UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the period ended September 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Transition period from _______________ to _______________
COMMISSION FILE NUMBER 000-23427
STIRLING COOKE BROWN HOLDINGS LIMITED
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
BERMUDA NOT APPLICABLE
(STATE OF OTHER JURISDICTION OF (IRS EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
VICTORIA HALL, 3RD FLOOR, 11 VICTORIA STREET, HAMILTON HM 11, BERMUDA
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
TELEPHONE NUMBER: (441) 295-7556
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
YES [X] NO [ ]
The number of outstanding shares of the registrant's Ordinary Stock, $0.25
par value, as of September 30, 1998 was 9,863,372.
<PAGE>
INDEX
PART I - FINANCIAL INFORMATION
PAGE
----
ITEM 1 UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets at December 31, 1997 and
September 30, 1998 (Unaudited).............................. 1
Unaudited Consolidated Statements of Income and
Comprehensive Income for the three month and nine month
periods ended September 30, 1997 and 1998................... 2
Unaudited Consolidated Statements of Changes in
Shareholders' Equity for the three month and nine month
periods ended September 30, 1997 and 1998................... 3
Unaudited Consolidated Statements of Cash Flows for the
nine month periods ended September 30, 1997 and 1998........ 4
Notes to Unaudited Consolidated Financial Statements at
September 30, 1997 and 1998................................. 5
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS......................... 6
PART II - OTHER INFORMATION
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K............................ 12
SIGNATURES.................................................. 13
EXHIBITS
Exhibit 11 - Statement of Computation of Net Income Per Ordinary
Share.................................................. 14
<PAGE>
<TABLE>
<CAPTION>
STIRLING COOKE BROWN HOLDINGS LIMITED
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND SEPTEMBER 30, 1998 (UNAUDITED)
(EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS, EXCEPT PER SHARE DATA)
1997 1998
-------- ---------
ASSETS
------
<S> <C> <C>
Marketable securities, at fair value
Debt securities (amortized cost, 1997 - $14,882, 1998 -
$15,729)................................................... $ 14,971 $ 15,958
Equity securities (cost, 1997 - $454, 1998 - $2,382)......... 486 2,124
Short term investments (amortized cost, 1997 - $5,579, 1998
- $8,352).................................................. 5,579 8,352
-------- --------
Total marketable securities...................................... 21,036 26,434
Cash and cash equivalents........................................ 50,631 69,742
Fiduciary funds-restricted....................................... 60,224 76,933
Insurance and reinsurance balances receivable (affiliates, 1997
- $8,118, 1998 - $16,940)...................................... 213,332 246,048
Outstanding losses recoverable from reinsurers................... 24,621 38,121
Deferred acquisition costs....................................... 579 1,724
Deferred reinsurance premiums ceded.............................. 12,503 18,351
Deferred tax asset............................................... 1,109 1,872
Goodwill......................................................... 8,613 8,957
Other assets..................................................... 10,926 15,075
Assets related to deposit liabilities............................ 2,756 2,975
-------- --------
Total assets............................................. $406,330 $ 506,232
======== =========
<CAPTION>
LIABILITIES
-----------
<S> <C> <C>
Outstanding losses and loss expenses............................. $ 36,276 $ 54,481
Unearned premiums................................................ 19,187 24,665
Deferred income.................................................. 2,853 4,373
Insurance and reinsurance balances payable (affiliates, 1997 -
$16,187, 1998 - $21,402)....................................... 251,713 311,619
Funds withheld................................................... 1,314 1,325
Accounts payable and accrued liabilities......................... 6,170 9,834
Income taxes payable............................................. 2,958 2,704
Deposit liabilities.............................................. 2,756 2,975
-------- --------
Total liabilities........................................ $323,227 $411,976
======== =========
<CAPTION>
SHAREHOLDERS' EQUITY
--------------------
<S> <C> <C>
Share Capital
Authorized 20,000,000 ordinary shares of par value $0.25 each
Issued and fully paid 9,863,372 ordinary shares.............. 2,466 2,466
Additional paid in capital....................................... 54,167 54,167
Accumulated other comprehensive income........................... 63 (41)
Retained earnings................................................ 27,074 38,331
