<PAGE>
UNITED STATES
-------------
SECURITIES AND EXCHANGE COMMISSION
----------------------------------
Washington, D.C. 20549
----------------------
FORM 10 - Q
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Quarterly Report Under Section 13 or 15 (d)
of the Securities Exchange Act of 1934
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For Quarter Ended September 30, 2000 Commission file Number 0-11538
------------------ -------
Overseas Partners Ltd.
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(Exact name of registrant as specified in its charter)
Islands of Bermuda N/A
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(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
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (441) 295-0788
---------------
Not Applicable
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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)
121,669,147 Shares
-------------------------
Outstanding at November 6, 2000
<PAGE>
PART I, FINANCIAL INFORMATION
-----------------------------
OVERSEAS PARTNERS LTD. AND SUBSIDIARIES
---------------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
(In thousands, except share and per share amounts)
--------------------------------------------------
<TABLE>
<CAPTION>
September 30, December 31,
------------- ------------
2000 1999
---- ----
(Unaudited)
-----------
<S> <C> <C>
ASSETS:
Investments:
Trading, at fair value-
Debt securities (amortized cost 2000-$545,675 1999-$559,416) $ 492,429 $ 512,148
Equity securities (cost 2000-$1,306,417 1999-$1,223,954) 1,692,486 1,737,498
Restricted investments, held-to-maturity, at amortized cost
(fair value 2000-$274,470 1999-$254,619) 246,583 242,931
-----------------------------------------------------------------------------------------------------------
2,431,498 2,492,577
Cash and cash equivalents 371,087 450,336
Receivables 951,633 711,495
Deferred acquisition costs 65,477 87,146
Real estate and leasing:
Operating leases with UPS 96,958 98,847
Finance leases 44,278 45,400
Hotel 156,319 159,403
Office buildings 620,360 790,864
Other assets
Goodwill 21,757 23,977
Other 88,528 55,237
-----------------------------------------------------------------------------------------------------------
Total assets $4,847,895 $4,915,282
-----------------------------------------------------------------------------------------------------------
LIABILITIES AND MEMBERS' EQUITY:
Liabilities:
Accrued losses and loss expenses $1,569,929 $ 972,201
Unearned premiums 422,241 376,745
Reinsurance balances payable 76,359 43,466
Accounts payable and other accruals 55,604 48,632
Deferred income taxes 21,081 16,542
Long-term debt 764,179 866,144
Minority interest 43,607 44,169
-----------------------------------------------------------------------------------------------------------
Total liabilities $2,953,000 $2,367,899
-----------------------------------------------------------------------------------------------------------
Commitments and contingencies -- --
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 127.5 million shares; outstanding 122,923,157 shares 12,750 12,750
Contributed surplus 39,991 39,991
Retained earnings 1,933,763 2,556,774
Treasury stock (2000 - 4,576,843 shares, 1999 - 3,108,585 shares), at cost (91,609) (62,132)
-----------------------------------------------------------------------------------------------------------
Total members' equity 1,894,895 2,547,383
-----------------------------------------------------------------------------------------------------------
Total liabilities and members' equity $4,847,895 $4,915,282
-----------------------------------------------------------------------------------------------------------
</TABLE>
See notes to unaudited consolidated financial statements.
<PAGE>
OVERSEAS PARTNERS LTD. AND SUBSIDIARIES
---------------------------------------
CONSOLIDATED STATEMENTS OF INCOME
---------------------------------
(In thousands, except per share amounts)
-----------------------------------------
(Unaudited)
-----------
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
<S> <C> <C> <C> <C>
2000 1999 2000 1999
---- ---- ---- ----
REVENUES:
Gross reinsurance premiums written $ 93,906 $200,005 $ 558,409 $ 835,786
Reinsurance premiums ceded (8,198) (17,840) (51,974) (25,405)
---------------------------------------------------------------------------------------------------------------------------
Reinsurance premiums written 85,708 182,165 506,435 810,381
Change in unearned premiums 93,228 48,588 (35,065) (134,938)
---------------------------------------------------------------------------------------------------------------------------
Reinsurance premiums earned 178,936 230,753 471,370 675,443
Commission income 1,446 1,347 4,214 4,189
Operating leases with UPS 4,605 4,563 13,847 13,325
Finance leases 907 941 2,746 2,846
Hotel 28,554 26,440 79,819 74,694
Office buildings 35,185 37,037 112,511 111,173
Gain on sale of office buildings 49,499 - 49,499 -
Interest 15,959 14,007 46,474 39,011
Net holding (loss) gain on trading securities (38,569) (76,978) (68,391) 54,972
Amortization of fixed income securities 3,691 3,667 11,055 10,985
Dividends 2,558 2,582 8,545 8,906
---------------------------------------------------------------------------------------------------------------------------
282,771 244,359 731,689 995,544
---------------------------------------------------------------------------------------------------------------------------
EXPENSES:
Reinsurance losses and loss expenses 148,755 187,374 836,202 454,957
Reinsurance commissions, taxes and other 32,542 32,086 119,158 94,989
Depreciation expense 8,672 9,030 27,406 26,884
Real estate and leasing operating expenses 38,614 36,568 114,835 108,777
Interest expense 16,885 17,874 52,052 53,880
Minority interest in earnings 1,087 720 2,695 1,958
Investment expenses 1,509 1,541 4,192 4,545
Amortization of goodwill 746 737 2,239 1,989
Other operating expenses 3,779 3,079 10,335 9,265
---------------------------------------------------------------------------------------------------------------------------
252,589 289,009 1,169,114 757,244
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Income (loss) before income taxes 30,182 (44,650) (437,425) 238,300
Income taxes (27,737) (2,058) (37,305) (6,535)
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Net income (loss) $ 2,445 $(46,708) $ (474,730) $ 231,765
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Basic and diluted net income (loss) per share $ 0.02 $ (0.37) $ (3.84) $ 1.84
---------------------------------------------------------------------------------------------------------------------------
Weighted average number of shares outstanding 123,312 126,821 123,565 126,248
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</TABLE>
See notes to unaudited consolidated financial statements.
