UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the period ended June 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 June 30, 1998 was 9,863,372.
INDEX
PART I - FINANCIAL INFORMATION
PAGE
----
ITEM 1 UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets at December 31,
1997 and June 30, 1998 (Unaudited)...........................1
Unaudited Consolidated Statements of Income
and Comprehensive Income for the three month
and six month periods ended June 30, 1997 and
1998.........................................................2
Unaudited Consolidated Statements of Changes
in Shareholders' Equity for the three month
and six month periods ended June 30, 1997 and
1998.........................................................3
Unaudited Consolidated Statements of Cash
Flows for the six month periods ended June
30, 1997 and 1998............................................4
Notes to Unaudited Consolidated Financial
Statements at June 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..................................................12
EXHIBITS
Exhibit 11 - Computation of Net Income per Share and Net Income per Share
assuming dilution
STIRLING COOKE BROWN HOLDINGS LIMITED
CONSOLIDATED BALANCE SHEETS
December 31, 1997 and June 30, 1998 (unaudited)
(Expressed in thousands of United States Dollars, except per share data)
1997 1998
--------- ---------
ASSETS
Marketable securities, at fair value
Debt securities (amortized cost,
1997 - $14,882, 1998 - $12,828) ................. $ 14,971 $ 12,901
Equity securities (cost, 1997 - $454,
1998 - $2,481) .................................. 486 2,528
Short term investments (amortized cost, 1997 -
$5,579, 1998 - $6,972) .......................... 5,579 6,972
--------- ---------
Total marketable securities .......................... 21,036 22,401
Cash and cash equivalents ............................ 50,631 65,332
Fiduciary funds-restricted ........................... 60,224 82,182
Insurance and reinsurance balances receivable
(affiliates, 1997 - $8,118, 1998 - $22,789) ........ 213,332 248,351
Outstanding losses recoverable from reinsurers ....... 24,621 36,150
Deferred acquisition costs ........................... 579 1,753
Deferred reinsurance premiums ceded .................. 12,503 18,293
Deferred tax asset ................................... 1,109 1,617
Goodwill ............................................. 8,613 8,260
Other assets ......................................... 10,926 13,691
Assets related to deposit liabilities ................ 2,756 3,645
--------- ---------
Total assets ................................... $ 406,330 $ 501,675
========= =========
LIABILITIES
Outstanding losses and loss expenses ................. $ 36,276 $ 52,764
Unearned premiums .................................... 19,187 25,612
Deferred income ...................................... 2,853 3,412
Insurance and reinsurance balances payable
(affiliates, 1997 - $16,187, 1998 - $33,788) ....... 251,713 311,157
Funds withheld ....................................... 1,314 1,819
Accounts payable and accrued liabilities ............. 6,170 7,951
Income taxes payable ................................. 2,958 4,773
Deposit liabilities .................................. 2,756 3,645
--------- ---------
Total liabilities .............................. $ 323,227 $ 411,133
--------- ---------
SHAREHOLDERS' EQUITY
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 79
Retained earnings .................................... 27,074 34,497
--------- ---------
83,770 91,209
Less: 40,000 Ordinary shares in treasury at cost ..... (667) (667)
--------- ---------
Total shareholders' equity ..................... 83,103 90,542
Total liabilities and shareholders' equity ..... $ 406,330 $ 501,675
========= =========
See accompanying notes to unaudited consolidated financial statements
STIRLING COOKE BROWN HOLDINGS LIMITED
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
AND COMPREHENSIVE INCOME
Three months and six months ended June 30, 1997 and 1998
(Expressed in thousands of United States Dollars, except per share data)
<TABLE>
<CAPTION>
Three Months Six Months
ended June 30 ended June 30
1997 1998 1997 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues
Risk management fees ................ $ 11,736 $ 14,065 $ 22,002 $ 26,840
Net premiums earned ................. 3,027 5,118 5,721 9,604
Net investment income ............... 1,666 2,093 2,878 4,059
Other income ........................ 216 816 389 1,532
-------- -------- -------- --------
Total revenues ................... 16,645 22,092 30,990 42,035
