800 Common Shares. The
Debentures may be purchased by the Company, at the option of the holder, as of
October 30, 2000, October 30, 2005 and October 30, 2010, at the issue price
plus accrued original issue discount. The Company, at its option, may elect to
pay such purchase price on any particular purchase date in cash or Common
Shares, or any combination thereof. After October 30, 2000, each Debenture is
redeemable in cash at the option of the Company for an amount equal to the
issue price plus accrued original issue discount.
Prior to October 30, 2000 the Debentures will be purchased for cash by the
Company, at the option of the holder, in the event of a Fundamental Change (as
defined). In addition, the Company will have the right, under certain
circumstances, to require the holders to exchange the Debentures for
Guaranteed Zero Coupon Exchangeable Subordinated Debentures due 2015 of Mutual
Group Ltd. (the "Exchangeable Debentures"), to be guaranteed on a subordinated
basis by the Company. The Exchangeable Debentures will be exchangeable for the
Company's Common Shares and will otherwise have terms and conditions
substantially identical to the Debentures. During the year Debentures
representing a principal amount of $34.23 million (1998--$24.1 million) were
converted into 736,606 Common Shares (1998--518,503 Common Shares).
F-13
<PAGE>
MUTUAL RISK MANAGEMENT LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
During the year Debentures representing a principal amount of $14 million
were repurchased in the open market for $6.3 million, resulting in an
extraordinary loss of $.18 million, net of tax.
7. BRIDGING LOAN
The Company has entered into a $250 million bridging loan agreement with
various financial institutions. Interest rates on the facility are based on
LIBOR plus .75%. The credit 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, and that Shareholders' equity
shall be greater than or equal to $341,674,000. For these purposes,
Shareholders' equity is to be calculated in accordance with U. S. GAAP, but
excludes any unrealized gains or losses and any goodwill in excess of $55
million.
At December 31, 1999, the Company had $117 million outstanding under this
loan, on which monthly interest payments are made, with the principal sum
being repayable on September 6, 2000. Under the terms of the agreement, and if
the Company was in compliance with the covenants thereunder, the Company has
access to an additional $133 million should the need arise. Under the
agreement the Company has access to this facility for a six month period
ending June 6, 2000.
The Company was in compliance with all the covenants of this bridging loan
agreement as of December 31, 1999. Interest payments on the above loan totaled
$.4 million for the year ended December 31, 1999. The repayment of the loan
has been guaranteed by Mutual Group Ltd., a U.S. subsidiary of the Company.
Additionally, the Common Shares of the Company's significant subsidiaries have
been pledged as collateral for the repayment of the loan.
8. COMPREHENSIVE INCOME
As of January 1, 1998, the Company adopted Statement 130, Reporting
Comprehensive Income. Statement 130 establishes new rules for the reporting
and display of comprehensive income and its components; however, the adoption
of this Statement had no impact on the Company's Net income or Shareholders'
equity. Statement 130 requires unrealized gains or losses on the Company's
available for sale investments, which prior to adoption were reported
separately in Shareholders' equity, to be included in Other comprehensive
income.
<TABLE>
<CAPTION>
Year Ended December 31, 1999
-----------------------------
Before Tax Net of Tax
Amount Tax Amount
---------- ------ ----------
(In thousands)
<S> <C> <C> <C>
Net unrealized (losses) gains on available for
sale investments arising during the year....... $(27,310) $2,702 $(24,608)
Less: reclassification adjustment for losses
realized in net income......................... 5,587 (372) 5,215
-------- ------ --------
Other comprehensive income...................... $(21,723) $2,330 $(19,393)
======== ====== ========
<CAPTION>
Year Ended December 31, 1998
-----------------------------
Amount Tax Amount
---------- ------ ----------
(In thousands)
<S> <C> <C> <C>
Net unrealized (losses) gains on available for
sale investments arising during the year....... $ (563) $ 63 $ (500)
Less: reclassification adjustment for losses
realized in net income......................... 1,498 (577) 921
-------- ------ --------
Other comprehensive income...................... $ 935 $ (514) $ 421
======== ====== ========
</TABLE>
F-14
<PAGE>
MUTUAL RISK MANAGEMENT LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
9. FAIR VALUE OF FINANCIAL INSTRUMENTS
<TABLE>
<CAPTION>
December 31, 1999 December 31, 1998
------------------- -------------------
Carrying Carrying
Amount Fair Value Amount Fair Value
-------- ---------- -------- ----------
(In thousands)
<S> <C> <C> <C> <C>
Investments............................. $451,920 $451,920 $462,434 $462,434
Other investments....................... $ 28,426 $ 28,426 $ 20,664 $ 20,664
Claims deposit liabilities.............. $ 27,924 $ 23,850 $ 37,448 $ 32,624
Debentures.............................. $110,898 $115,001 $125,485 $144,252
Bridging loan........................... $117,000 $117,000 $ -- $ --
</TABLE>
The following methods and assumptions were used to estimate the fair value
of specific classes of financial instruments. The carrying values of all other
financial instruments, as defined by SFAS 107, approximate their fair values
due to their short term nature.
Investments:
The fair market value of Investments is calculated using quoted market
prices.
Other investments:
Other investments consist primarily of privately held companies that do not
have readily ascertainable market values. These investments are initially
recorded at cost and are revalued based principally on substantive events or
factors which could indicate a diminution or appreciation in value.
Claims deposit liabilities:
The fair value of Claims deposit liabilities is calculated by discounting
the actuarially determined ultimate loss payouts at a rate of 6%.
Debentures:
The fair value of the Debentures is calculated using discounted cash flow
analyses based on current borrowing rates for similar types of borrowing
arrangements.
Bridging loan:
The Bridging loan bears interest at a floating rate and is repayable on
September 6, 2000, and as such, the fair value equals the carrying amount.
Assets held in separate accounts:
(a) Within Assets held in separate accounts are cash and marketable
investments with a carrying value and fair value of $471.2 million (1998:
$467.3 million). Fair value is calculated using quoted market prices.
(b) Within the $222.2 million of other assets (1998: $255.0 million) $70.0
million (1998: $78.5 million) are financial instruments. The fair market value
of other assets approximates carrying value due to the short term nature of
these items.
10. INCOME TAXES
The Company is incorporated under the laws of Bermuda and, under current
Bermuda law, is not obligated to pay any taxes in Bermuda based upon income or
capital gains. The Company has received an undertaking
F-15
<PAGE>
MUTUAL RISK MANAGEMENT LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
from the Minister of Finance in Bermuda pursuant to the provisions of the
Exempted Undertakings Tax Protection Act, 1966, which exempts the Company and
its shareholders, other than shareholders ordinarily resident in Bermuda, from
any Bermuda taxes computed on profits, income or any capital asset, gain or
appreciation, or any tax in the nature of estate duty or inheritance tax, at
least until the year 2016.
Mutual Risk Management Ltd. and its non-U.S. subsidiaries, except as
described below, do not consider themselves to be engaged in a trade or
business in the United States and accordingly do not expect to be subject to
direct United States income taxation.
The United States subsidiaries of the Company file a consolidated U.S.
federal income tax return. Mutual Indemnity (U.S.) Ltd. and Premium Securities
Ltd., Bermuda subsidiaries of the Company, have made irrevocable elections to
be taxed as domestic United States corporations.