-------- --------
83,770 94,923
Less: 40,000 ordinary shares in treasury at cost................. (667) (667)
-------- --------
Total shareholders' equity............................... 83,103 94,256
Total liabilities and shareholders' equity............... $406,330 $506,232
======== =========
See accompanying notes to unaudited consolidated financial statements
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
STIRLING COOKE BROWN HOLDINGS LIMITED
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
AND COMPREHENSIVE INCOME
THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1998
(EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS, EXCEPT PER SHARE DATA)
Three Months ended Nine Months ended
September 30 September 30
1997 1998 1997 1998
-------- ------- ------- -------
<S> <C> <C> <C> <C>
Revenues
Risk management fees................... $ 11,712 $14,112 $33,714 $40,952
Net premiums earned.................... 3,390 3,334 9,111 12,938
Net investment income.................. 1,440 2,314 4,318 6,373
Other income........................... 477 947 866 2,479
-------- ------- ------- -------
Total revenues..................... 17,019 20,707 48,009 62,742
-------- ------- ------- -------
Expenses
Net losses and loss expenses incurred.. 3,258 3,616 8,428 13,337
Acquisition costs...................... 286 267 1,007 1,627
Depreciation and amortization of
capital assets....................... 311 430 913 1,151
Amortization of goodwill............... 184 188 544 541
Salaries and benefits.................. 4,416 5,927 13,285 16,639
Other operating expenses............... 4,298 5,133 12,180 14,354
-------- ------- ------- -------
Total expenses..................... 12,753 15,561 36,357 47,649
-------- ------- ------- -------
Income before taxation..................... 4,266 5,146 11,652 15,093
Taxation................................... 676 1,017 2,070 2,952
-------- ------- ------- -------
Net income................................. $ 3,590 $ 4,129 $ 9,582 $12,141
-------- ------- ------- -------
Other comprehensive income (loss), net of tax:
Unrealized holding gains (losses) arising
during the Year....................... 36 (104) 192 (56)
Less: reclassification adjustments for
realized (gains) losses included in net
income................................. 6 (16) (255) (48)
-------- ------- ------- -------
Other comprehensive income (loss)...... 42 (120) (63) (104)
Comprehensive income................... 3,632 4,009 9,519 12,037
======== ======= ======= =======
Net income per share....................... $ 0.42 $ 0.42 $ 1.17 $ 1.24
======== ======= ======= =======
Net income per share
assuming dilution.......................... $ 0.42 $ 0.42 $ 1.15 $ 1.23
======== ======= ======= =======
Dividends per share........................ $ 0.00 $ 0.03 $ 0.00 $ 0.09
======== ======= ======= =======
See accompanying notes to unaudited consolidated financial statements
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
STIRLING COOKE BROWN HOLDINGS LIMITED
UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1998
(EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
1997 1998 1997 1998
--------- -------- -------- ---------
<S> <C> <C> <C> <C>
ORDINARY SHARES OF PAR VALUE $0.25 EACH
Balance at beginning of period.......... $ 1,550 $ 2,466 $ 1,500 $ 2,466
Options exercised....................... - - 150 -
Cancellation of ordinary shares in
treasury.............................. - - (100) -
--------- -------- -------- ---------
Balance at end of period................ $ 1,550 $ 2,466 $ 1,550 $ 2,466
--------- -------- -------- ---------
ADDITIONAL PAID IN CAPITAL
Balance at beginning of period.......... $ 13,722 $ 54,167 $ 12,319 $ 54,167
Proceeds from exercise of options in
excess of par......................... - - 1,475 -
Issuance of shares...................... - - (72) -
--------- -------- -------- ---------
Balance at end of period................ $ 13,722 $ 54,167 $ 13,722 $ 54,167
--------- -------- -------- ---------
NOTES RECEIVABLE
Balance at beginning of period.......... $ (1,625) $ - $ - $ -
Receivable on exercise of options....... - - (1,625) -
--------- -------- -------- ---------
Balance at end of period................ $ (1,625) $ - $ (1,625) $ -
--------- -------- -------- ---------
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Balance at beginning of period.......... $ 42 $ 79 $ 147 $ 63
Change in unrealized gain (loss) on
marketable securities................. 42 (120) (63) (104)
--------- -------- -------- ---------
Balance at end of period................ $ 84 $ (41) $ 84 $ (41)
--------- -------- -------- ---------
RETAINED EARNINGS
Balance at beginning of period.......... $ 20,377 $ 34,497 $ 15,973 $ 27,074
Net income.............................. 3,590 4,129 9,582 12,141
Dividends............................... - (295) - (884)
Cancellation of ordinary shares in - - (1,588) -
treasury..............................