<PAGE>
OVERSEAS PARTNERS LTD. AND SUBSIDIARIES
---------------------------------------
CONSOLIDATED STATEMENTS OF MEMBERS' EQUITY
------------------------------------------
Nine Months Ended September 30, 2000 and 1999
---------------------------------------------
(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, 1999 $ -- 127,500 $12,750 (277) $ (4,703) $39,757 $2,476,865 $2,524,669
Net income -- -- -- -- -- -- 231,765 231,765
Purchase of shares -- -- -- (7,174) (142,290) -- -- (142,290)
Sale of treasury stock -- -- -- 5,802 114,278 234 -- 114,512
Dividend declared ($1.20
per share) -- -- -- -- -- -- (152,886) (152,886)
-------------------------------------------------------------------------------------------------------------------------
Balance, September 30, 1999 $ -- 127,500 $12,750 (1,649) $ (32,715) $39,991 $2,555,744 $ 2,575,770
-------------------------------------------------------------------------------------------------------------------------
Balance, January 1, 2000 $ -- 127,500 $12,750 (3,109) $ (62,132) $39,991 $2,556,774 $ 2,574,383
Net loss -- -- -- -- -- -- (474,730) (474,8730)
Purchase of shares -- -- -- (1,468) (29,477) -- -- (29,477)
Dividends declared ($1.20
per share) -- -- -- -- -- -- (148,281) (148,281)
-------------------------------------------------------------------------------------------------------------------------
Balance, September 30, 2000 $ -- 127,500 $12,750 (4,577) $ (91,609) $39,991 $1,933,763 $1,894,895
-------------------------------------------------------------------------------------------------------------------------
</TABLE>
See notes to unaudited consolidated financial statements.
<PAGE>
OVERSEAS PARTNERS LTD. AND SUBSIDIARIES
---------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(In thousands)
--------------
(Unaudited)
-----------
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------
<S> <C> <C>
2000 1999
---- ----
CASH FLOW FROM OPERATING ACTIVITIES:
Net (loss) income $(474,730) $ 231,765
Adjustments to reconcile net income to net cash
provided by operating activities:
Deferred income taxes 4,539 (3,746)
Depreciation expense 27,406 26,884
Minority interest in earnings 2,695 1,958
Net holding loss (gain) on trading securities 68,391 (54,972)
Amortization of fixed income securities (11,055) (10,985)
Gain on sale of office buildings (49,499) -
Other (1,708) 3,148
Changes in assets and liabilities:
Receivables (240,138) (270,936)
Deferred acquisition costs 21,669 (30,929)
Other assets (33,291) (37,118)
Accrued losses and loss expenses 597,728 257,797
Unearned premiums 45,496 151,049
Reinsurance balances payable 32,893 26,803
Accounts payable and other accruals 6,972 5,926
Proceeds from sale of trading investments 822,696 955,139
Purchase of trading investments (826,278) (717,304)
--------------------------------------------------------------------------------------------------------
Net cash flow (used) provided by operating activities (6,214) 534,479
--------------------------------------------------------------------------------------------------------
CASH FLOW FROM INVESTING ACTIVITIES:
Proceeds from maturity of restricted investments 10,673 8,473
Purchase of restricted investments (3,348) (857)
Net proceeds from sale of office buildings 123,224 -
Additions to real estate and leasing assets (15,035) (4,649)
--------------------------------------------------------------------------------------------------------
Net cash flow provided by investing activities 115,514 2,967
--------------------------------------------------------------------------------------------------------
CASH FLOW FROM FINANCING ACTIVITIES:
Purchases of treasury stock (29,477) (142,290)
Proceeds from sale of treasury stock - 114,512
Repayment of debt (7,534) (7,101)
Distributions to minority interest (3,257) (3,871)
Dividends paid (148,281) (152,886)
--------------------------------------------------------------------------------------------------------
Net cash flow used by financing activities (188,549) (191,636)
--------------------------------------------------------------------------------------------------------
Net (decrease) increase in cash and cash equivalents (79,249) 345,810
Cash and cash equivalents:
Beginning of period 450,336 170,855
--------------------------------------------------------------------------------------------------------
End of period $ 371,087 $ 516,665
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Supplemental disclosures of cash flow information:
Cash paid during the period:
U.S. income taxes $ 24,484 $ 5,178
Interest $ 46,783 $ 47,169
Assignment of debt in partial consideration for sale of office buildings $ 94,473 $ -
--------------------------------------------------------------------------------------------------------
</TABLE>
See notes to unaudited consolidated financial statements.
<PAGE>
OVERSEAS PARTNERS LTD. AND SUBSIDIARIES
---------------------------------------
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
SEPTEMBER 30, 2000
------------------
(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, 1999.
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 nine-month periods ended September 30, 2000
and 1999 are not necessarily indicative of the results to be expected for the
full year.
2. SIGNIFICANT ACCOUNTING POLICIES
-------------------------------
Except as described in Note 1, 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. 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 2001 and is not
expected to have a material impact on the Company's financial position or
results of operations.
<PAGE>
OVERSEAS PARTNERS LTD. AND SUBSIDIARIES
---------------------------------------
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
SEPTEMBER 30, 2000
------------------
(Unaudited)
-----------
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., including Overseas
Partners Capital Corp. ("OPCC"). OPCC, but not OPL, is subject to U.S. income
taxes. Following the close of the third quarter, OPL acquired a U.S. insurance
company, Overseas Partners US Reinsurance Company ("OPUS Re"), through its newly
formed US holding company, Overseas Partners US Holding Company ("OPUS
Holdings"). (See Note 7, Subsequent Event-Acquisition.) As U.S. domiciled
companies, OPUS Re and OPUS Holdings are subject to US income taxes. Under
current Bermuda law, OPL is not obligated to pay any tax in Bermuda based upon
income or capital gains.
The United States Internal Revenue Service (IRS) previously asserted that the
Company was subject to U.S. taxation in the amount of approximately $53 million
for its 1984 taxable year and $240 million for its 1985 through 1987 taxable
years, plus additions to tax and interest for those years. On February 13,
1998, the IRS indicated that it no longer intended to pursue its position
against the Company for 1984. 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. On March 19,
1999, the Company filed a petition in the United States Tax Court contesting the
asserted deficiencies in tax and additions to tax in the Notice. On May 18,
1999, the IRS filed its Answer to the Company's Petition. The IRS has also
asserted that the Company is subject to U.S. taxation for its 1991 through 1994
taxable years and has proposed an aggregate assessment of $319 million of tax,
plus additions to tax and interest, for those years. The Company has filed a
Protest against the proposed assessment with the Appellate Division of the IRS
with respect to the years 1991 through 1994. The IRS has not proposed an
assessment for years subsequent to 1994. 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 is
vigorously contesting 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 includes accident & health, automobile, aviation,
marine, property, property catastrophe, workers' compensation and financial
classes of reinsurance business. Prior to October 1, 1999 the Company also
provided shipper's risk reinsurance. Real estate and leasing activities are
owned and managed through United States subsidiaries of Overseas Partners
Capital Corp., a wholly-owned subsidiary of OPL. There were no inter-segment
revenues earned for the periods ended September 30, 2000 and 1999. Inter-
segment expenses, such as corporate overhead, were allocated based on estimated
utilization for the periods ended September 30, 2000 and 1999.
