UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the period ended September 30, 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 September 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 September 30, 2000................ 1
Unaudited Consolidated Statements of Income (Loss) and
Comprehensive Income (Loss) for the three-month and
nine-month periods ended September 30, 1999 and 2000.... 2
Unaudited Consolidated Statements of Changes in
Shareholders' Equity for the Three-month and nine-month
periods ended September 30, 1999 and 2000............... 3
Unaudited Consolidated Statements of Cash Flows for the
Nine-month periods ended September 30, 1999 and 2000.... 4
Notes to Unaudited Consolidated Financial Statements at
September 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 6 EXHIBITS AND REPORTS ON FORM 8-K........................ 15
SIGNATURES.............................................. 16
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 September
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 - $26,195)............ $ 28,802 $ 25,720
Equity securities (cost, 1999 - $3,340, 2000 - $5,109)....................... 4,051 6,076
Short-term investments (amortized cost, 1999 - $1,256, 2000 - $3,344)........ 1,256 3,344
------------ ------------
Total marketable securities........................................................... 34,109 35,140
Cash and cash equivalents............................................................. 50,706 38,134
Fiduciary funds-restricted............................................................ 56,829 51,815
Insurance and reinsurance balances receivable......................................... 734,868 837,064
Paid losses recoverable from reinsurers............................................... 13,293 23,213
Outstanding losses recoverable from reinsurers........................................ 73,267 85,190
Deferred acquisition costs............................................................ 1,745 2,290
Deferred reinsurance premiums ceded................................................... 16,144 13,735
Deferred tax asset.................................................................... 3,315 3,315
Goodwill.............................................................................. 8,664 8,023
Other assets.......................................................................... 12,352 15,465
Income taxes receivable............................................................... 2,600 2,706
Assets related to deposit liabilities................................................. 3,517 3,541
------------ ------------
Total assets................................................................. $ 1,011,409 $ 1,119,631
============ ============
LIABILITIES
-----------
Outstanding losses and loss expenses.................................................. $ 93,135 $ 108,294
Unearned premiums..................................................................... 20,959 23,402
Deferred income....................................................................... 4,695 3,475
Insurance and reinsurance balances payable............................................ 774,888 878,186
Funds withheld........................................................................ 9,580 3,698
Accounts payable and accrued liabilities.............................................. 19,803 20,418
Deposit liabilities................................................................... 3,517 3,541
------------ ------------
Total liabilities............................................................ $ 926,577 $ 1,041,014
------------ ------------
Contingencies (Part II - Item 1 - Legal Proceedings)
------------------------------------------------------------------------------
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 (loss) income ........................................ (211) 205
Retained earnings..................................................................... 34,067 27,436
------------- ------------
90,502 84,274
Less: Ordinary shares in treasury (1999 - 443,400, 2000 - 443,400) at cost............ (5,657) (5,657)
------------- -------------
Total shareholders' equity................................................... 84,832 78,617
------------- ------------
Total liabilities and shareholders' equity................................... $ 1,011,409 $ 1,119,631
============- ============
See accompanying notes to unaudited consolidated financial statements
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Stirling Cooke Brown Holdings Limited
Unaudited Consolidated Statements of INCOME (LOSS)
and comprehensive income (LOSS)
Three months and nine months ended September
30, 1999 and 2000 (Expressed in thousands of
United States Dollars, except per share data)
Three months ended Nine months ended
September 30 September 30
1999 2000 1999 2000
------- ------ ------ ------
<S> <C> <C> <C> <C>
Revenues
Risk management fees........................... $ 11,736 $ 6,745 $ 44,277 $ 23,303
Net premiums earned............................ 2,511 6,455 10,290 13,650
Net investment income.......................... 1,504 1,735 5,443 4,867
Other losses................................... (1,428) 16 (1,516) (1)
---------- --------- ---------- ----------
Total revenues............................. 14,323 14,951 58,494 41,819
---------- --------- ---------- ----------
Expenses
Net losses and loss expenses incurred.......... 2,005 6,810 8,034 13,838
Acquisition costs.............................. 753 1,987 2,811 3,974
Depreciation and amortization of capital assets 417 393 1,268 1,205
Amortization of goodwill....................... 215 211 632 641
Salaries and benefits.......................... 6,166 5,091 18,847 16,016
Other operating expenses....................... 7,358 2,821 23,424 12,801
---------- --------- ---------- ----------
Total expenses............................. 16,914 17,312 55,016 48,474
---------- --------- ---------- ----------
(Loss) income before taxation....................... (2,591) (2,361) 3,478 (6,655)
Taxation............................................ (19) 195 1,134 (872)
---------- --------- ---------- ----------
Net (loss) income before cumulative effect of
------------------------------------------------------------ (2,572) (2,556) 2,344 (5,783)
a change in accounting principle...............
