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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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, 1998
COMMISSION FILE NUMBER: 0-27662
IPC HOLDINGS, LTD.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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BERMUDA NOT APPLICABLE
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(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
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(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(441) 298-5100
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(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. [ ]
The aggregate market value of the Registrant's Common Shares held by
non-affiliates of the Registrant as of March 19, 1999, was $383,412,123, 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 19, 1999, was 25,033,932.
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of the Registrant's 1998 Annual Report to Shareholders to be
mailed to shareholders on or about April 29, 1999 (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 18, 1999 (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
Shareholder Matters......................................... 19
6. Selected Financial Data..................................... 20
7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 21
7A. Quantitative and Qualitative Disclosures About Market
Risk........................................................ 21
8. Financial Statements and Supplementary Data................. 22
9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 22
PART III
10. Directors and Executive Officers............................ 22
11. Executive Compensation...................................... 22
12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 22
13. Certain Relationships and Related Transactions.............. 22
PART IV
14. Exhibits, Financial Statement Schedules and Reports on Form
8-K......................................................... 23
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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 forward-looking statements, the inclusion of such
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,
IPCRe Limited, a company incorporated under the laws of Bermuda ("IPCRe" and
together with the Company, IPCRe Europe (as defined herein) 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 IPC'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
IPCRe is engaged in the conduct of a trade or business within the U.S.
ITEM 1. BUSINESS
GENERAL DEVELOPMENT OF THE BUSINESS
The Company, through IPCRe and IPCRe's wholly-owned subsidiary, IPCRe
Europe Limited ("IPCRe Europe"), 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 1998, approximately
83% 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 IPCRe 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, 1999, IPCRe had 316
clients, including many of the leading insurance companies around the world.
Approximately 44% of these clients in 1998 were based in the United States, and
approximately 46% of premiums written during 1998 related primarily to U.S.
risks. IPCRe's non-U.S. clients and covered risks are located principally in
Europe, Japan and Australia/New Zealand. At December 31, 1998, IPC had total
shareholders' equity of $566 million and total assets of $643 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 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.
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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 March 13, 1996, the Company completed an initial public offering in
which 13,521,739 of the 25,000,000 Common Shares outstanding, were sold by
existing shareholders. The Company's Common Shares are included for trading on
the Nasdaq National Market under the ticker symbol "IPCRF".
On September 10, 1998, IPCRe incorporated a subsidiary in Ireland, named
IPCRe Europe Limited. Effective October 1st, 1998, IPCRe Europe commenced
underwriting selected reinsurance business in Europe. Currently, IPCRe Europe
retrocedes 90% of the business it underwrites to IPCRe. IPC Re Services Limited
("IPC Re Services"), a subsidiary of IPC Holdings, Ltd., is located in the
United Kingdom, from which European marketing efforts are conducted on behalf of
IPCRe.
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. To a limited extent, IPC also provides similar
reinsurance programs and products to reinsurers. 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 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), or the equivalent thereof, 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
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the total investment portfolio at December 31, 1998. On that date, 90.0% 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
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 83% of IPC's premiums
written during 1998, 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, such as occurred in 1998, can be expected to occur
from time to time. In the future, such events could 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. In addition, IPC's policies contain limitations and exclusions from
coverage and choice of forum. There can be no assurance that IPC's efforts to
limit exposure by using the foregoing methods will be successful. In addition,
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 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.
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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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1998 1997
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PERCENTAGE OF PERCENTAGE OF
PREMIUMS PREMIUMS NUMBER OF PREMIUMS PREMIUMS NUMBER OF
TYPE OF REINSURANCE ASSUMED WRITTEN WRITTEN CONTRACTS WRITTEN WRITTEN CONTRACTS
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(IN THOUSANDS) (IN THOUSANDS)
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Catastrophe
excess-of-loss.......... $ 92,737 83.3% 1,879 $ 96,138 82.1% 1,738
Risk excess-of-loss....... 5,633 5.1% 219 6,672 5.7% 215
Marine reinsurance........ 1,298 1.2% 177 3,231 2.8% 282
Retrocessional
reinsurance............. 4,223 3.8% 108 3,562 3.0% 82
Aviation (1).............. 5,912 5.3% 15 5,164 4.4% 14
Other..................... 1,462 1.3% 63 2,283 2.0% 41
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Total........... $111,265 100% 2,461 $117,050 100% 2,372
======== ==== ===== ======== ==== =====
</TABLE>
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(1) In 1998, aviation included one aviation contract and two satellite
contracts, written on a pro-rata basis; in 1997, 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.
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 1998, the majority of this business
was written in one pro rata aviation contract, where the underlying insurance is
written on an excess-of-loss basis, and two satellite contracts.
POLICY FEATURES. Historically, IPC's policies have been written for a
one-year period, and generally without experience-based adjustments. The trend
in the industry has been towards multi-year policies. In particular, some of the
insureds renewing policies in 1999 to date specifically have requested longer
periods, in part to address concerns regarding Y2K risks. (See "Year 2000
Readiness Disclosure Statement", contained in the Annual Report.) A proportion
of IPC's policies are now for terms of two years or longer. In addition, in
recent years the industry has offered a variety of experienced-based incentives
such as "no claims" bonuses and profit commissions. A proportion of IPC's
policies now include some or all of these incentives.
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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 North-Central 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.
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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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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........ $ 50,796 45.7% 985 $ 54,200 46.3% 938
Worldwide(2)......... 14,050 12.6% 284 16,141 13.8% 341
Worldwide (excluding
the U.S.)(3)....... 3,513 3.2% 69 2,497 2.1% 59
Europe (including the
U.K.).............. 23,555 21.2% 504 23,624 20.2% 448
Japan................ 4,139 3.7% 75 2,794 2.4% 74
Australia/New
Zealand............ 8,589 7.7% 163 9,433 8.1% 139
Other................ 6,623 5.9% 381 8,361 7.1% 373
-------- ----- ----- -------- ----- -----
Total...... $111,265 100.0% 2,461 $117,050 100.0% 2,372
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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.
(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 gross aggregate in-force liability
allocated to various zones of coverage exposure at January 1, 1999 and 1998.
IPC's aggregate limits will be reduced to the extent that business is ceded to
the new proportional reinsurance facility (see "Retrocessional Reinsurance"
below).
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AGGREGATE LIMIT OF
LIABILITY AT JANUARY 1,
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GEOGRAPHIC AREA(1) 1999 1998
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(IN THOUSANDS) (IN THOUSANDS)
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United States
New England............................................... $284,527 $358,153
Atlantic.................................................. 349,370 415,579
Gulf...................................................... 318,038 346,976
North Central............................................. 349,913 328,807
Mid West.................................................. 320,649 327,532
West...................................................... 336,254 376,052
Alaska.................................................... 132,171 102,491
Hawaii.................................................... 129,475 116,577
Total United States(2)............................ 546,133 563,567
Canada...................................................... 61,288 84,986
Worldwide(3)................................................ 86,167 33,475
Worldwide (excluding the U.S.)(4)........................... 98,229 122,577
Europe (including U.K.)..................................... 331,163 457,488
Japan....................................................... 97,020 57,369
Australia/New Zealand....................................... 148,748 175,868
Other....................................................... 116,563 179,443
</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 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 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. 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 these initial underwriting criteria, IPC then
evaluates the proposal in terms of its 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"
reinsurance data 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 the latter part of 1998, IPC
obtained a license for "GENIUS" as a reinsurance data system replacement for
RSG, and is in the process of implementing and converting data in readiness for
its usage. Final conversion and implementation is expected to be complete by the
middle of 1999.
