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, 1999
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, 1999 was 9,419,972.
<PAGE>
INDEX
PART I - FINANCIAL INFORMATION
PAGE
----
ITEM 1 UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets at December 31, 1998
and September 30, 1999
(Unaudited) ............................................. 1
Unaudited Consolidated Statements of Income and
Comprehensive Income for the three month and nine month
periods ended September 30, 1998 and 1999................ 3
Unaudited Consolidated Statements of Changes in
Shareholders' Equity for the three month and nine month
periods ended September 30, 1998 and 1999................ 4
Unaudited Consolidated Statements of Cash Flows for the
nine month periods ended September 30, 1998 and 1999..... 5
Notes to Unaudited Consolidated Financial Statements at
September 30, 1998 and 1999.............................. 6
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS...................... 8
PART II - OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS........................................ 15
ITEM 5 OTHER INFORMATION........................................ 17
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K......................... 17
SIGNATURES............................................... 18
EXHIBITS
Exhibit 11 - Statement of Computation of Net Income Per Ordinary Share
Exhibit 99 - Forward Looking Information
<PAGE>
<TABLE>
<CAPTION>
STIRLING COOKE BROWN HOLDINGS LIMITED
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND SEPTEMBER 30, 1999 (UNAUDITED)
(EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS, EXCEPT PER SHARE DATA)
1998 1999
--------- ---------
ASSETS
------
<S> <C> <C>
Marketable securities, at fair value
Debt securities (amortized cost, 1998 - $16,722, 1999 - $30,191)......... $ 17,057 $ 29,607
Equity securities (cost, 1998 - $2,384, 1999 - $3,583)................... 2,536 3,813
Short term investments (amortized cost, 1998 - $9,643, 1999 - $2,524).... 9,643 2,524
-------- --------
Total marketable securities................................................... 29,236 35,944
Cash and cash equivalents..................................................... 68,165 45,500
Fiduciary funds-restricted.................................................... 63,895 53,168
Insurance and reinsurance balances receivable (affiliates, 1998 - $9,994,
1999 - $Nil)............................................................. 382,417 587,226
Paid losses recoverable from reinsurers....................................... 8,916 15,791
Outstanding losses recoverable from reinsurers................................ 48,146 70,571
Deferred acquisition costs.................................................... 2,286 1,663
Deferred reinsurance premiums ceded........................................... 18,711 17,065
Deferred tax asset............................................................ 1,755 3,997
Goodwill...................................................................... 8,775 8,879
Other assets.................................................................. 14,026 13,592
Assets related to deposit liabilities......................................... 3,313 3,236
-------- --------
Total assets............................................................. $649,641 $856,632
======== ========
<CAPTION>
LIABILITIES
-----------
<S> <C> <C>
Outstanding losses and loss expenses.......................................... $ 66,117 $ 88,575
Unearned premiums............................................................. 25,037 22,138
Deferred income............................................................... 3,992 4,493
Insurance and reinsurance balances payable (affiliates, 1998 - $957,
1999 - $Nil)............................................................. 438,456 623,686
Funds withheld................................................................ 1,359 4,870
Accounts payable and accrued liabilities...................................... 10,719 12,367
Income taxes payable.......................................................... 3,016 3,565
Deposit liabilities........................................................... 3,313 3,236
-------- --------
Total liabilities........................................................ $552,009 $762,930
======== ========
Contingencies (Part II - Item 1 - Legal Proceedings)
<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 (loss)................................. 319 (377)
Retained earnings............................................................. 41,914 43,103
-------- --------
98,866 99,359
Less: Ordinary shares in treasury (1998 - 87,000, 1999 - 443,400) at cost..... (1,234) (5,657)
-------- --------
Total shareholders' equity............................................... 97,632 93,702
-------- --------
Total liabilities and shareholders' equity............................... $649,641 $856,632
======== ========
See accompanying notes to unaudited consolidated financial statements
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
STIRLING COOKE BROWN HOLDINGS LIMITED
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME (LOSS)
AND COMPREHENSIVE INCOME (LOSS)
THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1999
(EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS, EXCEPT PER SHARE DATA)
Three Months Nine Months
ended September 30 ended September 30
1998 1999 1998 1999
--------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Revenues
Risk management fees............................. $ 14,112 $ 11,736 $ 40,952 $ 44,277
Net premiums earned.............................. 3,334 2,511 12,938 10,290
Net investment income............................ 2,314 1,504 6,373 5,443
Other income (losses)............................ 947 (1,428) 2,479 (1,516)
-------- -------- -------- --------
Total revenues............................... 20,707 14,323 62,742 58,494
-------- -------- -------- --------
Expenses
Net losses and loss expenses incurred............ 3,616 2,005 13,337 8,034
Acquisition costs................................ 267 753 1,627 2,811
Depreciation and amortization of capital assets.. 430 417 1,151 1,268
Amortization of goodwill......................... 188 215 541 632
Salaries and benefits............................ 5,927 6,166 16,639 18,847
Other operating expenses......................... 5,133 7,358 14,354 23,424
-------- -------- -------- --------
Total expenses............................... 15,561 16,914 47,649 55,016
-------- -------- -------- --------
Income (loss) before taxation........................ 5,146 (2,591) 15,093 3,478
Taxation............................................. 1,017 (19) 2,952 1,134
-------- -------- -------- --------
Net income (loss) before cumulative effect of
a change in accounting principle................. 4,129 (2,572) 12,141 2,344
Cumulative effect of a change in accounting
principle, net of tax (note 2)................... - - - (307)
-------- -------- -------- --------
Net income (loss).................................... $ 4,129 ($ 2,572) $ 12,141 $ 2,037
-------- -------- -------- --------
Other comprehensive income (loss), net of tax:
Unrealized holding losses arising
during the period................................ (104) (291) (56) (689)
Less: reclassification adjustments for realized
(gains) losses included in net income............ (16) 81 (48) (7)
-------- -------- -------- --------
Other comprehensive loss......................... (120) (210) (104) (696)
Comprehensive income (loss)...................... 4,009 (2,782) 12,037 1,341
======== ======== ======== ========
Net income (loss) per share.......................... $ 0.42 ($ 0.27) $ 1.24 $ 0.21
======== ======== ======== ========
