<PAGE>
UNITED STATES
-------------
SECURITIES AND EXCHANGE COMMISSION
----------------------------------
Washington, D.C. 20549
----------------------
FORM 10 - Q
-----------
Quarterly Report Under Section 13 or 15 (d)
of the Securities Exchange Act of 1934
___________________
For Quarter Ended March 31, 1999 Commission file Number 0-11538
-------------- -------
Overseas Partners Ltd.
---------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Islands of Bermuda N/A
-------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Mintflower Place, 8 Par-la-Ville Road, Hamilton HM 08, Bermuda
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (441) 295-0788
---------------
Not Applicable
------------------------------------------------------
Former name, former address and former fiscal year, if changed since last report
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, and (2) has been subject to such filing requirements
for the past 90 days.
YES X NO
---- ----
Common Stock, par value $.10 per share
--------------------------------------
(Title of Class)
127,500,000 Shares
------------------
Outstanding at May 11, 1999
1
<PAGE>
PART I, FINANCIAL INFORMATION
-----------------------------
OVERSEAS PARTNERS LTD. AND SUBSIDIARIES
---------------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
(In thousands, except share and per share amounts)
--------------------------------------------------
<TABLE>
<CAPTION>
March 31, December 31,
--------- ------------
1999 1998
---- ----
(Unaudited)
-----------
ASSETS:
<S> <C> <C>
Cash and cash equivalents $ 223,039 $ 170,855
Investments:
Trading, at fair value-
Debt securities (amortized cost 1999-$542,665, 1998-$508,427) 536,111 536,017
Equity securities (cost 1999 -$1,366,711, 1998 -$1,353,321) 1,725,282 1,657,751
Restricted investments, held-to-maturity, at amortized cost
(fair value 1999-$288,266, 1998 -$292,236) 248,741 244,821
Receivables 685,079 500,710
Deferred acquisition costs 107,958 79,450
Real estate and leasing:
Operating leases with UPS 100,717 101,340
Finance leases 46,446 46,779
Hotel 163,268 164,601
Office buildings 804,110 810,033
Other assets
Goodwill 21,598 22,242
Other 36,849 33,744
- -----------------------------------------------------------------------------------------------------------
Total assets $ 4,699,198 $ 4,368,343
- -----------------------------------------------------------------------------------------------------------
LIABILITIES AND MEMBERS' EQUITY:
Liabilities:
Accrued losses and loss expenses $ 504,746 $ 468,326
Unearned premiums 565,740 352,392
Reinsurance balances payable 39,953 28,293
Accounts payable and other accruals 58,171 55,403
Deferred income taxes 17,409 18,565
Long-term debt 873,446 875,684
Minority interest 44,190 45,011
- -----------------------------------------------------------------------------------------------------------
Total liabilities 2,103,655 1,843,674
- -----------------------------------------------------------------------------------------------------------
Members' equity:
Preference Stock, par value $0.10 per share; authorized 200 million shares;
none issued -- --
Common Stock, par value $0.10 per share; authorized 900 million shares;
issued and outstanding, 127.5 million shares in 1999 and 1998 12,750 12,750
Contributed surplus 39,991 39,757
Retained earnings 2,582,349 2,476,865
Treasury stock (1,993,282 shares - 1999, 276,662 shares - 1998), at cost (39,547) (4,703)
Total members' equity 2,595,543 2,524,669
- -----------------------------------------------------------------------------------------------------------
Total liabilities and members' equity $ 4,699,198 $ 4,368,343
- -----------------------------------------------------------------------------------------------------------
</TABLE>
See notes to unaudited consolidated financial statements.