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, 1999.
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 cash and 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
real estate properties, operating leases and finance leases. Summary financial
information about the Company's segments is presented in the following table:
<PAGE>
OVERSEAS PARTNERS LTD. AND SUBSIDIARIES
---------------------------------------
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
SEPTEMBER 30, 2000
------------------
(Unaudited)
-----------
4. BUSINESS SEGMENTS (continued)
-----------------
<TABLE>
<CAPTION>
Three months ended September 30, Nine months ended September 30,
------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
(In thousands) 2000 1999 2000 1999
------------------------------------------------------------------------------------------------------------------
REVENUES
Reinsurance:
Premiums earned $178,936 $230,753 $ 471,370 $675,443
Commission income 1,446 1,347 4,214 4,189
Investment (loss) income (32,650) (57,887) (39,260) 104,801
------------------------------------------------------------------------------------------------------------------
147,732 174,213 436,324 784,433
------------------------------------------------------------------------------------------------------------------
Real estate and leasing:
Rentals 69,251 68,981 208,923 202,038
Gain on sale of office buildings 49,499 - 49,499 -
Investment income 16,289 1,165 36,943 9,073
------------------------------------------------------------------------------------------------------------------
135,039 70,146 295,365 211,111
------------------------------------------------------------------------------------------------------------------
Consolidated 282,771 244,359 731,689 995,544
------------------------------------------------------------------------------------------------------------------
NET INCOME BEFORE TAXES
Reinsurance (35,074) (46,788) (523,228) 229,942
Real estate and leasing 69,781 5,954 98,377 19,612
Other operating expenses (4,525) (3,816) (12,574) (11,254)
------------------------------------------------------------------------------------------------------------------
Consolidated $ 30,182 $(44,650) $(437,425) $238,300
------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------
(In thousands) September 30, December 31, 1999
2000 (Audited)
------------------------------------------------------------------------------------
ASSETS
Reinsurance
<S> <C> <C>
Cash and investments $2,312,990 $2,581,509
Other 1,075,279 808,127
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3,388,269 3,389,636
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Real estate and leasing
Cash and investments 489,595 383,016
Other 970,031 1,142,630
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1,459,626 1,525,646
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Consolidated $4,847,895 $4,915,282
------------------------------------------------------------------------------------
</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 70% of reinsurance revenues are generated from ceding companies
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 2000 and 1999, all of the
Company's long-lived assets were located in the United States.
The Company's largest reinsurance program, until its cancellation effective
October 1, 1999, related to the reinsurance of customer packages shipped by UPS.
Earned premiums on shipper's risk reinsurance were $nil and $91.8 million for
the three months ended September 30, 2000 and 1999, respectively. Net
underwriting income from shipper's risk reinsurance was $nil and $59.5 million
for the three months ended September 30, 2000 and 1999, respectively. OPL
earned premiums of $12.8 million and $12.0 million for the three months ended
September 30, 2000 and 1999, respectively for the reinsurance of workers'
compensation insurance, written by Liberty Mutual Insurance company, for
employees of a UPS subsidiary located in the State of California. OPL's real
estate and leasing segment includes a data processing facility leased to UPS
subsidiaries. Total rent from the facility lease was $4.6 million and $4.6
million for the three months ended September 30, 2000 and 1999, respectively.
<PAGE>
OVERSEAS PARTNERS LTD. AND SUBSIDIARIES
---------------------------------------
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
SEPTEMBER 30, 2000
------------------
(Unaudited)
-----------
4. BUSINESS SEGMENTS (continued)
-----------------
Earned premiums on shipper's risk reinsurance were $nil and $273.5 million for
the nine months ended September 30, 2000 and 1999, respectively. Net
underwriting income from shipper's risk reinsurance was $nil and $175.9 million
for the nine months ended September 30, 2000 and 1999, respectively. OPL earned
premiums of $40.8 million and $36.2 million for the nine months ended September
30, 2000 and 1999, respectively for the reinsurance of workers' compensation
insurance, written by Liberty Mutual Insurance company, for employees of a UPS
subsidiary located in the State of California. Total rent from the facility
lease was $13.8 million and $13.3 million for the nine months ended September
30, 2000 and 1999, respectively.
5. BERMUDA INSURANCE REGULATION
----------------------------
The Bermuda Insurance Act of 1978, amendments thereto and related Regulations
require OPL and its wholly-owned reinsurance subsidiaries to each maintain a
minimum solvency margin and a liquidity ratio. For the nine months ended
September 30, 2000 and 1999, they each met these requirements.
6. CONTINGENCIES
-------------
On November 19, 1999 and January 27, 2000 OPL was named as a defendant in two
class action lawsuits, filed on behalf of customers of UPS, in Montgomery
County, Ohio Court and Butler County, Ohio Court, respectively. The lawsuits
allege, amongst other things, that UPS told its customers that they were
purchasing insurance for coverage of loss or damage to goods shipped by UPS, but
a recent opinion by the United States Tax Court found that the insurance
program, as offered through UPS, several domestic insurance companies, and their
related reinsurance agreement with OPL, was not adequate for UPS to avoid
liability for federal income tax. The November 19, 1999 and January 27, 2000
actions were removed to federal court and thereafter transferred to the United
States District Court for the Southern District of New York and consolidated for
pretrial discovery purposes with other actions asserting claims against UPS.
Plaintiffs subsequently amended those claims against all defendants to join a
RICO claim as well. On August 7, 2000, the Company and its wholly owned
subsidiary, Overseas Partners Capital Corp., were added as defendants in another
class action lawsuit, also pending in the Southern District of New York. The
amended complaint alleges violations of United States antitrust laws, and state
unfair trade practice and consumer protection laws. The Company believes that
it has meritorious defenses to all three actions and intends to defend them
vigorously. The Company has filed motions to dismiss all of the actions on a
number of grounds, including that the antitrust claim fails to state a claim
upon which relief can be granted, and that the remaining claims are preempted by
federal law. There can be no assurance, however, that an adverse determination
of the lawsuits would not have a material effect on the Company.
7. SUBSEQUENT EVENT - ACQUISITION
------------------------------
On October 2, 2000 OPL completed the acquisition of OPUS Re (formerly known as
Reliance Reinsurance Company) for $6 million, plus its capital and surplus of
approximately $28.6 million at the date of closing. The acquisition includes a
team of 48 professionals and staff. This transaction does not involve the
assumption of any reinsurance liabilities previously underwritten by Reliance
Reinsurance Company. OPUS Re's principal operations are located in
Philadelphia. Since the completion of the acquisition OPL has made capital
contributions to OPUS Re such that OPUS Re now has capital of approximately $275
million. OPUS Re operates as a subsidiary of OPUS Holdings, which is wholly
owned by OPL.