-------- -------- -------- --------
Expenses
Net losses and loss expenses incurred 2,794 4,954 5,170 9,721
Acquisition costs ................... 361 794 721 1,360
Depreciation and amortization of
capital assets ..................... 319 370 602 721
Amortization of goodwill ............ 184 176 360 353
Salaries and benefits ............... 4,811 6,047 8,869 10,712
Other operating expenses ............ 4,350 4,684 7,882 9,221
-------- -------- -------- --------
Total expenses ................... 12,819 17,025 23,604 32,088
-------- -------- -------- --------
Income before taxation ................. 3,826 5,067 7,386 9,947
Taxation ............................... 654 1,042 1,394 1,935
-------- -------- -------- --------
Net income ............................. $ 3,172 $ 4,025 $ 5,992 $ 8,012
-------- -------- -------- --------
Other comprehensive income (loss),
net of tax:
Unrealized holding gains arising
during the year ................... 346 16 156 48
Less: reclassification adjustments
for realized gains
included in net income............... (149) (32) (261) (32)
-------- -------- -------- --------
Other comprehensive income (loss) ... 197 (16) (105) 16
Comprehensive income ................ 3,369 4,009 5,887 8,028
======== ======== ======== ========
Net income per share ................... $ 0.40 $ 0.41 $ 0.75 $ 0.82
======== ======== ======== ========
Net income per share
assuming dilution ...................... $ 0.39 $ 0.41 $ 0.72 $ 0.81
======== ======== ======== ========
Dividends per share .................... $ 0.00 $ 0.03 $ 0.00 $ 0.06
======== ======== ======== ========
</TABLE>
See accompanying notes to unaudited consolidated financial statements
STIRLING COOKE BROWN HOLDINGS LIMITED
UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Three months and six months ended June 30, 1997 and 1998
(Expressed in thousands of United States Dollars, except per share data)
<TABLE>
<CAPTION>
Three months Six months
ended June 30 ended June 30
1997 1998 1997 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Ordinary shares of par value $0.25
each
Balance at beginning of period ... $ 1,500 $ 2,466 $ 1,500 $ 2,466
Options exercised ................ 150 -- 150 --
Cancellation of ordinary shares
in treasury .................... (100) -- (100) --
-------- -------- -------- --------
Balance at end of period ......... $ 1,550 $ 2,466 $ 1,550 $ 2,466
-------- -------- -------- --------
Additional paid in capital
Balance at beginning of period ... $ 12,319 $ 54,167 $ 12,319 $ 54,167
Proceeds from exercise of options
in excess of par ............... 1,475 -- 1,475 --
Issuance of shares ............... (72) -- (72) --
-------- -------- -------- --------
Balance at end of period ......... $ 13,722 $ 54,167 $ 13,722 $ 54,167
-------- -------- -------- --------
Notes receivable
Balance at beginning of period ... $ -- $ -- $ -- $ --
Receivable on exercise
of options ..................... (1,625) -- (1,625) --
-------- -------- -------- --------
Balance at end of period ......... $ (1,625) $ -- $ (1,625) $ --
-------- -------- -------- --------
Accumulated other comprehensive
income
Balance at beginning of period ... $ (155) $ 95 $ 147 $ 63
Change in unrealized gain (loss)
on marketable securities ....... 197 (16) (105) 16
-------- -------- -------- --------
Balance at end of period ......... $ 42 $ 79 $ 42 $ 79
-------- -------- -------- --------
Retained earnings
Balance at beginning of period ... $ 18,793 $ 30,765 $ 15,973 $ 27,074
Net income ....................... 3,172 4,025 5,992 8,012
Dividends ........................ -- (293) -- (589)
Cancellation of ordinary shares
in treasury .................... (1,588) -- (1,588) --
-------- -------- -------- --------
Balance at end of period ......... $ 20,377 $ 34,497 $ 20,377 $ 34,497
-------- -------- -------- --------
Treasury stock
Balance at beginning of period ... $ (938) $ (667) $ (938) $ (667)
Purchase of ordinary shares in
treasury ....................... (812) -- (812) --
Sale of ordinary shares from
treasury ....................... 61 -- 61 --
Cancellation of ordinary shares
in treasury .................... 1,689 -- 1,689 --
-------- -------- -------- --------
Balance at end of period ......... $ -- $ (667) $ -- $ (667)
-------- -------- -------- --------
Total shareholders' equity ....... $ 34,066 $ 90,542 $ 34,066 $ 90,542
======== ======== ======== ========
</TABLE>
Dividends per share were $0 and $0.03 for the three months ended June 30,
1997 and 1998, respectively, and $0 and $0.06 for the six months ended
June 30, 1997 and 1998 respectively.