Net income (loss) per share assuming dilution........ $ 0.42 ($ 0.27) $ 1.23 $ 0.21
======== ======== ======== ========
Dividends per share.................................. $ 0.03 $ 0.03 $ 0.09 $ 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, 1998 AND 1999
(EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
1998 1999 1998 1999
--------- -------- -------- ---------
<S> <C> <C> <C> <C>
ORDINARY SHARES OF PAR VALUE $0.25 EACH
Balance at beginning of period........... $ 2,466 $ 2,466 $ 2,466 $ 2,466
--------- -------- -------- ---------
Balance at end of period................. $ 2,466 $ 2,466 $ 2,466 $ 2,466
--------- -------- -------- ---------
ADDITIONAL PAID IN CAPITAL
Balance at beginning of period........... $ 54,167 $ 54,167 $ 54,167 $ 54,167
--------- -------- -------- ---------
Balance at end of period................. $ 54,167 $ 54,167 $ 54,167 $ 54,167
--------- -------- -------- ---------
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Balance at beginning of period........... $ 79 $ (167) $ 63 $ 319
Change in unrealized gain (loss) on
marketable securities.................. (120) (210) (104) (696)
--------- -------- -------- ---------
Balance at end of period................. $ (41) $ (377) $ (41) $ (377)
--------- -------- -------- ---------
RETAINED EARNINGS
Balance at beginning of period........... $ 34,497 $ 45,957 $ 27,074 $ 41,914
Net income (loss)........................ 4,129 (2,572) 12,141 2,037
Dividends................................ (295) (282) (884) (848)
--------- -------- -------- ---------
Balance at end of period................. $ 38,331 $ 43,103 $ 38,331 $ 43,103
--------- -------- -------- ---------
TREASURY STOCK
Balance at beginning of period........... $ (667) $ (5,657) $ (667) $ (1,234)
Purchase of ordinary shares in treasury.. -- -- -- (4,423)
Balance at end of period................. $ (667) $ (5,657) $ (667) $ (5,657)
--------- -------- -------- ---------
Total shareholders' equity............... $ 94,256 $ 93,702 $ 94,256 $ 93,702
========= ======== ======== =========
Dividends per share were $0.03 and $0.03 for the three months ended
September 30, 1998 and 1999, respectively, and $0.09 and $0.09 for the
nine months ended September 30, 1998 and 1999 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, 1998 AND 1999
(EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS)
1998 1999
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 12,141 $ 2,037
Adjustments to reconcile net income to net cash provided
(used) by operating activities:
Depreciation and amortization of capital assets.............. 1,151 1,268
Amortization of goodwill..................................... 541 632
Amortization of marketable securities........................ 63 133
Net realized gains on sale of marketable securities.......... (48) (7)
Net (gains) losses on sale of capital assets................. (36) 25
(Equity in income)/writedown of affiliates................... (2,209) 1,756
Changes in non cash operating assets and liabilities:
Fiduciary funds.............................................. (16,709) 10,727
Insurance and reinsurance balances receivable................ (31,378) (204,809)
Paid losses recoverable from reinsurers...................... (4,358) (6,875)
Outstanding losses recoverable from reinsurers............... (10,480) (22,425)
Deferred acquisition costs................................... (1,145) 623
Deferred reinsurance premiums ceded.......................... (5,847) 1,647
Other assets................................................. (2,326) (1,669)
Deferred tax asset........................................... (712) (2,100)
Assets related to deposit liabilities........................ (219) 78
Outstanding losses and loss expenses......................... 18,204 22,458
Unearned premiums............................................ 5,478 (2,899)
Insurance and reinsurance balances payable................... 59,905 185,230
Funds withheld............................................... 11 3,512
Accounts payable and accrued liabilities..................... 3,664 1,648
Income taxes payable......................................... (254) 549
Deferred income.............................................. 1,520 501
Deposit liabilities.......................................... 219 (78)
------------ ------------
Net cash provided (used) by operating activities......... 27,176 (8,038)
------------ ------------
INVESTING ACTIVITIES
Purchase of capital assets................................... (2,178) (1,162)
Sale of capital assets....................................... 84 215
Purchase of debt securities.................................. (10,540) (21,804)
Purchase of equity securities................................ (2,467) (2,910)
Purchase of short-term investments, net...................... (2,773) 7,119
Proceeds on sale of debt securities.......................... 9,625 8,346
Proceeds on sale of equity securities........................ 587 1,575
Purchase of subsidiaries, net of cash acquired............... (884) (735)
Dividends received from affiliates........................... 1,365 -
------------ ------------
Cash used by investing activities........................ (7,181) (9,356)
------------ ------------
FINANCING ACTIVITIES
Dividends.................................................... (884) (848)
Purchase of ordinary shares in treasury...................... - (4,423)
------------ ------------
Cash used by investing activities........................ (884) (5,271)
------------ ------------
Increase (decrease) in cash and cash equivalents................. 19,111 (22,665)
Cash and cash equivalents at beginning of period................. 50,631 68,165
------------ ------------
Cash and cash equivalents at end of period....................... $ 69,742 $ 45,500
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for income taxes................. $ 2,836 $ 1,944
============ ============
See accompanying notes to unaudited consolidated financial statements
</TABLE>
<PAGE>
STIRLING COOKE BROWN HOLDINGS LIMITED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998 AND 1999
(EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS, EXCEPT SHARE DATA)
1. INTERIM ACCOUNTING POLICY
In the opinion of management of Stirling Cooke Brown Holdings ("the
Company"), the accompanying unaudited consolidated financial statements
include all adjustments, consisting only of normal recurring adjustments
and one non-recurring adjustment (see note 2), necessary to present fairly
the financial position of the Company at December 31, 1998 and September
30, 1999, the results of operations for the three months and nine months
ended September 30, 1998 and 1999 and the cash flows for the nine months
ended September 30, 1998 and 1999. 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, 1998. Results of operations for the three months
and nine months ended September 30, 1999 are not necessarily indicative of
what operating results may be for the full year.
2. REPORTING ON THE COSTS OF STARTUP ACTIVITIES
During 1998, the AICPA Accounting Standards Executive Committee issued
Statement of Position (SOP) 98-5. Reporting on the costs of start-up
activities. The accounting guidance of this SOP requires that the costs of
start-up activities be expensed as incurred and any costs that are carried
as an asset prior to adoption of SOP 98-5 would be written off by reporting
a cumulative effect of a change in accounting principle in the statement of
income as of January 1, 1999. The cumulative effect of a change in
accounting principle that was recorded in the statement of income for the
three months and nine months ended September 30, 1999 is approximately $Nil
and $307 (net of tax of $188) respectively.