8. COMPARATIVE FIGURES
-------------------
Certain prior year amounts have been reclassified to conform to the current year
presentation.
<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 September 30, 2000 and 1999
----------------------------------------------
Reinsurance:
------------
<TABLE>
<S> <C> <C>
(In thousands) 2000 1999
-----------------------------------------------------------------------------------------------------
Gross premiums written $ 93,906 $ 200,005
Premiums ceded (8,198) (17,840)
-----------------------------------------------------------------------------------------------------
Net premiums written 85,708 182,165
Change in unearned premiums 93,228 48,588
-----------------------------------------------------------------------------------------------------
Premiums earned 178,936 230,753
Commission income 1,446 1,347
-----------------------------------------------------------------------------------------------------
180,382 232,100
-----------------------------------------------------------------------------------------------------
Losses and loss expenses (148,755) (187,374)
Commissions and taxes (32,542) (32,086)
-----------------------------------------------------------------------------------------------------
(181,297) (219,460)
-----------------------------------------------------------------------------------------------------
Underwriting (loss) income (915) 12,640
-----------------------------------------------------------------------------------------------------
Investment income:
U.S. equities (5,468) (54,534)
Emerging market equities (27,952) (9,728)
Fixed income (14,906) 6,613
Strategic income mutual fund 11,469 (3,680)
Other 4,207 3,442
Expenses (1,509) (1,541)
-----------------------------------------------------------------------------------------------------
Investment loss (34,159) (59,428)
-----------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------
Reinsurance loss $ (35,074) $ (46,788)
=====================================================================================================
</TABLE>
The Company was originally formed to provide shipper's risk reinsurance covering
customer packages shipped by UPS. The program was cancelled effective October
1, 1999, following an adverse tax opinion issued against UPS earlier that year.
This had historically been our largest reinsurance program, generating up to
$380 million and $240 million of annual premium revenue and net underwriting
income, respectively.
Gross reinsurance premiums written decreased by $106.1 million for the three
months ended September 30, 2000 compared with the same period in the prior year.
The decrease was primarily due to the loss of the shipper's risk reinsurance
business, which had generated $91.8 million of premiums written for the three
months ended September 30, 1999. This was partially offset by two new programs
in our financial and property (agricultural) lines, which generated $70.0
million and $15.4 million of premiums written, respectively for the three months
ended September 30, 2000 compared with five new programs generating $64.8
million of premiums written for the three months ended September 30, 1999. Three
of these programs, with premiums written of $62.2 million, were not subsequently
renewed in 2000. $27.6 million of additional premiums were generated from our
new property catastrophe business. Renewals accounted for $3.0 million of
premiums written during the three months ended September 30, 2000 compared with
$24.4 million during the three months ended September 30, 1999. Premium
adjustment reduced premiums written by $22.1 million for the quarter ended
September 30, 2000 compared to an increase of $19.0 million for the three months
ended September 30, 1999.
Premiums ceded decreased to $8.2 million for the three months ended September
30, 2000 from $17.8 million for the same period last year. Premiums ceded in
1999 included common account protection on a large property program. This
program was subsequently cancelled in 2000. The majority of the premium ceded
for the quarter ended September 30, 2000 is as a result of a quota share
retrocession of our new property catastrophe business.
Reinsurance premiums earned decreased by $51.8 million for the three months
ended September 30, 2000 compared with the same period in the prior year,
primarily as a result of the loss of the shipper's risk reinsurance and the
cancellation of ten programs in the accident & health, aviation, marine and
multi-line lines of business in the first quarter of 2000. This decrease was
offset by $27.3 million of earned premium on the new property catastrophe
business entered into in 2000.
<PAGE>
Reinsurance: (continued)
------------
Our combined ratio, which is the ratio of the sum of losses, loss expenses,
commissions, taxes and other underwriting expenses to earned premiums increased
to 101.3% for the three months ended September 30, 2000 from 95.1% for the
corresponding period in 1999. Net underwriting loss for the quarter was $0.9
million compared to income of $12.6 million for the same period in 1999, a
decrease in income of $13.6 million. During the third quarter of 1999 the
shipper's risk program contributed underwriting income of $59.5 million which
was offset by adverse development of approximately $40 million on programs in
each of the marine, workers' compensation and accident & health lines of
business.
The Company provided retrocessional reinsurance to a reinsurer that has
commenced an arbitration to rescind its own reinsurance contract with the
primary carrier, principally on the grounds that the primary carrier did not
fully disclose the risks to be covered by the reinsurance contract. That
contract is expected to be unprofitable. Thus, if the reinsurer succeeds in the
arbitration it will be relieved of any obligation to pay losses under its
contract and therefore would not cede to the Company any share of those losses.
The arbitration is at an early stage and will likely take many months to
resolve. As such, it is too early to determine whether the arbitration decision
is likely to be in the reinsurer's favor and therefore benefit OPL as its
retrocessionaire. The Company continues to reserve for losses and loss expenses
without regard to any possibility that the reinsurer's contract will be
rescinded and therefore no losses ceded to the Company.
The Company previously audited the books and records of another program. On the
advice of counsel, the Company subsequently issued a Reservation of Rights
letter indicating that the Company would not make any further loss payments
under the program until such time as the ceding company had satisfactorily
resolved a number of serious issues highlighted by the audit. The Reservation
of Rights resulted in the ceding company serving an arbitration demand and
drawing down funds from the Company's letter of credit. During the third
quarter the Company resolved its differences with the ceding company and the
arbitration demand was withdrawn.
Amid continued volatility in world wide bond and equity markets, net investment
losses related to our reinsurance segment for the three months ended September
30, 2000 were $34.2 million, compared to losses of $59.4 million for the same
period in 1999. Net investment income includes both realized and unrealized
gains and losses on investments.
The Company's U.S. S&P 500 based equity portfolio, which closely tracks the
index, decreased by 0.7% or $5.5 million for the three months ended September
30, 2000 compared to a loss of $54.5 million for the same period in 1999. Our
emerging markets equity portfolio lost 12.7% or $28.0 million for the three
months ended September 30, 2000 compared to a loss of $9.7 million in the same
period in 1999. The global bond portfolio was down 2.8% or $14.9 million for the
quarter compared to a gain of $6.6 million for the same quarter in 1999,
primarily due to the weakening euro. Our U.S. strategic income portfolio, which
is a combination of fixed income strategies, returned 2.3% or $11.5 million for
the three months ended September 30, 2000 compared to a loss of $3.7 million for
the same period in 1999. Cash and cash equivalents earned 3 month CD rates of
approximately 6.5% compared to 6.0% for 1999.
