per diluted share in 2000, and $24.3 million, or $0.56 per diluted share, for the first six months, as compared to $23.8 million or $0.57 per diluted share in 2000.
Fee income increased 42% in the second quarter to $33.8 million and 40% to $65.6 million for the first six months. Pre-tax profit margins from fee-based operations grew to 27% for the second quarter and 28% for the first six months of
2001 as compared to 25% and 26% in the corresponding 2000 periods.
Insurance Operations contributed $8.3 million of operating income for the six months ended June 30, 2001 as compared to $7.8 million in the corresponding 2000 period. Cash flow from operations for the first six months was positive $2.6 million. Return on equity was 12.5% for the first six months of 2001.
In a joint statement, Robert A. Mulderig, Chairman and Chief Executive Officer and John Kessock, Jr., President said: "The improvement in property casualty pricing continued to positively affect new unit sales and fee income in our
Corporate Risk Management business segment. This will continue to have a positive impact on our mix of business and our performance as we move through 2001. Sales for the second quarter of 2001 produced 11 new Corporate Risk Management accounts compared to 5 in the 2000 second quarter. Corporate Risk Management fees increased by 18% in the quarter while Financial Services
fees continued their impressive results, achieving growth of 108% in the quarter.
Excluding the effect of our recent trust company acquisition, Financial Services fees still grew by 46% for the six months."
OPERATING RESULTS BY SEGMENT
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 41% of total fee income in boththe second quarter and the first six months of 2001. Corporate Risk Management fees increased by 18% in the second quarter to $13.7 million, and
by 23% in the first six months to $27.1 million. Profit margins were 25% in the second quarter and 27% for the first six months of 2001, compared to 27% and 25% in the corresponding 2000 periods. The Company expects that a continuing firming of prices generally and the affirmation of the Legion Companies' A-(Excellent) rating by A.M. Best will continue to generate the sale of Corporate Risk Management accounts and associated fees.
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 39% of total fee income for the second quarter and 38% for the
first six months of 2001. Fees from Financial Services increased in the quarter by 108% to $13.3 million and by 103% to $25.2 million for the half-year as a result of an increase in mutual fund assets under administration, which exceeded $45 billion at June 30, 2001. Mutual Trust Management also spurred this growth,
contributing $3.9 million of fees in the quarter and $7.1 million for the six months.
Profit margins improved to 22% in the second quarter and 21% for the first six months of 2001 from 15% and 18% in the corresponding 2000 periods.
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 second quarter and $9.3 million in the first six months of 2001, representing 14% of total fee income in both the second quarter and the first six months. Specialty Brokerage fees increased by 12% in the second quarter from $4.4 million in 2000, but decreased by 1% in the first six months of 2001 from $9.4 million in the corresponding 2000 period. This is primarily due to the timing of certain renewals and the decreased purchase of reinsurance by the Company's Insurance Operations. Profit margins improved to 31% in the second quarter and to 28% for the first six months from 20% and 27%
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 will retain a more significant portion of the underwriting risk over
time. Gross premiums written, which include premium from the Company's
Insurance Operations and Corporate Risk Management segments, increased
11% to $728.1 million for the first six months of 2001 as compared to $656.1
million in 2000.
Premiums earned increased 31% to $83.9 million in the second quarter and 23%
to $147.3 million in the first six months of 2001. The Company's combined ratio
of 96.3% in the first six months of 2001, plus fees of $4.1 million, produced
operating income of $8.3 million as compared to a combined ratio of 95.0%, fees
of $2.9 million and operating income of $7.8 million in 2000. Losses and loss
expenses increased to $49.8 million and $93.6 million in the second quarter and
first six months for loss ratios of 59.3% and 63.5% respectively, as compared to
$41.8 million and $76.1 million for loss ratios of 65.3% and 63.5% in the
corresponding 2000 periods. Acquisition and underwriting expenses amounted
to $31.7 million and $48.3 million in the quarter and six months for expense ratios
of 37.8% and 32.8% respectively, as compared to $18.3 million and $37.8 million
for expense ratios of 28.5% and 31.5% in the corresponding 2000 periods. Acquisition costs, which include all external costs associated with the production of net premiums, amounted to $35.8 million in the second quarter of 2001 and
$58.4 million for the six months, as compared to $25.1 million and $50.0 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 $28.2 million and $58.5 million for the quarter and the six months, as compared to $26.6 million
and $48.9 million in the corresponding 2000 periods.
Operating expenses for this segment, which were previously recorded as Program Business operating expenses, amounted to $24.2 million for the quarter and $48.3 million for the first six months as compared to $19.8 million and $36.8
million for the corresponding 2000 periods.
Net investment income decreased by 19% to $6.9 million in the second quarterand by 37% to $13.3 million for the first six months of 2001. Investment yields declined to 5.2% and 4.9% in the second quarter and first six months of 2001 as
compared to 6.7% in both corresponding periods of 2000. The 2000 yields of 6.7% exclude $3.7 million from a special purpose entity, Endeavour Real Estate Securities Ltd. Net investment income was affected by lower interest rates, a change in the portfolio mix to include more invested cash and generally lower net invested assets.
Operating expenses increased 35% to $24.2 million for the quarter, compared to $17.9 million in the second quarter of last year, and increased 32% to $47.0 million for the first six months of 2001, compared to $35.6 million in the first six
months of 2000. 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 $4.5 million and $9.0 million
for the quarter and six months, respectively. Excluding the effect of recent acquisitions, operating expenses increased by 9% in the quarter and 7% for the first six months.
DISPUTE RESOLUTIONS
Total reinsurance recoverables increased by 8% from December 31, 2000 to
$2.5 billion. As of June 30, 2001, the Company was involved in four reinsurance
disputes in arbitration involving approximately $51 million of unreimbursed paid
losses and an estimated $62 million of unpaid reserves.
As previously announced, during the second quarter the Company reached a
settlement in a former arbitration dispute with a reinsurer on one of Legion's
principal workers' compensation treaties. Under the settlement, the reinsurance
contract will remain in force in accordance with its terms. That arbitration
proceeding also involved other reinsurance treaties relating to two MGA
programs. The parties agreed to conduct a complete audit of these programs,
which is ongoing, and to defer the arbitration and jointly fund losses pending final
resolution of the dispute.
Subsequent to the quarter-end, the Company reached a preliminary settlement in
another of the reinsurance disputes in arbitration. This settlement will reduce the
number of active reinsurance disputes in arbitration to three.
ANNUAL GENERAL MEETING
The Company's Annual Meeting of Shareholders, previously scheduled for May
16, 2001, has been rescheduled for August 9, 2001. At the meeting,
shareholders are expected to approve the issuance of shares in connection with
the recent capital transaction led by XL Capital Ltd. in addition to the election of
directors.