--------- -------- -------- ---------
Balance at end of period................ $ 23,967 $ 38,331 $ 23,967 $ 38,331
--------- -------- -------- ---------
TREASURY STOCK
Balance at beginning of period.......... $ - $ (667) $ (938) $ (667)
Purchase of ordinary shares in treasury. - - (812) -
Sale of ordinary shares from treasury... - - 61 -
Cancellation of ordinary shares in
treasury.............................. - - 1,689 -
--------- -------- -------- ---------
Balance at end of period................ $ - $ (667) $ - $ (667)
--------- -------- -------- ---------
Total shareholders' equity.............. $ 37,698 $ 94,256 $ 37,698 $ 94,256
========= ======== ======== =========
Dividends per share were $0 and $0.03 for the three months ended September
30, 1997 and 1998, respectively, and $0 and $0.09 for the nine months ended
September 30, 1997 and 1998 respectively.
See accompanying notes to unaudited consolidated financial statements
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
STIRLING COOKE BROWN HOLDINGS LIMITED
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1998
(EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS)
1997 1998
--------------- ----------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 9,582 $ 12,141
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization of capital assets......... 913 1,151
Amortization of goodwill................................ 544 541
Amortization of marketable securities................... 140 63
Net realized gains on sale of marketable securities..... (411) (48)
Equity in income of affiliates.......................... (808) (2,209)
Profit on disposal of capital assets.................... (4) (36)
Changes in non cash operating assets and liabilities:
Fiduciary funds......................................... (6,133) (16,709)
Insurance and reinsurance balances receivables.......... (172,439) (32,716)
Outstanding losses recoverable from reinsurers.......... (4,024) (13,500)
Deferred acquisition costs.............................. (215) (1,145)
Deferred reinsurance premiums ceded..................... (1,921) (5,847)
Other assets............................................ (2,732) (2,326)
Deferred tax asset...................................... (859) (712)
Assets related to deposit liabilities................... 466 (219)
Outstanding losses and loss expenses.................... 8,044 18,204
Unearned premiums....................................... 3,296 5,478
Insurance and reinsurance balances payable.............. 173,828 59,905
Funds withheld.......................................... (546) 11
Accounts payable and accrued liabilities................ (122) 3,664
Income taxes payable.................................... 373 (254)
Deferred income......................................... 333 1,520
Deposit liabilities..................................... (466) 219
--------------- ----------------
Net cash provided by operating activities........... 6,839 27,176
--------------- ----------------
INVESTING ACTIVITIES
Purchase of capital assets.............................. (1,250) (2,178)
Sale of capital assets.................................. 132 84
Purchase of debt securities............................. (238) (10,540)
Purchase of equity securities........................... (3,977) (2,467)
Purchase of short-term investments, net................. (3,932) (2,773)
Proceeds on sale of debt securities..................... 2,091 9,625
Proceeds on sale of equity securities................... 7,087 587
Purchase of subsidiaries, net of cash acquired.......... (1,197) (884)
Investments in affiliates............................... (109) -
Dividends received from affiliates...................... 281 1,365
--------------- ----------------
Cash used by investing activities................... (1,112) (7,181)
--------------- ----------------
FINANCING ACTIVITIES
Dividends............................................... - (884)
Purchase of ordinary shares in treasury................. (812) -
Sales of ordinary shares in treasury.................... 61 -
--------------- ----------------
Cash used by investing activities................... (751) (884)
--------------- ----------------
Increase in cash and cash equivalents........................ 4,976 19,111
Cash and cash equivalents at beginning of period............. 15,602 50,631
--------------- ----------------
Cash and cash equivalents at end of period................... $ 20,578 $ 69,742
=============== ================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for income taxes............... $ 940 $ 2,836
=============== ================
See accompanying notes to unaudited consolidated financial statements
</TABLE>
<PAGE>
STIRLING COOKE BROWN HOLDINGS LIMITED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997 AND 1998
(EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS, EXCEPT SHARE DATA)
1. INTERIM ACCOUNTING POLICY
In the opinion of management of the Company, the accompanying unaudited
consolidated financial statements include all adjustments, consisting only
of normal recurring adjustments, necessary to present fairly the financial
position of the Company at December 31, 1997 and September 30, 1998, the
results of operations for the three months and nine months ended September
30, 1997 and 1998 and the cash flows for the nine months ended September
30, 1997 and 1998. Although the Company believes that the disclosure in
these financial statements is adequate to make the information presented
not misleading, certain information and footnote information normally
included in financial statements prepared in accordance with generally
accepted accounting principles has been condensed or omitted pursuant to
the rules and regulations of the Securities and Exchange Commission. The
interim financial statements should be read in conjunction with the
Company's Annual Report on Form 10-K for the fiscal year ended December 31,
1997. Results of operations for the three months and nine months ended
September 30, 1998 are not necessarily indicative of what operating results
may be for the full year.
