UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 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 OR 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)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
TITLE OF EACH CLASS
-------------------
Ordinary Shares, Par Value $0.25 per share
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
---
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. NOT APPLICABLE.
The aggregate market value of the shares of all classes of voting
stock of the registrant held by non-affiliates of the registrant on March
15, 2000 was approximately $13.8 million computed upon the basis of the
closing sales price of the Ordinary Shares on the Nasdaq National Market on
that date. For purposes of this computation, shares held by directors and
officers of the registrant have been excluded. Such exclusion is not
intended, nor shall it be deemed, to be an admission that such persons are
affiliates of the registrant.
As of March 15, 2000 there were 9,419,972 outstanding Ordinary Shares,
the only class of the registrant's common stock outstanding, of $0.25 par
value.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the registrant's Proxy Statement relating to its
Annual General Meeting of Shareholders scheduled to be held on May 25, 2000
are incorporated by reference into Part III of this Form 10-K.
Although Stirling Cooke Brown Holdings Limited is a "foreign private
issuer" within the meaning of Rule 3b-4 under the Securities Exchange Act
of 1934, as amended, it is voluntarily electing to file its Annual Report
for the year ended December 31, 1999 on a Form 10-K.
<PAGE>
INDEX
PAGE
----
PART 1
Item 1 Business................................................ 1
Item 2 Properties.............................................. 10
Item 3 Legal Proceedings....................................... 11
Item 4 Submission of Matters to a Vote of Security Holders..... 11
PART II
Item 5 Market for Registrant's Common Equity and Related
Stockholder Matters..................................... 12
Item 6 Selected Financial Data................................. 13
Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations..................... 14
Item 8 Financial Statements and Supplementary Data............. 19
Item 9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure..................... 46
PART III
Item 10 Directors and Executive Officers of the Registrant...... 46
Item 11 Executive Compensation.................................. 46
Item 12 Security Ownership of Certain Beneficial Owners and
Management.............................................. 46
Item 13 Certain Relationships and Related Transactions.......... 46
PART IV
Item 14 Exhibits, Financial Statement Schedules and Reports
on Form 8-K............................................. 47
Note: All dollar amounts are in U.S. dollars, unless otherwise
specifically noted.
<PAGE>
PART 1
ITEM 1--BUSINESS
THE COMPANY
Stirling Cooke Brown Holdings Limited (the "Company") is a Bermuda holding
company incorporated on December 12, 1995, which, through its subsidiaries,
provides insurance services and products. The Company provides its range of
services and products to unaffiliated insurance and reinsurance companies,
insurance agents, and insureds. The Company is active primarily in the
workers' compensation, occupational accident and health, and casualty
insurance markets through its subsidiaries located in London, Bermuda and
the United States.
THE COMPANY'S OPERATIONS
The Company's five main business segments are Brokerage, Program Business,
Underwriting Management, Insurance and Reinsurance. Each segment consists
of one or more separate companies and the results of each segment reflect
all fees, income, and direct expenses for the companies in that segment.
For example, revenues for the insurance segment include all of the
insurance company's income including premiums, policy issuance fees, and
investment income.
BROKERAGE
The Company's brokerage segment consists of subsidiaries that receive a fee
or commission for brokering insurance and reinsurance contracts. These
subsidiaries specialize in placing insurance and reinsurance business in
workers' compensation, accident and health, and specialty casualty lines.
The Company generates fees and commission-based revenues from this
business. The brokerage segment generated revenues of $24.9 million in
1999, $27.1 million in 1998 and $23.4 million in 1997. Price competition in
the U.S. market and the withdrawal of a number of reinsurers from the
market led to a reduction in revenues for the brokerage operations in 1999.
In addition, the segment has been adversely affected by the disruption
caused by widespread reinsurance market disputes and legal proceedings
involving the Company.
PROGRAM BUSINESS
The Company's program business segment consists of subsidiaries that market
insurance products and manage insurance programs developed by the Company.
These programs transfer risk from an insured to insurers and ultimately to
reinsurers primarily in the workers' compensation market. The segment's
subsidiaries are integrated to provide a range of business production and
administrative services to insurers. The program business segment services
are provided to various unaffiliated primary insurers and a Company-owned
primary insurer. This segment primarily consists of managing general agency
("MGA"), program management, third party claims administration ("TPA"), and
loss control and premium audit companies. The program business segment
generated revenues of $22.4 million in 1999, $27.1 million in 1998, and
$19.8 million in 1997. The revenues of this segment decreased in 1999 due
to a reduction in program business premiums together with a reduction in
fee margins earned on programs as a result of the increasingly competitive
environment in the U.S. workers' compensation insurance market.
The Company's MGA subsidiaries are responsible for marketing programs
through a network of retail and wholesale insurance agents. The MGA's are
also responsible for underwriting, policy issuance, policy servicing, and
administration of the business bound. The Company's MGA network includes
offices in Dallas, Texas; Bradenton and Boca Raton, Florida; and New York
City, New York.
UNDERWRITING MANAGEMENT
The Company's Managing General Underwriter ("MGU") subsidiaries are based
in Bermuda and are authorized primarily to underwrite and administer
reinsurance business on behalf of unaffiliated insurance and reinsurance
companies. The MGU's earn fees for providing underwriting and associated
administrative services relating to the business underwritten. The
underwriting management segment generated revenues of $4.1 million in 1999,
$3.6 million in 1998, and $4.2 million in 1997. The Company's underwriting
management segment experienced significant competitive pressures as 1999
progressed, with a significant reduction in business being renewed. This is
expected to continue during the current year.
INSURANCE
The Company's insurance segment consists of a New York domiciled insurer,
Realm National Insurance Company ("Realm National"). Realm National was
acquired by the Company in September 1996 and earns net premiums and policy
issuance fees. Realm National allows the Company to generate business and
receive premiums and fees from sources outside the Company's own MGA
network, to the extent that non-affiliated MGA's place business with Realm
National. The insurance segment generated revenues of $12.6 million in
1999, $11.1 million in 1998, and $5.4 million in 1997. Market conditions in
the workers compensation insurance market in which Realm National writes
the majority of its business grew increasingly competitive during 1999,
slowing Realm National's rate of growth.
Realm National had shareholders' equity of approximately $21.8 million at
December 31, 1999 (1998--$22.5 million, 1997--$21.5 million), net premiums
earned of approximately $9.5 million for the year ended December 31, 1999
(1998--$7.7 million, 1997--$2.9 million) and a B+ (Very Good) rating from
A.M. Best Company. For the year ended December 31, 1999, Realm National's
gross premiums written were $47.2 million (1998--$48.6 million, 1997--$21.7
million); net premiums written were $8.9 million (1998--$9.7 million,
1997--$4.0 million), of which $7.9 million (1998--$8.2 million, 1997--$2.3
million) were related to workers' compensation insurance and $1.0 million
(1998--$1.5 million, 1997--$1.7 million) were related to property
insurance.
REINSURANCE
The Company's reinsurance segment consists of its reinsurance subsidiary,
Comp Indemnity Reinsurance Company Limited ("CIRCL"). CIRCL primarily
reinsures workers' compensation and property and general liability risks.
The reinsurance segment generated revenues of $3.1 million in 1999, $10.9
million in 1998 and $9.4 million in 1997. Management determined in early
1999 to cease underwriting new programs in CIRCL due to unfavourable
results, and, for this reason, a number of existing contracts were not
renewed for the 1999 year. Accordingly, revenues decreased during the year.
For the year ended December 31, 1999, CIRCL's gross premiums assumed were
$3.0 million (1998--$11.8 million, 1997--$14.1 million), of which $2.7
million (1998--$6.9 million, 1997--$13.1 million) were related to workers'
compensation insurance and $0.3 million (1998--$4.9 million, 1997--$1.0
million) were related to property and general liability insurance. Net
premiums assumed were $4.7 million (1998--$7.7 million, 1997--$9.2
million).
MARKETING
The Company's marketing strategies vary by business segment. The Company's
program business segment markets its workers' compensation programs and
other specialty lines to wholesale and retail insurance agents in the U.S.
through its MGA's. Individual MGA offices market their services and
products through sales representatives, targeted direct mail, local and
regional advertising, seminars, and trade and industry conventions. Given a
general reliance on retail agents as an important source of business
production, special emphasis is placed on building and maintaining
relationships with individual retail agents and on expanding its network of
retail producers. To encourage loyalty from the retail agents the Company
seeks to provide a high level of service, offer insurance products that
satisfy the needs of clients and reward increased levels of production
through incentive compensation programs. The Company believes that it has
successfully developed a reputation for providing quality service,
cost-effective products and strong marketing support, which has enabled it
to develop strong relationships with its retail agents and commercial
customers.
The Company's insurance segment markets its insurance products to
independent insurance agents through unaffiliated agent networks and
through the Company's own MGA network. The Company's brokerage segment
markets its services directly to insurance and reinsurance companies, as
well as to insurance agents.
COMPETITION
The business of providing insurance services and products to the workers'
compensation and property and casualty insurance markets is highly
competitive. The Company competes with providers of traditional insurance
coverage and with 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). The Company believes that the key factors to effectively
compete in the risk management market are price, the ability to tailor
programs to the needs of the insured, and the ability to rapidly develop
new solutions to address changing market conditions. The Company believes
that its services and products are competitively priced, and that its
combination of services and products enables it to rapidly develop tailored
programs and act as a competitive provider of insurance services and
products. However, in periods of soft insurance market conditions as
existed during 1999, the Company's various business segments are subject to
additional competitive pressure in generating premium volume. In addition,
the fees that they charge for their services come under pressure as
insurers and reinsurers seek to reduce their costs.
Realm National is rated B+ (Very Good) by A.M. Best Company. In certain
circumstances, Realm National may be at a competitive disadvantage to
insurers with higher ratings. However, the Company's MGA's also represent
insurers with higher ratings from A.M. Best Company, thereby allowing the
Company's MGA's to remain competitive in circumstances where Realm National
is not selected as the insurer due to its rating.
EMPLOYEES
As of December 31, 1999, the Company had 310 employees. The service nature
of the Company's business makes its employees an important corporate asset.
While the market for qualified personnel is extremely competitive, the
Company believes that its relationship with its employees is good. None of
the Company's employees is represented by a union.
REGULATION
The Company's subsidiaries that are engaged in the insurance and
reinsurance segments (Realm National and CIRCL) are subject to regulation
by government agencies in the states and foreign jurisdictions in which
they do business. The nature and extent of such regulation vary from
jurisdiction to jurisdiction, but typically involve prior approval of the
acquisition of control of an insurance company or of any company
controlling an insurance company; regulation of certain transactions
entered into by an insurance company with any of its affiliates; approval
of premium rates and policy forms for many lines of insurance; standards of
solvency and minimum amounts of capital and surplus that must be
maintained; establishment of reserves required to be maintained for
unearned premium, losses and loss expense or for other purposes;
limitations on types and amounts of investments; restrictions on the size
of risks which may be insured; licensing of insurers and agents; deposits
of securities for the benefit of policyholders; and the filing of periodic
reports with respect to financial condition and other matters.
Most states require property and casualty insurers licensed to transact
insurance in the state to become members of insolvency funds or guaranty
associations which generally protect policyholders against the insolvency
of such insurers. Members of the fund or association must contribute to the
payment of certain claims made against insolvent insurers. Maximum
contributions required by law in any one year vary between 1% and 2% of
annual premiums written by a member in that state. Assessments from
insolvency funds paid by Realm National in 1997, 1998 and 1999 were
immaterial in relation to the Company's consolidated financial statements.
The cost of most of these assessments is recoverable through future policy
surcharges and premium tax deductions.
Realm National also is required to participate in various state-mandated
insurance facilities or in funding mandatory pools, which are generally
designed to provide insurance coverage for consumers who are unable to
obtain insurance in the voluntary insurance market. One such pool is the
multi-state workers' compensation pool operated by the National Council on
Compensation Insurance. These pools typically require all companies writing
applicable lines of insurance in the state for which the pool has been
established to fund deficiencies experienced by the pool based upon each
company's relative premium writings in that state, with any excess funding
typically distributed to the participating companies on the same basis.
Total assessments incurred by Realm National from all such facilities for
1997, 1998, and 1999 were immaterial in relation to the Company's
consolidated financial statements.
Realm National also is subject to various statutory and regulatory
restrictions, generally applicable to each insurance company in its state
of domicile, which limit the amount of dividends or distributions payable
by an insurance company to its shareholders. The restrictions are generally
based on certain levels of surplus, investment income, and operating
income, as determined under statutory accounting practices.
The New York Insurance Law regulates the distribution of dividends and
other payments to the Company by Realm National. Under the applicable New
York statute, unless prior regulatory approval is obtained, an insurer may
not declare or distribute any dividend to shareholders, which, together
with all dividends declared or distributed by it during the preceding
twelve months, exceeds the lesser of (i) 10% of its surplus to
policyholders as shown by its last statement on file with the New York
Department of Insurance, or (ii) 100% of adjusted net investment income
during such period. Such restrictions or any additional subsequently
imposed restrictions may in the future affect the Company's ability to pay
principal and interest on its debt, expenses, and cash dividends to its
shareholders.
The National Association of Insurance Commissioners ("NAIC") has adopted a
methodology for assessing the adequacy of statutory surplus of property and
casualty insurers that includes a risk-based capital requirement. Insurance
companies are required to calculate and report information under a
risk-based formula that attempts to measure statutory capital and surplus
needs based on the risks in a company's mix of products and investment
portfolio. The formula is designed to allow state insurance regulators to
monitor the adequacy of an insurer's capital. Under the formula, a company
determines its risk-based capital ("RBC") by taking into account certain
risks related to the insurer's assets (including risks related to its
investment portfolio and ceded reinsurance) and the insurer's liabilities
(including underwriting risks related to the nature and experience of its
insurance business). The RBC rules provide for different levels of
regulatory attention depending on the ratio of a company's total adjusted
capital to its "authorized control level" of RBC. Under the formula, a
higher ratio reflects a greater adequacy of capital. Based on calculations
made by the Company, the RBC level for the Company's insurance subsidiary
exceeds levels that would trigger regulatory attention. At December 31,
1999, Realm National's RBC ratio was approximately 416% (1998--703%), and
the threshold requiring minimum regulatory involvement was 200%. Therefore,
the Company's capital exceeded all requirements of the Risk-Based Capital
Model Act. The NAIC has also developed an Insurance Regulatory Information
System ("IRIS") to assist state insurance departments in their oversight of
the financial condition of insurance companies operating in their
respective states. IRIS identifies 11 industry ratios and specifies "usual
values" for each ratio. Departure from the usual values in four or more
ratios generally leads to inquiries from individual state insurance
commissioners. Management believes Realm National's IRIS ratios are in the
normal range and should not be of concern to regulators.
In addition to the oversight of the Company's insurance subsidiaries, the
Company, as the ultimate parent of a New York domiciled insurer (Realm
National), is also subject to regulation under the New York Insurance
Holding Company System Regulatory Act (the "Holding Company Act"). The
Holding Company Act contains certain reporting requirements including those
requiring the Company, as the ultimate parent company, to file information
relating to its capital structure, ownership, and financial condition and
general business operations of its insurance subsidiaries. The Holding
Company Act contains special reporting and prior approval requirements with
respect to transactions among affiliates.
Realm National is organized under the insurance laws of the State of New
York (the "New York Insurance Law"). The New York Insurance Law provides
that the acquisition or change of "control" of a domestic insurer, or any
person who controls a domestic insurer, cannot be consummated without the
prior approval of the relevant insurance regulatory authority. A person
seeking to acquire control, directly or indirectly, of a domestic insurance
company, or any person controlling a domestic insurance company, must seek
approval and generally file with the relevant insurance regulatory
authority an application for change of control (commonly known as a "Form
A") containing certain information required by statute and published
regulations and provide a copy of such Form A to the domestic insurer.
Under the New York Insurance Law, control is presumed to exist if any
person, directly or indirectly, owns, controls, holds with power to vote or
holds proxies representing ten percent or more of the voting securities of
any other person.
In addition, many state insurance regulatory laws contain provisions that
require pre-notification to state agencies of a change in control of a
non-domestic admitted insurance company in that state. While such
pre-notification statutes do not authorize the state agency to disapprove
the change of control, such statutes do authorize issuance of a cease and
desist order with respect to the non-domestic admitted insurer if certain
conditions exist, such as undue market concentration.
The Company intends to expand Realm National's licenses and business to
substantially all of the remaining states in which it is not currently
licensed. In order to obtain a license in a given state, Realm National
must complete an application and demonstrate compliance with state
licensing requirements. The applicable insurance regulatory authority
reviews the application, which review may take from three months to two or
more years. If all the requirements are met, a license is issued.
In determining whether to issue a license to do business in a state, the
state's insurance regulatory agency is required by statute or regulation to
consider a number of factors, largely for the purpose of protecting
policyholders within the state. Typically, the application process will
involve a review of the applicant's recent audited and statutory financial
statements, and, in many states, one or more years of operating
projections, to assess the financial strength of the applicant;
biographical information concerning the experience and fitness of
directors, officers and major shareholders; reports of recent examinations
as to the applicant's compliance record, finances and market practices in
its state of domicile; proposed policy forms and rate schedules; and the
applicant's experience in underwriting the line or lines of business to be
offered.
As a holding company, the Company is not subject to Bermuda insurance
regulations. However, the Bermuda Insurance Act 1978, as amended (the
"Insurance Act"), which regulates the insurance business of CIRCL, a
reinsurance subsidiary of the Company, provides that no person shall carry
on insurance business in or from within Bermuda unless registered as an
insurer under the Insurance Act by the Minister of Finance (the
"Minister"). The registration of an applicant as an insurer is subject to
its compliance with the terms of its registration and such other conditions
as the Minister may impose from time to time.
In general, the regulation of insurers in Bermuda relies heavily upon
auditors, loss reserve specialists, directors and managers who must certify
that an insurer meets minimum capital and solvency requirements. Every
registered insurer must appoint a government-approved auditor who will
annually audit and report on the Statutory Financial Statements and the
Statutory Financial Return of the insurer.
CIRCL is registered as a Class 3 insurer and, as such: (i) is required to
maintain a minimum statutory capital and surplus equal to the greatest of:
(a) $1 million; (b) 20% of the first $6 million of its net premiums written
plus 15% of its net premiums written over $6 million; or (c) 15% of its net
outstanding losses and loss expenses; (ii) is limited in declaring or
paying any dividends during any financial year with respect to a specified
minimum solvency margin or minimum liquidity ratio or if the declaration or
payment of such dividends would cause it to fail to meet such margin or
ratio; (iii) is prohibited, without the approval of the Minister, from
reducing by 15% or more its total statutory capital, as set out in its
previous year's financial statements; and (iv) is required to report its
failure to meet its minimum solvency margin to the Minister within 30 days
after becoming aware of such failure or having reason to believe that such
failure has occurred. CIRCL is also required to obtain an annual loss
reserve opinion issued by a government approved loss reserve specialist. At
December 31, 1999, CIRCL was required to maintain a minimum statutory
capital and surplus of $2.0 million (1998 - $2.1 million). At that date
statutory capital and surplus was $2.9 million (1998 - $2.3 million) and
the requirement was therefore met.
The Insurance Act provides a minimum liquidity ratio for general business.
An insurer engaged in general business is required to maintain the value of
its relevant assets at not less than 75% of the amount of its relevant
liabilities. Relevant assets include cash and time deposits, quoted
investments, unquoted bonds and debentures, first liens on real estate,
investment income due and accrued, accounts and premiums receivable,
reinsurance balances receivable and funds held by ceding reinsurers. There
are certain categories of assets which, unless specifically permitted by
the Minister, do not automatically qualify as relevant assets such as
unquoted equity securities, investments in and advances to affiliates, real
estate and collateral loans. The relevant liabilities are total general
business insurance reserves and total other liabilities less deferred
income tax and sundry liabilities (by interpretation, those not
specifically defined), letters of credit and guarantees. At December 31,
1999, CIRCL was required to maintain relevant assets of at least $23.0
million (1998 - $25.0 million). At that date relevant assets were
approximately $33.5 million (1998 - $35.6 million) and the requirement was
therefore met.
