Three Months ended March 31,
1998 1997
($thousands except per share data)
PER PER
COMMON SHARE COMMON SHARE
Basic Diluted Basic Diluted
Operating income $14,648 $0.39 $ 0.34 $11.158 $0.30 $0.27
Realized capital (losses) (116) (0.01) - (514) (0.01) (0.01)
Gains(A)
Net income available to common Shareholders $14,532 $0.38 $0.34 $10.644 $0.29 $0.26
Average number of shares outstanding (000's) 37,946 47,760 37,168 46,201
(a) Net of tax
(b) 1997 per share amounts have been adjusted to reflect the two-for-one stock split which was effected on September 26, 1997.
In a joint statement Robert A. Mulderig, Chairman and Chief Executive Officer and John Kessock, Jr., President said: "The operating results for the first quarter of 1998 were excellent, aided by continued strong growth in our Program Business segment, where fees grew almost 70%, and by a 33% increase in investment income which resulted from higher rates of return earned in Bermuda and an increase in invested assets. Operating income for the first quarter grew by 31% to a record $14.6 million or $0.34 per Common Share on a diluted basis, a 26% increase. Return on equity continued to meet our expectations at 22% for the first three months of 1998."
Fee income increased 32% to $31.6 million for the first three months of 1998 as compared to $23.9 million in 1997. Pre-tax profit margins were 38% for the first quarter of 1998 as compared to 41% in the 1997 first quarter primarily as a result of a small operating loss in our developing Financial Services segment due to a restructuring of the segment's executive incentive program. Excluding the Financial Services segment and the underwriting management portion of the Program Business segment, which generally has lower margins, pre-tax profit margins were 47% for the quarter as compared to 45% in 1997.
Operating expenses amounted to $19.7 million for the first three months of 1998, an increase of 39% over the corresponding 1997 period. This increase is attributable to a number of acquisitions made in 1997, growth in personnel and other expenses resulting from the increased business in each segment, as well as the costs associated with the revised executive incentive plan in the Financial Services segment. Excluding this revised executive bonus plan and the effect of acquisitions, the increase in operating expenses would have been 30%.
The Program Business segment, the fastest growing business segment, involves replacing traditional insurers and acting as a conduit between producers of specialty books of business and reinsures wishing to write that business. Program Business accounted for 49% of total Fee income for the first three months of 1998 compared to 38% in the corresponding 1997 period. Fees from Program Business increased 69% in the first quarter to $15.5 million compared to $9.2 million in the first quarter of 1997 as a result of the continued expansion in this business both through the growth of existing programs and the addition of new programs. Program Business profit margins were 40% in both periods.
Gross premiums written increased 38% to $182 million for the first three months of 1998 as compared to $132 million in 1997, primarily as a result of the growth within the Program Business segment. Program Business generally involves greater premium volume per unit than Corporate Risk Management business. Premiums earned increased 61% to $28.9 million in the first three months of 1998, as compared to $18.0 million in 1997. This increase was also primarily due to the growth within the Program Business segment.
Corporate Risk Management, the Company's original business segment, involves providing services to businesses and associations seeking to insure a portion of their risk in a loss sensitive Alternative Market structure. This segment accounted for 36% of total Fee income for the first three months of 1998, down from 48% in the corresponding 1997 period. Corporate Risk Management fees decreased by 1% in the quarter to $11.3 million compared to $11.5 million in 1997 as a result of a continuation of the extremely soft commercial insurance market. Profit margins, however, increased to 48% for the first three months of 1998 compared to 44% in 1997. The Company added 4 new corporate accounts in the first quarter as opposed to 17 in the corresponding 1997 quarter. Renewal rates, also reflecting the soft market cycle, dropped to 56% from 83% in 1997.
The Company's Specialty Brokerage business segment provides access to Alternative Risk Transfer insurers and reinsurers in Bermuda and Europe. The segment produced $1.8 million of total Fee income in the first quarter representing 6% of total Fee income. Specialty Brokerage fees grew by 13% in the first three months of 1998 from $1.6 million in the corresponding 1997 period. Renewal rates remained high in this segment at 91% for the first three months of 1998 as compared to 82% in 1997. Profit margins, however, decreased to 22% in the first quarter from 40% for the 1997 first quarter primarily as a result of declining premium rates in Bermuda on new and renewal business and the effects of a small start up operation in the U.S.
Financial Services, the Company's newest business segment, is being built on the acquisition of Hemisphere, which provides administrative services to offshore mutual funds and other companies. The segment accounted for 9% of total Fee income for the first three months of 1998 up from 7% in the corresponding 1997 period. Fees from Financial Services increased in the quarter of 68% to $2.9 million primarily as a result of an increase in the number of mutual funds under management from 98 at March 31, 1997 to 150 a year later. Renewal rates were 100% for the first three months of 1998 as compared to 99% in 1997. Profit margins were adversely affected in 1998 by a revised executive incentive plan and staff expansion costs to service new business and declined to (6%) in the quarter as opposed to 25% in the 1997 first quarter.
During the first quarter, the Company replaced the existing executive incentive program at Hemisphere with a revised long term plan. The prior plan, which was put in place in 1996 when the Company acquired Hemisphere, called for a one time payment in 1999 based on meeting performance targets. Due to the outstanding success of Hemisphere since its acquisition, that payment was likely to amount to the maximum possible of $5 million. The new plan replaces this potential bonus payable in 1999 with a current bonus arrangement payable over three years and a revised set of performance targets. The new plan replaces this potential bonus payable in 1999 with a current bonus arrangement payable over three years and a revised set of performance targets. The new incentive program will give Hemisphere the opportunity to continue the rapid growth that it has experienced since its acquisition and will facilitate its expansion into the United States and Europe. This revised executive incentive program will, however, affect the segment's operating expenses by $600,000 per quarter, adversely affecting the margins of the Financial Services segment in the short run.
Mutual Risk Management Ltd. Provides risk management services to clients in the United States, Canada and Europe seeking alternatives to traditional commercial insurance for certain of their risk exposures, as well as financial services to offshore mutual funds and other companies. Mutual Risk Management Ltd. (MM) Common Shares are listed on the New York and Bermuda stock exchanges.