Cumulative effect of a change in accounting
principle, net of tax (note 2) ................ ---------- --------- --------- ---------
- - (307) -
Net (loss) income................................... $ (2,572) $ (2,556) $ 2,037 $ (5,783)
---------- --------- ---------- ----------
Other comprehensive (loss) income , net of tax:
Unrealized holding (losses) gains arising
during the period.............................. (291) 187 (689) 362
Less: reclassification adjustments for realized
losses (gains) included in net income.......... 81 4 (7) 54
---------- --------- ---------- ----------
Other comprehensive (loss) income.............. (210) 191 (696) 416
---------- --------- ---------- ----------
Comprehensive (loss) income.................... $ (2,782) $ (2,365) $ 1,341 $ (5,367)
========== ========= ========== ==========
Net (loss) income per share......................... $ (0.27) $ (0.27) $ 0.21 $ (0.61)
========== ========= ========== ==========
Net (loss) income per share assuming dilution....... $ (0.27) $ (0.27) $ 0.21 $ (0.61)
========== ========= ========== ==========
Dividends per share................................. $ 0.03 $ 0.03 $ 0.09 $ 0.09
========== ========= ========== ==========
See accompanying notes to unaudited consolidated financial statements
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Stirling Cooke Brown Holdings Limited
UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Three months and nine months ended September
30, 1999 and 2000 (Expressed in thousands of
United States Dollars, except per share data)
Three months ended Nine months ended
September 30 September 30
1999 2000 1999 2000
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Ordinary shares of par value $0.25 each
Balance at beginning of period.................... $ 2,466 $ 2,466 $ 2,466 $ 2,466
----------- ----------- ----------- -----------
Balance at end of period.......................... $ 2,466 $ 2,466 $ 2,466 $ 2,466
----------- ----------- ----------- -----------
Additional paid in capital
Balance at beginning of period.................... $ 54,167 $ 54,167 $ 54,167 $ 54,167
----------- ----------- ----------- -----------
Balance at end of period.......................... $ 54,167 $ 54,167 $ 54,167 $ 54,167
----------- ----------- ----------- -----------
Accumulated other comprehensive (loss) income
Balance at beginning of period.................... $ (167) $ 14 $ 319 $ (211)
Change in unrealized (loss) gain on marketable
securities...................................... (210) 191 (696) 416
----------- ----------- ----------- -----------
Balance at end of period.......................... $ (377) $ 205 $ (377) $ 205
----------- ----------- ----------- -----------
Retained earnings
Balance at beginning of period.................... $ 45,957 $ 30,274 $ 41,914 $ 34,067
Net (loss) income................................. (2,572) (2,556) 2,037 (5,783)
Dividends......................................... (282) (282) (848) (848)
----------- ----------- ----------- -----------
Balance at end of period.......................... $ 43,103 $ 27,436 $ 43,103 $ 27,436
----------- ----------- ----------- -----------
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........................ $ 93,702 $ 78,617 $ 93,702 $ 78,617
=========== =========== =========== ===========
Dividends per share were $0.03 and $0.03 for the three months ended September
30, 1999 and 2000, respectively, and $0.09 and $0.09 for the nine months
ended September 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
Nine months ended September 30, 1999 and 2000
(Expressed in thousands of United States Dollars)
1999 2000
--------------- ---------------
<S> <C> <C>
Operating activities
Net income (loss) $ 2,037 $ (5,783)
Adjustments to reconcile net income to net cash provided (used) by operating
activities:
Depreciation and amortization of capital assets........................... 1,268 1,205
Amortization of goodwill.................................................. 632 641
Amortization of marketable securities..................................... 133 92
Net realized (gains) losses on sale of marketable securities.............. (7) 87
Net (gains) losses on sale of capital assets.............................. 25 (96)
Writedown of affiliates................................................... 1,756 -
Changes in non cash operating assets and liabilities:
Fiduciary funds........................................................... 10,727 5,013
Insurance and reinsurance balances receivable............................. (204,809) (102,196)
Paid losses recoverable from reinsurers................................... (6,875) (9,920)
Outstanding losses recoverable from reinsurers............................ (22,425) (11,922)
Deferred acquisition costs................................................ 623 (545)
Deferred reinsurance premiums ceded....................................... 1,647 2,410