Income tax (benefit) expense consists of:
<TABLE>
<CAPTION>
Current Deferred Total
------- -------- -------
(In thousands)
<S> <C> <C> <C>
December 31, 1999:
U.S. federal....................................... $ (118) $(1,004) $(1,122)
U.S. state and local............................... 169 -- 169
Foreign............................................ 588 -- 588
------- ------- -------
$ 639 $(1,004) $ (365)
======= ======= =======
December 31, 1998:
U.S. federal....................................... $ 4,603 $ 3,198 $ 7,801
U.S. state and local............................... 171 (4) 167
Foreign............................................ 568 -- 568
------- ------- -------
$ 5,342 $ 3,194 $ 8,536
======= ======= =======
December 31, 1997:
U.S. federal....................................... $11,103 $(2,763) $ 8,340
U.S. state and local............................... 1,160 (26) 1,134
Foreign............................................ 1,158 -- 1,158
------- ------- -------
$13,421 $(2,789) $10,632
======= ======= =======
</TABLE>
The effective total tax rate differed from the statutory U.S. federal tax
rate for the following reasons:
<TABLE>
<CAPTION>
Year ended December 31,
--------------------------
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Statutory U.S. federal tax rate.................... 35.0 % 35.0% 35.0%
Increase (reduction) in income taxes resulting
from:
U.S. state taxes................................. 0.2 0.2 1.2
Tax-exempt interest income....................... (2.5) (2.1) (3.1)
Foreign income not expected to be taxed in the
U.S............................................. (29.3) (18.2) (13.7)
Foreign taxes.................................... 1.2 0.8 1.9
Options.......................................... (6.2) (4.4) (3.7)
Other, net....................................... 0.9 0.4 (0.0)
------- ------- -------
Total............................................ (0.7)% 11.7% 17.6%
======= ======= =======
</TABLE>
F-16
<PAGE>
MUTUAL RISK MANAGEMENT LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December
31, 1999 and 1998 are presented below:
<TABLE>
<CAPTION>
1999 1998
-------- --------
(In thousands)
<S> <C> <C>
Deferred tax assets:
Unearned premiums and fees not deducted for tax........... $ 6,008 $ 7,355
Unpaid losses, discounted for tax......................... 10,164 11,870
Unrealized losses......................................... 3,463 --
Interest rate swap........................................ -- 704
Other..................................................... 120 154
-------- --------
Total gross deferred tax assets......................... 19,755 20,083
======== ========
Deferred tax liabilities:
Deferred acquisition costs................................ (7,090) (5,913)
Deferred marketing expenses............................... (2,577) (2,198)
Deferred market discount.................................. (1,039) (923)
Unrealized gains.......................................... -- (2,330)
Other..................................................... (1,353) (7,820)
-------- --------
Total gross deferred tax liabilities.................... (12,059) (19,184)
======== ========
Deferred tax benefit...................................... $ 7,696 $ 899
Valuation allowance on unrealized losses.................. (3,463) --
-------- --------
Net deferred tax benefit................................ $ 4,233 $ 899
======== ========
</TABLE>
The valuation allowance of $3.5 million relates to unrealized losses and has
been accounted for in Accumulated other comprehensive income.
11. REDEEMABLE PREFERRED AND COMMON SHARES
A. Series B Non-Voting Redeemable Preferred Shares--Authorized and issued
2,951,835, par value $1.00 per share. These shares were issued to one of the
IPC Companies as the holder of record for the benefit of the IPC Program
participants and were entitled to fixed, cumulative, preferential, semi-annual
dividends calculated at the six month LIBOR rate based on the redemption price
of $2.95 million. The Series B Non-Voting Redeemable Preferred Shares were
redeemed for their $1.00 par value or $2.95 million in 1997. The average
effective annual interest rate on these shares was 5.0% in 1997.
B. Common Shares Subject to Redemption--Issued 937,168 at $1.75 per share.
These shares were issued to four executive officers of the Company. The
Company had the right to reacquire these shares if the employees defaulted on
the loans used for the purchase. Two subsidiaries of the Company made loans to
these executive officers during 1990 for the purchase of the Common Shares
Subject to Redemption. These loans have been repaid and the Common Shares
included in Shareholders' equity.
12. SHAREHOLDERS' EQUITY AND RESTRICTIONS
A. The Board of Directors, on October 5, 1999, approved a stock repurchase
program to purchase up to three million of its outstanding Common Shares. On
October 27, 1999, the Board of Directors authorized the repurchase of an
additional two million shares. As of December 31, 1999, a total of 2,636,716
shares had been repurchased at an average price of $11.31.
F-17
<PAGE>
MUTUAL RISK MANAGEMENT LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
During the last quarter of 1999, the Company sold 570,000 put options for a
total consideration of $339,481 which has been recorded directly in additional
paid-in capital. The put options entitle the holders to sell Common Shares to
the company if the price of the Company's Common Shares falls below a
specified strike price. At December 31, 1999, 250,000 put options were
outstanding and no options had been exercised. The options expire at various
dates through May 2000 and have an average strike price of $12.83.
B. In September 1997 the company announced a two-for-one stock split of its
Common Shares. In connection with this split the Company issued an additional
18,741,121 Common Shares and 468,584 Common Shares subject to redemption.
C. The Company's ability to pay dividends is subject to certain restrictions
including the following:
(i) The Company is subject to a 30% U.S. withholding tax on any dividends
received from its U.S. subsidiaries and certain of the IPC Companies.
(ii) The Company's ability to cause the Legion Companies to pay a
dividend is limited by insurance regulation to an annual amount equal to
the greater of 10% of the Legion Companies' statutory surplus as regards
policyholders, or the Legion Companies' statutory income for the preceding
year. The maximum dividend the Legion Companies will be permitted to pay
under this restriction in 2000 is $35.0 million based upon 1999 results
(1999--$23.6 million based on 1998 results). The Legion Companies' net
assets which were restricted by the above were $353.6 million at December
31, 1999 (1998--$236.9 million). Loans and advances by the Legion Companies
to the Company or any other subsidiary would require the prior approval of
the Pennsylvania insurance department and possibly other states in which
they are licensed.
D. At December 31, 1999 the Legion Companies' combined risk-based capital
was $347.4 million (1998--$225.5 million). Under the risk-based capital tests,
the threshold that constitutes the authorized control level, which authorizes
the commissioner to take whatever regulatory actions considered necessary to
protect the best interest of the policyholders and creditors of the Legion
Companies was $121.0 million (1998--$78.5 million).
E. Net income and policyholders' surplus of the Legion Companies, as filed
with regulatory authorities on the basis of statutory accounting practices,
are as follows:
<TABLE>
<CAPTION>
Year ended December 31,
--------------------------
1999 1998 1997
-------- -------- --------
(In thousands)
<S> <C> <C> <C>
Statutory net income for the year................... $ 11,269 $ 20,238 $ 21,947
Statutory policyholders' surplus at year end........ $349,867 $227,664 $200,249
</TABLE>
13. STOCK OPTIONS
Employees have been granted options to purchase Common Shares under the
Company's Long Term Incentive Plans. In each case, the option price equals the
fair market value of the Common Shares on the day of the grant and an option's
maximum term is five to ten years. Options granted vest ratably over a four
year period.