<PAGE>
Real Estate and Leasing:
------------------------
<TABLE>
<S> <C> <C>
(In thousands) 2000 1999
---------------------------------------------------------------------------------------------------
REVENUE:
Office buildings $ 35,185 $ 37,037
Hotel 28,554 26,440
Leasing 5,512 5,504
Gain on sale of office buildings 49,499 -
---------------------------------------------------------------------------------------------------
118,750 68,981
---------------------------------------------------------------------------------------------------
EXPENSES:
Operating expenses (38,614) (36,568)
Interest expense (16,885) (17,874)
Depreciation (8,672) (9,030)
Minority interest in earnings (1,087) (720)
---------------------------------------------------------------------------------------------------
(65,258) (64,192)
---------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------
Operating income 53,492 4,789
---------------------------------------------------------------------------------------------------
Investment income:
Real estate investment trust certificates 10,386 (3,507)
Other 5,903 4,672
---------------------------------------------------------------------------------------------------
Investment income 16,289 1,165
---------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------
Real estate and leasing income $ 69,781 $ 5,954
===================================================================================================
</TABLE>
Office building revenue decreased by 5.0% for the quarter ended September 30,
2000 from $37.0 million for the same period in 1999. This decrease of $1.9
million was primarily due to the sale of 333 West Wacker and One Buckhead Plaza
in August of 2000. Hotel revenue increased $2.1 million due to an increase in
room and occupancy rates over the same period in 1999. Leasing revenue for the
quarter is consistent with the same period last year.
In August 2000 we sold two of our office buildings. The net cash proceeds
received were $123.2 million. The purchasers of both properties assumed the
associated debt totaling $94.5 million. For 333 West Wacker we received net
proceeds of $76.1 million and for One Buckhead Plaza we received $47.1 million.
This resulted in pre-tax gains on sale of $25.2 million and $24.3 million
respectively. We intend to take advantage of other sale opportunities in the
real estate market when and as circumstances permit. The proceeds from the sale
of properties will be re-deployed into our reinsurance segment.
Operating expenses have increased by $2.0 million primarily due to increases in
operating expenses at the hotel and Madison Plaza and additional real estate
taxes at Copley Place. The increase in operating expenses at the hotel is
primarily due to higher cost of sales as a result of increased revenues and
annual wage increases.
Investment income increased by $15.1 million from the same period in 1999
primarily as a result of an increase in the value of the real estate investment
trusts.
Real estate and leasing income for the quarter ended September 30, 2000
increased by $63.8 million over the same period in 1999 primarily due to the
gains on sale of 333 West Wacker and One Buckhead Plaza and increased investment
income.
Net Income:
-----------
Net income for the three months ended September 30, 2000 increased to $2.4
million from a net loss of $46.7 million for the same period in 1999 due to the
gain on the disposal of office buildings and the comparatively stronger
performance of the investment markets offset by the loss of the shipper's risk
program. The tax charge increased significantly from the same period in 1999
due to the tax on the gains on sales of the office buildings. The tax charge
for the three months ended September 30, 2000 was $27.7 million whereas the
charge for the same period in 1999 was $2.0 million. Net income per share for
the three months ended September 30, 2000 was $0.02 compared to a net loss per
share of $0.37 for the same period in 1999.
<PAGE>
Nine Months Ended September 30, 2000 and 1999
---------------------------------------------
Reinsurance:
------------
<TABLE>
<S> <C> <C>
(In thousands) 2000 1999
----------------------------------------------------------------------------------------------------
Gross premiums written $ 558,409 $ 835,786
Premiums ceded (51,974) (25,405)
----------------------------------------------------------------------------------------------------
Net premiums written 506,435 810,381
Change in unearned premiums (35,065) (134,938)
----------------------------------------------------------------------------------------------------
Premiums earned 471,370 675,443
Commission income 4,214 4,189
----------------------------------------------------------------------------------------------------
475,584 679,632
----------------------------------------------------------------------------------------------------
Losses and loss expenses (836,202) (454,957)
Commissions and taxes (119,158) (94,989)
----------------------------------------------------------------------------------------------------
(955,360) (549,946)
----------------------------------------------------------------------------------------------------
Underwriting (loss) income (479,776) 129,686
----------------------------------------------------------------------------------------------------
Investment income:
U.S. equities (16,921) 58,576
Emerging market equities (47,272) 67,096
Fixed income (12,016) (38,498)
Strategic income mutual fund 24,855 10,482
Other 12,094 7,145
Expenses (4,192) (4,545)
----------------------------------------------------------------------------------------------------
Investment (loss) income (43,452) 100,256
----------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------
Reinsurance (loss) income $(523,228) $ 229,942
====================================================================================================
</TABLE>
As mentioned previously the shipper's risk program was cancelled effective
October 1, 1999. The shipper's risk program was significant to the Company, not
only because of the magnitude of the underwriting income, but also because its
unique characteristics influenced our prior strategic and operational decision-
making. Our long-term investment philosophy, our underwriting risk tolerance
and our real estate diversification were all closely related to management's
perceptions of the profitability, stability and liquidity of the shipper's risk
program. Following the cancellation, management, in conjunction with
independent consultants, performed a thorough assessment of our business
operations, product lines and opportunities for future growth. As part of our
second quarter review process we, and our independent actuaries, also completed
a further evaluation of our reserve for accrued losses and loss expenses. In
addition to the loss of the shipper's risk program our results for the nine
month period ended September 30, 2000 reflect the results of our operational
review, including:
. reserve strengthening totaling $460 million during the second quarter,
. the discontinuation of our property (non-catastrophe) and marine lines
of business in the first quarter of 2000,
. the cancellation of ten programs in the accident & health, aviation,
marine and multi-line lines of business, also during the first quarter
of 2000.
The reserve strengthening related primarily to accident & health, aviation,
multi-line, marine and property programs written during 1997 to 1999. The
charge to earnings included $30.4 million of irrecoverable deferred acquisition
costs for estimated premium deficiencies on the unexpired portion of policies in
force. The reserve strengthening reflected significant additional claims
reported to the Company in the second quarter and our assessment of prevailing
conditions in the reinsurance market, including industry announcements that
indicate deterioration in loss estimates for 1999 storms and other large
industry events.
As a result of the above, our reinsurance segment experienced an underwriting
loss of $479.8 million for the nine months ended September 30, 2000 million
compared to income of $129.7 million for the same period in 1999.
