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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 12 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
Commission file number 000-23481
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ESG RE LIMITED
(Exact name of Registrant as specified in its charter)
Bermuda Not Applicable
(State or other jurisdiction of (I.R.S. Employer
incorporation of organization) Identification No.)
16 Church Street
Hamilton HM11, Bermuda
(Address of executive offices, zip code)
Telephone (441) 295-2185
(Registrant's telephone number, including area code)
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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 the Registrant's common shares (par value $1.00 per share)
outstanding as of November 15, 1999, was 13,228,399.
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<PAGE>
ESG RE LIMITED
1.1 Index to the Condensed Consolidated Financial Statements
PAGE
----
Condensed Consolidated Balance Sheets as of September 30, 1999 1
(unaudited) and December 31, 1998
Condensed Consolidated Statements of Operations for the three months
and nine months ended September 30, 1999 and 1998 (unaudited) 2
Condensed Consolidated Statements of Cash Flows for the
nine months ended September 30, 1999 and 1998 (unaudited) 3
Condensed Consolidated Statements of Comprehensive Income
for the three months and nine months ended
September 30, 1999 and 1998 (unaudited) 4
Notes to the Condensed Consolidated Financial Statements (unaudited) 5
Independent Accountants' Review Report 8
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ESG RE LIMITED
Condensed Consolidated Balance Sheets
(U.S. dollars in thousands except share and per share data)
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
--------- ---------
(Unaudited)
<S> <C> <C>
ASSETS
Fixed maturity investments - available for sale, at fair value
(cost: $198,851 and $ 211,589) $ 195,180 $ 212,387
Cash and cash equivalents 33,738 16,942
Other Investments 11,804 5,917
--------- ---------
Total investments and cash 240,722 235,246
Accrued investment income 3,617 3,629
Management fees receivable 2,095 3,164
Premiums receivable 277,513 162,015
Reinsurance balances receivable 11,475 6,259
Reinsurance recoverable on incurred losses 11,370 2,761
Funds retained by ceding companies 7,163 3,592
Prepaid reinsurance premiums 6,726 2,276
Deferred acquisition costs 52,975 37,625
Receivable for securities sold 5,107 --
Deferred tax asset 768 843
Other Assets 5,347 2,222
Cash and cash equivalents held in a fiduciary capacity 4,007 6,741
--------- ---------
TOTAL ASSETS $ 628,885 $ 466,373
========= =========
LIABILITIES
Unpaid losses and loss expenses $ 126,419 $ 44,379
Unearned premiums 166,520 111,884
Acquisition costs payable 74,385 45,487
Reinsurance balances payable 28,154 7,114
Payable for securities purchased 8,179 --
Accrued expenses, accounts payable, and other liabilities ($131 and
$204 due to related parties) 6,552 5,927
Fiduciary liabilities 4,007 6,741
--------- ---------
Total liabilities 414,216 221,532
--------- ---------
SHAREHOLDERS' EQUITY
Preference shares, 50,000,000 shares authorized; no shares issued and
outstanding for 1999 and 1998 -- --
Class B common shares, 100,000,000 shares authorized; no shares
issued and outstanding for 1999 and 1998 -- --
Common shares, par value $1 per share; 100,000,000 shares
authorized; 13,324,099 shares issued and outstanding for 1999
and 13,923,799 shares issued and outstanding for 1998 13,324 13,924
Additional paid-in capital 220,985 226,216
Accumulated other comprehensive income:
Foreign currency translation adjustments, net of tax (1,234) (574)
Unrealized gains/(losses) on securities, net of reclassification
adjustments and tax (4,311) 634
--------- ---------
Accumulated other comprehensive income (5,545) 60
--------- ---------
Retained earnings (14,095) 4,641
--------- ---------
Total shareholders' equity 214,669 244,841
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 628,885 $ 466,373
========= =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
ESG RE LIMITED
Condensed Consolidated Statements of Operations
(U.S. dollars in thousands except share and per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, 1999 September 30, 1998 September 30, 1999 September 30, 1998
------------------ ------------------ ------------------ ------------------
<S> <C> <C> <C> <C>
REVENUES
Net premiums written $ 59,919 $ 53,915 $ 243,789 $ 157,597
Change in unearned premiums 7,707 (27,781) (50,517) (90,154)
------------------ ------------------ ------------------ ------------------
Net premiums earned 67,626 26,134 193,272 67,443
Management fee revenue (159) 181 1,781 1,380
Net investment income 3,512 3,359 10,534 9,590
Net realized investment loss (861) 386 (1,136) 1,712
------------------ ------------------ ------------------ ------------------
70,118 30,060 204,451 80,125
------------------ ------------------ ------------------ ------------------
EXPENSES
Losses and loss expenses 57,012 15,940 140,672 42,922
Acquisition costs 19,761 7,324 52,679 17,028
Administrative expenses 16,505 2,467 26,486 8,771
------------------ ------------------ ------------------ ------------------
93,278 25,731 219,837 68,721
------------------ ------------------ ------------------ ------------------
NET INCOME BEFORE TAXES (23,160) 4,329 (15,386) 11,404
Income tax expense -- 335 311 912
------------------ ------------------ ------------------ ------------------
NET INCOME $ (23,160) $ 3,994 $ (15,697) $ 10,492
================== ================== ================== ==================
PER SHARE DATA
Basic net (loss)/income per share $ (1.68) $ 0.29 $ (1.13) $ 0.75
================== ================== ================== ==================
Diluted net (loss)/income per share $ (1.68) $ 0.29 $ (1.13) $ 0.74
================== ================== ================== ==================
Weighted average shares outstanding
Basic 13,792,450 13,923,799 13,879,235 13,923,799
Diluted 13,792,450 13,924,571 13,879,781 14,172,947
================== ================== ================== ==================
Dividends declared per share
$ 0.08 $ 0.075 $ 0.24 $ 0.225
================== ================== ================== ==================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
ESG RE LIMITED
Condensed Consolidated Statements of Cash Flows
(U.S. dollars in thousands)
(Unaudited)
Nine Months Ended
Sept 30, Sept 30,
1999 1998
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES
Net cash provided by operating activities $ 26,311 $ 1,417
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Cost of fixed maturity investments acquired
- available for sale (257,974) (405,480)
Proceeds from sale of fixed maturity investments
- available for sale 269,586 413,824
Net proceeds from sale of other investment assets 0 (1,116)
Funding of other investments (8,760) --
Purchases of fixed assets (2,002) (254)
Purchases of intangible assets (1,076) (90)
--------- ---------
Net cash provided by investing activities (226) 6,884
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends paid (3,342) (3,133)
Stock repurchase (5,947) --
Additional offering costs -- (85)
--------- ---------
Net cash used in financing activities (9,289) (3,218)
--------- ---------
--------- ---------
EFFECT OF EXCHANGE RATE CHANGES ON CASH 15
--------- ---------
Net increase in cash 16,796 5,083
Cash and cash equivalents at January 1 16,942 6,196
--------- ---------
Cash and cash equivalents at September 30 $ 33,738 $ 11,279
========= =========
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
ESG RE LIMITED
Condensed Consolidated Statements of Comprehensive Income
(U.S. dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
Sept 30, Sept 30, Sept 30, Sept 30,
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net income $(23,160) $ 3,994 $(15,697) $ 10,492
-------- -------- -------- --------
Other comprehensive income, net of tax:
Foreign currency translation adjustments (141) 82 (660) (755)
Unrealized gains on securities:
Unrealized holding (losses)/gains arising during
the period (789) 2,989 (5,220) 4,495
Less reclassification adjustment for losses/(gains) included in
net income 861 (386) 1,136 (1,712)
-------- -------- -------- --------
Other comprehensive income (69) 2,685 (4,744) 2,028
Comprehensive income $(23,229) $ 6,679 $(20,441) $ 12,520
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of ESG Re Limited
(together with its subsidiaries, the "Company") have been prepared in accordance
with generally accepted accounting principles in the United States of America
("U.S. GAAP") except pursuant to the rules and regulations of the Securities and
Exchange Commission which do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, these unaudited financial statements
reflect all adjustments considered necessary for a fair presentation of
financial position, results of operations and comprehensive income as of and for
the periods presented. The results of operations for any interim period are not
necessarily indicative of the results for a full year. These unaudited
consolidated financial statements should be read in conjunction with the audited
consolidated financial statements, and related notes thereto, included in the
Company's 1998 Annual Report on Form 10-K.
