The Company has established a valuation allowance against its U.S. net deferred tax asset on its Consolidated Balance Sheet at December 31, 2001 of $63.0 million, or $1.50 per diluted share. Although the Company ultimately expects to realize these tax benefits in future years, SFAS No. 109 "Accounting for Income Taxes", requires the establishment of a valuation allowance where there is uncertainty as to the ability to realize the net deferred tax assets. The net deferred tax asset will be recognized in future periods to the extent that the Company produces taxable income in the United States. If the Company determines that a portion, or all, of the valuation allowance is unnecessary in the future, the related tax benefits will be recorded at that time.
The results for the fourth quarter also include an addition to the Company's reserves for losses and loss expenses of $61.5 million; a gain on the sale of the Company's interest in Tremont Advisors Inc. and Tremont MRM Services Ltd., of $20.8 million; a loss on the expected disposal of the Company's CompFirst underwriting management subsidiary of $5.4 million and reductions in the carrying value of a number of the Company's investments, including certain Collateralized Bond Obligations, of $10.4 million.
As a result the Company reported a net loss of $99.7 million, or $2.38 per diluted share, in the quarter, as compared to a net loss for the fourth quarter of 2000 of $37.7 million, or $0.91 per diluted share. The net loss for the full 2001 year was $86.2 million, or $2.07 per diluted share, as compared to a net loss of $5.6 million, or $0.14 per diluted share in 2000.
SALE OF HEMISPHERE
The Company also announced that its Board of Directors has authorized the sale of its fund administration business, Hemisphere Management. The Company, working with Hemisphere's management, has received a number of bids and is engaged in negotiations with a potential purchaser. It expects to execute a definitive agreement prior to March 5 and to close the transaction prior to March 31, 2002. The Company currently expects to receive cash proceeds of approximately $110 million from the sale and to report a gain on the sale of at least $100 million, or $1.57 per diluted share. In 2001, Hemisphere produced revenues of $33.5 million and net income, after minority interest, of $7.0 million, or $0.17 per diluted share. The sale requires the consent of the Company's banks and debenture holders and a portion of the proceeds will likely be used to reduce debt.
In a joint statement Robert A. Mulderig, Chairman and Chief Executive Officer and John Kessock, Jr., President, said: "2001 has been a tumultuous year for the property-casualty insurance industry and Mutual Risk Management. Our 2001 results are certainly disappointing. The establishment of a 100% valuation allowance against the U.S net deferred tax asset is a non-cash charge which does not affect our ability to utilize this deferred tax asset in the future. Earnings in 2002 and beyond should be achieved without reduction for U.S income taxes until this asset is exhausted. The Company's shareholders' equity amounted to $268 million at December 31, 2001, representing a book value of $6.43 per share which is expected to increase to approximately $370 million or $8.86 per share on the sale of Hemisphere. The market is presently experiencing a dramatic improvement in pricing. This is leading to greatly increased demand for Alternative Market services. We believe we are the industry leaders in the Alternative Market which makes up more than one-third of the commercial property-casualty market in the United States. Sales of new corporate risk management accounts more than doubled in 2001, to 75 and Corporate Risk Management fees increased 24% in 2001. The improved market is also aiding the transition of our insurance companies to a specialty insurance business model which, we believe, will result in greater risk retention, lower dependence on reinsurance and improved operating cash flow."
OPERATING RESULTS BY SEGMENT
Fee income increased 39% in the fourth quarter to $38.6 million and 38% to $137.7 million for the year as a result of greater demand for Corporate Risk Management services and growth in the Financial Services segment. Pre-tax profit margins from fee-based operations were 21% for the fourth quarter and 24% for the year. Cash flow from operations for the fourth quarter declined to negative $5.5 million but was positive $18.0 million for the full year.
Corporate Risk Management 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 43% of total fee income in the fourth quarter and 42% for the year ended December 31, 2001. Corporate Risk Management fees increased by 26% in the fourth quarter to $16.5 million and by 24% for the year to $57.9 million. Profit margins were 18% in the fourth quarter and 25% for the year ended December 31, 2001, compared to 29% and 27% in the corresponding 2000 periods. Beginning in the fourth quarter of 2001, the Corporate Risk Management segment bore all of the marketing expenses of the Company's marketing subsidiary, CRS Services Inc. ("CRS"). CRS now devotes all its efforts to marketing the Company's Corporate Risk Management business. Prior to the fourth quarter of 2001, the majority of these marketing expenses were charged to the Company's Program Business segment.
