- ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------- 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 ---------------- 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). ---------------- Securities registered pursuant to Section 12(b) of the Act: - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- Title of Each Class Name of Each Exchange on Which Registered - -------------------------------------------------------------------------------------- Common Shares, $.01 par value............. New York Stock Exchange - -------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------- ---------------- Securities registered pursuant to Section 12(g) of the Act: None ---------------- 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. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- 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. 2 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 3 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. 4 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. 5 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 6 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 7 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. 8 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. 9 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 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: Year ended December 31, -------------------------------- 1999 1998 1997 ---------- ---------- -------- (In thousands) 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 ========== ========== ======== - -------- (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 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 Year ended December 31, -------------------------------- 1999 1998 1997 ---------- ---------- -------- (in thousands) 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 ========== ========== ======== 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 ANALYSIS OF LOSS AND LOSS EXPENSE DEVELOPMENT (Net of Reinsurance Recoverable) Year Ended December 31, --------------------------------------------------------------------------------------------------------------- 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 ------- ------- -------- -------- -------- -------- -------- -------- --------- ---------- ---------- (In thousands) 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 (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 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 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 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8K A. Exhibits Exhibit No. Description ------- ----------- 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) - -------- (1) Incorporated by reference to Form S-1 Registration Statement (No. 33-40152) of Mutual Risk Management Ltd. declared effective June 25, 1991. 16 (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 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 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 MUTUAL RISK MANAGEMENT LTD. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS At December 31, ---------------------- 1999 1998(1) ---------- ---------- (In thousands) 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 ========== ========== - -------- (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 MUTUAL RISK MANAGEMENT LTD. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME Year ended December 31, ---------------------------------- 1999 1998(1) 1997(1) ---------- ---------- ---------- (In thousands except per share data) 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 ========== ========== ========== - -------- (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 MUTUAL RISK MANAGEMENT LTD. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY 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) 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 ======== ======= ======== ======== ======= ===== ======== ======= ======== - -------- (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 MUTUAL RISK MANAGEMENT LTD. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Year ended December 31, ---------------------------- 1999 1998(1) 1997(1) -------- -------- -------- (In thousands) 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 ======== ======== ======== - -------- (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 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 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 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 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 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 MUTUAL RISK MANAGEMENT LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) D. Premiums earned are the result of the following: Year ended December 31, -------------------------------------------------------------- 1999 1998 1997 Premiums Premiums Premiums ---------------------- ------------------ ------------------ Written Earned Written Earned Written Earned ---------- ---------- -------- -------- -------- -------- (In thousands) 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 ========== ========== ======== ======== ======== ======== - -------- (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. Year ended December 31, -------------------------------- 1999 1998 1997 ---------- ---------- -------- (In thousands) 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 ========== ========== ======== 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 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: At December 31, 1999 ------------------------------------------- Amortized Unrealized Unrealized Fair Market Cost Gain Loss Value --------- ---------- ---------- ----------- (In thousands) 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 ======== ====== ======= ======== At December 31, 1998 ------------------------------------------- Amortized Unrealized Unrealized Fair Market Cost Gain Loss Value --------- ---------- ---------- ----------- (In thousands) 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 ======== ====== ======= ======== - -------- (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: Gross Unrealized Net Unrealized Gains (losses) Tax Gains (losses) ---------------- ------- -------------- (In thousands) 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) ======== ======= ======== F-11 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. December 31, 1999 December 31, 1998 -------------------- -------------------- Amortized Amortized Cost Percentage Cost Percentage --------- ---------- --------- ---------- (In thousands) 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% ======== ====== ======== ====== - -------- (1) Ratings as assigned by Standard & Poor's Corporation. The maturity distribution of Investments in Bonds and Redeemable Preferred Shares is as follows: December 31, 1999 December 31, 1998 --------------------- --------------------- Amortized Fair Market Amortized Fair Market Cost Value Cost Value --------- ----------- --------- ----------- (In thousands) 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 ======== ======== ======== ======== (ii) Realized gains and losses: Year ended December 31, --------------------------- 1999 1998 1997 ------- -------- -------- (In thousands) 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) ======= ======== ======== F-12 MUTUAL RISK MANAGEMENT LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) C. Details of investment income by major categories are presented below: Year ended December 31, ------------------------- 1999 1998 1997 ------- ------- ------- (In thousands) 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 ======= ======= ======= 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 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. Year Ended December 31, 1999 ----------------------------- Before Tax Net of Tax Amount Tax Amount ---------- ------ ---------- (In thousands) 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) ======== ====== ======== Year Ended December 31, 1998 ----------------------------- Amount Tax Amount ---------- ------ ---------- (In thousands) 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 ======== ====== ======== F-14 MUTUAL RISK MANAGEMENT LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 9. FAIR VALUE OF FINANCIAL INSTRUMENTS December 31, 1999 December 31, 1998 ------------------- ------------------- Carrying Carrying Amount Fair Value Amount Fair Value -------- ---------- -------- ---------- (In thousands) 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 $ -- $ -- 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 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: Current Deferred Total ------- -------- ------- (In thousands) 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 ======= ======= ======= The effective total tax rate differed from the statutory U.S. federal tax rate for the following reasons: Year ended December 31, -------------------------- 1999 1998 1997 ------- ------- ------- 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% ======= ======= ======= F-16 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: 1999 1998 -------- -------- (In thousands) 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 ======== ======== 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 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: Year ended December 31, -------------------------- 1999 1998 1997 -------- -------- -------- (In thousands) Statutory net income for the year................... $ 11,269 $ 20,238 $ 21,947 Statutory policyholders' surplus at year end........ $349,867 $227,664 $200,249 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 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: Year ended December 31, ----------------------------------------- 1999 1998 1997 ------------- ------------- ------------- (In thousands except per share amounts) 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 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: 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 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 Year ended December 31, ------------------------------------------- 1999 1998 1997 ------------- ------------- ------------- 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 F-19 MUTUAL RISK MANAGEMENT LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Summary of Options Outstanding at December 31, 1999 Weighted Year of Number Number of Average Exercise Grant of Shares Shares Vested Exercise Price Price Range Expiration Date Range - ------- --------- ------------- -------------- ------------- -------------------------------------- 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 ========= ========= ====== 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: Number of Shares Year of ------------------- Exercise Grant Granted Outstanding Price Expiration Date - ------- ------- ----------- ------------- -------------------------------- 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 ======= ======= F-20 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. 1999 1998 1997 ---------- ---------- ---------- (In thousands, except shares and earnings per share) 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 ========== ========== ========== 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 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 Year ended December 31, ---------------------------- 1999 1998 1997 -------- -------- -------- (In thousands) 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 ======== ======== ======== - -------- (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 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 Year ended December 31, -------------------------------- 1999 1998 1997 ---------- ---------- ---------- (In thousands) 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 ========== ========== ========== - -------- (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 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. Year ended Year ended December 31, December 31, 1998 1997 ------------ ------------ (In thousands) 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 ======== ======== - -------- (1) As previously reported Shareholders' equity at January 1, 1997 was restated as follows: As previously Captive reported Resources, Inc. As restated ------------- --------------- ----------- (In thousands) 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 ======== ===== ======== 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 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) 1999--Quarters Ended --------------------------------------- Dec 31 Sept 30 June 30 March 31 -------- --------- --------- ---------- (In thousands, except per share data) 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 1998--Quarters Ended(1) --------------------------------------- Dec 31 Sept 30 June 30 March 31 -------- --------- --------- ---------- (In thousands, except per share data) 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 - -------- (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 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 MUTUAL RISK MANAGEMENT LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) CONDENSED CONSOLIDATING BALANCE SHEETS DECEMBER 31, 1999 Parent Mutual Other Company Group Subsidiaries Eliminations Consolidated -------- -------- ------------ ------------ ------------ 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 ======== ======== ========== ========= ========== F-27 MUTUAL RISK MANAGEMENT LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) CONDENSED CONSOLIDATING BALANCE SHEETS DECEMBER 31, 1998 Parent Mutual Other Company Group Subsidiaries Eliminations Consolidated -------- -------- ------------ ------------ ------------ 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 ======== ======== ========== ========= ========== F-28 MUTUAL RISK MANAGEMENT LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) CONDENSED CONSOLIDATING STATEMENTS OF INCOME For the year ended December 31, 1999 Parent Mutual Other Company Group Subsidiaries Eliminations Consolidated ------- ------- ------------ ------------ ------------ 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 ======= ======= ======== ======== ======== F-29 MUTUAL RISK MANAGEMENT LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) CONDENSED CONSOLIDATING STATEMENTS OF INCOME For the year ended December 31, 1998 Parent Mutual Other Company Group Subsidiaries Eliminations Consolidated ------- ------- ------------ ------------ ------------ 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 ======= ======= ======== ========= ======== F-30 MUTUAL RISK MANAGEMENT LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) CONDENSED CONSOLIDATING STATEMENTS OF INCOME For the year ended December 31, 1997 Parent Mutual Other Company Group Subsidiaries Eliminations Consolidated ------- ------- ------------ ------------ ------------ 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 ======= ======= ======== ========= ======== F-31 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 Parent Mutual Other Company Group Subsidiaries Consolidated --------- -------- ------------ ------------ 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 ========= ======== ========= ========= F-32 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 Parent Mutual Other Company Group Subsidiaries Consolidated -------- -------- ------------ ------------ 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 ======== ======== ========= ========= F-33 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 Parent Mutual Other Company Group Subsidiaries Consolidated -------- -------- ------------ ------------ 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 ======== ======== ========= ========= F-34 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 MUTUAL RISK MANAGEMENT LTD CONDENSED FINANCIAL INFORMATION OF REGISTRANT PARENT COMPANY ONLY BALANCE SHEETS 1999 1998(1) ------------ ------------ 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 ============ ============ LIABILITIES & SHAREHOLDERS' EQUITY 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 ============ ============ - -------- (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 MUTUAL RISK MANAGEMENT LTD CONDENSED FINANCIAL INFORMATION OF REGISTRANT PARENT COMPANY ONLY INCOME STATEMENTS Years Ended December 31, -------------------------------------- 1999 1998(1) 1997(1) ------------ ----------- ----------- 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 ============ =========== =========== - -------- (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 MUTUAL RISK MANAGEMENT LTD CONDENSED FINANCIAL INFORMATION OF REGISTRANT PARENT COMPANY ONLY STATEMENTS OF CASH FLOW Years Ended December 31, ----------------------------------------- 1999 1998(1) 1997(1) ------------- ------------ ------------ 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 ============= ============ ============ - -------- (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 SCHEDULE VI MUTUAL RISK MANAGEMENT LTD. SUPPLEMENTARY INSURANCE INFORMATION (U.S. DOLLARS IN THOUSANDS) 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 - ----------------- ----------- --------------- ----------- -------- -------- ---------- 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 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 - ----------------- ----------- --------- ------------ -------- -------- --------- 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 - -------- (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