The preparation of financial statements in accordance with U.S. GAAP requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period as well as the disclosure of such amounts. Actual results
could materially differ from those estimates and assumptions.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company's condensed consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States of
America ("U.S GAAP"). The Company's significant accounting policies include the
following:
(A) PREMIUM REVENUES
Premiums written are estimated and recognized at the inception of the
reinsurance contract, based upon information received from intermediaries and
ceding companies. The Company compares estimated written premiums to actual
premiums as reported by ceding companies on a periodic basis. The timeliness and
frequency of ceding company reports vary considerably by ceding company, line of
business and geographic area, which means that the actual ultimate premium
written may not be known with certainty for prolonged periods. Differences
between such estimates and actual amounts as reported by ceding companies are
recorded in the period in which the actual amounts are determined.
The reinsurance contacts entered into by the Company are primarily of short
duration. Premiums written are recognized as earned over the coverage period in
proportion to the amount of protection provided. Unearned premium reserves are
established to cover the unexpired contract period.
(B) RESERVE FOR LOSSES AND LOSS EXPENSES
The reserve for unpaid losses and loss adjustment expenses includes an estimate
of reported case reserves and an estimate for losses incurred but not reported.
Case reserves are estimated based on ceding company reports and other data
considered relevant to the estimation process. The liability for losses incurred
but not reported is based to a large extent on the expectations of ceding
companies about ultimate loss ratios at the inception of the contracts,
supplemented by industry experience and the Company's specific historical
experience where available. As the Company has limited specific historical
experience on a significant number of its programs on which to base its estimate
of losses incurred but not reported, its reliance on ceding company expectations
and industry experience is necessarily increased, which increases the
uncertainty involved in the loss estimation process
The reserves as established by management are reviewed periodically, and
adjustments are made in the periods in which they become known. Although
management believes that an adequate provision has been made for the liability
for losses and loss expenses, based on all available information, there can be
no assurance that the ultimate losses will not differ significantly from the
amounts provided.
<PAGE>
(C) INVESTMENTS
Fixed maturity securities are classified as available for sale and are reported
at estimated fair value. Investments that are available for sale are expected to
be held for an indefinite period but may be sold depending on interest rates and
other considerations. Short-term investments comprise investments with a
maturity greater than 90 days but less than one year and are stated at cost,
which approximates fair value. Other investments over which the Company
exercises significant influence are accounted for under the equity method .
Other investments are accounted for at cost. Unrealized investment gains and
losses on fixed maturity securities available for sale, net of applicable
deferred income tax, are reported as a separate component of "accumulated other
comprehensive income". Realized gains or losses on sale of investments are
determined on the basis of average cost. The carrying values of fixed maturities
and other investments are adjusted for impairments in value that are considered
to be other than temporary.
(D) ESTIMATES
The preparation of financial statements in accordance with U.S. generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period as
well as the disclosure of such amounts. Actual results could materially differ
from those estimates and assumptions.
3. COMMITMENTS AND CONTINGENCIES
(A) EMPLOYMENT CONTRACTS
The Company has entered into employment contracts with several employees for
terms of one to five years which have total minimum commitments of $7.8 million
excluding any performance bonuses which are at the discretion of and determined
by the Board of Directors of the Company. The contracts remunerate the employees
for providing services to the Company. The contracts include various non-compete
clauses following termination of employment.
(B) LEASE COMMITMENTS
The Company and its subsidiaries have various obligations under operating
leases.
(C) LOAN COMMITMENTS
The Company and its subsidiaries have unfunded loan commitments outstanding of
$11.3 million of which $9.3 million is to COMED, the new German healthcare
association which the Company helped to establish in December 1998. A further $2
million is to a third party which is a significant ceding company to ESG. Under
the terms of the loan agreement with COMED, the Company has the right to refuse
any further disbursements, when the ability of COMED to repay the loan is in
doubt.
(D) LETTERS OF CREDIT
Letters of Credit in the amount of $52.0 million have been issued in favor of
ceding companies of which $24.6 million is secured against the Company's
investment portfolio.
The future minimum commitments under lease and employment agreements are as
follows:
Employment Lease
U.S. dollars in thousands Commitments Commitments Total
- --------------------------------------------------------------------------------
Years Ending December 31,
1999 $ 1,330 $ 140 $ 1,470
2000 3,296 546 3,842
2001 2,009 431 2,440
2002 990 174 1,164
2003 168 98 266
Thereafter 808 808
-------------------------------------------------
Total $ 7,793 $2,197 $ 9,990
=================================================
<PAGE>
4. RELATED PARTIES
Included in net investment income for the three months and nine months ended
September 30, 1999 were related party investment expenses of $73,000 and
$345,000 respectively.
<PAGE>
INDEPENDENT ACCOUNTANTS' REVIEW REPORT
To the Board of Directors and Shareholders of ESG Re Limited
We have reviewed the accompanying condensed consolidated balance sheet of ESG Re
Limited and subsidiaries as of September 30, 1999 and the related condensed
consolidated statements of operations, comprehensive income and cash flows for
the three month and nine month periods ended September 30, 1999 and 1998. These
financial statements are the responsibility of the Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and of making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based upon our review, we are not aware of any material modifications that
should be made to such condensed consolidated financial statements for them to
be in conformity with accounting principles generally accepted in the United
States.
We have previously audited, in accordance with auditing standards generally
accepted in the United States, the consolidated balance sheet of ESG Re Limited
and subsidiaries as of December 31, 1998 and the related consolidated statements
of operations, comprehensive income, changes in shareholders' equity and cash
flows for the year then ended (not presented herein) and in our report dated
March 8, 1999, we expressed an unqualified opinion on those consolidated
financial statements. In our opinion, the information set forth in the
accompanying condensed consolidated balance sheet as of December 31, 1998 is
fairly stated, in all material respects, in relation to the consolidated balance
sheet from which it has been derived.
Deloitte & Touche
Chartered Accountants
Hamilton, Bermuda
November 8, 1999
<PAGE>
ITEM 2. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following is a discussion and analysis of the financial condition as of
September 30, 1999 and the results of operations of ESG Re Limited and
subsidiaries (the "Company" or "ESG") for the three months and nine months ended
September 30, 1999 as compared to the three months and nine months ended
September 30, 1998. This discussion and analysis should be read in conjunction
with the attached unaudited consolidated financial statements and notes thereto
and the audited consolidated financial statements of the Company as of and for
the year ended December 31, 1998 and notes thereto included in the Company's
Annual Report to Shareholders for the fiscal year ended December 31, 1998. The
unaudited consolidated financial statements as of and for the three months and
nine months ended September 30, 1999 and for the three months and nine months
ended September 30, 1998 and notes thereto have been reviewed by independent
accountants in accordance with standards established by the American Institute
of Certified Public Accountants.