8
<PAGE> 10
In addition to its reinsurance data 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 reinsurance system 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.
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 60% of premiums written by IPCRe each year are for
contracts which have effective dates in January, about 16% in April, about 17%
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.
RETROCESSIONAL REINSURANCE
Effective January 1, 1999, IPCRe has arranged a proportional reinsurance
facility through two leading intermediaries. Business covered is property
catastrophe business written by IPCRe, and provides coverage up to $50 million
in each of at least 5 named zones, plus potentially other zones of IPCRe's
choosing, provided that they do not accumulate with the named zones. The United
States and the Caribbean are excluded zones. The named zones are the United
Kingdom; Europe (excluding the U.K.); Australia/New Zealand; Japan and Canada.
Business ceded to the facility is solely at the discretion of IPCRe. Within
these limitations, IPCRe may designate the treaties to be included in the
facility, subject to IPCRe retaining at least 50% of the risk. The premium ceded
is pro rata, less brokerage and an override commission. AIG, as a participating
reinsurer, has committed a 10% participation on a direct basis. Most reinsurers
participating in the facility have ratings of AA or above, and the minimum
rating is A.
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 1998, no
single ceding insurer accounted for more than 5.2% 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
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<PAGE> 11
reinsurance. In addition, IPC's products are marketed in Europe through IPC Re
Services, and certain European risks are underwritten by IPCRe Europe.
Based on premiums written under contracts in force on December 31, 1998,
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 (23.6%), Aon Corp. and affiliates
(22.1%), Benfield Greig (11.1%), Willis Faber (8.6%) and Herbert Clough (5.5%).
IPC, as of December 31, 1998, had in force reinsurance contracts with only 6
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. 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. IPCRe 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 IPCRe'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 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.
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. 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
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<PAGE> 12
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 management believes 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, 1998, other than cash,
IPC's investments consisted of fixed maturity securities, none of which had a
rating of less than A, and shares of stock in the companies which comprise the
S&P 500. Corporate bonds represented 41% of total fixed maturity investments at
December 31, 1998 and of these 43% and 57% were issued by U.S. and non-U.S.
corporations, respectively. IPC's investment policy also stresses
diversification and at December 31, 1998, only the U.S. Treasury represented
more than 5% of IPC's portfolio. In 1997, one other issuer, the International
Bank for Reconstruction and Development, whose issues represented 6% of the
fixed maturity portfolio, was greater than 5%. 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.
The following table summarizes the fair value of the investments and cash
and cash equivalents of IPC as of December 31, 1998 and 1997:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
TYPE OF INVESTMENT 1998 1997
- ------------------ -------- --------
(IN THOUSANDS)
<S> <C> <C>
Fixed Maturities Available for Sale
U.S. Government and government agencies.............. $111,210 $ 33,229
Other governments.................................... 125,240 125,780
Corporate............................................ 200,644 228,775
Supranational entities............................... 47,769 54,544
-------- --------
$484,863 $442,328
Equities, available for sale........................... $ 94,152 $ 86,685
Cash and cash equivalents.............................. $ 20,966 $ 9,746
-------- --------
$599,981 $538,759
======== ========
</TABLE>
In June, 1997 IPC restructured its investment portfolio, 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 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(g) 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 maturity securities, and ten years for
money-market securities. At December 31, 1998 the fixed maturity portfolio
(including cash and cash equivalents within such portfolio) had an average
maturity of 3.1 years and an average modified duration of 2.7 years. Management
believes that, given the relatively high quality of its portfolio, adequate
market liquidity exists to meet IPC's cash demands.
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<PAGE> 13
The following table summarizes the fair value by maturities of IPC's fixed
maturity investment portfolio as of December 31, 1998 and 1997. For this
purpose, maturities reflect contractual rights to put or call the securities;
actual maturities may be longer.
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1998 1997
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Available for Sale:
Due in one year or less.............................. $ 79,473 $ 47,828
Due after one year through five years................ 344,160 366,207
Due after five years through ten years............... 61,230 28,293
-------- --------
$484,863 $442,328
======== ========
</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
Moody's Investor Services ("Moody's") and, when no Moody's rating is available,
S&P 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,
----------------
1998 1997
------ ------
<S> <C> <C>
Cash and cash equivalents......................... 4.2% 2.2%
U.S. Government and government agencies........... 22.0% 7.3%
AAA............................................... 21.6% 44.6%
AA................................................ 42.2% 38.1%
A................................................. 10.0% 7.8%
------ ------
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, 1998, all of IPC's fixed
maturity investments were in securities denominated in U.S. dollars. At December
31, 1997, IPC held U.S.$23,112,000 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 the purpose of
improving overall portfolio yield. When it does hold non-U.S. dollar denominated
securities, IPC has entered and may enter 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.
INVESTMENT ADVISORY AND CUSTODIAL SERVICES. Investment advisory and
custodial services are provided to IPC by subsidiaries of AIG.
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<PAGE> 14
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 XL Mid Ocean Re.,
Renaissance Reinsurance Ltd., Partner Reinsurance Company Ltd., LaSalle Re
Limited, Tempest Reinsurance Company 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, IPCRe 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 and 1998. In July, 1997 Standard & Poor's assigned
financial strength and counter-party credit ratings of A+, which were affirmed
in 1998. Prior to 1996, IPCRe 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 Standard & Poor's 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 IPCRe believes that its ratings will not be
a major competitive advantage or disadvantage, some of the IPCRe's principal
competitors have a rating equal to or greater than 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. IPCRe 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" contained in the Annual Report.
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. Among other things, over the last few years capital
markets participants, including exchanges and financial intermediaries, have
developed financial products intended to compete with traditional reinsurance,
the usage of which has grown in volume. In addition, the tax policy of the
countries in which IPC's clients operate can affect the demand for reinsurance.
Management is also aware of many potential initiatives by capital market
participants to produce additional alternative products that may compete with
the existing catastrophe reinsurance markets. Management is unable to predict
the extent to 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, 1999, 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.
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<PAGE> 15
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").
IPCRe 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 IPCRe 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 IPCRe and its financial condition. These statutes and regulations may, in
effect, restrict the ability of IPCRe to write new business or, as indicated
below, distribute funds to the Company. The Insurance Act, which regulates the
insurance business of IPCRe, 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. IPCRe
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 IPCRe 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 IPCRe 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 reserves. If IPCRe 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, 1999, IPCRe would have been able to pay
approximately $141 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 IPCRe's current
capital structure and operating results. See note 14 to the Company's
Consolidated Financial Statements, contained in the Annual Report.