2. COMPREHENSIVE INCOME
During the nine months ended September 30, 1998, the Company adopted the
reporting and disclosure requirements of SFAS No. 130 "Reporting
Comprehensive Income".
<PAGE>
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following is Management's discussion and analysis of Stirling Cooke
Brown Holdings Limited's (the "Company") results of operations for the
three months and nine months ended September 30, 1997 and 1998 and
financial condition as of September 30, 1998. This discussion and analysis
should be read in conjunction with the attached unaudited consolidated
financial statements and notes thereto of the Company and the audited
consolidated financial statements and notes thereto of the Company
contained in the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1997.
GENERAL
The Company was incorporated in Bermuda on December 12, 1995. The Company
is a holding company engaged, through its subsidiaries, in providing
insurance services primarily in the United States, Bermuda and Europe. The
Company's activities include insurance and reinsurance brokering,
underwriting management, risk management, claims control, loss and safety
prevention, third party administration and managed care services. The
Company also owns a United States domiciled insurance company Realm
National Insurance Company Limited ("Realm National") which, together with
the Company's Bermuda based reinsurance company Comp Indemnity Reinsurance
Company Limited ("CIRCL"), writes insurance and reinsurance business. Realm
National also earns policy issuance fees. The Company specializes in the
North American occupational accident and workers' compensation alternative
risk transfer markets.
RESULTS OF OPERATIONS FOR THE THREE MONTHS AND NINE MONTHS ENDED
SEPTEMBER 30, 1997 AND 1998.
The results of operations for the three months and nine months ended
September 30, 1998 reflect a continuation of growth in revenues and net
income resulting from the increased business activity of the Company.
REVENUES
- --------
The components of the Company's revenues are illustrated below:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30 ENDED SEPTEMBER 30
1997 1998 1997 1998
---- ---- ---- ----
(dollars in thousands) (dollars in thousands)
% of % of % of % of
Total Total Total Total Total Total Total Total
----- ----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Risk management fees $11,712 68.8% $14,112 68.1% $33,714 70.2% $40,952 65.3%
Net premiums earned 3,390 19.9 3,334 16.1 9,111 19.0 12,938 20.6
Net investment income 1,440 8.5 2,314 11.2 4,318 9.0 6,373 10.1
Other income 477 2.8 947 4.6 866 1.8 2,479 4.0
------- ----- ------- ---- ------- ---- ------- ----
Total revenues $17,019 100.0% $20,707 100.0% $48,009 100.0% $62,742 100.0%
======= ====== ======= ====== ======= ====== ======= ======
</TABLE>
For the third quarter of 1998, total revenues increased $3.7 million, or
21.7%, to $20.7 million from $17.0 million in the third quarter of 1997.
For the first nine months of 1998, total revenues increased $14.7 million,
or 30.7%, to $62.7 million from $48.0 million in the first nine months of
1997.
Risk management fees increased $2.4 million in the third quarter of 1998 as
compared to the corresponding period in 1997 and increased $7.2 million in
the first nine months of 1998 as compared to the first nine months of 1997.
These increases are primarily due to increased business volume and are
analyzed in more detail below. Net premiums earned decreased $0.1 million
in the third quarter of 1998 as compared to the corresponding period in
1997 and increased $3.8 million in the first nine months of 1998 as
compared to the first nine months of 1997. The decrease in net premiums
earned during the third quarter of 1998 as compared to 1997 was due to a
decrease in net premiums earned by the Company's Bermuda based reinsurance
company. The year to date increase is a result of increased premium being
written by Realm National for the Company. Net investment income increased
$0.9 million in the third quarter of 1998 as compared to the corresponding
period in 1997 and increased $2.1 million in the first nine months of 1998
as compared to the first nine months of 1997. These increases reflect an
increase in the Company's average balances of cash, including cash held in
fiduciary accounts. The increased cash balances reflect the growth in the
Company's business activities together with the cash held following
completion of the Company's initial public offering in December, 1997.
Other income consists primarily of the Company's equity share in the net
income of affiliates which has increased $0.3 million in the third quarter
of 1998 as compared to the corresponding period in 1997 and increased $1.4
million in the first nine months of 1998 as compared to the first nine
months of 1997.
