UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the period ended June 30, 2000
OR
| |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Transition period from _______________ to _______________
COMMISSION FILE NUMBER 000-23427
STIRLING COOKE BROWN HOLDINGS LIMITED
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
BERMUDA NOT APPLICABLE
(STATE OF OTHER JURISDICTION OF (IRS EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
VICTORIA HALL, 3RD FLOOR, 11 VICTORIA STREET, HAMILTON HM 11, BERMUDA
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
TELEPHONE NUMBER: (441) 295-7556
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
YES |X| NO |_|
The number of outstanding shares of the registrant's Ordinary Stock, $0.25
par value, as of June 30, 2000 was 9,419,972.
<PAGE>
INDEX
PART I - FINANCIAL INFORMATION
PAGE
----
ITEM 1 UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Unaudited Consolidated Balance Sheets at December 31, 1999
and June 30, 2000............................................ 1
Unaudited Consolidated Statements of Income (Loss) and
Comprehensive Income (Loss) for the three-month and
six-month periods ended June 30, 1999 and 2000............... 2
Unaudited Consolidated Statements of Changes in Shareholders'
Equity for the Three-month and six-month periods ended
June 30, 1999 and 2000....................................... 3
Unaudited Consolidated Statements of Cash Flows for the
Six-month periods ended June 30, 1999 and 2000............... 4
Notes to Unaudited Consolidated Financial Statements at
June 30, 1999 and 2000....................................... 5
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.......................... 7
PART II - OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS........................................ 13
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...... 15
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K............................ 16
SIGNATURES.................................................. 17
EXHIBITS
Exhibit 11 - Statement of Computation of Net Income Per Ordinary Share
Exhibit 99 - Forward Looking Information
<PAGE>
<TABLE>
<CAPTION>
STIRLING COOKE BROWN HOLDINGS LIMITED
UNAUDITED CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND JUNE 30, 2000
(EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS,
EXCEPT PER-SHARE DATA)
1999 2000
----------- -----------
ASSETS
------
<S> <C> <C>
Marketable securities, at fair value
Debt securities (amortized cost, 1999 - $29,555, 2000 - $27,276)............ $ 28,802 $ 26,520
Equity securities (cost, 1999 - $3,340, 2000 - $5,109)....................... 4,051 6,167
Short-term investments (amortized cost, 1999 - $1,256, 2000 - $1,496)........ 1,256 1,496
------------ ------------
Total marketable securities........................................................... 34,109 34,183
Cash and cash equivalents............................................................. 50,706 48,503
Fiduciary funds-restricted............................................................ 56,829 48,423
Insurance and reinsurance balances receivable......................................... 734,868 820,697
Paid losses recoverable from reinsurers............................................... 13,293 17,483
Outstanding losses recoverable from reinsurers........................................ 73,267 81,442
Deferred acquisition costs............................................................ 1,745 3,160
Deferred reinsurance premiums ceded................................................... 16,144 16,735
Deferred tax asset.................................................................... 3,315 2,906
Goodwill.............................................................................. 8,664 8,234
Other assets.......................................................................... 12,352 12,238
Income taxes receivable............................................................... 2,600 3,264
Assets related to deposit liabilities................................................. 3,517 3,730
------------ ------------
Total assets................................................................. $ 1,011,409 $ 1,100,998
============ ============
LIABILITIES
-----------
Outstanding losses and loss expenses.................................................. $ 93,135 $ 105,232
Unearned premiums..................................................................... 20,959 26,770
Deferred income....................................................................... 4,695 3,571
Insurance and reinsurance balances payable............................................ 774,888 853,221
Funds withheld........................................................................ 9,580 6,679
Accounts payable and accrued liabilities.............................................. 19,803 20,531
Deposit liabilities................................................................... 3,517 3,730
------------ ------------
Total liabilities............................................................ $ 926,577 $ 1,019,734
------------ ------------
Contingencies (Part II - Item 1 - Legal Proceedings)
<PAGE>
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)......................................... (211) 14
Retained earnings..................................................................... 34,067 30,274
------------ ------------
90,502 86,921
Less: Ordinary shares in treasury (1999 - 443,400, 2000 - 443,400) at cost............ (5,657) (5,657)
------------ ------------
Total shareholders' equity................................................... 84,832 81,264
------------ ------------