2
<PAGE>
OVERSEAS PARTNERS LTD. AND SUBSIDIARIES
---------------------------------------
CONSOLIDATED STATEMENTS OF INCOME
---------------------------------
(In thousands, except per share amounts)
----------------------------------------
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1999 1998
---- ----
REVENUES:
<S> <C> <C>
Gross reinsurance premiums written $ 425,379 $ 279,127
Reinsurance premiums ceded (8,120) (2,402)
- --------------------------------------------------------------------------------------------------------------
Reinsurance premiums written 417,259 276,725
Change in unearned premiums (207,907) 115,032)
- --------------------------------------------------------------------------------------------------------------
Reinsurance premiums earned 209,352 161,693
Commission income 1,387 1,501
Operating leases with UPS 4,227 10,127
Finance leases 957 986
Hotel 20,329 18,159
Office buildings 37,650 29,445
Interest 12,856 15,552
Net holding gain on trading securities 30,767 119,974
Amortization of fixed income securities 3,656 1,289
Dividends 3,343 5,079
- --------------------------------------------------------------------------------------------------------------
324,524 363,805
- --------------------------------------------------------------------------------------------------------------
EXPENSES:
Reinsurance losses and loss expenses 122,108 77,996
Reinsurance commissions and taxes 27,207 25,055
Depreciation expense 8,921 8,549
Real estate and leasing operating expenses 34,742 31,594
Interest expense 18,300 15,772
Minority interest in earnings 565 617
Investment expenses 1,455 1,288
Other operating expenses (including amortization of
goodwill 1999 - $0.6 million, 1998 - $0.6 million) 3,605 2,915
- --------------------------------------------------------------------------------------------------------------
216,903 163,786
- --------------------------------------------------------------------------------------------------------------
Income before income taxes 107,621 200,019
Income taxes (2,137) (3,195)
- --------------------------------------------------------------------------------------------------------------
Net income $ 105,484 $ 196,824
- --------------------------------------------------------------------------------------------------------------
Basic and diluted net income per share $ 0.84 $ 1.56
- --------------------------------------------------------------------------------------------------------------
Weighted average number of shares outstanding 125,669 126,463
- --------------------------------------------------------------------------------------------------------------
</TABLE>
See notes to unaudited consolidated financial statements.
3
<PAGE>
OVERSEAS PARTNERS LTD. AND SUBSIDIARIES
---------------------------------------
CONSOLIDATED STATEMENTS OF MEMBERS' EQUITY
------------------------------------------
Three Months Ended March 31, 1999 and 1998
------------------------------------------
(In thousands)
--------------
(Unaudited)
-----------
<TABLE>
<CAPTION>
Common Stock Treasury Stock Total
Preference ------------ -------------- Contributed Retained Members'
Stock Shares Amount Shares Amount Surplus Earnings Equity
---------- ------ ------ ------ ------ ------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1998 $ -- 131,000 $13,100 -- $ -- $26,642 $2,187,420 $2,227,162
Net income -- -- -- -- -- -- 196,824 196,824
Transfer of Common Stock held
for stock plans -- -- -- (1,746) (24,859) -- -- (24,859)
Retirement of treasury stock -- (4,000) (400) 4,000 68,000 -- (67,600) --
Purchase of shares -- -- -- (5,965) (101,402) -- -- (101,402)
Sale of treasury stock -- -- -- 1,649 23,199 4,665 -- 27,864
- ------------------------------------------------------------------------------------ ----------------------------------
Balance, March 31, 1998 $ -- 127,000 $12,700 (2,062) $(35,062) $31,307 $2,316,644 $2,325,589
- ------------------------------------------------------------------------------------------------- ---------------------
Balance, January 1, 1999 $ -- 127,500 $12,750 (277) $ (4,703) $39,757 $2,476,865 $2,524,669
Net income -- -- -- -- -- -- 105,484 105,484
Purchase of shares -- -- -- (5,208) (103,294) -- -- (103,294)
Sale of treasury stock -- -- -- 3,492 68,450 234 -- 68,684
- -------------------------------------------------------------------- --------------------------------------------------
Balance, March 31, 1999 $ -- 127,500 12,750 (1,993) $(39,547) $39,991 $2,582,349 $2,595,543
- ------------------------------------------------------------------- ---------------------------------------------------
</TABLE>
See notes to unaudited consolidated financial statements.
4
<PAGE>
OVERSEAS PARTNERS LTD. AND SUBSIDIARIES
---------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(U.S.$ in thousands)
--------------------
(Unaudited)
-----------
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1999 1998
---- ----
CASH FLOW FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net income $ 105,484 $ 196,824
Adjustments to reconcile net income to net cash
provided by operating activities:
Deferred income taxes 2,137 787
Depreciation 8,921 8,549
Minority interest in earnings 565 617
Net holding gain on trading securities (30,767) (119,974)
Amortization of fixed income securities (3,656) (1,289)
Other (3,688) 1,445
Changes in assets and liabilities:
Interest and premiums receivable (183,751) (114,155)
Reinsurance recoverable on paid and unpaid losses (2,066) (254)
Unearned premiums ceded (5,442) (1,277)
Rentals receivable (5,060) (11,478)
Deposits with insurers 6,507 5,173
Deferred acquisition costs (28,508) (24,773)
Other assets 2,337 (2,706)
Accrued losses and loss expenses 36,420 13,737
Unearned premiums 213,348 116,309
Reinsurance balance payable 11,660 2,704
Accounts payable and other accruals 2,769 2,319
Proceeds from sale of traded investments 259,252 210,159
Purchases of traded investments (296,375) (336,641)
- ------------------------------------------------------------------------------------------------------------
Net cash flow provided (used) by operating activities 90,087 (53,924)
- ------------------------------------------------------------------------------------------------------------
CASH FLOW FROM INVESTING ACTIVITIES:
Additions to fixed assets (1,041) (3,925)
- ------------------------------------------------------------------------------------------------------------
Net cash flow used by investing activities (1,041) (3,925)
- ------------------------------------------------------------------------------------------------------------
CASH FLOW FROM FINANCING ACTIVITIES:
Purchases of shares (103,294) (101,402)
Proceeds from sale of treasury stock 68,684 27,864
Repayment of debt (2,252) (1,891)
- ------------------------------------------------------------------------------------------------------------
Net cash flow used by financing activities (36,862) (75,429)
- ------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 52,184 (133,278)
Cash and cash equivalents:
Beginning of period 170,855 355,056
- ------------------------------------------------------------------------------------------------------------
End of period $ 223,039 $ 221,778
- ------------------------------------------------------------------------------------------------------------
Amounts paid for:
U.S. income taxes $ 7,941 $ 2,466
- ------------------------------------------------------------------------------------------------------------
Interest $ 11,193 $ 9,905
- ------------------------------------------------------------------------------------------------------------
</TABLE>
See notes to unaudited consolidated financial statements.
