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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
COMMISSION FILE NUMBER: 0-27662
IPC HOLDINGS, LTD.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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BERMUDA NOT APPLICABLE
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
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AMERICAN INTERNATIONAL BUILDING, 29 RICHMOND ROAD, PEMBROKE, HM 08, BERMUDA
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(441) 298-5100
(REGISTRANT'S TELEPHONE NUMBER,
INCLUDING AREA CODE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: COMMON SHARES, PAR
VALUE $0.01 PER SHARE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if the disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K [X]
The aggregate market value of the Registrant's Common Shares held by
non-affiliates of the Registrant as of March 23, 1998, was $492,301,343, based
on the last reported sale price of Common Shares on the Nasdaq National Market
system on that date.
The number of the Registrant's Common Shares, par value U.S. $0.01 per
share, as of March 23, 1998, was 25,033,932.
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DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of the Registrant's 1997 Annual Report to Shareholders to be
mailed to shareholders on or about April 21, 1998 (the "Annual Report") are
incorporated by reference into Part II of this Form 10-K. With the exception of
the portions of the Annual Report specifically incorporated herein by reference,
the Annual Report is not deemed to be filed as part of this Form 10-K.
2. Portions of the Registrant's definitive proxy statement to be filed
with the Securities and Exchange Commission (the "Commission") pursuant to
Regulation 14A under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), relating to the Registrant's Annual Meeting of Shareholders
scheduled to be held June 12, 1998 (the "Proxy Statement") are incorporated
herein by reference. With the exception of the portions of the Proxy Statement
specifically incorporated herein by reference, the Proxy Statement is not deemed
to be filed as part of this Form 10-K.
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IPC HOLDINGS, LTD.
TABLE OF CONTENTS
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PAGE
ITEM NUMBER
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PART I
1. Business.................................................... 2
2. Properties.................................................. 19
3. Legal Proceedings........................................... 19
4. Submission of Matters to a Vote of Security Holders......... 19
PART II
5. Market for the Registrant's Common Stock and Related 20
Stockholder Matters.........................................
6. Selected Financial Data..................................... 21
7. Management's Discussion and Analysis of Financial Condition 22
and Results of Operations...................................
8. Financial Statements and Supplementary Data................. 22
9. Changes in and Disagreements with Accountants on Accounting 22
and Financial Disclosure....................................
PART III
10. Directors and Executive Officers............................ 22
11. Executive Compensation...................................... 22
12. Security Ownership of Certain Beneficial Owners and 22
Management..................................................
13. Certain Relationships and Related Transactions.............. 22
PART IV
14. Exhibits, Financial Statement Schedules, and Reports on Form 23
8-K.........................................................
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PART I
NOTE ON FORWARD-LOOKING STATEMENTS
This report contains certain forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Exchange Act. Forward-looking statements are statements other than historical
information or statements of current condition. Some forward-looking statements
may be identified by use of terms such as "believes", "anticipates", "intends",
or "expects". These forward-looking statements relate to the plans and
objectives of IPC Holdings, Ltd., a company incorporated under the laws of
Bermuda (the "Company"), for future operations. In light of the risks and
uncertainties inherent in all future projections, the inclusion of
forward-looking statements in this report should not be considered as a
representation by the Company or any other person that the objectives or plans
of the Company will be achieved. Numerous factors could cause the Company's
actual results to differ materially from those in the forward-looking
statements, including the following: (i) the occurrence of catastrophic events
with a frequency or severity exceeding the Company's estimates; (ii) a decrease
in the level of demand for property catastrophe reinsurance, or increased
competition owing to increased capacity of property catastrophe reinsurers;
(iii) any lowering or loss of one of the financial ratings of the Company's
wholly owned subsidiary, International Property Catastrophe Reinsurance Company,
Ltd., a company incorporated under the laws of Bermuda ("IPC Re" and together
with the Company and IPC Re Services (as defined herein), "IPC")), or the
Company's non-admitted status in United States jurisdictions; (iv) loss of
services of any one of the Company's executive officers; (v) the passage of
federal or state legislation subjecting the Company to supervision or regulation
in the United States; (vi) challenges by insurance regulators in the United
States or the United Kingdom to the Company's claim of exemption from insurance
regulation under current laws; or (vii) a contention by the United States
Internal Revenue Service that the Company or IPC Re is engaged in the conduct of
a trade or business within the U.S. The foregoing review of important factors
should not be construed as exhaustive; the Company undertakes no obligation to
release publicly the results of any future revisions it may make to
forward-looking statements to reflect events or circumstances after the date
hereof or to reflect the occurrence of unanticipated events.
ITEM 1. BUSINESS
GENERAL DEVELOPMENT OF THE BUSINESS
The Company, through IPC Re, provides property catastrophe reinsurance and,
to a limited extent, marine, aviation, property-per-risk excess and other
short-tail property reinsurance on a worldwide basis. During 1997, approximately
82% of premiums written covered property catastrophe risks. Property catastrophe
reinsurance covers unpredictable events such as hurricanes, windstorms,
hailstorms, earthquakes, volcanic eruptions, fires, industrial explosions,
freezes, riots, floods and other man-made or natural disasters. Substantially
all reinsurance written by IPC Re has been, and continues to be, written on an
excess-of-loss basis for primary insurers rather than reinsurers, and is subject
to aggregate limits on exposure to losses. As of January 1, 1998, IPC Re had 315
clients, including many of the leading insurance companies around the world.
Approximately 44% of these clients in 1997 were based in the United States, and
approximately 46% of premiums written during 1997 related primarily to U.S.
risks. IPC Re's non-U.S. clients and covered risks are located principally in
Europe, Japan and Australia/New Zealand. At December 31, 1997, IPC had total
shareholders' equity of $528 million and total assets of $585 million.
In response to a severe imbalance between the global supply of and demand
for property catastrophe reinsurance that developed in the period from 1989
through 1993, IPC commenced operations in July 1993 through the sponsorship of
American International Group, Inc. ("AIG"), a holding company incorporated in
Delaware which through its subsidiaries is primarily engaged in a broad range of
insurance and insurance-related activities and financial services in the United
States and abroad. AIG purchased 24.4% of the initial share capital of the
Company and an option (exercisable in specified conditions) to obtain up to an
additional 10% (on a fully diluted basis, excluding employee stock options) of
the share capital of the Company (the "AIG Option"). Since IPC's formation,
subsidiaries of AIG have provided administrative, investment management and
custodial services to IPC, and the Chairman of the Board of Directors of IPC is
also a
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director and officer of various subsidiaries and affiliates of AIG. AIG has
informed the Company that AIG presently intends to continue its share ownership
in the Company for the foreseeable future. See "Item 13. Certain Relationships
and Related Transactions." For discussion of the limitation of voting rights of
any 10% or more beneficial owner of Common Shares (including AIG) to less than
10% of total voting rights, see Amendment No. 1 to the Company's Registration
Statement on Form 8-A, dated February 9, 1996.
On December 20, 1995, in connection with a plan to sell shares to the
public, the Board of Directors of the Company also approved an exchange of the
capital stock of the Company whereby the then existing voting and non-voting
shares of the Company were exchanged for common shares (the "Exchange"). The
existing shareholders received 25,000 new common shares, par value $0.01 per
share ("Common Shares") for each of the 1,000 voting or non-voting share held at
the time of the Offering (as defined herein), resulting in 25,000,000 Common
Shares outstanding.
On March 13, 1996, the Company completed an initial public offering (the
"Offering") in which 13,521,739 Common Shares held by existing shareholders were
sold. All of the Common Shares sold were sold by existing shareholders.
Consequently, the Company did not receive any of the proceeds of the Offering.
The Company paid certain expenses related to the Offering, including certain
expenses on behalf of the selling shareholders.
On June 27, 1997 the Company incorporated a subsidiary in the United
Kingdom, named IPC Re Services Limited ("IPC Re Services"). The purpose of IPC
Re Services is to perform the same functions that were previously performed by
the Company's representative office in London.
BUSINESS STRATEGY
IPC's principal strategy is to provide property catastrophe excess-of-loss
reinsurance programs to a geographically diverse, worldwide clientele of primary
insurers with whom IPC maintains long-term relationships. To a lesser extent,
IPC also seeks to provide these clients with other excess-of-loss short-tail
property reinsurance products. See "Reinsurance Products". Management
periodically considers underwriting additional lines of property/casualty
coverage, including on a non-excess-of-loss basis, provided losses can be
limited in a manner comparable to that described below.
The primary elements of IPC's strategy include:
DISCIPLINED RISK MANAGEMENT. IPC seeks to limit and diversify its loss
exposure through six principal mechanisms: (i) writing substantially all of its
premiums on an excess-of-loss basis, which limits IPC's ultimate exposure per
contract and permits IPC to determine and monitor its aggregate loss exposure;
(ii) adhering to maximum limitations on reinsurance accepted in defined
geographical zones; (iii) limiting program size for each client in order to
achieve diversity within and across geographical zones; (iv) administering risk
management controls appropriately weighted with sophisticated modeling
techniques, as well as management's assessment of qualitative factors (such as
the quality of the cedent's management and capital and risk management
strategy); (v) utilizing a range of attachment points for any given program in
order to balance the risks assumed with the premiums written; and (vi) prudent
underwriting of each program written.
CAPITAL-BASED EXPOSURE LIMITS. Each year, IPC establishes maximum
limitations on reinsurance accepted in defined geographic zones on the basis of,
and as a proportion of, shareholders' equity.
CLIENT SELECTION AND PROFILE. Management believes that establishing
long-term relationships with insurers which have sound capital and risk
management strategies is key to creating long-term value for IPC and its
shareholders. IPC has successfully attracted customers that are generally
sophisticated, long-established insurers who desire the assurance not only that
claims will be paid, but that reinsurance will continue to be available after
claims have been paid. Management believes IPC's financial stability and growth
of capital are essential for creating and maintaining these long-term
relationships.
CAPITAL MANAGEMENT AND SHAREHOLDER RETURNS. IPC manages its capital
relative to its risk exposure in an effort to maximize sustainable long-term
growth in shareholder value, while recognizing that catastrophic
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losses will adversely impact short-term financial results from time to time. IPC
seeks growth of capital to protect itself from major catastrophes, to ensure
ongoing customer relationships and to support premium growth opportunities.
DISCIPLINED INVESTMENT MANAGEMENT. In light of the risks of IPC's
business, IPC's fixed maturity investment portfolio is limited to the top three
investment grades (i.e. AAA, AA or A) at the time of purchase. In addition, IPC
has purchased shares of stock in all the companies which comprise the Standard &
Poor's ("S&P") 500 Index. The investment in such equities represented 16.1% of
the total investment portfolio at December 31, 1997. On that date, 92.2% of the
fixed maturity investment portfolio consisted of cash, U.S. Treasuries or other
government agency issues and investments with an AAA or AA rating.
BUSINESS SEGMENTS
GENERAL. IPC provides treaty reinsurance principally to insurers of
personal and commercial property worldwide. As described below, IPC writes
substantially all reinsurance on an excess-of-loss basis. IPC's property
catastrophe reinsurance coverages, which accounted for 82% of IPC's premiums
written during 1997, are generally "all-risk" in nature, subject to various
policy exclusions. IPC's predominant exposure under such coverages is to
property damage from unpredictable events such as hurricanes, windstorms,
hailstorms, earthquakes and volcanic eruptions, although IPC is also exposed to
losses from sources as diverse as freezes, riots, floods, industrial explosions,
fires, and other man-made or natural disasters. The balance of premiums written
are derived from marine, aviation, property-per-risk excess and other short-tail
property reinsurance. In accordance with market practice, IPC's property
catastrophe reinsurance coverage generally excludes certain risks such as
terrorism, war, pollution, nuclear contamination and radiation.
Because IPC underwrites property catastrophe reinsurance and has large
aggregate exposures to natural and man-made disasters, management expects that
IPC's loss experience generally will include infrequent events of great
severity. Consequently, the occurrence of losses from catastrophic events is
likely to result in substantial volatility in IPC's financial results. In
addition, because catastrophes are an inherent risk of IPC's business, a major
event or series of events can be expected to occur from time to time and to have
a material adverse effect on IPC's financial condition or results of operations,
possibly to the extent of eliminating IPC's shareholders' equity and statutory
surplus. Increases in the values and concentrations of insured property and the
effects of inflation have resulted in increased severity of industry losses in
recent years, and IPC expects that those factors will increase the severity of
catastrophe losses per year in the future.
IPC currently seeks to limit its loss exposure principally by limiting
substantially all of its products to be on an excess-of-loss basis, adhering to
maximum limitations on reinsurance accepted in defined geographic zones,
limiting program size for each client and prudent underwriting of each program
written. There can be no assurance that any of these loss limitation methods
will be effective. There can be no assurance that various provisions of IPC's
policies, such as limitations or exclusions from coverage or choice of forum,
will be enforceable in the manner intended. Disputes relating to coverage or
choice of legal forum can be expected to arise. Geographic zone limitations
involve significant underwriting judgments, including the determination of the
area of the zones and the inclusion of a particular policy within a zone's
limits. Underwriting is inherently a matter of judgment, involving important
assumptions about matters that are inherently unpredictable and beyond IPC's
control, and for which historical experience and probability analysis may not
provide sufficient guidance.
EXCESS-OF-LOSS REINSURANCE CONTRACTS. IPC's policy is to write
substantially all of its business pursuant to excess-of-loss reinsurance
contracts. Such contracts provide a defined limit of liability, permitting IPC
to quantify its aggregate maximum loss exposure. By contrast, maximum liability
under pro-rata contracts is more difficult to quantify precisely. Quantification
of loss exposure is fundamental to IPC's ability to manage its loss exposure
through geographical zone limits and program limits described below.
Excess-of-loss contracts also help IPC to control its underwriting results by
increasing its flexibility to determine premiums for reinsurance at specific
retention levels independent of the premiums charged by primary insurers and
based upon IPC's own underwriting assumptions. In addition, because primary
insurers typically retain a larger loss
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exposure under excess-of-loss contracts, they have a greater incentive to
underwrite risks and adjust losses in a prudent manner.
In addition, IPC diversifies its risk by, to a limited extent, writing
other short-tail property coverages, including risk excess-of-loss, marine and
aviation. These lines diversify risk (although they involve some catastrophe
exposure) and thus reduce the volatility in results of operations caused by
catastrophes. The following table sets forth IPC's premiums written and number
of contracts written by type of reinsurance.
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YEAR ENDED DECEMBER 31,
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1997 1996
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PERCENTAGE OF PERCENTAGE OF
TYPE OF PREMIUMS PREMIUMS NUMBER OF PREMIUMS PREMIUMS NUMBER OF
REINSURANCE ASSUMED WRITTEN WRITTEN CONTRACTS WRITTEN WRITTEN CONTRACTS
------------------- -------------- ------------- --------- -------------- ------------- ---------
(IN THOUSANDS) (IN THOUSANDS)
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Catastrophe
excess-of-loss......... $ 96,138 82.1% 1,738 $ 87,313 78.3% 1,238
Risk excess-of-loss...... 6,672 5.7% 215 6,616 5.9% 155
Marine reinsurance....... 3,231 2.8% 282 11,001 9.8% 386
Retrocessional
reinsurance............ 3,562 3.0% 82 1,682 1.5% 61
Aviation(1).............. 5,164 4.4% 14 3,871 3.5% 19
Other.................... 2,283 2.0% 41 1,086 1.0% 29
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Total.......... $117,050 100.0% 2,372 $111,569 100.0% 1,888
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(1) In 1997 and 1996, two aviation contracts were on a pro rata basis.
CATASTROPHE EXCESS-OF-LOSS REINSURANCE. Catastrophe excess-of-loss
reinsurance provides coverage to a primary insurer when aggregate claims and
claim expenses from a single occurrence of a peril covered under a portfolio of
primary insurance contracts written by the primary insurer exceed the attachment
point specified in the reinsurance contract with the primary insurer. The
primary insurer can then recover up to the limit of reinsurance it has elected
to buy for each layer. Once a layer is exhausted by collection of claims, the
primary insurer generally buys another reinsurance layer for the same liability
coverage, i.e., a reinstatement, for an additional premium. Most of IPC's
policies are limited to losses occurring during the policy term. A small number
of IPC's policies have terms of more than one year, but most of these policies
contain a cancellation clause entitling either party to cancel at the
anniversary date.
RISK EXCESS-OF-LOSS REINSURANCE. IPC also writes risk excess-of-loss
property reinsurance. This reinsurance responds to a loss of the reinsured in
excess of its retention level on a single "risk", rather than to aggregate
losses for all covered risks, as does catastrophe reinsurance. A "risk" in this
context might mean the insurance coverage on one building or a group of
buildings or the insurance coverage under a single policy which the reinsured
treats as a single risk. Most of the risk excess treaties in which IPC
participates contain a relatively low loss-per-event limit on IPC's liability.
MARINE REINSURANCE. IPC also writes short-tail marine reinsurance for
selected international insurers. Although they primarily involve property
damage, certain marine risks may involve casualty coverage arising from the same
event causing the property damage. Coverage is solely written on an
excess-of-loss basis, so events likely to cause a claim will occur less
frequently. Such events might include the destruction of a drilling platform or
the loss of a sizable vessel and its contents.
AVIATION REINSURANCE. IPC also writes a small book of short-tail aviation
reinsurance on an excess-of-loss basis. Although they primarily involve property
damage, certain aviation risks may involve casualty coverage arising from the
same event causing the property damage. Coverage is generally written in excess
of a substantial attachment point, so events likely to cause a claim will occur
infrequently but be relatively severe. In 1997, the majority of this business
was written in two pro rata aviation contracts, where the underlying insurance
is written on an excess-of-loss basis.
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GEOGRAPHIC DIVERSIFICATION
Since inception, IPC has sought to diversify its exposure across geographic
zones around the world in order to obtain the optimum spread of risk. IPC
divides its markets into geographic zones and limits coverage it is willing to
provide for any risk located in a particular zone so as to maintain its
aggregate loss exposure from all contracts covering risks believed to be located
in that zone to a predetermined level.
The predetermined levels are established annually on the basis of, and as a
proportion of, shareholders' equity. If a proposed reinsurance program would
cause the limit then in effect to be exceeded, the program would be declined,
regardless of its desirability, unless retrocessional coverage (i.e. IPC
purchasing reinsurance) could be obtained, thereby reducing the net aggregate
exposure to the maximum limit permitted, or less. If IPC were to suffer a loss
in any fiscal year, thus reducing shareholders' equity, the limits per zone
would be reduced in the next year, with the possible effect that IPC would
thereafter reduce existing business in a zone exceeding such limit.
Currently, management has divided the United States into 8 geographic zones
and its European, Japanese and other markets into a total of 26 zones. IPC
designates as zones geographic areas which, based on historic catastrophe loss
experience reflecting actual catastrophe events and property development
patterns, it believes are most likely to absorb a large percentage of losses
from one catastrophic event. These zones are determined using computer modeling
techniques and underwriting assessments. The zones may overlap and vary in size
with the level of population density and commercial development in a particular
area. The zones with the greatest exposure written are, in the United States,
the Atlantic and Gulf regions and, elsewhere, in the United Kingdom. The
parameters of these geographic zones are subject to periodic review and change.