The components of the Company's risk management fees are illustrated below:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30 ENDED SEPTEMBER 30
1997 1998 1997 1998
---- ---- ---- ----
(dollars in thousands) (dollars in thousands)
% of % of % of % of
Total Total Total Total Total Total Total Total
----- ----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Brokerage fees and
commissions $5,932 50.6% $7,122 50.5% $17,785 52.8% $20,039 48.9%
Managing general
agency fees 3,052 26.1 3,641 25.8 8,207 24.3 10,871 26.5
Underwriting
management fees 1,107 9.5 636 4.5 3,037 9.0 2,528 6.2
Program and captive
management fees 786 6.7 1,073 7.6 2,099 6.2 2,901 7.1
Loss control and
audit fees 674 5.7 1,212 8.6 2,000 5.9 3,182 7.8
Policy issuance fees 161 1.4 428 3.0 586 1.8 1,431 3.5
------- ------ ------- ------ ------- ------ ------- ------
Total risk
management fees $11,712 100.0% $14,112 100.0% $33,714 100.0% $40,952 100.0%
======= ====== ======= ====== ======= ====== ======= ======
</TABLE>
For the third quarter of 1998, risk management fees increased $2.4 million,
or 20.5%, to $14.1 million from $11.7 million in the third quarter of 1997.
For the first nine months of 1998, risk management fees increased $7.2
million, or 21.5%, to $41.0 million from $33.7 million in the first nine
months of 1997.
Brokerage fees and commissions increased $1.2 million in the third quarter
of 1998 as compared to the corresponding period in 1997 and increased $2.3
million in the first nine months of 1998 as compared to the first nine
months of 1997. These increases are largely the result of increased
insurance and reinsurance brokerage activities from the Company's
U.K.-based brokerage operations. Managing general agency fees increased
$0.6 million in the third quarter of 1998 as compared to the corresponding
period in 1997 and increased $2.7 million in the first nine months of 1998
as compared to the first nine months of 1997. These increases are primarily
as a result of the Company's continued expansion of its managing general
agency operations in Florida and Texas. Underwriting management fees
decreased $0.5 million in the third quarter of 1998 as compared to the
corresponding period in 1997 and decreased $0.5 million in the first nine
months of 1998 as compared to the first nine months of 1997. These
decreases were the result of a reduction in business underwritten by the
Underwriting Management companies due to the current market conditions in
the areas in which these companies operate. Program and captive management
fees increased $0.3 million in the third quarter of 1998 as compared to the
corresponding period in 1997 and increased $0.8 million in the first nine
months of 1998 as compared to the first nine months of 1997 as a result of
increased business volume. Fees for loss control and audit services
increased $0.5 million in the third quarter of 1998 as compared to the
corresponding period in 1997 and increased $1.2 million in the first nine
months of 1998 as compared to the first nine months of 1997. The Company's
policy issuance fees increased $0.3 million in the third quarter of 1998 as
compared to the corresponding period in 1997 and increased $0.8 million in
the first nine months of 1998 as compared to the first nine months of 1997.
These increases are due to the increased business written by Realm
National.
EXPENSES
- --------
The components of the Company's expenses are illustrated below:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30 ENDED SEPTEMBER 30
1997 1998 1997 1998
---- ---- ---- ----
(thousands of dollars) (thousands of dollars)
<S> <C> <C> <C> <C>
Net losses and loss
expenses incurred $3,258 $3,616 $8,428 $13,337
Insurance premium
acquisition costs 286 267 1,007 1,627
------- ------- ------- -------
Total insurance costs 3,544 3,883 9,435 14,964
------- ------- ------- -------
Salaries and benefits 4,416 5,927 13,285 16,639
General and administration
expenses 4,793 5,751 13,637 16,046
------- ------- ------- -------
Total operating expenses 9,209 11,678 26,922 32,685
------- ------- ------- -------
Total expenses $12,753 $15,561 $36,357 $47,649
======= ======= ======= =======
</TABLE>
For the third quarter of 1998, total expenses increased $2.8 million, or
22.0%, to $15.6 million from $12.8 million in the third quarter of 1997.
For the first nine months of 1998, total expenses increased $11.3 million,
or 31.1%, to $47.6 million from $36.3 million in the first nine months of
1997.