Total liabilities and shareholders' equity................................... $ 1,011,409 $ 1,100,998
===========- ============
See accompanying notes to unaudited consolidated financial statements
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
STIRLING COOKE BROWN HOLDINGS LIMITED
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME (LOSS)
AND COMPREHENSIVE INCOME (LOSS)
THREE MONTHS AND SIX MONTHS ENDED JUNE 30,
1999 AND 2000 (EXPRESSED IN THOUSANDS OF UNITED STATES
DOLLARS, EXCEPT PER SHARE DATA)
Three Months Six Months
ended June 30 ended June 30
1999 2000 1999 2000
------ ------ ------ ------
Revenues
<S> <C> <C> <C> <C>
Risk management fees........................... $ 16,377 $ 7,151 $ 32,541 $ 16,558
Net premiums earned............................ 2,455 1,618 7,779 7,195
Net investment income.......................... 1,976 1,714 3,939 3,132
Other losses................................... (188) (18) (88) (17)
---------- ---------- ---------- ----------
Total revenues............................. 20,620 10,465 44,171 26,868
---------- ---------- ---------- ----------
Expenses
Net losses and loss expenses incurred.......... 1,792 2,164 6,029 7,028
Acquisition costs.............................. 768 713 2,058 1,987
Depreciation and amortization of capital assets 426 407 851 812
Amortization of goodwill....................... 214 215 417 430
Salaries and benefits.......................... 6,546 5,198 12,681 10,925
Other operating expenses....................... 9,520 5,097 16,066 9,981
---------- ---------- ---------- ----------
Total expenses............................. 19,266 13,794 38,102 31,163
---------- ---------- ---------- ----------
Income (loss) before taxation....................... 1,354 (3,329) 6,069 (4,295)
Taxation............................................ 376 (1,123) 1,153 (1,067)
---------- ---------- ---------- ----------
Net income (loss) before cumulative effect of
a change in accounting principle............... 978 (2,206) 4,916 (3,228)
Cumulative effect of a change in accounting
principle, net of tax (note 2) ................ - - (307) -
---------- --------- --------- ---------
Net income (loss)................................... $ 978 $ (2,206) $ 4,609 $ (3,228)
---------- --------- --------- ---------
Other comprehensive income (loss), net of tax:
Unrealized holding gains (losses) arising
during the period.............................. (451) 82 (398) 175
Less: reclassification adjustments for realized
(gains) losses included in net income.......... 102 - (88) 50
---------- --------- --------- ---------
Other comprehensive income (loss).............. (349) 82 (486) 225
---------- --------- --------- ---------
Comprehensive income (loss).................... $ 629 $ (2,124) $ 4,123 $ (3,003)
========== ========= ========= =========
Net income (loss) per share......................... $ 0.10 $ (0.23) $ 0.48 $ (0.34)
========== ========= ========= =========
Net income (loss) per share assuming dilution....... $ 0.10 $ (0.23) $ 0.48 $ (0.34)
========== ========= ========= =========
Dividends per share................................. $ 0.03 $ 0.03 $ 0.06 $ 0.06
========== ========= ========= =========
</TABLE>
See accompanying notes to unaudited consolidated financial statements
<PAGE>
<TABLE>
<CAPTION>
STIRLING COOKE BROWN HOLDINGS LIMITED
UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
THREE MONTHS AND SIX MONTHS ENDED JUNE 30,
1999 AND 2000 (EXPRESSED IN THOUSANDS OF UNITED STATES
DOLLARS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
1999 2000 1999 2000
------ ------ ------ ------
ORDINARY SHARES OF PAR VALUE $0.25 EACH
<S> <C> <C> <C> <C>
Balance at beginning of period.................... $ 2,466 $ 2,466 $ 2,466 $ 2,466
----------- ----------- ----------- -----------
Balance at end of period.......................... $ 2,466 $ 2,466 $ 2,466 $ 2,466
----------- ----------- ----------- -----------
ADDITIONAL PAID IN CAPITAL
Balance at beginning of period.................... $ 54,167 $ 54,167 $ 54,167 $ 54,167
----------- ----------- ----------- -----------
Balance at end of period.......................... $ 54,167 $ 54,167 $ 54,167 $ 54,167
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Balance at beginning of period.................... $ 182 $ (68) $ 319 $ (211)
Change in unrealized gain (loss) on marketable
securities...................................... (349) 82 (486) 225
----------- ----------- ----------- -----------
Balance at end of period.......................... $ (167) $ 14 $ (167) $ 14
----------- ----------- ----------- -----------
RETAINED EARNINGS
Balance at beginning of period.................... $ 45,262 $ 32,762 $ 41,914 $ 34,067
Net income (loss)................................. 978 (2,206) 4,609 (3,228)
Dividends......................................... (283) (282) (566) (565)
----------- ----------- ----------- -----------
Balance at end of period.......................... $ 45,957 $ 30,274 $ 45,957 $ 30,274
----------- ----------- ----------- -----------
TREASURY STOCK
Balance at beginning of period.................... $ (5,657) $ (5,657) $ (1,234) $ (5,657)
Purchase of ordinary shares in treasury........... -- -- (4,423) --
----------- ----------- ----------- -----------
Balance at end of period.......................... $ (5,657) $ (5,657) $ (5,657) $ (5,657)
----------- ----------- ----------- -----------
Total shareholders' equity........................ $ 96,766 $ 81,264 $ 96,766 $ 81,264
=========== =========== =========== ===========
Dividends per share were $0.03 and $0.03 for the three months ended June
30, 1999 and 2000, respectively, and $0.06 and $0.06 for the six months
ended June 30, 1999 and 2000 respectively.