IPC recognizes that events may affect more than one zone, and to the extent
IPC has accepted reinsurance from a ceding insurer with a loss exposure in more
than one zone, IPC will consider such potential loss in testing its limits in
all such affected zones. For example, the program for a U.S. national carrier
typically will be subject to limits in each U.S. zone. A program with worldwide
exposure will also be subject to limits in U.S. zones or other zones around the
world, as applicable. This results in very substantial "double-counting" of
exposures in determining utilization of an aggregate within a given zone.
Consequently, the total sum insured will be less than the sums of utilized
aggregates for all of the zones.
The following table sets forth premiums written, number of written
contracts and the percentage of IPC's premiums allocated to the zones of
coverage exposure.
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YEAR ENDED DECEMBER 31,
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1997 1996
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PERCENTAGE OF PERCENTAGE OF
PREMIUMS PREMIUMS NUMBER OF PREMIUMS PREMIUMS NUMBER OF
GEOGRAPHIC AREA(1) WRITTEN WRITTEN CONTRACTS WRITTEN WRITTEN CONTRACTS
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(IN THOUSANDS) (IN THOUSANDS)
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United States............ $ 54,200 46.3% 938 $ 51,641 46.3% 698
Worldwide(2)............. 16,141 13.8% 341 20,044 18.0% 408
Worldwide (excluding the
U.S.)(3)............... 2,497 2.1% 59 2,429 2.2% 36
United Kingdom........... 12,392 10.6% 177 11,403 10.2% 138
Europe (excluding the
U.K.).................. 11,232 9.6% 271 6,523 5.8% 156
Japan.................... 2,794 2.4% 74 5,088 4.6% 81
Australia/New Zealand.... 9,433 8.1% 139 6,308 5.6% 75
Other.................... 8,361 7.1% 373 8,133 7.3% 296
-------- ----- ----- -------- ----- -----
Total.......... $117,050 100.0% 2,372 $111,569 100.0% 1,888
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Notes:
(1) Except as otherwise noted, each of these categories includes contracts that
cover risks primarily located in the designated geographic area.
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(2) Includes contracts that cover risks primarily in two or more countries,
including the United States.
(3) Includes contracts that cover risks primarily in two or more countries,
excluding the United States.
The following table sets forth IPC's aggregate in-force liability allocated
to the zone of coverage exposure at January 1, 1998 and 1997.
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AGGREGATE LIMIT OF
LIABILITY AT JANUARY 1,
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GEOGRAPHIC AREA(1) 1998 1997
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(IN THOUSANDS) (IN THOUSANDS)
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United States
New England............................................... $358,153 $319,139
Atlantic.................................................. 415,579 372,820
Gulf...................................................... 346,976 316,845
North Central............................................. 328,807 294,723
Mid West.................................................. 327,532 277,203
West...................................................... 376,052 300,140
Alaska.................................................... 102,491 99,079
Hawaii.................................................... 116,577 106,687
Total United States(2)............................ 563,567 536,937
Canada...................................................... 84,986 77,774
Worldwide(3)................................................ 33,475 40,776
Worldwide (excluding the U.S.)(4)........................... 122,577 30,995
United Kingdom.............................................. 355,237 263,811
Europe (excluding U.K.)..................................... 210,004 288,954
Japan....................................................... 57,369 76,023
Australia/New Zealand....................................... 175,868 126,413
Other....................................................... 179,443 140,806
</TABLE>
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Notes:
(1) Except as otherwise noted, each of these aggregates includes contracts that
cover risks located primarily in the designated geographic area.
(2) The United States in aggregate is not a zone. The degree of
"double-counting" in the 8 U.S. zones is illustrated by the relation of the
aggregate in-force limit of liability for the United States as compared to
the individual limits of liability in the 8 zones.
(3) Includes contracts that cover risks primarily in two or more countries,
including the United States.
(4) Includes contracts that cover risks primarily in two or more countries,
excluding the United States.
The effectiveness of geographic zone limits in managing risk exposure
depends on the degree to which an actual event is confined to the zone in
question and on the ability of management to determine the actual location of
the risks believed to be covered under a particular reinsurance program.
Accordingly, there can be no assurance that risk exposure in any particular zone
will not exceed that zone's limits.
With respect to U.S. exposures, IPC uses the computer-based systems
described below as one tool in estimating the aggregate losses that could occur
under all of its contracts covering U.S. risks as a result of a range of
potential catastrophic events. By evaluating the effects of various potential
events, management monitors whether the risks that could be accepted within a
zone are appropriate in light of other risks already affecting such zone and, in
addition, whether the level of its zone limits is acceptable.
UNDERWRITING AND PROGRAM LIMITS
In addition to geographic zones, IPC seeks to limit its overall exposure to
risk by pursuing a disciplined underwriting strategy which limits the amount of
reinsurance IPC will supply pursuant to a particular program
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or contract so as to achieve diversification within and across geographical
zones. When it began operations, IPC maintained program limits of $15 million
and contract limits of $5 million. In 1996, program limits were increased to $25
million. In a small number of instances IPC has exceeded these limits, but not
in material amounts. IPC also attempts to distribute its exposure across a range
of attachment points. Attachment points vary and are based upon an assessment of
the ceding insurer's market share of property perils in any given geographic
zone to which the contract relates, as well as the capital needs of the ceding
insurer.
Prior to reviewing any program proposal, IPC considers the appropriateness
of the cedent, including the quality of its management and its capital and risk
management strategy. In addition, IPC requires that each proposed reinsurance
program received by it include information on the nature of the perils to be
included and detailed aggregate information as to the location or locations of
the risks covered under the catastrophe contract. Additional information would
also include the cedent's loss history for the perils being reinsured, together
with relevant underwriting considerations which would impact exposures to
catastrophe reinsurers. IPC first evaluates exposures on new programs in light
of the overall zone limits in any given catastrophe zone, together with program
limits and contract limits, to ensure a balanced and disciplined underwriting
approach. If the program meets all of these initial underwriting criteria, IPC
then evaluates the proposal in terms of risk/ reward profile to assess the
adequacy of the proposed pricing and its potential impact on IPC's overall
return on capital. Once a program meets IPC's requirements for underwriting and
pricing, the program would then be authorized for acceptance.
IPC extensively utilizes sophisticated modeling and other technology in its
underwriting techniques. Each submission received is registered on the "RSG"
system used by IPC for both underwriting and aggregate control purposes. This
system enables both management and underwriters to have on-line information
regarding both individual exposures and zonal aggregate concentrations. All
submissions are recorded to determine and monitor their status as being pending,
authorized, or bound. In addition to the RSG system, IPC uses computer modeling
to measure and estimate loss exposure under both simulated and actual loss
scenarios and in comparing exposure portfolios to both single and multiple
events. Since 1993, IPC has contracted Applied Insurance Research for the use of
CATMAP and EUROCAT as part of its modeling approach. These computer-based loss
modeling systems utilize A.M. Best's data and direct exposure information
obtained from IPC's clients, to assess each client's catastrophe management
approach and adequacy of their program's protection. Modeling is part of the
underwriting criteria for catastrophe exposure pricing. The majority of IPC's
client base also utilizes one or more of the various modeling consulting firms
in their exposure management analysis. In addition, IPC sometimes performs or
contracts for additional modeling analysis when reviewing its major commitments.
The combination of RSG information, together with CATMAP and EUROCAT modeling,
enables IPC to monitor and control its acceptance of exposure on a global basis.
Generally, the proposed terms of coverage, including the premium rate and
retention level for excess-of-loss contracts, are set by the lead reinsurer and
agreed to by the client and broker. On placements requiring large market
capacity, typically the broker strives to achieve a consensus of proposed terms
with many participating underwriters to ensure placement. IPC, on both U.S. and
non-U.S. business, acts in many cases as a lead or consensus lead reinsurer.
When not the lead, IPC sometimes actively negotiates additional terms or
conditions. If IPC elects to authorize a participation, it will specify its
percentage or monetary participation in each layer, and will execute a slip to
be followed by a contract to formalize coverage for a term of normally one year.
IPC has a procedure for underwriting control to ensure that all acceptances
are made in accordance with its underwriting policy and aggregate control. Each
underwriting individual is given an underwriting authority, limits above which
must be submitted for approval to the chief underwriting officer. All new
acceptances are reviewed at least weekly by either the chief executive officer
or the chief underwriting officer.
Generally, about 55% of premiums written by IPC each year are for contracts
which have effective dates in January, about 15% in April, about 18% in July and
the remainder at other times throughout the year. Premiums are generally due in
installments over the contract term, with each installment generally received
within 30 days after the due date.
8
<PAGE> 11
RETROCESSIONAL REINSURANCE
IPC currently does not limit its loss exposure by reinsuring portions of
its contracts with independent reinsurers. Management believes that current
program rates for retrocessional coverage are too high to render such coverage
economically feasible. Management continues to review availability, price and
potential use of retrocessional reinsurance.
MARKETING
IPC's customers generally are sophisticated, long-established insurers who
understand the risks involved and who desire the assurance not only that claims
will be paid but that reinsurance will continue to be available after claims are
paid. Catastrophic losses can be expected to affect financial results adversely
from time to time, and management believes that financial stability and growth
of capital (as well as service and innovation) are essential for creating
long-term relationships with clients, and that such relationships are key to
creating long-term value to the Company and its shareholders. During 1997, no
single ceding insurer accounted for more than 4.2% of IPC's premiums written.
IPC markets its reinsurance products worldwide through non-exclusive
relationships with more than 50 of the leading reinsurance brokers active in the
U.S. and non-U.S. markets for property catastrophe reinsurance. In addition, IPC
Re Services Limited has been incorporated in the United Kingdom, from which
European marketing efforts are conducted on behalf of IPC Re.
Based on premiums written under contracts in force on December 31, 1997,
the five brokers from which IPC derives the largest portions of its business
(with the approximate percentage of IPC's business derived from such broker) are
J. & H. Marsh & McLennan and affiliates (21.6%), Aon Corp. and affiliates
(21.5%), Willis Faber (9.7%), E.W. Blanch (7.7%) and Benfield Greig (7.0%). IPC,
as of December 31, 1997, has in force reinsurance contracts with only six ceding
companies which were not derived from a reinsurance broker; otherwise, its
products are marketed exclusively through brokers. Of the total premiums
attributable to the five largest producing brokers referred to above, none were
attributable to brokers affiliated with the insurers seeking coverage. Aon Corp.
Inc. is an affiliate of The Life Insurance Company of Virginia, a shareholder of
the Company that beneficially owned 163,043 Common Shares immediately after the
Offering (in which it sold 1,086,957 Common Shares). All brokerage transactions
are entered into on an arm's-length basis.
IPC's brokers perform data collection, contract preparation and other
administrative tasks, enabling IPC to market its reinsurance products
cost-effectively by maintaining a small staff. By relying largely on reinsurance
brokers to market its products, IPC is able to avoid the expense and regulatory
complications of worldwide offices, thereby minimizing fixed costs associated
with marketing activities. IPC believes that by maintaining close relationships
with brokers, it is able to obtain access to a broad range of potential
reinsureds. IPC Re meets frequently in Bermuda and elsewhere outside the United
States with brokers and senior representatives of clients and prospective
clients. All contract submissions are approved in IPC Re's executive offices in
Bermuda, and IPC does not believe that conducting its operations in Bermuda has
adversely affected its marketing activities in light of the client base it has
attracted and retained.
RESERVES
Under U.S. generally accepted accounting principles, IPC Re is not
permitted to establish loss reserves with respect to its property catastrophe
business until the occurrence of an event which may give rise to a claim. Once
such an event occurs, IPC establishes reserves based upon estimates of total
losses incurred by the ceding insurers as a result of the event and IPC's
estimate of the portion of such loss it has reinsured. With respect to its
non-catastrophe business, IPC is permitted to establish loss reserves as
determined by a historical loss development pattern. Only loss reserves
applicable to losses incurred up to the reporting date may be set aside, with no
allowance for the provision of a contingency reserve to account for expected
future losses. Claims arising from future catastrophic events can be expected to
require the establishment of substantial reserves from time to time. IPC's
reserves are adjusted as IPC receives notices of claims and proofs of loss from
reinsureds and as estimates of severity of damages and IPC's share of the total
loss are revised.
9
<PAGE> 12
IPC also establishes reserves for losses incurred as a result of an event
known but not reported to IPC. These incurred but not reported ("IBNR") reserves
are established for both catastrophe and other losses. To estimate the portion
of loss and loss adjustment expenses relating to these claims for the year, IPC
reviews its portfolio of business to determine where the potential for loss may
exist. Also, various loss forecasting models and industry loss data as well as
actual experience, knowledge of the business written by IPC and general market
trends in the reinsurance industry are considered. IPC has contracted a leading
worldwide independent firm of actuaries to conduct a review of reserves on a
semi-annual basis.
Generally, reserves are established without regard to whether the loss may
subsequently be contested by IPC. IPC's policy is to establish reserves for
reported losses based upon reports received from ceding companies, supplemented
by IPC's reserve estimates.
Loss reserves represent IPC's estimates, at a given point in time, of the
ultimate settlement and administration costs of claims incurred, and it is
possible that the ultimate liability may exceed or be less than such estimates.
Such estimates are not precise in that, among other things, they are based on
predictions of future developments and estimates of future trends in claim
severity and frequency and other variable factors such as inflation and currency
exchange rates. During the claim settlement period, it often becomes necessary
to refine and adjust the estimates of liability on a claim either upward or
downward, and any such adjustment would affect IPC's results of operations in
the period when the adjustment is determined. For example, as of December 31,
1994, IPC believed that its total losses and loss adjustment expenses (the sum
of loss reserves and losses paid to date) relating to the Northridge, California
earthquake would be $20.6 million. At December 31, 1997, this figure had
increased to $22.9 million. Even after such adjustments, ultimate liability may
materially exceed or be less than the revised estimates. Moreover, reserve
estimates by relatively new property catastrophe reinsurers, such as IPC, may be
inherently more volatile than the reserve estimates of a reinsurer with a stable
volume of business and an established claim history. In contrast to casualty
losses, which frequently can be determined only through lengthy, unpredictable
litigation, property losses tend to be reported promptly and settled within a
shorter period of time.
INVESTMENTS
GENERAL. IPC's current investment strategy is defined primarily by the
need to safeguard IPC's capital, since it is considered that the risks inherent
in catastrophe reinsurance should not be augmented by a speculative investment
policy. For this reason the policy is conservative with a strong emphasis on the
quality of investments.
At December 31, 1997, other than cash, IPC's investments consisted of
fixed-income securities, none of which had a rating of less than A, and shares
of stocks in the companies which comprise the S&P 500. Corporate bonds
represented 52% of total fixed income investments at December 31, 1997 and of
these 16% and 84% were issued by U.S. and non-U.S. corporations, respectively.
IPC's investment policy also stresses diversification and at December 31, 1997
only one single issuer of securities, other than the U.S. Treasury, represented
more than 5% of IPC's portfolio. This was the International Bank for
Reconstruction and Development, whose issues represented 6% of the fixed income
portfolio (8% in 1996). In addition to these parameters, guidelines are also set
which limit permitted issuers, the amount of non-U.S. dollar denominated
securities and the target duration of the portfolio.
10
<PAGE> 13
The following table summarizes the fair value of the investments and cash
and cash equivalents of IPC as of December 31, 1997 and 1996:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
TYPE OF INVESTMENT 1997 1996
------------------ -------- --------
(IN THOUSANDS)
<S> <C> <C>
FIXED MATURITIES AVAILABLE FOR SALE
U.S. Government and government agencies..................... $ 33,229 $ 74,155
Other governments........................................... 125,780 70,595
Corporate................................................... 228,775 70,311
Supranational entities...................................... 54,544 35,931
-------- --------
$442,328 $250,992
FIXED MATURITIES HELD TO MATURITY
U.S. Government and government agencies..................... -- 2,052
Other governments........................................... -- 75,438
Corporate................................................... -- 103,865
Supranational entities...................................... -- 48,109
-------- --------
-- 229,464
Equities, available for sale................................ $ 86,685 $ --
-------- --------
Cash and cash equivalents................................... $ 9,746 $ 23,797
-------- --------
$538,759 $504,253
======== ========
</TABLE>
In July 1994, IPC reclassified approximately half of its investment
portfolio from "available for sale" to "held to maturity" within the meaning of
Statement of Financial Accounting Standard No. 115. See note 2(d) to the
Company's Consolidated Financial Statements. The effect of this reclassification
was that unrealized gains and losses arising as a result of market fluctuations
on securities classified as held to maturity, and which would otherwise be
accounted for through shareholders' equity, were not recognized in IPC's
financial statements. In December 1995, IPC entered into a series of
transactions designed to align more closely the maturity profile of the held to
maturity portfolio with the index against which the performance of the total
investment portfolio is measured. In June, 1997 the portfolio underwent further
restructuring, with the intention of reducing the overall potential volatility
of its value. IPC reclassified all securities which were in the held to maturity
portfolio as "available for sale", and also entered into further transactions
designed to shorten the duration of the portfolio. As a result of the
reclassification, both total assets and shareholders' equity were reduced by
$517,000, representing the unrealized loss on the securities at the date of
transfer. See note 3(h) to the Company's Consolidated Financial Statements.
IPC's investment guidelines are reviewed periodically and are subject to
change at the discretion of the Board of Directors.
MATURITY AND DURATION OF PORTFOLIO. Currently IPC maintains a target
modified duration for the portfolio of between 1.25 years and 3.75 years
although actual maturities of individual securities vary from less than one year
to a maximum of eight years for fixed income securities, and ten years for
money-market securities. At December 31, 1997 the fixed maturity portfolio
(including cash and cash equivalents within such portfolio) had an average life
of 3.0 years and an average modified duration of 2.6 years. Management believes
that, given the relatively high quality of its portfolio, adequate market
liquidity exists to meet IPC's cash demands.
11
<PAGE> 14
The following table summarizes the fair value by maturities of IPC's fixed
maturity investment portfolio as of December 31, 1997 and 1996. For this
purpose, maturities reflect contractual rights to put or call the securities;
actual maturities may be longer.
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1997 1996
-------- --------
(IN THOUSANDS)
<S> <C> <C>
AVAILABLE FOR SALE:
Due in one year or less................................... $ 47,828 $ 34,424
Due after one year through five years..................... 366,207 98,427
Due after five years through ten years.................... 28,293 118,141
-------- --------
$442,328 $250,992
======== ========
HELD TO MATURITY:
Due in one year or less................................... $ -- $ 29,943
Due after one year through five years..................... -- 100,845
Due after five years through ten years.................... -- 98,676
-------- --------
$ -- $229,464
======== ========
</TABLE>
QUALITY OF DEBT SECURITIES IN PORTFOLIO. IPC's investment guidelines
stipulate that a majority of the securities be AAA and AA rated, although a
select number of A rated issues is permitted. The primary rating source is S&P
and, when no S&P rating is available, Moody's ratings are used.