5
<PAGE>
OVERSEAS PARTNERS LTD. AND SUBSIDIARIES
---------------------------------------
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
MARCH 31, 1999
--------------
(Unaudited)
-----------
1. GENERAL
-------
The accompanying unaudited interim consolidated financial statements include the
accounts of Overseas Partners Ltd. and its subsidiaries (collectively OPL or the
Company). OPL is engaged in the property, casualty and life reinsurance business
and in the real estate and leasing business.
The interim financial statements have been prepared pursuant to the rules and
regulations for reporting on Form 10-Q. Accordingly, certain information and
footnotes required by generally accepted accounting principles for complete
financial statements are not included herein. The interim financial statements
should be read in conjunction with the Overseas Partners Ltd. Annual Report on
Form 10-K for the fiscal year ended December 31, 1998.
Interim financial statements are subject to possible adjustments in connection
with the annual audit of the Company's financial statements for the full year;
in the Company's opinion, all adjustments necessary for a fair presentation of
these interim statements have been included and are of a normal and recurring
nature.
The results of operations for the three-month periods ended March 31, 1999 and
1998 are not necessarily indicative of the results to be expected for the full
year.
2. SIGNIFICANT ACCOUNTING POLICIES
-------------------------------
The financial statements have been prepared in accordance with accounting
principles generally accepted in the United States of America. All activity is
recorded in U.S. dollars. The accompanying consolidated financial statements
include the accounts of OPL. Inter-company balances and transactions have been
eliminated in consolidation.
A statement of comprehensive income is not included as OPL's net income equals
comprehensive income.
The operating leases are with subsidiaries of United Parcel Service of America
Inc. (UPS).
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" (SFAS 133). SFAS 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and hedging activities. It requires
that an entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value.
SFAS 133 is effective beginning in the first quarter of fiscal 2000 and is not
expected to have a material impact on the Company's financial position. OPL has
no exposure to derivative instruments and hedging activities at this time.
Certain prior year amounts have been reclassified to conform to the current year
presentation.
3. TAXES
-----
OPL is organized under the laws of the Islands of Bermuda and does not consider
itself to carry on business through a permanent establishment in the United
States and, therefore, does not expect to be subject to U.S. income taxes.
Certain of OPL's subsidiaries engage in business in the U.S., primarily Overseas
Partners Capital Corp. (OPCC), and as a result, it, but not OPL, is subject to
U.S. income taxes. Under current Bermuda law, OPL is not obligated to pay any
tax in Bermuda based upon income or capital gains.
6
<PAGE>
OVERSEAS PARTNERS LTD. AND SUBSIDIARIES
---------------------------------------
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
MARCH 31, 1999
--------------
(Unaudited)
-----------
3. TAXES (continued)
-----
The United States Internal Revenue Service (IRS) issued a Notice of Deficiency
with respect to the Company's 1984 taxable year in which it asserted that the
Company was subject to U.S. taxation in the amount of approximately $53 million,
plus additions to tax and interest, for that year. The Company filed a Petition
in the United States Tax Court contesting the proposed assessment of tax in the
Notice of Deficiency. A trial was held before the United States Tax Court during
the fall of 1997. On February 13, 1998, the IRS indicated that it no longer
intended to pursue its position against the Company for 1984. On January 21,
1999, the Court decided and ordered that there is no deficiency in income tax
and no additional tax due from the Company for 1984. The IRS also asserted that
the Company was subject to U.S. taxation for its 1985 through 1987 taxable years
and proposed an aggregate assessment of $240 million of tax, plus additions to
tax and interest, for those years. On January 4, 1999, the IRS indicated that it
no longer intended to pursue its position against the Company for 1985 through
1987. On December 22, 1998, the IRS issued a Notice of Deficiency with respect
to the Company's 1988 through 1990 taxable years in which it asserted that the
Company is subject to U.S. taxation in the aggregate amount of approximately
$170 million, plus additions to tax and interest, for those years. The IRS has
not proposed an assessment for years subsequent to 1990. However, the IRS may
take similar positions for subsequent years pending resolution of the years
currently in dispute.