F-18
<PAGE>
MUTUAL RISK MANAGEMENT LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In accordance with the provisions of SFAS 123, the Company applies APB
Opinion 25 and related Interpretations in accounting for its stock option
plans and, accordingly, does not recognize compensation cost. If the Company
had elected to recognize compensation cost based on the fair value of the
options granted at grant date as prescribed by SFAS 123, net income and
earnings per share would have been reduced to the pro forma amounts indicated
in the table below:
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------------------------
1999 1998 1997
------------- ------------- -------------
(In thousands except per share amounts)
<S> <C> <C> <C>
Net income--as reported............. $ 50,438 $ 64,527 $ 49,372
Net income--pro forma............... $ 44,465 $ 60,732 $ 47,192
Basic earnings per share--as
reported........................... $1.18 $1.56 $1.25
Basic earnings per share--pro
forma.............................. $1.04 $1.47 $1.20
Diluted earnings per share--as
reported........................... $1.14 $1.42 $1.15
Diluted earnings per share--pro
forma.............................. $1.02 $1.38 $1.13
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following assumptions:
<TABLE>
<S> <C> <C> <C>
Expected dividend yield.... 1.5% 0.6% 0.5%
Expected stock price
volatility................ .329-.398 .307-.330 .283-.329
Risk-free interest rate.... 5.9% 5.3% 5.0%
Expected life of options... 4 years-9 years 4 years-9 years 4 years-9 years
</TABLE>
The weighted average fair value of options granted during 1999 is $5.74 per
share (1998--$11.35 per share, 1997--$7.83 per share).
The pro forma effect on net income for 1999, 1998 and 1997 is not
representative of the pro forma effect on net income in future years because
it does not take into consideration pro forma compensation expense related to
grants made prior to 1995.
Options issued and outstanding under the plans are as follows:
Summary of Employee Stock Option Plan Activity
<TABLE>
<CAPTION>
Year ended December 31,
-------------------------------------------
1999 1998 1997
------------- ------------- -------------
<S> <C> <C> <C>
Number of Options
Outstanding, beginning of year... 4,220,580 3,794,925 3,442,322
Granted.......................... 1,586,183 1,010,399 1,015,100
Exercised........................ (744,223) (563,293) (615,189)
Cancelled........................ (138,267) (21,451) (47,308)
------------- ------------- -------------
Outstanding and exercisable, end
of year......................... 4,924,273 4,220,580 3,794,925
============= ============= =============
Option Price Per Share
Granted.......................... $11.44-$39.63 $26.25-$38.31 $15.00-$28.63
Exercised........................ $ 7.97-$26.25 $ 7.97-$26.25 $ 7.97-$15.14
Cancelled........................ $ 9.52-$39.54 $10.83-$26.25 $ 7.97-$19.38
Outstanding and exercisable, end
of year......................... $11.44-$39.63 $ 7.97-$38.31 $ 7.97-$28.63
</TABLE>
F-19
<PAGE>
MUTUAL RISK MANAGEMENT LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Summary of Options Outstanding at December 31, 1999
<TABLE>
<CAPTION>
Weighted
Year of Number Number of Average Exercise
Grant of Shares Shares Vested Exercise Price Price Range Expiration Date Range
- ------- --------- ------------- -------------- ------------- --------------------------------------
<S> <C> <C> <C> <C> <C>
1995 316,553 316,553 $15.08 $13.97-$15.14 September 21, 2000 to December 1, 2000
1996 1,211,451 490,032 $15.11 $14.25-$16.78 January 2, 2001 to December 17, 2006
1997 898,625 440,750 $25.55 $15.00-$28.63 January 31, 2002 to December 18, 2002
1998 980,461 217,172 $35.23 $29.94-$38.31 January 2, 2003 to December 21, 2003
1999 1,517,183 -- $17.06 $11.44-$39.63 February 26, 2004 to December 14, 2004
--------- --------- ------
4,924,273 1,464,507 $21.54
========= ========= ======
</TABLE>
Options generally vest 25% annually commencing one year after issuance,
except for 770,000 of the options issued in 1996 at a grant price of $15,
which were issued to executives of the Company. These options are for 10 years
and 75% have vesting schedules tied to the conversion of the Zero Coupon
Convertible Exchangeable Subordinated Debentures (see Note 6) and other
performance benchmarks.
Options have been granted to each of the outside directors. All options are
for five years and become exercisable six months after issuance.
Total options granted to directors are as follows:
<TABLE>
<CAPTION>
Number of Shares
Year of ------------------- Exercise
Grant Granted Outstanding Price Expiration Date
- ------- ------- ----------- ------------- --------------------------------
<S> <C> <C> <C> <C>
1995 140,000 140,000 $15.14 December 1, 2000
1996 105,000 105,000 $16.69 December 1, 2001
1997 75,000 75,000 $19.50-$27.81 May 21, 2002 to December 1, 2002
1998 60,000 60,000 $37.25 December 1, 2003
1999 60,000 60,000 $14.75 December 1, 2004
------- -------
440,000 440,000
======= =======
</TABLE>
F-20
<PAGE>
MUTUAL RISK MANAGEMENT LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
14. EARNINGS PER COMMON SHARE
The following table sets forth the computation of basic and diluted earnings
per common share.
<TABLE>
<CAPTION>
1999 1998 1997
---------- ---------- ----------
(In thousands, except shares and
earnings per share)
<S> <C> <C> <C>
Numerator
Income before extraordinary loss.............. $ 50,620 $ 64,527 $ 49,477
Extraordinary loss on extinguishment of
debentures, net of tax....................... 182 -- --
---------- ---------- ----------
Net Income.................................... 50,438 64,527 49,477
Preferred share dividends..................... -- -- 105
Numerator for basic earnings per common share
--Net income available to common
shareholders................................ 50,438 64,527 49,372
---------- ---------- ----------
Effect of dilutive securities:
Conversion of Zero Coupon Convertible
Exchangeable Subordinated Debentures........ 5,997 6,605 6,500
Numerator for diluted earnings per common
share
--Net income available to common shareholders
after assumed conversions................... $ 56,435 $ 71,132 $ 55,872
========== ========== ==========
Denominator
Denominator for basic earnings per common
share--weighted average shares............... 42,797,133 41,275,156 39,379,122
Effect of dilutive securities:
Stock options................................ 991,406 2,223,900 1,565,950
Common shares subject to Redemption.......... -- -- 861,380
Conversion of Zero Coupon Convertible
Exchangeable Subordinated Debentures........ 5,818,374 6,734,091 6,978,800
---------- ---------- ----------
Denominator for diluted earnings per common
share--adjusted weighted average shares and
assumed conversions.......................... 49,606,913 50,233,147 48,785,252
========== ========== ==========
Basic earnings per common share
Income before extraordinary loss............. $ 1.18 $ 1.56 $ 1.25
Extraordinary loss on extinguishment of
debentures, net of tax...................... $ 0.00 $ -- $ --
---------- ---------- ----------
Basic earnings per common share............... $ 1.18 $ 1.56 $ 1.25
========== ========== ==========
Diluted earnings per common share
Income before extraordinary loss............. $ 1.14 $ 1.42 $ 1.15
Extraordinary loss on extinguishment of
debentures, net of tax...................... $ 0.00 $ -- $ --
---------- ---------- ----------
Diluted earnings per common share............. $ 1.14 $ 1.42 $ 1.15
========== ========== ==========
</TABLE>
15. DERIVATIVE FINANCIAL INSTRUMENTS
The Company has had only limited involvement with derivative financial
instruments and does not use them for trading or speculative purposes. They
are utilized to manage interest rate risk.
In June 1998, the Financial Accounting Standards Board issued Statement 133,
"Accounting for Derivative Instruments and Hedging Activities" which was
amended by Statement 137 in June 1999. The Statement
F-21
<PAGE>
MUTUAL RISK MANAGEMENT LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
requires recording all derivative instruments as assets or liabilities,
measured at fair value. The Statement is effective for fiscal years beginning
after June 15, 2000. The Company does not expect the Statement to have a
material impact on its financial position or results of operations.
16. SEGMENT INFORMATION
Selected information by operating segment is summarized in the chart below.