<PAGE>
3. SEGMENTAL INFORMATION
SEGMENT REVENUES FOR THE THREE MONTHS FOR THE NINE MONTHS
---------------- ENDED SEPTEMBER 30 ENDED SEPTEMBER 30
1998 1999 1998 1999
---- ---- ---- ----
(dollars in thousands) (dollars in thousands)
Brokerage $ 6,821 $ 5,469 $19,144 $24,016
Program business 6,798 5,318 19,864 17,077
Underwriting management 683 841 2,676 3,173
Insurance 2,210 3,232 7,491 10,189
Reinsurance 2,198 275 8,530 3,351
Other 1,997 (812) 5,037 688
------- ------- ------- -------
Total $20,707 $14,323 $62,744 $58,494
------- ------- ------- -------
SEGMENT PRETAX INCOME FOR THE THREE MONTHS FOR THE NINE MONTHS
--------------------- ENDED SEPTEMBER 30 ENDED SEPTEMBER 30
(LOSS) 1998 1999 1998 1999
------ ---- ---- ---- ----
(dollars in thousands) (dollars in thousands)
Brokerage $ 3,582 $ 1,020 $ 9,204 $ 7,569
Program business 1,173 (753) 4,181 (1,494)
Underwriting management 237 (126) 1,200 1,126
Insurance 9 138 182 561
Reinsurance (507) (556) (1,568) (1,030)
Other 652 (2,314) 1,894 (3,254)
------- ------- ------- -------
Total $ 5,146 ($ 2,591) $15,093 $ 3,478
------- ------- ------- -------
<PAGE>
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following is Management's discussion and analysis of the results of
operations of Stirling Cooke Brown Holdings Limited ("the Company") for the
three months and nine months ended September 30, 1998 and 1999 and
financial condition as of September 30, 1999. 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, 1998.
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 the United
Kingdom. The Company's subsidiaries' activities include brokerage, program
business, underwriting management, insurance and reinsurance. The Company
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's subsidiaries
specialize in the North American occupational accident and workers'
compensation risk transfer markets.
RESULTS OF OPERATIONS FOR THE THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER
30, 1998 AND 1999.
REVENUES AND NET INCOME (LOSS)
- ------------------------------
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30 ENDED SEPTEMBER 30
1998 1999 1998 1999
---- ---- ---- ----
(dollars in thousands) (dollars in thousands)
<S> <C> <C> <C> <C>
Revenues $20,707 $14,323 $62,742 $58,494
Expenses 15,561 16,914 47,649 55,016
------- ------- ------- -------
Income (loss) before taxation 5,146 (2,591) 15,093 3,478
Taxation 1,017 (19) 2,952 1,134
------- ------- ------- -------
Net income (loss) before
cumulative effect of a
change in accounting
principle 4,129 (2,572) 12,141 2,344
Cumulative effect of a change
in accounting principle, net
of tax - - - (307)
------- ------- ------- -------
Net income (loss) $ 4,129 ($2,572) $12,141 $ 2,037
======= ======= ======= =======
BASIC EPS
Net income (loss) per Share $0.42 ($0.27) $1.24 $0.21
Avg. no. of ordinary shares
outstanding (000's) 9,823 9,420 9,823 9,501
DILUTED EPS
Net income (loss) per Share $0.42 ($0.27) $1.23 $0.21
Avg. no. of ordinary shares
outstanding (000's) 9,823 9,420 9,858 9,501
</TABLE>
Basic net loss per share was $0.27 in the third quarter and basic income
per share was $0.21 in the first nine months of 1999 from basic income per
share of $0.42 in the third quarter of 1998 and $1.24 in the first nine
months of 1998. Diluted net loss per share was $0.27 in the third quarter
and diluted income per share was $0.21 in the first nine months of 1999
compared to diluted income per share of $0.42 in the third quarter of 1998
and $1.23 in the first nine months of 1998.
The results above reflect the increasingly competitive conditions in both
the insurance and reinsurance markets in which the Company operates. As a
result of these conditions, the Company has experienced a decrease in
business volumes and a reduction in margins. The Company has continued the
process of restructuring its operations with a view to repositioning the
Company for the future. This continuing restructuring has included
reorganizing the Company's management structure and rationalizing its
operations to reduce costs. In addition to advisory fees concerning the
restructuring of the Company, the Company has continued to incur
significant litigation costs relating to the matters set out in the Legal
Proceedings section (see Part II - Item I). Costs relating to litigation,
strategic advisory and restructuring matters amounted to $1.8 million
(before tax) during the quarter and $6.6 million (before tax) during the
nine months ended September 30, 1999. Also during the third quarter, the
Company incurred a $1.4 million charge relating to a write-down of an
investment in a discontinued business. This charge has been recorded in
other income (losses) in the Company's financial statements.
At September 30, 1999, the Company had 9,419,972 shares outstanding,
compared to 9,776,372 shares at December 31, 1998, a decrease of 356,400
shares, or 3.6%. This decrease was due to various open market share
repurchases by the Company during the first three months of 1999.
REVENUES AND NET INCOME BY SEGMENT
- ----------------------------------
<TABLE>
<CAPTION>
SEGMENT REVENUES FOR THE THREE MONTHS FOR THE NINE MONTHS
- ---------------- ENDED SEPTEMBER 30 ENDED SEPTEMBER 30
1998 1999 1998 1999
---- ---- ---- ----
(dollars in thousands) (dollars in thousands)
<S> <C> <C> <C> <C>
Brokerage $ 6,821 $ 5,469 $19,144 $24,016
Program business 6,798 5,318 19,864 17,077
Underwriting management 683 841 2,676 3,173
Insurance 2,210 3,232 7,491 10,189
Reinsurance 2,198 275 8,530 3,351
Other 1,997 (812) 5,037 688
------- ------- ------- -------
Total $20,707 $14,323 $62,744 $58,494
------- ------- ------- -------
<CAPTION>
SEGMENT PRETAX INCOME FOR THE THREE MONTHS FOR THE NINE MONTHS
- --------------------- ENDED SEPTEMBER 30 ENDED SEPTEMBER 30
LOSS 1998 1999 1998 1999
- ---- ---- ---- ---- ----
(dollars in thousands) (dollars in thousands)
<S> <C> <C> <C> <C>
Brokerage $3,582 $1,020 $ 9,204 $ 7,569
Program business 1,173 (753) 4,181 (1,494)
Underwriting management 237 (126) 1,200 1,126
Insurance 9 138 182 561
Reinsurance (507) (556) (1,568) (1,030)
Other 652 (2,314) 1,894 (3,254)
------ ------ ------- -------
Total $5,146 ($2,591) $15,093 $ 3,478
------ ------ ------- -------
</TABLE>
<PAGE>
Brokerage
- ---------
The Company's brokerage segment comprises companies that receive a fee or
commission for placing insurance and reinsurance contracts which transfer
risk and associated premium from one company to another. Revenues of $5.5
million in the third quarter of 1999 represented a decrease of $1.3 million
or 19.8% from revenues of $6.8 million in the third quarter of 1998.