Other assets.............................................................. (1,669) (3,792)
Income taxes receivable................................................... - (106)
Deferred tax asset........................................................ (2,100) (116)
Assets related to deposit liabilities..................................... 78 (25)
Outstanding losses and loss expenses...................................... 22,458 15,160
Unearned premiums......................................................... (2,899) 2,442
Insurance and reinsurance balances payable................................ 185,230 103,297
Funds withheld............................................................ 3,512 (5,882)
Accounts payable and accrued liabilities.................................. 1,648 615
Income taxes payable...................................................... 549 -
Deferred income........................................................... 501 (1,220)
Deposit liabilities....................................................... (78) 25
--------------- ---------------
Net cash used by operating activities................................. (8,038) (10,616)
--------------- ---------------
Investing activities
Purchase of capital assets................................................ (1,162) (809)
Sale of capital assets.................................................... 215 380
Purchase of debt securities............................................... (21,804) (25)
Purchase of equity securities............................................. (2,910) (2,089)
Purchase of short-term investments, net................................... 7,119 (2,088)
Proceeds on sale of debt securities....................................... 8,346 3,264
Proceeds on sale of equity securities..................................... 1,575 259
Purchase of subsidiaries, net of cash acquired............................ (735) -
--------------- ---------------
Cash used by investing activities..................................... (9,356) (1,108)
--------------- ---------------
Financing activities
Dividends................................................................. (848) (848)
Purchase of ordinary shares in treasury................................... (4,423) -
--------------- ---------------
Cash used by investing activities..................................... (5,271) (848)
--------------- ---------------
Decrease in cash and cash equivalents........................................... (22,665) (12,572)
Cash and cash equivalents at beginning of period................................ 68,165 50,706
--------------- ---------------
Cash and cash equivalents at end of period...................................... $ 45,500 $ 38,134
=============== ===============
Supplemental disclosure of cash flow information
Cash paid (received) during the period for income taxes................... $ $
1,944 (105)
=============== ===============
See accompanying notes to unaudited consolidated financial statements
</TABLE>
<PAGE>
STIRLING COOKE BROWN HOLDINGS LIMITED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 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 Limited ("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 September
30, 2000, the results of operations for the three months and nine months
ended September 30, 1999 and 2000 and the cash flows for the nine months
ended September 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 nine months ended September 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 nine months ended September 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 Nine Months
---------------- Ended September 30 Ended September 30
1999 2000 1999 2000
---- ---- ---- ----
(dollars in thousands) (dollars in thousands)
<S> <C> <C> <C> <C>
Brokerage $5,469 $2,908 $24,016 $9,447
Program business 5,318 3,753 17,077 12,506
Underwriting management 841 293 3,173 1,405
Insurance 3,232 6,534 10,189 15,675
Reinsurance 275 1,112 3,351 1,583
Other (812) 351 688 1,203
---------- -------- --------- ---------
Total $14,323 $14,951 $58,494 $41,819
---------- --------- --------- ---------
SEGMENT PRETAX INCOME FOR THE THREE MONTHS FOR THE NINE MONTHS
---------------------------- ENDED SEPTEMBER 30 ENDED SEPTEMBER 30
(LOSS)
1999 2000 1999 2000
---- ---- ---- ----
(dollars in thousands) (dollars in thousands)
Brokerage $1,020 $360 $7,659 $ 1,540
Program business (753) (1,020) (1,494) (2,302)
Underwriting management (126) 169 1,126 162
Insurance 138 (803) 561 (2,491)
Reinsurance (556) (1,658) (1,030) (2,320)
Other (2,314) 591 (3,254) (1,244)
---------- --------- --------- ---------
Total $(2,591) $(2,361) $3,478 $(6,655)
---------- --------- --------- ---------
</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 nine months ended September 30, 1999 and 2000 and
financial condition as of September 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 NINE MONTHS ENDED SEPTEMBER
30, 1999 AND 2000.