The results of operations and cash flows for any interim period are not
necessarily indicative of results for the full year. In addition, this quarterly
report contains forward-looking statements regarding future profit levels,
premium growth, cash flows and other matters, which involve risks and
uncertainties that may affect the actual results of operations of the Company.
The following important factors, among others, could cause actual results to
differ materially from those set forth in the forward-looking statements: claims
frequency, claims severity, economic activity, competitive pricing and the
regulatory environment in which the Company operates.
General
The Company is a specialty reinsurance enterprise providing accident, medical,
credit, life and special risk reinsurance to insurers and selected reinsurers on
a worldwide basis, and underwriting management services to co-reinsurers.
On December 12, 1997, the Company raised gross proceeds of $257 million in a
private placement and an initial public offering (the "Offerings"). As a result,
the Company is now able to assume reinsurance risks for its own account. Prior
to the Offerings, the Company operated solely as a reinsurance management
services company.
In June 1999, the company launched a new business unit focused on the growing
health care management and technology field. The "Intelligent Health Care"
division will be aimed at developing and distributing disease management
programs, cardiovascular and other telemedicine applications worldwide. This
division will encompass the Company's on-going relationship with COMED, the new
German healthcare association which the Company helped to establish, under the
loan facility of $12 million provided in December 1998.
RESULTS OF OPERATIONS
OVERVIEW
Certain important events occurred during the period including:
1. Management Changes -- Certain changes were made to the management of the
Company, including the resignation of Wolfgang Wand and the subsequent
appointment of John C Head as Chief Executive Officer. See "Current
Developments" included in this filing.
2. Anticipated Withdrawal from a Line of Business -- The Health Care division
recognized $1.3 million in expenses associated with the unsuccessful launch
of heart-monitoring technology services. The Company expects to exit this
business in the fourth quarter.
3. Negative impact upon underwriting results due to deterioration of several
major North American and European Accounts:
- A medical quota share contract in Maine covering both 1998 and 1999
underwriting years has developed into a 127% loss and acquisition
ratio, resulting in a loss of $4.3 million on the account.
- A large quota share contract covering 6 ceding companies is expected
to develop into a 98% loss and acquisition ratio, resulting in a loss
of $2.1 million.
- Unfavorable development on a large medical group health account
resulting in a loss of $2.1 million being added.
- Reserve strengthening of $1.4 million relating to adverse development
in several smaller accounts in North America.
<PAGE>
- Uncertainties regarding collectability raised by slow payments on two
accounts in Europe has resulted in the establishment of a reserve of
$1.8 million.
4. Rating Decline -- Standard and Poor's reduced the long term credit and
insurer financial strength ratings of the Company's reinsurance
subsidiaries from single-A-minus (strong) to triple-B (good). See "Current
Developments" included in this filing. Although this rating reduction may
negatively impact the Company's premium production in certain markets,
particularly London and North America, the Company intends to focus upon
the profitability of its North American reinsurance and underwriting
businesses and, consistent with its original business strategy, build upon
its operations in the Western Europe, Asian and Latin American regions.
5. The Company expects to divest itself of its Health Care Division in 2000
through raising external capital to fund the venture. The Company expects
to maintain a significant non-controlling equity investment in the venture.
CONSOLIDATED RESULTS
Consolidated results of operations for the three months and nine months ended
September 30, 1999 and 1998 are presented below. Consolidated results of
operation for the periods ended September 30, 1999 reflect the combined results
of operation of the Company's reinsurance and health care divisions.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
U.S dollars in thousands except per share data 1999 1998 1999 1998
<S> <C> <C> <C> <C>
Gross Managed Premium 63,337 58,800 266,527 177,400
Net Premium Written 59,919 53,915 243,789 157,597
-------- -------- -------- --------
Net Premium Earned 67,626 26,134 193,272 67,443
Less:
Losses & Loss Adjustment Expenses (57,012) (15,940) (140,672) (42,922)
Acquisition Costs (19,761) (7,324) (52,679) (17,028)
-------- -------- -------- --------
Total Underwriting Expenses (76,773) (23,264) (193,351) (59,950)
-------- -------- -------- --------
(Loss)/Profit from Underwriting (9,147) 2,870 (79) 7,493
Administrative Expenses (16,505) (2,467) (26,486) (8,771)
Net Investment Income 3,512 3,359 10,534 9,590
Net realized investment gains/(losses) (861) 386 (1,136) 1,712
Management Fee Revenue (159) 181 1,781 1,380
-------- -------- -------- --------
Net (loss)/income before taxes (23,160) 4,329 (15,386) 11,404
Income Tax Expense 0 335 311 912
-------- -------- -------- --------
Net (Loss)/Income (23,160) 3,994 (15,697) 10,492
-------- -------- -------- --------
(Loss)/Income excluding realized investment gains
(losses) (22,299) 3,608 (14,561) 8,780
Basic net (loss)/income per common share $ (1.68) $ 0.29 $ (1.13) $ 0.74
Diluted net (loss)/income per common share $ (1.68) $ 0.29 $ (1.13) $ 0.74
</TABLE>
ESG's net income for the three months ended September 30, 1999 decreased to a
loss of $23.16 million from a profit of $3.99 million for the comparable period
in 1998 despite an increase in Net Premium Earned to $67.63 million for the
third quarter of 1999 compared to $26.13 million for the comparable period in
1998. The decrease in net income is primarily attributable to $10.1 million in
additional losses due to a rapid deterioration of certain accounts in the North
American and European markets (see "Overview" above) as well as an increase in
administrative expenses, primarily relating to the Company's health care
division.
<PAGE>
SEGMENT RESULTS
The Company is organized into two divisions; reinsurance and health care.
Results of operations by division, for the three months and nine months ended
September 30, 1999 and 1998, are presented below.
REINSURANCE DIVISION
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
U.S dollars in thousands except per share data 1999 1998 1999 1998
<S> <C> <C> <C> <C>
Gross Managed Premium 63,337 58,800 266,527 177,400
Co-Reinsurance 2,383 3,457 17,806 16,539
-------- -------- -------- --------
Gross Premium Written 60,954 55,343 248,721 160,861
Retroceded 1,035 1,428 4,932 3,264
-------- -------- -------- --------
Net Premium Written 59,919 53,915 243,789 157,597
Net Premium Earned 67,626 26,134 193,272 67,443
Less:
Losses & Loss Adjustment Expenses (57,012) (15,940) (140,672) (42,922)
Acquisition Costs (19,761) (7,324) (52,679) (17,028)
-------- -------- -------- --------
Total Underwriting Expenses (76,773) (23,264) (193,351) (59,950)
-------- -------- -------- --------
(Loss)/Profit from Underwriting (9,147) 2,870 (79) 7,493
Operating Expenses (7,338) (2,002) (16,513) (6,161)
Net Investment Income 3,478 3,359 10,483 9,590
Net realized investment gains/(losses) (861) 386 (1,136) 1,712
Management Fee Revenue (159) 181 1,532 1,380
-------- -------- -------- --------
Net (loss)/income before taxes (14,027) 4,794 (5,713) 11,404
-------- -------- -------- --------
</TABLE>
Premium
Gross managed premium increased by $4.5 million and $89.1 million, or 7.7% and
50.2%, for the three and nine months ended September 30, 1999 respectively,
compared to the corresponding prior year periods. During the quarter, the
Company's representative office in Toronto, Canada, recognized additional
premium of $20 million on a medical account for the transition of group health
insurance coverage sold through affinity groups to alternative providers. This
increased the gross managed premium on this one account to $65 million.
