In a joint statement Chairman and CEO Robert A. Mulderig and President John Kessock, Jr., commented that "The second half of 1999 proved to be disappointing for Mutual Risk. For the first time as a public company our earnings failed to meet analysts' expectations. However, even during this disappointing year, Mutual Risk was solidly profitable. Fee income increased by 13%. Return on equity dropped but amounted to 17% excluding provisions for losses on terminated programs taken in the third quarter, substantially above the industry average. We believe that 1999 will mark the bottom of the 12-year commercial property casualty market cycle, and that the next couple of years will present Mutual Risk with exceptional opportunity. Our Balance Sheet is strong and we have the experienced people and the tested products to take advantage of an improving market."
For the fourth quarter of 1999, Operating income amounted to $10.2 million or $0.25 per diluted share compared to $16.1 million or $0.35 per diluted share in the 1998 fourth quarter. As expected, the fourth quarter of 1999 produced lower Operating income than the third quarter, excluding the previously announced provisions, due to increased Operating expenses and decreased Fees and Investment income. For the full year, Operating income amounted to $63.6 million or $1.40 per diluted share, excluding the provisions for losses on terminated programs taken in the third quarter of $0.16 per diluted share as compared to the $1.43 per diluted share in 1998. Fee income decreased slightly for the fourth quarter to $40.7 million, but increased 13% to $177.7 million for the full year as compared to $157.3 million in 1998.
Net investment income increased by 8% to $8.4 million in the fourth quarter and by 14% to $33.6 million for the year. The increase in Investment income for the full year is due, in part, to the inclusion of Investment Income from one of the Company's programs, accounted for as Claims deposit liabilities, which added $2.8 million for the year. Excluding this, investment yields were 7.8% in the fourth quarter and 7.1% for the full year as compared to 7.0% and 6.9% in 1998. The increase in Investment income was offset by Realized capital losses in the portfolio.
Operating expenses increased 26% for the quarter and full year to $35.6 million and $128.5
million respectively. The increase in Operating Expenses for the year is attributable to growth in personnel and other expenses resulting from the increased business, increased spending to improve customer service, and recent acquisitions.
Program Business involves replacing traditional insurers and acting as a conduit between producers of specialty books of business and reinsurers wishing to write that business. The segment accounted for 48% of total Fee Income in the quarter and 53% for the year ended 1999 compared to 54% and 52% in the corresponding 1998 periods. Fees from Program Business decreased 13% in the fourth quarter to $19.4 million, but increased by 16% to $95.1 million for the year as compared to $22.2 million and $82.3 million respectively in 1998. In the quarter, Program Business fees were adversely affected by the seasonality of some Programs and certain adverse Fee adjustments. Profit margins declined to 8% for the quarter and 28% for the year, as compared to 37% and 40% in the corresponding 1998 periods. The decline in the Program Business growth rate and margins in the quarter continued to reflect trends seen in the third quarter including declines in premium rates, especially at the Company's underwriting management subsidiary, Small Business Underwriters, which was hurt by increased competition and lower rates.
Gross premiums written increased 37% to $1.2 billion for 1999 as compared to $850 million in 1998, 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 51% to $42.2 million in the fourth quarter and 78% to $181.8 million in the year, as compared to $27.9 million and $101.9 million in the corresponding 1998 periods. These increases in Premiums earned were 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 29% of total Fee Income in the fourth quarter and 28% for the year, down from 31% and 33% in the corresponding 1998 periods. Corporate Risk Management fees decreased by 7% in the fourth quarter to $11.9 million, and by 4% for the year to $49.4 million, reflecting the continuation of the soft commercial insurance market cycle for commercial risks. Profit margins dropped to 14% in the fourth quarter and 32% for the 1999 full year from 32% and 39% in 1998. The fourth quarter profit margin on Corporate Risk Management was negatively impacted by the significant decrease in Fees on Program Business because certain Operating expenses are not separately identified by segment but rather are apportioned by Fee income.
The Company's Specialty Brokerage business segment provides access to Alternative Risk
Transfer insurers and reinsurers in Bermuda and Europe. The segment produced $4.0 million of total Fee income in the fourth quarter and $13.7 million in the year, representing 10% of total Fee income for the fourth quarter and 8% for the year. Specialty Brokerage fees grew by 76% in the fourth quarter and 52% in the year as a result of increased business placed in Bermuda and London. Profit margins increased to 34% in the fourth quarter and 38% for the year, as compared to 23% and 25% in the corresponding 1998 periods as a result of the increased revenues.
Financial Services, the Company's newest business 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. The segment accounted for 13% of total Fee income for the fourth quarter and 11% for the year ended 1999. Fees from Financial Services increased in the quarter by 28% to $5.5 million over the 1998 corresponding period, and by 36% to $19.5 million for the year, primarily as a result of an increase in the number of mutual funds under administration to 279 from 195. Profit margins in the Financial Services segment have been adversely affected in 1998 and 1999 by the previously announced revised executive incentive plan and staff expansion costs to service new business, but remained level at 11% in the fourth quarter and increased to 7% for the year compared to 4% in 1998. Excluding the effect of the revised executive incentive plan, the profit margins in this segment would have been 20% for the quarter and 17% for the year.
During the fourth quarter, the Company repurchased 2.6 million Common Shares at an average price of $11.31 per share and $14 million face amount of its Convertible Exchangeable Subordinated Debentures due 2015 at a cost of $6.3 million. The Company also established a $250 million bridge loan facility, $117 million of which was outstanding at December 31, 1999. In December of 1999, the Company made an additional contribution to the policyholders' surplus of its U.S. insurance companies in the amount of $110 million from this facility. The Company expects to refinance this bridge loan facility with permanent financing during 2000, and recently filed a S-3 Shelf Registration Statement with the U.S. Securities and Exchange Commission, covering up to $500 million of debt and preferred securities.
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.