See accompanying notes to unaudited consolidated financial statements.
STIRLING COOKE BROWN HOLDINGS LIMITED
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months ended June 30, 1997 and 1998
(Expressed in thousands of United States Dollars)
1997 1998
--------- --------
Operating activities
Net income .......................................... $ 5,992 $ 8,012
Adjustments to reconcile net income to
net cash (used) provided by operating activities:
Depreciation and amortization of capital assets 602 721
Amortization of goodwill ....................... 360 353
Amortization of marketable securities .......... 51 54
Net realized gains on sale of marketable
securities ................................... (420) (32)
Equity in income of affiliates ................. (349) (1,448)
Changes in non cash operating assets and liabilities:
Fiduciary funds ................................ (9,623) (21,957)
Insurance and reinsurance balances
receivable .................................... (104,275) (35,018)
Outstanding losses recoverable from
reinsurers ................................... (2,576) (11,529)
Deferred acquisition costs ..................... (122) (1,174)
Deferred reinsurance premiums ceded ............ (30) (5,790)
Other assets ................................... (1,230) (1,699)
Deferred tax asset ............................. (7) (490)
Assets related to deposit liabilities .......... (830) (889)
Outstanding losses and loss expenses ........... 6,080 16,487
Unearned premiums .............................. (60) 6,426
Insurance and reinsurance balances payable ..... 102,304 59,443
Funds withheld ................................. (831) 539
Accounts payable and accrued liabilities ....... (456) 1,746
Income taxes payable ........................... 1,316 1,815
Deferred income ................................ 526 559
Deposit liabilities ............................ 830 889
--------- --------
Net cash (used) provided by operating
activities ................................ (2,748) 17,018
--------- --------
Investing activities
Purchase of capital assets ..................... (831) (1,168)
Sale of capital assets ......................... 39 48
Purchase of debt securities .................... -- (7,000)
Purchase of equity securities .................. (3,976) (2,276)
Purchase of short-term investments, net ........ (3,976) (1,393)
Proceeds on sale of debt securities ............ 2,130 9,000
Proceeds on sale of equity securities .......... 7,087 281
Purchase of subsidiaries, net of cash
acquired ..................................... (1,197) --
Dividends received from affiliates ............. 281 780
--------- --------
Cash used by investing activities .......... (443) (1,728)
--------- --------
Financing activities
Dividends ...................................... -- (589)
Purchase of ordinary shares in treasury ........ (812) --
Sales of ordinary shares in treasury ........... 61 --
--------- --------
Cash used by investing activities .......... (751) (589)
--------- --------
(Decrease) increase in cash and cash
equivalents ....................................... (3,942) 14,701
Cash and cash equivalents at beginning of
period ............................................ 15,602 50,631
--------- --------
Cash and cash equivalents at end of period .......... $ 11,660 $ 65,332
========= ========
Supplemental disclosure of cash flow information
Cash paid during the period for income
taxes ......................................... $ 867 $ 598
========= ========
See accompanying notes to unaudited consolidated financial statements
STIRLING COOKE BROWN HOLDINGS LIMITED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 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 June 30, 1998, the results
of operations for the three months and six months ended June 30, 1997 and
1998 and the cash flows for the six months ended June 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. Interim statements
are subject to possible adjustments in connection with the annual audit of
the Company's financial statements for the full year. 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 six months ended June 30, 1998 are not
necessarily indicative of what operating results may be for the full year.