See accompanying notes to unaudited consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
STIRLING COOKE BROWN HOLDINGS LIMITED
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1999 AND 2000
(EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS)
1999 2000
--------------- ---------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ 4,609 $ (3,228)
Adjustments to reconcile net income to net cash provided (used)
by operating activities:
Depreciation and amortization of capital assets........................... 851 812
Amortization of goodwill.................................................. 417 430
Amortization of marketable securities..................................... 57 37
Net realized (gains) losses on sale of marketable securities.............. (54) 81
Net gains on sale of capital assets....................................... (35) (103)
Writedown of affiliates................................................... 240 -
Changes in non cash operating assets and liabilities:
Fiduciary funds........................................................... 170 8,406
Insurance and reinsurance balances receivable............................. (146,859) (85,829)
Paid losses recoverable from reinsurers................................... (7,340) (4,190)
Outstanding losses recoverable from reinsurers............................ (14,553) (8,175)
Deferred acquisition costs................................................ 504 (1,415)
Deferred reinsurance premiums ceded....................................... 120 (591)
Other assets.............................................................. (479) (212)
Income taxes receivable................................................... - (664)
Deferred tax asset........................................................ (1,781) 293
Assets related to deposit liabilities..................................... (57) (213)
Outstanding losses and loss expenses...................................... 17,571 12,097
Unearned premiums......................................................... (770) 5,810
Insurance and reinsurance balances payable................................ 134,386 78,333
Funds withheld............................................................ 3,285 (2,901)
Accounts payable and accrued liabilities.................................. 3,598 729
Income taxes payable...................................................... 1,731 -
Deferred income........................................................... (1,015) (1,125)
Deposit liabilities....................................................... 57 213
--------------- ---------------
Net cash used by operating activities................................. (5,347) (1,405)
--------------- ---------------
INVESTING ACTIVITIES
Purchase of capital assets................................................ (674) (668)
Sale of capital assets.................................................... 89 285
Purchase of debt securities............................................... (19,581) (25)
Purchase of equity securities............................................. (2,701) (2,088)
Purchase of short-term investments, net................................... 8,537 (240)
Proceeds on sale of debt securities....................................... 2,737 2,244
Proceeds on sale of equity securities..................................... 1,575 259
Purchase of subsidiaries, net of cash acquired............................ (735) -
--------------- ---------------
Cash used by investing activities..................................... (10,753) (233)
--------------- ---------------
FINANCING ACTIVITIES
Dividends................................................................. (566) (565)
Purchase of ordinary shares in treasury................................... (4,423) -
--------------- ---------------
Cash used by investing activities..................................... (4,989) (565)
--------------- ---------------
Decrease in cash and cash equivalents........................................... (21,089) (2,203)
Cash and cash equivalents at beginning of period................................ 68,165 50,706
--------------- --------------
Cash and cash equivalents at end of period...................................... $ 47,076 $ 48,503
=============== ===============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid (received) during the period for income taxes................... $ 820 $ (398)
=============== ===============
See accompanying notes to unaudited consolidated financial statements
</TABLE>
<PAGE>
STIRLING COOKE BROWN HOLDINGS LIMITED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999 AND 2000
(EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS, EXCEPT SHARE DATA)
1. INTERIM ACCOUNTING POLICY
In the opinion of management of Stirling Cooke Brown Holdings ("the
Company"), the accompanying unaudited consolidated financial statements
include all adjustments, consisting only of normal recurring adjustments
and one non-recurring adjustment (see note 2), necessary to present fairly
the financial position of the Company at December 31, 1999 and June 30,
2000, the results of operations for the three months and six months ended
June 30, 1999 and 2000 and the cash flows for the six months ended June 30,
1999 and 2000. Although the Company believes that the disclosure in these
financial statements is adequate to make the information presented not
misleading, certain information and footnote information normally included
in financial statements prepared in accordance with accounting principles
generally accepted in the United States has been condensed or omitted
pursuant to the rules and regulations of the Securities and Exchange
Commission. The interim financial statements should be read in conjunction
with the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1999. Results of operations for the three months and six
months ended June 30, 2000 are not necessarily indicative of what operating
results may be for the full year.