A Bermuda-registered insurer is required to maintain a principal office in
Bermuda and to appoint and maintain a principal representative in Bermuda
to oversee the business of the insurer and to report to the Minister and
the Bermuda Registrar of Companies in respect of certain events. Unless the
approval of the Minister is obtained, an insurer may not terminate the
appointment of its principal representative, and the principal
representative may not cease to act as such, unless 30 days notice is given
in writing to the Minister of the intention to do so. Within 30 days of the
principal representative's knowing or having reason to believe that the
insurer the representative represents is likely to become insolvent or that
an "event" has occurred, the principal representative must provide a
written report to the Minister setting out all the particulars of the case
that are available to the representative. Examples of such an "event"
include failure by the insurer to comply substantially with a condition
imposed upon the insurer by the Minister relating to a solvency margin or a
liquidity or other ratio.
The Minister may appoint an inspector with extensive powers to investigate
the affairs of an insurer if the Minister believes that an investigation is
required in the interest of the insurer's policyholders or persons who may
become policyholders. In order to verify or supplement information
otherwise provided to him, the Minister may direct an insurer to produce
documents or information relating to matters connected with the insurer's
business.
If it appears to the Minister that there is a risk of the insurer becoming
insolvent, the Minister may direct the insurer not to take on any new
insurance business; not to vary any insurance contract if the effect would
be to increase the insurer's liabilities; not to make certain investments;
to realize certain investments; to maintain in Bermuda, or transfer to the
custody of a Bermuda bank, certain assets; or to limit its premium income.
The Bermuda Government actively encourages foreign investment in "exempted"
entities like CIRCL that are based in Bermuda but do not operate in
competition with local businesses. As well as having no restrictions on the
degree of foreign ownership, CIRCL is exempted from taxes on its income
until March 28, 2016 and is not subject to tax on its dividends or to any
foreign exchange controls in Bermuda. In addition, there currently is no
capital gains tax in Bermuda, and profits can be accumulated by CIRCL, as
required, without limitation.
Certain of the Company's subsidiaries are also subject to regulation as
insurance intermediaries. Under the applicable regulations, the
intermediary is responsible as a fiduciary for funds received for the
account of the parties to the insurance or reinsurance transaction and is
required to hold such funds in appropriate bank accounts subject to
restriction on withdrawals and prohibitions on commingling.
The Company's insurance intermediaries include several MGA's. MGA's
produce, underwrite, administer business produced and manage claims on
behalf of insurance companies in certain states, and they are subject to
regulation under state laws regarding licensure, fiduciary obligations with
respect to premium, and the general management of the insurers' business.
The activities of Stirling Cooke Brown Insurance Brokers Limited as an
insurance broker in the UK require it to be authorized under the Insurance
Brokers (Registration) Act of 1977 by the Insurance Brokers Registration
Council (the "Council"). Authorization by this body involves continuing
compliance with rules made by the Council, which require, among other
things, that the company maintain a minimum level of working capital, that
it allocate not more than a specified portion of its business to any
particular insurance company or group of insurance companies, that it
supply reports to the Council, and that it conduct its business in
accordance with the conduct of business rules published by the Council. It
is a condition to the authorization from the Council that a majority of the
directors of Stirling Cooke Brown Insurance Brokers Limited are and remain
registered as insurance brokers in the UK.
OUTSTANDING LOSSES AND LOSS EXPENSES
Both Realm National and CIRCL maintain loss reserves to reflect anticipated
future claims and claims expense payments. The Company establishes reserves
for losses and loss adjustment expenses related to reported claims on the
basis of the evaluations of independent claims adjusters and the Company's
own claims staff. In addition, reserves are established for losses which
have occurred but have not yet been reported and for adverse development of
reserves on reported losses. The Company and its independent actuaries
estimate claims and claims expenses arising for losses that have occurred
but not yet been reported based upon the Company's and the insurance
industry's experience, together with statistical information with respect
to the probable number and nature of such claims.
The following table sets forth a reconciliation of beginning and ending
reserves for losses and loss adjustment expenses:
RECONCILIATION OF OUTSTANDING LOSSES AND LOSS EXPENSES
FOR THE YEARS ENDED
-------------------
DECEMBER 31,
------------
1997 1998 1999
-------- -------- --------
Balance beginning of year........ $ 24,301 $ 36,276 $ 66,117
Less outstanding losses
recoverable.................... (16,588) (23,072) (48,146)
-------- -------- --------
Net balance...................... 7,713 13,204 17,971
-------- -------- --------
Incurred related to:
Current year................ 10,174 12,578 8,696
Prior years................. 777 4,693 3,674
-------- -------- --------
Total incurred.............. 10,951 17,271 12,370
-------- -------- --------
Paid related to:
Current year................ 2,011 3,066 2,830
Prior years................. 3,449 9,438 7,643
-------- -------- --------
Total paid............ 5,460 12,504 10,473
-------- -------- --------
Net balance..................... 13,204 17,971 19,868
Plus outstanding losses
recoverable................... 23,072 48,146 73,267
-------- -------- --------
Balance at end of year...... $ 36,276 $ 66,117 $ 93,135
======== ======== ========
The adverse development during 1999 on prior years primarily reflects the
increase in provisions for doubtful reinsurance recoveries of $4.2 million
to $6.7 million. This provision is included in the balance sheet as a
component of paid and outstanding losses recoverable from reinsurers. The
provision is an estimate and amounts not collectible from reinsurers may
ultimately be significantly greater or less than the provision established.
The adverse development during 1998 on prior years primarily represents an
increase in claims frequency on one program and a provision for doubtful
recoveries of $2.5 million.
The Company's underwriting loss ratio (i.e., the ratio of net losses and
net loss expenses to net assumed premium earned) for 1999 was 104.4%
(1998--97.2%).
The Company believes that the provision for outstanding losses and loss
expenses is adequate to cover the ultimate net cost of losses and loss
expenses incurred; however, such a provision is an estimate and may
ultimately be significantly greater or less than the provision established.
The Company has limited historical loss experience available to serve as a
basis for the estimation of ultimate losses.
The previous table represents a reconciliation of reserves in accordance
with generally accepted accounting principals ("GAAP"). The following table
reconciles the difference between those reserves and those contained in
regulatory filings made by the Company's subsidiaries in accordance with
statutory accounting practices ("SAP").
RECONCILIATION OF SAP AND GAAP RESERVES
FOR THE YEARS ENDED
-------------------
DECEMBER 31,
------------
1997 1998 1999
-------- -------- --------
(DOLLARS IN THOUSANDS)
Reserves for losses and loss adjustment
expenses, end of year SAP.................. $ 13,355 $ 18,024 $ 18,262
Gross-up for ceded reinsurance reserves...... 23,072 48,146 73,267
Provision for salvage receivable not
included on a SAP basis.................... (128) (30) (31)
Provision for uncollectible reinsurance...... -- -- 1,637
Provision for loss portfolio transfer
not included in SAP reserves............... (23) (23) --
-------- -------- --------
Reserves for losses and loss adjustment
expenses, end of year GAAP................. $ 36,276 $ 66,117 $ 93,135
======== ======== ========
The following table presents the development of the Company's ongoing net
reserves for 1997 through 1999. The top line of the table shows the
estimated reserve for unpaid losses and loss adjustment expenses recorded
at the balance sheet date for each of the indicated years. This amount
represents the estimated amount of losses and loss adjustment expenses for
claims that are unpaid at the balance sheet date, including losses that
have been incurred but not yet reported to the Company. The table also
shows the re-estimated amount of the previously recorded reserve based on
experience as of the end of each succeeding year. The estimate changes as
more information becomes known about the frequency and severity of claims
for individual years. The "Cumulative Deficiency" represents the aggregate
change in the estimates over all prior years. The Company's insurance
entities were both purchased in 1996 so, accordingly, there has only been
three years' movement in the Company's reserves. It should be noted that
the following table presents an analysis of loss and loss expense
development. Therefore, each amount in the table includes the effects of
changes in reserves for all prior years.
<PAGE>
ANALYSIS OF LOSS AND LOSS EXPENSE DEVELOPMENT
(NET OF OUTSTANDING LOSSES RECOVERABLE)
FOR THE YEARS ENDED
-------------------
DECEMBER 31,
------------
1996 1997 1998 1999
-------- -------- -------- --------
(DOLLARS IN THOUSANDS)
Gross reserve for losses and
loss adjustment expenses........ $ 24,301 $ 36,276 $ 66,117 $ 93,135
Less outstanding losses
recoverable..................... (16,588) (23,072) (48,146) (73,267)
-------- -------- -------- --------
Net reserve for losses and loss
adjustment expenses............. 7,713 13,204 17,971 19,868
Reserve re-estimated as of:
One year later............... 8,490 17,897 21,645 --
Two years later.............. 11,830 22,794 -- --
Three years later............ 13,092 -- -- --
-------- -------- -------- --------
Cumulative deficiency............. (5,379) (9,590) (3,674) --
-------- -------- -------- --------
Percentage........................ (69.7%) (72.6%) (14.7%) --
-------- -------- -------- --------
Cumulative amount of reserve
paid through:
One year later............... 3,449 9,438 7,383 --
Two years later.............. 7,669 14,097 -- --
Three years later............ 10,238 -- -- --
The increase in reserves one year later, two years later and three years
later on 1996, 1997 and 1998 reserves reflects primarily an increase in
claims frequency on one particular program that covers bodily injury and
property risks in the construction industry, and an increase in provisions
for doubtful reinsurance recoveries discussed in Note 8 to the consolidated
financial statements.
<PAGE>
ITEM 2--PROPERTIES
The Company's head office is located in Hamilton, Bermuda. This facility
currently serves as the headquarters for the financial and administrative
departments of the Company and the Company's Bermuda subsidiaries. The
following table sets forth additional information concerning the Company's
facilities:
APPROXIMATE
SQUARE LEASE
PROPERTY FEET EXPIRATION
- --------------------------- ------ ------------------
Hamilton, Bermuda.......... 5,900 June 20, 2006
London, England............ 12,500 August 10, 2009
Dallas, Texas.............. 14,700 August 31, 2003
Dallas, Texas.............. 10,500 May 31, 2001
New York, New York......... 7,900 October 31, 2003
New York, New York......... 2,600 September 14, 2004
Bradenton, Florida......... 12,350 June 28, 2008
Boca Raton, Florida........ 13,750 January 15, 2005
Southington, Connecticut... 3,300 August 31, 2011
All of the Company's facilities are leased. Aggregate lease payments for
1999 were $2.8 million (1998 - $2.2 million). The Company anticipates that
it will be able to extend these leases as they expire or, if necessary or
desirable, locate substitute facilities on acceptable terms.
ITEM 3--LEGAL PROCEEDINGS
(a) The civil action filed on March 29, 1999 against the Company and others
in the U.S. District Court for the Southern District of New York, certain
of its subsidiaries, by Odyssey Re (London) ("Odyssey") was dismissed by
the Court on February 25, 2000. The amended complaint in that case asserted
claims against the Company, certain of its subsidiaries, and others under
the Racketeering Influenced and Corrupt Organizations (RICO) Act, and for
common law fraud. The Court dismissed the amended complaint on the ground
of "forum non conveniens," finding that Odyssey's claims should be asserted
in the English courts. There is no counterpart to the U.S. RICO law in
England, nor does English law allow imposition of treble damages.
Odyssey, which changed its name to Sphere Drake Insurance Limited ("Sphere
Drake") during 1999, caused proceedings to be issued in the London
Commercial Courts (equivalent to a civil complaint in U.S. jurisdictions)
against the Company's U.K. subsidiaries, two former officers of those
subsidiaries, and others on February 29, 2000. Neither the Company nor any
of its U.S. or Bermuda subsidiaries is named in the action. Sphere Drake
generally alleges a conspiracy to defraud it in connection with various
reinsurance contracts.
It is the opinion of management that the claims generally described in
Sphere Drake's action are without merit and the case will be defended
vigorously.
(b) Several arbitration proceedings currently are pending in England
between reinsurers and ceding insurers relating to reinsurance transactions
involving the personal accident excess of loss market in London ("LMX") for
the account years 1993, 1994, 1995 and 1996. Although neither the Company
nor its broker subsidiaries is a party to any of these arbitrations,
certain of the Company's subsidiaries acted as reinsurance broker for
ceding insurer clients that are parties to certain of the arbitrations.
In addition, the Company's reinsurance subsidiary is party to one of the
LMX arbitrations. This particular arbitration has been dormant for some
time.
The reinsurers generally have alleged that they sustained losses due to an
"artificial" spiral in the LMX market, the existence of which, as well as
other information, 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 suspended payment of claims.
During 1998 and 1999 certain of the reinsurers and reinsureds that are
parties to the arbitrations described above issued proceedings in the
English courts against one or more of the Company's brokerage subsidiaries
and one underwriting management subsidiary, apparently for the primary
purpose of tolling the statute of limitations pending the outcome of the
arbitration. In one recently issued proceeding against the same
subsidiaries, three former officers of the subsidiaries were also named. In
none of these proceedings did the complainant specify an amount of damages
sought. If one or more reinsurers succeeds in avoiding its contracts in the
pending arbitrations, it is possible that ceding insurers clients on whose
behalf the Company's broker subsidiaries placed the reinsurance, may seek
to pursue a claim for indemnification or other claims against one or more
of those subsidiaries. Similarly, if one or more of the reinsurers fails to
avoid its contracts in the pending arbitrations, it also is possible that
those reinsurers may seek to pursue some type of claim against one or more
of those subsidiaries.
The Company understands that awards already have been made in favor of the
reinsurer in two arbitrations. However, based on the Company's
understanding of the reasons given by the arbitration panels for their
awards in favor of the reinsurer in those cases, the Company does not
believe there is any valid basis for its ceding insurer clients in those
cases to assert a claim against the Company or its broker subsidiaries.
All U.K. judicial proceedings against the Company's subsidiaries have been
stayed or held in abeyance pursuant to standstill agreements or court
order, except for one proceeding where the subsidiaries are considering a
request for a standstill and except for standstill agreements between two
of the Company's subsidiaries and one ceding insurer client, which recently
gave notice of termination of those standstill agreements.
One of the arbitration awards referenced above allowed a reinsurer to avoid
its reinsurance contracts with a Lloyd's syndicate. According to reports in
the London press, that award may have caused the syndicate's liabilities to
increase beyond the financial resources available to it and its Names,
requiring the syndicate to avail itself of the Lloyd's Central Fund.
Thereafter, Lloyd's initiated an investigation of that syndicate and all
"market participants," including the Company's U.K. subsidiaries. The
investigation is at an early stage and it is uncertain when it will be
completed.
The Company understands that substantial progress has been and is being
made by various market participants in settling ongoing reinsurance
disputes, including many of the market participants that are parties to the
arbitrations and other proceedings described above.
Although no assurances can be given as to the outcome of the pending U.K.
arbitrations or pending or potential judicial proceedings related to the
LMX spiral reinsurance arbitrations and their effect on the Company, the
Company believes, based on the information presently available to it, that
any such effect should not have a material adverse effect on the Company's
financial condition.
(c) The reinsurance markets in which the Company historically has been
involved experienced considerable disruption during 1999, for a variety of
reasons, including but not limited to the LMX market disputes described
above and other disputes involving the North American workers' compensation
reinsurance market.
One result of this market disruption has been that certain reinsurers with
whom the Company's broker subsidiaries placed business on behalf of ceding
insurer clients suspended claims payments to those clients, as well as to
the Company's insurance and reinsurance subsidiaries. As a result, a number
of arbitrations were commenced between Company clients and their
reinsurers.
In some instances, disputes or potential disputes have arisen concerning
whether reinsurance was properly placed by the Company's broker
subsidiaries. In other instances, the Company's ceding insurer clients have
demanded imdemnification by the Company if the client's reinsurance
contracts ultimately are avoided by its reinsurers.
Although no assurances can be given as to the effect on the Company of the
various disputes in the worker's compensation reinsurance market, or
related arbitrations, the Company believes, based on the information
presently available to it, that any such effect should not have a material
adverse effect on the Company's financial condition.
(d) 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's financial condition.
ITEM 4--SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of shareholders during the fourth
quarter of the fiscal year 1999.
PRINCIPAL EXECUTIVE OFFICERS OF THE REGISTRANT
The following sets forth certain information regarding the Principal
Executive Officers of the Company at March 15, 2000.
NAME AGE POSITION
--------------------- ---- ---------------------------------
Stephen A. Crane..... 54 President, Chief Executive
Officer and Director (1)
Len Quick............ 56 Chief Operating Officer and
Director (1)
George W. Jones...... 45 Chief Financial Officer and
Director (2)
James Lawless, IV.... 45 Senior Vice President, General
Counsel and Corporate Secretary
(1) Term as Director expires at Annual General Meeting in 2000.
(2) Term as Director expires at Annual General Meeting in 2001.
STEPHEN A. CRANE was appointed as President & Chief Executive Officer in
November, 1999. Prior to joining the Company, Mr. Crane served for five
years as President & Chief Executive Officer of Gryphon Holdings Inc., a
specialty property-casualty underwriting organization.
LEN QUICK was appointed as Chief Operating Officer in July, 1999, having
previously served as Chief of Operations of the Company's North
American-based subsidiaries from 1997. Between 1994 and 1997, Mr. Quick was
President of the Company's Dallas based subsidiary, North American Risk
Inc.
GEORGE W. JONES has been Chief Financial Officer and a Director of the
Company since it began operations.
JAMES LAWLESS, IV was appointed as Senior Vice President, General Counsel
and Corporate Secretary in March 2000. In the five year period prior to
joining the Company, Mr. Lawless practiced law in New York with LeBouef
Lamb Green and MacRae, Werner & Kennedy and Battle Fowler LLP.
<PAGE>
PART II
ITEM 5--MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
The Company's ordinary shares, $0.25 par value, have been quoted on the
Nasdaq National Market under the symbol "SCBHF" since November 26, 1997.
The ordinary shares were listed in connection with the Company's Initial
Public Offering, completed in December 1997. As of March 15, 2000, the
approximate number of holders of the Company's ordinary shares was 1,000.
The following table sets forth the high and low closing sale prices per
share of the Company's ordinary shares for the calender quarters of 1998
and 1999:
HIGH LOW
--------- ---------
Year ended December 31, 1998
First Quarter.................. $27 3/4 $23 5/16
Second Quarter................. $30 $25 1/4
Third Quarter.................. $27 7/8 $11 5/8
Fourth Quarter................. $20 $11 1/8
Year ended December 31, 1999
First Quarter.................. $18 3/4 $ 7
Second Quarter................. $ 7 1/2 $ 3 1/4
Third Quarter.................. $ 5 15/16 $ 1 11/32
Fourth Quarter................. $ 3 7/32 $ 1 3/8
The closing market price of the ordinary shares on March 15, 2000 was
$2 5/8.
During both 1998 and 1999, the Company paid dividends of $0.12 per
ordinary share. Dividends are paid quarterly. A dividend of $0.03 per
ordinary share was declared on March 7, 2000 and will be paid on March 31,
2000 to shareholders of record at March 17, 2000. The declaration and
payment of future dividends is at the discretion of the Company's Board of
Directors and will depend upon, among other things, future earnings,
capital requirements, the general financial condition of the Company,
general business conditions and other factors. The Company's ability to pay
dividends is partially restricted due to certain insurance regulations. See
"Management Discussion and Analysis of Financial Condition and Results of
Operations" and Note 17 to the Consolidated Financial Statements.
During 1999, the Company purchased 356,400 ordinary shares on the open
market at a total cost of $4,423,000. These shares were recorded as
treasury stock at cost. The Company now holds a total of 443,400 ordinary
shares in treasury at a total cost of $5.7 million.
Under current Bermuda law, there is no income tax, withholding tax,
captial gains or capital transfer tax on the Company or its shareholders in
respect of the payment of dividends or capital transactions.
<PAGE>
ITEM 6--SELECTED FINANCIAL DATA
The selected consolidated financial data below should be read in
conjunction with the Consolidated Financial Statements and the notes
thereto presented under Item 8.