2. COMPREHENSIVE INCOME
During the six months ended June 30, 1998, the Company adopted the
reporting and disclosure requirements of SFAS No. 130 "Reporting
Comprehensive Income".
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 six months ended June 30, 1997 and 1998 and financial
condition as of June 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 ("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 SIX MONTHS ENDED JUNE 30,
1997 AND 1998.
The results of operations for the three months and six months ended June
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 Six months
Ended June 30 Ended June 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 $11,736 70.5% $14,065 63.7% $22,002 71.0% $26,840 63.9%
Net premiums earned 3,027 18.2 5,118 23.1 5,721 18.5 9,604 22.8
Net investment income 1,666 10.0 2,093 9.5 2,878 9.3 4,059 9.7
Other income revenues 216 1.3 816 3.7 389 1.2 1,532 3.6
------- ----- ------- ----- ------- ----- ------- -----
Total revenues $16,645 100.0% $22,092 100.0% $30,990 100.0% $42,035 100.0%
======= ===== ======= ===== ======= ===== ======= =====
</TABLE>
For the second quarter of 1998, total revenues increased $5.5 million or
32.7%, to $22.1 million from $16.6 million in the second quarter of 1997.
For the first six months of 1998, total revenues increased $11.0 million,
or 35.6%, to $42.0 million from $31.0 million in the first six months of
1997.
Risk management fees increased $2.3 million in the second quarter of 1998
as compared to the corresponding period in 1997 and increased $4.8 million
in the first six months of 1998 as compared to the first six months of
1997. These increases are primarily due to increased business volume and
are analysed in more detail below. Net premiums earned increased $2.1
million in the second quarter of 1998 as compared to the corresponding
period in 1997 and increased $3.9 million in the first six months of 1998
as compared to the first six months of 1997. These increases are a result
of increased premium being written by Realm National for the Company which
results not only in increases in net premiums earned but is also partially
responsible for the increase in risk management fees in the form of policy
issuance fees. Net investment income increased $0.4 million in the second
quarter of 1998 as compared to the corresponding period in 1997 and
increased $1.2 million in the first six months of 1998 as compared to the
first six 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 $0.6 million in the second quarter of 1998 as compared
to the corresponding period in 1997 and increased $1.1 million in the first
six months of 1998 as compared to the first six months of 1997.
The components of the Company's risk management fees are illustrated below:
<TABLE>
<CAPTION>
For the Three Months For the Six months
Ended June 30 Ended June 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 $ 6,528 55.6% $ 6,851 48.7% $11,852 53.9% $12,917 48.1%
Managing general agency fees 2,647 22.6 3,515 25.0 5,155 23.4 7,230 26.9
Underwriting management fees 970 8.3 973 6.9 1,930 8.8 1,892 7.1
Program and captive management fees 717 6.1 953 6.8 1,314 6.0 1,828 6.8
Loss control and audit fees 663 5.6 1,156 8.2 1,326 6.0 1,970 7.3
Policy issuance fees 211 1.8 617 4.4 425 1.9 1,003 3.8
------- ----- ------- ----- ------- ----- ------- -----
Total risk management fees $11,736 100.0% $14,065 100.0% $22,002 100.0% $26,840 100.0%
======= ===== ======= ===== ======= ===== ======= =====
</TABLE>
For the second quarter of 1998, risk management fees increased $2.3 million
or 19.8% to $14.1 million from $11.7 million in the second quarter of 1997.
For the first six months of 1998, risk management fees increased $4.8
million or 22.0%, to $26.8 million from $22.0 million in the first six
months of 1997.