OPL believes that it has no tax liability, that it is not subject to U.S.
taxation, and that there is substantial authority for its position. It has
vigorously contested the Notice of Deficiency for 1988 through 1990 and will
vigorously contest proposed assessments or any future assessments.
4. BUSINESS SEGMENTS
-----------------
The Company's operations are presently conducted through two segments:
reinsurance and real estate and leasing. The reinsurance segment is managed from
the Bermuda office and underwrites shipper's risk, accident and health,
automobile, aviation, marine, property and workers compensation reinsurance.
Real estate and leasing activities are owned and managed through subsidiaries of
Overseas Partners Capital Corp., a wholly owned subsidiary of OPL. There were no
intersegment revenues earned for the periods ended March 31, 1999 and 1998.
Intersegment expenses, such as corporate overhead, were allocated based on
estimated utilization for the periods ended March 31, 1999 and 1998.
The accounting policies of the segments are the same as those described in the
summary of significant accounting policies disclosed in the Overseas Partners
Ltd. Annual Report on Form 10-K for the fiscal year ended December 31, 1998.
Income before income taxes by segment consists of revenues less expenses related
to the respective segment's operations. The reinsurance segment maintains a
portfolio of liquid investments to support its reserves for accrued losses and
loss expenses and unearned premiums as well as its capital requirements.
Investments relating to real estate and leasing are primarily used to
collateralize long-term debt issued in connection with the purchase of assets
under operating leases. Summary financial information about the Company's
segments is presented in the following table.
7
<PAGE>
OVERSEAS PARTNERS LTD. AND SUBSIDIARIES
---------------------------------------
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
MARCH 31, 1999
--------------
(Unaudited)
-----------
<TABLE>
<CAPTION>
5. BUSINESS SEGMENTS (continued)
-----------------
Three months ended March 31,
----------------------------
(In thousands) 1999 1998
- ------------------------------------------------------------------------------------------------------------
REVENUES
Reinsurance:
<S> <C> <C>
Premiums earned $ 209,352 $ 161,693
Commission income 1,387 1,501
Investment income 46,963 138,271
- ------------------------------------------------------------------------------------------------------------
257,702 301,465
- ------------------------------------------------------------------------------------------------------------
Real estate and leasing:
Rentals 63,163 58,718
Investment income 3,659 3,622
- ------------------------------------------------------------------------------------------------------------
66,822 62,340
- ------------------------------------------------------------------------------------------------------------
Consolidated $ 324,524 $ 363,805
- ------------------------------------------------------------------------------------------------------------
NET INCOME BEFORE TAXES
Reinsurance $ 106,932 $ 197,128
Real estate and leasing 4,294 5,806
Other administrative expenses (3,605) (2,915)
- ------------------------------------------------------------------------------------------------------------
Consolidated $ 107,621 $ 200,019
- ------------------------------------------------------------------------------------------------------------
March 31, 1999 December 31, 1998
-------------- -----------------
ASSETS
Reinsurance
Cash and investments $ 2,386,630 $ 2,273,000
Other 787,185 572,965
- ------------------------------------------------------------------------------------------------------------
3,173,815 2,845,965
- ------------------------------------------------------------------------------------------------------------
Real estate and leasing
Cash and investments 359,443 350,715
Other 1,165,940 1,171,662
- ------------------------------------------------------------------------------------------------------------
1,525,383 1,522,377
- ------------------------------------------------------------------------------------------------------------
Consolidated $ 4,699,198 $4,368,342
- ------------------------------------------------------------------------------------------------------------
</TABLE>
Substantially all of the Company's long-lived assets, interest expense,
depreciation expense and income tax expense relate to the Company's real estate
and leasing operations.
Approximately 80% of reinsurance revenues are generated from sources located in
the United States; the remainder is derived from customers located primarily in
European countries. All of the Company's leasing and real estate revenues are
generated in the United States. For 1999 and 1998, all of the Company's
long-lived assets were located in the United States.