Gross reinsurance premiums written decreased by $277.4 million for the nine
months ended September 30, 2000 compared with the same period in the prior year,
primarily due to the loss of the shipper's risk reinsurance business and the
non-renewal of a number of programs in the accident & health, aviation, marine
and multi-line lines of business, as discussed earlier. The shipper's risk
business had generated $273.5 million of premiums written for the nine months
ended September 30, 1999.
<PAGE>
Reinsurance: (continued)
------------
The non-renewal of the accident & health, aviation, marine and multi-line
programs resulted in a decrease in premiums written of $191.2 million during the
nine months ended September 30, 2000 compared to the prior year. We also
cancelled a number of existing property programs with premiums written of $128.3
million to avoid an aggregation of exposure with the new property catastrophe
risks written for the first time in 2000. We started to write property
catastrophe business as we believe that the risk-return characteristics will be
more favorable, over the long term, than from prior property programs. This new
property catastrophe business generated premiums written of $79.8 million for
the nine months ended September 30, 2000.
Renewals accounted for $311.3 million of premiums written during the nine months
ended September 30, 2000 compared with $396.5 million during the nine months
ended September 30, 1999. We also wrote 19 new programs with premiums of $177.8
million during the nine months ended September 30, 2000 compared with 15 new
programs yielding premiums of $121.5 million in the same period in 1999. Seven
of these programs, with premiums written of $101.9 million, were not
subsequently renewed in 2000. Accident & health, financial and aviation were the
largest contributors to the increase in new business. Revisions to original
premium estimates reduced premiums written by $10.5 million for the nine months
ended September 30, 2000 compared to an increase of $44.3 million for the nine
months ended September 30, 1999.
Premiums ceded increased to $52.0 million for the nine months ended September
30, 2000, compared to $25.4 million for the same period last year. This follows
our purchase of several layers of excess of loss protection for the aviation
book of business. The reinsurance protection provides coverage of $77.0 million
in excess of $3.0 million for a single loss event. In addition we purchased
additional common account protection on our new accident & health programs and
entered into a quota share retrocession of our property catastrophe business.
Premiums earned decreased by $204.1 million for the nine months ended September
30, 2000 compared with the same period in the prior year, primarily as a result
of the loss of the shipper's risk reinsurance and the factors discussed above.
Despite the decrease in premiums earned for the nine months ended September 30,
2000, commissions and taxes increased to $119.2 million from $95.0 million
during the same period last year. The increase relates to the expensing of
$30.4 million of deferred acquisition costs that are not expected to be
recoverable as a result of anticipated underwriting losses arising from the
future recognition of unearned premiums.
Our combined ratio, which is the ratio of the sum of losses, loss expenses,
commissions, taxes and other underwriting expenses to earned premiums increased
to 202.7% for the nine months ended September 30, 2000 from 81.4% for the
corresponding period in 1999. Net underwriting loss for the nine months ended
September 30, 2000 was $479.8 million compared to income of $129.7 million for
the same period in 1999. This decrease in income of $609.5 million and increase
in the combined ratio was principally due to two factors:
. the reserve strengthening adjustments of $460 million during the second
quarter as discussed earlier, and
. the cancellation of the shipper's risk program
For the nine months ended September 30, 2000, bond and equity markets around the
world have struggled to produce positive returns. Net investment losses related
to our reinsurance segment for the nine months ended September 30, 2000 were
$43.5 million, compared to net investment income of $100.3 million, attributed
primarily to a strong recovery in emerging markets, for the same period in 1999.
Net investment income includes both realized and unrealized gains and losses on
investments.
Our U.S. S&P 500 based equity portfolio, which closely tracks the index,
decreased by 1.1% for the nine months ended September 30, 2000 generating losses
of $16.9 million as compared to gains of $58.6 million for the same period in
1999. Our emerging markets equity portfolio is down 19.8% or $47.3 million for
the nine months ended September 30, 2000 compared to income of $67.1 million for
the same period in 1999. Our global bond portfolio lost 2.3% or $12.0 million
for the nine months ended September 30, 2000 primarily due to the weakening
euro, compared to a loss of $38.5 million in 1999. Our U.S. strategic income
portfolio, which is a combination of fixed income investments, returned 5.0% or
$24.9 million for the nine months ended September 30, 2000 compared to $10.5
million for the same period in 1999. Cash and cash equivalents earn 3 month CD
rates.
<PAGE>
Real Estate and Leasing:
------------------------
<TABLE>
<S> <C> <C>
(In thousands) 2000 1999
-----------------------------------------------------------------------------------------------------
REVENUE:
Office buildings $ 112,511 $ 111,173
Hotel 79,819 74,694
Leasing 16,593 16,171
Gain on sale of office buildings 49,499 -
-----------------------------------------------------------------------------------------------------
258,422 202,038
-----------------------------------------------------------------------------------------------------
EXPENSES:
Operating expenses (114,835) (108,777)
Interest expense (52,052) (53,880)
Depreciation (27,406) (26,884)
Minority interest in earnings (2,695) (1,958)
-----------------------------------------------------------------------------------------------------
(196,988) (191,499)
-----------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------
Operating income 61,434 10,539
-----------------------------------------------------------------------------------------------------
Investment income:
Real estate investment trust certificates 21,158 (4,217)
Other 15,785 13,290
-----------------------------------------------------------------------------------------------------
Investment income 36,943 9,073
-----------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------
Real estate and leasing income $ 98,377 $ 19,612
=====================================================================================================
</TABLE>
Office building revenue increased by 1.2% for the nine months ended September
30, 2000 from $111.2 million for the same period in 1999. This increase of $1.3
million was primarily due to increased revenues at Copley Place offset by
reductions in revenue following the sales of 333 West Wacker and One Buckhead
Plaza. Hotel revenue increased $5.1 million due to an increase in room and
occupancy rates over the same period in 1999. Leasing revenue has increased
from $16.2 million in the nine months ended September 30, 1999 to $16.6 million
in the nine months ended September 30, 2000 primarily due to a $0.5 million
increase in variable toll lease revenue of the Ramapo Ridge data processing
facility as a result of an inflationary increase in rates and an increased
volume of accounts processed.
In August 2000 we sold two of our office buildings. The net cash proceeds
received were $123.2 million. The purchasers of both properties assumed the
associated debt totaling $94.5 million. For 333 West Wacker we received net
proceeds of $76.1 million and for One Buckhead Plaza we received $47.1 million.
This resulted in pre-tax gains on sale of $25.2 million and $24.3 million
respectively. We intend to take advantage of other sale opportunities in the
real estate market when and as circumstances permit. The proceeds from the sale
of properties will be re-deployed into our reinsurance segment.