<TABLE>
<CAPTION>
REVENUES AND NET INCOME (LOSS)
------------------------------
For the Three Months For the Nine months
Ended September 30 Ended September 30
1999 2000 1999 2000
---- ---- ---- ----
(dollars in thousands) (dollars in thousands)
<S> <C> <C> <C> <C>
Revenues $14,323 $14,951 $58,494 $41,819
Expenses 16,914 17,312 55,016 48,474
------- ------- ------- -------
(Loss) income before taxation (2,591) (2,361) 3,478 (6,655)
Taxation (19) 195 1,134 (872)
------- ------- ------- -------
Net (loss) income before cumulative
effect of a change in accounting (2,572) (2,556) 2,344 (5,783)
principle
Cumulative effect of a change in
accounting principle, net of tax - - (307) -
-------- ------- ------- -------
Net (loss) income $ (2,572) $ (2,556) $ 2,037 $ (5,783)
========== =========== ========= =========
BASIC EPS
Net (loss) income per Share $ (0.27) $ (0.27) $ 0.21 $ (0.61)
Avg. no. of ordinary shares
outstanding (000's) 9,420 9,420 9,501 9,420
DILUTED EPS
Net (loss) income per Share $ (0.27) $ (0.27) $ 0.21 $ (0.61)
Avg. no. of ordinary shares
outstanding (000's) 9,420 9,420 9,501 9,420
</TABLE>
<PAGE>
Basic and diluted net loss per share was $0.27 in the third quarter and
$0.61 in the first nine months of 2000 compared to basic and diluted net
loss per share of $0.27 in the third quarter and net income per share of
$0.21 in the first nine months of 2000.
Net loss was $2.6 million for the third quarter and $5.8 million for the
first nine months of 2000, compared to net loss of $2.6 million for the
third quarter and net income of $2.0 million for the first nine months of
1999. The results for the third quarter and first nine months of 2000 were
adversely affected by underwriting losses incurred by the Company's
U.S.-based insurance company and the Company's reinsurance subsidiary. In
addition, 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 continued to result in reduced revenue and a
shrinkage in operating margins. The losses for the third quarter and first
nine 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.