The following table summarizes the composition of the fair value of all
cash and fixed maturity investments by rating:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------
1997 1996
----- -----
<S> <C> <C>
Cash and cash equivalents................................... 2.2% 4.7%
U.S. Government and government agencies..................... 7.3% 15.1%
AAA......................................................... 44.6% 49.3%
AA.......................................................... 38.1% 29.3%
A........................................................... 7.8% 1.6%
----- -----
100.0% 100.0%
===== =====
</TABLE>
There are no delinquent securities in IPC's investment portfolio.
REAL ESTATE. IPC's portfolio does not contain any investments in real
estate or mortgage loans.
FOREIGN CURRENCY EXPOSURE. At December 31, 1997 substantially all of IPC's
fixed maturity investments were in securities denominated in U.S. dollars. At
December 31, 1997, IPC held U.S. $23,112 of Australian dollar denominated bonds
issued by the New South Wales Treasury Corp. The investment guidelines permit up
to 25% of the portfolio to be invested in non-U.S. dollar securities. However,
from inception, such investments have been made infrequently and for relatively
short periods of time. Since July 1995, IPC has entered into forward foreign
exchange contracts for purposes of hedging its non-U.S. dollar denominated
investment portfolio. In addition, in the event that loss payments must be made
in currencies other than the U.S. dollar, in some cases IPC will match the
liability with assets denominated in the same currency, thus mitigating the
effect of exchange rate movements on the balance sheet. To date this strategy
has been used only once.
DERIVATIVES. IPC's investment policy guidelines provide that financial
futures and options and foreign exchange contracts may not be used in a
speculative manner but may be used, subject to certain numerical limits, as part
of a defensive strategy to protect the market value of the portfolio.
12
<PAGE> 15
INVESTMENT ADVISORY AND CUSTODIAL SERVICES. Investment advisory and
custodial services are provided to IPC by subsidiaries of AIG.
COMPETITION
The property catastrophe reinsurance industry is highly competitive. IPC
competes, and will continue to compete, with insurers and property catastrophe
reinsurers worldwide, many of which have greater financial, marketing and
management resources than IPC. In particular, IPC competes with the
Bermuda-based property catastrophe reinsurers, including Mid Ocean Reinsurance
Company Ltd., Renaissance Reinsurance Ltd., Partner Reinsurance Company Ltd., XL
Global Reinsurance Limited, LaSalle Re Limited, Tempest Reinsurance Company
Limited and Cat Limited, and outside Bermuda with the established international
reinsurers such as General Re, American Re Corporation, Munich Re, Swiss
Reinsurance Company and Lloyd's. In addition, there may be established companies
or new companies of which IPC is not aware that may be planning to enter the
property catastrophe reinsurance market or existing reinsurers that may be
planning to commit capital to this market. In addition, Lloyd's determined in
1993 to allow its syndicates to accept capital from corporate investors.
Competition in the types of reinsurance business that IPC underwrites is based
on many factors, including premium charges and other terms and conditions
offered, services provided, ratings assigned by independent rating agencies,
speed of claims payment, claims experience, perceived financial strength and
experience and reputation of the reinsurer in the line of reinsurance to be
written. Many of the reinsurers who have entered the Bermuda- and London-based
reinsurance markets have or could have more capital than IPC. The full effect of
this additional capital on the reinsurance market may not be known for some
time. No assurance can be given as to what impact this additional capital will
ultimately have on terms or conditions of the reinsurance contracts of the types
written by IPC.
In September 1996, IPC was rated by A.M. Best Company, Inc. ("A.M. Best"),
who gave an initial rating of A+ (Superior). This rating was affirmed by A.M.
Best during 1997. In July, 1997 S&P assigned a claims-paying ability rating of
A+. Prior to 1996, IPC was not rated by any rating agency. The rating received
from A.M. Best represents the second highest rating on their rating scale. The
rating received from S&P represents the fifth highest rating on their rating
scale. Such ratings are based on factors of concern to cedents and brokers and
are not directed toward the protection of investors. Such ratings are neither a
rating of securities nor a recommendation to buy, hold or sell such securities.
While the Company believes that its ratings will not be a major competitive
advantage or disadvantage, some of the Company's principal competitors have a
rating equal to that of the Company. Insurance ratings are one factor used by
brokers and cedents in the United States as a means of assessing the financial
strength and quality of reinsurers. In addition, a cedent's own rating may be
adversely affected by the lack of a rating of its reinsurer. IPC Re is not
licensed or admitted as an insurer in any jurisdiction in the United States and,
as a consequence, must generally post letters of credit or other security to
cover outstanding claims of, or unearned premiums with respect to, ceding
insurers in the United States to enable such insurers to obtain favorable
regulatory capital treatment of their reinsurance. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."
Management is aware of a number of new, proposed or potential legislative
or industry changes that may impact upon the worldwide demand for property
catastrophe reinsurance. In the United States, Florida and Hawaii have
implemented arrangements whereby the state provides catastrophe type property
insurance through sponsored state entities. Part of the reinsurance is placed
outside of the traditional reinsurance market in the capital markets. (i.e.
utilizing capital or derivative market instruments) or in the finite reinsurance
market. California has also implemented the formation of the California
Earthquake Authority to provide limited earthquake insurance for California
residents. Although IPC has been selected to participate, and currently
participates, in part of the reinsurance program for this entity, there can be
no assurance that such participation will continue. In the United Kingdom, the
government has enacted a bill to allow insurers to build claim equalization
reserves which might reduce the amount of reinsurance bought. Management is also
aware of many potential initiatives by capital market participants to produce
alternative products that may compete with the existing catastrophe reinsurance
markets. Management is unable to predict the extent to
13
<PAGE> 16
which the foregoing new, proposed or potential initiatives may affect the demand
for IPC's products or the risks which may be available for IPC to consider
underwriting.
EMPLOYEES
As of January 1, 1998, IPC employed 16 people on a full-time basis
including its Chief Executive Officer, Chief Financial Officer and three
underwriters. IPC believes that its employee relations are good. None of IPC's
employees are subject to collective bargaining agreements, and IPC knows of no
current efforts to implement such agreements at IPC.
Many of IPC's employees, including most of its senior management, are
employed pursuant to work permits granted by the Bermuda authorities. These
permits expire at various times over the next several years. IPC has no reason
to believe that these permits would not be extended upon request at their
respective expirations.
REGULATION -- BERMUDA
THE INSURANCE ACT OF 1978, AS AMENDED, AND RELATED REGULATIONS (THE
"INSURANCE ACT"). IPC Re is a registered Bermuda insurance company and is
subject to regulation and supervision in Bermuda. The applicable Bermudian
statutes and regulations generally are designed to protect insureds and ceding
insurance companies rather than shareholders. Among other things, such statutes
and regulations require IPC Re to maintain minimum levels of capital and
surplus; impose restrictions on the amount and type of investments it may hold;
prescribe solvency standards that it must meet; limit transfers of ownership of
its capital shares and provide for the performance of certain periodic
examinations of IPC Re and its financial condition. These statutes and
regulations may, in effect, restrict the ability of IPC Re to write new business
or, as indicated above, distribute funds to the Company. The Insurance Act,
which regulates the insurance business of IPC Re, provides that no person shall
carry on an insurance business in or from within Bermuda unless registered as an
insurer under the Insurance Act by the Minister of Finance (the "Minister"). The
Minister, in deciding whether to grant registration, has broad discretion to act
as he thinks fit in the public interest. The Minister is required by the
Insurance Act to determine whether the applicant is a fit and proper body to be
engaged in the insurance business and, in particular, whether it has, or has
available to it, adequate knowledge and expertise. The registration of an
applicant as an insurer is subject to its complying with the terms of its
registration and such other conditions as the Minister may impose at any time.
As a holding company, the Company is not subject to Bermuda insurance
regulations.
An Insurance Advisory Committee appointed by the Minister advises him on
matters connected with the discharge of his functions and sub-committees thereof
supervise and review the law and practice of insurance in Bermuda, including
reviews of accounting and administrative procedures.
The Insurance Act imposes on Bermuda insurance companies solvency and
liquidity standards and auditing and reporting requirements and grants to the
Minister powers to supervise, investigate and intervene in the affairs of
insurance companies. Significant aspects of the Bermuda insurance regulatory
framework are set forth below.
CLASSIFICATION OF INSURERS. In March 1995, the Insurance Act was amended
to establish four classes of insurers in the area of general business. IPC Re
applied to and obtained from the Registrar of Companies in Bermuda (the
"Registrar"), who is the chief administrative officer under the Insurance Act,
approval as a Class 4 insurer, having met the requirement of a minimum of $100
million of total statutory capital and surplus. The requirements of a Class 4
insurer -- the highest available class -- are intended to assure the world
insurance market of the license-holder's long-term stability and sound financial
condition. This classification requires that IPC Re not write long-term business
without the Minister's approval and, in the event a proposed dividend is in
excess of 25% of its total statutory capital and surplus, file an affidavit as
to solvency, declaring that it will remain in compliance with the solvency
margin and minimum capital and surplus requirements. In addition, dividends are
prohibited where payment would cause IPC Re to be in breach of the Insurance
Act. The solvency margin requirement is the greatest of $100 million, 50% of net
premiums written (with maximum credit of 25% for reinsurance ceded) or 15% of
loss and loss expense
14
<PAGE> 17
reserves. If IPC Re were to reduce its total statutory capital by more than 15%
of that contained in its Statutory Financial Statements for the prior fiscal
year, it would be required to apply to the Minister for approval and file
certain required information, including an affidavit declaring that it would
remain in compliance with the required minimum solvency margin and liquidity
ratio. As of January 1, 1998, IPC Re would have been able to pay approximately
$131 million in dividends in accordance with the foregoing restrictions. The
Company does not expect these requirements to impose any significant limitations
on the Company's liquidity, based on IPC Re's current capital structure and
operating results. See note 13 to the Company's Consolidated Financial
Statements.
CANCELLATION OF INSURER'S REGISTRATION. An insurer's registration may be
cancelled by the Minister on certain grounds specified in the Insurance Act,
including failure of the insurer to comply with its obligations under the
Insurance Act or, if in the opinion of the Minister after consultation with the
Insurance Advisory Committee, the insurer has not been carrying on business in
accordance with sound insurance principles.
INDEPENDENT APPROVED AUDITOR. Every registered insurer must appoint an
independent auditor who will annually audit and report on the Statutory
Financial Statements and the Statutory Financial Return of the insurer, which
are required to be filed annually with the Registrar. The independent auditor of
the insurer must be approved by the Minister and may be the same person or firm
which audits the insurer's financial statements and reports for presentation to
its shareholders.
LOSS RESERVE SPECIALIST. IPC Re, as a registered Class 4 insurer, is
required to submit an annual loss reserve opinion when filing the annual
Statutory Financial Return. This opinion must be issued by a Loss Reserve
Specialist, who, in IPC Re's case, is Mr. Edward Dew, a consulting actuary at
the Bermuda office of Tillinghast-Towers Perrin, a leading worldwide independent
firm of actuaries. The Loss Reserve Specialist, who will normally be a qualified
property/casualty actuary, must be approved by the Minister.
STATUTORY FINANCIAL STATEMENTS. An insurer must prepare annual Statutory
Financial Statements. The Insurance Act prescribes rules for the preparation and
substance of such Statutory Financial Statements (which include, in statutory
form, a balance sheet, income statement, and a statement of capital and surplus,
and notes thereto). The insurer is required to give detailed information and
analyses regarding premiums, claims, reinsurance and investments. The Statutory
Financial Statements are not prepared in accordance with U.S. generally accepted
accounting principles ("U.S. GAAP") and are distinct from the financial
statements prepared for presentation to the insurer's shareholders under the
Companies Act 1981 of Bermuda, which financial statements may be prepared in
accordance with U.S. GAAP. A Class 4 insurer is required to submit the annual
Statutory Financial Statements as part of the annual Statutory Financial Return.
MINIMUM SOLVENCY MARGIN. The Insurance Act provides that the statutory
assets of an insurer must exceed its statutory liabilities by at least the
prescribed minimum solvency margin which varies with the class of the insurer
and the insurer's premiums written and loss reserve level. As indicated above,
the solvency margin requirement for a Class 4 insurer is the greatest of $100
million, 50% of net premiums written (with maximum credit of 25% for reinsurance
ceded) or 15% of loss and loss expense reserves. See note 13 to the Company's
Consolidated Financial Statements for information with respect to IPC Re's
statutory capital and surplus.
MINIMUM LIQUIDITY RATIO. The Insurance Act provides a minimum liquidity
ratio for general business. An insurer engaged in general business is required
to maintain the value of its relevant assets at not less than 75% of the amount
of its relevant liabilities. Relevant assets include cash and time deposits,
quoted investments, unquoted bonds and debentures, first liens on real estate,
investment income due and accrued, accounts and premiums receivable and
reinsurance balances receivable. There are certain categories of assets which,
unless specifically permitted by the Minister, do not automatically qualify as
relevant assets, such as unquoted equity securities, investments in, and
advances to, affiliates, real estate and collateral loans. The relevant
liabilities are total general business insurance reserves and total other
liabilities less deferred income tax and sundry liabilities (by interpretation,
those not specifically defined).
ANNUAL STATUTORY FINANCIAL RETURN. IPC Re is required to file with the
Registrar a Statutory Financial Return no later than four months after its
financial year end (unless specifically extended). The Statutory
15
<PAGE> 18
Financial Return includes, among other matters, a report of the approved
independent auditor on the Statutory Financial Statements of the insurer; a
declaration of the statutory ratios; a solvency certificate; the Statutory
Financial Statements themselves; the opinion of the approved Loss Reserve
Specialist and certain details concerning ceded reinsurance. The solvency
certificate and the declaration of the statutory ratios must be signed by the
principal representative and at least two directors of the insurer who are
required to state whether the Minimum Solvency Margin and, in the case of the
solvency certificate, the Minimum Liquidity Ratio, have been met, and the
independent approved auditor is required to state whether in its opinion it was
reasonable for them to so state and whether the declaration of the statutory
ratios complies with the requirements of the Insurance Act. The Statutory
Financial Return must include the opinion of the Loss Reserve Specialist in
respect of the loss and loss expense provisions of IPC Re. Where an insurer's
accounts have been audited for any purpose other than compliance with the
Insurance Act, a statement to that effect must be filed with the Statutory
Financial Return.
SUPERVISION, INVESTIGATION AND INTERVENTION. The Minister may appoint an
inspector with extensive powers to investigate the affairs of an insurer if the
Minister believes that an investigation is required in the interest of the
insurer's policyholders or persons who may become policyholders. In order to
verify or supplement information otherwise provided to him, the Minister may
direct an insurer to produce documents or information relating to matters
connected with the insurer's business.
If it appears to the Minister that there is a risk of the insurer becoming
insolvent, or that it is in breach of the Insurance Act or any conditions
imposed upon its registration, the Minister may, among other things, direct the
insurer not to take on any new insurance business; not to vary any insurance
contract if the effect would be to increase the insurer's liabilities; not to
make certain investments; to realize certain investments; to maintain in
Bermuda, or transfer to the custody of a Bermuda bank, certain assets; not to
declare or pay any dividends or other distributions or to restrict the making of
such payments; and/or to limit its premium income.
An insurer is required to maintain a principal office in Bermuda and to
appoint and maintain a principal representative in Bermuda. For the purpose of
the Insurance Act, the principal office of IPC Re is at IPC's offices in
Pembroke, Bermuda and the Company's President and Chief Executive Officer is the
principal representative of IPC Re. Without a reason acceptable to the Minister,
an insurer may not terminate the appointment of its principal representative,
and the principal representative may not cease to act as such, unless 30 days'
notice in writing to the Minister is given of the intention to do so. It is the
duty of the principal representative, within 30 days of his reaching the view
that there is a likelihood of the insurer for which he acts becoming insolvent
or its coming to his knowledge, or his having reason to believe, that an "event"
has occurred, to make a report in writing to the Minister setting out all the
particulars of the case that are available to him. Examples of such an "event"
include failure by the insurer to comply substantially with a condition imposed
upon the insurer by the Minister relating to a solvency margin or a liquidity or
other ratio.
CERTAIN OTHER CONSIDERATIONS. Although IPC Re is incorporated in Bermuda,
it is classified as non-resident of Bermuda for exchange control purposes by the
Bermuda Monetary Authority. Pursuant to its non-resident status, IPC Re may hold
any currency other than Bermuda Dollars and convert that currency into any other
currency (other than Bermuda Dollars) without restriction.
As "exempted" companies, the Company and IPC Re may not, without the
express authorization of the Bermuda legislature or under a license granted by
the Minister, participate in certain business transactions, including: (i) the
acquisition or holding of land in Bermuda (except that required for its business
and held by way of lease or tenancy agreement for a term not exceeding 21
years); (ii) the taking of mortgages on land in Bermuda in excess of $50,000; or
(iii) the carrying on of business of any kind in Bermuda, except in certain
limited circumstances such as doing business with another exempted undertaking
in furtherance of the business of the Company or IPC Re (as the case may be)
carried on outside Bermuda.
The Bermuda government actively encourages foreign investment in "exempted"
entities like the Company that are based in Bermuda, but do not operate in
competition with local businesses. As well as having no restrictions on the
degree of foreign ownership, the Company and IPC Re are not currently subject
16
<PAGE> 19
to taxes on their income or dividends or to any foreign exchange controls in
Bermuda. In addition, there currently is no capital gains tax in Bermuda.
REGULATION -- UNITED STATES, UNITED KINGDOM AND OTHER
IPC Re is not admitted to do business in any jurisdiction except Bermuda.
Although IPC Re conducts its operations from Bermuda, it is not permitted to
underwrite local risks. The insurance laws of each state of the United States
and of many other countries regulate the sale of insurance and reinsurance
within their jurisdictions by alien insurers and reinsurers such as IPC Re,
which are not admitted to do business within such jurisdictions. With some
exceptions, such sale of insurance or reinsurance within a jurisdiction where
the insurer is not admitted to do business is prohibited. IPC Re does not intend
to maintain an office or to solicit, advertise, settle claims or conduct other
insurance activities in any jurisdiction other than Bermuda where the conduct of
such activities would require that IPC Re be so admitted.
In addition to the regulatory requirements imposed by the jurisdictions in
which they are licensed, reinsurers' business operations are affected by
regulatory requirements in various states of the United States governing "credit
for reinsurance" which are imposed on their ceding companies. In general, a
ceding company which obtains reinsurance from a reinsurer that is licensed,
accredited or approved by the jurisdiction or state in which the reinsurer files
statutory financial statements is permitted to reflect in its statutory
financial statements a credit in an aggregate amount equal to the liability for
unearned premiums and loss reserves and loss expense reserves ceded to the
reinsurer. IPC Re is not licensed, accredited or approved in any state in the
United States. The great majority of states, however, permit a credit to
statutory surplus resulting from reinsurance obtained from a non-licensed or
non-accredited reinsurer to be offset to the extent that the reinsurer provides
a letter of credit or other acceptable security arrangement. A few states do not
allow credit for reinsurance ceded to non-licensed reinsurers except in certain
limited circumstances and others impose additional requirements that make it
difficult to become accredited. IPC Re is also subject to excise tax in the
United States for U.S. business, and in certain other jurisdictions.