<TABLE>
<CAPTION>
AS OF OR FOR THE YEARS ENDED DECEMBER 31,
--------------------------------------------------------------
1995 1996(1) 1997 1998 1999
---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues........................ $ 19,048 $ 47,061 $ 65,310 $ 85,093 $ 67,821
Income (loss) before taxation... 7,154 12,199 15,918 19,808 (8,993)
Taxation........................ 2,560 2,281 2,925 3,790 (2,583)
Net income (loss) before
cumulative effect of a change
in accounting principle....... 4,594 9,918 12,993 16,018 (6,410)
Cumulative effect of a change
in accounting principle(2).... 0 0 0 0 $ (307)
Net income (loss)............... $ 4,594 $ 9,918 $ 12,993 $ 16,018 $ (6,717)
BASIC EARNINGS PER SHARE
Net income (loss) per share(3).. $ 1.07 $ 1.22 $ 1.55 $ 1.63 $ (0.71)
Weighted average number of
ordinary shares outstanding... 4,288,908 8,100,782 8,383,482 9,814,101 9,480,356
DILUTED EARNINGS PER SHARE
Net Income (loss) per share
assuming dilution(3).......... $ 1.07 $ 1.19 $ 1.53 $ 1.63 $ (0.71)
Weighted average number of
ordinary shares outstanding
assuming dilution............. 4,304,098 8,306,610 8,515,473 9,840,159 9,480,356
Dividends per ordinary share.... $ 0.53 $ 0.00 $ 0.00 $ 0.12 $ 0.12
BALANCE SHEET DATA:
Total assets(4)................. $ 103,273 $ 235,084 $ 406,330 $ 649,641 $1,011,409
Long term debt.................. 0 0 0 0 0
Ordinary shares subject to
redemption(5)................... 0 14,457 0 0 0
Total shareholders' equity...... $ 7,055 $ 29,001 $ 83,103 $ 97,632 $ 84,832
<FN>
(1) Includes the operations of Realm Investments Limited from its January
1996 acquisition by the Company, Realm National from its September
1996 acquisition by the Company and the operations of North American
Risk, Inc. from its July 1996 acquisition by the Company. All of such
acquisitions were accounted for as purchases. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations".
(2) See Note 2(q) of Notes to the Consolidated Financial Statements for an
explanation of the cumulative effect of a change in accounting
principle.
(3) See Note 2(l) of Notes to the Consolidated Financial Statements for an
explanation of the methods used to determine Net Income per share.
(4) Total assets comprise corporate assets together with cash held and
insurance balances receivable in a fiduciary capacity. See Note 4 to
the Consolidated Financial Statements.
(5) The ordinary shares subject to redemption were reclassified to
shareholders' equity upon consummation of the Initial Public Offering
since those shares were no longer redeemable.
</FN>
</TABLE>
<PAGE>
ITEM 7--MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following is a discussion of the Company's results of operations and
financial condition. This discussion and analysis should be read in
conjunction with the consolidated financial statements and the notes
thereto presented under Item 8.
Results of Operations For the Years Ended December 31, 1999, 1998 and 1997.
Net Loss for 1999 was ($6,717) compared to 1998 net income of $16,018 and
1997 net income of $12,993. The results for the year were affected by a
number of different factors. The most significant were costs and provisions
pertaining to reinsurance related disputes in which the Company was
involved during the year, including certain litigation. Provisions and
costs relating to these disputes amounted to $11.9 milllion pre-tax for the
year. Results for the year were also adversely influenced by significant
costs relating to the restructuring and consolidation of the Company's
operations and writedowns in connection with investments in affiliates.
These restructuring charges and write-downs amounted to $4.3 million
pre-tax for the year. Finally, and more generally, the U.S. workers'
compensation insurance market, in which the Company conducts most of its
business, became increasingly competitive as the year progressed, and the
Company experienced signficant deterioration in some of the market segments
in which it operates. These difficult conditions resulted in a diminution
of revenue and shrinkage in operating margins.
REVENUES AND NET INCOME
For the Years
Ended December 31,
--------------------------------
1997 1998 1999
-------- -------- --------
(dollars in thousands)
Revenues........................ $ 65,310 $ 85,093 $ 67,821
Expenses........................ 49,392 65,285 76,814
-------- -------- --------
Income (loss) before Taxation... 15,918 19,808 (8,993)
Taxation........................ (2,925) (3,790) 2,583
-------- -------- --------
Net Income (loss) before
cumulative effect of a
change in accounting
principle..................... 12,993 16,018 (6,410)
Cumulative effect of a
change in accounting
principle..................... -- -- 307
-------- -------- --------
Net Income (loss)............... $ 12,993 $ 16,018 $ (6,717)
======== ======== ========
Net Income (loss) per
Share - Basic................ $ 1.55 $ 1.63 ($0.71)
Net Income (loss) per Share
assuming dilution............. $ 1.53 $ 1.63 ($0.71)
Revenues of $67.8 million in 1999 represented a $17.3 million decrease
versus 1998 revenues of $85.1 million, which increased $19.8 million over
1997 revenues of $65.3 million. Net loss of $6.7 million in 1999 compares
to net income of $16.0 million in 1998, which represented a $3.0 million
increase over 1997 net income of $13.0 million. The 1999 decline in
revenues reflected the competitive pressures caused by the soft market
conditions in the markets in which the Company operates, which affected all
the segments of the Company's operations. The decline in revenue was also
caused by the decision by the Company to cease underwriting new business in
its Bermuda-based reinsurance subsidiary. Expenses of $76.8 million in 1999
represent a $11.5 million increase over 1998 expenses of $65.3 million,
which increased $15.9 million over 1997 expenses of $49.4 million. The 1999
increase in operating expenses was primarily due to restructuring costs,
costs and provisions associated with reinsurance disputes involving the
Company or its clients and related litigation, and an increase in bad debt
provisions.
Basic net loss per share was $0.71 in 1999, as compared to basic net income
of $1.63 in 1998 and basic net income of $1.55 in 1997 (excluding the
profit on disposal of subsidiaries during 1997, basic net income per share
was $1.49 during the year). Diluted net loss per share was $0.71 in 1999,
as compared to diluted net income per share of $1.63 in 1998 and $1.53 in
1997 (excluding the profit on disposal of subsidiaries during 1997, diluted
net income per share was $1.47 during the year).
REVENUES AND NET INCOME BY SEGMENT
Segment Revenues Segment Net Income (loss)
For the Years Ended For the Years Ended
December 31, December 31,
---------------------------- ----------------------------
1997 1998 1999 1997 1998 1999
-------- -------- -------- -------- -------- --------
(dollars in thousands (dollars in thousands)
Brokerage.......... $ 23,385 $ 27,144 $ 24,879 $ 8,591 $ 11,501 $ 2,706
Program Business... 19,770 27,119 22,444 3,938 5,187 (2,716)
Underwriting.......
Management....... 4,174 3,554 4,123 2,491 1,689 1,446
Insurance.......... 5,399 11,073 12,557 471 1,169 (2,139)
Reinsurance........ 9,382 10,905 3,138 57 (3,357) (3,402)
Other.............. 3,200 5,298 680 370 3,619 (5,383)
-------- -------- -------- -------- -------- --------
Total $ 65,310 $ 85,093 $ 67,821 $ 15,918 $ 19,808 $ (9,488)
======== ======== ======== ======== ======== ========
Brokerage
- ---------
The Company's brokerage segment consists of subsidiaries that receive a fee
or commission for brokering insurance and reinsurance contracts. Revenues
of $24.9 million in 1999 represented a decrease of $2.2 million from
revenues of $27.1 million in 1998, which increased $3.7 million from
revenues of $23.4 million in 1997. Increasingly competitive pressures in
the marketplace and significant changes in the overall market environment
led to a reduction in revenues for the brokerage operations. The slowdown
in 1999 brokerage revenues accelerated as the year progressed and was
affected by the disruption caused by certain market disputes and legal
proceedings in which the Company became involved (see Item 3 - Legal
Proceedings). To meet this changed market environment, the Company began a
program of restructuring of its brokerage operations in the third quarter
of the year.
The brokerage segment's profit of $2.7 million in 1999 represented a
decrease of $8.8 million from segment profit of $11.5 million in 1998,
which increased $2.9 million from segment profit of $8.6 million in 1997.
The 1999 decrease in segment profits reflects the decrease in revenue
combined with an increase in brokerage segment expenses. The increase in
expenses was primarily due to significant costs and provisions associated
with reinsurance disputes involving the Company or its clients and related
litigation, as well as restructuring costs and an increase in bad debt
provisions.
Program Business
- ----------------
The Company's program business segment consists of subsidiaries that market
insurance products and administer programs developed by the Company.
Program business revenues of $22.4 million in 1999 represented a decrease
of $4.7 million from revenues of $27.1 million in 1998, which increased
$7.3 million from revenues of $19.8 million in 1997. The decrease in
revenues during 1999 as compared to 1998 was due to a reduction in program
business volume together with a reduction on fee margins due to the
increasingly competitive environment in the U.S. workers' compensation
insurance market. In addition, a number of reinsurers withdrew from the
market, which led to cancellation of certain programs and contributed to
increased pressure on the Company's fee margins. Although there is some
indication of an increase in pricing, the Company's fee margins continue to
be under pressure.
The program business segment loss of $2.7 million in 1999 represented a
decrease of $7.9 million from segment profit of $5.2 million in 1998, which
increased $1.3 million from segment profit of $3.9 million in 1997. The
1999 decrease in segment profits reflects the decrease in program premium
volume, together with reduced fee margins. During the year, the Company
began a restructuring of its program segment operations, which resulted in
the closure of two offices, consolidation of certain operations, and a
streamlining of its remaining operations to reduce expenses and increase
efficiencies.
The Company has accelerated its development and increased its investment in
e-commerce to increase the quality and efficiency of service to its agency
network. The Company also has expanded its e-commerce focus to develop new
ways to deliver products and services to various market sectors.
Underwriting Management
- -----------------------
The Company's underwriting management segment comprises companies that
primarily underwrite and administer reinsurance business on behalf of
independent reinsurance companies. Segment revenues of $4.1 million in 1999
represented an increase of $0.5 million from revenues of $3.6 million in
1998, which decreased $0.6 million from revenues of $4.2 million in 1997.
This increase in revenues during 1999 was primarily due to additional
earnings realized in the first quarter of 1999 on contracts that were
placed in prior years.
Segment profit of $1.4 million in 1999 represented a decrease of $0.3
million from segment profit of $1.7 million in 1998, which in turn
reflected a $0.8 million decrease from segment profit of $2.5 million in
1997. The Company's underwriting management segment continued to experience
significant competitive pressures as 1999 progressed, with a significant
reduction in business being renewed during the year. Consequently the
Company expects revenues and profits for this segment to decline in the
current year.
Insurance
- ---------
The Company's insurance segment consists of its wholly owned U.S.-based
insurance company, Realm National Insurance Company. Revenues of $12.6
million in 1999 represented an increase of $1.5 million from revenues of
$11.1 million in 1998, which reflected a $5.7 million increase from
revenues of $5.4 million in 1997. Gross written premiums were $47.2 million
in 1999, which represented a $1.4 million decrease from $48.6 million in
1998, which reflected a $26.9 million increase from $21.7 million in 1997.
Net premiums earned increased to $9.5 million in 1999, which represented a
$1.8 million increase from $7.7 million in 1998, which reflected a $4.8
million increase from $2.9 million in 1997. The remainder of the growth in
revenues is due to an increase in policy issuance fees. Policy issuance
fees increased to $2.5 million in 1999, which represented a $0.4 million
increase from $2.1 million in 1998, which reflected a $1.3 million increase
from $0.8 million in 1997.
Market conditions in the workers compensation insurance market in which
Realm National writes the majority of its business grew increasingly
competitive during 1999, slowing its rate of growth. In addition,
cost-effective reinsurance capacity significantly diminished throughout
1999. This has resulted in Realm National retaining a greater proportion of
its business on some programs but has also led to the cancellation of
certain other programs. While these competitive insurance and reinsurance
market conditions continue, they are likely to restrict Realm National's
ability to expand its existing book of business.
Segment loss of $2.1 million in 1999 represented a decrease of $3.3 million
from segment profit of $1.2 million in 1998, which increased $0.7 million
from segment profit of $0.5 million in 1997. The results for the year were
adversely affected by a provision of $2.2 million against reinsurance
recoveries and a $0.5 million accounting charge following the adoption of
SOP 98-5.
Reinsurance
- -----------
The Company's reinsurance segment consists of its reinsurance subsidiary,
CIRCL. CIRCL primarily reinsures workers' compensation and property and
general liability risks. Management determined in early 1999 to cease
underwriting new programs in CIRCL. As a result, revenues for 1999
decreased accordingly. Revenues of $3.1 million in 1999 represented a
decrease of $7.8 million from revenues of $10.9 million in 1998, which in
turn increased $1.5 million from revenues of $9.4 million in 1997. Net
premiums earned are the largest component of revenues in CIRCL. Net
premiums earned of $2.4 million in 1999 represented a decrease of $7.7
million from net premiums earned of $10.1 million in 1998, which in turn
reflected a $1.2 million increase from net premiums earned of $8.9 million
in 1997.
Segment loss of $3.4 million in 1999 was consistent with a loss of $3.4
million in 1998, which in turn reflected a decrease of $3.5 million from
segment profit of $0.1 million in 1997. The primary reason for the loss
during 1999 was a $2.1 million provision against reinsurance recoveries.
CIRCL has experienced substantial delays in collection of reinsurance
recoverables from certain of its reinsurers. CIRCL therefore has
established a provision in the amount of $4.6 million against reinsurance
contracts with projected reinsurance recoverables of a total of $21.4
million. This provision has been included in the balance sheet as a
component of paid losses recoverable from reinsurers.
Other
- -----
Other includes primarily the Company's holding companies and other
non-operating subsidiaries, as well as income earned from investments in
non-consolidating affiliates. Revenues of $0.7 million in 1999 represented
a decrease of $4.6 million from revenues of $5.3 million in 1998, which in
turn reflected an increase of $2.1 million from revenues of $3.2 million in
1997. The primary reason for the decrease in revenues during 1999 was a
decline in income earned from investments in affiliates and a $2.0 million
charge due to a writedown of investments in affiliates. This segment was
also affected by significant increases in costs and provisions relating to
litigation, advisory fees and costs relating to the restructuring of the
Company.
Liquidity and Capital Resources
- -------------------------------
At December 31, 1999, the Company held cash and marketable securities of
$84.8 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 $56.8 million at December 31, 1999, compared to $63.9
million at December 31, 1998. These decreased cash balances reflect the
slow-down in the Company's business activities for 1999, together with the
net loss for the year. Of the $84.8 million of cash and marketable
securities held by the Company at December 31, 1999 (1998--$97.4 million),
$54.3 million (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 December 31, 1999, the Company's investment
portfolio (at fair market value) totalled $34.1 million (1998--$29.2
million). The portfolio consisted primarily of U.S. Treasury, short-term
cash and A-rated corporate debt securities.
During the year ended December 31, 1999, the Company's operating activities
used $4.1 million of net cash, compared to generating $28.7 million of net
cash during 1998 and $8.1 million in 1997. The cash generated from (used
by) operating activities varies according to the Company's net income
(loss) and the timing of collections and payments of the Company's own
insurance and reinsurance balances.
The increase of $352.5 million in insurance and reinsurance balances
receivable, and the corresponding increase of $336.4 million in insurance
and reinsurance balances payable, primarily reflects the growth in clients'
claims balances recorded in the Company's broking subsidiaries. As a result
of various disputes between insurers and reinsurers on various reinsurance
contracts, a number of the reinsurers have suspended paying claims due
under the contracts. The Company's brokerage and underwriting management
segment subsidiaries experienced a significant growth in client balances
receivable and payable recorded at the end of the year, reflecting this
accumulation of claims due by one party to another. These balances are
reflected as an asset or liability, as the case may be, on the Company's
balance sheet.
The Company used $4.4 million during the year ended December 31, 1999 to
repurchase 356,400 of its own shares on the open market.
Shareholders' equity decreased by $12.8 million, to $84.8 million, at
December 31, 1999 from $97.6 million at December 31, 1998, due primarily to
the net loss incurred for the year, together with purchases of treasury
stock on the open market during the year.
The Company had no outstanding debt at December 31, 1998 and 1999.
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.
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 1999 is approximately
$307,000 (net of tax of $188,000).
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
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.
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 provided guidance to
the operating and support departments, and monitored the progress of
efforts made to address the Year 2000 issue. During 1999 the Company
implemented its plan and prepared its various computer systems and selected
applications for the Year 2000. This process involved taking inventory,
testing, evaluating and adjusting all known date-sensitive systems and
equipment for Year 2000 compliance. In addition, the Company reviewed its
essential non-information technology systems for Year 2000 compliance. The
Company 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
was completed during 1999. In the last quarter of 1999, all systems
critical to the Company's core businesses were retested and rollover
testing was performed. The Company is not aware of any significant internal
or external problems occurring to date with respect to the Year 2000 issue.
In the U.S. and Bermuda, the Company's and its subsidiaries' internal
computer systems and software are relatively modern and few costs were
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 were incurred in that region. Because of the Year 2000
issue, one large system in the U.K. was replaced in late 1998. No further
costs are expected with regard to the Year 2000 issue.
The Company continues to assess its external relationships with third
parties. During 1999 the Company communicated with its significant vendors
and large customers to determine the extent to which the Company was
vulnerable to those third parties' failure to remediate their own Year 2000
problems. Although there were no problems noted following December 31,
1999, 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 continue to be immune to post-year-end Year 2000 problems that
would 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 cost of compliance was $0.7 million. Approximately $0.5 million
of the cost was related to reprogramming or replacement of software, and
approximately $0.2 million was related to acquisition of hardware. Costs
related to non-information technology were immaterial. All of the $0.7
million cost of compliance was incurred as of the end of December 31, 1999.
All of these costs were funded through operating cash flows. Total costs
have not had a material impact on the Company's financial results.
Based on the review of the Company and its risks, the Company currently
anticipates minimal business disruption will occur as a result of
post-year-end 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 established 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-K, or any 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," "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-K for a discussion of the factors that may cause actual
results to differ from the results discussed in these forward-looking
statements.
Inflation
- ---------
The Company does not believe its operations have been materially affected
by inflation. The potential adverse impacts of inflation include: (a) a
decline in the market value of the Company's fixed maturity investment
portfolio; (b) an increase in the ultimate cost of settling claims which
remain unresolved for a significant period of time; and (c) an increase in
the Company's operating expenses. However, the Company generally holds its
fixed maturity investments to maturity and currently believes that an
acceptable amount is included in the yield to compensate the Company for
the risk of inflation. Any increase in the cost of settling claims will be
offset by increases in investment income earned and, generally, an increase
in operating expenses resulting from inflation should be matched by similar
increases in investment income earned on the Company's general surplus
funds.
ITEM 7A--MARKET RISK
The Company's investment portfolio is comprised of fixed maturity
investments, equity securities, and short term investments. The Company's
exposure to market risk is primarily limited to changing interest rates,
primarily in the United States, as all fixed maturity investments are
denominated in U.S. dollars. The fair value of the fixed maturity
investments as at December 31, 1999 was $28.8 million. A change in interest
rates will affect the fair value of the Company's investments and will lead
to fluctuations in "Accumulated Other Comprehensive Income" on the balance
sheet. The Company does not use derivative financial instruments to manage
market risk in its portfolio.
<PAGE>
The table below (expressed in millions of U.S. dollars) presents the par
value amounts and related weighted average interest rates by year of
maturity for the Company's U.S. dollar denominated investment portfolio.
<TABLE>
<CAPTION>
2000 2001 2002 2003 2004 2005 2006 2009 2012 2019 TOTAL
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Investments Fixed
Maturity ($) 2.1 4.3 1.7 4.8 9.2 3.7 1.5 1.0 0.5 0.4 29.3
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- -----
Weighted average
interest rate 6.8% 5.9% 7.5% 5.6% 5.7% 4.1% 7.3% 5.3% 5.6% 6.3% 5.75%
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- -----
</TABLE>
Given the limited value of balances and transactions in foreign currencies,
the Company's exposure to foreign currency movements is considered to be
insignificant.