The shipper's risk program represents a major source of premiums for OPL's
reinsurance business. OPL reinsures shipper's risk insurance issued by U.S.
based companies covering loss or damage to packages carried by subsidiaries of
UPS. OPL expects that package reinsurance will continue to be a significant part
of its reinsurance business. Earned premiums on shipper's risk reinsurance were
$90.3 million and $90.6 million in 1999 and 1998, respectively. OPL earned
premiums of $12.1 million and $10.7 million in 1999 and 1998, respectively for
the reinsurance of workers' compensation insurance for employees of a UPS
subsidiary located in the State of California. OPL's real estate and leasing
segment includes five Boeing 757 aircraft (sold in July 1998) and a data
processing facility leased to UPS subsidiaries. Total rent from aircraft and
facility leases was $4.2 million and $10.1 million in 1999 and 1998,
respectively.
8
<PAGE>
OVERSEAS PARTNERS LTD. AND SUBSIDIARIES
---------------------------------------
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
MARCH 31, 1999
--------------
(Unaudited)
-----------
6. THE BERMUDA INSURANCE REGULATION
--------------------------------
The Bermuda Insurance Act of 1978, Amendments thereto and related Regulations
require OPL and its reinsurance subsidiary, each to maintain a minimum solvency
margin and a liquidity ratio. For the three months ended March 31, 1999 and
1998, they each met these requirements.
9
<PAGE>
OVERSEAS PARTNERS LTD. AND SUBSIDIARIES
---------------------------------------
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
-----------------------------------------------
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
(Transacted in U.S. Dollars)
----------------------------
RESULTS OF OPERATIONS
- ---------------------
Three Months Ended March 31, 1999 and 1998
- ------------------------------------------
Reinsurance:
- ------------
(In thousands) 1999 1998
- ----------------------------------------------------------------------------
Gross premiums written $ 425,379 $ 279,127
Premiums ceded (8,120) (2,402)
- ----------------------------------------------------------------------------
Net premiums written 417,259 276,725
Change in unearned premiums (207,907) (115,032)
- ----------------------------------------------------------------------------
Premiums earned 209,352 161,693
Commission income 1,387 1,501
- ----------------------------------------------------------------------------
210,739 163,194
- ----------------------------------------------------------------------------
Losses and loss expenses (122,108) (77,996)
Commissions and taxes (27,207) (25,055)
- ----------------------------------------------------------------------------
(149,315) (103,051)
- ----------------------------------------------------------------------------
Underwriting income 61,424 60,143
- ----------------------------------------------------------------------------
Investment income:
U.S. equities 40,778 107,615
Emerging market equities 21,495 18,949
Fixed income (25,170) 10,075
Strategic income mutual fund 8,127 -
Other 1,733 1,634
Expenses (1,455) (1,288)
- ----------------------------------------------------------------------------
Investment income 45,508 136,985
- ----------------------------------------------------------------------------
- ----------------------------------------------------------------------------
Reinsurance income $ 106,932 $ 197,128
============================================================================
Gross reinsurance premiums written increased by $146.3 million for the period
ended March 31, 1999. The Company's accident and health, financial, marine,
property and workers' compensation programs all contributed to this increase.
Premiums from nine new programs totaled $55.2 million with the largest
contributors being property, marine and aviation programs with $18.9 million,
$17.2 million and $13.7 million in new premiums respectively. Premiums from
renewed programs increased by $164.6 million, although $70.6 million of this
increase was due to timing differences on programs that were renewed in the
first quarter of 1999 but were not contracted and recorded until later periods
in 1998. Premiums from the shippers' risk program decreased by $0.2 million
compared to the same period last year. The Company declined to renew several
auto, aviation, property and marine programs as they did not meet the Company's
return requirements, resulting in a decrease in premiums written of $78.4
million compared to the prior year.
Reinsurance premiums earned increased by $47.7 million for the period ended
March 31, 1999 as a result of the growth in the volume of business written in
1998 and the first quarter of 1999.
10
<PAGE>
Reinsurance: (continued)
- -----------
The overall combined ratio has increased to 71.3% for the period ended March 31,
1999 from 63.7% for the comparative period in 1998. This increase is a result of
the Company's expansion into new lines of business, which have lower margins as
a result of intense competition in the reinsurance market. Our combined ratio
will increase further in future years to the extent that the premiums from our
other lines of reinsurance continue to grow at a faster rate than the premiums
from the shippers' risk program.
Net underwriting income increased by 2.0% for the period ended March 31, 1999.
This increase is attributable to growth, albeit at lower margins, in the volume
of business written and continued good loss experience on the shippers' risk
program.
Investment income related to our reinsurance segment for the three months ended
March 31, 1999 decreased by $91.4 million over the same period in 1998. The
decline is largely attributable to the comparative performance of our U.S. S&P
500-equity portfolio, which returned 4.2% for the quarter ended March 31, 1999
compared to almost 14% for the same period in 1998. To a lesser extent, the
comparative performance was affected by our global fixed income portfolio which
produced a 4.4% loss in 1999 compared to 1.4% gain for the same period in 1998.