2. REPORTING ON THE COSTS OF STARTUP ACTIVITIES
During 1998, the AICPA Accounting Standards Executive Committee issued
Statement of Position (SOP) 98-5, Reporting on the costs of start-up
activities. The accounting guidance of this SOP requires that the costs of
start-up activities be expensed as incurred and any costs that are carried
as an asset prior to adoption of SOP 98-5 would be written off by reporting
a cumulative effect of a change in accounting principle in the statement of
income as of January 1, 1999. The cumulative effect of a change in
accounting principle that was recorded in the statement of income for the
three months and six months ended June 30, 1999 is approximately $Nil and
$307 (net of tax of $188) respectively.
<PAGE>
<TABLE>
<CAPTION>
3. REVENUES AND NET INCOME (LOSS) BY SEGMENT
SEGMENT REVENUES FOR THE THREE MONTHS FOR THE SIX MONTHS
---------------- ENDED JUNE 30 ENDED JUNE 30
1999 2000 1999 2000
---- ---- ---- ----
(dollars in thousands) (dollars in thousands)
<S> <C> <C> <C> <C>
Brokerage $9,991 $3,052 $18,547 $6,539
Program business 5,733 3,983 11,759 8,753
Underwriting management 633 273 2,332 1,112
Insurance 2,196 2,468 6,957 9,141
Reinsurance 1,153 192 3,076 471
Other 914 497 1,500 852
--------- -------- ------- -------
Total $20,620 $10,465 $44,171 $26,868
--------- -------- ------- -------
SEGMENT PRETAX INCOME FOR THE THREE MONTHS FOR THE SIX MONTHS
---------------------------- ENDED JUNE 30 ENDED JUNE 30
(LOSS)
------ 1999 2000 1999 2000
---- ---- ---- ----
(dollars in thousands) (dollars in thousands)
Brokerage $2,742 $497 $6,549 $1,180
Program business (490) (1,198) (741) (1,282)
Underwriting management 58 (368) 1,252 (7)
Insurance 18 (1,262) 423 (1,688)
Reinsurance (82) (49) (474) (662)
Other (892) (949) (940) (1,836)
--------- --------- --------- ------------
Total $1,354 ($3,329) $6,069 ($4,295)
--------- --------- --------- ------------
</TABLE>
<PAGE>
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following is Management's discussion and analysis of the results of
operations of Stirling Cooke Brown Holdings Limited ("the Company") for the
three months and six months ended June 30, 1999 and 2000 and financial
condition as of June 30, 2000. This discussion and analysis should be read
in conjunction with the attached unaudited consolidated financial
statements and notes thereto of the Company and the audited consolidated
financial statements and notes thereto of the Company contained in the
Company's Annual Report on Form 10-K for the fiscal year ended December 31,
1999.
GENERAL
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.