Line of Business Financial Information
<TABLE>
<CAPTION>
Year ended December 31,
----------------------------
1999 1998 1997
-------- -------- --------
(In thousands)
<S> <C> <C> <C>
Revenue(1)
Program Business................................. $ 95,132 $ 82,267 $ 49,363
Corporate Risk Management........................ 49,365 51,640 54,800
Specialty Brokerage.............................. 13,692 9,021 8,351
Financial Services............................... 19,522 14,343 8,744
Underwriting..................................... 181,798 101,913 84,200
Net investment income............................ 28,417 28,587 24,984
Other............................................ (300) 143 56
-------- -------- --------
Total.......................................... $387,626 $287,914 $230,498
======== ======== ========
Income Before Income Taxes and Minority Interest
Program Business................................. $ 26,969 $ 32,620 $ 19,080
Corporate Risk Management........................ 15,694 20,158 20,498
Specialty Brokerage.............................. 5,226 2,264 2,594
Financial Services............................... 1,298 542 2,291
Underwriting..................................... (17,489) (2,406) (1,473)
Net investment income............................ 21,610 21,768 18,232
Other............................................ (3,001) (1,976) (1,113)
-------- -------- --------
Total.......................................... $ 50,307 $ 72,970 $ 60,109
======== ======== ========
</TABLE>
- --------
(1) Fee income from two clients accounted for 2% and 2% of total Fee income in
1999 (1998--2% and 1%; 1997--2% and 1%). Premiums earned from two clients
accounted for 6% and 6% of total Premiums earned during 1999 (1998--4% and
3%; 1997--5% and 4%). The subsidiaries' accounting records do not capture
information by reporting segment sufficient to determine identifiable
assets by such reporting segments.
F-22
<PAGE>
MUTUAL RISK MANAGEMENT LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
17. FOREIGN SALES AND OPERATIONS
The Company's non-U.S. operations include Bermuda, Barbados, the Cayman
Islands and Europe.
Financial Information Relating to Geographic Areas
<TABLE>
<CAPTION>
Year ended December 31,
--------------------------------
1999 1998 1997
---------- ---------- ----------
(In thousands)
<S> <C> <C> <C>
Total Revenues
U.S. Business................................ $ 291,458 $ 193,653 $ 161,681
Non-U.S. Business............................ 96,168 94,261 68,817
---------- ---------- ----------
Total...................................... $ 387,626 $ 287,914 $ 230,498
========== ========== ==========
Income Before Income Taxes and Minority
Interest
U.S. Business................................ $ 15,911 $ 38,285 $ 38,485
Non-U.S. Business............................ 34,396 34,685 21,624
---------- ---------- ----------
Total...................................... $ 50,307 $ 72,970 $ 60,109
========== ========== ==========
Total Assets
U.S. Business................................ $3,078,861 $2,082,077 $1,411,881
Non-U.S. Business(1)......................... 954,313 992,180 794,169
---------- ---------- ----------
Total...................................... $4,033,174 $3,074,257 $2,206,050
========== ========== ==========
</TABLE>
- --------
(1) Includes Assets held in separate accounts of $693.4 million, $722.3
million and $649.2 million for 1999, 1998 and 1997 respectively.
18. ACQUISITIONS
During 1998 the Company acquired several new businesses for a total of $25.6
million (1997--$19.6 million). The excess of the purchase price over net
assets acquired was $21.9 million (1997--$18.7 million). These acquisitions
were accounted for by the purchase method. The pro forma effect on the
Company's revenue, net income and earnings per share is not material.
During 1998 the Company acquired CompFirst, Inc. and IAS in a business
combination accounted for as a pooling of interests. These companies became
wholly owned subsidiaries of the Company through the exchange of 943,821
Common Shares for 100% of each company's outstanding stock.
F-23
<PAGE>
MUTUAL RISK MANAGEMENT LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
On March 1, 1999, the Company acquired Captive Resources, Inc. ("CRI") in a
business combination accounted for as a pooling of interests. CRI became a
wholly owned subsidiary of the Company through the exchange of 1,058,766
Common Shares for 100% of its outstanding stock.
<TABLE>
<CAPTION>
Year ended Year ended
December 31, December 31,
1998 1997
------------ ------------
(In thousands)
<S> <C> <C>
Revenues
MRM(1)................................................ $279,396 $223,826
Captive Resources, Inc................................ 8,518 6,672
-------- --------
As restated......................................... $287,914 $230,498
======== ========
Net Income
MRM(1)................................................ $ 63,632 $ 48,811
Captive Resources, Inc................................ 895 666
-------- --------
As restated......................................... $ 64,527 $ 49,477
======== ========
</TABLE>
- --------
(1) As previously reported
Shareholders' equity at January 1, 1997 was restated as follows:
<TABLE>
<CAPTION>
As previously Captive
reported Resources, Inc. As restated
------------- --------------- -----------
(In thousands)
<S> <C> <C> <C>
Common shares....................... $ 381 $ 11 $ 392
Additional paid-in capital.......... 82,059 (10) 82,049
Accumulated other comprehensive
income............................. 48 0 48
Retained earnings................... 129,036 (182) 128,854
-------- ----- --------
Total shareholders' equity........ $211,524 $(181) $211,343
======== ===== ========
</TABLE>
19. RELATED PARTY TRANSACTIONS
A. $.8 million (1998--$.6 million; 1997--$.9 million) of Fee income and
$(.1) million (1998--$1.4 million; 1997--$4.2 million) of premiums were earned
from a certain IPC Program participant associated with a director and
shareholder of the Company.
B. A number of subsidiaries of the Company have written business involving
subsidiaries of The Galtney Group, Inc. ("GGI") of which a director of the
Company is the principal shareholder. During 1999 the Company paid fees of
$3.0 million on such business to GGI (1998--$4.0 million; 1997--$4.3 million).
C. The Company and its subsidiaries provide administrative and accounting
services to a number of unaffiliated insurance and reinsurance companies.
Certain officers, directors and employees of the Company serve as officers and
directors of these companies, generally without remuneration.
D. In connection with the Company's acquisition of The Hemisphere Group
Limited ("Hemisphere") in July 1996, the Company acquired a 40% interest in
the Hemisphere Trust Company Limited ("Hemisphere Trust"), a Bermuda "local"
trust company, which had formerly been a wholly owned subsidiary of
Hemisphere. As a "local" Bermuda company, at least 60% of the shares of
Hemisphere Trust must be owned by Bermudians. In compliance with this
requirement, Mr. Robert A. Mulderig, Chairman and CEO of the Company, acquired
F-24
<PAGE>
MUTUAL RISK MANAGEMENT LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
60% of Hemisphere Trust for $.2 million at the time of the Company's
acquisition of Hemisphere. The amount of the purchase price was equal to 60%
of the book value of Hemisphere Trust on the date of acquisition.
The Company and Mr. Mulderig have entered into a Shareholders' Agreement
relating to Hemisphere Trust which provides, amongst other things, that (i)
the Company has the option, subject to regulatory approval to acquire Mr.
Mulderig's interest in Hemisphere Trust at Mr. Mulderig's cost, plus interest
at 6% per annum; (ii) the Company has a pre-emptive right, also subject to
regulatory approval, over the shares held by Mr. Mulderig and (iii) no
dividends or other distributions can be made by Hemisphere Trust without the
prior consent of the Company.