Revenues were $15.0 million in the third quarter and $41.8 million in the
first nine months of 2000, compared to revenues of $14.3 million in the
third quarter and $58.5 million in the first nine months of 1999. The
increase in revenues for the quarter primarily reflects the increase in
premium earned by the Company's U.S. based insurance carrier as the company
increased its level of retention on certain programs written. The
reinsurance segment benefited in the quarter from a reduction in provisions
for uncollectible premiums and an increase in adjustment premiums on
discontinued programs. All other segments experienced a decline in revenue
streams for the quarter. The decline in revenues in the first nine months
reflects the continuing competitive pressures caused by the soft market
conditions in the markets in which the Company operates. These continuing
soft market conditions led to a reduction in premium volume being written
by the program business segment as the Company sought to protect the
underwriting performance of its programs. Brokerage revenues continued to
decline as compared to 1999, reflecting the significant changes which have
occurred in the market environment in which this segment operates. The
decline in revenue for the first nine months 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 NINE MONTHS
---------------- ENDED SEPTEMBER 30 ENDED SEPTEMBER 30
1999 2000 1999 2000
---- ---- ---- ----
(dollars in thousands) (dollars in thousands)
<S> <C> <C> <C> <C>
Brokerage $5,469 $2,908 $24,016 $9,447
Program business 5,318 3,753 17,077 12,506
Underwriting management 841 293 3,173 1,405
Insurance 3,232 6,534 10,189 15,675
Reinsurance 275 1,112 3,351 1,583
Other (812) 351 688 1,203
---------- -------- -------- ----------
Total $14,323 $14,951 $58,494 $41,819
---------- -------- --------- ----------
Segment Pretax Income FOR THE THREE MONTHS FOR THE NINE MONTHS
--------------------- ENDED SEPTEMBER 30 ENDED SEPTEMBER 30
(LOSS) 1999 2000 1999 2000
------ ---- ---- ---- ----
(dollars in thousands) (dollars in thousands)
<S> <C> <C> <C> <C>
Brokerage $1,020 $360 $7,659 $1,540
Program business (753) (1,020) (1,494) (2,302)
Underwriting management (126) 169 1,126 162
Insurance 138 (803) 561 (2,491)
Reinsurance (556) (1,658) (1,030) (2,320)
Other 591 (3,254) (1,244)
---------- -------- --------- ----------
Total $(2,591) $(2,361) $3,478 $(6,655)
---------- -------- --------- ----------
</TABLE>
Brokerage
---------
The Company's brokerage segment consists of subsidiaries that receive a fee
or commission for brokering insurance and reinsurance contracts. Revenues
of $2.9 million in the third quarter of 2000 represented a decrease of $2.6
million from revenues of $5.5 million in the third quarter of 1999.
Revenues of $9.4 million in the first nine months of 2000 represented a
decrease of $14.6 million from revenues of $24.0 million in the first nine
months of 1999. Major changes in the overall market environment over the
past year and continued competitive conditions have resulted in a
significant reduction in brokerage revenues for these operations.
The brokerage segment's profit of $0.4 million in the third quarter of 2000
represented a decrease of $0.6 million from segment profit of $1.0 million
in the third quarter of 1999. The brokerage segment's profit of $1.5
million in the first nine months of 2000 represented a decrease of $6.2
million from segment profit of $7.7 million in the first nine months of
1999. The decrease in segment profits reflects the decrease in revenue.
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 $3.8 million in the third quarter of 2000
represented a decrease of $1.5 million from revenues of $5.3 million in the
third quarter of 1999. Revenues of $12.5 million in the first nine months
of 2000 represented a decrease of $4.6 million from revenues of $17.1
million in the first nine 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 resulting from the continued
competitive environment in the U.S. workers' compensation insurance market.
In addition, during 1999 and the first nine 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 $1.0 million in the third quarter of
2000 represented a $0.2 million increase over the $0.8 million loss in the
third quarter of 1999. The segment experienced a loss of $2.3 million in
the first nine months of 2000 compared to a loss of $1.5 million in the
first nine 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 third
quarter of 2000 represented a decrease of $0.5 million from revenues of
$0.8 million in the third quarter of 1999. Revenues of $1.4 million in the
first nine months of 2000 represented a decrease of $1.8 million from
revenues of $3.2 million in the first nine months of 1999.
Segment income of $0.2 million in the third quarter of 2000 represented an
improvement of $0.3 million from segment loss of $0.1 million in the third
quarter of 1999. This improvement was the result of reduced operating
expenses. Segment income of $0.2 million in the first nine months of 2000
represented a decline of $0.9 million from a segment profit of $1.1 million
in the first nine months of 1999.
Insurance
---------
The Company's insurance segment consists of its wholly owned U.S.-based
insurance company, Realm National Insurance Company ("Realm National").