The negative return on the global fixed income portfolio was caused primarily by
a sharp rise in U.S. interest rates magnified by foreign currency losses in our
Euro denominated bonds following depreciation in the Euro exchange rate. Recent
improvements in the Latin American region bolstered the return on emerging
markets equities to 9.5% for the quarter ended March 31, 1999 compared to 7.7%
for the same period in 1998. Our strategic income mutual fund, which is a
combination of U.S. fixed income strategies, earned $8.1 million for a return of
1.9%.
Real Estate and Leasing:
- ------------------------
(In thousands) 1999 1998
- ----------------------------------------------------------------------------
REVENUE:
Leasing $ 5,184 $ 11,113
Hotel 20,329 18,159
Office buildings 37,650 29,445
- ----------------------------------------------------------------------------
63,163 58,717
- ----------------------------------------------------------------------------
EXPENSES:
Operating expenses (34,742) (31,594)
Interest expense (18,300) (15,772)
Depreciation (8,921) (8,549)
Minority interest in earnings (565) (617)
- ----------------------------------------------------------------------------
(62,528) (56,532)
- ----------------------------------------------------------------------------
- ----------------------------------------------------------------------------
Operating income 635 2,185
- ----------------------------------------------------------------------------
Investment income:
Real estate investment trust certificates (571) 884
Other 4,230 2,739
- ----------------------------------------------------------------------------
Investment income 3,659 3,621
- ----------------------------------------------------------------------------
- ----------------------------------------------------------------------------
Real estate and leasing income $ 4,294 $ 5,806
============================================================================
Office building revenue increased by 27.9% for the three months ended March 31,
1999 from $29.4 million for 1998. This increase of $8.2 million was primarily
due to the July 1998 purchase of Madison Plaza, a 45-story Class A office
building located in Chicago's Central Business District. Hotel revenue increased
$2.2 million due to an increase in room rates and occupancy rates over 1998.
Leasing revenue has decreased from $11.1 million in 1998 to $5.2 million in 1999
due to the sale of five Boeing 757 aircraft to United Parcel Service Co. in July
1998, as well as a $0.6 million decrease in variable toll revenue on the data
processing facility lease.
Operating expenses have increased by $3.1 million due to the purchase of Madison
Plaza and an increase in operating costs at the hotel. Interest expense
increased by $2.5 million from 1998 due to the purchase of Madison Plaza.
Operating income for the three months ended March 31, 1999 decreased by $1.5
million over 1998 primarily due to the loss of revenue from the 757s to offset
the continuing interest obligation on the Series A bonds. Also, a restructuring
of the toll rates on the facility, to reflect current overhead absorption, has
led to a decrease in the data processing facility's variable toll revenue.
Improvements in the profitability of the hotel offset these decreases.
11
<PAGE>
Other investment income increased due to amortization on zero coupon U.S.
treasury notes and corporate bonds held as collateral for the interest
obligation on the Series A bonds.
Net Income:
- ----------
Net income decreased by $91.3 million over 1998 due to the comparative
performance of the investment markets. Net income per share was $0.84, a $0.72
per share decrease over 1998 as result of the aforementioned factors.
Liquidity and Capital Resources
- -------------------------------
OPL's cash and cash equivalents increased by $52.2 million during the quarter.
Operating activities generated $90.1 million while investing and financing
activities used $1.0 million and $36.9 million, respectively. Reinsurance and
real estate operations both provided inflows of $109.6 million and $10.7
million, respectively. The Company received $10.5 million of interest and
dividends and purchased an additional $37.1 million of investments in its
trading portfolio. Shareowners purchased $68.7 million of shares from OPL's
treasury stock during the first quarter while the Company purchased $103.3
million of shares from its shareowners.
OPL believes that its investments and cash flow from operations are adequate
sources of capital and liquidity for the payment of claims, operating expenses
and dividends and for its share repurchases. OPL further believes that its
strong capital position will permit continued expansion of its reinsurance
business, should appropriate opportunities arise. In the event OPL decides to
purchase additional capital assets, it may, as demonstrated by its existing
portfolio of assets, finance such purchases from internally generated funds or
from outside borrowing which OPL believes would be readily available to it.
OPL's investment policies are designed to achieve enhanced returns to
shareowners, measured over conventional medium- to long-term market cycle
periods. OPL's fixed income portfolio comprises highly liquid debt securities of
governments, supranationals, government agencies, financial institutions and
utilities. OPL's U.S. and emerging markets equity portfolios are comprised of
stocks drawn mainly from within the S&P 500 Index and the IFC Index.