RESULTS OF OPERATIONS FOR THE THREE MONTHS AND SIX MONTHS ENDED JUNE 30,
1999 AND 2000.
REVENUES AND NET INCOME (LOSS)
------------------------------
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30 ENDED JUNE 30
1999 2000 1999 2000
---- ---- ---- ----
(dollars in thousands) (dollars in thousands)
<S> <C> <C> <C> <C>
Revenues $20,620 $10,465 $44,171 $26,868
Expenses 19,266 13,794 38,102 31,163
------ ------ ------ ------
Income (loss) before taxation 1,354 (3,329) 6,069 (4,295)
Taxation 376 (1,123) 1,153 (1,067)
------ ------ ----- -------
Net income (loss) before cumulative
effect of a change in accounting
principle 978 (2,206) 4,916 (3,228)
Cumulative effect of a change in
accounting principle, net of tax - - (307) -
------ ------ ------ ------
Net income (loss) $ 978 $ (2,206) $ 4,609 $ (3,228)
===== ========= ======= =========
BASIC EPS
Net income (loss) per Share $ 0.10 $ (0.23) $ 0.48 $ (0.34)
Avg. no. of ordinary shares
outstanding (000's) 9,420 9,420 9,542 9,420
DILUTED EPS
Net income (loss) per Share $ 0.10 $ (0.23) $ 0.48 $ (0.34)
Avg. no. of ordinary shares
outstanding (000's) 9,420 9,420 9,542 9,420
</TABLE>
Basic and diluted net loss per share was $0.23 in the second quarter and
$0.34 in the first six months of 2000 compared to basic and diluted net
income per share of $0.10 in the second quarter and $0.48 in the first six
months of 2000.
Net loss was $2,206 for the second quarter and $3,228 for the first six
months of 2000 compared to net income of $978 for the second quarter and
$4,609 for the first six months of 1999. The U.S. workers' compensation
insurance market, in which the Company conducts most of its business,
continued to be extremely competitive throughout the quarter, and the
Company continued to experience significant pricing pressures in the market
segments in which it operates. These difficult conditions resulted in
reduced revenue and a shrinkage in operating margins. The losses for the
second quarter and first six months of 2000 also reflect continued costs
incurred pertaining to reinsurance-related disputes in which the Company is
involved, including certain litigation, and additional costs relating to
the restructuring and consolidation of the Company's operations. The
results for the second quarter and first six months of 2000 were also
adversely affected by underwriting losses incurred by the Company's
U.S.-based insurance carrier.
Revenues were $10.5 million in the second quarter and $26.9 million in the
first six months of 2000 as compared to revenues of $20.6 million in the
second quarter and $44.2 million in the first six months of 1999. The
decline in revenues reflected the continuing 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. These
continuing soft market conditions led to a reduction in premium volume
being written as the Company sought to protect the underwriting performance
of its programs. Brokerage revenues decreased substantially reflecting
significant changes in the market environment in which this segment
operates. The decline in revenue was also the result of the decision taken
in 1999 by the Company to cease underwriting new business in its
Bermuda-based reinsurance subsidiary.
<TABLE>
<CAPTION>
REVENUES AND NET INCOME (LOSS) BY SEGMENT
SEGMENT REVENUES FOR THE THREE MONTHS FOR THE SIX MONTHS
---------------- ENDED JUNE 30 ENDED JUNE 30
1999 2000 1999 2000
---- ---- ---- ----
(dollars in thousands) (dollars in thousands)
<S> <C> <C> <C> <C>
Brokerage $9,991 $3,052 $18,547 $6,539
Program business 5,733 3,983 11,759 8,753
Underwriting management 633 273 2,332 1,112
Insurance 2,196 2,468 6,957 9,141
Reinsurance 1,153 192 3,076 471
Other 914 497 1,500 852
---------- -------- --------- -------
Total $20,620 $10,465 $44,171 $26,868
---------- ---------- ---------- -------------
SEGMENT PRETAX INCOME (LOSS) FOR THE THREE MONTHS FOR THE SIX MONTHS
---------------------------- ENDED JUNE 30 ENDED JUNE 30
1999 2000 1999 2000
---- ---- ---- ----
(dollars in thousands) (dollars in thousands)
Brokerage $2,742 $497 $6,549 $1,180
Program business (490) (1,198) (741) (1,282)
Underwriting management 58 (368) 1,252 (7)
Insurance 18 (1,262) 423 (1,688)
Reinsurance (82) (49) (474) (662)
Other (892) (949) (940) (1,836)
--------- --------- --------- ------------
Total $1,354 ($3,329) $6,069 ($4,295)
--------- --------- --------- ------------
</TABLE>
Brokerage
---------
The Company's brokerage segment consists of subsidiaries that receive a fee
or commission for brokering insurance and reinsurance contracts. Revenues
of $3.1 million in the second quarter of 2000 represented a decrease of
$6.9 million from revenues of $10.0 million in the second quarter of 1999.
Revenues of $6.5 million in the first six months of 2000 represented a
decrease of $12.0 million from revenues of $18.5 million in the first six
months of 1999. Continued competitive conditions in the marketplace and
significant changes in the overall market environment over the past year
has led to this reduction in revenues for the brokerage operations.