Revenues of $6.5 million in the third quarter of 2000 represented an
increase of $3.3 million from revenues of $3.2 million in the third quarter
of 1999. Revenues of $15.7 million in the first nine months of 2000
represent an increase of $5.5 million from revenues of $10.2 million in the
first nine months of 1999. Net premiums earned increased $3.2 million to
$5.6 million in the third quarter of 2000 from $2.4 million in the third
quarter of 1999. Net premiums earned increased to $12.7 million in the
first nine months of 2000, which represented a $5.2 million increase from
$7.5 million in the first nine months of 1999. This increase in net
premiums earned reflects a reduction in the level of reinsurance on Realm
National's programs, and partially offset by the decision to discontinue
certain loss making programs. Policy issuance fees were $0.7 million in the
third quarter of 2000, representing a $0.1 million increase from $0.6
million in the third quarter of 1999. Policy issuance fees were $2.3
million in the first nine months of 2000, which represented a $0.3 million
increase from $2.0 million in first nine months of 1999.
Market conditions in the worker's 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
nine months of 2000. This has resulted in Realm National retaining a
greater proportion of its premium income 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 $0.8 million in the third quarter of
2000, as compared to income of $0.1 in the third quarter of 1999. For the
first nine months of 2000, the segment experienced a $2.5 million loss, as
compared to income of $0.6 million in the first nine months of 1999. The
losses for the third quarter and the first nine months of 2000 primarily
reflect 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 were substantially less than in 1999.
Revenues of $1.1 million in the third quarter of 2000 represent an increase
of $0.8 million from revenues of $0.3 million in the third quarter of 1999.
The increase in revenues in the third quarter was the result of a reduction
in the provisions for uncollectible premiums and an increase in adjustment
premiums in respect of discontinued programs. Revenues of $1.6 million in
the first nine months of 2000 represent a decrease of $1.8 million from
revenues of $3.4 million in the first nine months of 1999.
The segment's loss of $1.7 million in the third quarter of 2000 represents
a $1.1 million increase from segment loss of $0.6 million in the third
quarter of 1999. The segment's loss of $2.3 million for the first nine
months of 2000 represents a $1.3 million increase from $1.0 million for the
first nine months of 1999. The losses for the third quarter and first nine
months was the result of adverse loss development on CIRCL's discontinued
programs.
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 third quarter
of 2000 represented an increase of $1.2 million from the third quarter of
1999. Revenues of $1.2 million in the first nine months of 2000 represent
an increase of $0.5 million from revenues of $0.7 million in the first nine
months of 1999.
Segment income of $0.6 million in the third quarter of 2000 represented a
$2.9 million improvement from segment loss of $2.3 million in the third
quarter of 1999. Segment loss of $1.2 million in the first nine months of
2000 represented a $2.1 million improvement from segment loss of $3.3
million in the first nine months of 1999. The improvement in performance of
the segment is due to a reduction in operating expenses and provisions in
2000 compared to 1999.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2000, the Company held cash and marketable securities of
$73.3 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 $51.8 million at September 30, 2000, compared to
$56.8 million at December 31, 1999. Of the $73.3 million of cash and
marketable securities held by the Company at September 30, 2000 (December
31, 1999 - $84.8 million), $44.9 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 September 30, 2000, the Company's investment portfolio (at fair market
value) totaled $35.1 million. The portfolio consisted primarily of U.S.
Treasury bonds, short-term cash, equity securities and A-rated corporate
debt securities.
During the nine-month period ending September 30, 2000, the Company's
operating activities used $10.6 million of net cash, compared to using $8.0
million of net cash during the corresponding nine 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 $102.2 million in insurance and reinsurance balances
receivable during the first nine months of 2000, and the corresponding
increase of $103.3 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, 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 September 6, 2000 the Company paid a quarterly dividend of $0.03 per
share to shareholders of record on August 14, 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 nine-month period ended September
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 adopted this standard during the third quarter of
2000 and it did not have a significant impact on the Company's financial
position or results of operations.