Because the liquidity of OPL's investments permits OPL to respond quickly to
changing market conditions, OPL's investments are not significantly affected by
inflation. Inflation, including damage awards and costs, can substantially
increase the ultimate cost of claims in certain types of insurance. This is
because the actual payment of claims may take place a number of years after the
provisions for losses are reflected in the financial statements. OPL will, on
the other hand, earn income on the funds retained for a period of time until
eventual payment of a claim.
12
<PAGE>
Impact of the Year 2000 Issue
- -----------------------------
The Year 2000 issue is the result of the inability of computers, software and
other equipment utilizing microprocessors to recognize and properly process data
fields using two digits rather than four to define the applicable year.
Time-sensitive systems and software may recognize a date using "00" as the year
1900 rather than the year 2000.
OPL formed a Year 2000 Committee in May 1998 to evaluate the potential effects
of this issue and to ensure that the Company is Year 2000 ready. The Committee
is led by a senior member of management and comprises representatives from each
of the Company's locations and functional areas. The Committee has developed a
formal, written plan, which outlines the required action steps that must be
completed prior to the Company's targeted project completion date of June 30,
1999. The Committee makes periodic reports of progress against the plan to the
Chief Executive Officer and the Board of Directors.
The Company has completed inventories of its information technology assets such
as computers and software and assessed each item for Year 2000 compliance (that
is, the ability of software, systems and equipment to properly handle date data
within and between the twentieth and twenty-first centuries). The Company does
not believe that it has significant exposure to non-compliant internal
information technology systems or assets. The Company has minimal exposure to
legacy systems and most hardware and software has either been purchased or
upgraded to Year 2000 Compliant technology within the last two years. A small
number of non-critical systems and assets will be replaced, repaired or retired
as part of the Year 2000 initiative.
The Company's real estate properties and office premises include systems that
rely on date sensitive computer programs or embedded chip microprocessors. These
systems include controlled access to the premises, elevators and escalators,
fire detection and safety systems and telecommunication systems. The Company's
worst case scenario is widespread disruption in building operations should
programmed systems not correctly recognize the Year 2000. In addition to the
potential for lost productivity, any failure of such systems could result in
additional claims against the Company from its tenants and other third parties.
The Company has identified and contacted all key equipment manufacturers and
service providers to assess whether such systems and equipment are Year 2000
compliant. Assurances have been received from most of these manufacturers and
service providers and the rest are followed up on a regular basis. The Company
has identified those items that require repair, remediation or replacement and
expects to complete the process of repair, remediation and replacement by June
1999.
The Company has significant business relationships with investment managers,
banks, custodians, reinsurance companies, reinsurance intermediaries and utility
companies that provide services and financial reports that are critical to the
Company's operations. Enquiries have been made, and in most cases assurances
received, of the Company's significant business partners to determine their
state of readiness for the Year 2000. The Company intends to have additional
communication with its key business partners in the 1st half of 1999. There is
no assurance that such business partners will not suffer a year 2000 business
disruption. Such failures could have a material adverse effect on the Company's
financial condition and results of operations.
The Company's investment portfolio also has exposure to the impact of Year 2000
failures. OPL's fixed income portfolio comprises highly liquid debt securities
of governments, government agencies, financial institutions and utilities. OPL's
U.S. and emerging markets equity portfolios are comprised of stocks drawn mainly
from within the S&P 500 Index and the IFC Index. A global economic crisis could
have a material impact on the Company's investment earnings, however, the
likelihood or magnitude of such an event cannot be determined at this point.
Reinsurance contracts that commence in 1999 may expose the Company to increases
in the frequency and severity of claims as a direct result of Year 2000 failures
relating to the insureds. Unfavorable outcomes to these claims, particularly for
property, aviation and marine exposures, could have a material impact on the
Company's financial condition and operations. It is not possible at this time to
determine how the Year 2000 issue will impact future claim experience. The
Company will continue to exercise underwriting discretion and explore
opportunities that may help to reduce this exposure, including the use of policy
exclusions, where possible.
The assessment and remediation phases of its project were complete by December
31, 1998. The Company has not commenced significant testing activity but expects
testing of mission critical systems to be completed by June 1999. The Company
has developed contingency plans for each of its mission critical systems and
functions. For the most part such contingency plans require collation of hard
copy audit trail or frequent reviews prior to the year 2000 in order to minimize
loss of historical information. In the event that there are computer hardware or
software problems that are not revealed until the year 2000 the Company will
implement manual procedures and processes. However, the Company realizes that
any reasonable contingency plan cannot accurately account for all possible
scenarios which may arise as a result of Year 2000 related computer problems.
