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 March 31, 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 March 31, 2000 was 9,419,972.
<PAGE>
INDEX
PART I - FINANCIAL INFORMATION
PAGE
----
ITEM 1 UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets at December 31, 1999 and
March 31, 2000 (Unaudited) ................................. 1
Unaudited Consolidated Statements of Income and
Comprehensive Income for the three-month period ended
March 31, 1999 and 2000..................................... 2
Unaudited Consolidated Statements of Changes in
Shareholders' Equity for the three-month period ended
March 31, 1999 and 2000..................................... 3
Unaudited Consolidated Statements of Cash Flows for the
three-month period ended March 31, 1999 and 2000............ 4
Notes to Unaudited Consolidated Financial Statements at
March 31, 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........................................... 12
ITEM 5 OTHER INFORMATION........................................... 14
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K............................ 14
SIGNATURES.................................................. 15
EXHIBITS
Exhibit 11 - Statement of Computation of Net Income Per Ordinary Share
Exhibit 99 - Forward Looking Information
<PAGE>
<TABLE>
<CAPTION>
STIRLING COOKE BROWN HOLDINGS LIMITED
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND MARCH 31, 2000 (UNAUDITED)
(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 - $28,291)............. $ 28,802 $ 27,453
Equity securities (cost, 1999 - $3,340, 2000 - $3,107)....................... 4,051 4,135
Short-term investments (amortized cost, 1999 - $1,256, 2000 - $1,287)........ 1,256 1,287
---------- ----------
Total marketable securities....................................................... 34,109 32,875
Cash and cash equivalents......................................................... 50,706 44,145
Fiduciary funds-restricted........................................................ 56,829 66,769
Insurance and reinsurance balances receivable..................................... 734,868 762,370
Paid losses recoverable from reinsurers........................................... 13,293 12,438
Outstanding losses recoverable from reinsurers.................................... 73,267 78,792
Deferred acquisition costs........................................................ 1,745 3,227
Deferred reinsurance premiums ceded............................................... 16,144 13,737
Deferred tax asset................................................................ 3,315 3,106
Goodwill.......................................................................... 8,664 8,449
Other assets...................................................................... 12,352 17,688
Income taxes receivable........................................................... 2,600 2,769
Assets related to deposit liabilities............................................. 3,517 3,873
---------- ----------
Total assets................................................................. $1,011,409 $1,050,238
========== ==========
<CAPTION>
LIABILITIES
-----------
<S> <C> <C>
Outstanding losses and loss expenses.............................................. $ 93,135 $ 101,175
Unearned premiums................................................................. 20,959 25,760
Deferred income................................................................... 4,695 3,585
Insurance and reinsurance balances payable........................................ 774,888 801,791
Funds withheld.................................................................... 9,580 9,996
Accounts payable and accrued liabilities.......................................... 19,803 20,388
Deposit liabilities............................................................... 3,517 3,873
---------- ----------
Total liabilities............................................................ $ 926,577 $ 966,568
---------- ----------
Contingencies (Part II - Item 1 - Legal Proceedings)
<CAPTION>
SHAREHOLDERS' EQUITY
--------------------
<S> <C> <C>
Share Capital
Authorized 20,000,000 ordinary shares of par value $0.25 each
Issued and fully paid 9,863,372 ordinary shares.............................. 2,466 2,466
Additional paid in capital........................................................ 54,167 54,167
Accumulated other comprehensive loss.............................................. (211) (68)
Retained earnings................................................................. 34,067 32,762
---------- ----------
90,502 89,327
Less: Ordinary shares in treasury (1999 - 443,400, 2000 - 443,400) at cost........ (5,657) (5,657)
---------- ----------
Total shareholders' equity............................................... 84,832 83,670
---------- ----------
Total liabilities and shareholders' equity............................... $1,011,409 $1,050,238
========== ==========
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 ENDED MARCH 31, 1999 AND
2000 (EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS, EXCEPT PER SHARE DATA)
Three Months
ended March 31,
1999 2000
----------- -----------
<S> <C> <C>
Revenues
Risk management fees................................... $ 16,164 $ 9,407
Net premiums earned.................................... 5,324 5,577
Net investment income.................................. 1,963 1,418
Other income........................................... 100 1
-------- -------
Total revenues..................................... 23,551 16,403
Expenses
Net losses and loss expenses incurred.................. 4,237 4,864
Acquisition costs...................................... 1,290 1,274