Revenues of $24.0 million in the first nine months of 1999 represented an
increase of $4.9 million, or 25.4%, from revenues of $19.1 million in the
first nine months of 1998. The conditions in the marketplace in which this
segment operates have become increasingly competitive during the year,
resulting in reduced brokerage revenues for the third quarter. The increase
in revenues for the year to date is primarily due to increased insurance
and reinsurance brokerage activities during the first six months of the
year in the Company's UK based brokerage operations.
The brokerage segment's profit of $1.0 million in the third quarter of 1999
represented a decrease of $2.6 million, or 71.5%, from segment profit of
$3.6 million in the third quarter of 1998. Profit of $7.6 million in the
first nine months of 1999 represented a decrease of $1.6 million, or
17.7%, from segment profit of $9.2 million in the first nine months of
1998. The decrease in segment profit reflects the increasingly competitive
market conditions in the third quarter of 1999, as well as an increase in
brokerage segment expenses. This increase in expenses was primarily due to
significant costs associated with ongoing litigation in respect of these
operations as discussed in the Legal Proceedings section (Part II - Item 1)
and bad debt expenses incurred during the period.
Program Business
- ----------------
The Company's program business segment comprises companies that market and
manage insurance products and programs developed by the Company on behalf
of insurers and reinsurers. Program business revenues of $5.3 million in
the third quarter of 1999 represented a decrease of $1.5 million, or 21.8%,
from revenues of $6.8 million in the third quarter of 1998. Revenues of
$17.1 million in the first nine months of 1999 represented a decrease of
$2.8 million, or 14.0%, from revenues of $19.9 million in the first nine
months of 1998. The decrease in revenues was due to reduced fee margin on
programs and a reduction in program business volume due to the increasingly
competitive environment in the U.S. workers' compensation insurance market.
The program business segment's loss of $0.8 million in the third quarter of
1999 represented a decrease of $2.0 million from segment profit of $1.2
million in the third quarter of 1998. A loss of $1.5 million in the first
nine months of 1999 represented a decrease of $5.7 million from segment
profit of $4.2 million in the first nine months of 1998. The decrease in
the segment profit reflects the decrease in revenues, together with reduced
fee margins.
Underwriting Management
- -----------------------
The Company's underwriting management segment comprises companies that
underwrite and administer reinsurance business on behalf of independent
reinsurance companies. Revenues of $0.8 million in the third quarter of
1999 represented an increase of $0.1 million from revenues of $0.7 million
in the third quarter of 1998. Revenues of $3.2 million in the first nine
months of 1999 represented an increase of $0.5 million from revenues of
$2.7 million in the first nine months of 1998. This increase in revenues
during the first nine months of 1999 was primarily due to additional
earnings realized in the first quarter of 1999 on contracts that were
placed in prior years.
Segment loss of $0.1 million in the third quarter of 1999 represented a
decrease of $0.3 million from segment profit of $0.2 million in the third
quarter of 1998. Segment profit of $1.1 million in the first nine months of
1999 represented a decrease of $0.1 million from segment profit of $1.2
million in the first nine months of 1998. The Company's underwriting
management segment continued to experience significant competitive
pressures during the third quarter of 1999 and consequently the Company
expects revenues and profit for this segment to continue to decline until
market conditions improve.
Insurance
- ---------
The Company's insurance segment comprises its wholly owned U.S. based
insurance company, Realm National Insurance Company. Revenues of $3.2
million in the third quarter of 1999 represented an increase of $1.0
million from revenues of $2.2 million in the third quarter of 1998.
Revenues of $10.2 million in the first nine months of 1999 represented an
increase of $2.7 million from revenues of $7.5 million in the first nine
months of 1998. Realm National's gross written premiums were $10.3 million
in the third quarter of 1999, which represents a $1.3 million, or 14%,
increase from $9.0 million in the third quarter of 1998. Gross written
premiums were $36.2 million in the first nine months of 1999 which
represents a $1.1 million, or 3%, increase from $35.1 million in the first
nine months of 1998.
Market conditions in the workers' compensation insurance market, in which
Realm National writes the majority of its business, remained very
competitive during the third quarter of 1999.
Segment profit of $0.1 million in the third quarter of 1999 represented an
increase of $0.1 million from segment profit of $0.0 million in the third
quarter of 1998. Segment profit of $0.6 million in the first nine months of
1999 represented an increase of $0.4 million from segment profit of $0.2
million in the first nine months of 1998. The increases in profit reflects
the increase in premium written.
Reinsurance
- -----------
The Company's reinsurance segment comprises Comp Indemnity Reinsurance
Company ("CIRCL"). Revenues of $0.3 million in the third quarter of 1999
represent a decrease of $1.9 million from revenues of $2.2 million in the
third quarter of 1998. Revenues of $3.4 million in the first nine months of
1999 represent a decrease of $5.1 million from revenues of $8.5 million in
the third quarter of 1998. In early 1999, management decided to cease
underwriting any new programs in CIRCL and a number of existing contracts
were not renewed for the 1999 year. Those renewed are only being allowed to
run until they expire at December 31, 1999. Because some contracts were not
renewed by CIRCL during 1999, revenues have continued to decrease during
the year.