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
the accounting and reporting standards for certain derivative instruments
and certain hedging activities. The Company adopted this standard during
the third quarter of 2000 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 third parties, such as utility
companies, regulatory bodies, government entities, insurance-related
companies or insurance carriers on which the Company's operations rely,
will continue to be immune to post-year-end Year 2000 problems that would
have a material adverse effect on the Company's operating results. However,
management believes that ongoing communication with and assessment of third
parties will minimize these risks.
The Company's insurance and reinsurance subsidiaries may also have an
underwriting exposure to the Year 2000 issue. Although the subsidiaries
have not received any claims of coverage from insureds based on losses
resulting from Year 2000 issues, there can be no assurance that insureds
will be free from losses of this type or that these subsidiaries will be
free from claims made under their policies.
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 proceedings which Sphere Drake Insurance Limited ("Sphere Drake")
caused to be issued on February 29, 2000 in the London Commercial Court
(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, remain pending. 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 the underwriting agent by the Company's broker
subsidiary. These proceedings currently are focused on certain procedural
issues relating to discovery and to the scope of the trial of the action,
which is scheduled for October 2001.
It is the opinion of management that the claims described in Sphere Drake's
action are without merit and the case is being and will be defended
vigorously.
(b) The Company, together with one of its London subsidiaries and a former
employee of that subsidiary, have filed a motion to dismiss the claims
asserted against them in the amended complaint in an existing action in the
New York State Supreme Court brought by AXA Reassurance S.A. ("AXA"), in
which AXA seeks to void reinsurance contracts entered into in connection
with certain "reinsurance-backed gap film financing" arrangements brokered
by the Company's London subsidiary. Pending the determination of that
motion, the Company, its subsidiary and the former employee are engaged in
ongoing discovery proceedings in the action.
It is the opinion of management that the claims described in the action are
without merit and the case is being and 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 insurer 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 aware that the investigation is ongoing, but has no other
information as to the progress 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. The Company understands
that a settlement by certain market participants of reinsurance disputes
arising in the 1994 year of account (the "1994 Year of Account Settlement")
has been, or shortly will be, executed.
A subsidiary of the Company has been notified of a potential claim by one
of the parties to the 1994 Year of Account Settlement for the recovery of
costs arising out of the settlement as well as for the costs and expenses
incurred by the party in connection with its overall involvement in the LMX
market. The Company's subsidiary has denied any liability for this
potential claim.
Although no assurances can be given as to the outcome of the pending U.K.
arbitrations or pending or potential arbitration or 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 continue to experience considerable disruption 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 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: November 13th, 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 PER ORDINARY SHARE
(Expressed in thousands of United States Dollars, except per share data)
As of or for the three As of or for the nine
months ended months ended
September 30 September 30
1999 2000 1999 2000
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Net (Loss) Income...................................... $ (2,572) $ (2,556) $ 2,037 $ (5,783)
=========== ========== ========= ===========
BASIC
Number of Shares:
Weighted average number of ordinary shares
outstanding. 9,863,372 9,863,372 9,863,372 9,863,372
Weighted average treasury shares held.................. (443,400) (443,400) (362,666) (443,400)
----------- ---------- ---------- -----------
9,419,972 9,419,972 9,541,742 9,419,972
=========== ========== ========= ===========
Net (loss) income per share............................ $ (0.27) $ (0.27) $ 0.21 $ (0.61)
=========== ========== ========= ===========
DILUTED
Number of shares:
Weighted average number of ordinary shares
outstanding. 9,863,372 9,863,372 9,863,372 9,863,372
Weighted average treasury shares held.................. (443,400) (443,400) (362,666) (443,400)
9,419,972 9,419,972 9,541,742 9,419,972
=========== ========== ========= ===========
Net (loss) income per share assuming dilution......... $ (0.27) $ (0.27) $ 0.21 $ (0.61)
=========== ========== ========= ===========
</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 accounting principles
generally accepted in the United States 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
its relationship 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 is 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.
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.