ITEM 8--FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements and Related Notes:
PAGE #
-------
Reports of Independent Public Accountants... 23
Consolidated Balance Sheets................. 25
Consolidated Statements of Income
and Comprehensive Income ................. 26
Consolidated Statements of Changes in
Shareholders' Equity...................... 27
Consolidated Statements of Cash Flows....... 28
Notes to Consolidated Financial Statements.. 29-48
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
The Board of Directors and Shareholders of
Stirling Cooke Brown Holdings Limited
We have audited the consolidated balance sheet of Stirling Cooke Brown
Holdings Limited and subsidiaries as of December 31, 1999, and the related
consolidated statements of income and comprehensive income, changes in
shareholders' equity and cash flows for the year then ended. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audit. The consolidated
financial statements of Stirling Cooke Brown Holdings Limited and
subsidiaries as of December 31, 1998 and 1997, were audited by other
auditors whose report, dated March 5, 1999, expressed an unqualified
opinion on those statements.
We conducted our audit in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe
that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
Stirling Cooke Brown Holdings Limited and subsidiaries as of December 31,
1999 and the results of their operations and their cash flows for year then
ended in conformity with accounting principles generally accepted in the
United States.
/s/ Arthur Andersen LLP
- -----------------------
Arthur Andersen LLP
New York, New York
March 13, 2000
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders of
Stirling Cooke Brown Holdings Limited
We have audited the consolidated balance sheet of Stirling Cooke Brown
Holdings Limited and subsidiaries as of December 31, 1998, and the related
statements of income and comprehensive income, changes in
shareholders' equity and cash flows for each of the years in the two year
period ended December 31, 1998. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with United States generally accepted
auditing standards. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
Stirling Cooke Brown Holdings Limited and subsidiaries as at December 31,
1998 and the results of their operations and their cash flows for each of
the years in the two year period ended December 31, 1998, in conformity
with United States generally accepted accounting principles.
/s/ KPMG
- -----------------
KPMG
Hamilton, Bermuda
March 5, 1999
<PAGE>
<TABLE>
<CAPTION>
STIRLING COOKE BROWN HOLDINGS LIMITED
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1999
(EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS, EXCEPT SHARE AND PER SHARE DATA)
1998 1999
--------- ----------
ASSETS
------
<S> <C> <C>
Marketable securities, at fair value (Note 5)
Debt securities (amortized cost, 1998--$16,722, 1999--$29,555)...................... $ 17,057 $ 28,802
Equity securities (cost, 1998--$2,384, 1999--$3,340)................................ 2,536 4,051
Short term investments (amortized cost,1998--$9,643, 1999--$1,256).................. 9,643 1,256
--------- ----------
Total marketable securities.............................................................. 29,236 34,109
Cash and cash equivalents (Note 3)....................................................... 68,165 50,706
Fiduciary funds-restricted (Notes 3 and 4)............................................... 63,895 56,829
Insurance and reinsurance balances receivable (affiliates, 1998--$9,994, 1999--$Nil)
(Notes 3, 4 and 18)................................................................... 382,417 734,868
Paid losses recoverable from reinsurers (Note 8) ........................................ 8,916 13,293
Outstanding losses recoverable from reinsurers (Notes 8 and 9)........................... 48,146 73,267
Deferred acquisition costs............................................................... 2,286 1,745
Deferred reinsurance premiums ceded (Note 8)............................................. 18,711 16,144
Deferred tax asset (Note 12)............................................................. 1,755 3,315
Goodwill (Note 2(j))..................................................................... 8,775 8,664
Other assets (Note 6).................................................................... 14,026 12,352
Income taxes receivable (Note 12) ....................................................... -- 2,600
Assets related to deposit liabilities (Note 7)........................................... 3,313 3,517
--------- ----------
Total assets................................................................... $ 649,641 $1,011,409
========= ==========
<CAPTION>
LIABILITIES
-----------
<S> <C> <C>
Outstanding losses and loss expenses (Note 9)............................................ $ 66,117 $ 93,135
Unearned premiums........................................................................ 25,037 20,959
Deferred income.......................................................................... 3,992 4,695
Insurance and reinsurance balances payable (affiliates, 1998--$957, 1999--$Nil)
(Notes 4 and 18)...................................................................... 438,456 774,888
Funds withheld........................................................................... 1,359 9,580
Accounts payable and accrued liabilities................................................. 10,719 19,803
Income taxes payable (Note 12)........................................................... 3,016 --
Deposit liabilities (Note 7)............................................................. 3,313 3,517
--------- ----------
Total liabilities.............................................................. 552,009 926,577
--------- ----------
Commitments and Contingencies (Notes 16 and 19)
<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 (Note 10)................................................... 2,466 2,466
Additional paid in capital............................................................... 54,167 54,167
Accumulated other comprehensive income (loss)............................................ 319 (211)
Retained earnings........................................................................ 41,914 34,067
--------- ----------
98,866 90,502
Less: Ordinary shares in treasury (1998--87,000, 1999--443,400) at cost (Note 10).......... (1,234) (5,657)
--------- ----------
Total shareholders' equity..................................................... 97,632 84,832
--------- ----------
Total liabilities and shareholders' equity..................................... $649,641 $1,011,409
========= ==========
The accompanying notes are an integral part of these statements
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
STIRLING COOKE BROWN HOLDINGS LIMITED
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
(EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS,
EXCEPT PER SHARE DATA)
1997 1998 1999
-------- --------- -------
<S> <C> <C> <C>
REVENUES
Risk management fees (Note 2 (g))............................ $ 45,664 $ 55,580 $ 51,012
Net premiums earned (Note 8)................................. 11,790 17,774 11,850
Net investment income (Note 5)............................... 5,782 8,771 6,714
Other income (loss) (Notes 2(i))............................. 2,074 2,968 (1,755)
-------- -------- --------
Total revenues.......................................... 65,310 85,093 67,821
-------- -------- --------
EXPENSES
Net losses and loss expenses incurred (Notes 2(f) and 9)..... 10,951 17,271 12,370
Acquisition costs............................................ 1,344 3,618 3,860
Depreciation and amortization of capital assets.............. 1,199 1,562 1,674
Amortization of goodwill..................................... 707 740 847
Salaries and benefits........................................ 18,503 22,805 26,478
Other operating expenses..................................... 16,688 19,289 31,585
-------- -------- --------
Total expenses.......................................... 49,392 65,285 76,814
-------- -------- --------
Income (loss) before taxation..................................... 15,918 19,808 (8,993)
Taxation (Note 12)................................................ 2,925 3,790 (2,583)
-------- -------- --------
Net income (loss) before cumulative effect of
a change in accounting principle............................. 12,993 16,018 (6,410)
Cumulative effect of a change in accounting
principle, net of tax (Note 2(q)) ........................... (307)
-------- -------- --------
Net income (loss)................................................. $ 12,993 $ 16,018 $ (6,717)
-------- -------- --------
Other comprehensive income (loss), net of tax:
Unrealized holding gains (losses) arising during
the year (net of tax of $130, $130 and $168)................. 188 314 (716)
Less: reclassification adjustments for realized (gains) losses
included in net income (net of tax of $166, $1 and ($169))... (272) (58) 186
-------- -------- --------
Other comprehensive income (loss), net of tax ............... (84) 256 (530)
Comprehensive income (loss).................................. $ 12,909 $ 16,274 $ (7,247)
======== ======== ========
Net income (loss) per share (Note 13)............................. $ 1.55 $ 1.63 $ (0.71)
======== ======== ========
Net income (loss) per share assuming dilution (Note 13)........... $ 1.53 $ 1.63 $ (0.71)
======== ======== ========
The accompanying notes are an integral part of these statements
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
STIRLING COOKE BROWN HOLDINGS LIMITED
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
(EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS,
EXCEPT PER SHARE DATA)
1997 1998 1999
--------- ---------- -------
<S> <C> <C> <C>
Ordinary shares of par value $0.25 each
Balance at beginning of year................................ $ 1,500 $ 2,466 $ 2,466
Issuance of shares.......................................... 344 -- --
Options exercised........................................... 150 -- --
Cancellation of ordinary shares in treasury................. (100) -- --
Reclassification of ordinary shares subject to redemption... 572 -- --
-------- -------- -------
Balance at end of year...................................... $ 2,466 $ 2,466 $ 2,466
-------- -------- -------
Additional paid in capital
Balance at beginning of year................................ $ 12,319 $ 54,167 $54,167
Issuance of shares.......................................... 26,488 -- --
Proceeds from exercise of options in excess of par.......... 1,475 -- --
Issuance of shares (conversion of Class A).................. (72) -- --
Reclassification of ordinary shares subject to redemption... 13,957 -- --
-------- -------- -------
Balance at end of year...................................... $ 54,167 $ 54,167 $54,167
-------- -------- -------
Notes receivable
Balance at beginning of year................................ $ -- $ -- $ --
Receivable on exercise of options........................... (1,625) -- --
Repayment of notes.......................................... 1,625 -- --
-------- -------- -------
Balance at end of year...................................... $ -- $ -- $ --
-------- -------- -------
Accumulated other comprehensive income (loss)
Balance at beginning of year................................ $ 147 $ 63 $ 319
Change in unrealized gain (loss)............................ 256 (530)
-------- -------- -------
(84)
Balance at end of year...................................... $ 63 $ 319 $ (211)
-------- -------- -------
Retained earnings
Balance at beginning of year................................ $ 15,973 $ 27,074 $41,914
Net income (loss)........................................... 12,993 16,018 (6,717)
Dividends................................................... -- (1,178) (1,130)
Cancellation of ordinary shares in treasury................. (1,892) -- --
-------- -------- -------
Balance at end of year...................................... $ 27,074 $ 41,914 $34,067
-------- -------- -------
Treasury stock
Balance at beginning of year................................ $ (938) $ (667) $(1,234)
Purchase of ordinary shares in treasury..................... (1,807) (567) (4,423)
Sale of ordinary shares from treasury....................... 86 -- --
Cancellation of ordinary shares in treasury................. 1,992 -- --
-------- -------- -------
Balance at end of year...................................... $ (667) $ (1,234) $(5,657)
-------- -------- -------
Total shareholders' equity.................................. $ 83,103 $ 97,632 $84,832
======== ======== =======
Dividends per share were $0, $0.12 and $0.12 for the years ended
December 31, 1997, 1998 and 1999, respectively.
The accompanying notes are an integral part of these statements
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
STIRLING COOKE BROWN HOLDINGS LIMITED
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
(EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS)
1997 1998 1999
------- -------- -------
<S> <C> <C> <C>
Operating activities
Net income (loss) $ 12,993 $ 16,018 $ (6,717)
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization of capital assets................ 1,199 1,562 1,674
Net gain on sale of subsidiaries............................... (478) -- --
Amortization of goodwill....................................... 707 740 847
Amortization of marketable securities.......................... 197 68 104
Net realized (gains)/losses on sale of marketable securities... (438) (59) 355
(Equity in income)/writedown of affiliates.................... (1,266) (2,631) 2,018
(Gains)/losses on sale of capital assets....................... -- (67) 120
Changes in non-cash operating assets and liabilities:
Fiduciary funds................................................ (13,245) (3,671) 7,066
Insurance and reinsurance balances receivable.................. (115,935) (170,926) (352,451)
Paid losses recoverable from reinsurers........................ (2,811) (5,374) (4,377)
Outstanding losses recoverable from reinsurers................. (6,484) (25,074) (25,121)
Deferred acquisition costs..................................... (408) (1,707) 541
Deferred reinsurance premiums ceded............................ (5,281) (6,208) 2,567
Other assets................................................... (3,620) (1,405) (956)
Income taxes receivable........................................ -- -- (2,600)
Deferred tax asset............................................. (801) (710) (1,565)
Assets related to deposit liabilities.......................... 1,292 (557) (203)
Outstanding losses and loss expenses........................... 11,975 29,841 27,018
Unearned premiums.............................................. 6,672 5,850 (4,078)
Insurance and reinsurance balances payable..................... 120,887 186,743 336,432
Funds withheld................................................. (69) 45 8,221
Accounts payable and accrued liabilities....................... 2,431 4,467 9,084
Income taxes payable........................................... 782 58 (3,016)
Deferred income................................................ 1,060 1,139 703
Deposit liabilities............................................ (1,292) 557 203
--------- -------- ---------
Net cash provided (used by) by operating activities........ 8,067 28,699 (4,130)
--------- -------- ---------
Investing activities
Purchase of capital assets..................................... (1,619) (2,899) (2,265)
Sale of capital assets......................................... 88 229 1,083
Purchase of debt securities.................................... (318) (12,584) (24,509)
Purchase of equity securities.................................. (3,977) (2,530) (3,555)
Purchase of short-term investments, net........................ (5,459) (4,064) 8,387
Proceeds on sale of debt securities............................ 4,190 10,680 11,469
Proceeds on sale of equity securities.......................... 7,262 658 2,349
Purchase of subsidiaries, net of cash acquired................. (1,197) (1,055) (735)
Cash received of upon sale of subsidiaries..................... 861 -- --
Investments in affiliates...................................... (198) -- --
Dividends received from affiliates............................. 593 2,145 --
--------- -------- ---------
Cash provided (used) by investing activities............... 226 (9,420) (7,776)
--------- -------- ---------
Financing activities
Dividends...................................................... -- (1,178) (1,130)
Net proceeds from subscriptions to share capital............... 26,832 -- --
Proceeds from exercise of options.............................. 1,625 -- --
Purchase of ordinary shares in treasury........................ (1,807) (567) (4,423)
Sales of ordinary shares in treasury........................... 86 -- --
--------- -------- ---------
Cash provided (used) by financing activities............... 26,736 (1,745) (5,553)
--------- -------- ---------
Increase (decrease) in cash and cash equivalents................... 35,029 17,534 (17,459)
Cash and cash equivalents at beginning of year.....................$ 15,602 $ 50,631 $ 68,165
--------- -------- ---------
Cash and cash equivalents at end of year...........................$ 50,631 $ 68,165 $ 50,706
========= ========= =========
Supplemental disclosure of cash flow information
Cash paid during the year for income taxes.................$ 3,755 $ 3,275 $ 1,959
========= ========= =========
The accompanying notes are an integral part of these statements
</TABLE>
<PAGE>
STIRLING COOKE BROWN HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1998 AND 1999
(EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS,
EXCEPT SHARE AND PER SHARE DATA)
1. GENERAL
Stirling Cooke Brown Holdings Limited ("Stirling Cooke") was incorporated
in Bermuda on December 12, 1995. Stirling Cooke is a holding company which,
through its subsidiaries, provides insurance services and products.
Stirling Cooke provides its range of services and products to unaffiliated
insurance and reinsurance companies, insurance agents, as well as directly
to insureds. Stirling Cooke is primarily active in the workers
compensation, occupational accident and health and casualty insurance
markets through its subsidiaries based in London, Bermuda and the United
States. In January 1996, Stirling Cooke acquired all the outstanding common
shares of Realm Investments Ltd. in exchange for 1,999,980 of its newly
issued ordinary shares. Stirling Cooke also acquired, in September 1996,
its own United States domiciled insurance company Realm National Insurance
Company ("Realm National") which writes insurance business in the workers
compensation, occupational accident and health and casualty and property
insurance markets.
On December 2, 1997, Stirling Cooke and certain selling shareholders
consummated an initial public offering of 3,421,250 ordinary shares. Of
these shares, 1,375,000 were sold by Stirling Cooke and 2,046,250 were sold
by selling shareholders. Net proceeds of $26,832 were received by Stirling
Cooke upon consummation of the initial public offering.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying consolidated financial statements are prepared in
accordance with accounting principles generally accepted in the United
States. The following are the significant accounting policies adopted by
Stirling Cooke:
a) Basis of presentation
These consolidated financial statements include the financial statements of
Stirling Cooke and all of its majority-owned subsidiaries (collectively
referred to as the "Company"). All significant intercompany balances and
transactions have been eliminated on consolidation. The results of a number
of subsidiaries have been included from the dates of their acquisition.
b) Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions for those transactions that are not yet complete or for which
the ultimate effects cannot be precisely determined. Such estimates and
assumptions affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
c) Marketable securities
Marketable securities comprise investments in debt and equity securities
and short term investments. All investments are classified as available for
sale in accordance with SFAS 115, "Accounting for Certain Investments in
Debt and Equity Securities". Accordingly, these securities are carried at
fair value, with the difference between fair value and cost or amortized
cost being recorded as accumulated other comprehensive income as a separate
component of shareholders' equity, net of applicable deferred income taxes.
Bond discounts and premiums are amortized over the remaining term of the
securities. Such amortization is included as a component of net investment
income in the consolidated statements of income. Realized gains and losses
are determined on the basis of specific identification. Investment income
is recorded as earned and accrued to the balance sheet date.
d) Premiums written, assumed and ceded
Premiums written and assumed are recorded on an accrual basis and included
in income on a pro-rata basis over the life of the policies or reinsurance
agreements to which they relate, with the unearned portion deferred in the
consolidated balance sheets. Adjustment premiums arising from premium
audits are recorded in the period in which they are determined. Reinsurance
premiums ceded are similarly pro-rated over the terms of the reinsurance
contract with the unearned portion being deferred in the consolidated
balance sheets as deferred reinsurance premiums ceded.
e) Acquisition costs
Acquisition costs associated with the acquisition of new or renewal
business, including commissions, premium taxes and brokerage, are deferred
and amortized to income over the periods in which the premiums are earned.
The method followed in determining the deferred acquisition expenses limits
the amount of the deferral to its realizable value by giving consideration
to losses and expenses expected to be incurred as premiums are earned.
Future investment income is also anticipated in determining whether a
premium deficiency exists.
f) Losses and loss expenses
Losses and related loss adjustment expenses are charged to income as they
are incurred and are net of losses recovered and recoverable of $16,866,
$44,312 and $53,863 for the years ended December 31, 1997, 1998 and 1999
respectively. Amounts recoverable from reinsurers are estimated in a manner
consistent with the underlying liability associated with the reinsured
policy. Outstanding losses recoverable are shown separately on the
consolidated balance sheets.
The Company establishes reserves for losses and loss adjustment expenses
related to reported claims on the basis of the evaluations of independent
claims adjusters and the Company's own claims staff. In addition, reserves
are established for losses which have occurred but have not yet been
reported and for adverse development of reserves on reported losses. The
Company's independent actuaries estimate claims and claims expenses arising
for losses that have occurred but not yet been reported based upon the
Company's and the insurance industry's experience, together with
statistical information with respect to the probable number and nature of
such claims. The Company believes that the provision for outstanding losses
and loss expenses is adequate to cover the ultimate net cost of losses and
loss expenses incurred; however, such a provision is an estimate and may
ultimately be significantly greater or less than the provision established.
The Company has limited historical loss experience available to serve as a
basis for the estimation of ultimate losses. It is possible that management
will revise the estimate of outstanding losses and loss expenses in the
future.
g) Recognition of risk management fees
FOR THE YEARS ENDED
-------------------
DECEMBER 31,
------------
1997 1998 1999
--------- --------- --------
Brokerage fees and commissions............ $23,965 $26,968 $24,577
Managing general agency fees.............. 11,391 14,743 10,164
Underwriting management fees.............. 4,022 3,357 3,900
Program and captive management fees....... 2,876 3,908 2,298
Loss control and audit fees............... 2,627 4,508 7,577
Policy issuance fees...................... 783 2,096 2,496
------- ------- -------
Total risk management fees...... $45,664 $55,580 $51,012
======= ======= =======
(i) Brokerage fees and commissions are recorded and earned as
premiums are billed since substantially all placement services have
been provided at that time. Any subsequent adjustments, including
adjustments due to policy cancellations, premium rate adjustments and
profit commissions are recognized in risk management fees when advised
by the client.
(ii) Managing general agency fees are included within program
business segment revenue, and are reported net of commission expense
to agents and are initially recorded as of the effective date of the
related insurance policy and are recognized in income over the period
of the underlying policy (which is typically one year). Fee income for
claims handling services are recognized in income over the period that
services are performed in accordance with the Company's contractual
obligations, typically ranging up to five years, based on the
Company's estimation of expected claims handling requirements in each
accounting period. Such estimation is based upon industry standards.