Managing general agency fees had the most significant impact on the growth
of risk management fees and increased $0.9 million in the second quarter of
1998 as compared to the corresponding period in 1997 and increased $2.1
million in the first six months of 1998 as compared to the first six 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. Brokerage fees and commissions increased $0.3 million in the
second quarter of 1998 as compared to the corresponding period in 1997 and
increased $1.1 million in the first six months of 1998 as compared to the
first six 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. Program and captive management fees
increased $0.2 million in the second quarter of 1998 as compared to the
corresponding period in 1997 and increased $0.5 million in the first six
months of 1998 as compared to the first six months of 1997. These increases
being due to increased business volume. Fees for loss control and audit
services increased $0.5 million in the second quarter of 1998 as compared
to the corresponding period in 1997 and increased $0.6 million in the first
six months of 1998 as compared to the first six months of 1997. The
Company's policy issuance fees increased $0.4 million in the second quarter
of 1998 as compared to the corresponding period in 1997 and increased $0.6
million in the first six months of 1998 as compared to the first six 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:
For the Three For the Six
Months Months
Ended June 30 Ended June 30
1997 1998 1997 1998
------- ------- ------- -------
(thousands of (thousands of
dollars) dollars)
Net losses and loss expenses incurred $ 2,794 $ 4,954 $ 5,170 $ 9,721
Insurance premium acquisition costs 361 794 721 1,360
------- ------- ------- -------
Total insurance costs 3,155 5,748 5,891 11,081
------- ------- ------- -------
Salaries and benefits 4,811 6,047 8,869 10,712
General and administration expenses 4,853 5,230 8,844 10,295
------- ------- ------- -------
Total operating expenses 9,664 11,277 17,713 21,007
------- ------- ------- -------
Total expenses $12,819 $17,025 $23,604 $32,088
======= ======= ======= =======
For the second quarter of 1998, total expenses increased $4.2 million or
32.8%, to $17.0 million from $12.8 million in the second quarter of 1997.
For the first six months of 1998, total expenses increased $8.5 million or
35.9% to $32.1 million from $23.6 million in the first six months of 1997.
Total insurance costs, which includes net losses and loss expenses incurred
and insurance premium acquisition costs, increased $2.6 million in the
second quarter of 1998 as compared to the corresponding period in 1997 and
increased $5.2 million in the first six months of 1998 as compared to the
first six 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. Although the majority of this loss development was
incurred during the first quarter of 1998, there was some additional
development during the second quarter of 1998. Total operating expenses
increased $1.6 million in the second quarter of 1998 as compared to the
corresponding period in 1997 and increased $3.3 million in the first six
months of 1998 as compared to the first six months of 1997. Salaries and
benefits, the largest component of total operating expenses, increased $1.2
million in the second quarter of 1998 as compared to the corresponding
period in 1997 and increased $1.8 million in the first six months of 1998
as compared to the first six months of 1997. Similarly, general and
administration expenses increased $0.4 million in the second quarter of
1998 as compared to the corresponding period in 1997 and increased $1.5
million in the first six months of 1998 as compared to the first six months
of 1997. The increases in salaries and benefits and the increases in
general and administration expenses were all 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:
For the Three For the Six
Months Months
Ended June 30 Ended June 30
1997 1998 1997 1998
-------- -------- -------- --------
(thousands of (thousands of
dollars) dollars)
Risk management companies $ 3,627 $ 5,304 $ 6,959 $ 10,836
Underwriting companies 199 (237) 427 (889)
-------- -------- -------- --------
Income before taxation 3,826 5,067 7,386 9,947
-------- -------- -------- --------
Taxation 654 1,042 1,394 1,935
Net income $ 3,172 $ 4,025 $ 5,992 $ 8,012
-------- -------- -------- --------
Effective tax rate 17.1% 20.6% 18.9% 19.5%
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 during the first and second quarter of 1998, 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 second quarter of 1998, income before taxation increased $1.3
million or 32.4%, to $5.1 million from $3.8 million in the second quarter
of 1997 whilst net income increased $0.8 million or 26.9% in the second
quarter of 1998 to $4.0 million from $3.2 million in the second quarter of
1997.
For the first six months of 1998, income before taxation increased $2.6
million or 34.7%, to $10.0 million from $7.4 million in the second quarter
1997 whilst net income increased $2.0 million or 33.7% in the first six
months of 1998 to $8.0 million from $6.0 million in the first six months of
1997.