Segment loss of $0.6 million in the third quarter of 1999 represented a
$0.1 million worsening from a segment loss of $0.5 million in the third
quarter of 1998. Segment loss of $1.0 million in the first nine months of
1999 represented a $0.6 million improvement from a segment loss of $1.6
million in the first nine months of 1998. The loss during the first nine
months of 1998 was primarily the result of the Company incurring
significant adverse development on one particular program that covers
bodily injury and property risks in the construction industry. The primary
reason for the loss during the first nine months of 1999 was a $0.5 million
provision which was recognized in the first six months of 1999 against
reinsurance recoveries. CIRCL is in dispute with certain of its reinsurers
in respect of amounts due under retrocession coverages. CIRCL has provided
$3.0 million against reinsurance contracts with projected reinsurance
recoverables of a total of $16.8 million. The provision represents
management's best estimates at this time of a possible shortfall in
recoveries. This provision is included in the balance sheet as a component
of paid losses recoverable from reinsurers. The provision is necessarily an
estimate and amounts not collectible from reinsurers may ultimately be
significantly greater or lesser than the provision established. Any
subsequent differences arising will be recorded in the period in which they
occur.
Other
- -----
Other includes primarily the Company's holding companies and other
non-operating subsidiaries, and income earned from investments in
non-consolidating affiliates. Revenues of ($0.8) million in the third
quarter of 1999 represented a decrease of $2.8 million from revenues of
$2.0 million in the third quarter of 1998. Revenues of $0.7 million in the
first nine months of 1999 represented a decrease of $4.3 million from
revenues of $5.0 million in the first nine months of 1998. The primary
reason for the decrease in revenues during the quarter and the first nine
months of 1999 is a decline in income earned from investments in affiliates
and a $1.4 million charge due to a writedown of an investment in an
affiliate that has discontinued its business.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1999, the Company held cash and marketable securities of
$81.5 million, compared to $97.4 million at December 31, 1998. In addition,
the Company held cash in fiduciary accounts relating to insurance client
premiums amounting to $53.2 million at September 30, 1999, compared to
$63.9 million at December 31, 1998. Of the $81.5 million of cash and
marketable securities held by the Company at September 30, 1999 (December
31, 1998 - $97.4 million), $46.9 million (December 31, 1998 - $58.9
million) were held by subsidiaries whose payment of dividends to the
Company was subject to regulatory restrictions or possible tax liabilities.
At September 30, 1999, the Company's investment portfolio (at fair market
value) totaled $36.0 million. The portfolio consisted primarily of U.S.
Treasury bonds, short-term investments, equity securities and A-rated
corporate debt securities.
During the nine month period ending September 30, 1999, the Company's
operating activities used $8.0 million of net cash, compared to generating
$27.2 million of net cash during the corresponding nine months of 1998. The
cash generated from (used by) operating activities varies according to the
timing of collections and payments of insurance and reinsurance balances.
The Company used $4.4 million during the nine month period ended September
30, 1999 to repurchase 356,400 of its own shares on the open market.
The increase of $204.8 million in insurance and reinsurance balances
receivable, and the corresponding increase of $185.2 in insurance and
reinsurance balances payable, primarily reflects the growth in client's
claims and premiums balances in the Company's broking subsidiaries.
On September 3, 1999 the Company paid a third quarter dividend of $0.03 per
share to shareholders of record on August 23, 1999. 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 December 1997, the 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 is effective for fiscal
years beginning after December 15, 1998. The Company adopted this standard
effective January 1, 1999 and it did not have a significant impact on the
Company's financial position or results of operations.
In June 1999, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 137 "Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective Date of FASB
Statement No. 133". This statement amends SFAS No. 133 to defer its
effective date for one year, to fiscal years beginning after June 15, 2000.
Initial application for the Company will begin for the first quarter of the
year 2001. The Company is currently reviewing the potential impact that
this standard may or may not have on its financial reporting.
As discussed in Note 2 - Item I, during 1998, the AICPA Accounting
Standards Executive Committee issued SOP 98-5. Reporting on the costs of
start-up activities. The accounting guidance of this SOP requires that the
costs of start-up activities be expensed as incurred and any costs that are
carried as an asset prior to adoption of SOP 98-5 would be written off by
reporting a cumulative effect of a change in accounting principle in the
statement of income as of January 1, 1999. The cumulative effect of a
change in accounting principle that was recorded in the statement of income
for the three months and nine months ended September 30, 1999 is
approximately $Nil and $307 (net of tax of $188) respectively.
In November 1998, the AICPA Accounting Standards Executive Committee issued
SOP 98-7. Deposit accounting: Accounting for Insurance and Reinsurance
Contracts that do not transfer risk. This statement is effective for all
quarters of fiscal years beginning after June 15, 1999. This SOP provides
accounting guidance for insurance and reinsurance contracts that do not
transfer risk, as determined by the provisions of SFAS 113. The Company is
currently reviewing the potential impact that this standard may or may not
have 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 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 into problems and to provide additional
perspective on solutions. Compliance work with respect to the Company's
internal systems is substantially complete. In the last quarter of 1999,
all systems critical to the Company's core businesses will be retested and
rollover testing done.
The individuals in each geographic region report at least quarterly to the
overall committee that they are a part of and update that committee on
their respective region's progress. Each geographic region is proceeding on
schedule as planned. In the U.S. and Bermuda, the Company's and its
subsidiaries' internal computer systems and software are relatively modern
and few costs have been or are expected to be incurred to bring those
systems into compliance. In the U.K., the Company's subsidiaries' internal
systems and software were not as modern and the majority of the Company's
Year 2000 costs in upgrading the Company's systems and software have been
incurred in that region. Because of the Year 2000 issue, one large system
in the U.K. was replaced in late 1998.
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 problems. 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 Company's insurance and reinsurance subsidiaries may also have an
underwriting exposure to the Year 2000 issue. Although the subsidiaries
have not received any claims of coverage from insureds based on losses
resulting from Year 2000 issues, there can be no assurance that insureds
will be free from losses of this type or that these subsidiaries will be
free from claims made under their policies.
The total estimated cost 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.
Substantially all of the $0.7 million cost of compliance has been incurred
as of the end of September 30, 1999. All of these costs are being funded
through operating cash flows. Total costs have not had and are not expected
to have a 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 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 and reinsurers, to meet Year 2000
compliance could have a materially detrimental effect on the Company. The
Company is in the process of establishing a contingency plan for possible
Year 2000 issues. Where needed, the Company will revise or adjust its
contingency plan based on actual testing experience with its systems and
assessment of outside risks.