Depreciation and amortization of capital assets........ 425 405
Amortization of goodwill............................... 203 215
Salaries and benefits.................................. 6,135 5,727
Other operating expenses............................... 6,546 4,884
Total expenses..................................... 18,836 17,369
Income (loss) before taxation............................... 4,715 (966)
Taxation.................................................... 777 56
Net income (loss) before cumulative effect of
a change in accounting principle....................... 3,938 (1,022)
Cumulative effect of a change in accounting
principle, net of tax (note 2) ........................ (307) -
-------- -------
Net income (loss)........................................... $3,631 $(1,022)
-------- -------
Other comprehensive income (loss), net of tax:
Unrealized holding gains arising during the period..... 53 93
Less: reclassification adjustments for realized
(gains) losses included in net income.................. (190) 50
-------- -------
Other comprehensive income (loss)...................... (137) 143
Comprehensive income (loss)............................ $3,494 $ (879)
======== ========
Net income (loss) per share................................. $ 0.38 $ (0.11)
======== ========
Net income (loss) per share assuming dilution............... $ 0.38 $ (0.11)
======== ========
Dividends per share......................................... $ 0.03 $ 0.03
======== ========
See accompanying notes to unaudited consolidated financial statements
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
STIRLING COOKE BROWN HOLDINGS LIMITED
UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
THREE MONTHS ENDED MARCH 31, 1999 AND 2000
(EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED MARCH 31,
1999 2000
------------- -------------
ORDINARY SHARES OF PAR VALUE $0.25 EACH
<S> <C> <C>
Balance at beginning of period........................ $ 2,466 $ 2,466
------------- -------------
Balance at end of period.............................. $ 2,466 $ 2,466
------------- -------------
ADDITIONAL PAID IN CAPITAL
Balance at beginning of period........................ $ 54,167 $ 54,167
------------- -------------
Balance at end of period.............................. $ 54,167 $ 54,167
------------- -------------
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Balance at beginning of period........................ $ 319 $ (211)
Change in unrealized gain (loss) on marketable
securities.......................................... (137) 143
------------- -------------
Balance at end of period.............................. $ 182 $ (68)
------------- -------------
RETAINED EARNINGS
Balance at beginning of period........................ $ 41,914 $ 34,067
Net income (loss)..................................... 3,631 (1,022)
Dividends............................................. (283) (283)
------------- -------------
Balance at end of period.............................. $ 45,262 $ 32,762
------------- -------------
TREASURY STOCK
Balance at beginning of period........................ $ (1,234) $ (5,657)
Purchase of ordinary shares in treasury............... (4,423) --
------------- -------------
Balance at end of period.............................. $ (5,651) $ (5,657)
------------- -------------
Total shareholders' equity............................ $ 96,420 $ 83,670
============= =============
Dividends per share were $0.03 and $0.03 for the three months ended
March 31, 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
THREE MONTHS ENDED MARCH 31, 1999 AND 2000
(EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS)
1999 2000
--------------- ---------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ 3,631 $ (1,022)
Adjustments to reconcile net income to net cash used by operating activities:
Depreciation and amortization of capital assets........................... 425 405
Amortization of goodwill.................................................. 203 215
Amortization of marketable securities..................................... 14 19
Net realized (gains) losses on sale of marketable securities.............. (190) 81
Net gains on sale of capital assets....................................... (38) (89)
Changes in non-cash operating assets and liabilities:
Fiduciary funds........................................................... 2,239 (9,940)
Insurance and reinsurance balances receivable............................. (97,569) (27,502)
Paid losses recoverable from reinsurers................................... (4,589) 856
Outstanding losses recoverable from reinsurers............................ (13,002) (5,524)
Deferred acquisition costs................................................ (21) (1,482)
Deferred reinsurance premiums ceded....................................... 163 2,407
Other assets.............................................................. 547 (5,340)
Income taxes receivable................................................... -- (169)
Deferred tax asset........................................................ (1,210) 123
Assets related to deposit liabilities..................................... 108 (357)
Outstanding losses and loss expenses...................................... 16,712 8,040
Unearned premiums......................................................... 165 4,800
Insurance and reinsurance balances payable................................ 87,167 26,902
Funds withheld............................................................ 2,267 416
Accounts payable and accrued liabilities.................................. 1,635 585
Income taxes payable...................................................... 1,323 --
Deferred income...........................................................