20. QUARTERLY FINANCIAL DATA--(UNAUDITED)
<TABLE>
<CAPTION>
1999--Quarters Ended
---------------------------------------
Dec 31 Sept 30 June 30 March 31
-------- --------- --------- ----------
(In thousands, except per share data)
<S> <C> <C> <C> <C>
Total revenues.......................... $ 89,293 $ 102,623 $ 103,817 $ 91,893
Income before income taxes and minority
interest............................... 7,723 2,065 19,713 20,806
Income before minority interest......... 8,417 5,366 18,098 18,791
Income before extraordinary loss........ 8,365 5,361 18,095 18,799
Net income.............................. 8,183 5,361 18,095 18,799
Net income available to common
shareholders........................... 8,183 5,361 18,095 18,799
Basic earnings per Common Share:
Net income available to common
shareholders......................... $ 0.20 $ 0.12 $ 0.42 $ 0.44
<CAPTION>
1998--Quarters Ended(1)
---------------------------------------
Dec 31 Sept 30 June 30 March 31
-------- --------- --------- ----------
(In thousands, except per share data)
<S> <C> <C> <C> <C>
Total revenues.......................... $ 77,351 $ 72,935 $ 65,154 $ 72,474
Income before income taxes and minority
interest............................... 18,070 19,309 18,149 17,442
Income before minority interest......... 16,113 17,054 16,092 15,175
Net income.............................. 16,163 17,097 16,092 15,175
Net income available to common
shareholders........................... 16,163 17,097 16,092 15,175
Basic earnings per Common Share:
Net income available to common
shareholders......................... $ 0.38 $ 0.41 $ 0.39 $ .0.38
</TABLE>
- --------
(1) Prior periods have been restated to reflect a pooling of interests
following the acquisition of Captive Resources, Inc.
21. SUBSEQUENT EVENTS
In January and February 2000, the Company repurchased Convertible Debentures
representing a principal amount of $168.1 million in the open market for $76.8
million, resulting in an extraordinary loss of $3.4 million, net of tax. The
Company expects to have similar extraordinary losses in the future if it
repurchases the remaining $83.9 million principal amount of Convertible
Debentures in 2000.
In January and February 2000, the Company drew down an additional $76.0
million under the bridging loan facility (see note 7).
In February 2000, the Company filed an S-3 Shelf Registration Statement with
the U. S. Securities and Exchange Commission, for the future issuance of $500
million of debt and preferred securities.
F-25
<PAGE>
MUTUAL RISK MANAGEMENT LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
22. 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 large 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 financial information presents the condensed consolidating
balance sheets of the Parent Company, Mutual Group and other subsidiaries as
of December 31, 1999 and 1998 and condensed consolidating statements of income
and cash flows for the years ended December 31, 1999, 1998 and 1997.
Investments in subsidiaries are accounted for on the equity method and
accordingly, entries necessary to consolidate the Parent 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 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.
F-26
<PAGE>
MUTUAL RISK MANAGEMENT LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
CONDENSED CONSOLIDATING BALANCE SHEETS
DECEMBER 31, 1999
<TABLE>
<CAPTION>
Parent Mutual Other
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 liabilities..... -- -- 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>
F-27
<PAGE>
MUTUAL RISK MANAGEMENT LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
CONDENSED CONSOLIDATING BALANCE SHEETS
DECEMBER 31, 1998
<TABLE>
<CAPTION>
Parent Mutual Other
Company Group Subsidiaries Eliminations Consolidated
-------- -------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
ASSETS
Cash and cash
equivalents.......... $ 689 $ 1,872 $ 114,862 $ -- $ 117,423
Investments........... 8,594 -- 453,840 -- 462,434
Other investments..... 736 1,219 18,709 -- 20,664
Investments in and
advances to
subsidiaries and
affiliates, net...... 456,261 198,793 (276,044) (379,010) --
Accounts Receivable... -- 1,673 352,196 -- 353,869
Reinsurance
receivables.......... -- -- 1,079,563 -- 1,079,563
Deferred expenses..... -- -- 27,215 -- 27,215
Prepaid reinsurance
premiums............. -- -- 206,487 -- 206,487
Fixed assets.......... -- -- 19,671 -- 19,671
Deferred tax benefit.. -- -- 1,999 (1,100) 899
Goodwill.............. -- -- 52,901 -- 52,901
Other assets.......... 2,372 14 8,482 -- 10,868
Assets held in
separate accounts.... -- -- 722,263 -- 722,263
-------- -------- ---------- --------- ----------
Total Assets........... $468,652 $203,571 $2,782,144 $(380,110) $3,074,257
======== ======== ========== ========= ==========
LIABILITIES AND SHAREHOLDERS'
EQUITY
LIABILITIES
Reserve for losses and
loss expenses........ $ -- $ -- $1,190,426 $ -- $1,190,426
Reserve for unearned
premiums............. -- -- 241,893 -- 241,893
Pension fund
reserves............. -- -- 79,753 -- 79,753
Claims deposit
liabilities.......... -- -- 37,448 -- 37,448
Accounts payable...... 1 244 243,173 -- 243,418
Accrued expenses...... -- -- 12,052 -- 12,052
Taxes payable......... -- -- 14,850 -- 14,850
Bridging loan......... -- -- -- -- --
Other loans payable... -- -- 3,538 -- 3,538
Prepaid fees.......... -- -- 47,126 -- 47,126
Debentures............ 125,485 -- -- -- 125,485
Deferred tax
liability............ -- 1,100 -- (1,100) --
Other liabilities..... -- -- 12,839 -- 12,839
Liabilities related to
separate accounts.... -- -- 722,263 -- 722,263
Total Liabilities...... 125,486 1,344 2,605,361 (1,100) 2,731,091
-------- -------- ---------- --------- ----------
SHAREHOLDERS' EQUITY.... 343,166 202,227 176,783 (379,010) 343,166
-------- -------- ---------- --------- ----------
Total Liabilities and
Shareholders'
Equity............... $468,652 $203,571 $2,782,144 $(380,110) $3,074,257
======== ======== ========== ========= ==========
</TABLE>
F-28
<PAGE>
MUTUAL RISK MANAGEMENT LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
CONDENSED CONSOLIDATING STATEMENTS OF INCOME
For the year ended December 31, 1999
<TABLE>
<CAPTION>
Parent Mutual Other
Company Group Subsidiaries Eliminations Consolidated
------- ------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
REVENUES
Fee income............ $ -- $ -- $177,711 $ -- $177,711
Premiums earned....... -- -- 181,798 -- 181,798
Net investment
income............... 1,009 759 31,848 -- 33,616
Intercompany interest
income............... -- -- 20,831 (20,831) --
Realized capital
losses............... -- 361 (5,560) -- (5,199)
Other (losses)
income............... -- (114) (186) -- (300)
Equity in subsidiary
earnings............. 56,322 22,586 -- (78,908) --
------- ------- -------- -------- --------
Total revenues...... 57,331 23,592 406,442 (99,739) 387,626
------- ------- -------- -------- --------
EXPENSES
Losses and loss
expenses incurred.... -- -- 147,705 -- 147,705
Acquisition costs..... -- -- 51,582 -- 51,582
Operating expenses.... 141 633 127,750 -- 128,524
Interest expenses..... 6,570 -- 237 -- 6,807
Intercompany interest
expense.............. -- 20,831 -- (20,831) --
Other expenses........ -- -- 2,701 -- 2,701
------- ------- -------- -------- --------
Total expenses...... 6,711 21,464 329,975 (20,831) 337,319
------- ------- -------- -------- --------
INCOME BEFORE INCOME
TAXES AND MINORITY
INTEREST............... 50,620 2,128 76,467 (78,908) 50,307