IPC Re does not believe it is in violation of insurance laws of any
jurisdiction in the United States. There can be no assurance, however, that
inquiries or challenges to IPC Re's reinsurance activities will not be raised in
the future. IPC Re believes that its manner of conducting business through its
offices in Bermuda has not materially adversely affected its operations to date.
There can be no assurance, however, that IPC's location, regulatory status or
restrictions on its activities resulting therefrom will not adversely affect its
ability to conduct business in the future.
Similarly, IPC Re Services is not registered as an insurer in the United
Kingdom or in any other jurisdiction. The Company believes that IPC Re Services
is not required to be registered as an insurance company in the United Kingdom,
and that the activities of IPC Re Services do not cause the Company or IPC Re to
be subject to regulation as an insurance company in the United Kingdom.
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The discussion below is only a general summary of certain United States
federal income tax considerations that are relevant to certain holders of Common
Shares of the Company. It does not address all relevant tax considerations that
may be relevant to holders of Common Stock nor does it address tax
considerations that may be relevant to certain holders. Investors and
prospective investors should consult their own tax advisors concerning federal,
state local and non-U.S. tax consequences of ownership and disposition of Common
Shares.
TAXATION OF THE COMPANY AND IPC RE. The Company and IPC Re are Bermuda
corporations; neither files United States tax returns. IPC Re believes that it
operates in such a manner that it is not subject to U.S. tax (other than U.S.
excise tax on reinsurance premiums and withholding tax on certain investment
income from U.S. sources) because it does not engage in a trade or business in
the United States. However, because definitive identification of activities
which constitute being engaged in a trade or business in the United States is
not provided by the Internal Revenue Code of 1986, as amended (the "Code"), or
regulations or court decisions, there can be no assurance that the Internal
Revenue Service will not contend that the Company
17
<PAGE> 20
and/or IPC Re is engaged in a trade or business in the United States. If IPC Re
were engaged in a trade or business in the United States (and, if IPC Re were to
qualify for benefits under the income tax treaty between the United States and
Bermuda, such trade or business were attributable to a "permanent establishment"
in the United States), IPC Re would be subject to U.S. tax at regular corporate
rates on its income that is effectively connected with its U.S. trade or
business, plus an additional 30% "branch profits" tax on such income remaining
after the regular tax, in which case the Company's earnings and shareholders'
equity could be materially adversely affected.
IPC Re pays premium excise taxes in the United States (1%), Australia (3%),
and certain other jurisdictions. From time to time, U.S. legislation has been
proposed which would increase such tax to 4%.
CONTROLLED FOREIGN CORPORATION RULES. Each "United States shareholder" of
a "controlled foreign corporation" ("CFC") who owns shares in the CFC on the
last day of the CFC's taxable year must include in its gross income for United
States federal income tax purposes its pro-rata share of the CFC's "subpart F
income", even if the subpart F income is not distributed. For these purposes,
any U.S. person who owns, directly or indirectly through foreign persons, or is
considered to own under applicable constructive ownership rules of the Code, 10%
or more of the total combined voting power of all classes of stock of a foreign
corporation will be considered to be a "United States shareholder" In general, a
foreign insurance company such as IPC Re is treated as a CFC only if such
"United States shareholders" collectively own more than 25% of the total
combined voting power or total value of the company's stock for an uninterrupted
period of 30 days or more during any tax year. AIG owns 24.4% of the Common
Shares and the AIG Option, although, pursuant to the Bye-laws, the combined
voting power of these shares is limited to less than 10% of the combined voting
power of all shares. The Company believes that, because of the dispersion of the
Company's share ownership among holders other than AIG and because of the
restrictions on transfer, issuance or repurchase of the Common Shares,
shareholders of the Company will not be subject to treatment as "United States
shareholders" of a CFC. In addition, because under the Bye-laws no single
shareholder (including AIG) is permitted to exercise as much as 10% of the total
combined voting power of the Company, shareholders of the Company should not be
viewed as "United States shareholders" of a CFC for purposes of these rules.
There can be no assurance, however, that these rules will not apply to
shareholders of the Company. Accordingly, U.S. persons who might, directly or
through attribution, acquire 10% or more of the Common Shares of the Company
should consider the possible application of the CFC rules.
RELATED PERSON INSURANCE INCOME RULES. If IPC Re's related person
insurance income ("RPII") were to equal or exceed 20% of IPC Re's gross
insurance income in any taxable year, a U.S. person who owns Common Shares
directly or indirectly on the last day of the taxable year would likely be
required to include in its income for U.S. federal income tax purposes the
shareholder's pro-rata share of IPC Re's RPII for the taxable year, determined
as if such RPII were distributed proportionately to such United States
shareholders at that date regardless of whether such income is distributed. The
amount of RPII earned by IPC Re (generally, premium and related investment
income from the direct or indirect insurance or reinsurance of any direct or
indirect U.S. shareholder of IPC Re or any person related to such shareholder,
including the Company) will depend on a number of factors, including the
geographic distribution of IPC Re's business and the identity of persons
directly or indirectly insured or reinsured by IPC Re. Although IPC Re does not
believe that the 20% threshold was met in taxable years 1994, 1995, 1996 or
1997, some of the factors which determine the extent of RPII in any period may
be beyond the control of IPC Re. Consequently, there can be no assurance that
IPC Re's RPII will not equal or exceed 20% of its gross insurance income in any
taxable year.
The RPII rules provide that if a shareholder who is a U.S. person disposes
of shares in a foreign insurance corporation that has RPII (even if the amount
of RPII is less than 20% of the corporation's gross insurance income) and in
which U.S. persons own 25% or more of the shares, any gain from the disposition
will generally be treated as ordinary income to the extent of the shareholder's
share of the corporation's undistributed earnings and profits that were
accumulated during the period that the shareholder owned the shares (whether or
not such earnings and profits are attributable to RPII). In addition, such a
shareholder will be required to comply with certain reporting requirements,
regardless of the amount of shares owned by the shareholder. These rules should
not apply to dispositions of Common Shares because the Company is not itself
directly
18
<PAGE> 21
engaged in the insurance business and because proposed U.S. Treasury regulations
appear to apply only in the case of shares of corporations that are directly
engaged in the insurance business. There can be no assurance, however, that the
Internal Revenue Service will interpret the proposed regulations in this manner
or that the applicable regulations will not be promulgated in final form in a
manner that would cause these rules to apply to dispositions of Common Shares.
TAX-EXEMPT SHAREHOLDERS. Recently enacted legislation generally requires
tax-exempt entities to treat certain subpart F insurance income, including RPII,
that is includible in income by the tax-exempt entity as unrelated business
taxable income.
ITEM 2. PROPERTIES
Pursuant to an administrative services agreement with American
International Company, Limited ("AICL"), a wholly-owned subsidiary of AIG, IPC
is allocated office space in AICL's building in Bermuda and IPC's principal
executive offices are located there. The address of the principal executive
offices is American International Building, 29 Richmond Road, Pembroke HM 08,
Bermuda and its telephone number is (441) 298-5100. In addition, IPC Re Services
leases office space located in London, England.
ITEM 3. LEGAL PROCEEDINGS
IPC will be subject to litigation and arbitration in the ordinary course of
its business. IPC currently is not involved in any material pending litigation
or arbitration proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of shareholders of the Company during
the fourth quarter of the year ended December 31, 1997.
19
<PAGE> 22
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER
MATTERS
The Common Shares have been included for trading on the Nasdaq National
Market under the symbol "IPCRF".
The following table sets forth, for the periods indicated, the high and low
sales prices for the Common Shares as reported by the Nasdaq National Market.
Such prices reflect inter-dealer prices, without retail mark-up, mark-down or
commission, and do not necessarily represent actual transactions.
<TABLE>
<CAPTION>
HIGH LOW
------- -------
<S> <C> <C>
1997
Quarter ended March 31, 1997.............................. $26.375 $22.500
Quarter ended June 30, 1997............................... 28.125 22.375
Quarter ended September 30 ,1997.......................... 30.500 26.750
Quarter ended December 31, 1997........................... 32.875 29.125
1996
Quarter ended March 31, 1996 (from March 14, 1996)........ $22.250 $19.875
Quarter ended June 30, 1996............................... 21.625 19.000
Quarter ended September 30 ,1996.......................... 20.750 19.500
Quarter ended December 31, 1996........................... 22.875 19.625
</TABLE>
As of February 28, 1998, there were 124 holders of record of Common Shares.
In each of March, June, September, and December 1997, the Company paid
dividends of $0.3175 per Common Share. In addition, in June and December 1997,
the Company paid special dividends of $1.00 per Common Share. The actual amount
and timing of any future dividends is at the discretion of the Board and is
dependent upon the profits and financial requirements of the Company, as well as
loss experience, business opportunities and any other factors that the Board
deems relevant. In addition, if the Company has funds available for
distribution, it may nevertheless determine that such funds should be retained
for the purposes of replenishing capital, expanding premium writings or other
purposes. The Company is a holding company, whose principal source of income is
cash dividends and other permitted payments from IPC Re. The payment of
dividends from IPC Re to the Company is restricted under Bermuda law and
regulation, including Bermuda insurance law. Under the Insurance Act, IPC Re is
prohibited from paying dividends of more than 25% of its statutory capital and
surplus at the beginning of the fiscal year unless it files an affidavit stating
it will continue to meet the required solvency margin and minimum liquidity
ratio requirements, and from declaring or paying dividends without the approval
of the Minister of Finance if it failed to meet its required margins from the
previous fiscal year. The maximum amount of dividends which could be paid by IPC
Re to the Company at January 1, 1998 without such notification is approximately
$131,287,000. The Insurance Act also requires IPC Re to maintain a minimum
solvency margin and minimum liquidity ratio and prohibits dividends which would
result in a breach of these requirements. In addition, IPC Re is prohibited
under the Insurance Act from reducing its opening total statutory capital by
more than 15% without the approval of the Minister of Finance. As a result of
these factors, there can be no assurance that the Company's dividend policy will
not change or that the Company will declare or pay any dividends.
20
<PAGE> 23
ITEM 6. SELECTED FINANCIAL DATA
The historical consolidated financial data presented below as of and for
each of the periods ended December 31, 1997, 1996, 1995 and 1994 were derived
from the Company's consolidated financial statements which are incorporated
herein by reference to the Annual Report. The selected consolidated financial
data should be read in conjunction with the Company's consolidated financial
statements and related notes thereto, and with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" also contained in the
Annual Report and incorporated herein by reference.
<TABLE>
<CAPTION>
PERIOD
MAY 20, 1993
YEAR ENDED DECEMBER 31, THROUGH
----------------------------------------------------- DECEMBER 31,
1997 1996 1995 1994 1993
----------- ----------- ----------- ----------- ------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA
Premiums written.............. $ 117,050 $ 111,569 $ 104,096 $ 85,610 $ 15,387
Premiums earned............... 112,486 113,642 101,541 74,667 5,035
Net investment income......... 29,883 28,883 22,855 16,762 6,370
Loss and loss expenses
incurred................... 14,708 32,732 36,657 31,570 --
Acquisition costs............. 13,487 11,849 10,315 7,665 516
General & administrative
expenses(1)................ 10,238 9,250 6,112 4,708 1,351
Realized capital
gains/(losses)............. (3,616) 3,871 2,973 (1,053) 8
Net income.................... $ 100,320 $ 92,565 $ 74,285 $ 46,433 $ 9,546
Net income per Common
Share(2)................... $ 3.79 $ 3.55 $ 2.90 $ 1.85 $ 0.38
Weighted average shares
outstanding(2)............. 26,492,401 26,080,744 25,618,719 25,130,454 25,073,598
Dividend per Common Share(3).. $ 3.27 $ 0.8925 -- -- --
OTHER DATA
Loss and loss expense
ratio(4)................... 13.1% 28.8% 36.1% 42.3% 0.0%
Expense ratio(4).............. 19.7% 19.2% 17.4% 16.9% 36.9%
Combined ratio(4)............. 32.8% 48.0% 53.5% 59.2% 36.9%
Return on average equity(5)... 19.6% 19.9% 19.1% 14.5% 6.2%
BALANCE SHEET DATA (AT END OF
PERIOD)
Total cash and investments.... $ 538,759 $ 503,846 $ 444,082 $ 354,697 $ 302,342
Reinsurance balances
receivable................. 27,735 25,687 25,451 19,285 8,165
Total assets.................. 585,019 548,081 485,248 387,327 319,690
Reserve for losses and loss
expenses................... 27,590 28,483 24,717 17,976 --
Unearned premiums............. 26,462 21,898 23,971 21,416 10,338
Total shareholders' equity.... 528,293 496,135 434,292 347,183 309,007
Book value per Common
Share(6)................... $ 19.94 $ 19.02 $ 16.58 $ 13.76 $ 12.36
</TABLE>
- ---------------
(1) Includes gains and losses arising from foreign exchange.
(2) Net income per Common Share is based upon the weighted average number of
Common Shares outstanding during the relevant period, after giving effect to
the Exchange. The weighted average number of shares includes Common Shares
and the dilutive effect of the AIG Option and employee stock options, using
the treasury stock method. The weighted average number of shares for 1995
and prior are pro forma.
21
<PAGE> 24
(3) Dividend per Common Share is based on the number of average outstanding
Common Shares during the years ended December 31, 1997 and 1996,
respectively.
(4) The loss and loss expense ratio is calculated by dividing the losses and
loss expenses incurred by the net premiums earned. The expense ratio is
calculated by dividing the sum of acquisition costs and general and
administrative expenses (excluding gains and losses from foreign exchange)
by net premiums earned. The combined ratio is the sum of the loss and loss
expense ratio and the expense ratio.
(5) Return on average equity equals the annual net income divided by the average
of the shareholders' equity on the first and last day of the respective
period.
(6) Book value per Common Share is based on the number of Common Shares
outstanding on the relevant date (after giving effect to the Exchange),
after considering the effect of the AIG Option as of each date presented and
after considering the effect of options granted to employees, calculated on
the basis described in note (2) above.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information required for this item is incorporated herein by reference
to the narrative contained under the caption "Management's Discussion and
Analysis of Financial Condition and Results of Operations" in the Annual Report.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required for this item is incorporated herein by reference
to the consolidated financial statements of the Company contained in the Annual
Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
The information concerning directors required for this item is incorporated
herein by reference to the information contained under the captions "Election of
Directors", "Executive Officers" and "Section 16(a) Beneficial Ownership
Reporting Compliance" in the Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION
The information required for this item is incorporated herein by reference
to the information contained under the caption "Executive Compensation" in the
Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required for this item is incorporated herein by reference
to the information contained under the caption "Beneficial Ownership of Common
Shares" in the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required for this item is incorporated herein by reference
to the information contained under the caption "Certain Relationships and
Related Transactions" in the Proxy Statement.
22
<PAGE> 25
The fees payable to AICL in connection with the provision of administrative
services pursuant to an administrative services agreement between IPC and AICL
are equal to 2.5% of the first $500 million of annual gross premiums written,
1.5% of the next $500 million and 1% of any additional gross premiums written.
This administrative services agreement terminates on June 30, 2003 and is
automatically renewed thereafter for successive three-year terms unless prior
written notice to terminate is delivered by or to AICL at least 180 days prior
to the end of such three-year term.
AIG Global Investment Corp. (Ireland) Ltd. ("AIGIC"), an indirect wholly
owned subsidiary of AIG, provides investment advisory services to IPC pursuant
to an investment advisory agreement that has a one year term expiring June 23,
1998 and is subject to termination thereafter any such period by either party on
30 days' written notice. IPC pays AIGIC an annual fee of .35% on the first $100
million of funds under management, .25% on the next $100 million of funds under
management and .15% on all funds managed greater than $200 million.
AIG Global Investment Trust Services Limited, an indirect wholly-owned
subsidiary of AIG based in Ireland, provides custodial services to IPC pursuant
to a custodial agreement that provides for an annual fee of .04% of the market
value of the portfolio plus reimbursement of fees and out-of-pocket expenses,
and may be terminated by either party upon 90 days' written notice.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Financial Statements and Exhibits
1. Financial Statements
The following Consolidated Financial Statements of the Company and
Report of Independent Auditors are incorporated herein by reference to
pages 13 to 39 of the Annual Report:
Report of Independent Public Accountants.
Consolidated balance sheets as of December 31, 1997 and 1996.
Consolidated statements of income for the years ended December 31, 1997,
1996 and 1995.
Consolidated statements of changes in shareholders' equity for the years
ended December 31, 1997, 1996 and 1995.
Consolidated statements of cash flows for the years ended December 31,
1997, 1996 and 1995.
Notes to the Consolidated Financial Statements.
2. Financial Statement Schedules
Report of Independent Public Accountants on Schedules.
Schedule II -- Condensed Financial Information of Registrant.
Schedule III -- Supplementary Insurance Information of Subsidiary for the
years ended December 1997, 1996 and 1995.
Schedule IV -- Supplementary Information concerning Reinsurance for the
years ended
December 31, 1997, 1996 and 1995.
Certain schedules have been omitted, either because they are not
applicable or because the
information is included in the Consolidated Financial Statements of the
Company incorporated by reference to the Annual Report.
23
<PAGE> 26
3. Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION METHOD OF FILING
- ------- ----------- ----------------
<C> <S> <C>
2.2 Board Resolution authorizing the Exchange................... *
3.1 Memorandum of Association of the Company.................... *
3.2 Amended and Restated Bye-Laws of the Company................ *
3.3 Form of Memorandum of Increase of Share Capital............. *
3.4 Form of Registration Rights Agreement....................... *
4.1 Form of Share Certificate................................... *
10.1A Termination Agreement among the Company and its previous
shareholders.............................................. *
10.1 B Amendment No. 1 to the Termination Agreement dated as of
February 15, 1996......................................... *
10.2 Form of Amended and Restated Option Agreement entered into
between the Company and AIG............................... *
10.3 IPC Holdings, Ltd. Stock Option Plan........................ *
10.4 IPC Re Defined Contribution Plan............................ *
10.5 Amended and Restated Administrative Services Agreement among
IPC and AICL.............................................. *
10.6 Investment Management Agreement between IPC Re and AIGIC.... **
10.7 Investment Sub-Advisory Agreement between AIGIC and AIGIC
(Europe) (formerly known as Dempsey & Company
International Limited).................................... *
10.8 Custodial Agreement between AIGTS and IPC Re................ *
10.9 Retirement Agreement between IPC Re and James P. Bryce...... *
10.10 Retirement Agreement between IPC Re and Peter J.A. Cozens... *
11.1 Statement regarding Computation of Per Share Earnings....... Filed herewith
13.1 Portions of the Annual Report incorporated herein by
reference................................................. Filed herewith
21.1 Subsidiaries of the Registrant.............................. Filed herewith
23.1 Consent of Arthur Andersen & Co............................. Filed herewith
27.1 Financial Data Schedule..................................... Filed herewith
</TABLE>
- ---------------
* Incorporated by reference to the corresponding exhibit in the Company's
Registration Statement on Form S-1 (No. 333-00088).