Operating expenses have increased by $6.1 million primarily due to increases at
the hotel and additional real estate taxes at Copley Place. The increase in
operating expenses at the hotel is primarily due to higher cost of sales as a
result of increased revenues and annual wage increases.
Investment income increased by $27.9 million from the same period in 1999
primarily as a result of an increase in the value of the real estate investment
trusts.
Real estate and leasing income for the nine months ended September 30, 2000
increased by $78.8 million over the same period in 1999 primarily due to gains
on the sales of 333 West Wacker and One Buckhead Plaza and increased investment
income.
Net Income:
-----------
Net income for the nine months ended September 30, 2000 decreased by $706.5
million compared to the same period in 1999 due to the comparatively poorer
performance of the investment markets, the second quarter reserve strengthening
and the loss of the shipper's risk program. Net income from shipper's risk for
the nine months ended September 30, 2000 and 1999 was $nil and $175.9 million,
respectively. The tax charge increased significantly from the same period in
1999 due to the tax on the gains on sales of the office buildings. The tax
charge for the nine months ended September 30, 2000 was $37.3 million whereas
the charge for the same period in 1999 was $6.5 million. Net loss per share for
the nine months ended September 30, 2000 was $3.84, compared to net income per
share of $1.84 for the same period in 1999.
<PAGE>
Liquidity and Capital Resources
-------------------------------
Our cash and cash equivalents decreased by $79.2 million during the nine months
ended September 30, 2000 compared to an increase of $345.8 million in the same
period in 1999. Operating activities used $6.2 million, investing activities
generated $115.5 million and financing activities used $188.5 million compared
to generating $534.5 million, $3.0 million and using $191.6 million
respectively, in the same period in 1999.
Reinsurance operations used $51.7 million for the nine months ended September
30, 2000 compared to an inflow of $229.8 million for the same period in 1999.
This was largely due to the loss of the positive cash flow from the shipper's
risk program and an increase in loss payments on accident & health, marine and
multi-line programs.
Real estate operations generated $31.6 million for the nine months ended
September 30, 2000 compared to $31.8 million for the same period in 1999.
We received $50.8 million of interest and dividends, purchased $826.3 million of
traded investments and sold $822.7 million of investments in our trading
portfolio compared to $30.7 million, $717.3 million and $995.1 million
respectively, for the same period in 1999.
Our real estate investing activities produced net cash inflow of $123.2 million
following the sale of two office buildings, 333 West Wacker and One Buckhead
Plaza. The purchasers of both properties assumed the associated existing debt of
$94.5 million. We intend to take advantage of other sale opportunities in the
real estate market when and as circumstances permit. The proceeds from the sale
of properties will be re-deployed into our reinsurance segment.
We have paid two interim dividends each in the amount of $0.60 per share in the
nine months ended September 30, 2000 resulting in a total cash outflow of $148.3
million compared to $152.9 million in 1999.
During the nine months ended September 30, 2000 we purchased $29.5 million of
shares from our shareowners. For the same period in 1999 we purchased $142.3
million of shares from our shareowners and received $114.5 million from sales of
shares.
In November 1999, the Board announced that it would limit the number of shares
of our Common Stock that we were willing to purchase from any shareowners
seeking to sell such shares between November 23, 1999 and November 1, 2000.
During such period, we were willing to purchase up to 10% of the shares of our
Common Stock held by any shareowner as of November 23, 1999. The Board recently
decided to similarly limit the number of shares that we would be willing to
purchase from any shareowners seeking to sell such shares between November 1,
2000 and December 31, 2001. Accordingly, during such period, we will be willing
to purchase up to 10% of the shares of our Common Stock held by any shareowner
as of November 1, 2000. This means that if a shareowner of record as of
November 1, 2000 subsequently transfers shares to another party, then the
Company will not purchase any of these shares from the transferee since the
transferee will not be a shareowner of record as of November 1, 2000. Although
no determination has been made, the Board expects that the 10% limitation on
share purchases by the Company will continue for years subsequent to 2001 on an
annual basis. However, because of our need to maintain a strong and stable
capital base, we could, at any time, revise our policy on share purchases from
shareowners and impose further limitations on the number of shares of our Common
Stock that we will purchase from any shareowner seeking to sell shares. As a
result, there can be no assurance of the continuation of our willingness to
purchase shares from shareowners who wish to sell shares.
The Board has also authorized existing shareowners to purchase up to 10,000
shares of OPL Common Stock subject to registration of our shares for sale with
the Securities and Exchange Commission. We intend to use any proceeds from the
sale of shares for general corporate purposes, including strategic investments
and acquisitions and the financing thereof. We may also use all or a portion of
the proceeds to repurchase additional shares from those other shareowners that
may desire offering their shares for repurchase by the Company.
Our investment policies are designed to achieve enhanced returns to shareowners,
measured over conventional medium- to long-term market cycle periods. Our fixed
income portfolio comprises highly liquid debt securities of governments,
supranationals, government agencies, financial institutions and utilities. Our
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 our
investments permits us to respond quickly to changing market conditions, our
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. We will, on the other hand, earn income on the funds
retained for a period of time until eventual payment of a claim.
Despite the loss of our shipper's risk reinsurance business, we believe that our
investments, cash flow from operations and borrowing ability are adequate
sources of capital and liquidity for the payment of claims, operating expenses
and dividends and for share repurchases. We further believe that our strong
capital position will permit expansion of our reinsurance business, should
appropriate opportunities arise. In the event we decide to purchase additional
capital assets, we may, as demonstrated by our existing portfolio of assets,
finance such purchases from internally generated funds or from outside borrowing
which we believe would be readily available to us.
<PAGE>
Recent Developments
-------------------
As disclosed in the Taxation section of our Form 10-K for the year ended
December 31, 1999 ("1999 10-K"), under the passive foreign investment company
("PFIC") rules, a United States shareowner of OPL would be subject to rules
designed to approximate current taxation of the earnings of OPL if at least 75%
of the gross income of OPL were "passive income", or if at least 50% of the
average assets of OPL were to produce, or were held for the production of,
"passive income." In general, income derived in the active conduct of an
insurance business does not constitute "passive income," and assets that produce
or are held for the production of such income do not constitute "passive
assets." The opinion issued by the United States Tax Court against UPS,
discussed in the Reinsurance Activities section of the 1999 10-K, taxes to UPS
the shipper's risk reinsurance premium income received by OPL in past years.