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
this Form 10-Q 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 1 - LEGAL PROCEEDINGS
(a) There currently are pending several arbitration proceedings in
England between reinsurers and their ceding insurers relating to
reinsurance transactions involving the personal accident excess of loss
market ("LMX") for the account years 1993, 1994, 1995 and 1996. Although
neither the Company nor its broker subsidiaries are a party to any of these
arbitrations, certain of the Company's subsidiaries acted as reinsurance
broker for ceding companies that are parties to certain of the
arbitrations.
The reinsurers have alleged that they sustained losses due to a spiral
in the LMX market that was not disclosed to them by the ceding insurers or
their reinsurance brokers. As a consequence, these reinsurers have asserted
that they are no longer obliged to honor their reinsurance agreements and
have ceased paying claims. If one or more reinsurers prevail in the pending
arbitrations, it is possible that one or more ceding insurers that are
reinsurance brokerage clients of the Company's broker subsidiaries may
assert a claim against one or more of those subsidiaries.
The Company understands that an award has been made in one arbitration
and that a decision by the arbitrators is pending in a second arbitration.
At this time, however, the Company does not believe that the outcomes of
either of these two arbitrations are likely to give rise to any liability
with respect to the Company. The hearing in the next scheduled arbitration
is not expected to commence before mid-year 2000.
In addition, one insurance company subsidiary of the Company is
directly involved in one of the same arbitrations because it assumed the
position of one of the reinsureds by way of portfolio transfer. If the
insurance company subsidiary does not prevail in that arbitration, it may
be unable to recover some or all of the amounts currently or ultimately due
to it under certain contracts of reinsurance.
During 1998, certain of the reinsurers and reinsureds filed a total of
7 writs in the English courts (which are the equivalent of a civil
complaint in U.S. jurisdictions) against one or more of the Company's
brokerage subsidiaries to toll the statute of limitations. Some of these
writs were issued pending the outcome of related arbitrations. None of
these writs specified an amount of damages sought. In most cases, to avoid
incurring additional litigation expenses, the relevant subsidiaries
negotiated standstill agreements with the reinsurer or reinsured. In one
case, where the reinsurer alleged that the Company's brokerage subsidiary
participated in a conspiracy, the subsidiary has challenged that allegation
in the English courts; the matter has been stayed at the request of the
reinsurer pending completion of the related arbitration.
The primary factual allegation by the reinsurers is that, although
they believed they reinsured the subject risks only at high excess levels,
the LMX spiral caused their high excess positions to not equate with their
expectation of remoteness from the incidence of loss. As to certain of the
Company's brokerage subsidiaries, the reinsurers and reinsureds have
alleged in their writs that the subsidiary was negligent, misrepresented,
or failed to disclose the potential effect of the spiral on the reinsurers'
exposure to risk. As indicated, in one case the writ also alleged
conspiracy, an allegation that will be vigorously defended.
The Company does not yet have sufficient information to determine
whether any claims ultimately will be prosecuted against the Company or its
subsidiaries or whether any such claims ultimately will result in payment
of any liability or settlement by the Company or its subsidiaries.
The Company understands that the parties to the arbitration and court
proceedings and other participants in these markets currently are
attempting to achieve a business solution that could involve a financial
contribution by participants in the market. Although no assurance can be
given as to the outcome of pending proceedings or the amount, if any, of
the Company's possible contribution to any business solution, the Company
believes, based on the information currently available to it, that the
effect of these matters should not have a material adverse on the Company's
financial condition.
Separately, the Company has settled an arbitration between one of the
Company's subsidiaries and the Liquidator of an insolvent insurer at an
amount that approximated the estimated legal costs to complete the
arbitration.
(b) A civil complaint was filed on March 29, 1999 in the U.S. District
court for the Southern District of New York by Odyssey Re (London)
("Odyssey"). The complaint asserts claims against the Company, certain of
its subsidiaries, and unrelated parties under the Racketeering Influenced
and Corrupt Organizations ("RICO") Act and for common law fraud. The
complaint alleges that the defendants participated in an unlawful scheme to
induce Odyssey to act as a reinsurer for reinsurance risks that, by their
structure and nature, were certain to generate substantial losses. Odyssey
seeks compensatory damages "in excess of $35 million," treble damages,
punitive damages in an unspecified amount, rescission of its reinsurance
and other contracts, and payment of its attorneys' fees.
Based on information currently available, it is the opinion of
management that this complaint is without merit, and the Company intends to
vigorously defend itself. In this respect, on April 28, 1999, the Company
filed a motion to dismiss the claim. A hearing on the Company's motion was
held on June 28, 1999. By order dated July 1, 1999, the court directed
Odyssey to file an amended complaint by August 15, 1999, which it did. The
Company moved to dismiss the amended complaint on September 30, 1999, and
briefing on the motion will be completed by November 23, 1999. The Company
anticipates that the Court should be in a position to decide the case by
the end of the year. Although no assurance can be given as to the outcome
of this legal proceeding, the Company believes, based on the information
currently available to it, that the outcome should not materially adversely
affect the Company's financial condition.
(c) The Company is subject to other litigation and arbitration in the
ordinary course of its business. While any of these proceedings contains an
element of uncertainty, management presently believes the outcome of these
currently pending proceedings will not have a material adverse effect on
the Company.
ITEM 5 OTHER INFORMATION
Mr. Nicholas Brown resigned as managing director and head of the
London brokering operations effective October 5, 1999. He did not
resign because of any disagreement with the Company on any
matter.
Mr. Stephen A. Crane was elected President, Chief Executive
Officer and director of the Company during November, 1999.
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit No. Description
----------- -----------
11. Statement of Computation of Net Income Per
Ordinary Share
99. Forward Looking Information
(b) Reports on Form 8-K
The Company filed a report on Form 8-K on August 13, 1999
reporting the Company's financial results for the three
months ended June 30, 1999.
The Company filed a report on Form 8-K on October 11, 1999
reporting the resignation of Mr. Nicholas Brown as managing
director and head of the London brokering operations.
The Company filed a report on Form 8-K on November 3, 1999
reporting the election of Mr. Stephen A. Crane as President
and Chief Executive Officer of the Company effective
November 1, 1999.