** Incorporated by reference to Exhibit 10.1 to the Company's Form 10-Q for the
quarter ended June 30, 1997 (File No. 0-27662).
(b) Reports on Form 8-K.
No reports were filed on Form 8-K during the fourth quarter of 1997.
24
<PAGE> 27
IPC HOLDINGS, LTD.
INDEX TO SCHEDULES
<TABLE>
<CAPTION>
SCHEDULE/REPORT PAGE
--------------- ----
<S> <C> <C>
Report of Independent Public Accountants on Schedules........................ 26
Schedule II Consolidated Financial Information of the Registrant........ 27
Schedule III Supplementary Insurance Information of Subsidiary for the
years ended December 31, 1997, 1996 and 1995.............. 29
Schedule IV Supplementary Information concerning Reinsurance for the
years ended December 31, 1997, 1996 and 1995.............. 30
</TABLE>
25
<PAGE> 28
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of IPC Holdings, Ltd.
We have audited in accordance with generally accepted accounting standards
the consolidated financial statements of IPC Holdings, Ltd. and subsidiaries as
of December 31, 1997 and 1996 and for each of the three years in the period
ended December 31, 1997 included in IPC Holdings, Ltd.'s annual report to
shareholders incorporated by reference in this Form 10-K, and have issued our
report thereon dated February 3, 1998. Our audit was made for the purpose of
forming an opinion on the basic financial statements taken as a whole. The
schedules listed in the accompanying index are the responsibility of management
and are presented for purposes of complying with the Securities and Exchange
Commission's rules and are not part of the basic financial statements. These
schedules have been subjected to the auditing procedures applied in the audits
of the basic financial statements and, in our opinion, fairly state in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN & CO.
Hamilton, Bermuda
February 3, 1998
26
<PAGE> 29
SCHEDULE II
IPC HOLDINGS, LTD.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
BALANCE SHEET
(PARENT COMPANY)
(EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS)
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
--------------------
1997 1996
-------- --------
<S> <C> <C>
ASSETS:
Cash...................................................... $ 352 $ 580
Investment in wholly-owned subsidiaries................... 529,206 496,848
Other assets.............................................. 1,282 363
-------- --------
Total assets.............................................. $530,840 $497,791
======== ========
LIABILITIES:
Payable to subsidiary..................................... $ 2,481 $ 1,625
Other liabilities......................................... 66 31
-------- --------
Total liabilities......................................... $ 2,547 $ 1,656
SHAREHOLDERS' EQUITY:
Share Capital -- 1997: 25,017,603 shares outstanding, par
value $0.01; 1996: 25,000,000 shares
outstanding, par value $0.01............. $ 250 $ 250
Additional paid in capital................................ 299,533 299,267
Unrealized gain/(loss) on investments..................... 9,476 (3,898)
Retained earnings......................................... 219,034 200,516
-------- --------
Total shareholders' equity................................ 528,293 496,135
-------- --------
Total liabilities and shareholders' equity................ $530,840 $497,791
======== ========
</TABLE>
STATEMENT OF INCOME
(PARENT COMPANY)
(EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1997 1996 1995
-------- ------- -------
<S> <C> <C> <C>
Interest Income............................................. $ 25 $ 50 $ --
Expenses:
Operating Costs and expenses, net......................... 1,490 3,226 1,515
-------- ------- -------
(Loss)/profit before equity in net income of wholly-owned
subsidiary................................................ (1,465) (3,176) (1,515)
Equity in net income of wholly-owned subsidiaries........... 101,785 95,741 75,800
-------- ------- -------
Net Income available to common shareholders................. $100,320 $92,565 $74,285
======== ======= =======
</TABLE>
27
<PAGE> 30
SCHEDULE II
CONTINUED
IPC HOLDINGS, LTD.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED)
STATEMENT OF CASH FLOWS
(PARENT COMPANY)
(EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1997 1996 1995
--------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income................................................ $ 100,320 $ 92,565 $ 74,285
Adjustments to reconcile net income to cash provided by:
Equity in net income from subsidiaries.................. (101,785) (95,741) (75,801)
Changes in, net:
Other assets......................................... (919) (363)
Payable to subsidiary................................ 856 1,603 45
Other liabilities.................................... 35 (1,497) 1,501
--------- -------- --------
(1,493) (3,433) 30
--------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Additional paid-in capital................................ 266 -- --
Dividends received from subsidiary........................ 82,801 26,275 --
Dividends paid to shareholders............................ (81,802) (22,313) --
--------- -------- --------
1,265 3,962 --
--------- -------- --------
Net increase (decrease) in cash and cash equivalents...... (228) 529 30
Cash and cash equivalents, beginning of year.............. 580 51 21
--------- -------- --------
Cash & cash equivalents, end of year...................... $ 352 $ 580 $ 51
========= ======== ========
</TABLE>
28
<PAGE> 31
SCHEDULE III
IPC HOLDINGS, LTD. AND SUBSIDIARIES
SUBSIDIARY SUPPLEMENTARY INSURANCE INFORMATION
(EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS)
<TABLE>
<CAPTION>
FUTURE POLICY BENEFITS, AMORTIZATION
DEFERRED BENEFITS, CLAIMS, OF DEFERRED
POLICY LOSSES, CLAIMS NET LOSSES AND POLICY OTHER
ACQUISITION AND LOSS UNEARNED PREMIUM INVESTMENT SETTLEMENT ACQUISITION OPERATING
SEGMENT COSTS EXPENSE PREMIUMS REVENUE INCOME EXPENSES COSTS EXPENSES
------- ----------- -------------- -------- -------- ---------- ---------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1997:
Property &
Similar........... $2,593 $27,590 $26,462 $112,486 $29,858 $14,708 $13,487 $7,272
1996:
Property &
Similar........... 2,354 28,483 21,898 113,642 28,833 32,732 11,849 6,656
1995:
Property &
Similar........... 2,441 24,717 23,971 101,541 22,855 36,657 10,315 5,862
<CAPTION>
PREMIUMS
SEGMENT WRITTEN
------- --------
<S> <C>
1997:
Property &
Similar........... $117,050
1996:
Property &
Similar........... 111,569
1995:
Property &
Similar........... 104,096
</TABLE>
29
<PAGE> 32
SCHEDULE IV
REINSURANCE
(EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS)
<TABLE>
<CAPTION>
CEDED TO ASSUMED FROM PERCENTAGE OF
OTHER OTHER AMOUNT
GROSS AMOUNT COMPANIES COMPANIES NET AMOUNT(1) ASSUMED TO NET
------------ --------- ------------ ------------- --------------
<S> <C> <C> <C> <C> <C>
1997:
Property & Similar............... $ -- $ -- $117,050 $117,050 100%
1996:
Property & Similar............... -- -- 111,569 111,569 100%
1995:
Property & Similar............... -- -- 104,096 104,096 100%
</TABLE>
- ---------------
(1) Premiums written
30
<PAGE> 33
IPC HOLDINGS, LTD.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the registrant has duly caused this report to
be signed on its behalf by the undersigned thereunto duly authorized, in
Pembroke, Bermuda, on the 23rd day of March, 1998.
IPC HOLDINGS, LTD.
/s/ JOHN P. DOWLING
--------------------------------------
John P. Dowling
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed by the following persons on behalf of the
Registrant and in the capacities indicated and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ JOSEPH C.H. JOHNSON Chairman of the Board of March 23, 1998
- -------------------------------------------------------- Directors
Joseph C.H. Johnson
/s/ JOHN P. DOWLING President, Chief Executive March 23, 1998
- -------------------------------------------------------- Officer and Director
John P. Dowling
/s/ JOHN R. WEALE Vice President and Chief March 23, 1998
- -------------------------------------------------------- Financial Officer
John R. Weale
/s/ MICHAEL L. BOURIS Deputy Chairman of Board of March 23, 1998
- -------------------------------------------------------- Directors
Michael L. Bouris
/s/ RON HIRAM Director March 23, 1998
- --------------------------------------------------------
Ron Hiram
/s/ DR. THE HONOURABLE CLARENCE E. JAMES Director March 23, 1998
- --------------------------------------------------------
Dr. The Honourable Clarence E. James
/s/ FRANK MUTCH Director March 23, 1998
- --------------------------------------------------------
Frank Mutch
/s/ JOHN T. SCHMIDT Director March 23, 1998
- --------------------------------------------------------
John T. Schmidt
</TABLE>
31
<PAGE> 34
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION METHOD OF FILING
- ------- ----------- ----------------
<C> <S> <C>
2.2 Board Resolution authorizing the Exchange *
3.1 Memorandum of Association of the Company *
3.2 Amended and Restated Bye-Laws of the Company *
3.3 Form of Memorandum of Increase of Share Capital *
3.4 Form of Registration Rights Agreement *
4.1 Form of Share Certificate *
10.1A Termination Agreement among the Company and its previous
shareholders *
10.1B Amendment No.1 to the Termination Agreement dated as of
February 15, 1996 *
10.2 Form of Amended and Restated Option Agreement entered into
between the Company and AIG *
10.3 IPC Holdings, Ltd. Stock Option Plan *
10.4 IPC Re Defined Contribution Plan *
10.5 Amended and Restated Administrative Services Agreement among
IPC and AICL *
10.6 Investment Management Agreement between IPC Re and AIGIC **
10.7 Investment Sub-Advisory Agreement between AIGIC and AIGIC
(Europe) (formerly known as Dempsey & Company
International Limited) *
10.8 Custodial Agreement between AIGTS and IPC Re *
10.9 Retirement Agreement between IPC Re and James P. Bryce *
10.10 Retirement Agreement between IPC Re and Peter J.A. Cozens *
11.1 Statement regarding Computation of Per Share Earnings Filed herewith
13.1 Portions of the Annual Report incorporated herein by
reference Filed herewith
21.1 Subsidiaries of the Registrant Filed herewith
23.1 Consent of Arthur Andersen & Co. Filed herewith
27.1 Financial Data Schedule Filed herewith
</TABLE>
- ---------------
* Incorporated by reference to the corresponding exhibit in the Company's
Registration Statement on Form S-1 (No. 333-00088).
** Incorporated by reference to Exhibit 10.1 to the Company's Form 10-Q for the
quarter ended June 30, 1997 (File No. 0-27662).
32
<PAGE> 1
EXHIBIT 11.1
IPC HOLDINGS, LTD. AND SUBSIDIARIES
CALCULATION OF NET INCOME PER COMMON SHARE
(EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1997 1996
---------- ----------
(AUDITED) (AUDITED)
<S> <C> <C>
BASIC
Net income.................................................. $100,320 $92,565
Common shares outstanding at January 1, 1997................ 25,000,000 25,000,000
Common shares outstanding at December 31, 1997.............. 25,017,603 25,000,000
Weighted average common shares outstanding.................. 25,010,060 25,000,000
Net income per common share............................ $ 4.01 $ 3.70
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1997 1996
---------- ----------
(AUDITED) (AUDITED)
<S> <C> <C>
DILUTED
Net income.................................................. $100,320 $92,565
Weighted average common shares outstanding.................. 25,010,060 25,000,000
Dilutive effect of share options............................ 1,482,341 1,080,744
---------- ----------
Total....................................................... 26,492,401 26,080,744
---------- ----------
Net income per common share............................ $ 3.79 $ 3.55
</TABLE>
<PAGE> 1
EXHIBIT 13.1
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following is a discussion of the results of operations and financial
position of IPC Holdings, Ltd. (the "Company"). References to "IPC" mean the
Company together with its wholly-owned subsidiaries, International Property
Catastrophe Reinsurance Company, Ltd. ("IPC Re"), and IPC Re Services Limited.
This discussion should be read in conjunction with the Company's Consolidated
Financial Statements and notes thereto, for the year ended December 31, 1997.
GENERAL
IPC commenced operations in July 1993. Because IPC has a limited operating
history, the financial data included herein are not necessarily indicative of
the financial condition or results of operations of IPC in the future.
Premiums written include new and renewal business, reinstatement premiums
and premium adjustments on current and prior year contracts. Renewal dates for
property catastrophe reinsurance policies are generally concentrated in the
first quarter of each calendar year. Generally, about 55% of premiums written by
IPC Re each year are for contracts which have effective dates in January, about
15% in April, about 18% in July, and the remainder at other times throughout the
year. Premiums are generally due in installments over the contract term, with
each installment generally received within 30 days after the due date. Premiums
are earned on a pro rata basis over the contract period, which is generally
twelve months.
Historically, property catastrophe reinsurers have experienced significant
fluctuations in operating results due to competition, frequency of occurrence or
severity of catastrophic events, levels of capacity, general economic conditions
and other factors. Demand for reinsurance is influenced significantly by
underwriting results of primary property insurers and prevailing general
economic conditions. The supply of reinsurance is related to prevailing prices,
the levels of insured losses and level of industry surplus which, in turn, may
fluctuate in response to changes in rates of return on investments being earned
in the reinsurance industry. As a result, the property catastrophe reinsurance
business historically has been a cyclical industry characterized by periods of
intense price competition due to excessive underwriting capacity as well as
periods when shortages of capacity permitted favourable premium levels.
Increases in the frequency and severity of losses suffered by insurers can
significantly affect these cycles. Conversely, the absence of severe or frequent
catastrophe events could result in declining premium rates in the global market.
IPC can be expected to experience the effects of such cyclicality.
If and while favourable loss experience continues, and reinsurance capacity
does not diminish, the Company expects further downward pressure on rates for
property catastrophe reinsurance during 1998.
RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1997 AND 1996
In the years ended December 31, 1997 and 1996, IPC Re wrote premiums of
$117.1 million and $111.6 million, respectively, an increase of 4.9%. These
writings included reinstatement premiums of $2.5 million and $4.9 million,
respectively. During 1997, IPC Re had 2,372 contracts with 409 clients
worldwide, compared to 1,888 contracts with 296 clients during 1996. IPC Re had
larger signings from existing clients, and selectively wrote business for new
clients. New business included $4.1 million of written premiums from the
California Earthquake Authority. These increases were offset in part by rate
reductions, generally in the range of 10 to 15%, but as high as 20% in some
cases, which reflected general market conditions. In addition, IPC Re did not
renew some marine business where premium rates had fallen to unacceptable
levels. Premiums earned in the years ended December 31, 1997 and 1996 were
$112.5 million and $113.6 million, respectively, a decrease of 1.0%. Premiums
earned did not grow proportionately to written premiums, primarily because some
programs were written which had policy periods greater than twelve months.
Excluding reinstatement premiums, premiums earned increased by 1.1% from $108.7
million in the year ended December 31, 1996 to $110.0 million in the year ended
December 31, 1997.
<PAGE> 2
Net investment income increased 3.5% from $28.9 million in the year ended
December 31, 1996, to $29.9 million in the year ended December 31, 1997. These
amounts are net of investment expenses, primarily investment management and
custodial fees payable to subsidiaries of American International Group ("AIG"),
the Company's original sponsor, and holder of 24.4% of the Company's Common
Shares. (See Note 8 to the Consolidated Financial Statements.) These fees
totaled $1.4 million and $1.3 million in the years ended December 31, 1997 and
1996, respectively. The increase in net investment income resulted from a higher
average investment asset base, which increased 10.0% from $473.7 million during
1996 to $521.3 million during 1997, offset by a lower average yield in the year
ended December 31, 1997, of approximately 5.7%, compared to the average yield of
6.2% in the year ended December 31, 1996. The reduction in average yield was
partially due to the effect of changes made to the structure of the Company's
investment portfolio. These changes have been employed to effect the reduction
of volatility in the value of the portfolio. At December 31, 1997 the portfolio
consisted of high quality, fixed maturity investments, and shares of stock in
all the companies which comprise the S&P 500.
Net realized gains and losses from the sale of investments were a $3.6
million loss and a $3.9 million gain for the years ended December 31, 1997 and
1996, respectively. Net gains and losses generally fluctuate from period to
period, depending on the securities sold, as recommended by the Company's
investment advisor. Net unrealized gains on the Company's investment portfolio
(see Note 3 to the Consolidated Financial Statements) were $9.5 million at
December 31, 1997, compared to net unrealized losses of $3.9 million at December
31, 1996. This increase in value was primarily the result of the restructuring
of the investment portfolio noted above, as well as minor changes in
intermediate term interest rates during 1997.
Losses and loss adjustment expenses incurred were $14.7 million and $32.7
million in the years ended December 31, 1997 and 1996, respectively. The low
level of losses during 1997 was a reflection of the low level of catastrophe
frequency and associated insured losses, which were the lowest for over ten
years in the United States. Of the 1996 amount, $12.0 million related to
Hurricane Fran, which caused the fourth largest insured loss arising from a
windstorm in United States history. Other losses for both years came from
various other natural and man-made disasters. Loss payments during the years
ended December 31, 1997 and 1996 were $15.2 million and $28.9 million,
respectively. Of the losses paid during 1997, 88.8% related to claims for which
reserves had been established in prior years. IPC's loss and loss expense ratio
(the ratio of losses and loss adjustment expenses incurred to premiums earned)
for 1997 was 13.1%, compared to 28.8% in 1996.
Acquisition costs, which are typically a percentage of premiums written,
consist primarily of commission and brokerage fees paid to intermediaries for
the production of premiums written, and excise taxes. Brokerage commissions on
property catastrophe excess of loss contracts typically range from 5% to 10% of
ceded premiums. Acquisition costs incurred were $13.5 million and $11.8 million
during the years ended December 31, 1997 and 1996, respectively, after deferring
those costs related to the unearned portion of premiums written. This represents
an increase of 13.8%. Certain contracts have been written with profit commission
clauses, which return a portion of the net underwriting profits generated from
those contracts as a commission to the insureds. This has resulted in an
increase in the level of acquisition costs as a percentage of premiums earned.
General and administrative expenses were $8.7 million and $9.9 million for the
years ended December 31, 1997 and 1996, respectively. These figures include fees
paid to a subsidiary of AIG for administrative services, which are based on a
percentage of premiums written, and were $2.8 million in each of 1997 and 1996.
General and administrative expenses in 1996 also included $1.6 million in
connection with the Company's unsuccessful bid to purchase Tempest Reinsurance
Company Limited, another Bermuda-based catastrophe reinsurer, and $0.5 million
additional expenses related to the Company's initial public offering (included
in the first quarter of 1996). Excluding these non-recurring charges, general
and administrative expenses would have been $7.8 million for the year ended
December 31, 1996. The increase of $0.8 million in recurring costs was a result
of increases in several expense categories, including travel, professional fees,
communications, data processing and investor relations. The Company's expense
ratio (the ratio of acquisition costs plus general and administrative expenses,
to earned premiums) was 19.7% for the year ended December 31, 1997, compared to
19.2% for the year ended December 31, 1996. Excluding the non-recurring items,
the expense ratio would have been 17.5% for 1996.