(447) (1,110)
Deposit liabilities.......................................................
(108) 357
-------------- ---------------
-------------- ---------------
Net cash used by operating activities................................. (7,329)
(575)
-------------- ---------------
INVESTING ACTIVITIES
Purchase of capital assets................................................ (431) (528)
Sale of capital assets....................................................
77 217
Purchase of debt securities...............................................
(14,511) --
Purchase of equity securities.............................................
(1,000) --
Purchase of short-term investments, net................................... 1,950 (31)
Proceeds on sale of debt securities.......................................
2,212 1,222
Proceeds on sale of equity securities.....................................
-- 171
Purchase of subsidiaries, net of cash acquired............................ --
(735)
-------------- ---------------
Cash (used) provided by investing activities.......................... 1,051
(12,438)
-------------- ---------------
FINANCING ACTIVITIES
Dividends.................................................................
(296) (283)
Purchase of ordinary shares in treasury................................... --
(4,423)
-------------- ---------------
Cash used by investing activities.....................................
(4,706) (283)
-------------- ---------------
Decrease in cash and cash equivalents...........................................
(17,719) (6,561)
Cash and cash equivalents at beginning of period................................
68,165 50,706
-------------- ---------------
Cash and cash equivalents at end of period...................................... $ 50,446 $ 44,145
============== ===============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for income taxes.............................. $ 348 $ --
============== ===============
See accompanying notes to unaudited consolidated financial statements
</TABLE>
<PAGE>
STIRLING COOKE BROWN HOLDINGS LIMITED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 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 March 31,
2000, the results of operations for the three months ended March 31, 1999
and 2000 and the cash flows for the three months ended March 31, 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 ended March 31, 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 ended March 31, 1999 is approximately $307 (net of tax of
$188).
<PAGE>
3. REVENUES AND NET INCOME (LOSS) BY SEGMENT
<TABLE>
<CAPTION>
SEGMENT REVENUES SEGMENT PRETAX INCOME (LOSS)
FOR THE THREE MONTHS FOR THE THREE MONTHS
ENDED MARCH 31, ENDED MARCH 31,
1999 2000 1999 2000
---- ---- ---- ----
(dollars in thousands) (dollars in thousands)
<S> <C> <C> <C> <C>
Brokerage $ 8,556 $ 3,487 $ 3,807 $ 683
Program business 6,026 4,770 (251) (84)
Underwriting management 1,699 839 1,194 361
Insurance 4,761 6,673 405 (426)
Reinsurance 1,923 279 (392) (613)
Other 586 355 (48) (887)
---------- ---------- ------------- -------------
Total $ 23,551 $ 16,403 $ 4,715 $ (966)
---------- ---------- ------------- -------------
</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 ended March 31, 1999 and 2000 and financial condition as of
March 31, 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 ENDED MARCH 31, 1999 AND 2000.
REVENUES AND NET INCOME (LOSS)
- ------------------------------
FOR THE THREE MONTHS
ENDED MARCH 31,
1999 2000
---- ----
(dollars in thousands)
Revenues $23,551 $16,403
Expenses 18,836 17,369
------ ------
Income (loss) before taxation 4,715 (966)
Taxation 777 56
----- -----
Net income (loss) before cumulative
effect of a change in accounting
principle 3,938 (1,022)
Cumulative effect of a change in
accounting principle, net of tax
(307) -
----- --------
Net income (loss) $ 3,631 $(1,022)
======= ========
BASIC EPS
Net income (loss) per Share $ 0.38 $ (0.11)
Avg. no. of ordinary shares
outstanding (000's) 9,665 9,420
DILUTED EPS
Net income (loss) per Share $ 0.38 $ (0.11)
Avg. no. of ordinary shares
outstanding (000's) 9,665 9,420
Basic net loss per share was $0.11 in the first quarter of 2000 compared to
basic income per share of $0.38 in the first quarter of 1999. Diluted net
loss per share was $0.11 in the first quarter compared to diluted income
per share of $0.38 in the first quarter of 1999.