Income taxes.......... -- (6,743) 6,378 -- (365)
------- ------- -------- -------- --------
INCOME BEFORE MINORITY
INTEREST............... 50,620 8,871 70,089 (78,908) 50,672
Minority Interest..... -- -- (52) -- (52)
------- ------- -------- -------- --------
INCOME BEFORE
EXTRAORDINARY LOSS..... 50,620 8,871 70,037 (78,908) 50,620
Extraordinary loss on
extinguishment of
debentures, net of
tax.................. 182 -- -- -- 182
------- ------- -------- -------- --------
NET INCOME.............. $50,438 $ 8,871 $ 70,037 $(78,908) $ 50,438
======= ======= ======== ======== ========
</TABLE>
F-29
<PAGE>
MUTUAL RISK MANAGEMENT LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
CONDENSED CONSOLIDATING STATEMENTS OF INCOME
For the year ended December 31, 1998
<TABLE>
<CAPTION>
Parent Mutual Other
Company Group Subsidiaries Eliminations Consolidated
------- ------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
REVENUES
Fee income............ $ -- $ -- $157,271 $ -- $157,271
Premiums earned....... -- -- 101,913 -- 101,913
Net investment
income............... 2,171 606 26,813 -- 29,590
Intercompany interest
income............... -- -- 18,600 (18,600) --
Realized capital
losses............... -- 599 (1,602) -- (1,003)
Other (losses)
income............... -- 390 (247) -- 143
Equity in subsidiary
earnings............. 69,102 38,986 -- (108,088) --
------- ------- -------- --------- --------
Total revenues...... 71,273 40,581 302,748 (126,688) 287,914
------- ------- -------- --------- --------
EXPENSES
Losses and loss
expenses incurred.... -- -- 78,258 -- 78,258
Acquisition costs..... -- -- 26,061 -- 26,061
Operating expenses.... 141 634 100,912 -- 101,687
Interest expenses..... 6,605 -- 214 -- 6,819
Intercompany interest
expense.............. -- 18,600 -- (18,600)
Other expenses........ -- -- 2,119 -- 2,119
------- ------- -------- --------- --------
Total expenses...... 6,746 19,234 207,564 (18,600) 214,944
------- ------- -------- --------- --------
INCOME BEFORE INCOME
TAXES AND MINORITY
INTEREST............... 64,527 21,347 95,184 (108,088) 72,970
Income taxes.......... -- (4,759) 13,295 -- 8,536
------- ------- -------- --------- --------
INCOME BEFORE MINORITY
INTEREST............... 64,527 26,106 81,889 (108,088) 64,434
Minority Interest..... -- -- 93 -- 93
------- ------- -------- --------- --------
INCOME BEFORE
EXTRAORDINARY LOSS..... 64,527 26,106 81,982 (108,088) 64,527
Extraordinary loss on
extinguishment of
debentures, net of
tax.................. -- -- -- -- --
------- ------- -------- --------- --------
NET INCOME.............. $64,527 $26,106 $ 81,982 $(108,088) $ 64,527
======= ======= ======== ========= ========
</TABLE>
F-30
<PAGE>
MUTUAL RISK MANAGEMENT LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
CONDENSED CONSOLIDATING STATEMENTS OF INCOME
For the year ended December 31, 1997
<TABLE>
<CAPTION>
Parent Mutual Other
Company Group Subsidiaries Eliminations Consolidated
------- ------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
REVENUES
Fee income............ $ -- $ -- $121,258 $ -- $121,258
Premiums earned....... -- -- 84,200 -- 84,200
Net investment
income............... 2,929 456 23,207 -- 26,592
Intercompany interest
income............... -- -- 12,332 (12,332) --
Realized capital
losses............... -- -- (1,608) -- (1,608)
Other (losses)
income............... -- -- 56 -- 56
Equity in subsidiary
earnings............. 53,190 38,723 -- (91,913) --
------- ------- -------- --------- --------
Total revenues...... 56,119 39,179 239,445 (104,245) 230,498
------- ------- -------- --------- --------
EXPENSES
Losses and loss
expenses incurred.... -- -- 49,857 -- 49,857
Acquisition costs..... -- -- 35,816 -- 35,816
Operating expenses.... 142 139 76,514 -- 76,795
Interest expenses..... 6,500 -- 252 -- 6,752
Intercompany interest
expense.............. -- 12,332 -- (12,332) --
Other expenses........ -- -- 1,169 -- 1,169
------- ------- -------- --------- --------
Total expenses...... 6,642 12,471 163,608 (12,332) 170,389
------- ------- -------- --------- --------
INCOME BEFORE INCOME
TAXES AND MINORITY
INTEREST............... 49,477 26,708 75,837 (91,913) 60,109
Income taxes.......... -- (3,919) 14,551 -- 10,632
------- ------- -------- --------- --------
INCOME BEFORE MINORITY
INTEREST............... 49,477 30,627 61,286 (91,913) 49,477
Minority Interest..... -- -- -- -- --
------- ------- -------- --------- --------
INCOME BEFORE
EXTRAORDINARY LOSS..... 49,477 30,627 61,286 (91,913) 49,477
Extraordinary loss on
extinguishment of
debentures, net of
tax.................. -- -- -- -- --
------- ------- -------- --------- --------
NET INCOME.............. $49,477 $30,627 $ 61,286 $ (91,913) $ 49,477
======= ======= ======== ========= ========
</TABLE>
F-31
<PAGE>
MUTUAL RISK MANAGEMENT LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
For the year ended December 31, 1999
<TABLE>
<CAPTION>
Parent Mutual Other
Company Group Subsidiaries Consolidated
--------- -------- ------------ ------------
<S> <C> <C> <C> <C>
NET CASH FLOW FROM OPERATING
ACTIVITIES..................... $ (533) $(12,326) $ 33,493 $ 20,634
--------- -------- --------- ---------
CASH FLOWS FROM INVESTING
ACTIVITIES
Proceeds from sale of
investments--available for
sale......................... -- -- 85,312 85,312
Proceeds from maturity of
investments--available for
sale......................... -- -- 53,183 53,183
Fixed asset purchases......... -- -- (17,732) (17,732)
Investments purchased--
available for sale........... -- -- (153,949) (153,949)
Acquisitions and other
investments.................. -- -- (10,130) (10,130)
Proceeds from other
investments.................. -- -- 577 577
Other items................... -- -- 104 104
Investments in and advances to
subsidiaries and affiliates,
net.......................... (74,185) 11,473 62,712 --
--------- -------- --------- ---------
NET CASH FLOWS FROM (APPLIED TO)
INVESTING ACTIVITIES........... (74,185) 11,473 20,077 (42,635)
--------- -------- --------- ---------
CASH FLOWS FROM FINANCING
ACTIVITIES
Bridging loan received........ 117,000 -- -- 117,000
Other loans received.......... -- -- 511 511
Extinguishment of convertible
debentures................... (6,163) -- -- (6,163)
Proceeds from shares issued... 11,209 -- -- 11,209
Purchase of Treasury Shares... (29,813) -- -- (29,813)
Claims deposit liabilities.... -- -- (9,524) (9,524)
Pension fund reserves......... -- -- (11,773) (11,773)
Dividends paid................ (11,482) -- -- (11,482)
--------- -------- --------- ---------
NET CASH FLOW FROM (APPLIED TO)
FINANCING ACTIVITIES........... 80,751 -- (20,786) 59,965
--------- -------- --------- ---------
Net increase (decrease) in
cash and cash equivalents.... 6,033 (853) 32,784 37,964
Cash and cash equivalents at
beginning of year............ 689 1,872 114,862 117,423
--------- -------- --------- ---------
Cash and cash equivalents at
end of year.................. $ 6,722 $ 1,019 $ 147,646 $ 155,387
========= ======== ========= =========
</TABLE>
F-32
<PAGE>
MUTUAL RISK MANAGEMENT LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
For the year ended December 31, 1998
<TABLE>
<CAPTION>
Parent Mutual Other
Company Group Subsidiaries Consolidated
-------- -------- ------------ ------------
<S> <C> <C> <C> <C>
NET CASH FLOW FROM OPERATING
ACTIVITIES...................... $ 1,073 $(18,363) $ 79,641 $ 62,351
-------- -------- --------- ---------
CASH FLOWS FROM INVESTING
ACTIVITIES......................