Any subsequent adjustments, including adjustments due to policy
cancellation and premium adjustments, are recorded when advised by the
client or agent. The portion that will be earned in the future is
deferred and reported as deferred income in the consolidated balance
sheets.
(iii) Underwriting management fees are initially recorded and
earned when the premium is billed in accordance with terms of trade.
Fee income for claims handling services is recognized in income over
the period that services are performed in accordance with the
Company's contractual obligations. Such fees are recognized in income
over the period that contractual services are performed, typically up
to five years, based on the Company's estimation of expected claims
handling requirements in each accounting period. Such estimation is
based upon the Company's claims handling experience over recent years.
Any subsequent adjustments, including adjustments due to policy
cancellations and premium adjustments, are recorded when advised by
the client or agent. The portion of recorded fees that will be earned
in the future is deferred and reported as deferred income in the
consolidated balance sheets.
(iv) Program and captive management fees are included within
program business segment revenue, and are initially recorded as of the
effective date of the insurance policy or, in the case of installment
premiums, when the installment is billed and are earned in income over
the period of the underlying policy (which is typically one year) in
proportion to the level of services provided in accordance with the
Company's contractual obligations. Any subsequent adjustments are
recognized in income when advised by the client or agent. The portion
of recorded management fees that will be earned in the future is
deferred and reported as deferred income in the consolidated balance
sheets.
(v) Loss control and audit fees are included within program
business segment revenue, and comprise claims administration handling,
loss and safety control fees and premium audit fees. Such fees are
recorded as the fees are billed and are recognized in income over the
period that services are performed in accordance with the Company's
contractual obligations, typically ranging up to five years depending
on the type of service provided, based on the Company's estimation of
expected claims handling requirements in each accounting period. Such
estimation is based upon industry standards. The proportion that will
be earned in the future is deferred and reported as deferred income in
the consolidated balance sheets.
(vi) Policy issuance fees are recorded as the premium is written
and earned over the applicable policy period (which is typically one
year). The unearned portion is included in deferred income in the
consolidated balance sheet.
h) Cash and cash equivalents
The Company considers time deposits with original maturity dates of three
months or less to be equivalent to cash. Fiduciary funds are restricted
from use and are not considered cash equivalents.
i) Investments in affiliates
The Company's investments in affiliated companies that are not majority
owned or controlled are accounted for using the equity method if the
Company is able to exert significant influence upon such companies. Other
investments in affiliates are carried at cost. Investments in affiliates of
$1,982 and $198 for the years ended December 31, 1998 and 1999,
respectively, are recorded in other assets. The Company's equity share in
the net income of affiliates, for the years ended December 31, 1997, 1998
and 1999 of $1,266, and $2,631 and $Nil respectively, which, for 1999,
included $2,018 of write-downs to recognize a decrease in the value of
several of their equity holdings, is included in other income (loss) for
those years. Dividends received from affiliated companies of $593, $2,145
and $Nil during 1997, 1998 and 1999, respectively, are recorded as a
reduction in the carrying value of the investment.
j) Goodwill
Goodwill in the amounts of $8,775 and $8,664 at December 31, 1998, and
1999, respectively, represents the excess of purchase price over fair value
of net assets acquired. Goodwill is amortized on a straight-line basis over
the expected periods to be benefited, generally 5 to 20 years. Accumulated
amortization at December 31, 1998 and 1999 was $1,870 and $2,717,
respectively. The Company assesses the recoverability of this intangible
asset by determining whether the amortization of the goodwill balance over
its remaining life can be recovered through undiscounted future operating
cash flows of the acquired operation. The amount of goodwill impairment, if
any, is measured based on projected discounted future operating cash flows
using a discount rate reflecting the Company's average cost of funds.
k) Capital assets and depreciation
Capital assets are stated at cost less accumulated depreciation.
Depreciation is calculated using the straight-line method over four to five
years, which are the estimated useful lives of the related assets.
l) Earnings per share
Earnings per share have been calculated in accordance with Statement of
Financial Accounting Standards No. 128. Net income per share is calculated
by dividing income available to ordinary shareholders by the weighted
average number of ordinary shares outstanding. Shares held in treasury are
not considered outstanding for purposes of the computation. Net income per
share assuming dilution is computed by dividing income available to
ordinary shareholders by the weighted average number of ordinary shares and
potentially dilutive securities such as stock options. The dilutive effect
of options is reflected in the computation by application of the treasury
stock method.
m) Income taxes
Under the asset and liability method used by the Company as outlined in
SFAS No. 109, "Accounting for Income Taxes", deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
temporary differences between the consolidated financial statements
carrying amounts of existing assets and liabilities and their respective
tax bases. A valuation allowance is provided for a portion or all of the
deferred tax assets when it is more likely than not that such portion or
all such deferred assets will not be realized.
n) Foreign exchange
The United States Dollar is the Company's functional currency. Foreign
currency monetary assets and liabilities are translated at exchange rates
in effect at the balance sheet date. Fixed assets and deferred income are
translated at their historical exchange rates. Foreign currency revenues
and expenses are translated at exchange rates in effect at the date of the
transaction. Net exchange gains (losses) of $311, $223 and ($117) are
included in other income for the years ended December 31, 1997, 1998 and
1999, respectively.
o) Derivative financial instruments
During the year, the Company was a party to transactions in certain
derivative financial instruments, specifically, forward foreign exchange
contracts which are used to manage foreign currency exposures on non-U.S.
dollar denominated assets and liabilities. The Company does not engage in
derivatives for any other purpose. The Company's policy on such derivatives
is that forward foreign exchange contracts are recorded at their fair
value, and the fair values of open contracts are based on the quoted market
prices of forward contracts with similar maturities. Changes in fair values
are recognized in other income as appropriate in the period in which the
changes occur. Amounts receivable or payable on open positions are recorded
in other assets or accounts payable and accrued liabilities as appropriate.
See Note 14(c).
p) Stock compensation plans
As permitted by FASB Statement No. 123, "Accounting for Stock-Based
Compensation", the Company has elected to continue to account for stock
option grants in accordance with APB Opinion No. 25, "Accounting for Stock
Issued to Employees", and, accordingly, recognizes compensation expense for
stock option grants to the extent that the fair value of the stock exceeds
the exercise price of the option at the measurement date. Any resulting
compensation expense is recorded over the shorter of the vesting or service
period.
q) 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.
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 1999 is approximately $307
(net of tax of $188).
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
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.
3. LETTERS OF CREDIT AND ASSETS HELD IN TRUST
In the normal course of insurance and reinsurance operations the Company's
bankers have issued letters of credit totalling $13,141 and $18,604 at
December 31, 1998 and 1999, respectively in favor of ceding insurance
companies. At December 31, 1998 and 1999, $13,141 and $18,604,
respectively, of cash and cash equivalents were pledged as collateral for
these letters of credit.
One of the Company's subsidiaries is registered with the Society of Lloyd's
as a registered Lloyd's Broker. As required by Lloyd's Brokers Byelaw (No.
5 of 1988), the subsidiary has entered into a trust deed under which all
insurance broking account assets are subject to a floating lien held in
trust for the Society of Lloyd's for the benefit of the insurance
creditors. Insurance and reinsurance balances payable covered by the
floating lien at December 31, 1998 and 1999, amounted to $139,216 and
$741,932, respectively, including relevant creditors of other subsidiaries.
The purpose of the trust deed is to provide security to the Lloyd's
Broker's insurance creditors in the event of the Brokers insolvency by
creating a charge over the Broker's insurance transaction assets. The lien
becomes enforceable only in the event the Lloyd's Broker becomes insolvent
or breaches Lloyd's solvency rules or regulations. The assets which were
subject to this floating lien at December 31, 1998 and 1999 were:
1998 1999
-------- --------
Fiduciary funds....................... $22,797 $43,432
Insurance and reinsurance balances
receivable.......................... 117,753 702,828
-------- --------
$140,550 $746,260
======== ========
4. FIDUCIARY ASSETS AND LIABILITIES
In its various capacities as an insurance intermediary, the Company acts as
a conduit for insurance and reinsurance premiums from insureds and other
intermediaries, and after deducting its risk management fee and, where
appropriate, surplus lines taxes and stamping fees, remits the premium to
the respective insurance company or underwriter. Additionally, the Company
acts as a conduit for loss payments. Pending the remittance of such funds
to the insurance company or underwriter in accordance with the applicable
insurance contract, the Company holds collected funds in its own segregated
bank accounts and is entitled to any accrued interest on such funds. The
obligation to remit these funds is recorded as insurance and reinsurance
balances payable on the Company's balance sheet. The period for which the
Company holds such funds is dependent upon the date the insured remits the
payment of the premium to the Company and the date the Company is required
to forward such payment to the insurer.
5. MARKETABLE SECURITIES
a) The cost or amortized cost and estimated fair value of marketable
securities held as 'available for sale' are as follows:
<TABLE>
<CAPTION>
1998
----------------------------
COST/ GROSS GROSS ESTIMATED
----- ----- ----- ---------
AMORTIZED UNREALIZED UNREALIZED FAIR
--------- ---------- ---------- ----
COST GAINS LOSSES VALUE
---- ----- ------ -----
<S> <C> <C> <C> <C>
U.S. Treasury securities and obligations of
U.S. Government agencies ........................... $ 5,694 $ 152 $ -- $ 5,846
Foreign government..................................... 29 1 -- 30
Obligations of states and political subdivisions....... 6,897 90 -- 6,987
Corporate securities................................... 4,102 92 -- 4,194
-------- ------ ----- -------
Debt securities........................................ 16,722 335 -- 17,057
Equity securities...................................... 2,384 152 -- 2,536
Short term investments................................. 9,643 -- -- 9,643
-------- ------ ----- -------
Total........................................ $ 28,749 $ 487 $ -- $29,236
======== ====== ===== =======
<CAPTION>
1999
----------------------------
COST/ GROSS GROSS ESTIMATED
----- ----- ----- ---------
AMORTIZED UNREALIZED UNREALIZED FAIR
--------- ---------- ---------- ----
COST GAINS LOSSES VALUE
---- ----- ------ -----
<S> <C> <C> <C> <C>
U.S. Treasury securities and obligations of
U.S. Government agencies ........................... $ 8,996 $ 25 $ 149 $ 8,872
Foreign government..................................... 30 -- -- 30
Obligations of states and political subdivisions....... 7,687 -- 191 7,496
Corporate securities................................... 12,842 107 545 12,404
-------- ------ ------- -------
Debt securities........................................ 29,555 132 885 28,802
Equity securities...................................... 3,340 887 176 4,051
Short term investments................................. 1,256 1,256
-------- ------ ------- -------
Total........................................ $ 34,151 $1,019 $1,061 $34,109
======== ====== ======= =======
</TABLE>
Deferred tax liabilities of $168 and $169 at December 31, 1998 and 1999,
respectively, have been provided against unrealized gains on marketable
securities held as "available for sale", which have been presented net as
accumulated other comprehensive income within shareholders' equity.
b) The amortized cost and estimated fair value of debt securities by
contractual maturity are shown in the following table. Actual maturities
may differ from contractual maturities because borrowers may have the right
to call or prepay obligations with or without call or prepayment penalties.
1999
----------------
AMORTIZED ESTIMATED
--------- ---------
COST FAIR VALUE
---- ----------
Due in one year or less.................. $ 2,082 $ 2,080
Due after one year through five years.... 20,179 19,621
Due after five years through ten years... 6,314 6,155
Due after ten years through twenty years. 965 946
------- -------
$29,540 $28,802
======= =======
c) Proceeds from sales of investments in debt securities during 1998
and 1999 were $10,680 and $11,469, respectively. Proceeds from sales of
investments in equity securities during 1998 and 1999 were $658 and $2,349,
respectively. There was $0 of realized losses and $59 of realized gains
during 1998. There was $587 of realized losses and $232 of realized gains
during 1999.
d) At December 31, 1998 and 1999, debt securities having an amortized
cost of $2,878 and $3,971, respectively, were on deposit with government
authorities as required by law.
e) At December 31, 1998 and 1999, there were no individual
investments, other than investments in U.S. Government securities, which
exceeded 10% of shareholders' equity.
f) Net investment income by source, including realized gains and
losses, is as follows:
<TABLE>
<CAPTION>
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Debt securities...................................... $ 1,029 $ 731 $ 1,488
Equity securities.................................... 70 52 (166)
Cash, cash equivalents and short-term investments.... 4,754 8,068 5,537
Other ............................................. 2 16 13
------- ------ -------
Total investment income.............................. 5,855 8,867 6,872
Less applicable expenses............................. 73 96 158
------- ------ -------
Net investment income........................... $ 5,782 $ 8,771 $ 6,714
======= ======= =======
</TABLE>
6. CAPITAL ASSETS
Included within other assets are capital assets as follows:
<TABLE>
<CAPTION>
1998 1999
------------------------ -----------------------
ACCUMULATED NET BOOK ACCUMULATED NET BOOK
----------- -------- ----------- --------
COST DEPRECIATION VALUE COST DEPRECIATION VALUE
---- ------------ ----- ---- ------------ -----
<S> <C> <C> <C> <C> <C> <C>
Furniture and fixtures... $1,732 $ 875 $ 857 $1,845 $ 1,026 $ 819
Computer equipment....... 4,598 2,409 2,189 3,789 1,917 1,872
Office equipment......... 973 483 490 964 522 442
Motor vehicles........... 1,321 482 839 849 217 632
Total.......... $8,624 $ 4,249 $ 4,375 $7,447 $ 3,682 $ 3,765
====== ======= ======= ====== ======= =======
</TABLE>
7. DEPOSIT LIABILITIES AND RELATED ASSETS
Certain of the Company's reinsurance contracts, referred to as
rent-a-captive programs, do not satisfy the conditions for reinsurance
accounting as the maximum exposure to loss is fully funded by premium, cash
and other collateral and indemnity agreements. Accordingly, these contracts
are accounted for as deposit liabilities. The assets related to these
programs represent funds under management as the insured retains the risks
and rewards of ownership. Such assets are recorded as assets related to
deposit liabilities in the consolidated balance sheets. These assets
comprised cash and short-term deposits at December 31, 1998 and 1999. The
Company receives a fee based on a percentage of premiums written and
investment income earned for structuring and providing ongoing management
of the programs.
In addition, deposit liabilities and related assets include $2,687 and
$2,980 of deposits received from customers as security for the timely
payment of premiums for workers' compensation insurance at December 31,
1998 and 1999, respectively. The deposit is restricted from use by the
Company, and is the property of the customer. The deposit is refunded to
the customer after the policy expires or is canceled and all claims related
to the insurance policy have been settled. The interest income earned by
these restricted deposit accounts is the property of the customer, and is
therefore excluded from the Company's operating results.
8. REINSURANCE ASSUMED AND CEDED
The Company accounts for reinsurance assumed and ceded in accordance with
SFAS 113 "Accounting and Reporting for Reinsurance of Short-Duration and
Long-Duration Contracts". Net premiums earned are the result of the
following:
<TABLE>
<CAPTION>
1997 1998 1999
------- -------- -------
<S> <C> <C> <C>
Premiums written................................... $21,743 $48,625 $47,216
Premiums assumed................................... 14,115 11,806 2,952
Change in unearned premiums........................ (6,672) (5,850) 4,389
------- ------- -------
Premiums earned.................................... 29,186 54,581 54,557
------- ------- -------
Premiums ceded..................................... 22,677 43,015 40,140
Change in deferred reinsurance premiums ceded...... (5,281) (6,208) 2,567
------- ------- -------
Net premiums ceded................................. 17,396 36,807 42,707
------- ------- -------
Net premiums earned................................ $11,790 $17,774 $11,850
======= ======= =======
</TABLE>
The Company, in the ordinary course of business, reinsures certain risks
with other companies. Such arrangements serve to enhance the Company's
capacity to write business and limit the Company's maximum loss on large or
unusually hazardous risks.
Reinsurance contracts do not relieve the Company from its obligations to
policyholders. Failure of reinsurers to honor their obligations could
result in losses to the Company; consequently, allowances are established
for amounts deemed uncollectible. The Company evaluates the financial
condition of its reinsurers and monitors concentrations of credit risk
arising from similar geographic regions, activities, or economic
characteristics of the reinsurers to minimize its exposure to significant
losses from reinsurer insolvencies. The Company has experienced substantial
delays in collection of reinsurance recoverables from certain of its
reinsurers and has commenced arbitration against one of these reinsurers.
Management believes that approximately $6,742 (1998 - $2,500) of paid and
outstanding losses recoverable from reinsurers may prove uncollectible and
has established a provision for doubtful recoveries accordingly. This
provision of $6,742 against reinsurance recoveries of $32,346 represents
management's best estimate at this time of a shortfall in recoveries. This
provision is included in the balance sheet as a component of paid and
outstanding 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. It is possible that management will revise this estimate in
the future. Any subsequent differences arising will be recorded in the
period in which they occur.
At December 31, 1999 there were amounts due from three reinsurers that
totaled $52,039. These reinsurers are rated `Superior' by A.M. Best. At
December 31, 1998 there was an amount due from one reinsurer that totaled
$17,276, which was in excess of 10% of the Company's shareholders' equity.
The Company recognizes reinsurance recoveries when the associated loss is
booked.
Realm National, a subsidiary of the Company, writes workers compensation,
property and general liability business. Workers' compensation comprises
the largest proportion of Realm National's written premium. With respect to
1999 and prior years, this business was subject to quota share reinsurance
whereby Realm National retained 25% of the first $1,000. A portion of Realm
National's retention under its quota share treaties was further protected
by common account excess coverages that reduced Realm National's net
retention to $3 or $5. In addition, Realm National purchased excess loss
coverages on an occurrence basis to limits between $50,000 and $100,000.
Realm National also writes property risks and purchased a property
reinsurance program related to 1999 and prior years whereby it retained 25%
of the first $1,000 on any one risk and purchased facultative per risk
reinsurance for limits above $1,000. In addition, Realm National's net
retention was further protected by a per risk excess of loss cover which
reduced the maximum loss on any one risk to $125.
With respect to its general liability risks Realm National purchased a
reinsurance program whereby it retained 25% of the first $300 on any one
risk and purchased facultative per risk excess reinsurance for limits above
$300 to $1,000.
Comp Indemnity Reinsurance Company Limited ("CIRCL"), a subsidiary of the
Company, assumed various quota shares of workers' compensation and
employers' liability on both a primary and excess basis. CIRCL's exposure
under the reinsurance contracts assumed is limited in most instances to
between $25 to $300 for workers' compensation and $1,000 per occurrence for
employers liability and in some instances is subject to an annual aggregate
limit based on various percentages of original gross written premium
income. CIRCL further limited its exposure through the purchase of
reinsurance protection for certain risks covering losses in excess of $1 to
$3 for workers' compensation and $50 per occurrence for employers'
liability.
CIRCL also assumed bodily injury, difference in conditions, and property
risks on a general liability treaty covering risks in the construction
industry. CIRCL's exposure under the reinsurance contracts assumed is
limited in most instances to $250 per occurrence. CIRCL limited in most
instances this exposure through the purchase of reinsurance covering losses
in excess of $63 per occurrence. In addition, CIRCL purchased aggregate
reinsurance with limits based on various percentages of original gross
written premium income.
Management decided in early 1999 to cease underwriting any new programs in
CIRCL due to unfavourable results and a number of existing contracts were
not renewed for the 1999 year.
9. OUTSTANDING LOSSES AND LOSS EXPENSES
Outstanding losses and loss expenses relate to the insurance activities of
CIRCL and Realm National.