Net loss for the first quarter of 2000 was $1,022 compared to net income
for the first quarter of 1999 of $3,631. The results for the quarter
continued to be affected by adverse factors which impacted the Company's
results last year. 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 experienced significant
pricing pressures in the market segments in which it operates. These
difficult conditions resulted in reduced revenue and shrinkage in operating
margins. The Company continued to incur costs pertaining to
reinsurance-related disputes in which the Company is involved, including
certain litigation. Results for the quarter also reflected additional costs
relating to the restructuring and consolidation of the Company's
operations.
Revenues of $16.4 million in the first quarter of 2000 represented a $7.2
million decrease compared to 1999 first quarter revenues of $23.6 million.
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. The
reduction in brokerage revenues was also caused by significant changes in
the market environment in which the 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. Expenses of $17.4 million in the first quarter of 2000
decreased by $1.4 million from expenses of $18.8 million in the first
quarter of 1999. The reduction of expenses reflects the cost savings that
have resulted from the restructuring and a diminution in administrative
expenses.
<TABLE>
<CAPTION>
REVENUES AND NET INCOME BY SEGMENT
- ----------------------------------
SEGMENT REVENUES SEGMENT PRETAX INCOME (LOSS)
FOR THE THREE MONTHS FOR THE THREE MONTHS
ENDED MARCH 31, ENDED MARCH 31,
1999 2000 1999 2000
---- ---- ---- ----
(dollars in thousands) (dollars in thousands)
<S> <C> <C> <C> <C>
Brokerage $ 8,556 $ 3,487 $ 3,807 $ 683
Program business 6,026 4,770 (251) (84)
Underwriting management 1,699 839 1,194 361
Insurance 4,761 6,673 405 (426)
Reinsurance 1,923 279 (392) (613)
Other 586 355 (48) (887)
---------- ---------- ------------- -------------
Total $ 23,551 $ 16,403 $ 4,715 $ (966)
---------- ---------- ------------- -------------
</TABLE>
Brokerage
- ---------
The Company's brokerage segment consists of subsidiaries that receive a fee
or commission for brokering insurance and reinsurance contracts. Revenues
of $3.5 million in the first quarter of 2000 represented a decrease of $5.1
million from revenues of $8.6 million in the first quarter 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. To meet this changed
market environment, the Company began a program of restructuring of its
brokerage operations during 1999.
The brokerage segment's profit of $0.7 million in the first quarter of 2000
represented a decrease of $3.1 million, or 81.6%, from segment profit of
$3.8 million in the first quarter of 1999. The decrease in segment profits
reflects the decrease in revenue which has been partially offset by a
reduction in the segment's cost base.
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 $4.8 million in the first quarter of 2000
represented a decrease of $1.2 million, or 20.0%, from revenues of $6.0
million in the first quarter 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 on fee margins due to the continued competitive
environment in the U.S. workers' compensation insurance market. In
addition, during 1999 and the first quarter 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. Although
there is some indication of an increase in pricing in some states, the
Company's fee margins continue to be under pressure.
The program business segment's loss of $0.1 million in the first quarter of
2000 represented an improvement of $0.2 million from segment loss of $0.3
million in the first quarter of 1999. The improvement in segment
performance reflects the benefit of the cost savings arising from the
restructuring of the program segment operations which began in 1999.
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 $0.8 million in the first
quarter of 2000 represented a decrease of $0.9 million from revenues of
$1.7 million in the first quarter of 1999. This decrease in revenues during
2000 reflects the continuing competitive market conditions which have
resulted in a significant reduction in business being underwritten.
Segment income of $0.4 million in the first quarter of 2000 represented a
decrease of $0.8 million from segment profit of $1.2 million in the first
quarter of 1999 reflecting the decrease in business being underwritten.