Proceeds from sale of
investments--available for
sale.......................... 30,476 -- 115,269 145,745
Proceeds from maturity of
investments--available for
sale.......................... -- -- 57,175 57,175
Fixed asset purchases.......... -- -- (9,890) (9,890)
Investments purchased--
available for sale............ (15,943) -- (252,925) (268,868)
Acquisitions and other
investments................... -- -- (28,886) (28,886)
Proceeds from other
investments................... -- -- 2,929 2,929
Other items.................... -- -- 9 9
Investments in and advances to
subsidiaries and affiliates,
net........................... (13,958) 15,936 (1,978) --
-------- -------- --------- ---------
NET CASH FLOWS FROM (APPLIED TO)
INVESTING ACTIVITIES............ 575 15,936 (118,297) (101,786)
-------- -------- --------- ---------
CASH FLOWS FROM FINANCING
ACTIVITIES......................
Loan repayment and interest
received...................... 389 -- -- 389
Other loans received........... -- -- 1,379 1,379
Proceeds from shares issued.... 8,055 -- -- 8,055
Claims deposit liabilities..... -- -- (4,997) (4,997)
Pension fund reserves.......... -- -- 79,753 79,753
Dividends paid................. (10,427) -- -- (10,427)
-------- -------- --------- ---------
NET CASH FLOW FROM (APPLIED TO)
FINANCING ACTIVITIES............ (1,983) -- 76,135 74,152
-------- -------- --------- ---------
Net increase (decrease) in cash
and cash equivalents.......... (335) (2,427) 37,479 34,717
Cash and cash equivalents at
beginning of year............. 1,024 4,299 77,383 82,706
-------- -------- --------- ---------
Cash and cash equivalents at
end of year................... $ 689 $ 1,872 $ 114,862 $ 117,423
======== ======== ========= =========
</TABLE>
F-33
<PAGE>
MUTUAL RISK MANAGEMENT LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
For the year ended December 31, 1997
<TABLE>
<CAPTION>
Parent Mutual Other
Company Group Subsidiaries Consolidated
-------- -------- ------------ ------------
<S> <C> <C> <C> <C>
NET CASH FLOW FROM OPERATING
ACTIVITIES...................... $ 6,417 $(12,921) $ 62,856 $ 56,352
-------- -------- --------- ---------
CASH FLOWS FROM INVESTING
ACTIVITIES
Proceeds from sale of
investments--available for
sale.......................... 56,556 -- 153,189 209,745
Proceeds from maturity of
investments--available for
sale.......................... -- -- 44,685 44,685
Fixed asset purchases.......... 1,266 -- (9,749) (8,483)
Investments purchased--
available for sale............ (18,754) -- (225,107) (243,861)
Acquisitions and other
investments................... -- -- (25,792) (25,792)
Proceeds from other
investments................... -- -- -- --
Other items.................... -- -- 21 21
Investments in and advances to
subsidiaries and affiliates,
net........................... (45,174) 21,183 23,991 --
-------- -------- --------- ---------
NET CASH FLOWS FROM (APPLIED TO)
INVESTING ACTIVITIES............ (6,106) 21,183 (38,762) (23,685)
-------- -------- --------- ---------
CASH FLOWS FROM FINANCING
ACTIVITIES
Loan repayment and interest
received...................... 419 -- -- 419
Redemption of preferred
shares........................ (2,952) -- -- (2,952)
Proceeds from shares issued.... 7,297 -- -- 7,297
Claims deposit liabilities..... -- -- (3,244) (3,244)
Dividends paid................. (8,301) -- -- (8,301)
-------- -------- --------- ---------
NET CASH FLOW FROM (APPLIED TO)
FINANCING ACTIVITIES............ (3,537) -- (3,244) (6,781)
-------- -------- --------- ---------
Net increase (decrease) in cash
and cash equivalents.......... (3,226) 8,262 20,850 25,886
Cash and cash equivalents at
beginning of year............. 4,250 (3,963) 56,533 56,820
-------- -------- --------- ---------
Cash and cash equivalents at
end of year................... $ 1,024 $ 4,299 $ 77,383 $ 82,706
======== ======== ========= =========
</TABLE>
F-34
<PAGE>
INDEPENDENT AUDITOR'S REPORT
[LOGO OF ERNST & YOUNG
APPEARS HERE]
To the Board of Directors and Shareholders
Mutual Risk Management Ltd.
We have audited the accompanying consolidated balance sheets of Mutual Risk
Management Ltd. and subsidiaries as of December 31, 1999 and 1998, and the
related consolidated statements of income and comprehensive income, changes in
shareholders' equity, and cash flows for each of the three years in the period
ended December 31, 1999. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Mutual Risk
Management Ltd. and subsidiaries at December 31, 1999 and 1998, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1999, in conformity with
accounting principles generally accepted in the United States.
/S/ ERNST & YOUNG
Hamilton, Bermuda
February 15, 2000
except for note 21, as to which the date is
February 29, 2000
F-35
<PAGE>
MUTUAL RISK MANAGEMENT LTD
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
PARENT COMPANY ONLY BALANCE SHEETS
<TABLE>
<CAPTION>
1999 1998(1)
------------ ------------
<S> <C> <C>
ASSETS
Cash and cash equivalents............................ $ 6,721,527 $ 689,260
Investments.......................................... 9,664,914 8,594,316
Investments in subsidiaries and affiliates........... 570,072,530 425,013,307
Due from subsidiaries and affiliates................. 542,308 34,455,222
Other Assets......................................... 2,319,150 2,371,905
------------ ------------
Total Assets......................................... $589,320,429 $471,124,010
============ ============
</TABLE>
<TABLE>
<S> <C> <C>
LIABILITIES &
SHAREHOLDERS'
EQUITY
</TABLE>
<TABLE>
<S> <C> <C>
LIABILITIES
Accounts payable and accrued expenses............... $ 393,741 $ 926
Other liabilities................................... 2,884,665 2,471,885
Debentures.......................................... 110,898,002 125,485,201
Bridging loan....................................... 117,000,000 --
------------ ------------
Total Liabilities................................... 231,176,408 127,958,012
============ ============
SHAREHOLDERS' EQUITY
Common Shares--Authorized 180,000,000 (par value
$0.01) Issued 41,205,191 (excluding 2,636,716
cumulative shares held in treasury) (1998--
42,205,596)........................................ 412,052 422,056
Additional paid-in capital.......................... 110,754,754 114,916,045
Accumulated other comprehensive (loss) income....... (14,937,127) 4,456,781
Retained earnings................................... 261,914,342 223,371,116
------------ ------------
Total Shareholders' Equity.......................... 358,144,021 343,165,998
------------ ------------
Total Liabilities & Shareholders' Equity............ $589,320,429 $471,124,010
============ ============
</TABLE>
- --------
(1) Prior periods have been restated to reflect a pooling of interests
following the acquisition of Captive Resources, Inc.