<PAGE> 3
The following table summarizes the loss and loss expense ratio, expense
ratio and combined ratio (sum of loss and loss expense ratio plus expense ratio)
for the years ended December 31, 1997 and 1996, respectively:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------
1997 1996
---- ----
<S> <C> <C>
Loss and loss expense ratio................................. 13.1% 28.8%
Expense ratio............................................... 19.7% 19.2%
Combined ratio.............................................. 32.8% 48.0%
</TABLE>
Net income for the years ended December 31, 1997 and 1996 was $100.3
million and $92.6 million, respectively, an increase of 8.4%. Excluding the
effects of realized gains and losses arising from the sale of investments, net
operating income was $103.9 million and $88.7 million for the years ended
December 31, 1997 and 1996, respectively, representing an increase of 17.2%. Net
operating income amounts are equivalent to $3.92 and $3.40 per Common Share,
respectively, on a diluted basis.
YEARS ENDED DECEMBER 31, 1996 AND 1995
In the years ended December 31, 1996 and 1995, IPC wrote premiums of $111.6
million and $104.1 million, respectively, an increase of 7.2%, including
reinstatement premiums of $4.9 million and $6.6 million, respectively. During
1996, IPC had 1,888 contracts with 296 clients worldwide, compared to 1,010
contracts with 267 clients during 1995. Premiums written increased from 1995 to
1996 as a result of business from new clients and larger signings from existing
clients. These increases were offset in part by rate reductions, generally in
the range of 10 to 15%, but as high as 20% in some cases. Premium writings were
also affected by the restructuring of some programs previously written, as well
as the effect of changing exchange rates for some currencies, in particular the
Japanese Yen. Premiums earned in the years ended December 31, 1996 and 1995 were
$113.6 million and $101.5 million, respectively, an increase of 11.9%. Excluding
reinstatement premiums, premiums earned increased by 14.5% from $94.9 million in
the year ended December 31, 1995 to $108.7 million in the year ended December
31, 1996.
Net investment income was $28.9 million and $22.9 million in the years
ended December 31, 1996 and 1995, respectively, an increase of 26.4%. These
amounts are net of investment expenses, primarily investment management and
custodial fees paid to subsidiaries of AIG, which totaled $1.3 million and $1.2
million, respectively, in those periods. The increase in net investment income
resulted from a higher investment yield, 6.2% for the year ended December 31
1996 compared to 5.7% for the corresponding period in 1995, as well as a higher
average investment asset base, which increased 18.7% from $399.4 million during
1995 to $473.7 million during 1996. The portfolio consisted of high quality,
fixed maturity investments.
Net realized gains from the sale of investments were $3.9 million and $3.0
million for the years ended December 31, 1996 and 1995, respectively. Net gains
and losses fluctuate from period to period, depending on the securities sold, as
recommended by the Company's investment advisor. Net unrealized losses on the
"Available for Sale" portion of the Company's investment portfolio were $3.9
million at December 31, 1996, compared to net unrealized gains of $4.5 million
at December 31, 1995. This decrease in value was primarily the result of an
increase in intermediate term interest rates of approximately 100 basis points
during 1996.
Losses and loss adjustment expenses incurred in the years ended December
31, 1996 and 1995 were $32.7 million and $36.7 million, respectively. Of the
1996 amount, $12.0 million related to Hurricane Fran, which caused the fourth
largest insured loss arising from a windstorm in United States history. In 1995,
losses and loss adjustment expenses included $12.1 million resulting from a loss
at a major industrial plant, as well as $12 million for Hurricanes Luis, Marilyn
and Opal combined. The balance of losses for both years came from various other
natural and man-made disasters. Losses and loss adjustment expenses incurred in
1996 included a net amount of $0.5 million relating to an increase in the cost
of claims occurring in prior years. Loss payments during the years ended
December 31, 1996 and 1995 were $28.9 million and $29.9 million, respectively.
IPC's loss and loss expense ratio was 28.8% in 1996, compared to 36.1% in 1995.
<PAGE> 4
Acquisition costs, which are typically a percentage of premiums written,
consist primarily of commission and brokerage fees paid to intermediaries for
the production of premiums written, and excise taxes. Brokerage commissions on
property catastrophe excess of loss contracts typically range from 5% to 10% of
ceded premiums. Acquisition costs incurred during the years ended December 31,
1996 and 1995 were $11.8 million and $10.3 million, respectively, after
deferring those costs related to the unearned portion of premiums written.
Acquisition costs have principally increased commensurate with the increase in
earned premiums, although some premiums were written which had no brokerage fees
or commissions. General and administrative expenses were $9.9 million and $7.4
million for the years ended December 31, 1996 and 1995, respectively. These
figures include fees paid to a subsidiary of AIG for administrative services,
which are based on a percentage of premiums written, and were $2.8 million in
1996 and $2.0 million in 1995. General and administrative expenses in 1996 also
included $1.6 million in connection with the Company's unsuccessful bid to
purchase Tempest Reinsurance Company Limited, and $0.5 million expenses related
to the Company's initial public offering (included in the first quarter of
1996). In 1995, general and administrative expenses included an accrual of $1.5
million in connection with the Company's initial public offering. Excluding
these non-recurring charges, general and administrative expenses would have been
$7.8 million and $5.9 million for the years ended December 31, 1996 and 1995,
respectively. The increase was primarily due to the increase in fees paid under
an administrative services agreement with a subsidiary of AIG, which are based
on premiums, together with increases in most expense categories, including
salaries, travel, professional fees, and advertising, all of which were incurred
in the production of increased premiums. Additional ongoing costs were incurred
by the Company as a publicly traded entity. The Company's expense ratio was
19.2% for the year ended December 31, 1996, compared to 17.4% for the year ended
December 31, 1995. Excluding the non-recurring items, the expense ratio would
have been 17.5% and 15.9% for 1996 and 1995, respectively.
The following table summarizes the loss and loss expense ratio, expense
ratio and combined ratio for the years ended December 31, 1996 and 1995,
respectively:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------
1996 1995
---- ----
<S> <C> <C>
Loss and loss expense ratio................................. 28.8% 36.1%
Expense ratio............................................... 19.2% 17.4%
Combined ratio.............................................. 48.0% 53.5%
</TABLE>
Net income for the years ended December 31, 1996 and 1995 was $92.6 million
and $74.3 million, respectively, an increase of 24.6%. Excluding the effects of
realized gains and losses arising from the sale of investments, net operating
income was $88.7 million and $71.3 million for the years ended December 31, 1996
and 1995, respectively, representing an increase of 24.4%. Net operating income
amounts are equivalent to $3.40 and $2.78 per Common Share, respectively.
LIQUIDITY AND CAPITAL RESOURCES
The Company was initially capitalized with $300.0 million in June 1993 from
which placement costs of $0.5 million were paid. At December 31, 1997 and 1996,
shareholders' equity had increased to $528.3 million and $496.1 million,
respectively. Substantially all of the original capital, after deducting
organizational costs was contributed to IPC Re.
The Company is a holding company that conducts no reinsurance operations of
its own. During 1997, the Company incorporated a new subsidiary in the United
Kingdom called IPC Re Services, Limited, which carries out a representative
function in Europe on behalf of IPC Re. The Company's cash flows are limited to
distributions from IPC Re by way of loans or dividends. The dividends that IPC
Re may pay are limited under Bermuda legislation. IPC Re may not in any
financial year pay any dividends which would exceed 25% of its statutory capital
and surplus at the prior year end, unless it has filed with the Bermuda
Registrar of Companies an affidavit stating that the declaration of those
dividends has not caused the Company to fail to meet its solvency margin and
minimum liquidity ratio. In addition, IPC Re is prohibited from declaring or
paying any dividend during any financial year if it would cause IPC Re to fail
to meet its solvency margin and minimum
<PAGE> 5
liquidity ratio. The maximum dividend payable by IPC Re in accordance with the
foregoing restrictions as of January 1, 1998 was approximately $131.3 million.
IPC's sources of funds consist of premiums written, investment income and
proceeds from sales and redemptions of investments. Cash is used primarily to
pay losses and loss adjustment expenses, brokerage commissions, excise taxes,
general and administrative expenses and dividends. IPC generated cash flows from
operations of $108.5 million and $90.1 million in the years ended December 31,
1997 and 1996, respectively. These amounts represent the excess of premiums
collected and investment earnings realized, over losses, loss adjustment
expenses and underwriting and other expenses paid and investment losses
realized. Cash flows from operations differ, and may continue to differ,
substantially from net income. To date, all cash flows not required for
operating purposes or payment of dividends have been invested by IPC. The
potential for a large catastrophe means that unpredictable and substantial
payments may need to be made within relatively short periods of time. Hence,
future cash flows cannot be predicted with any certainty and may vary
significantly between periods. Loss payments during the years ended December 31,
1997 and 1996 were $15.2 million and $28.9 million, respectively.
Under U.S. generally accepted accounting principles, IPC is not permitted
to establish loss reserves with respect to its property catastrophe reinsurance
until the occurrence of an event which may give rise to a claim. As a result,
only loss reserves applicable to losses incurred up to the reporting date may be
set aside, with no allowance for the provision of a contingency reserve to
account for expected future losses. Claims arising from future catastrophic
events can be expected to require the establishment of substantial reserves from
time to time.
The establishment of appropriate reserves for catastrophes is an inherently
uncertain process. Loss reserves represent IPC's estimates, at a given point in
time, of ultimate settlement and administration costs of losses incurred
(including incurred but not reported losses) and these estimates are regularly
reviewed and updated, using the most current information available to
management. Consequently, the ultimate liability for a catastrophic loss is
likely to differ from the original estimate. For example, as of December 31,
1994, IPC Re believed that its total losses and loss adjustment expenses (the
sum of loss reserves and losses paid to date) relating to the Northridge,
California earthquake would be $20.6 million. At December 31, 1997, this figure
had increased to $22.9 million. Because of the start-up nature of its operations
at the time of the Northridge, California earthquake, the coverage written by
IPC Re for the risks affected by the Northridge event was more limited than that
which IPC Re currently writes or will in the future write for similar risks.
Whenever IPC Re determines that any existing loss reserves are inadequate, IPC
Re is required to increase its loss reserves with a corresponding reduction,
which could be material, in IPC's operating results in the period in which the
deficiency is identified. The establishment of new reserves, or the adjustment
of reserves for reported claims, could have a material adverse effect on IPC's
financial condition or results of operations in any particular period.
With the exception of cash holdings, IPC's funds are primarily invested in
fixed maturity securities, the market value of which is subject to fluctuation
depending on changes in prevailing interest rates, and also equities comprising
the S&P 500. IPC Re does not hedge its investment portfolio against interest
rate risk. Accordingly, an increase in interest rates may result in losses, both
realized and unrealized, on IPC Re's investments.
The Company has adopted Statement of Financial Accounting Standard No. 115
to account for its marketable securities. As of December 31, 1997 all of the
Company's investments were classified as "Available for Sale". Investments are
carried at fair market value and any unrealized gains or losses are reported as
a separate component of shareholders' equity.
At December 31, 1997, 92.2% of IPC Re's fixed maturity investment portfolio
consisted of cash, U.S. Treasuries or other government agency issues, and
investments with a AAA or AA rating. The primary rating source is Standard &
Poor's Corporation. At December 31, 1997 the portfolio had an average life of
3.0 years and an average modified duration of 2.6 years.
<PAGE> 6
IPC's functional currency is the U.S. dollar. IPC's operating currency is
generally also the U.S. dollar. However, premiums receivable and losses payable
in respect of a significant portion of IPC's business are denominated in
currencies of other countries, principally industrial countries. Consequently,
IPC may, from time to time, experience currency exchange gains and losses that
could affect its financial position and results of operations. The Company
currently does not -- and as a practical matter cannot -- hedge its U.S. dollar
currency exposure with respect to potential claims until a loss payable in a
non-U.S. dollar currency occurs (after which it may match such liability with
assets denominated in the same currency, which it has done on one occasion, or
purchase a currency hedge, although to date it has not done so). Such exposure
could be substantial. IPC also has not hedged its non-U.S. dollar currency
exposure with respect to premiums receivable, which generally are collected over
the relevant contract term. To date, foreign currency hedging has only been used
three times to secure the value of a non-U.S. dollar investment in U.S. dollars.
At December 31, 1997, IPC had one forward contract hedge outstanding. The
purpose of this hedge was to reduce any potential loss as a result of a change
in the value of the Australian dollar denominated portion of the investment
portfolio, which totaled Australian $34.2 million. The effect of the hedge was
to forward sell (to March 5, 1998) Australian $34.2 million at an exchange rate
of U.S.$0.6828.
IPC's investment portfolio does not currently include options, warrants,
swaps, collars or similar derivative instruments. IPC's investment policy
guidelines provide that financial futures and options and foreign exchange
contracts may not be used in a speculative manner, but may be used, subject to
certain numerical limits, only as part of a defensive strategy to protect the
market value of the portfolio.
IPC Re is not a licensed insurer in the United States and therefore, under
the terms of most of its contracts in the United States, must provide security
to reinsureds to cover unpaid liabilities in a form acceptable to state
insurance commissioners. Typically, such security takes the form of a letter of
credit issued by an acceptable bank, the establishment of a trust, or a cash
advance. Currently IPC Re obtains letters of credit through one commercial bank
pursuant to a $20 million facility. In turn, IPC Re provides the bank security
by giving the bank a lien over certain of IPC Re's investments in an amount not
to exceed the aggregate letters of credit outstanding to a maximum of $20
million. At December 31, 1997, 1996 and 1995, there were outstanding letters of
credit of $7.2 million, $11.5 million and $12.0 million, respectively.
Neither the Company nor IPC Re has any material commitment for capital
expenditures.
EFFECTS OF INFLATION
IPC Re estimates the effect of inflation on its business and reflects these
estimates in the pricing of its reinsurance contracts. Because of the relatively
short claims settlement cycle associated with its reinsurance portfolio, IPC Re
generally does not take into account the effects of inflation when estimating
reserves. Levels of inflation also affect investment returns. The actual effects
of inflation on the results of IPC Re cannot be accurately known until claims
are ultimately settled.
<PAGE> 7
IPC HOLDINGS, LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1997 AND 1996
(EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS EXCEPT FOR PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
ASSETS:
Fixed maturity investments:
Available for sale, at fair market value (Amortized cost
1997: $439,517; 1996: $254,890)........................ $442,328 $250,992
Held to maturity, at amortized cost (Fair market value
1997: $0; 1996: $229,464).............................. -- 229,057
Equity investments, available for sale (Cost 1997:
$80,020).................................................. 86,685 --
Cash and cash equivalents................................... 9,746 23,797
Reinsurance balances receivable (Related party 1997: $4,418;
1996: $3,097)............................................. 27,735 25,687
Accrued investment income................................... 14,374 15,015
Deferred acquisition costs.................................. 2,593 2,354
Prepaid expenses and other assets........................... 1,558 1,179
-------- --------
Total assets...................................... $585,019 $548,081
======== ========
LIABILITIES:
Reserve for losses and loss adjustment expenses............. $ 27,590 $ 28,483
Unearned premiums........................................... 26,462 21,898
Accounts payable and accrued liabilities (Related party
1997: $758; 1996: $825)................................... 2,674 1,565
-------- --------
Total liabilities................................. 56,726 51,946
======== ========
SHAREHOLDERS' EQUITY:
Share capital -- 1997: 25,017,603 shares outstanding, par
value $0.01;
1996: 25,000,000 shares outstanding, par
value $0.01............................................... 250 250
Additional paid-in capital.................................. 299,533 299,267
Unrealized gain (loss), net on investments.................. 9,476 (3,898)
Retained earnings........................................... 219,034 200,516
-------- --------
Total shareholders' equity........................ 528,293 496,135
-------- --------
Total liabilities and shareholders' equity........ $585,019 $548,081
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 8
IPC HOLDINGS, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR EACH OF THE YEARS IN THE THREE YEAR PERIOD ENDED DECEMBER 31, 1997
(EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS EXCEPT FOR PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
REVENUES:
Premiums written (Related party 1997: $11,359; 1996:
$9,628; 1995: $6,343)............................. $ 117,050 $ 111,569 $ 104,096
Change in unearned premiums......................... (4,564) 2,073 (2,555)
----------- ----------- -----------
Premiums earned..................................... 112,486 113,642 101,541
Net investment income............................... 29,883 28,883 22,855
Realized gains (losses), net on investments......... (3,616) 3,871 2,973
----------- ----------- -----------
Total revenues............................ 138,753 146,396 127,369
----------- ----------- -----------
EXPENSES:
Losses and loss adjustment expenses................. 14,708 32,732 36,657
Acquisition costs (Related party 1997: $790; 1996:
$1,943; 1995: $1,655)............................. 13,487 11,849 10,315
General and administrative expenses (Related party
1997: $2,812; 1996: $2,816; 1995: $2,003)......... 8,676 9,934 7,377
Exchange (gain) loss, net........................... 1,562 (684) (1,265)
----------- ----------- -----------
Total expenses............................ 38,433 53,831 53,084
----------- ----------- -----------
NET INCOME.......................................... $ 100,320 $ 92,565 $ 74,285
=========== =========== ===========
Basic net income per common share................... $ 4.01 $ 3.70 $ 2.97
Diluted net income per common share................. $ 3.79 $ 3.55 $ 2.90
Weighted average number of common shares -- basic... 25,010,060 25,000,000 25,000,000
Weighted average number of common
shares -- diluted................................. 26,492,401 26,080,744 25,618,719
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 9
IPC HOLDINGS, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR EACH OF THE YEARS IN THE THREE YEAR PERIOD ENDED DECEMBER 31, 1997
(EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS EXCEPT FOR PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
COMMON SHARES PAR VALUE $0.01
Balance, beginning of year............................... $ 250 $ 200 $ 200
Effect of the Exchange: 1,000 shares to 25,000,000
shares................................................ -- 50 --
Additional 17,603 shares issued.......................... -- -- --
-------- -------- --------
Balance, end of year..................................... $ 250 $ 250 $ 200
-------- -------- --------
ADDITIONAL PAID-IN CAPITAL
Balance, beginning of year............................... $299,267 $299,317 $299,317
Effect of the Exchange: 1,000 shares to 25,000,000
shares................................................ -- (50) --
Additional paid-in capital on 17,603 shares issued....... 266 -- --
-------- -------- --------
Balance, end of year..................................... $299,533 $299,267 $299,317
-------- -------- --------
UNREALIZED GAIN (LOSS), NET ON INVESTMENTS:
Balance, beginning of year............................... $ (3,898) $ 4,511 $ (8,313)
Change in unrealized gain (loss) in year................. 13,374 (8,409) 12,824
-------- -------- --------
Balance, end of year..................................... $ 9,476 $ (3,898) $ 4,511
-------- -------- --------
RETAINED EARNINGS:
Balance, beginning of year............................... $200,516 $130,264 $ 55,979
Net income in year....................................... 100,320 92,565 74,285
Dividends paid........................................... (81,802) (22,313) --
-------- -------- --------
Balance, end of year..................................... $219,034 $200,516 $130,264
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 10
IPC HOLDINGS, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR EACH OF THE YEARS IN THE THREE YEAR PERIOD ENDED DECEMBER 31, 1997
(EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS)
<TABLE>
<CAPTION>
1997 1996 1995
-------- --------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................................... $100,320 $ 92,565 $ 74,285
Adjustments to reconcile net income to cash provided by
operating activities:
Amortization of investment premium, net................ 1,787 3,485 4,848
Realized (gains) losses, net on investments............ 3,616 (3,871) (2,973)
Changes in, net:
Reinsurance balances receivable..................... (2,048) (236) (6,166)
Accrued investment income........................... 641 (2,663) (1,387)
Deferred acquisition costs.......................... (239) 87 (253)
Prepaid expenses and other assets................... (379) (257) (730)
Reserve for losses and loss adjustment expenses..... (893) 3,766 6,741
Unearned premiums................................... 4,564 (2,073) 2,555
Accounts payable and accrued liabilities............ 1,109 (703) 1,516
-------- --------- ---------
108,478 90,100 78,436
-------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of equity investments.......................... (80,228) -- --
Proceeds from sales of equity investments................ 239 -- --
Purchases of fixed maturity investments:
Available for sale..................................... (372,612) (350,757) (432,291)
Held to maturity....................................... (17,815) (34,006) (90,095)
Proceeds from sales of fixed maturity investments:
Available for sale..................................... 363,939 309,664 424,287
Held to maturity....................................... -- -- --
Proceeds from maturities of fixed maturity investments:
Available for sale..................................... 41,734 -- 12,000
Held to maturity....................................... 23,750 13,000 8,000
-------- --------- ---------
(40,993) (62,099) (78,099)
-------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Additional share capital................................. 266 -- --
Cash dividends paid to shareholders...................... (81,802) (22,313) --
-------- --------- ---------
(81,536) (22,313) --
-------- --------- ---------
Net (decrease) increase in cash and cash equivalents..... (14,051) 5,688 337
Cash and cash equivalents, beginning of year............. 23,797 18,109 17,772
-------- --------- ---------
Cash and cash equivalents, end of year................... $ 9,746 $ 23,797 $ 18,109
======== ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 11
IPC HOLDINGS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND DECEMBER 31, 1996
(EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS EXCEPT FOR PER SHARE AMOUNTS)
1. GENERAL:
IPC Holdings, Ltd. (the "Company") was incorporated in Bermuda on May 20,
1993 and through its wholly-owned subsidiary, International Property Catastrophe
Reinsurance Company, Ltd. ("IPC Re"), provides reinsurance of property
catastrophe risks worldwide, substantially all on an excess-of-loss basis.