Insurance
- ---------
The Company's insurance segment consists of its wholly owned U.S.-based
insurance company, Realm National Insurance Company. Revenues of $6.7
million in the first quarter of 2000 represented an increase of $1.9
million from revenues of $4.8 million in the first quarter of 1999. Net
premiums earned increased to $5.5 million in 2000, which represented a $1.9
million increase from $3.6 million in 1999. Policy issuance fees increased
to $1.0 million in 2000, which represented a $0.1 million increase from
$0.9 million in 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
quarter of 2000. 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 $0.4 million in the first quarter of 2000 represented a
decrease of $0.8 million from segment profit of $0.4 million in the first
quarter of 1999. The loss for the quarter reflects a decrease in
underwriting profits together with an increase in operating expenses
arising from certain restructuring costs incurred during the quarter.
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 the first
quarter of 2000 decreased accordingly. Revenues of $0.3 million in the
first quarter of 2000 represent a decrease of $1.6 million from revenues of
$1.9 million in the first quarter of 1999.
Segment loss of $0.6 million in the first quarter of 2000 represented a
$0.2 million worsening from a segment loss of $0.4 million in the first
quarter of 1999. The primary reason for the loss during the first quarter
of 2000 was an increase in loss reserves against one particular program and
an increase in provisions for uncollectible premiums.
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 $0.4 million in the first quarter
of 2000 represented a decrease of $0.2 million from revenues of $0.6
million in the first quarter of 1999. Segment loss of $0.9 million in the
first quarter of 2000, compared to $0.1 million in 1999, reflected
increased operating costs incurred by the segment during the quarter.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2000, the Company held cash and marketable securities of $77.0
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 $66.8 million at March 31, 2000, compared to $56.8
million at December 31, 1999. Of the $77.0 million of cash and marketable
securities held by the Company at March 31, 2000 (December 31, 1999 - $84.8
million), $48.4 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 March 31, 2000, the
Company's investment portfolio (at fair market value) totaled $32.9
million. The portfolio consisted primarily of U.S. Treasury bonds,
short-term cash, equity securities and A-rated corporate debt securities.
During the three-month period ending March 31, 2000, the Company's
operating activities used $7.3 million of net cash, compared to using $0.6
million of net cash during the corresponding three 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 $27.5 million in insurance and reinsurance balances
receivable during the first quarter of 2000, and the corresponding increase
of $26.9 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 March 31, 2000 the Company paid a first quarter dividend of $0.03 per
share to shareholders of record on March 17, 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 three-month period ended March 31,
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.
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.
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 has 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. However, the Company believes that the appeal insofar as the
Company's subsidiary is concerned is without merit and ultimately will be
dismissed as to the subsidiary.
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.
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) 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 U.K. 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 In
addition, one ceding insurer client gave notice of termination of its
standstill agreements with two of the Company's subsidiaries. However, the
client has recently requested that the standstill agreement be reinstated.
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 whether the investigation remains active or, if
active, 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.
(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 workers' 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 5 OTHER INFORMATION
Mr. James Lawless, IV was appointed Senior Vice President,
General Counsel and Secretary of the Company in March, 2000.
Mr. Hadley C. Ford was appointed as a director of the Company in
March, 2000.
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: May 15, 2000
STIRLING COOKE BROWN HOLDINGS LIMITED
BY: /s/ George W. Jones
--------------------------------
George W. Jones
CHIEF FINANCIAL OFFICER AND DIRECTOR
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT 11
STIRLING COOKE BROWN HOLDINGS LIMITED
STATEMENT OF COMPUTATION OF NET INCOME (LOSS) PER ORDINARY SHARE
(Expressed in thousands of United States Dollars, except per share data)
As of or for the three
months ended March 31,
1999 2000
--------- ---------
<S> <C> <C>
Net income (loss).................................... $ 3,631 $ (1,022)
========= =========
BASIC
Number of shares:
Weighted average number of ordinary shares
outstanding........................................
9,863,372 9,863,372
Weighted average treasury shares held................ (195,508) (443,400)
--------- ---------
9,664,864 9,419,972
========= =========
Net income (loss) per share.......................... $ 0.38 $ (0.11)
========= =========
DILUTED
Number of shares:
Weighted average number of ordinary shares
outstanding.
9,863,372 9,863,372
Weighted average treasury shares held................ (195,508) (443,400)
--------- ---------
9,664,864 9,419,972
========= =========
Net income (loss) per share assuming dilution........ $ 0.38 $ (0.11)
========= =========
</TABLE>
<PAGE>
EXHIBIT 99
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% 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'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.
