Description

Mutual Risk is in 4 lines of business:
1) The historal business - Alternative Insurance - provides a "rent-a-captive" insurance service to allow a company to self-insure. With P/C rates (particularly workers comp) up huge this business is growing again. I think it will grow 20-30% this year. MM takes no risk, as this is a fee business. This business has historically gotten a 20ish P/E. With this business just starting to grow again after 5 years, I think this is exciting.

2) They are the largest custodian for offshore hedge-funds & mutual funds. This is a small business, but grew 90% in the first qt(45%+ ex acq.) Once again a no risk, scale, fee business.

3) a small specialty insurance broker.

4) A program business - Where they own an insurance company that used to reinsure 90% of the risk. This business has run into a problem. 5 reinsurers( who are no longer in the business) have broken their agreements & refused to pay. MM has had to pay 50 million out of pocket & likely another 50 mill ultimately. MM has sued the 5 and won the first case in arbitration. MM has set up a reserve for half of the $100 mill. & expects it all arbitration cases to be resolved by yr. end. MM is shrinking this business & taking greater risk themselves ( 20-40%) & reinsuring the rest.

VALUATION
MM ($8.50 stock price) is expected to earn 1.00-1.15 in '01 & grow 15-20%.


CONCERNS
1) After taking charge against reinsrance recoverables, AM Best threatened a downgrade. MM raised capital, which diluted EPS by 10-15%, from XL Capital & others. The ratings are no longer at risk.

2) MM doesn't have a history, or experts to be an insurance underwriter. They are hiring people to do so. XL Capital does have such skills & is aiding them.

Catalyst

The capital has been raised. By year-end the arbitration should be complete. Wall street doesn't believe the mgt. EPS goals & we will know who's right by year-end