Property catastrophe reinsurance covers unpredictable events such as hurricanes,
windstorms, hailstorms, earthquakes, volcanic eruptions, fires, freezes,
industrial explosions and other man-made or natural disasters. IPC Re's loss
experience will generally include infrequent events of great severity. IPC Re's
clients include many of the leading insurance companies in the world.
Approximately 46% of premiums written in 1997 related to U.S. risks. The balance
of IPC Re's covered risks are located principally in Europe, Japan and
Australia/New Zealand.
On December 20, 1995, the Board of Directors of the Company approved a plan
to register shares for sale to the public. On December 20, 1995, the Board of
Directors of the Company also approved an exchange of the capital stock of the
Company whereby the existing voting and non-voting shares of the Company were
exchanged for Common Shares (the "Exchange"). The existing shareholders received
25,000 new Common Shares for each voting or non-voting share held at the time of
the offering. Share information presented in the consolidated financial
statements, including these notes, gives effect to the Exchange.
On March 13, 1996, the Company completed an initial public offering in
which 13,521,739 common shares held by existing shareholders were sold. All of
the shares sold were sold by existing shareholders. Consequently, the Company
did not receive any of the proceeds of the offering. The Company paid certain
expenses related to the offering, including certain expenses on behalf of the
selling shareholders.
On June 27, 1997 the Company incorporated a subsidiary in the United
Kingdom, named IPC Re Services Limited. This subsidiary's purpose is to perform
the same functions that were previously performed by the Company's
representative office in London.
2. SIGNIFICANT ACCOUNTING POLICIES:
The consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States. The preparation
of consolidated financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. The significant accounting
policies are as follows:
a) Principles of consolidation:
The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries, IPC Re, and IPC Re Services
Limited (together "IPC"). All significant intercompany transactions have
been eliminated in consolidation.
b) Premiums and acquisition costs:
Premiums written are recorded at the policy inception date and are
based on information received from ceding companies. Subsequent premium
adjustments, if any, are recorded in the period in which they are
determined. Premiums are earned on a pro-rata basis over the period for
which reinsurance coverage is provided. Unearned premiums represent the
portion of premiums written which is applicable to the unexpired terms of
the policies in force.
<PAGE> 12
IPC HOLDINGS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Acquisition costs, consisting primarily of commissions and brokerage
expenses incurred at policy issuance, are deferred and amortized to income
over the period in which the related premiums are earned. Deferred
acquisition costs are limited to estimated realizable value based on
related unearned premium, anticipated claims and expenses and investment
income.
c) Reserve for losses and loss adjustment expenses:
The reserve for losses and loss adjustment expenses, which includes an
allowance for losses and loss adjustment expenses incurred but not
reported, is based on reports, individual case estimates received from
ceding companies, actuarial determinations and management's estimates. For
certain catastrophic events there is considerable uncertainty underlying
the assumptions and associated estimated reserves for losses and loss
adjustment expenses. Reserves are reviewed regularly and, as experience
develops and new information becomes known, the reserves are adjusted as
necessary. Such adjustments, if any, are reflected in results of operations
in the period in which they become known.
d) Investments:
IPC adopted Statement of Financial Accounting Standard No. 115,
"Accounting for Certain Investments in Debt and Equity Securities"
("Statement 115") as of December 31, 1993. Upon adopting Statement 115, the
Company classified its entire portfolio of investments as "available for
sale". In July, 1994 the Company reclassified a portion of its investment
portfolio as "held to maturity". In June, 1997 the Company reclassified its
entire portfolio of "held to maturity" investments as "available for sale".
Investments, available for sale
All fixed maturity investments classified as "available for sale" have
a fixed maturity and are carried at market value. Such investments are
available to be sold in response to liquidity needs. In addition, all
investments in equity securities are classified as "available for sale" and
are carried at market value. Unrealized gains and losses are included as a
separate component of shareholders' equity.
Investments, held to maturity
All fixed maturity investments classified as "held to maturity" had a
fixed maturity and were carried at amortized cost. Management had the
positive intent and ability to hold these investments until maturity and
the investments could not be disposed of other than in certain, very
specific circumstances. As of June 30, 1997, the Company reclassified all
of its fixed maturity investments previously classified as "held to
maturity" as "available for sale".
Investments are recorded on a trade date basis. Realized gains and
losses on sales of investments are determined on the basis of first-in,
first-out. Investment income is recognized when earned and includes the
amortization of premium and accretion of discount on investments.
e) Translation of foreign currencies:
Transactions in foreign currencies are translated into U.S. dollars at
the rate of exchange prevailing at the date of each transaction. Monetary
assets and liabilities denominated in foreign currencies are translated
into U.S. dollars at the exchange rates in effect on the balance sheet
date. Foreign currency revenues and expenses are translated at the average
exchange rates prevailing during the period. Exchange gains and losses,
including those arising from forward exchange contracts, are included in
the determination of net income. IPC's functional currency is the U.S.
dollar, since it is the single largest currency in which IPC transacts its
business. The U.S. dollar is also the currency in which IPC holds, and will
continue to hold, most of its investments and in which investment returns
are measured.
<PAGE> 13
IPC HOLDINGS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
f) Cash and cash equivalents:
Cash and cash equivalents include amounts held in banks and time
deposits with maturities of less than three months from the date of
purchase.
g) Net income per common share:
The Company has adopted Statement of Financial Accounting Standards
No. 128, "Earnings per Share", which requires dual presentation of basic
and diluted earnings per share. Diluted net income per common share is
computed by dividing net income by the weighted average number of shares of
common stock and common stock equivalents outstanding during the year.
Stock options granted to a shareholder of the Company were considered
common stock equivalents and were included in the number of weighted
average shares outstanding using the treasury stock method. Stock options
granted to employees on February 15, 1996, July 25, 1996 and January 2,
1997, as discussed in Note 6, were also considered common stock equivalents
for the purpose of calculating diluted net income per common share.
h) Stock incentive compensation plan:
The Company accounts for stock option grants in accordance with APB
Opinion No. 25, "Accounting for Stock Issued to Employees", and,
accordingly, recognizes compensation expense for stock option grants to the
extent that the fair value of the stock exceeds the exercise price of the
option at the measurement date.
i) Reinsurance premiums receivable:
Reinsurance premiums receivable are stated net of an allowance for
doubtful accounts. The allowance for doubtful accounts was $0 as of
December 31, 1997 and December 31, 1996.
3. INVESTMENTS:
a) The cost or amortized cost, gross unrealized gains, gross unrealized
losses and market value of investments available for sale by category as of
December 31, 1997 and December 31, 1996 are as follows:
<TABLE>
<CAPTION>
COST OR GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
DECEMBER 31, 1997 COST GAINS LOSSES VALUE
----------------- --------- ---------- ---------- --------
<S> <C> <C> <C> <C>
U.S. Government and government
agencies........................... $ 32,980 $ 249 $ -- $ 33,229
Other governments..................... 125,037 939 (196) 125,780
Corporate............................. 227,395 1,549 (169) 228,775
Supranational entities................ 54,105 439 -- 54,544
-------- ------ ------- --------
$439,517 $3,176 $ (365) $442,328
======== ====== ======= ========
Equity investments...................... $ 80,020 $9,136 $(2,471) $ 86,685
======== ====== ======= ========
</TABLE>
<TABLE>
<CAPTION>
COST OR GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
DECEMBER 31, 1996 COST GAINS LOSSES VALUE
----------------- --------- ---------- ---------- --------
<S> <C> <C> <C> <C>
U.S. Government and government
agencies........................... $ 74,974 $ 133 $ (952) $ 74,155
Other governments..................... 71,487 158 (1,050) 70,595
Corporate............................. 71,218 407 (1,314) 70,311
Supranational entities................ 37,211 -- (1,280) 35,931
-------- ------ ------- --------
$254,890 $ 698 $(4,596) $250,992
======== ====== ======= ========
</TABLE>
<PAGE> 14
IPC HOLDINGS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
b) The amortized cost, gross unrealized gains, gross unrealized losses and
market value of investments held to maturity by category as of December 31, 1996
are as follows:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
--------- ---------- ---------- --------
<S> <C> <C> <C> <C>
U.S. Government and government
agencies.............................. $ 2,007 $ 45 $ -- $ 2,052
Other governments....................... 75,556 387 (505) 75,438
Corporate............................... 103,519 916 (570) 103,865
Supranational entities.................. 47,975 338 (204) 48,109
-------- ------ ------- --------
$229,057 $1,686 $(1,279) $229,464
======== ====== ======= ========
</TABLE>
c) The contractual maturity dates of fixed maturity investments available
for sale as of December 31, 1997 are as follows:
<TABLE>
<CAPTION>
AMORTIZED MARKET
COST VALUE
--------- --------
<S> <C> <C>
Due in one year or less................................ $ 47,808 $ 47,828
Due after one year through five years.................. 363,393 366,207
Due after five years through ten years................. 28,316 28,293
-------- --------
$439,517 $442,328
======== ========
</TABLE>
Expected maturities may differ from contractual maturities because
borrowers may have the right to prepay obligations with or without prepayment
penalties.
d) Pledged assets:
In the normal course of business IPC Re provides security to
reinsureds if requested. Such security takes the form of a letter of credit
or a cash advance. Letters of credit are issued by a bank at the request of
IPC Re.
Under an agreement effective September 20, 1994, IPC Re provides the
bank security by giving the bank a lien over certain of IPC Re's
investments in an amount not to exceed the aggregate letters of credit
outstanding to a maximum of $20,000. As of December 31, 1997 and 1996 the
bank had outstanding letters of credit of $7,200 and $11,509, respectively.
e) Net investment income:
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Interest on fixed maturity investments........ $30,816 $32,216 $27,855
Interest on cash and cash equivalents......... 1,860 1,409 1,074
Net amortization of premium on investments.... (1,787) (3,485) (4,848)
------- ------- -------
30,889 30,140 24,081
Net dividend income from equities............. 428 -- --
Less: investment expenses..................... (1,434) (1,257) (1,226)
------- ------- -------
Net investment income......................... $29,883 $28,883 $22,855
======= ======= =======
</TABLE>
f) Proceeds from sales of available for sale securities for the years ended
December 31, 1997, 1996 and 1995 were $363,939, $309,664 and $424,287,
respectively. Gross realized gains were $318, $6,078 and $3,820, respectively,
and gross realized losses were $3,934, $2,207, and $847, respectively, for the
years ended December 31, 1997, 1996 and 1995. Changes in net unrealized gains
(losses) were $13,374, $(8,409), and $12,824, respectively, for the years ended
December 31, 1997, 1996 and 1995.
<PAGE> 15
IPC HOLDINGS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
g) The following table summarizes the composition of the fair value of all
cash and fixed maturity investments by rating:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1997 1996
------------ ------------
<S> <C> <C>
Cash and cash equivalents.......................... 2.2% 4.7%
U.S. Government and government agencies............ 7.3% 15.1%
AAA................................................ 44.6% 49.3%
AA................................................. 38.1% 29.3%
A.................................................. 7.8% 1.6%
----- -----
100.0% 100.0%
===== =====
</TABLE>
The primary rating source is Standard & Poor's Corporation ("S&P"). When no
S&P rating is available, Moody's Investors Services Inc. ("Moody's") ratings are
used.
h) In June, 1997, the Company purchased shares of stock in all of the
companies which comprise the Standard & Poor's 500 Index ("S&P 500"). The number
of shares of stock purchased is such that their weighting within the Company's
portfolio matches the weighting of each stock within the index.
As of June 30, 1997, the Company reclassified its entire "held to maturity"
investment portfolio as "available for sale". The securities transferred had a
market value of $221,720, an amortized cost of $222,237, and an unrealized loss
of $517, on the date of transfer.
4. FAIR VALUE OF FINANCIAL INSTRUMENTS:
The following table presents the carrying values and estimated fair values
of IPC's financial instruments as of December 31, 1997 and December 31, 1996:
<TABLE>
<CAPTION>
DECEMBER 31, 1997 DECEMBER 31, 1996
-------------------- --------------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Cash and cash equivalents............... $ 9,746 $ 9,746 $ 23,797 $ 23,797
Fixed maturity investments.............. $442,328 $442,328 $480,049 $480,456
Equity investments...................... $ 86,685 $ 86,685 $ -- $ --
</TABLE>
The carrying amount of cash and cash equivalents approximates fair value
because of the short maturity of those instruments. The fair values of
investments are disclosed in Note 3 and are based on quoted market prices
provided by either independent pricing services or when such prices are not
available, by reference to broker or underwriter bid indications. The fair value
of forward foreign exchange contracts represents the estimated cost to the
Company as of the balance sheet date of obtaining the specified currency to meet
the obligation of the contracts.
5. COMMON STOCK AND ADDITIONAL PAID-IN CAPITAL:
On June 29, 1993 shareholders contributed total funds of $300,000 through a
private placement offering of which $483 was used to pay placement costs.
<PAGE> 16
IPC HOLDINGS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The authorized share capital of the Company as of December 31, 1997 and
December 31, 1996 consisted of the following:
<TABLE>
<CAPTION>
SHARES ADDITIONAL
AUTHORIZED ISSUED AND SHARE PAID-IN
SHARES FULLY PAID CAPITAL CAPITAL
---------- ---------- ------- ----------
<S> <C> <C> <C> <C>
DECEMBER 31, 1997
Voting common shares, par value U.S. $0.01
each......................................... 75,000,000 25,017,603 $250 $299,533
Preferred shares, par value U.S. $0.01 each.... 25,000,000 -- -- --
</TABLE>
<TABLE>
<CAPTION>
SHARES ADDITIONAL
AUTHORIZED ISSUED AND SHARE PAID-IN
SHARES FULLY PAID CAPITAL CAPITAL
---------- ---------- ------- ----------
<S> <C> <C> <C> <C>
DECEMBER 31, 1996
Voting common shares, par value U.S. $0.01
each......................................... 75,000,000 25,000,000 $250 $299,267
Preferred shares, par value U.S. $0.01 each.... 25,000,000 -- -- --
</TABLE>
There are various restrictions on the ability of certain shareholders to
dispose of their shares.
In March, June, September and December 1997, respectively, the Company paid
quarterly dividends of $0.3175, $0.3175, $0.3175 and $0.3175, per share to
holders of its common shares. In addition, in June and December, 1997,
respectively, the Company paid special dividends of $1.00 and $1.00 per share to
holders of its common shares.
In June, September and December 1996, respectively, the Company paid
dividends of $0.2875, $0.2875 and $0.3175 per share to holders of its common
shares.
6. SHARE PURCHASE OPTIONS:
In conjunction with the private placement offering discussed in Note 5, the
Company granted to American International Group, Inc. ("AIG") an option to
acquire up to 2,775,000 common shares at an exercise price of $12.7746 per share
(the "AIG Option"). The $12.7746 exercise price per share at the time of the
private placement was equal to the price paid per share by all of the Company's
shareholders, other than AIG (which paid $9.60 per share). Following
consummation of the offering referred to in Note 1, the AIG Option is
exercisable in certain circumstances, generally upon an offering of common stock
subsequent to the initial public offering referred to in Note 1, upon
amalgamation, merger, or sale of the assets of the Company or at certain dates
between June 29, 2001 and June 23, 2003 provided that the book value per share
on such dates is at least 175% of the exercise price.
The Company also adopted a Stock Option Plan (the "Plan"), effective
February 15, 1996. Under the Plan, at the discretion of the Compensation
Committee of the Board of Directors (the "Committee"), the Company may grant to
certain employees up to 277,500 common shares, $0.01 par value. The exercise
price of the options granted under the Plan shall be as determined by the
Committee in its sole discretion, including, but not limited to, the book value
per share or the publicly traded market price per share.
On February 15, 1996 and July 25, 1996, the Company granted options to
acquire 85,249 common shares to officers and management employees at an exercise
price of $16.54 per common share which equaled the book value per common share
as of December 31, 1995. On January 2, 1997 the Company granted options to
acquire 38,500 shares to officers and management employees at an exercise price
of $22.50 per common share which equaled the opening market price on that day.
Such options vest at a rate of 25% annually and lapse on the tenth anniversary
of issue.
The effect on net income and net income per common share of recording
compensation expense under the provisions of SFAS 123, "Accounting for
Stock-based Compensation", versus compensation expense under the provisions of
APB Opinion No. 25 is not material for the years ended December 31, 1997 and
1996.
