Business at Hemisphere Group Ltd. grew so much that Mutual Risk Management Ltd. executives would have received $5 million in bonus payable next year.

However Bermuda-based Mutual Risk, which bought local company Hemisphere for $11.6 million in 1996, decided to revise the incentive programme with a bonus arrangement payable over three years and a revised set of performance targets.

Yet even with the revised plan, which spreads the payments out, the company's bottom line performance will be hurt by $600,000 a quarter as the payments to the executives are made.

Mutual Risk said Hemisphere's executive payout and the subsequent setting of higher performance targets will help continue the performance of its new segment.

"The new incentive programme will give Hemisphere the opportunity to continue the rapid growth that it has experienced since its acquisition and will facilitate its expansion into the United States and Europe,'' the company stated in its first quarter report to shareholders. "This revised executive incentive programme will, however, affect the segment's operating expenses by $600,000 per quarter, adversely affecting the margins of the financial services segment in the short run.'' Mutual Risk bought Hemisphere with the intention of making it the centre piece of its financial services segment, a new area for the company. The previous incentive plan was made in 1996 when Mutual Risk acquired publicly traded Hemisphere and took it private.

Hemisphere president and chief executive officer Christopher Wetherhill remained at the company with overall responsibility for Mutual Risk's new financial services division -- MRM Financial Services. Hemisphere co-founder Margaret Every, and Tom Healy, the company's chief operating officer, also remained on the job after the purchase.

Hemisphere, which provides administrative services to offshore mutual funds and other companies, accounted for nine percent of the groups total fee income in the first quarter 1998. Fees from financial services grew 68 percent to $2.9 million compared to first quarter 1997 as the number of mutual funds under management grew an additional 52 in the year to 150 by March 31, 1998.

"Profit margins ere adversely affected in 1998 by a revised executive incentive plan and staff expansion costs to service the new business and declined to minus six percent in the quarter as opposed to 25 percent in the 1997 first quarter,'' the company stated.

Meanwhile, Mutual Risk Management got a boost from its programme business segment, where fees rose about 70 percent, and from a 33 percent increase in investment income.

The company reported net income of $14.5 million for the first quarter ended March 31, a gain of 37 percent over first quarter 1997 results. The company had operating income of $14.6 million, or 34 cents per common share on a diluted basis, a 26 percent increase.

Return on equity was 22 percent for the first three months. Fee income increased to $31.6 million, a 32 percent gain.

"Pre-tax profit margins were 38 percent for the first quarter of 1998 as compared to 41 percent in the 1997 first quarter primarily as a result of a small operating loss in our developing financial services segment,'' Mutual Risk chairman and chief executive officer Robert Mulderig, and president John Kessock, Jr. said in a joint statement.

Operating expenses grew 39 percent to $19.7 mainly due to the acquisitions made in 1997, "This increase is attributable to a number of acquisitions made in 1997, growth in personnel and other expenses resulting from the increased business in each segment, as well as the costs associated with the revised executive incentive plan in the financial services segment,'' the executives stated.

The company's programme business segment, which had the fastest growth, involves replacing traditional insurers and acting as a conduit between producers of specialty books of business, and reinsurers wishing to write the business.

The segment accounted for 49 percent of total fee income for the first quarter, a gain of 11 percentage points over first quarter 1997. Fees from programme business rose 69 percent in the first quarter to $15.5 million.

Profit margins in the segment was 40 percent.

The company wrote gross premiums of $182 million, a gain of 38 percent, in the first quarter 1998. Premiums earned increased 61 percent to $28.9 million.

Meanwhile, the company's original business segment, corporate risk management, accounted for 36 percent of total fee income for the first quarter, down from 48 percent in first quarter 1997. Fees decreased on percent to $11.3 million due to a soft commercial insurance market. Renewal rates dropped to 56 percent from 83 percent in 1997.

Corporate risk management provides services to businesses and associations looking to insure a portion of their risk in an alternative market structure.

Mutual Risk provides risk management services in the US, Canada and Europe to clients seeking alternatives to traditional commercial insurance for certain risk exposures.

Robert Mulderig