The brokerage segment's profit of $0.5 million in the second quarter of
2000 represented a decrease of $2.2 million from segment profit of $2.7
million in the second quarter of 1999. The brokerage segment's profit of
$1.2 million in the first six months of 2000 represented a decrease of $5.3
million from segment profit of $6.5 million in the first six months of
1999. The decrease in segment profits reflects the decrease in revenue
which led to a significant reduction in operating margins.
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 $4.0 million in the second quarter of 2000
represented a decrease of $1.7 million from revenues of $5.7 million in the
second quarter of 1999. Revenues of $8.8 million in the first six months of
2000 represented a decrease of $3.0 million from revenues of $11.8 million
in the first six months of 1999. The decrease in revenues during 2000 as
compared to 1999 was due to a reduction in program business volume together
with a reduction in fee margins due to the continued competitive
environment in the U.S. workers' compensation insurance market. In
addition, during 1999 and the first six months of 2000 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.
The program business segment's loss of $1.2 million in the second quarter
of 2000 represented a $0.7 million increased loss from the $0.5 million
loss in the second quarter of 1999. The segment experienced a loss of $1.3
million in the first six months of 2000 compared to a loss of $0.7 million
in the first six months of 1999. The increased loss is due to the reduction
in program business volume and reduced fee margins.
Underwriting Management
-----------------------
The Company's underwriting management segment comprises companies that
primarily underwrite and administer reinsurance business on behalf of
independent reinsurance companies. Revenues of $0.3 million in the second
quarter of 2000 represented a decrease of $0.3 million from revenues of
$0.6 million in the second quarter of 1999. Revenues of $1.1 million in the
first six months of 2000 represented a decrease of $1.2 million from
revenues of $2.3 million in the first six months of 1999.
Segment loss of $0.4 million in the second quarter of 2000 represented a
decline of $0.5 million from segment profit of $0.1 million in the second
quarter of 1999. The Underwriting Management segment broke even for the
first six months of 2000 compared to segment profit of $1.3 million in the
first six months of 1999.
Insurance
---------
The Company's insurance segment consists of its wholly owned U.S.-based
insurance company, Realm National Insurance Company. Revenues of $2.5
million in the second quarter of 2000 represented an increase of $0.3
million from revenues of $2.2 million in the second quarter of 1999.
Revenues of $9.1 million in the first six months of 2000 represent an
increase of $2.1 million from revenues of $7.0 million in the first six
months of 1999. Net premiums earned increased $0.1 million to $1.6 million
in the second quarter of 2000 from $1.5 million in the second quarter of
1999. Net premiums earned increased to $7.1 million in the first six months
of 2000, which represented a $2.0 million increase from $5.1 million in the
first six months of 1999. Policy issuance fees were $0.6 million in the
second quarter of 2000, representing a $0.1 million increase from $0.5
million in the second quarter of 1999. Policy issuance fees were $1.6
million in the first six months of 2000, which represented a $0.2 million
increase from $1.4 million in first six months of 1999.
Market conditions in the workers' compensation insurance market in which
Realm National writes the majority of its business continued to be
extremely competitive during the quarter. In addition, cost-effective
reinsurance capacity significantly diminished throughout 1999 and the first
six months of 2000. This has resulted in Realm National retaining a greater
proportion of its business on some programs and has also led to the
cancellation of certain other programs. This increased risk retention has
resulted in increased volatility in the underwriting performance of the
Company. As long as these competitive insurance and reinsurance market
conditions continue, they are likely to restrict Realm National's ability
to expand its existing book of business.
The insurance segment had losses of $1.3 million in the second quarter of
2000 as compared to breaking even in the second quarter of 1999. For the
first six months of 2000, the segment experienced a $1.7 million loss as
compared to income of $0.4 million in the first six months of 1999. The
loss for the second quarter and the first six months of 2000 primarily
reflects an increase in underwriting losses incurred on the Company's
programs during the period together with an increase in operating expenses
arising from certain restructuring costs incurred during the first quarter.
Reinsurance
-----------
The Company's reinsurance segment consists of its reinsurance subsidiary,
Comp Indemnity Reinsurance Company Limited ("CIRCL"). CIRCL primarily
reinsured workers' compensation, property and general liability risks.
Management determined in early 1999 to cease underwriting new programs in
CIRCL. As a result, revenues for 2000 are substantially less than in 1999.