Partially offsetting the increases in the gross managed premium during the
quarter was a decrease of $3.3 million due to the cancellation of a credit
account in Latin America. Also affecting the level of gross managed premium in
the three month ended September 30, 1999 was non-renewal in 1999 of an $8
million credit account in Latin America that was included in the comparable
period of 1998.
<PAGE>
Geographical Distribution
The Company has experienced significant growth in North America business in the
third quarter. The distribution of gross written premiums for the three months
ended September 30, 1999 and 1998 and for the year ended December 31, 1998, is
as follows:
<TABLE>
<CAPTION>
Three months ended Three months ended Year ended
September 30, 1999 September 30, 1998 December 31, 1998
- ------------------------------------- --------------------------- --------------------------- ------------------------
<S> <C> <C> <C>
Western Europe 8.7 % 18.9 % 30.9 %
North America 80.8 % 49.6 % 46.2 %
Latin America 0.8 % 30.0 % 14.9 %
Other 9.7 % 1.5 % 8.0 %
- ------------------------------------- --------------------------- --------------------------- ------------------------
Total 100.0 % 100.0 % 100.0 %
- ------------------------------------- --------------------------- --------------------------- ------------------------
</TABLE>
The distribution of gross written premiums for the nine months ended September
30, 1999 and 1998 and for the year ended December 31, 1998, is as follows:
<TABLE>
<CAPTION>
Nine months ended Nine months ended Year ended
September 30, 1999 September 30, 1998 December 31, 1998
- ------------------------------------- --------------------------- --------------------------- ------------------------
<S> <C> <C> <C>
Western Europe 26.7 % 37.0 % 30.9 %
North America 57.3 % 36.5 % 46.2 %
Latin America 8.6 % 18.2 % 14.9 %
Other 7.4 % 8.3 % 8.0 %
- ------------------------------------- --------------------------- --------------------------- ------------------------
Total 100.0 % 100.0 % 100.0 %
- ------------------------------------- --------------------------- --------------------------- ------------------------
</TABLE>
The growth in the percentage of gross written premiums written in the North
American region over these periods reflects the relatively greater development
to date of the Company's business operations in the region compared to those
being developed and established by the Company in other regions of the world.
The Company anticipates that this concentration of gross written premiums from
the North American region will continue through 1999 but will gradually decrease
as the Company grows its business operations in other regions and as its
business in North America is affected by the recent downgrading of the Company's
long term counterparty and insurer financial strength ratings (see "Current
Developments" included in this filing) and the Company's intention to increase
its focus upon the profitabiltiy of its North American business.
<PAGE>
Product Mix
The distribution of gross premiums written by line of business for the three
months and nine months ended September 30, 1999 and 1998, and for the year ended
December 31, 1998 was as follows:
<TABLE>
<CAPTION>
Three months ended Three months ended Year ended
September 30, 1999 September 30, 1998 December 31, 1998
- --------------------------------------- ------------------------ ----------------------------- ------------------------
<S> <C> <C> <C>
Medical 95.6 % 55.2% 59.6 %
Personal Accident 12.7 % 28.3 % 26.1 %
Credit (14.1) % 14.8 % 6.2 %
Life 1.9 % 1.4 % 5.5 %
Special Risk 2.7 % 0.3 % 2.6 %
Other 1.2 % -- % -- %
- --------------------------------------- ------------------------ ----------------------------- ----------------------
Total 100.0 % 100.0 % 100.0 %
- --------------------------------------- ------------------------ ----------------------------- ----------------------
<CAPTION>
- -------------------------------------- ------------------------- ------------------------- -----------------------------
Nine months ended Nine months ended Year ended
September 30, 1999 September 30, 1998 December 31, 1998
- --------------------------------------- ------------------------ ----------------------------- -------------------------
<S> <C> <C> <C>
Medical 75.3 % 52.0 % 59.6 %
Personal Accident 22.1 % 29.4 % 26.1 %
Credit (1.6) % 7.6 % 6.2 %
Life 2.1 % 7.5 % 5.5 %
Special Risk 0.9 % 3.5 % 2.6 %
Other 1.2 % -- % -- %
- --------------------------------------- ------------------------ ----------------------------- ----------------------
Total 100.0 % 100.0 % 100.0 %
- --------------------------------------- ------------------------ ----------------------------- ----------------------
</TABLE>
Underwriting Results
Underwriting results for the three months ended September 30, 1999, by line of
business and in total were as follows:
<TABLE>
<CAPTION>
Personal
U.S. dollars in thousands Medical Accident Special Credit Life Other Total
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Gross premiums written $ 58,251 $ 7,753 $ 1,629 $ (8,623) $ 1,183 $ 761 $ 60,954
==================================================================================
Net premiums written 57,554 7,485 1,562 (8,300) 1,141 477 59,919
==================================================================================
Net premiums earned 51,141 11,942 815 (88) 2,821 995 67,626
Losses and loss expenses 45,283 9,027 (300) 14 2,293 695 57,012
Acquisition costs 15,798 2,920 316 7 487 233 19,761
Operating costs 5,549 1,296 88 (9) 306 108 7,338
----------------------------------------------------------------------------------
Net underwriting income (loss) $(15,489) $ (1,301) $ 711 $ (100) $ (265) $ (41) $(16,485)
==================================================================================
</TABLE>
Medical results are impacted by $10.1 million of additional losses and loss
expenses due to the rapid deterioration of several major accounts in North
America:
- - A medical quota share contract in Maine covering both 1998 and 1999
underwriting years has developed into a 127% loss and acquisition ratio,
resulting in a loss of $4.3 million on the account
- - A large quota share contract covering 6 ceding companies is expected to
develop into a 98% loss and acquisition ratio, resulting in a loss of $2.1
million.
- - Unfavorable development on a large medical group health account resulting
in a loss of $2.1 million being added.
- - Reserve strengthening of $1.4 million relating to adverse development in
several smaller accounts in North America.
Personal Accident underwriting results reflect reserve strengthening on several
accounts acquired through our London office emanating from both the 1998 and
1999 underwriting years. Credit results primarily relate to the cancellation of
a Latin American risk in Colombia. Life results reflect additional claims on
Norwegian Life business.