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<PAGE> 16
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. IPCRe, 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 will normally be a qualified property/casualty actuary, 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 14 to the Company's
Consolidated Financial Statements contained in the Annual Report, for
information with respect to IPCRe'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. IPCRe 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 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 IPCRe. Where an insurer's accounts
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<PAGE> 17
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 IPCRe is at IPC's offices in
Pembroke, Bermuda and the Company's President and Chief Executive Officer is the
principal representative of IPCRe. 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 IPCRe 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, IPCRe 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 IPCRe 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 held by way of lease or
tenancy agreement which is required for its business and held for a term not
exceeding 50 years, or which is used to provide accommodation or recreational
facilities for its officers and employees and held with the consent of the
Minister); (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 IPCRe (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 IPCRe are not currently subject 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.
UNITED STATES
IPCRe is not admitted to do business in the United States. Although IPCRe
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 IPCRe, which are not
admitted to do business within such jurisdictions. With
16
<PAGE> 18
some exceptions, such sale of insurance or reinsurance within a jurisdiction
where the insurer is not admitted to do business is prohibited. IPCRe does not
intend to maintain an office or to solicit, advertise, settle claims or conduct
other insurance activities in any jurisdiction other than Bermuda or Ireland
where the conduct of such activities would require that IPCRe 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. IPCRe 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. IPCRe is also subject to excise tax in the
United States for U.S. business, and in certain other jurisdictions.
IPCRe 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 IPCRe's reinsurance activities will not be raised in
the future. IPCRe 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.
UNITED KINGDOM
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 IPCRe to
be subject to regulation as an insurance company in the United Kingdom.
EUROPEAN UNION
IPCRe Europe is incorporated in Ireland, and as such subject to regulations
imposed by the European Union.
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 Shares 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 IPCRe. The Company and IPCRe are Bermuda
corporations; neither files United States tax returns. IPCRe 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 and/or IPCRe is engaged in a
trade or business in the United States. If IPCRe were engaged in a trade or
business in the United States (and, if IPCRe were to qualify for benefits under
the income tax treaty between
17
<PAGE> 19
the United States and Bermuda, such trade or business were attributable to a
"permanent establishment" in the United States), IPCRe 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.
IPCRe 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 IPCRe 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 IPCRe's related person insurance
income ("RPII") were to equal or exceed 20% of IPCRe'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
IPCRe'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 IPCRe
(generally, premium and related investment income from the direct or indirect
insurance or reinsurance of any direct or indirect U.S. shareholder of IPCRe or
any person related to such shareholder, including the Company) will depend on a
number of factors, including the geographic distribution of IPCRe's business and
the identity of persons directly or indirectly insured or reinsured by IPCRe.
Although IPCRe does not believe that the 20% threshold was met in taxable years
1994, 1995, 1996, 1997 or 1998, some of the factors which determine the extent
of RPII in any period may be beyond the control of IPCRe. Consequently, there
can be no assurance that IPCRe'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 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,
18
<PAGE> 20
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
disposition of Common Shares.
TAX-EXEMPT SHAREHOLDERS. Tax-exempt entities are generally required 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, the
Company and IPCRe are allocated office space in AICL's building in Bermuda and
the Company'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, 1998.
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>
1998
Quarter ended March 31, 1998.............................. $32.750 $ 29.5625
Quarter ended June 30, 1998............................... 33.250 29.1250
Quarter ended September 30 ,1998.......................... 30.625 21.1875
Quarter ended December 31, 1998........................... 26.375 19.0000
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
</TABLE>
As of February 28, 1999, there were 105 holders of record of Common Shares.
In each of March, June, September, and December 1998, the Company paid
dividends of $0.3175 per Common Share. In addition, in March 1998, the Company
paid a special dividend of $0.80 per Common Share. In each of March, June,
September, and December 1997, the Company paid dividends of $0.3175 per
19
<PAGE> 21
Common Share. In addition, in each of March and June 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 IPCRe. The payment of dividends from IPCRe to the
Company is restricted under Bermuda law and regulation, including Bermuda
insurance law and under IPCRe's five-year $300 million revolving credit facility
with a syndicate of lenders led by the First National Bank of Chicago. The
credit facility limits the amount of dividends that may be paid by IPCRe to the
Company to the lesser of i) IPCRe's aggregate positive net income from March 31,
1998 to the end of the then-current fiscal quarter over the aggregate amount of
all dividends and distributions paid during the same period, and ii) IPCRe's
positive consolidated net income for the four fiscal quarters then ending over
the aggregate amount of all dividends and distributions paid during the same
period.
Under the Insurance Act, IPCRe 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 IPCRe to the Company at January 1, 1999 without
such notification is approximately $140,780,000. The Insurance Act also requires
IPCRe to maintain a minimum solvency margin and minimum liquidity ratio and
prohibits dividends which would result in a breach of these requirements. In
addition, IPCRe 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.
ITEM 6. SELECTED FINANCIAL DATA
The historical consolidated financial data presented below as of and for
each of the periods ended December 31, 1998, 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>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------
1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA
Premiums written................ $ 111,265 $ 117,050 $ 111,569 $ 104,096 $ 85,610
Premiums earned................. 120,125 112,486 113,642 101,541 74,667
Net investment income........... 30,053 29,883 28,883 22,855 16,762
Loss and loss expenses
incurred...................... 61,459 14,708 32,732 36,657 31,570
Acquisition costs............... 16,968 13,487 11,849 10,315 7,665
General & administrative
expenses(1)................... 11,051 10,238 9,250 6,112 4,708
Realized gains/(losses), net on
investments................... 7,014 (3,616) 3,871 2,973 (1,053)
Net Income...................... $ 67,714 $ 100,320 $ 92,565 $ 74,285 $ 46,433
Net income per Common
Share(2)...................... $ 2.55 $ 3.79 $ 3.55 $ 2.90 $ 1.85
</TABLE>
20
<PAGE> 22
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------
1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
Weighted average shares
outstanding(2)................ 26,547,062 26,492,401 26,080,744 25,618,719 25,130,454
Dividend per Common Share(3).... $ 2.07 $ 3.27 $ 0.8925 -- --
OTHER DATA
Loss and loss expense
ratio(4)...................... 51.2% 13.1% 28.8% 36.1% 42.3%
Expense ratio(4)................ 23.0% 19.7% 19.2% 17.4% 16.9%
Combined ratio(4)............... 74.2% 32.8% 48.0% 53.5% 59.2%
Return on average equity(5)..... 12.4% 19.6% 19.9% 19.1% 14.5%
BALANCE SHEET DATA (AT END OF
PERIOD)
Total cash and investments...... 599,981 538,759 $ 503,846 $ 444,082 $ 354,697
Reinsurance balances
receivable.................... 20,747 27,723 25,687 25,451 19,285
Total assets.................... 643,091 585,019 548,081 485,248 387,327
Reserve for losses and loss
expenses...................... 52,226 27,590 28,483 24,717 17,976
Unearned premiums............... 17,602 26,462 21,898 23,971 21,416
Total shareholders' equity...... 565,952 528,293 496,135 434,292 347,183
Book value per Common
Share(6)...................... $ 21.32 $ 19.94 $ 19.02 $ 16.58 $ 13.76
</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.
(3) Dividend per Common Share is based on the number of average outstanding
Common Shares during the years ended December 31, 1998, 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 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required for this item is incorporated herein by reference
to the section entitled "Management's Discussion and Analysis -- Market Risk" in
the Annual Report.
21
<PAGE> 23
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.