Total insurance costs, which includes net losses and loss expenses incurred
and insurance premium acquisition costs, increased $0.3 million in the
third quarter of 1998 as compared to the corresponding period in 1997 and
increased $5.5 million in the first nine months of 1998 as compared to the
first nine months of 1997. These increases are primarily as a result of the
corresponding increase in net premiums earned during the respective
periods. In addition, the Company incurred loss development on one
particular program that covers bodily injury and property risks in the
construction industry. Total operating expenses increased $2.5 million in
the third quarter of 1998 as compared to the corresponding period in 1997
and increased $5.8 million in the first nine months of 1998 as compared to
the first nine months of 1997. Salaries and benefits, the largest component
of total operating expenses, increased $1.5 million in the third quarter of
1998 as compared to the corresponding period in 1997 and increased $3.4
million in the first nine months of 1998 as compared to the first nine
months of 1997. Similarly, general and administration expenses increased
$1.0 million in the third quarter of 1998 as compared to the corresponding
period in 1997 and increased $2.4 million in the first nine months of 1998
as compared to the first nine months of 1997. The increases in salaries and
benefits and the increases in general and administration expenses were
primarily due to the general expansion of the Company's business as
reflected in the Company's growth in revenues.
INCOME
- ------
The components of the Company's income are illustrated below:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30 ENDED SEPTEMBER 30
1997 1998 1997 1998
---- ---- ---- ----
(thousands of dollars) (thousands of dollars)
<S> <C> <C> <C> <C>
Risk management companies $4,198 $5,644 $11,157 $16,479
Underwriting companies 68 (498) 495 (1,386)
------- ------- ------- -------
Income before taxation 4,266 5,146 11,652 15,093
------- ------- ------- -------
Taxation 676 1,017 2,070 2,952
Net income $3,590 $4,129 $9,582 $12,141
------- ------- ------- -------
Effective tax rate 15.8% 19.8% 17.8% 19.6%
</TABLE>
Risk management companies comprise those companies that do not retain any
underwriting risk and underwriting companies comprise those companies that
do retain various degrees of underwriting risk. Underwriting companies
include income from risk management fees earned by them in the form of
policy issuance fees. Interest income is included in each segment's income
if the asset on which the interest is earned is included among the
segment's identifiable assets. The performance of the underwriting
companies was affected by adverse loss development on one particular
program that the Company writes covering bodily injury and property risks
in the construction industry.
For the third quarter of 1998, income before taxation increased $0.9
million, or 20.6%, to $5.1 million from $4.3 million in the third quarter
of 1997 while net income increased $0.5 million, or 15.0%, in the third
quarter of 1998 to $4.1 million from $3.6 million in the third quarter of
1997.
For the first nine months of 1998, income before taxation increased $3.4
million, or 29.5%, to $15.1 million from $11.7 million in the third quarter
1997 while net income increased $2.6 million, or 26.7%, in the first nine
months of 1998 to $12.1 million from $9.6 million in the first nine months
of 1997.
The Company's provision for taxation increased $0.3 million in the third
quarter of 1998 as compared to the corresponding period in 1997 and
increased $0.9 million in the first nine months of 1998 as compared to the
first nine months of 1997. The increase in effective tax rates for the
third quarter of 1998 compared to 1997 and the first nine months of 1998 as
compared to 1997 are primarily due to the relative increase in profits from
the Company's U.S. and U.K. subsidiaries.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1998, the Company held cash and marketable securities of
$96.2 million compared to $71.7 million at December 31, 1997. In addition,
the Company held cash in fiduciary accounts relating to insurance client
premiums amounting to $76.9 million at September 30, 1998 compared to $60.2
million at December 31, 1997. Of the $96.2 million of cash and marketable
securities held by the Company at September 30, 1998 (December 31, 1997 -
$71.7 million), $55.1 million (December 31, 1997 - $40.9 million) were held
by subsidiaries whose payment of dividends to the Company was subject to
regulatory restrictions or possible tax liabilities. At September 30, 1998,
the Company's investment portfolio (at fair market value) totalled $26.4
million. The portfolio consisted primarily of U.S. Treasury, short-term
cash, equity securities and A-rated corporate debt securities.
During the nine month period ending September 30, 1998, the Company's
operating activities generated $27.2 million of net cash, compared to
generating $6.8 million of net cash during the corresponding nine months of
1997. The cash generated from operating activities varies according to the
timing of collections and payments of insurance and reinsurance balances.
Total assets increased to $506.2 million at September 30, 1998 from $406.3
million at December 31, 1997, principally as a result of increased business
activity. The Company had no outstanding debt as of September 30, 1998.