Revenues of $0.2 million in the second quarter of 2000 represent a decrease
of $1.0 million from revenues of $1.2 million in the second quarter of
1999. Revenues of $0.5 million in the first six months of 2000 represent a
decrease of $2.6 million from revenues of $3.1 million in the first six
months of 1999.
The segment's break-even performance for the second quarter of 2000
represents a $0.1 million improvement on segment loss of $0.1 million in
the second quarter of 1999. The segments loss of $0.7 million for the first
six months of 2000 represents a $0.2 million increased loss from $0.5
million for the first six months of 1999. The primary reason for the losses
was an increase in loss reserves against one particular program and an
increase in provisions for uncollectible premiums booked in the first
quarter of 2000.
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 $0.5 million in the second
quarter of 2000 represented a decrease of $0.4 million from revenues of
$0.9 million in the second quarter of 1999. Revenues of $0.9 million in the
first six months of 2000 represent a decrease of $0.6 million from revenues
of $1.5 million in the first six months of 1999.
Segment loss of $1.0 million in the second quarter of 2000 represented a
$0.1 million increase in loss from segment loss of $0.9 million in the
second quarter of 1999. Segment loss of $1.8 million in the first six
months of 2000 represented a $0.9 million increase in loss from segment
loss of $0.9 million in the first six months of 1999. The increased losses
were primarily a result of increased operating costs incurred by the
segment during the quarter.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2000, the Company held cash and marketable securities of $82.7
million, compared to $84.8 million at December 31, 1999. In addition, the
Company held cash in fiduciary accounts relating to insurance client
premiums amounting to $48.4 million at June 30, 2000, compared to $56.8
million at December 31, 1999. Of the $82.7 million of cash and marketable
securities held by the Company at June 30, 2000 (December 31, 1999 - $84.8
million), $49.1 million (December 31, 1999 - $54.3 million) were held by
subsidiaries whose payment of dividends to the Company was subject to
regulatory restrictions or possible tax liabilities. At June 30, 2000, the
Company's investment portfolio (at fair market value) totaled $34.2
million. The portfolio consisted primarily of U.S. Treasury bonds,
short-term cash, equity securities and A-rated corporate debt securities.
During the six-month period ending June 30, 2000, the Company's operating
activities used $1.4 million of net cash, compared to using $5.3 million of
net cash during the corresponding six months of 1999. The cash used by
operating activities varies according to the timing of collections and
payments of insurance and reinsurance balances.
The increase of $85.8 million in insurance and reinsurance balances
receivable during the first quarter of 2000, and the corresponding increase
of $78.3 million in insurance and reinsurance balances payable, primarily
reflects the growth in client's claims and 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.
On June 1, 2000 the Company paid a first quarter dividend of $0.03 per
share to shareholders of record on May 19, 2000. The actual amount and
timing of any future ordinary share dividends is at the discretion of the
Board of Directors of the Company. The declaration and payment of any
dividends is dependent upon the profits and financial requirements of the
Company and other factors, including certain legal, regulatory and other
restrictions. There can be no assurance that the Company's dividend policy
will not change or that the Company will declare or pay any dividends in
future periods.
The Company used $4.4 million during the six-month period ended June 30,
1999 to repurchase 356,400 of its own shares on the open market.
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.
During 1998, the AICPA Accounting Standards Executive Committee issued SOP
98-5, "Reporting on the costs of start-up activities". The accounting
guidance of this SOP requires that the costs of start-up activities be
expensed as incurred and any costs that are carried as an asset prior to
adoption of SOP 98-5 would be written off by reporting a cumulative effect
of a change in accounting principle in the statement of income as of
January 1, 1999. The cumulative effect of a change in accounting principle
that was recorded in the statement of income for the first quarter of 1999
was 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.
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.
In June 2000, the Financial Accounting Standards Board issued SFAS No. 138,
"Accounting for Certain Derivative Instruments and Certain Hedging
Activities". This statement is an amendment of SFAS No. 133 with respect to
accounting the reporting standards for certain derivative instruments and
certain hedging activities. This statement will become effective
concurrently with SFAS No. 133 and the Company is currently reviewing the
potential impact that this standard may or may not have on its financial
reporting.
YEAR 2000
The Year 2000 issue is the result of computer programs being written using
two digits rather than four digits to define the applicable year. Any of
the Company's programs or non-information systems that have date-sensitive
software may recognize a date using "00" as the year 1900 rather than the
year 2000. This could result in a major system failure or in
miscalculations.