The fees payable to AICL in connection with the provision of administrative
services pursuant to an administrative services agreement between the Company,
IPCRe 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 had a one year term expiring June 23,
1998 and is subject to termination thereafter 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.
AIG Insurance Management Services (Europe) Ltd. ("AIMS"), an indirect
wholly-owned subsidiary of AIG, provides management and administrative services
to IPCRe Europe pursuant to a management services agreement, which provides for
an annual fee of approximately $38,000. This agreement may be terminated by
either party subject to three months' written notice.
22
<PAGE> 24
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 9 to 39 of
the Annual Report:
Report of Independent Public Accountants
Consolidated balance sheets as of December 31, 1998 and 1997
Consolidated statements of income for the years ended December 31, 1998,
1997 and 1996.
Consolidated statements of changes in shareholders' equity for the years
ended December 31, 1998, 1997 and 1996.
Consolidated statements of cash flows for the years ended December 31, 1998,
1997 and 1996.
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 31, 1998, 1997 and 1996.
Schedule IV -- Supplementary Information concerning Reinsurance for the
years ended December 31, 1998, 1997 and 1996.
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.
3. Exhibits
<TABLE>
<CAPTION>
EXHIBIT METHOD
NUMBER DESCRIPTION OF FILING
- ------- ----------- ---------
<C> <S> <C>
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................................... *
10.1 Termination Agreement among the Company and its previous
shareholders................................................ *
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 IPCRe Defined Contribution Plan............................. *
10.5 Amended and Restated Administrative Services Agreement among
the Company, IPCRe and AICL................................. *
10.6 Investment Management Agreement between IPCRe 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 IPCRe................. *
</TABLE>
23
<PAGE> 25
<TABLE>
<CAPTION>
EXHIBIT METHOD
NUMBER DESCRIPTION OF FILING
- ------- ----------- ---------
<C> <S> <C>
10.9 Retirement Agreement between IPCRe and James P. Bryce....... *
10.10 Retirement Agreement between IPCRe and Peter J.A. Cozens.... *
10.11 IPC Holdings, Ltd. Deferred Compensation Plan............... +
10.12 Credit Agreement between IPCRe Limited, the First National
Bank of Chicago, and other Lenders named therein............ +
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)
+ Incorporated by reference to Exhibits 10.1 and 10.2 to the Company's Form
10-Q for the quarter ended June 30, 1998 (File No. 0-27662)
b) Reports on Form 8-K.
No reports were filed on Form 8-K during the fourth quarter of 1998.
24
<PAGE> 26
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 30
years ended December 31, 1998, 1997 and 1996................
Schedule IV Supplementary Information concerning Reinsurance for the 31
years ended December 31, 1998, 1997 and 1996................
</TABLE>
25
<PAGE> 27
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF
IPC HOLDINGS, LTD.
We have audited in accordance with generally accepted auditing standards
the consolidated financial statements of IPC Holdings, Ltd. and subsidiaries
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
5, 1999. Our audit was made for the purpose of forming an opinion on those
financial statements taken as a whole. The schedules listed in the accompanying
index are the responsibility of the Company's 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 5, 1999
26
<PAGE> 28
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,
--------------------
1998 1997
-------- --------
<S> <C> <C>
ASSETS:
Cash........................................................ $ 69 $ 352
Investment in wholly-owned subsidiaries..................... 566,809 529,206
Other assets................................................ 1,577 1,282
-------- --------
Total assets...................................... $568,455 $530,840
======== ========
LIABILITIES:
Payable to subsidiaries..................................... $ 2,481 $ 2,481
Other liabilities........................................... 22 66
-------- --------
Total liabilities................................. $ 2,503 $ 2,547
SHAREHOLDERS' EQUITY:
Share Capital -- 1998: 25,033,932 shares outstanding, par
value $0.01; 1997: 25,017,603 shares
outstanding, par value $0.01............... $ 250 $ 250
Additional paid in capital.................................. 299,833 299,533
Retained earnings........................................... 234,928 219,034
Accumulated other comprehensive income...................... 30,941 9,476
-------- --------
Total shareholders' equity........................ 565,952 528,293
-------- --------
Total liabilities and shareholders' equity........ $568,455 $530,840
======== ========
</TABLE>
27
<PAGE> 29
IPC HOLDINGS, LTD.
STATEMENT OF INCOME
(PARENT COMPANY)
(EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1998 1997 1996
------- -------- -------
<S> <C> <C> <C>
Interest Income............................................. $ 15 $ 25 $ 50
Expenses:
Operating Costs and expenses, net......................... 889 1,490 3,226
------- -------- -------
(Loss)/profit before equity in net income of wholly-owned
subsidiaries.............................................. (874) (1,465) (3,176)
Equity in net income of wholly-owned subsidiaries........... 68,588 101,785 95,741
------- -------- -------
Net Income available to common shareholders................. $67,714 $100,320 $92,565
======= ======== =======
</TABLE>
28
<PAGE> 30
IPC HOLDINGS, LTD.
STATEMENT OF CASH FLOWS
(PARENT COMPANY)
(EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1998 1997 1996
------- --------- -------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income.................................................. $67,714 $ 100,320 $92,565
Adjustments to reconcile net income to cash provided by:
Equity in net income from subsidiaries.................... (68,588) (101,785) (95,741)
Changes in, net:
Other assets........................................... (295) (919) (363)
Payable to subsidiaries................................ -- 856 1,603
Other liabilities...................................... (44) 35 (1,497)
------- --------- -------
(1,213) (1,493) (3,433)
------- --------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Additional share capital.................................... 300 266 --
Dividends received from subsidiaries........................ 52,450 82,801 26,275
Dividends paid to shareholders.............................. (51,820) (81,802) (22,313)
------- --------- -------
930 1,265 3,962
------- --------- -------
Net increase (decrease) in cash and cash equivalents........ (283) (228) 529
Cash and cash equivalents, beginning of year................ 352 580 51
------- --------- -------
Cash & cash equivalents, end of year........................ $ 69 $ 352 $ 580
======= ========= =======
</TABLE>
29
<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
ACQUISITION AND LOSS UNEARNED PREMIUM INVESTMENT SETTLEMENT ACQUISITION
SEGMENT COSTS EXPENSE PREMIUMS REVENUE INCOME EXPENSES COSTS
- ------- ----------- ----------------- -------- -------- ---------- ---------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
1998:
Property &
Similar.......... $2,048 $52,226 $17,602 $120,125 $30,038 $61,459 $16,968
1997:
Property &
Similar.......... 2,593 27,590 26,462 112,486 29,858 14,708 13,487
1996:
Property &
Similar.......... 2,354 28,483 21,898 113,642 28,833 32,732 11,849
<CAPTION>
OTHER
OPERATING PREMIUMS
SEGMENT EXPENSES WRITTEN
- ------- --------- --------
<S> <C> <C>
1998:
Property &
Similar.......... $9,856 $111,265
1997:
Property &
Similar.......... 7,272 117,050
1996:
Property &
Similar.......... 6,656 111,569
</TABLE>
30
<PAGE> 32
SCHEDULE IV
REINSURANCE
(EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS)
<TABLE>
<CAPTION>
CEDED TO ASSUMED PERCENTAGE OF
OTHER FROM OTHER AMOUNT
GROSS AMOUNT COMPANIES COMPANIES NET AMOUNT(1) ASSUMED TO NET
------------ --------- ---------- ------------- --------------
<S> <C> <C> <C> <C> <C>
1998:
Property & Similar................ $-- $-- $111,265 $111,265 100%
1997:
Property & Similar................ -- -- 117,050 117,050 100%
1996:
Property & Similar................ -- -- 111,569 111,569 100%
</TABLE>
- ---------------
(1) Premiums Written
31
<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 22nd day of March, 1999.