<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 11, 1999
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 (LOSS) 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
1998 1999 1998 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net Income (Loss)............................ $ 4,129 ($ 2,572) $ 12,141 $ 2,037
========= ========= ========== =========
BASIC
Number of Shares:
Weighted average number of ordinary shares
outstanding................................ 9,863,372 9,863,372 9,863,372 9,863,372
Weighted average treasury shares held........ (40,000) (443,400) (40,000) (362,666)
--------- --------- --------- ---------
9,823,372 9,419,972 9,823,372 9,500,706
========= ========= ========== =========
Net income (loss) per share.................. $ 0.42 ($ 0.27) $ 1.24 $ 0.21
========= ========= ========== =========
DILUTED
Number of shares:
Weighted average number of ordinary shares
outstanding................................ 9,863,372 9,863,372 9,863,372 9,863,372
Weighted average treasury shares held........ (40,000) (443,400) (40,000) ( 362,666)
Incremental shares of outstanding stock
options.................................... -- -- 34,744 --
--------- --------- --------- ---------
9,823,372 9,419,972 9,858,116 9,500,706
========= ========= ========== =========
Net income (loss) per share
assuming dilution.......................... $ 0.42 ($ 0.27) $ 1.23 $ 0.21
========= ========= ========== =========
</TABLE>
EXHIBIT 99
FORWARD-LOOKING INFORMATION
The Private Securities Litigation Reform Act of 1995 provides a
"safe harbor" for forward-looking statements. The Company's Form l0-K for
the year ended December 31, 1998, the Company's 1998 Annual Report to
Shareholders, any Form 10-Q or Form 8-K of the Company, or any other oral
or written statements made by or on behalf of the Company, 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," "projects," "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. The actual results of the Company
may differ significantly from the results discussed in forward-looking
statements. Factors that might cause such a difference include but are not
limited to, (a) the general political, economic and competitive conditions
in the United States, Bermuda and the United Kingdom, and other markets
where the Company operates; (b) changes in capital availability or costs,
such as changes in interest rates; (c) market perceptions of the industry
in which the Company operates, or security or insurance ratings; (d)
government regulation; (e) authoritative generally accepted accounting
principles or policy changes from such standard-setting bodies as the
Financial Accounting Standards Board and the Securities and Exchange
Commission, (f) possible disruptions from the Year 2000 problem, and the
factors set forth below.
COMPETITION; CYCLICALITY OF INSURANCE AND REINSURANCE BUSINESSES
The business of providing risk management services and products
to the workers' compensation and property and casualty insurance markets is
highly competitive. The Company competes with other providers of
alternative market services (including domestic and foreign insurance
companies, reinsurers, insurance brokers, captive insurance companies,
rent-a-captives, self-insurance plans, risk retention groups, state funds,
assigned risk pools and other risk-financing mechanisms) and with providers
of traditional insurance coverage. Many of the Company's competitors have
significantly greater financial resources, longer operating histories, and
better financial or insurance ratings and offer a broader line of insurance
products than the Company. Factors affecting the traditional insurance and
reinsurance industry influence the environment for alternative risk
management services and products. Insurance market conditions historically
have been subject to cyclicality and volatility due to premium rate
competition, judicial trends, changes in the investment and interest rate
environment, regulation and general economic conditions, causing many
insurance buyers to search for more stable alternatives. The traditional
insurance and reinsurance industry is in a protracted period of significant
price competition, due in part to excess capacity in most lines of
business. While some form of workers' compensation insurance is a statutory
requirement in most states, the choices exercised by employers in response
to the underwriting cycle in traditional insurance and reinsurance markets
have had and will continue to have a material effect on the Company's
results of operations. Although most of the Company's revenues are derived
from fees and commissions rather than underwriting activities, a
substantial portion of the Company's fees are calculated as a percentage of
premium volume, and therefore the Company's fee revenues are directly and
adversely affected by highly competitive market conditions. Additionally,
changes in risk retention patterns by purchasers of insurance and
reinsurance products could have an adverse effect upon the Company.
DEPENDENCE ON RELATIONSHIPS WITH INDEPENDENT PRIMARY INSURANCE
CARRIERS
The Company's Managing General Agencies market insurance products
and programs developed by the Company on behalf of insurers and reinsurers.
The primary insurers are Clarendon National Insurance Company and its
affiliates ("Clarendon") and Legion Insurance Company and its affiliates
("Legion"). In addition, the Company's insurance brokering and reinsurance
brokering operations, Managing General Underwriters, and claims and loss
control servicing operations provide additional business and services to
Clarendon and Legion in respect of these products and other insurance and
reinsurance policies. In 1998, fees received from Clarendon accounted for
approximately 43% (1997 -- 51%) of the Company's total revenues, while fees
received from Legion accounted for less than 10% (1997 -- same) of the
Company's total revenues. Historically, the Company has had a good
relationship with both Clarendon and Legion. There can be no assurance,
however, that Clarendon or Legion will not institute changes which affect
their relationships with the Company. The loss of business from Clarendon
or Legion could have a material adverse effect on the Company's results of
operations and financial conditions. Additionally, any decline in or
disruption of Clarendon's or Legion's business could disrupt the Company's
business and could have a material adverse effect on the Company's results
of operations and financial condition.
REINSURANCE CONSIDERATIONS; AVAILABILITY AND COSTS; CREDIT RISKS
The Company relies upon the use of reinsurance agreements in its
various programs to limit and manage the amount of risk retained by the
Company or its customers, including insurance companies. The availability
and cost of reinsurance may vary over time and is subject to prevailing
market conditions. A lack of available reinsurance coverage could limit the
Company's ability to continue certain of its insurance programs. In respect
of the Company's own insurance operations, the lack of available
reinsurance or increases in the cost of reinsurance could also increase the
amount of risk retained by the Company. In addition, while the Company
seeks to obtain reinsurance with coverage limits intended to be appropriate
for the risk exposures assumed, there can be no assurance that losses
experienced by the Company will be within the coverage limits of the
Company's reinsurance agreements. The Company is also subject to credit
risk as a result of its reinsurance arrangements, as the Company is not
relieved of its liability to policyholders by ceding risk to its
reinsurers. The Company is selective in regard to its reinsurers, placing
reinsurance with only those reinsurers that it believes have strong balance
sheets. The Company monitors the financial strength of its reinsurers on an
ongoing basis. The insolvency, inability, or unwillingness of any of the
reinsurers used by the Company to meet its obligations could have a
material adverse effect on the results of operations and financial position
of the Company. No assurance can be given regarding the future ability of
any of the Company's reinsurers to meet their obligations. The
establishment of provisions against reinsurance balances receivable is an
inherently uncertain process and there can be no assurance that the
ultimate provision will not materially increase or decrease. Although the
Company has no reason to believe that its provision against reinsurance
balances receivable are inadequate, it is possible that the Company will
need to revise the provision significantly in the near term. In the event
of such an increase or decrease, the amount would be reflected in the
Company's income statement in the period in which the provision was
adjusted.