The changes in outstanding losses and loss expenses are summarized as
follows:
1997 1998 1999
------- ------- -------
Balance beginning of year................ $24,301 $36,276 $66,117
Less outstanding losses recoverable...... (16,588) (23,072) (48,146)
------- ------- -------
Net balance 7,713 13,204 17,971
------- ------- -------
Incurred related to:
Current year................... 10,174 12,578 8,696
Prior years.................... 777 4,693 3,674
------- ------- -------
Total incurred................. 10,951 17,271 12,370
------- ------- -------
Paid related to:
Current year................... 2,011 3,066 2,830
Prior years.................... 3,449 9,438 7,643
------- ------- -------
Total paid................ 5,460 12,504 10,473
------- ------- -------
Net balance 13,204 17,971 19,868
Plus outstanding losses recoverable...... 23,072 48,146 73,267
------- ------- -------
Balance at end of year......... $36,276 $66,117 $93,135
======= ======= =======
The adverse development during 1999 on prior years primarily reflects the
increase in provisions for doubtful reinsurance recoveries of $4.2 million
to $6.7 million discussed in Note 8. The adverse development during 1998 on
prior years primarily represents an increase in claims frequency on one
particular program that covers bodily injury and property risks in the
construction industry and a provision for doubtful recoveries of $2.5
million discussed in Note 8.
10. SHARE CAPITAL AND ADDITIONAL PAID IN CAPITAL
The Company's authorized share capital at December 31, 1998 and 1999
comprised 20,000,000 ordinary shares of par value $0.25 each of which
9,863,372 ordinary shares were issued and fully paid at that date.
Outstanding shares at December 31, 1998 and 1999 were 9,776,372 and
9,419,972 respectively, which were net of 87,000 and 443,400 treasury
shares respectively.
During 1996, the Company issued 2,000,000 ordinary shares and 25 Class "A"
non-voting shares to a private investor group. The 2,000,000 ordinary
shares and related 25 Class "A" shares were subject to a put option
whereby, after 2004, the holders of such shares could request that the
Company repurchase the shares for fair market value at that date. As such
shares were subject to redemption at the option of the holder, the
aggregate subscription price was classified outside of shareholders' equity
as at December 31, 1996. The put option expired upon the consummation by
the Company of an Initial Public Offering ("IPO") in December 1997 and
accordingly the shares were reclassified into shareholders' equity at that
date.
In April 1997, the Company purchased 213,732 of its ordinary shares from a
founding shareholder for a total cost of $1,141. Such shares were recorded
as treasury stock at cost.
In June 1997, the Company reissued 16,000 ordinary shares of its treasury
stock for a total subscription price of $86.
On June 30, 1997, the remaining 400,516 ordinary shares held in treasury at
that date were cancelled. The excess cost of treasury shares over their par
value was recorded as a deduction from retained earnings.
On June 30, 1997, the Company increased its authorized share capital to
20,000,000 ordinary shares of par value $0.25 each and effected a
four-for-one stock split whereby each of the Company's ordinary shares of
par value $1.00 each was divided into four ordinary shares of par value
$0.25 each.
On June 30, 1997, certain shareholders exercised options to purchase
600,000 ordinary shares in the Company (see Note 11 to the consolidated
financial statements) at an exercise price of $2.71 per share.
Contemporaneously, 288,888 ordinary shares of par value of $0.25 each were
issued to the holders of the Class "A" shares pursuant to certain
anti-dilution rights, and the Class "A" shares were repurchased by the
Company for nominal consideration. The $72 excess of the par value of the
ordinary shares issued over the original par value of the Class "A" shares
was recorded as a deduction from additional paid-in-capital. On the same
date the Company loaned the shareholders $1,625, an amount equal to the
aggregate exercise price of the options. Such loans were evidenced by
promissory notes, bearing interest at 7% per annum until maturity in June
1998 or earlier in the event of early repayment. Included within notes
receivable were $325, $866 and $109 due from Messrs. Cooke, Brown and
Jones, respectively. The loans were repaid in full in December 1997
following the successful completion of the IPO of the Company's ordinary
shares.
On December 2, 1997, the Company and certain Selling Shareholders
consummated the IPO of 3,421,250 ordinary shares at $22 per share. Of these
shares 1,375,000 were sold by the Company and 2,046,250 were sold by
Selling Shareholders. The Company received net proceeds of $26,832 after
deducting underwriting commissions of $2,117 and expenses of $1,301
relating to the issue.
In December 1997, under a put and call option originally granted in April
1997, the Company purchased 40,000 ordinary shares for a total cost of
$667. These shares were held as treasury stock at December 31, 1998 and
1999.
In October 1998, the Company purchased a further 47,000 of its ordinary
shares on the open market for a total cost of $567. These shares were held
as treasury stock at cost at December 31, 1998 and 1999.
In the first quarter of 1999, the Company purchased a further 356,400 of
its ordinary shares on the open market for a total cost of $4,423. These
shares were held as treasury stock at cost at December 31, 1999.
11. STOCK OPTIONS
Employees and directors have been granted options to purchase Ordinary
Shares in the Company. These options have been issued in three series:
i) Options issued to Employees--Shareholders
In 1996, the Company granted 600,000 options to certain employee
shareholders replacing an earlier agreement entered into in 1995. The
options had an exercise price of $2.71 per share, which reflected the
estimated fair value of the shares at the original grant date. The options
were fully vested at the grant date and were able to be exercised at any
time prior to January 23, 2003.
On June 30, 1997, the shareholders exercised these options and
purchased 600,000 ordinary shares in the Company at an exercise
price of $2.71.
(ii) Options issued under Equity Incentive Plan
On November 25, 1997 the Company granted 300,000 options to
certain employees.
The options have an exercise price of $22 per share, which
reflected the estimated fair value of the shares at the grant
date. The options vest ratably over a three-year period and may
be exercised at any time prior to November 25, 2007. At December
31, 1999, 186,750 of these options remained outstanding (1998 -
300,000). The balance of the shares were forfeited during the
year.
(iii) Options issued to Officers and Directors
On October 26, 1999 the Company granted 285,000 options to
certain officers and directors.
The options have an exercise price of $2.31 per share, which
reflected the market price of the shares on that date. The
options vest ratably over a three-year period and may be
exercised at any time prior to October 26, 2009. All of these
options were outstanding at December 31, 1999.
In accordance with the provisions of FASB Statement No. 123, the Company
applies APB Opinion 25 and related interpretations in accounting for its
stock option plans and accordingly, recognizes compensation cost based on
the intrinsic value of the options at the grant date. If the Company had
elected to recognize compensation cost based on the fair value of the
options granted at the grant date as prescribed by SFAS 123, net income
(loss) and earnings (loss) per share would have been adjusted to the pro
forma amounts indicated in the table below:
<TABLE>
<CAPTION>
1997 1998 1999
---------- -------- --------
<S> <C> <C> <C>
Net income (loss)--as reported.............................. $12,993 $16,018 $(6,717)
Net income (loss)--pro forma................................. $12,926 $14,820 $(6,606)
Net income (loss) per share--as reported..................... $ 1.55 $ 1.63 $(0.71)
Net income (loss) per share--pro forma....................... $ 1.54 $ 1.51 $(0.70)
Net income (loss) per share assuming dilution--as reported... $ 1.53 $ 1.63 $(0.71)
Net income (loss) per share assuming dilution--pro forma..... $ 1.52 $ 1.51 $(0.70)
</TABLE>
These pro forma compensation costs may not be representative of those to be
expected in future years due to the timing of option issuances and
pro-ration of the corresponding compensation costs.
The fair value of each option grant is estimated on the date of the grant
using the Black-Scholes option pricing model with the following assumptions
used:
Expected dividend yield.......... 4.5%
Expected stock price volatility.. 87.46%
Risk-free interest rate.......... 6.72%
Expected life of options......... 10 years
The fair value of options granted during 1999 was $1.25 per share. There
were no options granted during 1998. The fair value of options granted
during 1997 was $6.59 per share.
12. TAXATION
Under current Bermuda law, the Company is not required to pay any taxes in
Bermuda on either income or capital gains. The Company has received an
undertaking from the Minister of Finance in Bermuda that in the event of
any such taxes being imposed the Company will be exempted from taxation
until the year 2016.
Total income tax expense (benefit) for the years ended December 31, 1997,
1998 and 1999 was allocated as follows:
<TABLE>
<CAPTION>
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Income (loss) from continuing operations.................... $2,925 $3,790 $(2,583)
Effect of change in accounting method (Note 2(q))........... -- -- (188)
------ ------ -------
$2,925 $3,790 $(2,771)
====== ====== =======
</TABLE>
Income tax expense (benefit) attributable to income from continuing
operations consists of:
<TABLE>
<CAPTION>
CURRENT DEFERRED TOTAL
------- -------- -----
<S> <C> <C> <C>
Year ended December 31, 1997
U.S. Federal and State.............. $ 934 $ (809) $ 125
Foreign (U.K.)...................... 2,800 -- 2,800
-------- ------- -------
$ 3,734 $ (809) $ 2,925
-------- ------- -------
Year ended December 31, 1998
U.S. Federal and State.............. $ 1,324 $ (753) $ 571
Foreign (U.K.)...................... 3,219 -- 3,219
-------- ------- -------
$4,543 $ (753) $ 3,790
======== ======= =======
Year ended December 31, 1999
U.S. Federal and State.............. $ (1,377) $(1,432) $(2,621)
Foreign (U.K.)...................... 38 -- 38
-------- ------- -------
$(1,339) $(1,432) $(2,583)
======== ======= =======
</TABLE>
Income tax expense (benefit) attributable to income from continuing
operations and change in accounting method was $2,925, $3,790 and ($2,771)
for the years ended December 31, 1997, 1998 and 1999 respectively, and
differed from the amounts computed by applying the U.S. federal income tax
rate of 34% to income before taxation as a result of the following:
<TABLE>
<CAPTION>
1997 1998 1999
-------- --------- --------
<S> <C> <C> <C>
Computed expected tax expense benefit........... $5,412 $6,888 $(3,226)
Foreign income not subject to US taxes.......... (2,305) (2,988) 420
Foreign income subject to tax at foreign rates.. (200) (99) 3
Change in valuation allowance................... (86) (104) --
Miscellaneous permanent differences............. 98 94 21
Deferred U.S. interest witholding tax........... -- -- 351
State taxes..................................... 80 79 (340)
Utilization of acquired net operating losses.... (74) (80) (0)
------ ------ -------
Actual tax expense benefit...................... $2,925 $3,790 $(2,771)
====== ====== ========
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
December 31, 1998 and 1999, are presented below:
<TABLE>
<CAPTION>
1998 1999
-------- --------
<S> <C> <C>
Deferred tax assets:
Deferred revenue................................................. $ 1,220 $ 1,114
Discount on unearned premiums and outstanding loss reserves...... 459 540
Deferred interest deductions..................................... 280 67
Allowance for doubtful accounts.................................. -- 1,636
Restructuring reserve............................................ -- 229
State net operating loss carryover............................... -- 150
Other............................................................ -- 60
------- -------
1,959 3,796
Deferred tax liabilities:
Deferred policy acquisition costs................................ -- (287)
Unrealized investment gains...................................... (168) (169)
Other............................................................ (36) (25)
------- -------
Net deferred tax asset........................................... $ 1,755 $3,315
======= =======
</TABLE>
There was no valuation allowance for deferred tax assets as of December 31,
1998 or 1999, as management believes that it is more likely than not that
the deferred tax assets will be realized. However, the amount of deferred
tax assets could be reduced in the near term if estimates of taxable income
are reduced.
The Company has not recognized a deferred tax liability for the
undistributed earnings of its United States subsidiaries. (A 30% tax is
generally imposed in the United States on dividends paid by United States
corporations to non-United States shareholders). The Company does not
expect those unremitted earnings to become taxable in the foreseeable
future. A deferred tax liability will be recognized when the Company
expects that it will recover those undistributed earnings in a taxable
manner, such as the receipt of dividends. The deferred tax liability
relating to these unremitted earnings, which is not recognized by the
Company, is approximately $542, $986 and $2,442 at December 31, 1997, 1998,
and 1999, respectively.
13. EARNINGS PER SHARE
Earnings per share have been calculated in accordance with SFAS 128:
<TABLE>
<CAPTION>
1997 1998 1999
--------- --------- ----------
<S> <C> <C> <C>
Net Income (Loss)..................................... $ 12,993 $ 16,018 $ (6,717)
========== ========== ==========
Weighted average number of ordinary shares
outstanding........................................ 8,383,482 9,814,101 9,480,356
---------- ---------- ----------
Net income (loss) per share........................... $ 1.55 $ 1.63 ($ 0.71)
---------- ---------- ----------
Income (loss) available to ordinary shareholders...... $ 12,993 $ 16,018 ($ 6,717)
========== ========== ==========
Weighted average number of ordinary shares
outstanding........................................ 8,383,482 9,814,101 9,480,356
Plus: incremental shares from assumed exercise of
options............................................ 131,991 26,058 --
---------- ---------- ----------
Adjusted weighted average number of ordinary
shares outstanding................................. 8,515,473 9,840,159 9,480,356
---------- ---------- ----------
Net income (loss) per share assuming dilution......... $ 1.53 $ 1.63 $ (0.71)
========== ========== ==========
</TABLE>
See Notes 10 and 11 to the consolidated financial statements for further
discussion of share capital and share option transactions.
14. FINANCIAL INSTRUMENTS
a) Fair value
The carrying values of all financial instruments, as defined by SFAS 107
and as recorded in the consolidated balance sheets, approximate their fair
value. The Company does not have any significant off-balance sheet
financial instruments. The following methods and assumptions were used by
the Company in estimating fair values:
Cash and cash equivalents and fiduciary funds: The carrying values for
cash and cash equivalents and fiduciary funds approximated fair market
values due to the short-term maturities of these instruments.
Marketable securities: The fair values of debt and equity securities
are based on quoted market prices and dealer quotes at the consolidated
balance sheet dates.
Deposit liabilities and related assets: Underlying assets comprise
mainly cash and deposits. The carrying values for deposit liabilities and
related assets approximated fair market values due to the short-term
maturities of these instruments.
Other assets and liabilities: The fair values of all other financial
instruments, as defined by SFAS 107, approximate their carrying values due
to their short-term nature.
The estimates of fair values presented herein are subjective in nature and
are not necessarily indicative of the amounts that the Company would
actually realize in a current market exchange. Any differences would not be
expected to be material. Certain amounts such as prepaid expenses, other
assets, goodwill and deferred expenses, deferred fee income, outstanding
losses recoverable from reinsurers, and outstanding losses and loss
expenses are excluded from fair value disclosure. Thus the total fair value
amounts cannot be aggregated to determine the underlying economic value of
the Company.
b) Concentrations of credit risk and provision for doubtful accounts
The Company's financial instruments exposed to possible concentrations of
credit risk consist primarily of its cash and cash equivalents, outstanding
losses recoverable from reinsurers and insurance and reinsurance balances
receivable.
The Company maintains a substantial portion of its cash and cash
equivalents in two financial institutions which the Company considers of
high credit quality.
Concentrations of credit risk with respect to other financial instruments
are to some extent limited due to the number of reinsurers, agents and
customers comprising the Company's receivable base. At December 31, 1999
there were amounts due from three reinsurers that totaled $52,039, as
discussed in Note 8. As at December 31, 1999, management believes that
approximately $6,742 (1998 - $2,500) of paid and outstanding losses
recoverable from reinsurers may prove uncollectible and has established a
provision for doubtful accounts accordingly, as discussed in Note 8.
c) Forward foreign exchange contracts
The Company's functional currency is the U.S. dollar; however, as the
Company operates internationally, it has exposure to changes in foreign
currency exchange rates. These exposures include net cash inflows on
non-U.S. dollar-denominated transactions.
To manage the Company's exposure to these risks, the Company enters into
forward foreign exchange contracts in the currencies to which the Company
is exposed. These contracts generally involve the exchange of one currency
for another at some future date. The Company had no notional principal
amounts outstanding at December 31, 1998 and 1999, respectively, relating
to contracts to buy British Pounds Sterling in the future. A net realized
gain (loss) of $(22), $182 and $0 is included in other income in the
consolidated statements of income in respect of such contracts during the
years ended December 31, 1997, 1998 and 1999, respectively.
15. SEGMENTAL INFORMATION
(a) The Company has five main business segments; Brokerage, Program
Business, Underwriting Management, Insurance, and Reinsurance. The
brokerage segment comprises subsidiaries that receive a fee or
commission for brokering insurance and reinsurance contracts. The
program business segment comprises subsidiaries that market insurance
products and manage programs developed by the Company. Underwriting
Management companies are authorized to underwrite and administer
reinsurance business on behalf of unaffiliated insurance and
reinsurance companies. The insurance and reinsurance segments
represent companies that underwrite and retain, subject to their own
reinsurance, certain insurance and reinsurance risks, and their
revenues include premiums earned on insurance and reinsurance polices,
investment income and policy issuance fees. Other includes the
Company's holding companies, group services companies, and income
earned from investments in affiliated companies(1997 - $1,266, 1998 -
$2,631, 1999 - $Nil). Intercompany transactions are recorded under
normal terms of trade. Adjustments and eliminations to revenue are in
respect of intersegment revenues that are eliminated at the
consolidated level. Adjustments and eliminations to assets are
primarily in respect of intersegment insurance balances receivable
that are eliminated at the consolidated level.
<TABLE>
<CAPTION>
Adj. and
Program Underwriting --------
Brokerage Business Management Insurance Reinsurance Other eliminations Total
--------- -------- ------------ --------- ----------- ----- ------------ -----
DECEMBER 31, 1997
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues 23,385 19,770 4,174 5,399 9,382 3,200 -- 65,310
Income before tax 8,591 3,938 2,491 471 57 370 -- 15,918
Assets 249,334 22,465 32,038 58,306 40,452 35,029 (31,294) 406,330
DECEMBER 31, 1998
Revenues 27,144 27,119 3,554 11,073 10,905 5,798 (500) 85,093
Income (loss) before tax 11,501 5,187 1,689 1,169 (3,357) 3,619 -- 19,808
Assets 462,420 35,015 38,179 94,843 58,761 47,123 (86,700) 649,641
DECEMBER 31, 1999
Revenues 24,879 22,444 4,123 12,557 3,138 680 -- 67,821
Income (loss) before tax 2,706 2,716 1,446 (2,139) (3,402) (5,383) -- (9,488)
Assets 787,818 34,927 88,975 112,916 54,758 35,199 (103,184) 1,011,409
</TABLE>
(b) Summarized financial information by geographic location of
subsidiary for the years ended December 31, 1997, 1998 and 1999 is as
follows:
<TABLE>
<CAPTION>
Adjustments &
-------------
Bermuda U.K U.S.A. eliminations Consolidated
------- --- ------ ------------ ------------
<S> <C> <C> <C> <C> <C>
REVENUES FOR THE YEAR ENDED
December 31, 1997 21,326 22,459 22,262 (737) 65,310
December 31, 1998 27,485 23,632 34,713 (737) 85,093
December 31, 1999 13,355 20,295 34,582 (411) 67,821
IDENTIFIABLE ASSETS AT THE YEAR ENDED
December 31, 1997 119,066 250,668 85,066 (48,410) 406,330
December 31, 1998 178,489 477,639 127,851 (134,338) 649,641
December 31, 1999 221,492 793,641 151,671 (172,449) 994,355
</TABLE>
(c) The Company's Program Business companies market and manage
insurance products and programs developed by the Company on behalf of
independent insurance carriers. In addition, the Company, through its
brokerage operations and managing general underwriters provide additional
business and services to certain of these independent insurance carriers in
respect of these products and other insurance and reinsurance policies. For
the year ended December 31, 1997, 1998 and 1999 revenues received from one
independent insurance carrier approximately accounted for the following
percentage of total revenues.
<TABLE>
<CAPTION>
Program Underwriting
------- ------------
Brokerage Business Management Insurance Reinsurance Other Total
--------- -------- ---------- --------- ----------- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C>
December 31, 1997 22% 79% 89% 0% 83% 30% 51%
December 31, 1998 19% 71% 94% 0% 74% 11% 43%
December 31, 1999 19% 70% 91% 0% 72% 0% 39%
</TABLE>
The loss of this carrier could have a material adverse effect on the
Company. However, the Company believes that, subject to market conditions,
the availability of alternative underwriting capacity at Realm National and
other independent insurance carriers would reduce the impact of such a
loss.