IPC HOLDINGS, LTD.
/s/ JOHN P. DOWLING
--------------------------------------
By: 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 22, 1999
- ------------------------------------------------ Directors
Joseph C.H. Johnson
/s/ JOHN P. DOWLING President, Chief Executive March 22, 1999
- ------------------------------------------------ Officer and Director
John P. Dowling
/s/ JOHN R. WEALE Vice President and Chief March 22, 1999
- ------------------------------------------------ Financial Officer
John R. Weale
/s/ RUSSELL FISHER Deputy Chairman of Board of March 22, 1999
- ------------------------------------------------ Directors
Russell Fisher
/s/ ANTHONY M. PILLING Director March 22, 1999
- ------------------------------------------------
Anthony M. Pilling
/s/ CLARENCE JAMES Director March 22, 1999
- ------------------------------------------------
Dr. The Honourable Clarence E. James
/s/ FRANK MUTCH Director March 22, 1999
- ------------------------------------------------
Frank Mutch
/s/ JOHN T. SCHMIDT Director March 22, 1999
- ------------------------------------------------
John T. Schmidt
</TABLE>
32
<PAGE> 34
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT METHOD
NUMBER DESCRIPTION OF FILING
- ------- ----------- ---------
<C> <S> <C>
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................................... *
10.1 Termination Agreement among the Company and its previous
shareholders................................................ *
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 IPCRe Defined Contribution Plan............................. *
10.5 Amended and Restated Administrative Services Agreement among
the Company, IPCRe and AICL................................. *
10.6 Investment Management Agreement between IPCRe 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 IPCRe................. *
10.9 Retirement Agreement between IPCRe and James P. Bryce....... *
10.10 Retirement Agreement between IPCRe and Peter J.A. Cozens.... *
10.11 IPC Holdings, Ltd. Deferred Compensation Plan............... +
10.12 Credit Agreement between IPCRe Limited, the First National
Bank of Chicago, and other Lenders named therein............ +
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)
+ Incorporated by reference to Exhibits 10.1 and 10.2 to the Company's Form
10-Q for the quarter ended June 30, 1998 (File No. 0-27662)
33
<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,
--------------------------
1998 1997
----------- -----------
(AUDITED) (AUDITED)
<S> <C> <C>
BASIC
Net income.................................................. $ 67,714 $ 100,320
Common shares outstanding at January 1, 1998................ 25,000,000 25,000,000
Common shares outstanding at December 31, 1998.............. 25,033,932 25,017,603
Weighted average common shares outstanding.................. 25,031,211 25,010,060
Net income per common share................................. $ 2.71 $ 4.01
DILUTED
Net income.................................................. $ 67,714 $ 100,320
Weighted average common shares outstanding.................. 25,031,211 25,010,060
Dilutive effect of share options............................ 1,515,851 1,482,341
----------- -----------
Total....................................................... 26,547,062 26,492,401
----------- -----------
Net income per common share................................. $ 2.55 $ 3.79
</TABLE>
34
<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, IPCRe Limited ("IPCRe"),
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, 1998.
GENERAL
IPC commenced operations in July 1993. Because of the volatile nature of
property catastrophe reinsurance, 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 60% (by volume) of
premiums written by IPCRe each year are for contracts which have effective dates
in January, about 16% in April, about 17% 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.
The volatility of property catastrophe reinsurance has been clearly
demonstrated by events in 1997 and 1998. In 1997, there were very few events of
a catastrophic nature, resulting in few claims being made on IPCRe. Conversely,
1998 was a year of many catastrophic events in many parts of the world,
including Hurricane Georges, (estimated insured losses in excess of U.S.$ 4
billion), the tornadoes and hailstorm which struck Minnesota and five nearby
states ("Cat.#51" -- $1.4 billion) and Typhoon Vicki which struck Japan ($2.0
billion).
Over the last few years, the supply of reinsurance in absence of major
catastrophe has resulted in downward pressure on pricing. For the following
January renewal cycles, premium rates declined by an average of 15% in 1997, 15%
in 1998 and 10% in 1999. If and while reinsurance capacity does not diminish,
the Company expects further downward pressure on rates for property catastrophe
reinsurance during the remainder of 1999.
RESULTS OF OPERATIONS
Years Ended December 31, 1998, 1997 and 1996
In the twelve months ended December 31, 1998, IPCRe wrote premiums of
$111.3 million, compared to $117.1 million and $111.6 million written in the
years ended December 31, 1997 and 1996, respectively. These
35
<PAGE> 2
writings included reinstatement premiums of $6.3 million, $2.5 million and $4.9
million, respectively. In 1998, IPCRe had increased participation and additional
business from existing clients, and selectively wrote business for new clients.
Also in 1998, reinstatement premiums from increased claim activity helped boost
writings. These increases were more than offset by rate reductions in the
period, generally in the range of 15%, but as high as 20% in some cases, which
reflected general market conditions. In addition, IPCRe decided not to renew
some contracts, and premium writings were also affected by declining exchange
rates in Pacific Rim countries. In 1997, new business included $4.1 million of
written premiums from the California Earthquake Authority ("CEA") for a 24 month
non-cancellable policy.
Premiums earned were $120.1 million, $112.5 million and $113.6 million in
the years ended December 31, 1998, 1997 and 1996, respectively, representing
changes of 6.8% and (0.1%). Earned premiums changed disproportionately to
written premiums, primarily because some programs were written in 1997 which had
policy periods greater than twelve months (including the CEA). Excluding
reinstatement premiums, which are fully earned when written, 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, and by a further 3.4% to
$113.8 million in 1998.
Net investment income for 1998 increased by 0.6% from $29.9 million in the
year ended December 31, 1997 to $30.1 million. During 1997, net investment
income had increased 3.5% from $28.9 million from the year ended December 31,
1996, to $29.9 million. These amounts are net of investment expenses, primarily
investment management and custodial fees payable to subsidiaries of American
International Group, Inc. ("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, $1.4 million and $1.3 million in
the years ended December 31, 1998, 1997 and 1996, respectively. The increases 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 and a further 9.2% to $569.4 million during 1998. These increases were
offset in part by lower average yields in the years ended December 31, 1998 and
1997, respectively of approximately 5.3% and 5.7%, compared to the average yield
of 6.2% in the year ended December 31, 1996. The reduction in average yields was
partially due to the effect of changes made to the structure of the Company's
investment portfolio in June, 1997. These changes have been employed to effect
the reduction of volatility in the value of the portfolio. At December 31, 1998
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 $7.0
million gain for the year ended December 31, 1998, compared to 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 $30.9 million at December 31,
1998, compared to $9.5 million at December 31, 1997, and 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 and 1998.
