A proposed restructuring of long-time Bermuda insurance and financial services firm Mutual Risk Management may forge the way for its service entities to carry on business, but the fate of its US insurance subsidiaries remains in question and value for common shareholders could be tied to that outcome.

Mutual Risk (MRM) earlier in the year reported close to $100 million in losses for 2001 which put it in violation of certain debt agreements. As a result, the company and several subsidiaries were hit with rating downgrades and its US insurance companies - the Legion group - were put in to rehabilitation by state regulators.

In addition, a lack of investor confidence sent the company's market value in to tailspin as shares fell to below $1. After trading at that level for a period of weeks, MRM was delisted after more than a decade on the New York Stock Exchange.

The company is currently trading on the Over the Counter (OTC) Bulletin Board where trading has been below 10 cents per share during recent weeks.

Following MRM's restructuring announcement the stock price saw a marginal gain, closing at 16 cents on Monday and reaching a high of 17 cents yesterday before dipping down to 12 cents.

In comparison to its market value just over three years ago - $682.89 million - the company, despite a marginal gain on its share value this week, is left with market capitalisation of below $5 million.

Speaking with The Royal Gazette this week, MRM CEO Robert Mulderig said of the restructuring and how it may bear on shareholders: "What that (restructuring) does is eliminate all the debt of the parent company and takes away the debenture defaults. And the realisation of value for the MRM (common) shareholders will largely come about by virtue of whether we see a recovery out of the rehabilitation and the substantial realisation of value that is there in the Legion Companies."

CEO of MRM Services David Ezekiel, which will as part of the restructuring hold the MRM fee-based units including the Global Captive Group, as International Advisory Services (IAS) and Shoreline Mutual Management, and MRM Speciality Brokers Ltd, added that in the long-term the company does hope for recovery of the US insurance companies: "The hope is that we can, by working with the department (of insurance regulators), assist in retaining the value in the insurance companies.

"Clearly the best possible outcome would be to have the situation be stabilised enough for them to come out of rehabilitation, Mr. Ezekiel said.

In terms of the companies coming out of rehabilitation, Mr. Ezekiel said: "One could expect to unlock the value in Legion, for shareholders, if they came out of rehab. But it is a long process."

He added: "For there to be value to the common shareholders, it is clear that there needs to be a combination of continued success on the service side (from MRM Services), which we know will happen, and the creation of some substantial residual value in the Legion companies."

But Mr. Mulderig said that whether or not the MRM US insurance subsidiaries would carry on writing business after coming out of rehabilitation would have to be determined: "We are working towards getting the company out of rehabilitation and preserving the value that is in the company and then make the determination of what if any business we should write going forward. But there is a large amount of value that is there. And that, in the best case scenario, would be preserved for MRM shareholders."

In terms of the value in the companies, Mr. Mulderig said: "The US insurance companies at year end had about $400 million of capital, and about $2.6 billion of reinsurance recoverables. That is because in a very soft market they ceded to reinsurers all of the liability on the business that they wrote. The problem was that produced a very highly leveraged situation. And then a small number of disputes that arose caused insurers to pay late, or not pay at all," he said.

Mr. Mulderig said the difficulty in claiming reinsurance recoverables was the root of the firm's problems.

Mr. Ezekiel added: "On that large of a reinsurance recoverable, even a small delay can cause serious problems in meeting obligations on the outgoing side."

When asked if there is hope of recovering the $2.6 billion in reinsurance, Mr. Mulderig said: "Sure," and added that the reinsurance amounts in dispute were a little more than $50 million of the total $2.6 billion in reinsurance balances at the end of 2001.

Mr. Mulderig continued: "The receivables are from perfectly solvent companies and over time hopefully all of it will be received by the Legion Companies."

Mr. Ezekiel said of the reinsurance disputes: "It would be fair to say that in insurance business what happens is that if you have one, two, three disputes, a lot of other people that owe you money start dragging their feet a bit.

"The (Legion) companies, when they went in to rehab, had one of the largest surpluses it had had in its entire history. But there clearly was uncertainty about some of the collections.

"People take a look at what is clearly a small number of disputes and extrapolate it, And start saying if that is an expression of the whole, oh my goodness," Mr. Ezekiel said.

He also pointed out that Mr. Mulderig is in advanced discussions with those involved in the reinsurance disputes.

Mr. Mulderig added that those discussions have been "difficult to resolve but we are hopeful that we will get those resolved and get the reinsurance collected. But you are right that (reinsurance recovery) is the major problem for all of MRM."

When asked if MRM stands to return to its glory days - in years past it was heralded as one of Bermuda's strongest international companies, and within the last three years its stock was trading on the New York Stock Exchange at above $40 per share - Mr. Mulderig said: "With the restructuring, there will be separate companies. This separates MRM Services from Mutual Risk Management so the answer is probably no.

"The best case outcome to hope for - and what we are all working for - is to end up with a very successful service company in MRM Services and that MRM shareholders receive some value going forward, both from their shares in MRM Services (which will be 20 percent after restructuring) and more particularly, from the successful outcome of the rehabilitation of the Legion companies."

But, both Mr. Mulderig and Mr. Ezekiel stressed that obligations to senior debt holders must be met first: "Any value (from MRM or MRM Services) will first used to pay the creditors, to repay senior debt and to accrue to the preferred shares and then remaining value will go to (common) shareholders," they said.

Meanwhile, Mr. Mulderig said the shares will continue to trade on the Over the Counter (OTC) bulletin board.

In terms of an eventual relisting on the NYSE, Mr. Mulderig said: "I would say that it is unlikely. It would only happen after the Legion Companies came out of rehabilitation." And Mr. Mulderig added that there are no guarantees that the companies will come out of rehabilitation.

Mr. Ezekiel added: "It needs to said, even though we believe there is value (in the Legion Companies), the record of companies going in to rehab and coming out is not great. We believe that by actively managing the process with the department (of insurance), which we are committed to doing, we substantially improve the chances of that happening."

And Mr. Ezekiel said the company could still face adverse business developments such as the recent legal action against the company's rent-a-captive company IPC, in which $3 million of MRM assets were frozen, and as reported in The Royal Gazette on Monday

He said: "That sort of thing is going to happen going forward in the normal course of business. Because until such time as we clarify the obligations of the rent-a-captive operations, until such time as we determine that it meets solvency tests and so forth there is little movement we can make in terms of paying cash, declaring dividends and in that period you are going to get certain clients of these companies trying to protect their own interests.

"So you are going to get what looks like a lot of different things but they are all going to be pretty much emanating from the same issue which is that until we are totally clear as to where we stand it is going to be difficult for us to take any actions," he concluded.