The Financial Services business segment provides administrative services to offshore mutual funds and other companies, provides trust and private client services, and offers a proprietary family of mutual funds as well as asset accumulation life insurance products for the high net worth market. The segment accounted for 40% of total fee income in the fourth quarter and 39% for the year. Fees from Financial Services increased by 90% to $15.4 million in the fourth quarter and by 91% to $53.3 million for the year as a result of an increase in mutual fund assets under administration, which were approximately $52 billion as at December 31, 2001. Mutual Trust Management also added to this growth, contributing $4.6 million of fees in the quarter and $14.7 million for the year. Profit margins improved to 21% in the fourth quarter and 19% for the year, from 14% and 16% in the corresponding 2000 periods. Excluding Hemisphere, fees from this segment would have been $5.9 million for the quarter and $19.9 million for the full year, and profit margins would have been 18% and 15%.
The Company's Specialty Brokerage business segment provides access to insurers and reinsurers in Bermuda, Europe and the United States. The segment produced $4.9 million of fee income in the fourth quarter and $19.0 million in the year, representing 13% and 14% of total fee income in the fourth quarter and the year, respectively. Specialty Brokerage fees were flat as compared to 2000 in both the quarter and full year. This resulted from the decreased purchase of reinsurance by the Company's Insurance Operations, offset by higher commissions on new and renewal business due to increased pricing. Profit margins declined to 16% in the fourth quarter and 21% in the year, from 25% and 24% in the corresponding 2000 periods.
Insurance Operations represents the Company's former Program Business segment, which is being transitioned to a specialty insurance operation in which the Company retains a more significant portion of the underwriting risk. Gross premiums written, which includes premium from the Company's Insurance Operations and Corporate Risk Management segments, increased 9% to $1.5 billion for the year ended December 31, 2001 as compared to $1.4 billion in 2000. Net premiums written increased 41% to $395.6 million for the year from $280.2 million in 2000.
Acquisition and underwriting expenses amounted to $33.2 million and $105.2 million in the quarter and full year for expense ratios of 40.4% and 32.8% respectively, as compared to $34.5 million and $82.7 million for expense ratios of 55.2% and 32.5% in the corresponding 2000 periods. Acquisition costs, which include all external costs associated with the production of net premiums, amounted to $32.8 million in the fourth quarter of 2001 and $119.8 million for the 2001 year, as compared to $40.2 million and $110.2 million in the corresponding 2000 periods. Acquisition costs are reduced by the excess of the ceding commissions received from reinsurers over the related acquisition costs on ceded premium. These excess ceding commissions, which were previously recorded as Program Business fees, amounted to $19.6 million and $107.2 million for the quarter and the 2001 year, as compared to $28.2 million and $107.7 million in the corresponding 2000 periods. Underwriting expenses for this segment, which were previously recorded as Program Business operating expenses, amounted to $20.1 million for the quarter and $92.6 million for the year, as compared to $22.5 million and $80.1 million for the corresponding 2000 periods.
Losses and loss expenses amounted to $120.1 million in the quarter and $303.8 million for all of 2001, producing loss ratios of 145.9% and 94.7% as compared to 151.0% and 89.3% in 2000. Losses and loss expenses in the fourth quarter included: (a) an increase in loss reserves of $38.3 million as a result of the previously announced review of year-end reserves by the Company's consulting actuaries; (b) an increase of $12.4 million in the Company's reserve for reinsurance recoverables and related legal expenses; (c) an increase of $3.5 million in the Company's reserve for unallocated loss adjustment expenses in connection with the disposal of CompFirst; and (d) provision for losses of $10.8 million in connection with the commutation of certain reinsurance contracts. As previously announced, the results for the 2001 year also include $26.9 million related to the write-off of reinsurance balances due from Reliance Group Holdings, Inc. and $1.2 million of net losses related to the tragic events of September 11th.