Losses and loss adjustment expenses incurred were $61.5 million, $14.7
million and $32.7 million in the years ended December 31, 1998, 1997 and 1996,
respectively. There was a significant increase in the level of catastrophic
events during 1998, compared to the low level of losses during 1997, where
catastrophe associated insured losses were the lowest for over ten years in the
United States. During 1998, there were icestorms in the U.S. and Canada in
January, floods in the U.K. in April, various windstorms in the U.S. in May and
June, including Cat.#51, Hurricanes Bonnie, Georges and Mitch, typhoons which
struck both Korea and Japan, a cyclone which struck India, and the failure of
two satellites. Of IPCRe's total incurred losses in 1998, $24.0 million related
to Hurricane Georges. Of the 1996 amount, $12.0 million related to Hurricane
Fran. Other losses for all three years came from various other natural and
man-made disasters, as well as development of claims for current and prior year
marine and aviation business. Loss payments during the years ended December 31,
1998, 1997 and 1996 were $37.4 million, $15.2 million and $28.9 million,
respectively. IPC's loss and loss expense ratio (the ratio of losses and loss
adjustment expenses incurred to premiums earned) for 1998 was 51.2%, compared to
13.1% in 1997 and 28.8% in 1996.
36
<PAGE> 3
Acquisition costs, which are typically a percentage of premiums written,
consist primarily of commissions 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 $17.0 million, $13.5 million and
$11.8 million for the years ended December 31, 1998, 1997 and 1996,
respectively, after deferring those costs related to the unearned portion of
premiums written. These represent increases of 25.8% during 1998, and 13.8%
during 1997, respectively. The increase in 1998 is due, in part, to the increase
in earned premiums. In addition, certain contracts have been written with profit
commission clauses or "no claims" bonuses, which return a portion of the net
underwriting profits generated from those contracts as a commission to the
reinsureds. This has resulted in increases in the level of acquisition costs as
a percentage of premiums earned in both 1997 and 1998.
General and administrative expenses were $10.7 million, $8.7 million and
$9.9 million for the years ended December 31, 1998, 1997 and 1996, respectively.
These figures include fees paid to subsidiaries of AIG for administrative
services, which are based on a percentage of premiums written, and were $3.0
million in 1998, and $2.8 million in each of 1997 and 1996. In 1998, general and
administrative expenses included the upfront cost and ongoing fees in respect of
IPCRe's $300.0 million standby credit facility, increased legal fees in respect
of a one-time project, and increased data processing costs relating to the
implementation of new computer software. In 1996, general and administrative
costs 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). The Company's expense
ratio (the ratio of acquisition costs plus general and administrative expenses,
to earned premiums) was 23.0%, 19.7% and 19.2% for the years ended December 31,
1998, 1997 and 1996, respectively.
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, 1998, 1997 and 1996, respectively:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1998 1997 1996
----- ----- -----
<S> <C> <C> <C>
Loss and loss expense ratio............................ 51.2% 13.1% 28.8%
Expense ratio.......................................... 23.0% 19.7% 19.2%
Combined ratio......................................... 74.2% 32.8% 48.0%
</TABLE>
Net income for the years ended December 31, 1998, 1997 and 1996 was $67.7
million, $100.3 million and $92.6 million, respectively. Excluding the effects
of realized gains and losses arising from the sale of investments, net operating
income was $60.7 million, $103.9 million and $88.7 million for the years ended
December 31, 1998, 1997 and 1996, respectively. Net operating income amounts are
equivalent to $2.29, $3.92 and $3.40 per Common Share, respectively, on a
diluted basis.
LIQUIDITY AND CAPITAL RESOURCES
The Company is a holding company that conducts no reinsurance operations of
its own. During 1997, the Company incorporated a subsidiary in the United
Kingdom called IPC Re Services, Limited, which carries out a representative
function in Europe on behalf of IPCRe. During 1998, IPCRe incorporated a
subsidiary in Ireland called IPCRe Europe Limited, which will underwrite
selected reinsurance business in Europe. The Company's cash flows are limited to
distributions from IPCRe by way of loans or dividends. The dividends that IPCRe
may pay are limited under Bermuda legislation and IPCRe's revolving credit
facility. Under Bermuda law, IPCRe 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, IPCRe is prohibited from declaring or paying any dividend during any
financial year if it would cause IPCRe to fail to meet its solvency margin and
minimum liquidity ratio. The maximum dividend payable by IPCRe in accordance
with the foregoing restrictions as of January 1, 1999 was approximately $141
million.
37
<PAGE> 4
IPCRe has obtained a five-year, $300 million revolving credit facility with
a syndicate of lenders led by the First National Bank of Chicago. The credit
facility limits the amount of dividends that may be paid by IPCRe to the Company
to the lesser of i) IPCRe's aggregate positive net income from March 31, 1998 to
the end of the then-current fiscal quarter over the aggregate amount of all
dividends and distributions paid during the same period, and ii) IPCRe's
positive consolidated net income for the four fiscal quarters then ending over
the aggregate amount of all dividends and distributions paid during the same
period.
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 $84.8 million, $108.5 million and $90.1 million in the years ended
December 31, 1998, 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,
1998 and 1997 were $37.4 million and $15.2 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. Whenever IPCRe determines that any
existing loss reserves are inadequate, IPCRe 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. IPCRe 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 IPCRe's investments (see "Market Risk Disclosure"
below).
The Company has adopted Statement of Financial Accounting Standard No. 115
to account for its marketable securities. As of December 31, 1998 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, 1998 and 1997,
shareholders' equity had increased to $566.0 million and $528.3 million,
respectively.
At December 31, 1998, 90.0% of IPCRe'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 Moody's
Investors Services Inc. At December 31, 1998 the portfolio had an average life
of 3.1 years and an average modified duration of 2.7 years.
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
38
<PAGE> 5
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. IPC's practice is to exchange
non-U.S. dollar denominated premiums upon receipt. Foreign currency investments
are infrequently made, generally for the purpose of improving overall portfolio
yield. At December 31, 1998, IPC had no forward contract hedges outstanding.
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.
IPCRe 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 IPCRe obtains letters of credit through one commercial bank
pursuant to a $20 million facility. In turn, IPCRe provides the bank security by
giving the bank a lien over certain of IPCRe's investments in an amount not to
exceed the aggregate letters of credit outstanding to a maximum of $20 million.
At December 31, 1998, 1997 and 1996, there were outstanding letters of credit of
$12.4 million, $7.2 million and $11.5 million, respectively.
To further enhance liquidity, in July 1998, IPCRe entered into the
revolving credit facility described above. The facility contains certain
financial covenants, including minimum net worth provisions, restrictions on the
amount of dividends that IPCRe may pay, and certain investment restrictions. No
amounts have been drawn under this facility. Management believes that this
facility, and the relatively high quality of its investment portfolio, provides
sufficient liquidity to meet IPC's cash demands.
Neither the Company nor IPCRe or subsidiaries thereof have any material
commitment for capital expenditures.
MARKET RISK DISCLOSURE
The investment portfolio of IPCRe is exposed to market risk. Market risk is
the risk of loss of fair value resulting from adverse fluctuations in interest
and foreign currency exchange rates and equity prices.