<PAGE>
Underwriting results for the three months ended September 30, 1998, by line of
business and in total were as follows:
<TABLE>
<CAPTION>
Personal
U.S. dollars in thousands Medical Accident Special Credit Life Other Total
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Gross premiums written $ 30,516 $ 15,655 $ 190 $ 8,186 $ 796 $ -- $ 55,343
==============================================================================
Net premiums written 29,965 15,463 179 7,883 425 -- 53,915
==============================================================================
Net premiums earned 11,004 16,971 901 1,694 (4,436) -- 26,134
Losses and loss expenses 6,310 11,550 (42) 1,268 (3,146) -- 15,940
Acquisition costs 4,141 3,379 348 316 (860) -- 7,324
Operating costs 843 1,300 69 130 (340) -- 2,002
------------------------------------------------------------------------------
Net underwriting income (loss) $ (290) $ 742 $ 526 $ (20) $ (90) $ -- $ 868
==============================================================================
</TABLE>
Underwriting results for the nine months ended September 30, 1999, by line of
business and in total were as follows:
<TABLE>
<CAPTION>
Personal
U.S. dollars in thousands Medical Accident Special Credit Life Other Total
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Gross premiums written $ 187,358 $ 55,029 $ 2,294 $(4,125) $ 5,110 $ 3,055 $ 248,721
================================================================================
Net premiums written 184,466 53,440 2,214 (3,982) 4,954 2,697 243,789
================================================================================
Net premiums earned 151,721 28,633 2,170 1,679 7,015 2,054 193,272
Losses and loss expenses 113,585 19,553 374 764 5,206 1,190 140,672
Acquisition costs 42,999 6,796 833 405 975 671 52,679
Operating costs 12,716 2,618 190 139 642 208 16,513
--------------------------------------------------------------------------------
Net underwriting income (loss) $ (17,579) $ (334) $ 773 $ 371 $ 192 $ (15) $ (16,592)
================================================================================
</TABLE>
Underwriting results for the nine months ended September 30, 1998, by line of
business and in total were as follows:
<TABLE>
<CAPTION>
Personal
U.S. dollars in thousands Medical Accident Special Credit Life Other Total
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Gross premiums written $ 83,707 $ 47,329 $ 5,613 $ 12,177 $ 12,035 $ -- $ 160,861
==============================================================================
Net premiums written 82,487 46,360 5,433 11,752 11,565 -- 157,597
==============================================================================
Net premiums earned 24,790 34,505 2,050 3,166 2,932 -- 67,443
Losses and loss expenses 14,971 22,885 445 2,316 2,305 -- 42,922
Acquisition costs 8,540 6,875 751 501 361 -- 17,028
Operating costs 2,231 3,066 184 278 402 -- 6,161
------------------------------------------------------------------------------
Net underwriting income (loss) $ (952) $ 1,679 $ 670 $ 71 $ (136) $ -- $ 1,332
==============================================================================
</TABLE>
<PAGE>
Operating Expenses
Total reinsurance operating expenses for the three months ended September 30,
1999 were $7.3 million, compared to $2.0 million for the three months ended
September 30, 1998. Operating expenses for the nine months ended September 30,
1999 increased to $16.5 million from $6.2 million for nine months ended
September 30, 1998.
Total operating expenses for the three months ended September 30, 1999 represent
12.2% of net premiums written and 10.9% of net premiums earned, compared to 3.7%
and 7.7%, respectively, for the prior year. For the nine months ended September
30, 1999 operating expenses represent 6.8% of net premiums written and 8.5% of
net premiums earned, compared to 3.9% and 9.1%, respectively, for the comparable
period of the prior year.
The Company incurred $0.6 million in operating expenses in its new business
units in Thailand, Indonesia and Georgia. Excluding these offices, operating
expenses increased by $1.7 million over the three months ended June 30, 1999.
Personnel expenses increased by $0.5 million over the three months ended June
30, 1999 due to the continued investment in key personnel at the holding company
and various representative offices. Professional service fees increased by $0.7
million for the three months ended September 30, 1999 from $1.6 million in the
three months ended June 30, 1999. The increase was due to accounting, taxation
and legal costs associated with loss reserve reviews and the acquisition of new
entities in Indonesia and Thailand. Travel expenses increased by $0.3 million to
$0.8 million for the three months ended September 30, 1999 from $0.5 million in
the three months ended June 30, 1999. These travel expenses relate primarily to
the Company's continuing identification and investigation of new business and
underwriting opportunities and corporate governance. Foreign exchange losses of
$0.3 million were reported for the three months ended September 30, 1999, as
compared to profits of $0.2 million for the three months ended June 30, 1999.
Operating Ratios
The operating ratios for the three months ended September 30, 1999, by line of
business and in total were as follows:
<TABLE>
<CAPTION>
Personal Special
Medical Accident Risk Credit Life Other Total
- ---------------------------------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Loss ratio 88.5 % 75.6 % (36.9) % (15.9) % 81.3 % 69.8 % 84.3 %
Acquisition expense ratio 30.9 % 24.4 % 38.8 % (8.0) % 17.2 % 23.4 % 29.2 %
- ---------------------------------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Loss and acquisition expense
Ratio 119.4 % 100.0 % 1.9 % (23.9) % 98.5 % 93.2 % 113.5 %
- ---------------------------------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Operating expense ratio 10.9 %
===========
Combined ratio 124.4 %
===========
</TABLE>
The operating ratios for the three months ended September 30, 1998, by line of
business and in total were as follows:
<TABLE>
<CAPTION>
Personal Special
Medical Accident Risk Credit Life Other Total
- ---------------------------------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Loss ratio 57.3 % 68.1 % (4.7) % 74.9 % 70.9 % -- 61.0 %
Acquisition expense ratio 37.6 % 19.9 % 38.6 % 18.7 % 19.4 % -- 28.0 %
- ---------------------------------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Loss and acquisition expense
Ratio 94.9 % 88.0 % 33.9 % 93.6 % 90.3 % -- 89.0 %
- ---------------------------------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Operating expense ratio 7.7 %
===========
Combined ratio 96.7 %
===========
</TABLE>
<PAGE>
The operating ratios for the nine months ended September 30, 1999, by line of
business and in total were as follows:
<TABLE>
<CAPTION>
Personal Special
Medical Accident Risk Credit Life Other Total
- ---------------------------------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Loss ratio 74.9 % 68.3 % 17.2 % 45.5 % 74.2 % 57.9 % 72.8 %
Acquisition expense ratio 28.3 % 23.7 % 38.4 % 24.1 % 13.9 % 32.7 % 27.2 %
- ---------------------------------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Loss and acquisition expense
Ratio 103.2 % 92.0 % 55.6 % 69.6 % 88.1 % 90.6 % 100.0 %
- ---------------------------------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Operating expense ratio 8.5 %
===========
Combined ratio 108.5 %
===========
</TABLE>
The operating ratios for the nine months ended September 30, 1998, by line of
business and in total were as follows:
<TABLE>
<CAPTION>
Personal Special
Medical Accident Risk Credit Life Other Total
- ---------------------------------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Loss ratio 60.4 % 66.3 % 21.7 % 73.2 % 78.6 % -- 63.7 %
Acquisition expense ratio 34.4 % 19.9 % 36.6 % 15.8 % 12.3 % -- 25.2 %
- ---------------------------------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Loss and acquisition expense
Ratio 94.8 % 86.2 % 58.3 % 89.0 % 90.9 % -- 88.9 %
- ---------------------------------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Operating expense ratio 9.1 %
===========
Combined ratio 98.0 %
===========
</TABLE>
The operating expense ratios for the three months and nine months ended
September 30, 1999 and 1998, respectively, were calculated by expressing total
administrative expenses net of corporate office expenses and health care
division expenses, as a percentage of net premiums earned. For the three months
and nine months ended September 30, 1998, management fee revenue of $181,000 and
$1.4 million respectively, was deducted from operating expenses due to the
expense of administering the pool business of 1997 and prior underwriting years,
which the Company previously managed as a reinsurance management services
company.