Net investment income decreased by 26% to $6.7 million in the fourth quarter and by 30% to $27.7 million for the year. Investment yields declined to 4.54% and 5.09% in the fourth quarter and the year as compared to 7.29% and 7.63% in the corresponding 2000 periods. The twelve-month 2000 yield includes $3.7 million from a special purpose entity, Endeavour Real Estate Securities Ltd. which did not recur in subsequent quarters. Net investment income was adversely affected by lower interest rates and a change in the portfolio mix to include more invested cash and higher net invested assets.
Operating expenses increased 46% to $30.1 million for the quarter, compared to $20.6 million in the fourth quarter of last year, and increased 36% to $102.7 million for the year, compared to $75.3 million in the corresponding 2000 period. The increase in operating expenses is attributable to growth in personnel and other expenses to service the Company's existing businesses. Recent acquisitions also contributed an additional $3.8 million and $15.9 million for the quarter and the year, respectively. Excluding the effect of recent acquisitions, operating expenses increased by 25% in the quarter and 14% for the year.
REINSURANCE UPDATE
Total reinsurance recoverables increased by 10% in 2001 to $2.5 billion. Paid loss reinsurance recoverables, which are included in accounts receivable, increased 24% from $185.6 million at December 31, 2000 to $230.9 million at December 31, 2001. As of December 31, 2001, the Company was still involved in three previously reported reinsurance arbitration disputes involving approximately $48.7 million of unreimbursed paid losses and an additional $14.6 million of estimated unpaid reserves, as compared to five disputes involving $56 million and an additional $83 million of estimated unpaid reserves respectively at December 31, 2000. In addition, as previously disclosed, the Company continues to be involved in a series of related proceedings concerning a property program terminated in 1999.
In the fourth quarter the Company also commuted one reinsurance agreement and is currently negotiating a second commutation agreement as a result of a dispute which recently arose. These commutations involve the Company receiving a payment of cash from the reinsurers based on a discount to the ultimate losses expected under the agreement. Although the Company has incurred a loss of $10.8 million under these commutation agreements, the Company will earn investment income in the future on the cash received.
DEBT COVENANTS
Due to the size of the net loss in the fourth quarter, the Company has violated certain of the covenants of its bank debt and debenture holder agreements at December 31, 2001. The Company is negotiating with the banks and debenture holders to obtain waivers of these violations and to amend certain additional covenants. The Company's auditors have advised that, although they have not completed their audit of the Company's 2001 financial statements, their Report of Independent Auditors on the Company's 2001 financial statements will contain a paragraph referring to these events of default if they still exist at the time the audit is completed.
CONFERENCE CALL INFORMATION
The Company will conduct a conference call for interested shareholders, analysts and investors on Tuesday February 19, 2002 at 2.00 p.m. E.S.T. which can be accessed by calling (212) 676-4900 or by logging on to the Company's website at www.accessmrm.com (or www.streetevents.com). A replay of the conference call will be available from 4.00 p.m. E.S.T. on Tuesday February 19, 2002, until 4.00 p.m. E.S.T. on Tuesday, February 26, 2002. To access the rebroadcast, dial 1-800-633-8284 or 1-858-812-6440 and enter reservation #20365539.
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.
This press release contains forward-looking statements within the meaning of the U.S. federal securities laws with regard to our future growth, profitability and income from some of our business segments. We intend these forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in these laws. These statements are not guarantees of performance. Actual results may differ materially from those projected in such forward-looking statements and therefore you should not place undue reliance on them. A non-exclusive list of the important factors that could cause actual results to differ materially from those in such forward-looking statements includes the following: (a) the timely and full recoverability of reinsurance placed by Mutual Risk with third parties; (b) adverse developments in the world's insurance, reinsurance and financial markets; (c) our ability to sell our subsidiary Hemisphere Management Ltd. on the terms and at the price currently anticipated; and (d) our ability to obtain waivers of the event of default existing under our bank and debenture agreements; and (e) the other factors set forth in Mutual Risk's most recent report on Form 10-K and Mutual Risk's other documents on file with the Securities and Exchange Commission. Mutual Risk undertakes no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future developments or otherwise.