However, the Tax Court did not decide whether shipper's risk reinsurance
premiums received by OPL are "active income" of OPL, which was not a party to
the case. The explanation contained in the 1999 10-K notes that it is not clear
what, if any, position the IRS might take regarding the character of the
shipper's risk reinsurance premiums to OPL.
During the second quarter of 2000, OPL was advised by the IRS of the existence
of an internal IRS memorandum that, among other things, consistent with the
outcome of the UPS case in the Tax Court, concludes that the shipper's risk
reinsurance premiums are not income of OPL and that the associated investment
income is not "active income" for purposes of the PFIC rules. The IRS
memorandum is expressly not binding on IRS auditing agents. However, based upon
certain assumptions and conclusions therein, the IRS could seek to impose the
PFIC rules against OPL's U.S. shareholders for one or more past years. It is
not known at this time whether the IRS will attempt to do so. It should be
noted, in this regard, that the UPS Tax Court decision in question is being
appealed to the U.S. Court of Appeals.
If OPL were found to be a PFIC in any year, those U.S. shareholders who held OPL
shares in that year would suffer adverse tax consequences with respect to
certain dispositions of and distributions on the shares. In general, gain
realized on the disposition of the shares would not be eligible for capital gain
treatment, and such gain as well as certain distributions on the shares would be
taxed under a special regime that would substantially increase the tax cost with
respect to the disposition or distribution. In addition, under the PFIC regime,
gain generally must be recognized from transactions that otherwise would be
entitled to nonrecognition treatment.
On August 24, 2000 A.M. Best downgraded the Company from A+ (Superior) to A
(Excellent). An "Excellent" rating still reflects the Company's balance sheet
strength.
Safe Harbor Disclosure
----------------------
Some of the statements contained in this Securities and Exchange Commission
filing contain forward-looking information. Forward-looking statements are
statements other than historical information or statements of current condition.
Some forward looking statements can be identified by the use of such words as
"expect," "believe," "goal," "plan," "intend," "estimate," "may" and "will" or
similar words. These forward-looking statements relate to our plans and
objectives for future operations including our growth and operating strategy,
trends in our industry and our policy on future dividends.
You should be aware that these statements are subject to risks, uncertainties
and other factors, that could cause the actual results to differ materially from
those suggested by the forward-looking statements. Accordingly, there can be no
assurance that those indicated results will be realized. Among the important
factors that could cause actual results to differ materially from those
indicated by our forward-looking statements are:
. our ability to replace, with profitable business, the revenues that we
derived in the past from reinsurance of excess value package insurance
associated with the business of United Parcel Service of America, Inc.
. pricing pressure resulting from the competitive environment in which we
operate
. ability to collect reinsurance recoverables
. the uncertainties of the reserving process
. the occurrence of catastrophic events with a frequency or severity
exceeding our estimates
. loss of the services of any of the Company's executive officers
. uncertainties relating to government and regulatory policies (such as
subjecting us to insurance regulation or taxation in certain
jurisdictions)
. losses due to interest rate fluctuations
. developments in global financial markets which could affect our
investment portfolio
. the resolution of any pending or future tax assessments by the IRS
against us
. the resolution of other pending litigation
. the impact of mergers and acquisitions
We do not undertake to update these forward-looking statements in any manner.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
----------------------------------------------------------
There has been no material change in the Company's market risks in 2000.
<PAGE>
OVERSEAS PARTNERS LTD. AND SUBSIDIARIES
---------------------------------------
PART II, OTHER INFORMATION
--------------------------
Item 1. Legal Proceedings
-----------------
See Note 6 to Financial Statements for a discussion of current legal proceedings
to which OPL is a party.
Item 4. Submission of Matters to a Vote of Security Holders.
----------------------------------------------------
The Annual General Meeting of Shareowners of Overseas Partners Ltd. (OPL) was
held on August 9, 2000 at its corporate office in Hamilton, Bermuda. The notice
of the Annual General Meeting and Proxy Statement were mailed on or about July
7, 2000 to shareowners of record as of May 30, 2000.
At the Annual Meeting, each of the directors nominated by the Board for
election, Messrs. Clanin, Davis, Pyne and Rance and Mrs. Mary R. Hennessy were
elected to one (1) year terms by the shareowners. Mr. Edwin Reitman and Mr.
Walter Scott opted not to stand for re-election as members of the board. Mr.
Clanin was elected as OPL's new Chairman of the Board. The Shareowners voted
one board position shall remain vacant until it is filled by such person, at
such time, as the Board of Directors determines appropriate.
<TABLE>
<CAPTION>
SHARES SHARES SHARES VOTED SHARES SHARES TOTAL
VOTED VOTED TO WITHHOLD ABSTAINED VOTES SHARES
FOR AGAINST AUTHORITY VOID VOTED
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Robert J. Clanin 110,006,010 N/A 927,486 N/A 64,034 110,997,530
-----------------------------------------------------------------------------------------------
D. Scott Davis 110,315,162 N/A 618,334 N/A 64,034 110,997,530
-----------------------------------------------------------------------------------------------
Joseph M. Pyne 110,158,014 N/A 775,482 N/A 64,034 110,997,530
-----------------------------------------------------------------------------------------------
Cyril E. Rance 110,278,570 N/A 654,926 N/A 64,034 110,997,530
-----------------------------------------------------------------------------------------------
Mary R. Hennessy 110,317,322 N/A 616,174 N/A 64,034 110,997,530
-----------------------------------------------------------------------------------------------
Vacant Position 109,378,303 1,053,906 N/A 565,321 N/A 110,997,530
-----------------------------------------------------------------------------------------------
</TABLE>
The appointment of Deloitte & Touche, Chartered Accountants, as independent
auditors of the Company for the year ended December 31, 2000 was approved by a
vote of 109,640,717 for, 1,103,918 against and 252,895 abstaining.
The adoption of the Overseas Partners Ltd. Incentive Compensation Plan was
approved by a vote of 106,988,338 for, 3,192,457 against and 816,735 abstaining.
The amendment to the Memorandum of Association increasing the Company's minimum
share capital to $370,000 was approved by a vote of 108,982,602 for, 1,095,455
against and 919,473 abstaining.
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: The Company filed a report on Form 8-K on August 25,
-------------------
2000 stating that on August 24, 2000 A.M. Best downgraded the financial
strength rating of Overseas Partners Ltd. from A+ (Superior) to A
(Excellent).
<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.
Date: November 9, 2000 OVERSEAS PARTNERS LTD.
By: /s/ Mary R. Hennessy
--------------------
Mary R. Hennessy
Chief Executive Officer and President
By: /s/ Mark R. Bridges
-------------------
Mark R. Bridges
Vice President and Treasurer
(Principal Financial and Accounting
Officer)
