charge of $17.5 million or $0.28 per diluted common share resulting from the Company's decision to write-off all reinsurance balances due from Reliance Group Holdings, Inc."Reliance"). This determination was made as a result of the insurance company subsidiaries of Reliance being placed in liquidation by the
Pennsylvania Insurance Department in October 2001. The Company's results also include $0.8 million after-tax, or $0.02 per diluted common share, of estimated losses from the tragic events of September 11, 2001.
As a result of the third quarter charges, the Company reported an operating loss of $5.4 million, or $0.13 per diluted share for the quarter, and operating income of $18.9 million or $0.45 per diluted share for the nine months of 2001.
Excluding the Reliance and World Trade Center ("WTC") losses, the Company reported operating income of $12.9 million or $0.27 per diluted share, as compared to $13.4 million or $0.32 per diluted share in 2000, and $37.2 million,
or $0.82 per diluted share for the nine months, as compared to $37.2 million or $0.89 per diluted share in 2000.
In a joint statement, Robert A. Mulderig, Chairman and Chief Executive Officer and John Kessock, Jr., President said: "The property casualty insurance market is experiencing a dramatic improvement in pricing, which has positively affected new unit sales and fee income in our Corporate Risk Management segment. We
expect this trend to continue and to dramatically increase demand for our Alternative Market services. Sales of new Corporate Risk Management accounts in the third quarter reached a record 22 as compared to 3 in the 2000 third quarter. We are also experiencing excellent growth in our Financial Services segment, where fees grew by 70% in the third quarter. We are also pleased
with the progress made in the transition of our insurance operations to a specialty insurance company model under a team led by our new Chief Underwriting Officer, Doug Boyce."
Fee income increased 32% in the third quarter to $33.4 million and 38% to $99.1 million for the nine months. Pre-tax profit margins from fee-based operations were 24% for the third quarter and 26% for the nine months of 2001 as compared
to 27% and 26% in the corresponding 2000 periods. Cash flow from operations for the quarter and nine months improved to $12.8 million and $23.4 million, respectively. Return on equity amounted to 12% for the nine months, excluding the charges and extraordinary loss.
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 42% of total fee income in both the third quarter and the nine months of 2001. Corporate Risk Management fees increased by 23% in the third quarter and nine months to $14.2 million and $41.3 million, respectively. Profit margins were 22% in the third quarter and 25% for
the nine months of 2001, compared to 25% in both the corresponding 2000 periods. The Company expects that a substantial firming of prices generally will continue to increase unit sales 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 38% of total fee income for both the third quarter and first nine months of 2001. Fees from Financial Services increased in the quarter by 70% to $12.7 million and by 91% to $37.9 million for the nine months as a result of an increase in mutual fund assets under administration, which were approximately
$50 billion at September 30, 2001. Mutual Trust Management also added to this growth,contributing $3.0 million of fees in the quarter and $10.1 million for the nine months. Profit margins were 18% in the third quarter and 20% for the nine
months of 2001, as compared to 21% and 19% 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 $4.8 million of fee income in the third quarter and $14.1 million in the first nine months of 2001, representing 15% and 14% of total fee income in the third quarter and the nine months, respectively. Specialty Brokerage fees increased by 1% in the third quarter, but decreased by 1% in the nine months of
2001 from $14.2 million in the corresponding 2000 period. 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 remained steady at 28% in the third quarter and nine months of 2001, from 29% and 28% in the corresponding 2000 periods.
The Company recently reorganized the Specialty Brokerage segment to reduce operating expenses and respond to the opportunity afforded by recent capital flows into Bermuda based insurance and reinsurance companies. Paul Scope, the Chief Executive Officer of the Bermuda brokerage operation, will succeed Phillip Hancock as Chairman of MRM Specialty Brokerage Ltd., with Michael Foulger continuing as Chief Operating Officer. Messrs. Scope and Foulger will
continue to be based in Bermuda and will be responsible for MRM's brokerage operations worldwide. Graham Bell, formerly a Managing Director of Marsh Marine and Energy Division in London, has joined the brokerage operation in
London to build a team concentrating on marine and related specialty reinsurance business.