The Company's provision for taxation increased $0.4 million in the second
quarter of 1998 as compared to the corresponding period in 1997 and
increased $0.5 million in the first six months of 1998 as compared to the
first six months of 1997. The increase in effective tax rates for the
second quarter of 1998 compared to 1997 and the first six 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 June 30, 1998, the Company held cash and marketable securities of $87.7
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 $82.2 million at June 30, 1998 compared to $60.2
million at December 31, 1997. Of the $87.7 million of cash and marketable
securities held by the Company at June 30, 1998 (December 31, 1997 - $71.7
million), $50.7 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 June 30, 1998, the
Company's investment portfolio (at fair market value) totalled $22.4
million. The portfolio consisted primarily of U.S. Treasury, short-term
cash, equity securities, and A-rated corporate debt securities.
During the six month period ending June 30, 1998, the Company's operating
activities generated $17.0 million of net cash, compared to using $2.7
million of net cash during the corresponding six months of 1997. The cash
generated from (used by) operating activities varies according to the
timing of collections and payments of insurance and reinsurance balances.
Total assets increased to $501.7 million at June 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 June 30, 1998.
On June 9, 1998, the Company paid a second quarter dividend of $0.03 per
share to shareholders of record on May 26, 1998 making the total dividends
for the year to date $0.06 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 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 Company has conducted a review of its computer systems to identify the
systems that could be affected by the Year 2000 Issue and is currently
implementing its plan to resolve the issue. The Year 2000 Issue is the
result of computer programs being written using two digits rather than four
to define the applicable year. Any of the Company's programs that have
time-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
miscalculations.
The Company presently believes that, with modifications to existing
software and conversions to new software, the Year 2000 Issue will not pose
significant operational problems for the Company's computer systems as so
modified and converted. However, if such modifications and conversions are
not completed timely, the Year 2000 Issue may have a significant impact on
the operations of the Company.
The Company has begun formal communications 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. However, there can be no guarantee that the systems of other
companies on which the Company's systems rely will be timely converted, or
that a failure to convert by another company, or a conversion that is
incompatible with the Company's systems, would not have a material adverse
effect on the Company's operating results.
The total cost to the Company of the Year 2000 issue has not yet been
calculated but is not anticipated to be material to its financial position
or results of operations in any given period.
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.
PART II - OTHER INFORMATION
Item 6 EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit No. Description
----------- -----------
11. Net income per share Data
(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.
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: August 13, 1998
STIRLING COOKE BROWN HOLDINGS LIMITED
BY /s/ George W. Jones
----------------------------------
George W. Jones
CHIEF FINANCIAL OFFICER AND DIRECTOR
Exhibit 11
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)
<TABLE>
<CAPTION>
As of or for the As of or for the
three months six months
ended June 30 ended June 30
1997 1998 1997 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net Income ............................. $ 3,172 $ 4,025 $ 5,992 $ 8,012
=========== =========== =========== ===========
BASIC
Number of Shares:
Weighted average number of ordinary
shares outstanding ................... 8,000,000 9,863,372 8,000,000 9,863,372
Weighted average treasury shares held .. (360,800) (40,000) (281,792) (40,000)
Shares issued in June, 1997(1) ......... 288,888 -- 288,888 --
----------- ----------- ----------- -----------
7,928,088 9,823,372 8,007,096 9,823,372
=========== =========== =========== ===========
Net income per share ................... $ 0.40 $ 0.41 $ 0.75 $ 0.82
=========== =========== =========== ===========
DILUTED
Number of shares:
Weighted average number of ordinary
shares outstanding ................... 8,000,000 9,863,372 8,000,000 9,863,372
Weighted average treasury shares held .. (360,800) (40,000) (281,792) (40,000)
Shares issued in June, 1997 ............ 288,888 -- 288,888 --
Incremental shares of outstanding
stock options ........................ 268,131 60,544 260,740 52,117
----------- ----------- ----------- -----------
8,196,219 9,883,916 8,267,836 9,875,489
=========== =========== =========== ===========
Net income per share assuming
dilution ............................. $ 0.39 $ 0.41 $ 0.72 $ 0.81
=========== =========== =========== ===========
</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.