Measuring potential losses in fair values has recently become the focus of
risk management efforts by many companies. Such measurements are performed
through the application of various statistical techniques. One such technique is
Value at Risk ("VaR"). VaR is a summary statistical measure that uses historical
interest and foreign currency exchange rates and equity prices and estimates of
the volatility and correlation of each of these rates and prices to calculate
the maximum loss that could occur within a given statistical confidence level
and time horizon.
IPCRe believes that statistical models alone do not provide a reliable
method of monitoring and controlling market risk. While VaR models are
relatively sophisticated, the quantitative market risk information is limited by
the assumptions and parameters established in creating the related models.
Therefore, such models are tools and do not substitute for the experience or
judgement of senior management.
IPCRe, through AIG Global Investment Corp. (Ireland) Limited, a subsidiary
of AIG, has commissioned a VaR analysis to estimate the maximum potential loss
of fair value for each segment of market risk, prepared by an independent
analyst. In this analysis, financial instrument assets include cash, bonds and
equities. The various sources of market risk addressed in the analysis were
interest rate or yield curve risk, equity or stock risk, and currency or
exchange risk.
39
<PAGE> 6
The independent analyst calculated the VaR with respect to the net fair
value of its financial instrument assets as of December 31, 1998. This
calculation used the variance-covariance (delta-normal) methodology. The
calculation used daily historical interest and foreign currency exchange rates
and equity prices in the two years ended December 31, 1998. The VaR model
estimated the volatility of each of these rates and equity prices and the
correlation among them. For interest rates, the yield curve was constructed
using eleven separate points on the curve to model possible curve movements.
Thus, the VaR measured the sensitivity of the asset portfolio to each of the
aforementioned market risk exposures. These sensitivities were then applied to a
database which contained both historical ranges of movements in all market
factors and the correlations among them. The results were aggregated to provide
a single amount that depicts the maximum potential loss in fair value at a
confidence level of 95 percent for a time period of one month. At December 31,
1998 the VaR of IPCRe's investment portfolio was approximately $12.5 million.
The following table presents the VaR of each component of market risk of
IPCRe's investment portfolio at December 31, 1998:
<TABLE>
<S> <C>
MARKET RISK........................................ $ (000)
Currency........................................... 0
Interest Rate...................................... 5,724
Equity............................................. 10,330
-------
Sum of Risk........................................ 16,054
Diversification Benefit............................ (3,571)
-------
TOTAL NET RISK..................................... 12,483
=======
</TABLE>
IPCRe's balances receivable from reinsurance contracts it has written, are
exposed to the risk of loss of fair value resulting from adverse fluctuations in
foreign currency exchange rates. Management does not believe that the amount of
such currency risk is material to IPCRe's financial position or results of
operations, at December 31, 1998.
YEAR 2000 READINESS DISCLOSURE STATEMENT
Certain computer programs use only the last two digits to refer to a year.
Therefore, these computer programs do not properly recognize the century in
which a particular year occurs and may, for example, treat "00" as being the
year 1900, instead of the year 2000. These computer programs may be used in
software applications or may be embedded in microprocessors used to control the
operation of computer hardware and other devices. If not corrected, many
computer programs could fail or create erroneous results. This problem is
commonly known as the "Y2K", "Millennium Bug" and/or "Year 2000" issue and
systems and equipment which use computer programs and microprocessors that do
not have this problem are generally referred to as being "compliant".
IPC's Critical Systems
IPC believes that all of its critical systems, including its hardware and
software, are currently compliant. IPC's critical systems include those used in
assessing underwriting risk, recording policy details, processing related
premium and claims transactions and communicating with brokers who produce the
business. Following minor remedial work to some computer hardware and the
upgrading of some software, a test programme was undertaken on these systems and
the results were completed by September 30, 1998 and subjected to audit by
technology consultants provided through American International Group, Inc.
("AIG"). Accordingly, while there can be no assurance that these systems will be
free from failure, IPC believes that any failure will not result in material
adverse impact on IPC's results of operations or financial condition.
40
<PAGE> 7
Third Party Dependencies
IPC's Y2K compliance programme also includes a review of third party
dependencies, which includes non-information technology areas, including office
equipment, power supply, telecommunications and building infrastructure.
Administrative Services
IPC's day-to-day administrative services, including the provision of
non-information technology, are performed by American International Company,
Limited ("AICL"), a wholly-owned subsidiary of AIG, pursuant to an
administrative services agreement (the "Administrative Services Agreement").
Services and facilities provided pursuant to the Administrative Services
Agreement include legal and accounting services, office space in Bermuda, the
use of office equipment, electronic data services and other services required by
IPC in the ordinary course of business. IPC and AICL have worked jointly to
ensure compliance of systems used in the processing of IPC's business and this
work was successfully completed by September 30, 1998.
In addition, AICL is monitoring progress towards compliance by significant
third parties from whom IPC receives non-information technology services, such
as the suppliers of electric power and local and long-distance telephone
services. In the event that such third parties are unable to achieve compliance,
AICL has developed contingency plans, for example, independent power supply,
which are designed to mitigate the effects of a failure on the part of such
third parties to supply services.
Accordingly, while there can be no assurance that these systems will be
free from failure, IPC believes that any failure will not result in material
adverse impact on IPC's results of operations or financial condition.
Other Third Parties
As of December 31, 1998, IPC has contacted other third parties, such as
brokers and depository institutions, with whom IPC currently has a relationship
which, in IPC's judgement, involves material Y2K compliance concerns, in order
to establish their degree of compliance and/or their plans to become compliant
prior to December 31, 1999. Among other things, IPC's brokers collect, and
maintain records of, premiums and claims and, as such, make payments into IPC's
depository institutions. Prior to June 30, 1999, IPC intends to develop
contingency plans to mitigate the effects of the failure of such third party
systems on IPC's business operations. There can be no assurance that the systems
of such third parties will be timely converted, that IPC will be able to develop
satisfactory contingency plans or that failure of such systems in any event
would not have a material adverse effect on IPC's results of operations or
financial condition.
Costs
The costs incurred by IPC up to December 31, 1998 in effecting Y2K
compliance of its own systems are nominal and it is not anticipated that the
future costs of IPC's Year 2000 evaluation and compliance implementation will be
material. In addition, AICL is responsible for the cost of compliance of the
administrative services it supplies to IPC. Therefore, assuming compliance has
been achieved as aforesaid, it is not anticipated that the total costs incurred
in relation to the Y2K issue will have a material adverse effect on IPC's
results of operations.
Policy Risks
The extent of worldwide property damage (whether insured or uninsured)
which could result from failure or malfunction of non-compliant systems is not
known. Many of the insurance markets around the world in which IPC's clients
operate have not established a clear position on whether to include or exclude
Y2K risk in policies available in those markets. Although Y2K exclusion clauses
have been produced by some individual companies and some insurance and
reinsurance industry associations, to date they have not been applied in a
uniform manner. The Y2K issue is unique. Therefore, notwithstanding the presence
or absence of an exclusion of the Y2K risk in insurance or reinsurance policies,
in the general absence of legal precedent, courts may
41
<PAGE> 8
determine, on a case-by-case basis, that coverage exists for property damage
resulting from failure or malfunction of non-compliant systems.
IPCRe is principally an excess of loss property catastrophe reinsurer.