Although there were no problems noted following December 31, 1999, there
can be no assurance that the systems of first 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 first
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.
NOTE ON FORWARD-LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements. This Form 10-Q, 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-Q for a discussion of the factors that may cause actual
results to differ from the results discussed in these forward-looking
statements.
<PAGE>
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
(a) 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 initially filed a notice of appeal of the District Court's
dismissal order as to one of the Company's Bermuda subsidiaries and certain
other parties. The appeal insofar as the Company's subsidiary is concerned
has been withdrawn, and neither the Company nor any of its subsidiaries are
parties to these proceedings any longer.
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 two of 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 alleges, in substance, that each and every contract placed with it
through its underwriting agent by the Company's U.K. broker subsidiary was
commercially unreasonable. Sphere Drake further alleges that this was
obvious to the broker and that, accordingly, the London Commercial Court
should infer a conspiracy between the broker and the underwriting agent to
defraud Sphere Drake, thereby allowing it to treat as void from the outset
all of the inwards reinsurance contracts placed through its underwriting
agent by the Company's broker subsidiary. The Court has scheduled the trial
of the action for October 2001.
It is the opinion of management that the claims described in Sphere Drake's
action are without merit and the case will be defended vigorously.
(b) The Company, together with one of its London subsidiaries and a former
employee of that subsidiary, has been joined by way of an amended complaint
in an existing action in the New York State Supreme Court brought by AXA
Reassurance S.A. ("AXA") seeking to void reinsurance contracts entered into
in connection with certain "reinsurance-backed gap film financing"
arrangements brokered by the Company's London subsidiary.
AXA seeks damages based on alleged fraud and misrepresentation by the
Company, its subsidiary and the former employee, all of which have filed a
motion to dismiss the amended complaint. It is the opinion of management
that the claims described in the action are without merit and the case will
be defended vigorously.
(c) 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, and the Company expects it to be terminated shortly.
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 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 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 fail 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 judicial proceedings against the Company's subsidiaries relating to
these matters have been stayed or held in abeyance pursuant to standstill
agreements or court order, except for one proceeding where the subsidiaries
have been informed that the proceeding will be withdrawn.
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
Company is uncertain as to the status of the investigation or when it will
be completed.
The Company understands that substantial progress has been and continues to
be 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.
(d) 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 indemnification 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.
(e) 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.
<PAGE>
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its Annual Meeting of Stockholders (the "Meeting") on May
25, 2000. A total of 9,863,372 of the Company's Ordinary Shares, with one
vote each, were entitled to vote at the Meeting and holders of 7,672,441
Ordinary Shares voted in person or by proxy, constituting a quorum.
The following directors were elected at the Meeting:
Name of Director Votes For Votes Withheld
---------------- --------- --------------
Mr. Patrick J. McDonough 7,645,442 27,000
Mr. Peter S. Christie 7,646,941 25,500
Mr. Stephen A. Crane 7,646,541 25,900
Mr. Hadley C. Ford 7,646,741 25,700
Mr. Jean de Pourtales 7,644,341 28,100
Mr. Nicholas Mark Cooke 7,623,691 48,750
Mr. Len Quick 7,646,441 26,000
The following additional directors continued to serve after the meeting:
Mr. George W. Jones and Mr. Reuben Jeffery III.
Other matters voted on during the Meeting were as follows:
To appoint Arthur Andersen LLP as auditors of the Company to hold office
until the close of the next Annual General Meeting: 7,658,541 affirmative,
1,400 negative, 12,500 abstained.
To amend the Company's 1997 Equity Incentive Plan to increase the Ordinary
Shares reserved for issuance thereunder by an additional 300,000 Ordinary
Shares of the Company: 7,449,527 affirmative, 192,714 negative, 30,200
abstained.
To create a new 2000 Non-Employee Director Stock Option Plan: 7,461,667
affirmative, 192,074 negative, 18,700 abstained.
<PAGE>
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit No. Description
----------- -----------
11. Statement of Computation of Net Income
Per Ordinary Share
99. Forward Looking Information
(b) Reports on Form 8-K
None.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
Dated: August 11, 2000
STIRLING COOKE BROWN HOLDINGS LIMITED
BY: /s/ George W. Jones
-----------------------------
George W. Jones
CHIEF FINANCIAL OFFICER AND DIRECTOR