16. COMMITMENTS
Future minimum lease payments under non-cancelable operating leases as at
December 31, 1999 are as follows:
2000.................. $ 2,885
2001.................. 2,671
2002.................. 2,232
2003.................. 1,930
2004.................. 1,422
2005 and thereafter... 3,929
-------
$15,069
-------
Total rental expense for the years ended December 31, 1997, 1998 and 1999,
was $1,894, $2,191, and $2,787, respectively.
Certain lease commitments are subject to annual adjustment under escalation
clauses, for real estate taxes and the landlord's operating expenses. Such
adjustments will not be material to the Company.
17. STATUTORY SURPLUS AND DIVIDEND RESTRICTIONS
The Company's ability to pay dividends is subject to certain restrictions
including the following:
a) The Company is subject to a 30% withholding tax on certain
dividends and interest received from its United States subsidiaries.
b) Under New York law, Realm National may pay cash dividends only
from earned surplus determined on a statutory basis. Further, Realm
National is restricted (on the basis of the lower of 10% of statutory
surplus at the end of the preceding twelve-month period or 100% of the
adjusted net investment income for the preceding twelve-month period)
as to the amount of dividends it may declare or pay in any twelve
month period without the approval of the Insurance Department of the
State of New York.
Realm National did not have any earned surplus available for the
payment of dividends in 1998 and 1999 due to its statutory-basis
accumulated deficit. Additionally, $21 and $23 of statutory surplus
has been segregated as special funds as of December 31, 1998 and 1999
and will not become available for dividend payments until earned.
Realm National's total capital and surplus and net income determined
on a New York statutory basis are as follows:
1998 1999
-------- -------
Total capital and surplus at December 31,... $18,889 $17,177
Net income for year ended December 31,...... $ 663 $ 219
c) The NAIC has a model law which establishes certain minimum
risk-based capital ("RBC") requirements for property-casualty
insurance companies. The RBC calculation serves as a benchmark for the
regulation of insurance companies by state insurance regulators. The
calculation specifies various formulas and weighting factors that are
applied to financial balances or various levels of activity based on
the perceived degree of risk and are set forth in the RBC
requirements. The capital of Realm National as of December 31, 1998
and 1999 exceeded the amount calculated using the RBC requirements.
d) The Company's Bermuda reinsurance subsidiary, CIRCL, is
required by its license to maintain capital and surplus greater than a
minimum statutory amount determined as the greater of a percentage of
outstanding losses and loss expenses (net of reinsurance recoverable)
or a given fraction of net written premiums. At December 31, 1998 and
1999, respectively, CIRCL was required to maintain a minimum statutory
capital and surplus of $2,135 and $2,024. Accordingly, approximately
$2,024 of contributed surplus and retained earnings is restricted from
distribution.
CIRCL's total surplus and net loss determined on a Bermuda statutory
basis is as follows:
1998 1999
-------- -------
Total surplus at December 31...................... $ 2,304 $2,857
Net loss for year ended December 31............... $(3,558) ($5,227)
CIRCL is also required to maintain a minimum liquidity ratio whereby
the value of its relevant assets are not less than 75% of the amount
of its relevant liabilities. Certain categories of assets do not
qualify as relevant assets under the statute. At December 31, 1998 and
1999, respectively, CIRCL was required to maintain relevant assets of
at least $25,000 and $23,000. At that date relevant assets were
approximately $35,600 and $33,500 and the minimum liquidity ratio was
therefore met.
18. RELATED PARTY TRANSACTIONS
a) Amounts due from/to affiliates are interest-free and unsecured with
no fixed terms of repayment.
b) Goldman, Sachs & Co. acted as a co-managing underwriter for the
Company's IPO completed in December 1997, from which the underwriters
received aggregate underwriting discounts of $5.3 million from the Company
and selling shareholders.
Goldman, Sachs & Co. or certain of its affiliates maintain certain
contractual relationships with the Company and have provided investment
banking services to the Company. Goldman, Sachs & Co. also provides
investment management services to Realm National pursuant to a Corporate
Account Agreement dated December 24, 1996 and received customary fees and
expenses of approximately $32 during 1999 (1998 - $20) for such services.
19. CONTINGENCIES
(a) The civil action filed on March 29, 1999 against the Company, certain
of its subsidiaries, and others in the U.S. District Court for the Southern
District of New York by Odyssey Re (London) ("Odyssey") was dismissed by
the Court on February 25, 2000. The amended complaint in that case asserted
claims against the Company, certain of its subsidiaries, and others under
the Racketeering Influenced and Corrupt Organizations (RICO) Act, and for
common law fraud. The Court dismissed the amended complaint on the ground
of "forum non conveniens," finding that Odyssey's claims should be asserted
in the English courts. There is no counterpart to the U.S. RICO law in
England, nor does English law allow imposition of treble damages.
Odyssey, which changed its name to Sphere Drake Insurance Limited ("Sphere
Drake") during 1999, caused proceedings to be issued in the London
Commercial Courts (equivalent to a civil complaint in U.S. jurisdictions)
against the Company's U.K. subsidiaries, two former officers of those
subsidiaries, and others on February 29, 2000. Neither the Company nor any
of its U.S. or Bermuda subsidiaries are named in the action. Sphere Drake
generally alleges a conspiracy to defraud it in connection with various
reinsurance contracts.
It is the opinion of management that the claims generally described in
Sphere Drake's action are without merit and the case will be defended
vigorously.
(b) Several arbitration proceedings currently are pending in England
between reinsurers and ceding insurers relating to reinsurance transactions
involving the personal accident excess of loss market in London ("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 insurer clients that are parties to certain of the arbitrations.
In addition, the Company's reinsurance subsidiary is party to one of the
LMX arbitrations. This particular arbitration has been dormant for some
time.
The reinsurers generally have alleged that they sustained losses due to an
"artificial" spiral in the LMX market, the existence of which, as well as
other information, 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 suspended payment of claims.
During 1998 and 1999 certain of the reinsurers and reinsureds that are
parties to the arbitrations described above issued proceedings in the
English courts against one or more of the Company's brokerage subsidiaries
and one underwriting management subsidiary, apparently for the primary
purpose of tolling the statute of limitations pending the outcome of the
arbitrations. In one recently issued proceeding against the same
subsidiaries, three former officers of the subsidiaries were also named. In
none of these proceedings did the complainant specify an amount of damages
sought. If one or more reinsurers succeed in avoiding their contracts in
the pending arbitrations, it is possible that ceding insurers clients, on
whose behalf the Company's broker subsidiaries placed the reinsurance, may
seek to pursue a claim for indemnification or other claims against one or
more of those subsidiaries. Similarly, if one or more of the reinsurers
fails to avoid its contracts in the pending arbitrations, it also is
possible that those reinsurers may seek to pursue some type of claim
against one or more of those subsidiaries.
The Company understands that awards already have been made in favor of the
reinsurer in two arbitrations. However, based on the Company's
understanding of the reasons given by the arbitration panels for their
awards in favor of the reinsurer in those cases, the Company does not
believe there is any valid basis for its ceding insurer clients in those
cases to assert a claim against the Company or its broker subsidiaries.
All U.K. judicial proceedings against the Company's subsidiaries have been
stayed or held in abeyance pursuant to standstill agreements or court
order, except for one proceeding where the subsidiaries are considering a
request for a standstill and except for standstill agreements between two
of the Company's subsidiaries and one ceding insurer client, which recently
gave notice of termination of those standstill agreements.
One of the arbitration awards referenced above allowed a reinsurer to avoid
its reinsurance contracts with a Lloyd's syndicate. According to reports in
the London press, that award may have caused the syndicate's liabilities to
increase beyond the financial resources available to it and its Names,
requiring the syndicate to avail itself of the Lloyd's Central Fund.
Thereafter, Lloyd's initiated an investigation of that syndicate and all
"market participants," including the Company's U.K. subsidiaries. The
investigation is at an early stage and it is uncertain when it will be
completed.
The Company understands that substantial progress has been and is being
made by various market participants in settling ongoing reinsurance
disputes, including many of the market participants that are parties to the
arbitrations and other proceedings described above.
Although no assurances can be given as to the outcome of the pending U.K.
arbitrations or pending or potential judicial proceedings related to the
LMX spiral reinsurance arbitrations and their effect on the Company, the
Company believes, based on the information presently available to it, that
any such effect should not have a material adverse effect on the Company's
financial condition.
(c) The reinsurance markets in which the Company historically has been
involved experienced considerable disruption during 1999, for a variety of
reasons, including but not limited to the LMX market disputes described
above and other disputes involving the North American workers' compensation
reinsurance market.
One result of this market disruption has been that certain reinsurers with
whom the Company's broker subsidiaries placed business on behalf of ceding
insurer clients suspended claims payments to those clients, as well as to
the Company's insurance and reinsurance subsidiaries. As a result, a number
of arbitrations were commenced between Company clients and their
reinsurers.
In some instances, disputes or potential disputes have arisen concerning
whether reinsurance was properly placed by the Company's broker
subsidiaries. In other instances, the Company's ceding insurer clients have
demanded imdemnification by the Company if the client's reinsurance
contracts ultimately are avoided by its reinsurers.
Although no assurances can be given as to the effect on the Company of the
various disputes in the worker's compensation reinsurance market, or
related arbitrations, the Company believes, based on the information
presently available to it, that any such effect should not have a material
adverse effect on the Company's financial condition.
(d) 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's financial condition.
20. QUARTERLY FINANCIAL DATA--UNAUDITED
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
----- ------ ----- ------
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
(i) (i) (i) (i)
YEAR ENDED DECEMBER 31, 1998 --- --- --- ---
<S> <C> <C> <C> <C>
Total revenues ............................ $19,989 $22,245 $20,925 $21,934
Net income................................. 3,987 4,025 4,129 3,877
Net income (loss) per share................ 0.41 0.41 0.42 0.40
Net income (loss) per share assuming dilution $ 0.40 $ 0.41 $ 0.42 $ 0.40
<CAPTION>
YEAR ENDED DECEMBER 31, 1999
<S> <C> <C> <C> <C>
Total revenues ............................ $23,551 $20,620 $14,323 $9,327
Net income................................. 3,631 978 (2,572) (8,754)
Net income (loss) per share................ 0.38 0.10 (0.27) (0.92)
Net income (loss) per share assuming dilution $ 0.38 $ 0.10 ($0.27) ($ 0.92)
<FN>
(i) As discussed in Note 8, the Company recorded a provision of $2,500
against paid and outstanding losses recoverable from reinsurers during
the fourth quarter of 1998. The Company recorded a further provision
of $500 against paid and outstanding losses recoverable from
reinsurers during the first quarter of 1999, and a further $3,742
during the fourth quarter of 1999.
</FN>
</TABLE>
<PAGE>
ITEM 9--CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On April 29, 1999, the Company engaged Arthur Andersen LLP as its
independent accountant. The Company's independent accountant for the fiscal
year ended December 31, 1998 was KPMG ("KPMG").
During the Company's fiscal years ended December 31, 1997 and 1998 and the
interim period subsequent to the fiscal year ended December 31, 1998,
neither the Company nor any person on the Company's behalf consulted Arthur
Andersen LLP, regarding either:
(i) the application of accounting principles to a specified
transaction, either completed or proposed, or the type of audit
opinion that might be rendered on the Company's financial
statements; and no written or oral advice was provided to the
Company, that Arthur Andersen LLP concluded was an important
factor considered by the Company in reaching a decision as to
accounting, auditing, or financial reporting issues; or
(ii) any matter that was the subject of a disagreement or a reportable
event, as those items are defined under Regulation ss. 229.304
(17 C. F. R. ss. 229.304)
On April 20, 1999, KPMG notified the Company that it would not seek
re-election as auditors to the Company for the year ended December 31,
1999.
KPMG's reports on the Company's financial statements for each of the fiscal
years ended December 31, 1997 and 1998 did not contain an adverse opinion
or a disclaimer of opinion and were not qualified or modified as to
uncertainty, audit scope, or accounting principles.
During the Company's fiscal years ended December 31, 1997 and 1998, and the
subsequent interim period preceding KPMG's declination, there were no
disagreements between the Company and KPMG on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope
or procedure which, if not resolved to the satisfaction of KPMG, would have
caused KPMG to make a reference to the subject matter of disagreement in
connection with KPMG's report.
During the Company's fiscal years ended December 31, 1997 and 1998 and the
subsequent interim period preceding KPMG's declination:
(a) KPMG did not advise the Company that the internal controls
necessary for the Company to develop reliable financial
statements do not exist;
(b) KPMG did not advise the Company that information has come to
KPMG's attention that has led it to no longer be able to rely on
management's representations, or that has made it unwilling to be
associated with the financial statements prepared by management;
(c) (1) KPMG did not advise the Company of the need to expand
significantly the scope of its audit, or that information had
come to KPMG's attention during such period that if further
investigated may (i) materially impact the fairness or
reliability of either a previously issued audit report or the
underlying financial statements, or the financial statements
issued or to be issued covering the fiscal periods subsequent to
the date of the most recent financial statements covered by an
audit report (including information that may prevent it from
rendering an unqualified audit report on those financial
statements), or (ii) cause it to be unwilling to rely on
management's representations or be associated with the
registrant's financial statements; and (2) KPMG did not so expand
the scope of its audit or conduct such further investigation; and
(d) (1) KPMG did not advise the Company that information has come to
KPMG's attention that it has concluded materially impacts the
fairness or reliability of either (i) a previously issued audit
report or the underlying financial statements, or (ii) the
financial statements issued or to be issued covering the fiscal
period subsequent to the date of the most recent financial
statements covered by an audit report (including information
that, unless resolved to the accountant's satisfaction, would
prevent it from rendering an unqualified audit report on those
financial statements), and (2) KPMG did not advise the Company
that due to KPMG's declination to seek re-election, or for any
other reason, accounting issues have not been resolved to KPMG's
satisfaction prior to declination to seek re-election.
PART III
ITEM 10--DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Certain of the information required by this item is included in Part 1 of
this Form 10-K.
The remainder of this item is omitted because the information will be
contained in a definitive proxy statement, which involves the election of
directors, to be filed with the Securities and Exchange Commission not
later than 120 days after December 31, 1999. Such information is hereby
incorporated by reference.
ITEM 11--EXECUTIVE COMPENSATION
This item is omitted because the information will be contained in a
definitive proxy statement, which involves the election of directors, to be
filed with the Securities and Exchange Commission not later than 120 days
after December 31, 1999. Such information is hereby incorporated by
reference.
ITEM 12--SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
This item is omitted because the information will be contained in a
definitive proxy statement, which involves the election of directors, to be
filed with the Securities and Exchange Commission not later than 120 days
after December 31, 1999. Such information is hereby incorporated by
reference.
ITEM 13--CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Certain of the information required by this item is included in Part 2,
Item 8 of this Form 10-K.
The remainder of this item is omitted because the information will be
contained in a definitive proxy statement, which involves the election of
directors, to be filed with the Securities and Exchange Commission not
later than 120 days after December 31, 1999. Such information is hereby
incorporated by reference.
<PAGE>
PART IV
ITEM 14--EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(A) EXHIBITS
EXHIBIT NO. DESCRIPTION
- -------------------- -----------------------------------------------------
3.l Memorandum of Association of the Company (1)
3.2 Bye-Laws of the Company (1)
4.1 Shareholders' Agreement, dated as of January 24, 1996,
among the Management Shareholders (as defined therein),
Bridge Street Fund 1995, L.P., Goldman Sachs & Co.
Verwaltungs GmbH (for GS Capital Partners II German
Civil Law Partnership), GS Capital Partners II, L.P.,
GS Capital Partners Offshore, L.P., Stone Street Fund
1995, L.P. and the Company (1)
4.2 Registration Rights Agreement, dated January 24, 1996,
between the Company, the Management Shareholders (as
defined therein) and the Investors (as defined therein)
(1)
10.1 Stirling Cooke Brown Holdings Limited 1997 Equity
Incentive Plan (1)*
10.2 Employment Agreement dated September 1, 1997 between
Realm Investments Ltd. and Nicholas Mark Cooke (1)*
10.4 Employment Agreement dated September 1, 1997 between
Stirling Cooke Brown Holdings Limited and George W.
Jones (l)*
10.5 Agency Agreement dated as of June 1, 1995 between
Clarendon National Insurance Company and Stirling Cooke
Insurance Services, Inc. (1)
10.6 Amendment Number One to Agency Agreement dated as of
June 1, 1995 between Clarendon National Insurance
Company and Stirling Cooke Insurance Services, Inc. (1)
10.7 Amendment Number Two to Agency Agreement dated as of
June 1, 1995 between Clarendon National Insurance
Company and Stirling Cooke Insurance Services, Inc. (1)
10.8 Addendum dated April 1, 1997 to Agency Agreement dated
as of June 1, 1995 between Clarendon National Insurance
Company and Stirling Cooke Insurance Services, Inc. (1)
10.9 Agency Agreement dated as of October 1, 1995 between
Clarendon National Insurance Company and Stirling Cooke
Texas, Inc. (1)
10.10 Management Agreement dated as of August 1, 1995 between
Legion Insurance Company and Stirling Cooke Insurance
Services, Inc. (1)
11 Statement Re Computation of Per Share Earnings
21 Subsidiaries of the Company
99 Forward-Looking Information
(1) Incorporated by reference from Registration Statement on Form S-1 (No.
333-32995) of Stirling Cooke Brown Holdings Limited.
*Management Compensation
<PAGE>
(B) REPORTS ON FORM 8-K.
The Company filed a 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 Form 8-K on November 3, 1999 reporting the
election of Mr. Stephen A. Crane as President, Chief Executive Officer
and director of the Company effective November 1, 1999.
(C) FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
1. Financial Statements
Included in Part II--Item 8 of this report.
2. Index to Financial Statement Schedules
Included in Part IV of this report:
SCHEDULE
----------------------------- --------
NUMBER PAGE
------ --------
Reports of Independent Accountants on financial
statement schedules included in Form 10-K. 53
Schedule of Investments excluding Investments in
Related Parties as of December 31, 1999 I 55
Condensed Financial Information of Registrant as
of and for the years ended December 31, 1997, 1998
and 1999 II 56-58
Supplementary Insurance Information as of and for
the years ended December 31, 1997, 1998 and 1999 III 59
Reinsurance for the years ended December 31, 1997, IV 60
1998 and 1999 Valuation and Qualifying Accounts
for the years ended December 31, 1997, 1998 and
1999 V 61
Supplmental Information concerning
Property-Casualty Insurance Operations for the
years ended December 31, 1997, 1998 and 1999 VI 62
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
The Board of Directors and Shareholders of
Stirling Cooke Brown Holdings Limited
Under date of March 13, 2000, we reported on the consolidated balance sheet
of Stirling Cooke Brown Holdings Limited and subsidiaries as of December
31, 1999, and the related consolidated statements of income and
comprehensive income, changes in shareholders' equity and cash flows for
the year then ended. These consolidated financial statements referred to
above are included in Item 8 of this Annual Report on Form 10-K for the
year ended December 31, 1999. In connection with our audit of the
aforementioned consolidated financial statements, we also audited the
related financial statement schedules listed in the accompanying index.
These financial statement schedules are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statement schedules based on our audit.
The consolidated financial statements of Stirling Cooke Brown Holdings
Limited and subsidiaries as of December 31, 1998 and 1997, were reported on
by other auditors whose report is dated March 5, 1999. Those consolidated
financial statements referred to above are also included in Item 8 of this
Annual Report on Form 10-K for the year ended December 31, 1999. In
connection with their audits of the aforementioned consolidated financial
statements, they also audited the related financial statement schedules
listed in the accompanying index.
In our opinion, the 1999 amounts included in the financial statement
schedules fairly state in all material respects the financial data required
to be set forth therein in relation to the basic financial statements taken
as a whole.
/s/ Arthur Andersen LLP
- -----------------------
Arthur Andersen LLP
New York, New York
March 13, 2000
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders of
Stirling Cooke Brown Holdings Limited
Under date of March 5, 1999, we reported on the consolidated balance
sheet of Stirling Cooke Brown Holdings Limited and subsidiaries as of
December 31, 1998, and the related consolidated statements of income and
comprehensive income, changes in shareholders' equity, and cash flows for
each of the years in the two year period ended December 31, 1998, which are
included in item 8 of this Form 10-K for the year ended December 31, 1999.