The Company retained an independent legal firm to assess the risks of liability
associated with the Company's Year 2000 plan. The legal firm continues to
monitor the Company's progress with respect to the plan.
13
<PAGE>
Any costs incurred by the Company's business partners in connection with their
Year 2000 efforts will be borne by those business partners. Any costs incurred
in preparing OPL's internal systems and equipment for Year 2000 Compliance are
not expected to be material. The project costs have not exceeded $1,000,000.
Safe Harbour Disclosure
- -----------------------
The Private Securities Litigation Reform Act of 1995 provides a "safe harbour"
for forward-looking statements. This Securities and Exchange Commission filing
contains forward looking statements made by management that reflect the views
and beliefs of the Company with respect to future events and financial
performance. The words "expect", "anticipate", "intend", "plan", "believe",
"seek", "estimate" and other similar expressions are intended to identify such
forward-looking statements; however, this Form 10Q also contains other
forward-looking statements in addition to historical information. The Company
cautions that there are various important factors that could cause actual
results to differ materially from those indicated in the forward-looking
statements; accordingly, there can be no assurance that such indicated results
will be realized. Among the important factors that could cause actual results to
differ materially from those indicated by such forward-looking statements are:
(i) uncertainties relating to government and regulatory policies (such as
subjecting the Company to insurance regulation or taxation in additional
jurisdictions), (ii) the occurrence of catastrophic events with a frequency or
severity exceeding the Company's estimates, (iii) the legal environment, (iv)
the uncertainties of the reserving process, (v) loss of the services of any of
the Company's executive officers (vi) losses due to foreign currency exchange
rate fluctuations, (vii) ability to collect reinsurance recoverables, (viii)
strikes or similar disruptions in the business of UPS or other insureds, (ix)
the competitive environment in which the Company operates, (x) the impact of
mergers and acquisitions, (xi) the impact of Year 2000 related issues, (xii)
developments in global financial markets which could affect the Company's
investment portfolio, (xiii) risks associated with the introduction of lines of
business, and (xiv) the resolution of any proposed or future tax assessments by
the IRS against the Company. By making these forward-looking statements, the
Company does not undertake to update them in any manner except as may be
required by the Company's disclosure obligations in filings it makes with the
Securities and Exchange Commission under the Federal securities laws.
14
<PAGE>
OVERSEAS PARTNERS LTD. AND SUBSIDIARIES
---------------------------------------
PART II , OTHER INFORMATION
---------------------------
Item 6 - Exhibits and Reports on Form 8-K
- ------ --------------------------------
a) Exhibits: 27 - Financial Data Schedule (For SEC use only)
--------
b) Reports on Form 8-K: No reports on Form 8-K were filed during the
-------------------
quarter ended March 31, 1999.
15
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on behalf by the
undersigned, thereunto duly authorized, in the city of Hamilton, Bermuda.
Date: May 14, 1999 OVERSEAS PARTNERS LTD.
Signed in Hamilton, Bermuda
By: /s/ D. Scott Davis
------------------
D. Scott Davis
Chief Executive Officer and President
16
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<LEGEND>
This schedule contains summary financial information extracted from OPL's
Consolidated Balance Sheets and the Statements of Consolidated Income and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<DEBT-HELD-FOR-SALE> 0
<DEBT-CARRYING-VALUE> 248,741
<DEBT-MARKET-VALUE> 285,747
<EQUITIES> 1,324,954
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 2,510,134
<CASH> 223,039
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 107,958
<TOTAL-ASSETS> 4,699,18
<POLICY-LOSSES> 504,746
<UNEARNED-PREMIUMS> 565,740
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 873,446
0
0
<COMMON> 12,750
<OTHER-SE> 2,582,793
<TOTAL-LIABILITY-AND-EQUITY> 4,699,198
425,379
<INVESTMENT-INCOME> 19,855
<INVESTMENT-GAINS> 10,843
<OTHER-INCOME> 63,163
<BENEFITS> 122,108
<UNDERWRITING-AMORTIZATION> 27,207
<UNDERWRITING-OTHER> 0
<INCOME-PRETAX> 107,621
<INCOME-TAX> 2,137
<INCOME-CONTINUING> 105,484
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 105,484
<EPS-PRIMARY> 0.84
<EPS-DILUTED> 0
<RESERVE-OPEN> 0<F1>
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
<FN>
<F1>AMOUNTS FOR SECURITIES ACT INDUSTRY GUIDE 6 AND EXCHANGE ACT INDUSTRY GUIDE 4
DISCLOSURES ARE REQUIRED FOR ANNUAL FILINGS ONLY. ACCORDINGLY, NO AMOUNTS WILL
BE REPORTED FOR INTERIM FILINGS.
</FN>
</TABLE>