Exposure Management
The Company manages its underwriting risk exposures through geographic
distribution, an excess of loss reinsurance program, and co-reinsurance. The
Company's excess liability insurance policy generally provides limits up to a
maximum of $30 million per occurrence, with a minimum attachment point generally
of $100,000.
The Company's non-North American business is co-reinsured with two other
reinsurance companies that have participation with underwriting lines totaling
12.5%; the North American business is co-reinsured with two companies, having a
total participation of 15.0%.
Management Fee Revenue
Management fee revenue for the quarter was $211,000, less a write-down of 1995
and 1996 profit commissions of $370,000, following an evaluation of those years'
pool results.
<PAGE>
HEALTH CARE DIVISION
Through its newly formed health care division, ESG Health, the Company offers
medical referral, second opinion and disease management services to the German
market. The new division includes COMED, a non-profit German healthcare
association which the Company helped to establish and IPT (Institut fuer
Praeventivmedizin & Technologie GmbH), a provider of doctor's referral and
second opinion services.
Results
<TABLE>
<CAPTION>
U.S dollars in thousands except per share data Three Months ended Nine Months Ended
September 30, 1999 September 30, 1999
<S> <C> <C>
Management Fee Income --- 249
Investment Income 34 51
-------------- --------------
Total Income 34 300
-------------- --------------
Less:
Personnel Expenses (411) (578)
Professional Service Fees (679) (796)
Heart Monitoring Technology services (1,295) (1,295)
Expenses Associated with COMED (5,879) (5,450)
Other expenses (482) (627)
-------------- --------------
Total Expenses (8,746) (8,746)
-------------- --------------
Net (Loss) $(8,712) $(8,446)
-------------- --------------
</TABLE>
Expenses of $8.7 million were incurred primarily in establishing ESG Health and
in repositioning the health care products. A provision of $5.5 million was
established for an outstanding loan to and receivables from COMED incurred since
its formation, of which $1 million related to additional loans in the three
months ended September 30, 1999 under the $12 million loan facility provided by
ESG in December 1998. COMED's ability to repay is dependent on its ability to
generate sufficient revenues from members. As of October 31, 1999, COMED had
recruited 583 members.
The Company, through its German subsidiary, "IPT" had $1.3 million in loans and
prepaid expenses under a service contract with a company to supply
heart-monitoring technology for resale to COMED and other healthcare providers.
These prepaid expenses will not be recovered as following the unsuccessful
launch of this heart-monitoring technology service, the Company has decided to
exit this business in the fourth quarter of 1999.
The Company expects to divest itself of its Health Care Division in 2000 through
raising external capital to fund the venture. The Company expects to maintain a
significant non-controlling equity investment in the venture.
INVESTMENT RESULTS
For the three months ended September 30, 1999, net investment income totaled
$3.5 million and net realized investment losses totaled $0.9 million. For the
three months ended September 30, 1998, net investment income and net realized
investment gains totaled $3.4 million and $0.4 million respectively. For the
nine months ended September 30, 1999, net investment income totaled $10.5
million and net realized investment losses totaled $1.1 million. For the nine
months ended September 30, 1998, net investment income and net realized
investment gains totaled $9.6 million and $1.7 million respectively. As of
September 30, 1999, total investments and cash were $240.7 million, a decrease
of $10.6 million from June 30, 1999.
<PAGE>
The following table reflects the investment results for the three months ended
September 30, 1999:
<TABLE>
<CAPTION>
Net Annualized Net Realized
Average Investment Effective Investment
U.S dollars in thousands Investments Income(1) Yield Losses
- ------------------------------------------- -------------- ---------------- ---------------- --------------
<S> <C> <C> <C> <C>
Fixed maturity investments $ 197,352 $ 2,957 6.0 % $ (861)
Other investments (2) 12,999 116 3.6 % --
Cash and cash equivalents 35,698 439 4.9 % --
- ------------------------------------------- -------------- ---------------- ---------------- --------------
Total $ 246,049 $ 3,512 5.7 % $ (861)
- ------------------------------------------- -------------- ---------------- ---------------- --------------
</TABLE>
(1) Net investment income is net of investment-related expenses and income on
premium receivable and funds held by ceding companies.
(2) Loans of $2.7 million were provided to COMED under its $12 million loan
facility, which were fully provided for.
The following table reflects the investment results for the three months ended
September 30, 1998:
<TABLE>
<CAPTION>
Net Annualized Net Realized
Average Investment Effective Investment
U.S dollars in thousands Investments Income(1) Yield Gains
- ------------------------------------------- -------------- ---------------- --------------- ----------------
<S> <C> <C> <C> <C>
Fixed maturity investments $ 218,624 $ 3,085 5.6 % $ 386
Other investments -- -- -- % --
Cash and cash equivalents 27,146 274 4.0 % --
- ------------------------------------------- -------------- ---------------- --------------- ----------------
Total $ 245,770 $ 3,359 5.5 % $ 386
- ------------------------------------------- -------------- ---------------- --------------- ----------------
</TABLE>
(1) Net investment income is net of investment related expenses.
The following table reflects the investment results for the nine months ended
September 30, 1999:
<TABLE>
<CAPTION>
Net Annualized Net Realized
Average Investment Effective Investment
U.S dollars in thousands Investments Income(1) Yield Losses
- ------------------------------------------- -------------- ---------------- ---------------- --------------
<S> <C> <C> <C> <C>
Fixed maturity investments $ 201,937 $ 9,194 6.1 % $ (1,136)
Other investments (2) 10,635 325 4.1 % --
Cash and cash equivalents 26,542 1,015 5.1 % --
- ------------------------------------------- -------------- ---------------- ---------------- --------------
Total $ 239,114 $ 10,534 5.9 % $ (1,136)
- ------------------------------------------- -------------- ---------------- ---------------- --------------
</TABLE>
(1) Net investment income is net of investment-related expenses and income on
premium receivable and funds held by ceding companies.
(2) In addition to the $2.7 million of loans provided to COMED, a further $7
million of equity investment and loans has been provided to two companies
that are expected to generate or secure profitable business for the
Company.
<PAGE>
The following table reflects the investment results for the nine months ended
September 30, 1998:
<TABLE>
<CAPTION>
Net Annualized Net Realized
Average Investment Effective Investment
U.S dollars in thousands Investments Income(1) Yield Gains
- ------------------------------------------- -------------- ---------------- --------------- ----------------
<S> <C> <C> <C> <C>
Fixed maturity investments $ 218,654 $ 9,079 5.5 % $ 1,712
Other investments -- -- -- % --
Cash and cash equivalents 21,209 511 3.2 % --
- ------------------------------------------- -------------- ---------------- --------------- ----------------
Total $ 239,863 $ 9,590 5.3 % $ 1,712
- ------------------------------------------- -------------- ---------------- --------------- ----------------
</TABLE>
(1) Net investment income is net of investment related expenses.
Liquidity and Capital Resources
As of September 30, 1999, total investments and cash were $240.7 million
compared to $235.2 million at December 31, 1998. Cash flow from operating
activities for the nine months ended September 30, 1999 was $26.3 million with
two significant accounts contributing $15.4 million of positive cash flow. All
fixed maturity securities in the Company's investment portfolio are classified
as available for sale and are carried at fair value. The following table
summarizes the fixed maturity investment portfolio as of September 30, 1999.