See Notes to Consolidated Financial Statements
S-1
<PAGE>
MUTUAL RISK MANAGEMENT LTD
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
PARENT COMPANY ONLY INCOME STATEMENTS
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------
1999 1998(1) 1997(1)
------------ ----------- -----------
<S> <C> <C> <C>
NET INVESTMENT INCOME................. 1,008,904 2,171,384 2,928,791
Operating expenses.................... 141,055 141,140 140,943
Interest expense...................... 573,200 -- --
Amortization of debentures............ 5,996,459 6,605,238 6,500,288
------------ ----------- -----------
LOSS BEFORE EXTRAORDINARY LOSS AND
EQUITY IN EARNINGS OF SUBSIDIARIES... (5,701,810) (4,574,994) (3,712,440)
Extraordinary loss on extinguishment
of debentures, net of tax............ (181,742) -- --
------------ ----------- -----------
NET LOSS BEFORE EQUITY IN EARNINGS OF
SUBSIDIARIES......................... (5,883,552) (4,574,994) (3,712,440)
Dividend from subsidiaries............ -- -- 11,922,627
Undistributed equity in earnings of
subsidiary........................... 56,321,584 69,102,196 41,266,925
------------ ----------- -----------
NET INCOME............................ 50,438,032 64,527,202 49,477,112
Preferred share dividends............. -- -- (104,929)
------------ ----------- -----------
NET INCOME AVAILABLE TO COMMON
SHAREHOLDERS......................... 50,438,032 64,527,202 49,372,183
OTHER COMPREHENSIVE INCOME, NET OF TAX
Unrealized (losses) gains on
investments, net of reclassification
adjustment........................... (19,393,912) 421,385 3,987,716
------------ ----------- -----------
COMPREHENSIVE INCOME.................. $ 31,044,120 $64,948,587 $53,359,899
============ =========== ===========
</TABLE>
- --------
(1) Prior periods have been restated to reflect a pooling of interests
following the acquisition of Captive Resources, Inc.
See Notes to Consolidated Financial Statements
S-2
<PAGE>
MUTUAL RISK MANAGEMENT LTD
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
PARENT COMPANY ONLY STATEMENTS OF CASH FLOW
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------
1999 1998(1) 1997(1)
------------- ------------ ------------
<S> <C> <C> <C>
NET CASH FLOW FROM OPERATING
ACTIVITIES
Net loss before equity in earnings
of subsidiaries................... $ (5,883,552) $ (4,574,994) $ (3,712,440)
Items not affecting cash
Amortization of debentures........ 5,996,459 6,605,238 6,500,288
Amortization of investments....... (1,092,079) (1,188,773) (166,292)
Net changes in non-cash balances
relating to operations:
Other assets...................... 52,755 239,181 5,229,028
Accounts payable and accrued
expenses......................... 392,815 (6,592) (1,348,741)
Other liabilities................. -- -- (85,145)
Due from subsidiaries and
affiliates....................... 33,912,914 (11,370,137) (20,698,928)
------------- ------------ ------------
NET CASH FLOW FROM (APPLIED TO)
OPERATING ACTIVITIES.............. 33,379,312 (10,296,077) (14,282,230)
------------- ------------ ------------
CASH FLOWS FROM INVESTING
ACTIVITIES
Proceeds from sale of fixed
assets........................... -- -- 1,265,818
Cost of investments............... -- (15,942,997) (18,753,904)
Proceeds from sale of
investments...................... -- 30,475,717 56,556,009
Cost of investments in affiliates
and subsidiaries................. (108,097,564) (2,587,782) (36,397,234)
Dividends received from
subsidiaries..................... -- -- 11,922,627
------------- ------------ ------------
NET CASH (APPLIED TO) FROM
INVESTING ACTIVITIES.............. (108,097,564) 11,944,938 14,593,316
------------- ------------ ------------
CASH FLOWS FROM FINANCING
ACTIVITIES
Proceeds from shares issued....... 11,209,642 8,055,217 7,297,184
Purchase of Treasury shares....... (29,813,837) -- --
Extinguishment of convertible
debentures....................... (6,163,258) -- --
Redemption of preferred shares.... -- -- (2,951,835)
Bridging loan received............ 117,000,000 -- --
Subscription loans receivable..... -- 383,761 383,761
Loan interest received............ -- 4,922 34,727
Dividends paid.................... (11,482,028) (10,427,321) (8,301,338)
------------- ------------ ------------
NET CASH FLOWS FROM (APPLIED TO)
FINANCING ACTIVITIES.............. 80,750,519 (1,983,421) (3,537,501)
------------- ------------ ------------
Net increase (decrease) in cash and
cash equivalents.................. 6,032,267 (334,560) (3,226,415)
Cash and cash equivalents at begin-
ning of year...................... 689,260 1,023,820 4,250,235
------------- ------------ ------------
Cash and cash equivalents at end of
year.............................. $ 6,721,527 $ 689,260 $ 1,023,820
============= ============ ============
</TABLE>
- --------
(1) Prior periods have been restated to reflect a pooling of interests
following the acquisition of Captive Resources, Inc.
See Notes to Consolidated Financial Statements
S-3
<PAGE>
SCHEDULE VI
MUTUAL RISK MANAGEMENT LTD.
SUPPLEMENTARY INSURANCE INFORMATION
(U.S. DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Gross
Deferred Reserve for Gross
Year Ended Policy Unpaid Claims Discount, Gross Net Net
December 31, Acquisition and if any, Unearned Earned Investment
Property-Casualty Costs Claims Expenses Deducted(1) Premiums Premiums Income
- ----------------- ----------- --------------- ----------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
1999 20,531 1,860,120 39,538 335,265 181,798 17,466
1998 17,948 1,190,426 36,213 241,893 101,913 16,357
1997 19,204 716,461 28,083 188,389 84,200 16,879
</TABLE>
<TABLE>
<CAPTION>
Net Claim and Claims
Expenses Incurred
Related to (1)
---------------------
Amortization Net Paid
of Deferred Claims
Year Ended Policy and Net Other
December 31, Current Prior Acquisition Claims Premiums Operating
Property-Casualty Year Year Costs Expenses Written Expenses
- ----------------- ----------- --------- ------------ -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
1999 146,414 1,291 51,582 128,384 200,517 42,857
1998 74,476 3,782 26,061 53,158 104,948 30,164
1997 50,301 (444) 35,816 33,512 96,170 19,559
</TABLE>
- --------
(1) Medical malpractice reserves have been discounted at 6% in 1999, 1998 and
1997. Workers' compensation reserves have been discounted at 4% in 1999,
1998 and 1997.
S-4
<PAGE>
Exhibit 23.2
CONSENT OF INDEPENDENT AUDITORS
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS
MUTUAL RISK MANAGEMENT LTD.
We consent to the use of our report dated February 15, 2000 (except for note
21, as to which the date is February 29, 2000), included in the Annual Report
(Form 10-K) of Mutual Risk Management Ltd. for the year ended December 31,
1999, with respect to the consolidated financial statements, as amended,
included in this Form 10-K/A.
We also consent to the incorporation by reference in the Registration
Statements on Form S-8 (Nos. 33-44124, 33-55282, 333-05008, 333-77359 and 333-
80741) and Form S-3 (Nos. 333-64419, 333-11053, 333-75505 and 333-96425) of
Mutual Risk Management Ltd. of our report dated February 15, 2000 (except for
note 21, as to which the date is February 29, 2000), with respect to the
consolidated financial statements and schedules of Mutual Risk Management Ltd.
included in the Annual Report (Form 10-K), as amended, by this Form 10-K/A for
the year ended December 31, 1999.
/s/ Ernst & Young
Hamilton, Bermuda
April 27, 2000