On September 3, 1998 the Company paid a third quarter dividend of $0.03 per
share to shareholders of record on August 20, 1998 making the total
dividends for the year to date $0.09 per share. The actual amount and
timing of any future ordinary share dividends is at the discretion of the
Board of Directors of the Company. The declaration and payment of any
dividends is dependent upon the profits and financial requirements of the
Company and other factors, including certain legal, regulatory and other
restrictions. There can be no assurance that the Company's dividend policy
will not change or that the Company will declare or pay any dividends in
future periods.
ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131
"Disclosures about Segments of an Enterprise and Related Information." This
statement was effective for financial statements issued for fiscal years
beginning after December 15, 1997. SFAS No. 131 requires the Company to
report financial and descriptive information about its reportable operating
segments. The Company is currently reviewing the impact of this standard on
its financial reporting.
In December 1997, AICPA Accounting Standards Executive Committee issued
Statement of Position (SOP) 97-3. Accounting by Insurance and Other
Enterprises for Insurance-Related Assessments. The accounting guidance of
this SOP focuses on the timing of recognition and measurement of
liabilities for insurance-related assessments. Guidance is also provided on
recording assets representing future recoveries of assessments through
premium tax offsets or policy surcharges. The SOP was issued to reduce
diversity in practice and to improve comparability and disclosure. The SOP
is effective for fiscal years beginning after December 15, 1998. The
Company is currently reviewing the impact of the adoption of this new SOP
on its consolidated financial statements.
In April 1998, AICPA Accounting Standards Executive Committee issued
Statement of Position (SOP) 98-5. Reporting on the Costs of Start-up
Activities. The SOP is effective for fiscal years beginning after December
15, 1998. This SOP addressed the treatment of certain start-up costs and
was issued to reduce diversity in financial reporting. The SOP requires
that certain start-up costs be treated as a cumulative effect of a change
in accounting principle in the beginning of the fiscal year in which the
SOP is first adopted. The Company is currently reviewing the impact of the
adoption of this new SOP on its consolidated financial statements.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133
"Accounting for Derivative Instruments and Hedging Activities." This
statement is effective for all fiscal quarters of fiscal years beginning
after June 15, 1999. The Company is currently reviewing the impact of this
standard on its financial reporting.
YEAR 2000
The Year 2000 Issue is the result of computer programs being written using
two digits rather than four digits to define the applicable year. Any of
the Company's programs or non-information systems that have date-sensitive
software may recognize a date using "00" as the year 1900 rather than the
year 2000. This could result in a major system failure or in
miscalculations.
In 1997, the Company appointed individuals in each of the Company's
geographic regions to review and assess the Company's state of readiness
and its ability to process transactions in the Year 2000. These individuals
and the overall committee that they are a part of are providing guidance to
the operating and support departments, and have and will continue to
monitor the progress of efforts made to address the Year 2000 issue. The
Company is currently implementing its plan and preparing its various
computer systems and selected applications for the Year 2000. This process
involves taking inventory, testing, evaluating and adjusting all known
date-sensitive systems and equipment for Year 2000 compliance. In addition,
the Company is reviewing its essential non-information technology systems
for Year 2000 compliance. The Company has also consulted with various third
parties, including, but not limited to, outside consultants, outside
service providers and infrastructure providers to develop approaches to the
Year 2000 issue, to gain insight to problems and to provide additional
perspective on solutions. The Company expects that compliance work with
respect to the internal systems will be substantially completed by the
first quarter of 1999. In 1999, all systems critical to the Company's core
businesses will be retested.
The Company continues to assess its external relationships with third
parties. The Company is in the process of communicating with its
significant vendors and large customers to determine the extent to which
the Company is vulnerable to those third parties' failure to remediate
their own Year 2000 issues. Where deemed necessary by the Company, this
process involves onsite review of the third party's procedures and plans
for Year 2000 compliance. However, there can be no assurance that the
systems of third parties, such as utility companies, regulatory bodies,
government entities, insurance related companies or insurance carriers on
which the Company's operations rely, will be timely converted, or that a
failure to convert by another company would not have a material adverse
effect on the Company's operating results. However, management believes
that ongoing communication with and assessment of third parties will
minimize these risks.
The total estimated costs of compliance is $0.7 million. Approximately $0.5
million of the cost is related to reprogramming or replacement of software,
approximately $0.2 million is related to acquisition of hardware. Costs
related to non-information technology are expected to be immaterial.
Approximately $0.4 million of the $0.7 million cost of compliance has been
incurred as of the end of September 30, 1998. All of these costs are being
funded through operating cash flows. Total costs have not had and are not
expected to have material impact on the Company's financial results.