<PAGE> 17
IPC HOLDINGS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A summary of the status of the Company's stock option plan as of December
31, 1997 and 1996 and changes during the years then ended is presented in the
table and narrative below:
<TABLE>
<CAPTION>
1997 1996
-------------------- --------------------
NUMBER OF EXERCISE NUMBER OF EXERCISE
SHARES PRICE SHARES PRICE
--------- -------- --------- --------
<S> <C> <C> <C> <C>
Outstanding, beginning of year................... 80,624 $16.54 -- --
Granted.......................................... 38,500 $22.50 85,249 $16.54
Exercised........................................ 20,153 $16.54 -- --
Forfeited........................................ 8,204 $18.72 4,625 --
Expired.......................................... -- -- -- --
Outstanding, end of year......................... 90,767 $18.87 80,624 $16.54
Exercisable, end of year......................... -- -- -- --
Weighted average fair value of options granted
(per share).................................... $7.01 $7.16
</TABLE>
The remaining weighted average contractual life of the options outstanding
as of December 31, 1997 is 8.54 years.
The fair value of options granted on January 2, 1997 was estimated using
the Black-Scholes option pricing model, using an assumed risk-free rate of
interest of 6.35%; an expected dividend yield of 5.64%; an expected life of 7
years; and an expected volatility of 45%.
The fair value of options granted on February 15, 1996 and July 25, 1996
was estimated using the Black-Scholes option pricing model, using an assumed
risk-free rate of interest of 5.40%; an expected dividend yield of 5.67%; an
expected life of 7 years; and an expected volatility of 40%.
7. NET INCOME PER COMMON SHARE:
A reconciliation of the numerator and the denominator for basic and diluted
net income per common share ("EPS") is given in the following table:
<TABLE>
<CAPTION>
DECEMBER 31, 1997 DECEMBER 31, 1996
--------------------------------- --------------------------------
AMOUNT AMOUNT
INCOME SHARES PER SHARE INCOME SHARES PER SHARE
-------- ---------- --------- ------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS....................... $100,320 25,010,060 $4.01 $92,565 25,000,000 $3.70
Effect of Dilutive Options...... -- 1,482,341 -- 1,080,744
Diluted EPS..................... $100,320 26,492,401 $3.79 $92,565 26,080,744 $3.55
<CAPTION>
DECEMBER 31, 1995
--------------------------------
AMOUNT
INCOME SHARES PER SHARE
------- ---------- ---------
<S> <C> <C> <C>
Basic EPS....................... $74,285 25,000,000 $2.97
Effect of Dilutive Options...... -- 618,719
Diluted EPS..................... $74,285 25,618,719 $2.90
</TABLE>
8. RELATED PARTY TRANSACTIONS:
In addition to the share purchase options discussed in Note 6, IPC has
entered into the following transactions and agreements with companies affiliated
with AIG:
a) Administrative services
The Company and IPC Re are parties to an agreement with American
International Company, Limited ("AICL"), an affiliate of AIG, under which
AICL provides administrative services for a fee of 2.5% of the first
$500,000 annual gross written premiums (1.5% of the next $500,000 and 1%
thereafter). These fees are included in general and administrative expenses
in the accompanying consolidated statements of income.
b) Investment management services
<PAGE> 18
IPC HOLDINGS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
IPC Re is party to an agreement with AIG Global Investment Corp.
(Ireland) Limited ("AIGGIC"), an affiliate of AIG, under which AIGGIC
provides investment advisory and management services. IPC Re has agreed to
pay fees to AIGGIC based on the month end market value of the total
investment portfolio as follows:
<TABLE>
<CAPTION>
ANNUAL FEE
PORTFOLIO BALANCE IN BASIS POINTS
----------------- ---------------
<S> <C>
Up to $100,000.............................................. 35
Excess of $100,000 through $200,000......................... 25
Excess of $200,000.......................................... 15
</TABLE>
These fees are included in net investment income in the accompanying
consolidated statements of income.
c) Investment custodian services
IPC Re is party to an agreement with AIG Trust Services Limited
("AIGTS"), an affiliate of AIG, under which AIGTS provides investment
custodian services. IPC Re has agreed to pay fees of 0.04% per annum based
on the month end market value of investments held under custody. These fees
are included in net investment income in the accompanying consolidated
statements of income.
The following amounts were incurred for services provided by affiliates of
AIG:
<TABLE>
<CAPTION>
INVESTMENT INVESTMENT
ADMINISTRATIVE MANAGEMENT CUSTODIAN
SERVICES SERVICES SERVICES
-------------- ---------- ----------
<S> <C> <C> <C>
Year ended December 31, 1997.................... $2,812 $1,121 $313
Year ended December 31, 1996.................... 2,816 1,017 240
Year ended December 31, 1995.................... 2,003 989 237
</TABLE>
The following amounts were payable as of the balance sheet date to
affiliates of AIG:
<TABLE>
<S> <C>
December 31, 1997........................................... $758
December 31, 1996........................................... 825
</TABLE>
d) IPC Re assumed premiums from companies affiliated with two shareholders
of the Company. Premiums assumed were $11,359, $9,628 and $6,343, respectively,
for the years ended December 31, 1997, 1996 and 1995. In addition, IPC Re
assumed premiums through brokers related to shareholders of the Company totaling
$7,903, $19,429 and $16,555, respectively, for the years ended December 31,
1997, 1996 and 1995. Brokerage fees and commissions incurred in respect of this
business were approximately $790, $1,943 and $1,655, respectively, for the years
ended December 31, 1997, 1996 and 1995. All such transactions were undertaken on
normal commercial terms. Reinsurance premiums receivable due from related
parties as of December 31, 1997 and December 31, 1996 were $4,418 and $3,097,
respectively.
e) A director and executive officer of various AIG subsidiaries and
affiliates serves as the Chairman of the Board of Directors of IPC.
<PAGE> 19
IPC HOLDINGS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. RESERVE FOR LOSSES AND LOSS ADJUSTMENT EXPENSES:
Activity in the reserve for losses and loss adjustment expenses is
summarized as follows:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Balance, beginning of year......................... $ 28,483 $ 24,717 $ 17,976
Losses incurred related to:
Current year..................................... 15,368 32,192 34,400
Prior years...................................... (660) 540 2,257
-------- -------- --------
Total incurred..................................... 14,708 32,732 36,657
-------- -------- --------
Paid related to:
Current year..................................... (1,658) (15,670) (17,946)
Prior years...................................... (13,531) (13,274) (11,934)
-------- -------- --------
Total paid......................................... (15,189) (28,944) (29,880)
-------- -------- --------
Effect of foreign exchange movements............... (412) (22) (36)
-------- -------- --------
Balance, end of year............................... $ 27,590 $ 28,483 $ 24,717
-------- -------- --------
</TABLE>
Losses incurred in the year ended December 31, 1997 in respect of prior
years included increases related to the Northridge, California earthquake and a
per risk treaty loss, which were more than offset by reductions in incurred
losses for property catastrophe business, including Hurricanes Luis, Marilyn,
Opal and Fran, and a Korean per risk treaty loss.
Losses incurred in the year ended December 31, 1996 in respect of prior
years included increases related to the Northridge, California earthquake,
together with increases in reserves for marine and aviation business. These
increases were offset by reductions in reserves for property catastrophe
business, in particular in respect of Hurricanes Luis, Opal and Marilyn.
Losses incurred in the year ended December 31, 1995 in respect of prior
years included approximately $2,000 related to an explosion at an industrial
plant and approximately $2,000 related to the Northridge, California earthquake.
These increases were offset by reductions in reserves for other claims.
The Company's loss reserves have been reviewed by an independent firm of
actuaries.
<PAGE> 20
IPC HOLDINGS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. WRITTEN PREMIUM BY GEOGRAPHIC REGION:
Financial information relating to reinsurance premiums written by
geographic region is as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1997 DECEMBER 31, 1996 DECEMBER 31, 1995
----------------- ----------------- -----------------
PREMIUMS PREMIUMS PREMIUMS
GEOGRAPHIC AREA(1) WRITTEN % WRITTEN % WRITTEN %
------------------ -------- ----- -------- ----- -------- -----
<S> <C> <C> <C> <C> <C> <C>
United States..................... $ 54,200 46.3% $ 51,641 46.3% $ 44,516 42.8%
Worldwide(2)...................... 16,141 13.8% 20,044 18.0% 23,977 23.0%
Worldwide (excluding the
U.S.)(3)........................ 2,497 2.1% 2,429 2.2% 2,434 2.3%
United Kingdom.................... 12,392 10.6% 11,403 10.2% 10,299 9.9%
Europe (excluding the U.K.)....... 11,232 9.6% 6,523 5.8% 5,858 5.6%
Japan............................. 2,794 2.4% 5,088 4.6% 5,495 5.3%
Australia/New Zealand............. 9,433 8.1% 6,308 5.6% 4,229 4.1%
Other............................. 8,361 7.1% 8,133 7.3% 7,288 7.0%
-------- ----- -------- ----- -------- -----
$117,050 100.0% $111,569 100.0% $104,096 100.0%
======== ===== ======== ===== ======== =====
</TABLE>
- ---------------
(1) Except as otherwise noted, each of these categories includes contracts that
cover risks located primarily in the designated geographic area.
(2) Includes contracts that cover risks primarily in two or more countries,
including the United States.
(3) Includes contracts that cover risks primarily in two or more countries,
excluding the United States.
11. CONCENTRATION AND CREDIT RISK:
As of December 31, 1997 and December 31, 1996, IPC held U.S. Treasury notes
which represented approximately 6% and 15%, respectively, and International Bank
for Reconstruction & Development notes which represented approximately 5% and
8%, respectively, of shareholders' equity.
Credit risk arises out of the failure of a counterparty to perform
according to the terms of the contract. IPC does not require collateral or other
security to support financial instruments with credit risk.
A single broker accounted for approximately 22%, 19% and 26%, respectively,
of total premiums written for the years ended December 31, 1997, 1996 and 1995.
Five brokers accounted for approximately 68%, 48% and 53%, respectively, of
total premiums written for the years ended December 31, 1997, 1996 and 1995.
12. COMMITMENTS AND CONTINGENCIES:
Since July 1995, IPC Re has entered into forward foreign exchange contracts
for purposes of hedging its investment portfolio. Changes in the value of these
contracts offset the foreign exchange gains and losses in the foreign currency
denominated assets being hedged. Net gains resulting from such forward foreign
exchange contracts during the years ended December 31 1997, 1996 and 1995 were
$849, $597 and $386, respectively, and are included in realized gains (losses),
net in the accompanying consolidated statements of income. As of December 31,
1997 IPC Re had one forward foreign exchange contract outstanding, in respect of
hedging Australian Dollar denominated investments held at year end. IPC Re may
also enter into forward contracts to manage the exposures relating to known
reinsurance losses denominated in foreign currencies. No such contracts have
been entered into to date.
13. STATUTORY CAPITAL AND SURPLUS:
IPC Re is registered under the Bermuda Insurance Act 1978 and Related
Regulations (the "Act") and is obliged to comply with various provisions of the
Act regarding solvency and liquidity. Under the Act, as
<PAGE> 21
IPC HOLDINGS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
amended in May, 1995, IPC Re is required to maintain minimum statutory capital
and surplus equal to the greater of $100,000, 50% of net premiums written or 15%
of the reserve for losses and loss adjustment expenses. These provisions have
been met as shown in the following table:
<TABLE>
<CAPTION>
DECEMBER 31, 1997 DECEMBER 31, 1996
----------------- -----------------
<S> <C> <C>
Actual statutory capital and surplus......... $525,147 $493,898
Minimum statutory capital and surplus........ $100,000 $100,000
</TABLE>
IPC Re's statutory net income for the years ended December 31, 1997, 1996
and 1995, was $101,504, $95,828 and $74,912, respectively.
The Act limits the maximum amount of annual dividends or distributions paid
by IPC Re to the Company without notification to the Registrar of such payment
(and in certain cases the prior approval of the Registrar). The maximum amount
of dividends which could be paid by IPC Re to the Company at January 1, 1998
without such notification is approximately $131,287.
14. PENSION PLAN:
Effective December 1, 1995, IPC adopted a defined contribution retirement
plan for its officers and employees. Pursuant to the plan, each participant can
contribute 5% or more of their salary and IPC will contribute an amount equal to
5% of each participant's salary. IPC's contributions under the plan are fully
funded, and amounted to approximately $453 and $109 in 1997 and 1996,
respectively.
15. TAXES:
At the present time, no income, profit, capital or capital gains taxes are
levied in Bermuda. In the event that such taxes are levied, the Company and IPC
Re have received an undertaking from the Bermuda Government exempting them from
all such taxes until March 28, 2016.
IPC does not consider itself to be engaged in a trade or business in the
United States and, accordingly, does not expect to be subject to United States
income taxes.
16. EXCHANGE GAINS (LOSSES):
The exchange gain (loss) in the accompanying consolidated statements of
income comprises the net effect of realized and unrealized exchange gains and
losses. The unrealized component arises from the revaluation of certain foreign
currency assets and liabilities as of the balance sheet dates. The realized
component arises from the difference between amounts previously recorded for
foreign currency assets and liabilities and the actual amounts received or paid
during the year.
<PAGE> 22
IPC HOLDINGS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
17. SUBSIDIARY FINANCIAL DATA:
Summarized financial data of the subsidiary, IPC Re, is as follows:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, 1997 DECEMBER 31, 1996 DECEMBER 31, 1995
----------------- ----------------- -----------------
<S> <C> <C> <C>
Written premiums...................... $117,050 $111,569 $104,096
Premiums earned....................... 112,486 113,642 101,541
Investment income..................... 29,858 28,833 22,855
Realized gain (loss), net............. (3,616) 3,871 2,973
Incurred losses....................... (14,708) (32,732) (36,657)
Acquisition costs..................... (13,487) (11,849) (10,315)
General & admin. expenses and exchange
gain (loss), net.................... (8,790) (6,024) (4,597)
-------- -------- --------
Net Income............................ $101,743 $ 95,741 $ 75,800
======== ======== ========
Loss ratio............................ 13.1% 28.8% 36.1%
Expense ratio (excluding exchange gain
(loss), net)........................ 18.4% 15.9% 15.9%
Combined ratio........................ 31.5% 44.7% 52.0%
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1997 DECEMBER 31, 1996
----------------- -----------------
<S> <C> <C>
Cash & investments................................... $538,287 $503,265
Reinsurance balances receivable...................... 27,735 25,687
Other assets......................................... 19,739 19,810
-------- --------
Total Assets......................................... $585,761 $548,762
======== ========
Unearned premiums.................................... $ 26,462 $ 21,898
Reserves for losses.................................. 27,590 28,483
Other liabilities.................................... 2,546 1,533
-------- --------
Total Liabilities.................................... 56,598 51,914
-------- --------
Common stock......................................... 250,000 250,000
Additional paid-in capital........................... 49,500 49,500
Unrealized gain (loss), net on investments........... 9,476 (3,898)
Retained earnings.................................... 220,187 201,246
-------- --------
Total Liabilities and Shareholder's Equity........... $585,761 $548,762
======== ========
</TABLE>
<PAGE> 23
IPC HOLDINGS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
18. UNAUDITED QUARTERLY FINANCIAL DATA:
<TABLE>
<CAPTION>
QUARTER QUARTER QUARTER QUARTER
ENDED ENDED ENDED ENDED
MARCH 31, JUNE 30, SEPT. 30, DEC. 31,
1997 1997 1997 1997
--------- -------- --------- --------
<S> <C> <C> <C> <C>
Premiums written................................... $71,415 $18,159 $21,721 $ 5,755
Premiums earned.................................... 28,407 27,321 28,559 28,199
Net investment income.............................. 7,602 8,001 7,091 7,189
Realized gains (losses), net....................... (322) (1,854) (1,314) (126)
Losses and loss adjustment expenses................ 2,464 2,718 2,857 6,669
Net income......................................... 27,512 25,528 25,534 21,746
Net income per common share -- basic............... $ 1.10 $ 1.02 $ 1.02 $ 0.87
Net income per common share -- diluted............. $ 1.05 $ 0.97 $ 0.96 $ 0.82
</TABLE>
<TABLE>
<CAPTION>
QUARTER QUARTER QUARTER QUARTER
ENDED ENDED ENDED ENDED
MARCH 31, JUNE 30, SEPT. 30, DEC. 31,
1996 1996 1996 1996
--------- -------- --------- --------
<S> <C> <C> <C> <C>
Premiums written................................... $61,808 $18,742 $22,467 $ 8,552
Premiums earned.................................... 27,833 27,743 28,883 29,183
Net investment income.............................. 6,726 7,146 7,414 7,597
Realized gains (losses), net....................... 3,503 (875) (358) 1,601
Losses and loss adjustment expenses................ 6,634 3,568 12,086 10,444
Net income......................................... 27,044 23,181 19,241 23,099
Net income per common share -- basic............... $ 1.08 $ 0.93 $ 0.77 $ 0.92
Net income per common share -- diluted............. $ 1.03 $ 0.89 $ 0.74 $ 0.88
</TABLE>
<PAGE> 1
EXHIBIT 21.1
SUBSIDIARIES OF THE REGISTRANT
International Property Catastrophe Reinsurance Company, Ltd.
IPC Re Services Limited
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we consent to the incorporation by
reference in the previously filed registration statement of IPC Holdings, Ltd.
on Form S-8 (File No. 333-19149) of our reports dated February 3rd, 1998,
included or incorporated by reference in this Annual Report on Form 10-K.
ARTHUR ANDERSEN & CO.
Hamilton, Bermuda
March 24, 1998
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
EXHIBIT 27.1
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE REPORT
ON FORM 10-K OF IPC HOLDINGS, LTD. FOR THE YEAR ENDED DECEMBER 31, 1997 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FINANCIAL STATEMENTS (AND THE
NOTES THERETO) CONTAINED IN SUCH REPORT.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<DEBT-HELD-FOR-SALE> 442,328
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 86,685
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 529,013
<CASH> 9,746
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 2,593
<TOTAL-ASSETS> 585,019
<POLICY-LOSSES> 27,590
<UNEARNED-PREMIUMS> 26,462
<POLICY-OTHER> 1,202
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 0
0
0
<COMMON> 250
<OTHER-SE> 528,043
<TOTAL-LIABILITY-AND-EQUITY> 585,019
112,486
<INVESTMENT-INCOME> 29,883
<INVESTMENT-GAINS> (3,616)
<OTHER-INCOME> 0
<BENEFITS> 14,708
<UNDERWRITING-AMORTIZATION> 13,487
<UNDERWRITING-OTHER> 8,676
<INCOME-PRETAX> 100,320
<INCOME-TAX> 0
<INCOME-CONTINUING> 100,320
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 100,320
<EPS-PRIMARY> 4.01
<EPS-DILUTED> 3.79
<RESERVE-OPEN> 28,483
<PROVISION-CURRENT> 15,368
<PROVISION-PRIOR> (660)
<PAYMENTS-CURRENT> (1,658)
<PAYMENTS-PRIOR> (13,531)
<RESERVE-CLOSE> 27,590
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