<TABLE>
<CAPTION>
Average
U.S. dollars in thousands Fair Duration Market Credit
Value (Years) Yield Rating
- ------------------------------------------------ -------------- --------------- -------------- ------------
<S> <C> <C> <C> <C>
Corporate securities $ 123,864 3.0 6.9 % A+
U.S. treasury securities and obligations of
U.S. government corporations and agencies
22,476 1.9 5.2 % AAA
Mortgage & Asset backed securities 16,392 3.2 7.3 % AAA
Obligations of states and political
subdivisions 17,984 2.3 6.6 % AAA
Foreign currency debt securities 14,464 3.9 4.7 % AAA
- ------------------------------------------------ -------------- --------------- ------------- -------------
Total $ 195,180 2.9 6.5 % AA
- ------------------------------------------------ -------------- --------------- ------------- -------------
</TABLE>
By comparison, at December 31, 1998, the fixed maturity investment portfolio
analysis was as follows:
<TABLE>
<CAPTION>
Average
U.S. dollars in thousands Fair Duration Market Credit
Value (Years) Yield Rating
- ------------------------------------------------ -------------- --------------- -------------- ------------
<S> <C> <C> <C> <C>
Corporate securities $138,727 3.1 5.7 % AA
U.S. treasury securities and obligations of
U.S. government corporations and agencies
31,698 1.5 4.4 % AAA
Mortgage & Asset backed securities 9,232 0.8 5.8 % AAA
Obligations of states and political
subdivisions 24,647 2.3 5.9 % AA
Foreign currency debt securities 8,083 3.4 3.5 % AA
- ------------------------------------------------ -------------- --------------- ------------- -------------
Total $212,387 2.6 5.2 % AA
- ------------------------------------------------ -------------- --------------- ------------- -------------
</TABLE>
The Company's investment policy objective is to maximize long-term investment
returns while maintaining a liquid, high-quality portfolio. To this end, the
investment policy requires that the portfolio have an average credit quality
rating of AA, no more than 3% of the portfolio invested in the securities of a
single issuer (other than issues of sovereign governments with a rating of AA or
better), and a target duration of 2.75 years. The Company's investment portfolio
reflects its investment policy and guidelines.
The Company expects that its financial and operational needs for the foreseeable
future will be met by funds generated from operations and from liquidating a
small percentage of its investment portfolio. The Company expects to remain
highly capitalized after any near-term investment portfolio liquidation.
<PAGE>
Shareholders' equity as of September 30, 1999 was $214.7 million compared to
$244.8 million at December 31, 1998. The major factors contributing to the
decrease in shareholders' equity included $15.7 million of net losses, the
Company's repurchase of $5.8 million of its common shares, net unrealized
investment losses of approximately $4.9 million and the Company's declaration of
cumulative dividends of $0.24 per common share. Book value per common share
decreased to $16.11 as of September 30, 1999 from $17.58 as of December 31,
1998.
Current Developments
A quarterly cash dividend of $0.08 per share was declared on November 8, 1999 by
the Company's Board of Directors, payable on December 8, 1999 to common
shareholders of record on November 22, 1999.
In March 1999, Odyssey Re instituted an action in New York against a broker,
Stirling Cooke Brown, alleging fraud and violation of U.S. racketeering statutes
on the reinsurance placement of 1997 and 1998 Personal Accident and Workers
Compensation "carve out" business with Odyssey Re. On or about July 1, 1998, ESG
accepted a 25% quota share reinsurance treaty with Odyssey Re (UK) retroactive
to January 1, 1998. This treaty covers various reinsurance contracts
underwritten by Odyssey Re (UK) and retroceded to ESG. Among these cedants are
various insurance companies involved in the litigation Odyssey Re instituted in
New York over 1997 and 1998 business. This treaty terminated as of December 31,
1998 but ESG renewed its participation for 1999 directly to one of those
cedents. The Company continues to investigate its position regarding possible
misrepresentation and failure to disclose material facts and is unable at this
time to determine the amount of its exposure and the possible effect upon the
Company's business, financial condition or results of operation.
During the quarter the Company extended further loans to COMED, the new German
healthcare association which the Company helped to establish, under the loan
facility of $12 million provided in December 1998. At September 30, 1999, $2.7
million is outstanding under this facility and is fully provided for. The
ability of COMED to repay the loan is dependent on its ability to generate
sufficient revenues from members. Under the terms of the loan agreement, the
Company has the right to refuse any further disbursements where the ability of
COMED to repay the loan is in doubt.
The Company has repurchased 695,400 shares of its common stock, equivalent to 5%
of the outstanding shares of ESG Re Limited under its Common Stock Repurchase
Program as of October 31, 1999. The average purchase price was $9.79. On October
6, 1999, the Company authorized the repurchase of an additional 1,000,000 common
shares.
On September 10, 1999, John C Head was appointed Chief Executive Officer of the
Company, effective October 1, 1999, following the resignation of Wolfgang Wand
effective September 30, 1999; Edward Tilly, formerly a non-executive director of
the Company was appointed Deputy Chairman; and Steven Debrovner was appointed
Chief Executive Officer of the Reinsurance division, having previously been
Chief Marketing and Underwriting Officer of the Company. Dr. Gerald Moeller was
appointed Chief Executive Officer of the Health Care Division on July 1, 1999.
The Company announced the departure of Renate Nellich, President and CEO of ES
North America, ESG's marketing and underwriting manager in Toronto, Canada,
effective November 5, 1999. Marty Hatfield, Senior Vice President, Marketing,
Underwriting and Claims, will assume the role of Regional Executive for North
America.
On November 11, 1999, the Company was notified that Standard & Poor's lowered
the long term counterparty credit and insurer financial strength ratings of the
Company's reinsurance subsidiaries from single-A-minus (strong) to triple-B
(good). Standard & Poor's cited (i) weak earnings performance in the North
American market, (ii) concerns over internal control mechanisms and wide-scale
changes in its management team, and (iii) a departure from its original business
development strategy as the motivating factors behind its decision. However, the
rating agency listed the Company's extremely strong current capitalization as a
mitigating factor in its decision. The Company expects to return to its original
business development strategy by refocusing its underwriting efforts on certain
markets other than the North American market in the future.
MARKET RISK
The Company is subject to market risk arising from the potential change in value
of its various financial instruments. These changes may be due to fluctuations
in interest rates or foreign exchange rates, or both in the case of foreign
currency investments. The Company monitors its exposure to interest rate and
currency rate risk on a continuous basis and currently does not believe that the
use of derivatives to manage such risk is necessary. The Company intends to
reevaluate the need for a formal hedging strategy on a periodic basis, and may
determine that such a strategy, including the use of derivative instruments, is
appropriate in the future.
<PAGE>
INTEREST RATE RISK
The largest source of market risk for the Company is interest rate risk on its
portfolio of fixed maturity investments, especially fixed rate instruments. In
addition, the credit worthiness of the issuer, relative values of alternative
investments, liquidity and general market conditions may affect fair values of
interest rate sensitive instruments.
The Company's general strategy with respect to fixed maturity securities is to
invest in high quality securities while maintaining diversification and to avoid
significant concentrations in individual issuers' industry segments or
countries.
FOREIGN CURRENCY RISK
The Company's functional currency is the U.S. dollar. However, the Company
writes reinsurance business in numerous geographic regions and currencies,
giving rise to the risk that the ultimate settlement of receivables and payables
on reinsurance transactions will differ from the amounts currently recorded as
assets and liabilities in the financial statements. The Company intends to hold
investments in currencies in which it will collect premiums and pay claims, thus
creating a partial natural hedge against exchange rate fluctuations.