In connection with our audits of the aforementioned consolidated financial
statements, we also audited the related financial statement schedules as of
December 31, 1998 and for each of the years in the two year period ended
December 31, 1998. These financial statement schedules are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statement schedules based on our
audits.
In our opinion, such financial statement schedules, when considered in
relation to the basic consolidated financial statements taken as a whole,
present fairly, in all material respects, the information set forth
therein.
/s/ KPMG
- -----------------
KPMG
Hamilton, Bermuda
March 5, 1999
<PAGE>
<TABLE>
<CAPTION>
STIRLING COOKE BROWN HOLDINGS LIMITED
SCHEDULE OF INVESTMENTS EXCLUDING INVESTMENTS IN RELATED PARTIES
SCHEDULE I
AMOUNT AT WHICH
SHOWN IN THE
FAIR BALANCE SHEET
COST VALUE DECEMBER 31, 1999
------ ----- -----------------
<S> <C> <C> <C>
Fixed maturities
Bonds:
United States Government and government agencies and
authorities.............................................. $ 8,988 $ 8,872 $ 8,872
States, municipalities and political subdivisions........... 30 30 30
Foreign governments......................................... 7,680 7,496 7,496
All other corporate bonds................................... 12,842 12,404 12,404
-------- ------- ---------
Total fixed maturities................................. 29,540 28,802 28,802
Equity securities
Common stocks:
Industrial, miscellaneous and all other..................... 2,626 3,354 3,354
Nonredeemable preferred stocks................................ 697 697 697
-------- ------- ---------
Total equity securities................................ 3,323 4,051 4,051
Short-term investments........................................... 1,256 1,256 1,256
-------- ------- ---------
Total investments...................................... $34,119 $34,109 $ 34,109
======= ======= =========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
STIRLING COOKE BROWN HOLDINGS LIMITED
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
PARENT COMPANY ONLY BALANCE SHEETS--SCHEDULE II
DECEMBER 31, 1998 AND 1999
(Expressed in thousands of United States Dollars, except share and per share data)
1998 1999
-------- --------
<S> <C> <C>
Assets
Cash and cash equivalents............................................................ $28,007 $14,495
Due from subsidiaries................................................................ 15,569 23,812
Investments in subsidiaries.......................................................... 49,786 34,143
Other assets......................................................................... 427 497
Marketable securities................................................................ 4,092 12,606
------- -------
Total Assets.................................................................... $97,881 $85,553
======= =======
Liabilities
Accounts payable and accrued liabilities............................................. $249 $721
------- -------
Total Liabilities............................................................... 249 721
------- -------
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 (loss)........................................ 319 (211)
Retained earnings.................................................................... 41,914 34,067
------- -------
98,866 90,489
Less: ordinary shares in treasury (1998--87,000, 1999--443,400) at cost................ (1,234) (5,657)
------- -------
Total shareholders' equity...................................................... 97,632 84,832
------- -------
Total Liabilities and Shareholders' equity................................................ $97,881 $85,553
======= =======
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
STIRLING COOKE BROWN HOLDINGS LIMITED
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
PARENT COMPANY ONLY STATEMENTS OF INCOME AND COMPREHENSIVE INCOME--SCHEDULE II
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
(EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS, EXCEPT SHARE AND PER SHARE DATA)
1997 1998 1999
----- ----- -----
<S> <C> <C> <C>
REVENUES
Net investment income............................................ $ 139 $ 1,920 $ 1,717
------ ------- -------
Total Revenues........................................................ 139 1,920 1,920
EXPENSES
Salaries and benefits............................................ 395 184 536
Other operating expenses......................................... 683 1,015 3,178
-------- -------- --------
Total Expenses........................................................ 1,078 1,199 3,714
NET INCOME (LOSS) BEFORE EQUITY IN INCOME OF SUBSIDIARIES ............ (939) 721 (1,997)
Equity in income of subsidiaries...................................... 13,932 15,297 (4,720)
-------- -------- --------
NET INCOME (LOSS)..................................................... $12,993 $16,018 ($ 6,717)
-------- -------- --------
Other comprehensive income (loss), net of tax:
Unrealized holding gains (losses) arising during
the year (net of tax of $130, $130 and $72)................... 188 314 (696)
Less: reclassification adjustments for realized gains (losses).....
included in net income (net of tax of $166, $1 and ($189)).... (272) (58) 16
-------- -------- --------
Other comprehensive income (loss), net of tax...................... (84) 256 (530)
Comprehensive income (loss)........................................ $12,909 $16,274 ($ 7,247)
======== ======== ========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
STIRLING COOKE BROWN HOLDINGS LIMITED
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
PARENT COMPANY ONLY STATEMENTS OF CASH FLOWS--SCHEDULE II
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
(Expressed in thousands of United States
Dollars, except share and per share data)
1997 1998 1999
----- ----- -----
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss)..................................................... $12,993 $16,018 ($6,717)
Items not effecting cash
Amortization of goodwill.............................................. 373 373 373
Amortization of marketable securities................................. 0 (8) 10
Depreciation and amortization of capital assets....................... 0 2 10
Equity in income of subsidiaries...................................... (13,932) (15,297) 4,720
Gain on sale of marketable securities................................. 0 (55) (143)
Changes in non cash operating assets and liabilities
Other assets....................................................... (258) (134) (80)
Accounts payable and accrued liabilities........................... 1,125 (892) 472
Due to subsidiaries................................................ (193) 0 0
-------- -------- --------
Net cash provided (used) by operating activities................. 108 7 (1,355)
-------- -------- --------
INVESTING ACTIVITIES
Purchase of capital assets............................................ (37) 0 0
Investments in subsidiaries........................................... (274) 960 15
Due from subsidiaries................................................. (5,600) (4,331) (3,606)
Dividends received from subsidiaries.................................. 6,850 9,250 6,000
Purchase of debt securities........................................... 0 (3,992) (11,156)
Purchase of equity securities......................................... 0 (503) (1,000)
Proceeds on sale of debt securities................................... 0 0 2,190
Proceeds on sale of equity securities................................. 0 558 953
-------- -------- --------
Cash provided (used) by investing activities..................... 939 1,942 (6,604)
-------- -------- --------
FINANCING ACTIVITIES
Dividends............................................................. 0 (1,178) (1,130)
Net proceeds from subscription to share capital....................... 26,832 0 0
Proceeds from exercise of options..................................... 1,625 0 0
Purchase of ordinary shares in treasury............................... (1,807) (567) (4,423)
Sales of ordinary shares in treasury.................................. 86 0 0
-------- -------- --------
Cash provided (used) by financing activities..................... 26,736 (1,745) (5,553)
-------- -------- --------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........................... 27,783 204 (13,512)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR............................. 20 27,803 28,007
-------- -------- --------
CASH AND CASH EQUIVALENTS FROM END OF YEAR................................. $27,803 $28,007 $14,495
======== ======== ========
All dividends received were from consolidated subsidiaries.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
STIRLING COOKE BROWN HOLDINGS LIMITED
SUPPLEMENTARY INSURANCE INFORMATION--SCHEDULE III
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
(Expressed in thousands of United States
Dollars, except share and per share data)
FUTURE
POLICY
BENEFITS, OTHER BENEFITS, AMORTIZATION
DEFERRED LOSSES, POLICY CLAIMS, OF DEFERRED
POLICY CLAIMS CLAIMS NET LOSSES AND POLICY OTHER
ACQUISITION AND LOSS UNEARNED AND PREMIUM INVESTMENT SETTLEMENT ACQUISITION OPERATING PREMIUMS
COSTS EXPENSES PREMIUMS BENEFITS REVENUE INCOME EXPENSES COSTS EXPENSES WRITTEN
----- -------- -------- -------- ------- ------ -------- ----- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Year ended December 31, 1997
Insurance................. $ 34 $ 14,969 $ 13,338 $ 0 $ 2,921 $ 1,696 $ 2,426 $ 840 $ 1,662 $ 3,988
Reinsurance............... 23 21,307 5,849 0 8,869 517 8,525 504 296 9,193
Brokerage................. 0 0 0 0 2,531 0 0 14,794 0
Program Business.......... 0 0 0 0 74 0 0 15,832 0
Underwriting Management... 0 0 0 0 15 0 0 1,684 0
Other..................... 0 0 0 0 14 0 0 2,829 0
-------- -------- -------- ---- -------- ------- -------- -------- ------- --------
$ 579 $ 36,276 $ 19,187 $ 0 $11,790 $ 5,782 $10,951 $ 1,344 $37,097 $ 13,181
Year ended December 31, 1998
Insurance................. 1,848 $ 30,788 $ 22,477 $ 0 $ 7,716 $ 1,261 $ 4,790 $ 2,052 $ 3,062 $ 9,676
Reinsurance............... 438 35,329 2,560 0 10,058 847 12,481 1,566 215 7,740
Brokerage................. 0 0 0 0 0 3,336 0 0 15,643 0
Program Business.......... 0 0 0 0 0 777 0 0 21,932 0
Underwriting Management... 0 0 0 0 0 197 0 0 1,865 0
Other..................... 0 0
0 0 0 0 0 2,353 0 0 1,679 0
--------- -------- -------- ---- -------- ------- -------- -------- ------- --------
$ 2,286 $ 66,117 $ 25,037 $ 0 $17,774 $ 8,771 $17,271 $ 3,618 $44,396 $ 17,416
Year ended December 31, 1999
Insurance................. $ 1,723 $ 59,422 $ 20,108 $ 0 $ 9,451 $ 558 $ 6,965 $ 3,141 $ 4,590 $ 8,907
Reinsurance............... 22 33,713 851 0 2,399 739 5,405 719 416 1,121
Brokerage................. 0 0 0 0 0 2,573 0 0 22,173 0
Program Business.......... 0 0 0 0 0 424 0 0 25,160 0
Underwriting Management... 0 0 0 0 0 223 0 0 2,677 0
Other..................... 0 0
0 0 0 0 0 2,197 0 0 6,063 0
--------- -------- -------- ---- -------- ------- -------- -------- ------- --------
$ 1,745 $ 93,135 $ 20,959 $ 0 $11,850 $ 6,714 $12,370 $ 3,860 $61,079 $ 10,028
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
STIRLING COOKE BROWN HOLDINGS LIMITED
REINSURANCE--SCHEDULE IV
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
(Expressed in thousands of United States
Dollars, except share and per share data)
PERCENTAGE
OF GROSS
PREMIUMS
GROSS GROSS GROSS NET ASSUMED
PREMIUMS PREMIUMS PREMIUMS PREMIUMS TO NET
WRITTEN CEDED ASSUMED EARNED PREMIUMS EARNED
------- -------- -------- -------- ---------------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1997....... $15,408 $ 17,396 $ 13,778 $11,790 117%
Year ended December 31, 1998....... $39,526 $ 36,807 $ 15,055 $17,774 85%
Year ended December 31, 1999....... $49,856 $ 42,707 $ 4,701 $11,850 40%
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
STIRLING COOKE BROWN HOLDINGS LIMITED
VALUATION AND QUALIFYING ACCOUNTS--SCHEDULE V
(EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS)
CHARGED TO
BALANCE AT CHARGED TO OTHER
BEGINNING COSTS AND ACCOUNTS- DEDUCTIONS BALANCE AT
DESCRIPION OF PERIOD EXPENSES DESCRIBE -DESCRIBE END OF PERIOD
---------- ---------- ---------- ----------- ---------- -------------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1997
Allowance for Doubtful Accounts $ -- $ -- $ -- $ -- $ --
Year ended December 31, 1998
Allowance for Doubtful Accounts $ -- $ 2,500 $ -- $ -- $ 2,500
Year ended December 31, 1999
Allowance for Doubtful Accounts $ 2,500 $ 4,242 $ -- $ -- $ 6,742
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
STIRLING COOKE BROWN HOLDINGS LIMITED
SUPPLEMENTARY INSURANCE INFORMATION
CONCERNING PROPERTY/CASUALTY INSURANCE OPERATIONS--SCHEDULE VI
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
(Expressed in thousands of United States
Dollars, except share and per share data)
LOSSES AND LOSS
ADJUSTMENT EXPENSES
INCURRED RELATED TO
RESERVE AMORTIZATION
FOR LOSSES OF DEFERRED
DEFERRED AND LOSS DISCOUNT, NET (1) POLICY
ACQUISITION ADJUSTMENT IF ANY, UNEARNED EARNED INVESTMENT CURRENT (2) ACQUISITION
COSTS EXPENSES DEDUCTED PREMIUMS PREMIUMS INCOME YEAR PRIOR YEAR COSTS
----- -------- -------- -------- -------- ------ ---- ---------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Year ended December 31, 1997
Property/Casualty
entities................... $ 579 $ 36,276 $ -- $ 19,187 $ 11,790 $ 2,213 $ 10,174 $ 777 $ 1,344
Year ended December 31, 1998
Property/Casualty
entities................... $ 2,286 $ 66,117 $ -- $ 25,037 $ 17,774 $ 2,108 $ 12,578 $ 4,693 $ 3,618
Year ended December 31, 1999
Property/Casualty
entities................... $ 1,745 $ 93,135 $ -- $ 20,959 $ 11,850 $ 1,297 $ 7,721 $ 4,649 $ 3,860
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
STIRLING COOKE BROWN HOLDINGS LIMITED
SUPPLEMENTARY INSURANCE INFORMATION
CONCERNING PROPERTY/CASUALTY INSURANCE OPERATIONS--SCHEDULE VI
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
(Expressed in thousands of United States
Dollars, except share and per share data)
LOSSES AND LOSS
ADJUSTMENT EXPENSES
INCURRED RELATED TO
PAID LOSSES
AND LOSS
ADJUSTMENT PREMIUMS
EXPENSES WRITTEN
-------- --------
<S> <C> <C>
Year ended December 31, 1997
Property/Casualty
entities................... $ 5,460 $ 13,181
Year ended December 31, 1998
Property/Casualty
entities................... $ 12,504 $ 17,416
Year ended December 31, 1999
Property/Casualty
entities................... $ 10,473 $ 10,028
</TABLE>
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE
SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED IN
HAMILTON, BERMUDA, ON THE 30TH DAY OF MARCH, 2000.
STIRLING COOKE BROWN HOLDINGS LIMITED
/S/ GEORGE W. JONES
By
George W. Jones
Chief Financial Officer and Director
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934,
THIS REPORT HAS BEEN SIGNED BELOW AS OF THIS 30TH DAY OF MARCH, 2000, BY
THE FOLLOWING PERSONS IN THE CAPACITIES INDICATED:
SIGNATURE TITLE
------------------------- -----------------------------------
/S/ STEPHEN A. CRANE President, Chief Executive Officer and
Director (Principal Executive Officer)
Stephen A. Crane
/S/ GEORGE W. JONES Chief Financial Officer and Director (Principal
Financial and Accounting Officer)
George W. Jones
/S/ LEN QUICK Chief Operating Officer and Director
Len Quick
/S/ REUBEN JEFFERY III Director
Reuben Jeffery III
/S/ NICHOLAS MARK COOKE Director
Nicholas Mark Cooke
/S/ JEAN DE POURTALES Director
Jean de Pourtales
/S/ PATRICK J. MCDONOUGH Director
Patrick J. McDonough
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 share and per share data)
1997 1998 1999
------------- ---------- ---------
<S> <C> <C> <C>
Net Income (Loss)...................................... $ 12,993 $ 16,018 ($ 6,717)
============= ========== =========
BASIC
Number of Shares:
Weighted average number of ordinary shares
outstanding.......................................... 8,382,434 9,863,372 9,863,372
Weighted average treasury shares held.................. (143,396) (49,271) (383,016)
Shares issued in June 1997............................. 144,444 -- --
------------- ---------- ---------
8,383,482 9,814,101 9,480,356
============= ========== =========
Net income (loss) per share............................ $ 1.55 $ 1.63 ($ 0.71)
============= ========== =========
DILUTED
Number of shares:
Weighted average number of ordinary shares
outstanding.......................................... 8,237,990 9,863,372 9,863,372
Weighted average treasury shares held.................. (143,396) (49,271) (383,016)
Shares issued in June 1997............................. 288,888 -- --
Incremental shares from assumed exercise of options.... 131,991 26,058 --
------------- ---------- ---------
8,515,473 9,840,159 9,480,356
============= ========== =========
Net income (loss) per share assuming dilution.......... $ 1.53 $ 1.63 ($ 0.71)
============= ========== =========
</TABLE>
EXHIBIT 21
STIRLING COOKE BROWN HOLDINGS LIMITED
SUBSIDIARIES
The following subsidiaries are incorporated in Bermuda.
Realm Investments Ltd.
Raydon Underwriting Management Company Limited
Realm Captive Management Company Limited
Realm Underwriting Management Ltd
Stirling Cooke Brown Insurance Brokers (Bermuda) Limited
Comp Indemnity Reinsurance Company Limited
Realm Insurance Services Limited
The following subsidiaries are incorporated in the United Kingdom:
Stirling Cooke Brown Holdings (UK) Limited
Stirling Cooke Brown Insurance Brokers Limited
Stirling Cooke Brown Reinsurance Brokers Limited
The following subsidiaries are incorporated in the United States:
Stirling Cooke North American Holdings Ltd., a Delaware corporation
Stirling Cooke Insurance Services Inc., a Florida corporation
Stirling Cooke (Texas) Inc., a Texas corporation
Stirling Cooke Risk Management Services, Inc., a Florida corporation
Stirling Cooke Brown North American Reinsurance Intermediaries, Inc.,
a New York corporation
Employers and Providers Resource Group Inc., a Delaware corporation
North American Risk Inc., a Texas corporation
Realm National Insurance Company, a New York Insurance corporation
Stirling Cooke Southeast, Inc., an Alabama corporation
World Trade Services Inc., a New York corporation
Stirling Cooke New York Insurance Services Agency Inc., a New York corporation
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, 1999, the Company's 1999 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, including developments in e-commerce,
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 Company
and 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) the outcome of legal proceedings, 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 CARRIER
The Company's Managing General Agencies market insurance products and
programs developed by the Company on behalf of insurers. The primary
insurer is Clarendon National Insurance Company and its affiliates
("Clarendon"). 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 in respect of these products and other insurance and
reinsurance policies. In 1999, fees received from Clarendon accounted for
approximately 39% (1998 -43%) of the Company's total revenues.
Historically, the Company has had a good relationship with Clarendon. There
can be no assurance, however, that Clarendon will not institute changes
which affect their relationships with the Company. Any adverse change or
disruption of Clarendon'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. In particular during 1999, the insurance marketplace in which
the Company primarily operates was subject to considerable disruption which
led to a number of reinsurers leaving the market. The full effect of this
change in the marketplace for the current and future years is still to be
determined. 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. This issue has become
increasingly significant during recent years as a result of the increase in
the number of reinsurers who are unwilling to meet their contractual
obligations due to unfavorable results. No assurance can be given regarding
the future ability or willingness of the Company's reinsurers to meet their
obligations. Further, 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, the Company may
need to revise the provision significantly depending on future information
or events. 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 and middle management personnel. 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 depending on future information or
events. 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 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.
In addition, the United States Congress enacted new legislation during 1999
that now allows banks and insurance companies to affiliate with one
another. This legislation, the "Financial Services Modernization Act of
1999" (also known as the "Gramm-Leach-Bliley Act") allows mergers of banks
and insurers that previously had been prohibited by U.S. federal law. The
new legislation is expected to facilitate mergers between banks and
insurers, thereby contributing to consolidation of the insurance industry
and increased competition in the broader financial services industry. There
can be no assurance that such competition will not have an adverse effect
on the operation of the Company's business over time.
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")
licenses in substantially all of the remaining 50 states and the District
of Columbia in which it is not currently licensed. 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 could become an increasingly more important component of the
Company's future earnings growth. However, no assurance can be given that
Realm National will receive such approvals and licenses, when such
approvals and licenses will be granted, or the extent to which Realm
National will generate revenues and earnings. 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.