Based on the review of the state of readiness of the Company and its risks,
the Company currently anticipates minimal business disruption will occur as
a result of Year 2000 issues. Nonetheless, the Year 2000 issue represents a
risk that cannot be assessed with precision nor controlled with certainty.
Possible consequences of disruptions that could occur given non-compliance
include, but are not limited to, loss of communication links with
subsidiaries and insurance carriers, loss of electric power, inability to
process transactions or inability to engage in similar normal business
activities. Furthermore, failure of significant third parties with which
the Company conducts business, including insurance carriers, to meet Year
2000 compliance could have a materially detrimental effect on the Company.
To date, the Company has not established a contingency plan for possible
Year 2000 issues. Where needed, the Company will establish contingency
plans based on actual testing experience with its systems and assessment of
outside risks.
Readers are referred to the following section, which addresses
forward-looking statements made by the Company.
NOTE ON FORWARD-LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements. This Form 10-Q may include
forward-looking statements which reflect the Company's current views with
respect to future events and financial performance. These forward-looking
statements are identified by their use of such terms and phrases as
"intends," "intend," "intended," "goal," "estimate," "estimates,"
"expects," "expect," "expected," "project," "projected," "projections,"
"plans," "anticipates," "anticipated," "should," "designed to,"
"foreseeable future," "believe," "believes" and "scheduled" and similar
expressions. Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date the statement
was made. The Company undertakes no obligation to publicly update or revise
any forward-looking statements, whether as a result of new information,
future events or otherwise.
Reference is made to the cautionary statements contained in Exhibit 99 to
the Company's Form 10-K for the year ended December 31, 1997 for a
discussion of the factors that may cause actual results to differ from the
results discussed in these forward-looking statements.
<PAGE>
PART II - OTHER INFORMATION
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit No. Description
11. Statement of Computation of Net Income
Per Ordinary Share
(b) Reports on Form 8-K
The Company filed a report on Form 8-K dated May 14, 1998
reporting the Company's financial results for the three
months ended March 31, 1998.
The Company filed a report on Form 8-K dated August 10, 1998
reporting the Company's financial results for the three
months ended June 30, 1998.
The Company filed a report on From 8-K dated October 7, 1998
reporting on a share repurchase plan undertaken by the
Company.
The Company filed a report on Form 8-K dated November 9,
1998 reporting the Company's financial results for the three
months ended September 30, 1998.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
Dated: November 13, 1998
STIRLING COOKE BROWN HOLDINGS LIMITED
BY /s/ George W. Jones
----------------------------------
George W. Jones
CHIEF FINANCIAL OFFICER AND DIRECTOR
EXHIBIT 11
<TABLE>
<CAPTION>
STIRLING COOKE BROWN HOLDINGS LIMITED
STATEMENT OF COMPUTATION OF NET INCOME PER ORDINARY SHARE
(Expressed in thousands of United States Dollars, except per share data)
As of or for the As of or for the
three months ended nine months ended
September 30 September 30
1997 1998 1997 1998
--------- -------- ---------- --------
<S> <C> <C> <C> <C>
Net Income.................................. $ 3,590 $ 4,129 $ 9,582 $ 12,141
========= ========= ========== ========
BASIC
Number of Shares:
Weighted average number of ordinary shares
outstanding............................... 8,488,372 9,863,372 8,162,791 9,863,372
Weighted average treasury shares held....... -- (40,000) (187,861) (40,000)
Shares issued in June, 1997(1).............. -- -- 192,592 --
--------- --------- ---------- --------
8,488,372 9,823,372 8,167,522 9,823,372
========= ========= ========== =========
Net income per share........................ $ 0.42 $ 0.42 $ 1.17 $ 1.24
========= ========= ========== =========
DILUTED
Number of shares:
Weighted average number of ordinary shares
outstanding............................... 8,488,372 9,863,372 8,162,791 9,863,372
Weighted average treasury shares held....... -- (40,000) (187,861) (40,000)
Shares issued in June, 1997................. -- -- 192,592 --
Incremental shares of outstanding stock
options................................... -- -- 173,826 34,744
--------- --------- ---------- --------
8,488,372 9,823,372 8,341,348 9,858,116
========= ========= ========== =========
Net income per share assuming dilution...... $ 0.42 $ 0.42 $ 1.15 $ 1.23
========= ========= ========== =========
</TABLE>
(1) In accordance with SEC Staff Accounting Bulletin 98, ordinary shares
which were issued in connection with the conversion of 25 class "A"
non-voting shares are considered outstanding for all prior periods
presented for purposes of both basic and diluted presentations.