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 include premium from the Company's Insurance Operations and Corporate Risk management segments, increased 5% to $1.2
billion for the first nine months of 2001, as compared to $1.1 billion in 2000. Net premiums written increased 41% to $319.4 million for the nine months of 2001 from $227.1 million in 2000.
Net premiums earned increased 27% to $91.3 million in the third quarter and 24% to $238.6 million in the first nine months of 2001. The Company reported loss ratios of 98.8% and 77.0% for the third quarter and nine months of 2001.
However, the Reliance charge added $26.9 million of losses in the quarter which were previously ceded to Reliance, increasing these loss ratios by 30% and 11% for the quarter and nine months, respectively. The loss ratio also includes 1.3%
in the quarter for the Company's net exposure to the WTC tragedy. Excluding these losses, losses and losses expenses were $62.1 million and $155.6 million in the third quarter and nine months for loss ratios of 68.0% and 65.2%, respectively, as compared to $56.6 million and $132.7 million for loss ratios of 78.6% and 69.1% in the corresponding 2000 periods.
Acquisition and underwriting expenses amounted to $24.0 million and $72.3 million in the quarter and nine months for expense ratios of 26.3% and 30.3% respectively, as compared to $11.2 million and $49.0 million for expense ratios of 15.5% and 25.5% in the corresponding 2000 periods. Excluding the Reliance and WTC losses, the combined ratios were 94.3% and 95.5% for the third
quarter and nine months of 2001, as compared to 94.1% and 94.6% in the corresponding 2000 periods.
Acquisition costs, which include all external costs associated with the production of net premiums, amounted to $28.5 million in the third quarter of 2001 and $87.0 million for the nine months, as compared to $20.1 million and $70.1 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 $29.1 million and $87.6 million
for the quarter and the nine months, as compared to $30.6 million and $79.5 million in the corresponding 2000 periods. Underwriting expenses for this segment, which were previously recorded as Program Business operating expenses, amounted to $24.6 million for the quarter and $72.9 million for the nine months as compared to $21.6 million and $58.4 million for the corresponding
2000 periods.
Net investment income decreased by 16% to $7.7 million in the third quarter and by 30% to $21.1 million for the nine months. Investment yields declined to 5.3% and 5.2% in the third quarter and nine months of 2001 as compared to 7.4% and
7.0% in the corresponding 2000 periods. The nine-month 2000 yield excludes $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 higher net invested assets.
Operating expenses increased 37% to $25.1 million for the quarter, compared to $18.4 million in the third quarter of last year, and increased 34% to $72.1 million for the nine months of 2001, compared to $54.0 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 $4.5 million and $13.5 million
for the quarter and nine months, respectively. Excluding the effect of recent acquisitions, operating expenses increased by 12% in the quarter and 9% for the first nine months.
DISPUTE RESOLUTIONS
Total reinsurance recoverables increased by 11% from December 31, 2000 to $2.6 billion. As previously disclosed, the Company settled one reinsurance dispute in arbitration during the quarter. As of September 30, 2001, the
Company was involved in three reinsurance disputes in arbitration involving approximately $49 million of unreimbursed paid losses and an estimated $36 million of unpaid reserves, as compared to $56 million and $83 million at
December 31, 2000.
REALIZED GAIN
In October 2001, the Company completed the previously announced sale of its interest in Tremont Advisers Inc. for cash proceeds of $25.7 million. This sale will result in a realized pre-tax gain of approximately $20.0 million, or
approximately $0.32 per diluted share, which will be recorded in the fourth quarter.
OUTSOURCING CONTRACT
The Company has entered into a three-year agreement to provide a full range of accounting and administrative services to AXIS Specialty Limited ("AXIS"), a new Bermuda based insurance and reinsurance company formed to respond to the
capacity shortage in the insurance industry. As part of this agreement, Andrew Cook, the Company's Chief Financial Officer, will also act as Chief Financial Officer of AXIS. Mr. Cook will devote all of his time to AXIS by the second
quarter of 2002. During that time, the Company expects to recruit a replacement for Mr. Cook.
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.