INFLATION
Inflation has not had a material impact on the Company's operations for the
periods presented. The Company has commenced writing reinsurance business in
Latin America, particularly in Brazil, which has experienced periods of high
inflation. It is possible that future inflationary conditions may impact
subsequent accounting periods.
THE EURO
On January 1, 1999, a single currency, the "euro" was adopted as the national
currency of the 11 participating countries in the European Monetary Union,
including Germany and Ireland, two of the countries in which the Company
operates and in which the Company maintains a significant presence. The
Company's German and Irish subsidiaries will not be required to use the euro for
accounting purposes prior to January 1, 2002. Due to uncertainties related to
the euro conversion, the impact of the conversion is not known. To date, the
impact of the conversion has had no material impact on the Company's operations,
accounting systems or financial reporting. The Company's general ledger systems
have been upgraded to a euro compliant platform.
YEAR 2000 ISSUE
The Year 2000 Issue relates to the ability of computer systems to properly
interpret date information for the year 2000 and beyond. In January 1998, the
Company initiated an enterprise-wide project to address Year 2000 issues with
respect to the Company's computer software and information technology systems.
The initiative had as its focus two distinct areas that include Year 2000
compliance of the Company's software, systems and technology platforms and the
evaluation of the Year 2000 preparedness of significant third parties with whom
the Company conducts business, including vendors and customers.
The Company has completed this initiative.
The Company's systems do not interface electronically with those of its
customers or clients. As such, the Company's exposure to the Year 2000 issue
with respect to customers and clients is limited to the possibility that
information supplied by these companies could not be of sufficient quality or
timeliness and therefore could indirectly affect the quality or timeliness of
the Company's own data. The Company has communicated with its significant
clients and service providers to assess their vulnerability and readiness to
comply with Year 2000 issues and will address compliance risks with each new
significant vendor.
<PAGE>
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There are no lawsuits pending, or to the knowledge of the Company threatened, to
which the Company or any of its subsidiaries or affiliates is a party or of
which any of their properties is subject other than the routine litigation
incidental to the business.
ITEM 2. CHANGES IN SECURITIES
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
No matters were submitted to a vote of stockholders during the third quarter of
this fiscal year.
ITEM 5. OTHER TRANSACTIONS
Not applicable.
ITEM 6. EXHIBITS
(a) Exhibits
Exhibit 11.1 Computation of Earnings Per Share
Exhibit 15.1 Consent of Deloitte & Touche
Exhibit 27.1 Financial Data Schedule
(b) Report on Form 8-K
The Company filed one report on Form 8-K during the reporting period on
September 10, 1999 to announce the resignation of Mr. Wolfgang Wand as Chief
Executive Officer and Director and the appointment of Mr. John C Head as his
replacement as Chief Executive Officer. The Company also announced the election
of Edward A. Tilly as Deputy Chairman and the appointment of Steven Debrovner as
Chief Executive of the Company's reinsurance operation. The Company also
announced that it has decided to expense currently all costs associated with its
health care initiatives in a charge of up to $7 million.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Company has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
November 15, 1999
ESG RE LIMITED
By: /s/ Joan H. Dillard
-------------------------------
Name: Joan H. Dillard
Title: Chief Financial Officer
Exhibit 11.1
Computation of Earnings Per Share
The following is a reconciliation of the numerators and denominators of the
basic and diluted earnings per share computations for income from continuing
operations:
<TABLE>
<CAPTION>
U.S. dollars in thousands except share and per Income Shares Per Share
share data (Numerator) (Denominator) Amount
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Three Months Ended September 30, 1999
- --------------------------------------------------
Basic loss per share
Loss available to common shareholders $(23,160) 13,792,450 $(1.68)
Effect of Dilutive Securities:
Class A Warrants --
Director and Employee Options --
Class B Warrants --
--------------------------------------------------
Diluted loss per share
Loss available to common shareholders $(23,160) 13,792,450 $(1.68)
==================================================
Three Months Ended September 30, 1998
- --------------------------------------------------
Basic earnings per share
Income available to common shareholders $3,994 13,923,799 $0.29
Effect of Dilutive Securities:
Class A Warrants --
Director and Employee Options 772
Class B Warrants --
--------------------------------------------------
Diluted earnings per share
Income available to common shareholders $3,994 13,924,571 $0.29
==================================================
Nine Months Ended September 30, 1999
- --------------------------------------------------
Basic loss per share
Loss available to common shareholders $(15,697) 13,879,235 $(1.13)
Effect of Dilutive Securities:
Class A Warrants --
Director and Employee Options 546
Class B Warrants --
--------------------------------------------------
Diluted earnings per share
Income available to common shareholders $(15,697) 13,879,781 $(1.13)
==================================================
Nine Months Ended September 30, 1998
- --------------------------------------------------
Basic earnings per share
Income available to common shareholders $10,492 13,923,799 $0.75
Effect of Dilutive Securities:
Class A Warrants 164,516
Director and Employee Options 51,729
Class B Warrants 32,903
--------------------------------------------------
Diluted earnings per share
Income available to common shareholders $10,492 14,172,947 $0.74
==================================================
</TABLE>
EXHIBIT 15.1
CONSENT OF DELOITTE AND TOUCHE
November 15, 1999
ESG Re Limited
Skandia International House
16 Church Street
Hamilton, Bermuda
We have made a review, in accordance with standards established by the American
Insitutute of Certified Public Accountants, of the unaudited interim financial
information of ESG Re Limited and subsidiaries for the periods ended September
30, 1999 and 1998, as indicated in our report dated November 8, 1999 because we
did not perform an audit, we expressed no opinion on that information.
We are aware that our report referred to above, which is included in your
Quarterly Report on Form 10-Q for the quarter ended September 30, 1999 is
incorporated by reference in Registration Statement No. 333-40107 on Forms S-8
and in Registration Statement No. 333-76983 of Form S-3.
We are also aware that the aforementioned report, pursuant to Rule 436(c) under
the Securities Act of 1933, is not considered a part of the Registration
Statement prepared or certified by an accountant or a report prepared or
certified by an accountant within the meaning of Sections 7 and 11 of that Act.
/s/ Deloitte & Touche
- -------------------------
Deloitte & Touche
Hamilton, Bermuda
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
This schedule contains summary financial information extracted from the
condensed consolidated balance sheet at September 30, 1999 and condensed
consolidated statement of operations for the quarter ended September 30, 1999,
and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<DEBT-HELD-FOR-SALE> 195,180
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 0
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 206,984
<CASH> 33,738
<RECOVER-REINSURE> 11,370
<DEFERRED-ACQUISITION> 52,975
<TOTAL-ASSETS> 628,885
<POLICY-LOSSES> 126,419
<UNEARNED-PREMIUMS> 166,520
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 0
0
0
<COMMON> 13,324
<OTHER-SE> 220,985
<TOTAL-LIABILITY-AND-EQUITY> 628,885
59,919
<INVESTMENT-INCOME> 3,512
<INVESTMENT-GAINS> (861)
<OTHER-INCOME> (159)
<BENEFITS> 57,012
<UNDERWRITING-AMORTIZATION> 19,761
<UNDERWRITING-OTHER> 0
<INCOME-PRETAX> (23,160)
<INCOME-TAX> 0
<INCOME-CONTINUING> (23,160)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 0
<EPS-BASIC> (1.68)
<EPS-DILUTED> (1.68)
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