DEPENDENCE ON KEY PERSONNEL
The Company's success depends to a substantial extent on the
ability and experience of its executive officers. The loss of the services
of one or more such persons could have a material adverse effect on the
business of the Company and its future operations.
POSSIBLE REVISIONS TO LOSS RESERVES
To the extent its activities involve any retention of risk of
loss, the Company maintains loss reserves to cover its estimated ultimate
liability for losses and loss adjustment expenses with respect to reported
and unreported claims incurred. Reserves are estimates involving actuarial
and statistical projections at a given time of what the Company expects to
be the cost of the ultimate settlement and administration of claims based
on facts and circumstances then known, estimates of future trends in claims
severity and other variable factors such as inflation. To the extent that
reserves prove to be inadequate in the future, the Company would have to
increase such reserves and incur a charge to earnings in the period such
reserves are increased, which could have a material adverse effect on the
Company's results of operations and financial condition. The establishment
of appropriate reserves is an inherently uncertain process and there can be
no assurance that ultimate losses will not materially exceed the Company's
loss reserves. The Company has limited historical claim loss experience to
serve as a reliable basis for the estimation of ultimate claim losses.
Although the Company has no reason to believe that its loss reserves are
inadequate, it is possible that the Company will need to revise the
estimate of claim losses significantly in the near term. In the event of
such an increase, the amount, net of associated reinsurance recoveries,
would be reflected in the Company's income statement in the period in which
the reserves were increased.
ADVERSE EFFECT OF LEGISLATION AND REGULATORY ACTIONS
The Company conducts business in a number of states and foreign
countries. Certain of the Company's subsidiaries are subject to
comprehensive regulation and supervision by government agencies in the
states and foreign jurisdictions in which they do business. The primary
purpose of such regulation and supervision is to provide safeguards for
policyholders rather than to protect the interests of shareholders. The
laws of the various state jurisdictions establish supervisory agendas with
broad administrative powers with respect to, among other things, licensing
to transact business, licensing of agents, admittance of assets, regulating
premium rates, approving policy forms, regulating unfair trade and claims
practices, establishing reserve requirements and solvency standards,
requiring participation in guarantee funds and shared market mechanisms,
and restricting payment of dividends. Also, in response to perceived
excessive cost or inadequacy of available insurance, states have from
time-to-time created state insurance funds and assigned risk pools which
compete directly, on a subsidized basis, with private providers such as the
Company. Any such event, in a state in which the Company has substantial
operations, could substantially affect the profitability of the Company's
operations in such state, or cause the Company to change its marketing
focus. State insurance regulators and the National Association of Insurance
Commissioners continually re-examine existing laws and regulations. It is
impossible to predict the future impact of potential state, federal and
foreign country regulations on the Company's operations, and there can be
no assurance that future insurance-related laws and regulations, or the
interpretation thereof, will not have an adverse effect on the operations
of the Company's business.
POSSIBLE ADVERSE IMPACT OF LICENSING PROCESS ON REALM NATIONAL
The Company is in the process of seeking the regulatory approvals
necessary to expand Realm National Insurance Company Limited's ("Realm
National") business to include workers' compensation and other specialty
casualty insurance lines in each of the states in which Realm National is
currently licensed to offer other insurance products, and intends to
license Realm National in substantially all of the remaining 50 states and
the District of Columbia. The Company expects that as Realm National
receives such approvals and licenses, the revenues to be generated by Realm
National and its integration into the Company's existing businesses will
become an important component of the Company's future earnings growth.
However, no assurance can be given that Realm National will receive such
approvals and licenses, or when such approvals and licenses will be granted
if Realm National does receive them. A state may require as part of its
licensing process that the insurer or its management have a certain period
of experience (typically one to three years) in the lines of business for
which a license is being sought. Although the Company's management has been
involved in offering workers' compensation products and services for many
years, Realm National's own experience in this line of business began for
all material purposes after Realm National's acquisition by the Company in
September 1996. Therefore, some states may determine that Realm National
does not have the requisite experience to meet this requirement. In the
absence of such experience, the insurance regulatory authority may delay
issuing a license until such time as the experience is obtained. The
failure to receive, or a delay in receiving, one or more of such approvals
and licenses could have a material adverse impact on Realm National's
ability to generate future earnings growth for the Company.
TAXATION OF THE COMPANY AND CERTAIN OF ITS SUBSIDIARIES
The Company and certain of its subsidiaries are incorporated
outside the United States and, as foreign corporations, do not file United
States tax returns. These entities believe that they operate in such a
manner that they will not be subject to U.S. tax (other than U.S. excise
tax on reinsurance premiums and withholding tax on certain investment
income from U.S. sources) because they do not engage in business in the
United States. There can be no assurance, however, that these entities will
not become subject to U.S. tax because U.S. law does not provide definitive
guidance as to the circumstances in which they would be considered to be
doing business in the United States. If such entities are deemed to be
engaged in business in the United States (and, if the Company were to
qualify for benefits under the income tax treaty between the United States
and Bermuda or the United States and the United Kingdom, such business
would be attributable to a "permanent" establishment in the United States),
the Company would be subject to U.S. tax at regular corporate rates on its
income that is effectively connected with its U.S. business plus an
additional 30% "branch profits" tax on income remaining after the regular
tax.
INTEREST RATE FLUCTUATIONS
The Company maintains most of its cash in the form of short-term,
fixed-income securities, the value of which is subject to fluctuation
depending on changes in prevailing interest rates. The Company generally
does not hedge its cash investments against interest rate risk.
Accordingly, changes in interest rates may result in fluctuations in the
income derived from the Company's cash investments.
LEGAL PROCEEDINGS
The Company is a party to certain legal proceedings. Although the
Company does not believe, based on presently available information, that
the outcome of these proceedings will have a material adverse effect on the
Company's financial condition, the outcomes of legal proceedings are always
subject to uncertainty.