Currently, IPCRe's reinsurance policies do not specifically include Y2K as a
covered event and IPCRe currently does not intend to provide specific coverage
for losses arising from Y2K events. However, in the future, it is possible that
market forces could oblige IPCRe to provide such coverage, or that certain of
IPCRe's policies could be held to cover such losses. IPC carefully monitors the
terms of policy renewals with respect to the extent that they oblige IPC to
provide such coverage and, with respect to the January 1, 1999 renewals,
declined certain business. If, regardless of IPCRe's intent not to provide
specific coverage for losses arising from Y2K events and IPCRe's actions to
avoid obligations to provide such coverage, if IPCRe is obliged to provide such
coverage or its policies are held to cover such losses, there can be no
assurance that such losses would not have a material adverse effect on IPCRe's
future results of operations or financial condition, commencing in the year
2000.
EFFECTS OF INFLATION
IPCRe 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, IPCRe
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 IPCRe cannot be accurately known until claims are
ultimately settled.
42
<PAGE> 9
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and shareholders of
IPC Holdings, Ltd.:
We have audited the accompanying consolidated balance sheets of IPC
Holdings, Ltd. (a Bermuda Company) and subsidiaries as of December 31, 1998 and
1997, and the related consolidated statements of income, shareholders' equity
and cash flows for each of the three years in the period ended December 31,
1998. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of IPC
Holdings, Ltd. and subsidiaries as of December 31, 1998 and 1997 and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1998 in conformity with accounting principles
generally accepted in the United States.
ARTHUR ANDERSEN & CO.
Hamilton, Bermuda
February 5, 1999
43
<PAGE> 10
IPC HOLDINGS, LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1998 AND 1997
(EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS EXCEPT FOR PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
ASSETS:
Fixed maturity investments:
Available for sale, at fair market value (Amortized cost
1998: $478,806; 1997: $439,517)........................ $484,863 $442,328
Equity investments, available for sale (Cost 1998: $69,268;
1997: $80,020)............................................ 94,152 86,685
Cash and cash equivalents................................... 20,966 9,746
Reinsurance balances receivable............................. 20,747 27,723
Funds held by reinsured companies........................... 2,434 12
Accrued investment income................................... 14,752 14,374
Deferred acquisition costs.................................. 2,048 2,593
Prepaid expenses and other assets........................... 3,129 1,558
-------- --------
Total assets...................................... $643,091 $585,019
======== ========
LIABILITIES:
Reserve for losses and loss adjustment expenses............. $ 52,226 $ 27,590
Unearned premiums........................................... 17,602 26,462
Accounts payable and accrued liabilities.................... 7,311 2,674
-------- --------
Total liabilities................................. 77,139 56,726
-------- --------
SHAREHOLDERS' EQUITY:
Share capital -- 1998: 25,033,902 shares outstanding, par
value $0.01
1997: 25,017,603 shares outstanding, par
value $0.01................................................. 250 250
Additional paid-in capital.................................. 299,833 299,533
Retained earnings........................................... 234,928 219,034
Accumulated other comprehensive income...................... 30,941 9,476
-------- --------
Total shareholders' equity........................ 565,952 528,293
-------- --------
Total liabilities and shareholders' equity........ $643,091 $585,019
======== ========
</TABLE>
See accompanying notes to consolidated financial statements
44
<PAGE> 11
IPC HOLDINGS, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR EACH OF THE YEARS IN THE THREE YEAR PERIOD ENDED DECEMBER 31, 1998
(EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS EXCEPT FOR PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
REVENUES:
Premiums written....................................... $ 111,265 $ 117,050 $ 111,569
Change in unearned premiums............................ 8,860 (4,564) 2,073
---------- ---------- ----------
Premiums earned........................................ 120,125 112,486 113,642
Net investment income.................................. 30,053 29,883 28,883
Realized gains (losses), net on investments............ 7,014 (3,616) 3,871
---------- ---------- ----------
Total revenues............................... 157,192 138,753 146,396
---------- ---------- ----------
EXPENSES:
Losses and loss adjustment expenses.................... 61,459 14,708 32,732
Acquisition costs...................................... 16,968 13,487 11,849
General and administrative expenses.................... 10,680 8,676 9,934
Exchange loss (gain), net.............................. 371 1,562 (684)
---------- ---------- ----------
Total expenses............................... 89,478 38,433 53,831
---------- ---------- ----------
NET INCOME............................................. $ 67,714 $ 100,320 $ 92,565
========== ========== ==========
Basic net income per common share...................... $2.71 $4.01 $3.70
Diluted net income per common share.................... $2.55 $3.79 $3.55
Weighted average number of common shares -- basic...... 25,031,211 25,010,060 25,000,000
Weighted average number of common shares -- diluted.... 26,547,062 26,492,401 26,080,744
</TABLE>
See accompanying notes to consolidated financial statements
45
<PAGE> 12
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, 1998
(EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS EXCEPT FOR PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
COMMON SHARES PAR VALUE $0.01
Balance, beginning of year............................... $ 250 $ 250 $ 200
Effect of the Exchange: 1,000 shares to 25,000,000
shares................................................ -- -- 50
Additional shares issued................................. -- -- --
-------- -------- --------
Balance, end of year..................................... $ 250 $ 250 $ 250
-------- -------- --------
ADDITIONAL PAID-IN CAPITAL:
Balance, beginning of year............................... $299,533 $299,267 $299,317
Effect of the Exchange: 1,000 shares to 25,000,000
shares................................................ -- -- (50)
Additional paid-in capital on shares issued.............. 300 266 --
-------- -------- --------
Balance, end of year..................................... $299,833 $299,533 $299,267
-------- -------- --------
RETAINED EARNINGS:
Balance, beginning of year............................... $219,034 $200,516 $130,264
Net income............................................... 67,714 100,320 92,565
Dividends paid........................................... (51,820) (81,802) (22,313)
-------- -------- --------
Balance, end of year..................................... $234,928 $219,034 $200,516
-------- -------- --------
ACCUMULATED OTHER COMPREHENSIVE INCOME:
Balance, beginning of year............................... $ 9,476 $ (3,898) $ 4,511
Change in comprehensive income........................... 21,465 13,374 (8,409)
-------- -------- --------
Balance, end of year..................................... $ 30,941 $ 9,476 $ (3,898)
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements
46
<PAGE> 13
IPC HOLDINGS, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR EACH OF THE YEARS IN THE THREE YEAR PERIOD ENDED DECEMBER 31, 1998
(EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS)
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.............................................. $ 67,714 $ 100,320 $ 92,565
Adjustments to reconcile net income to cash provided by
operating activities:
Amortization of investment premium, net............... 542 1,787 3,485
Realized (gains) losses, net on investments........... (7,014) 3,616 (3,871)
Changes in, net:
Reinsurance balances receivable.................... 6,976 (2,036) (236)
Funds held by reinsured companies.................. (2,422) (12) --
Accrued investment income.......................... (378) 641 (2,663)
Deferred acquisition costs......................... 545 (239) 87
Prepaid expenses and other assets.................. (1,571) (379) (257)
Reserve for losses and loss adjustment expenses.... 24,636 (893) 3,766
Unearned premiums.................................. (8,860) 4,564 (2,073)
Accounts payable and accrued liabilities........... 4,637 1,109 (703)
--------- --------- ---------
84,805 108,478 90,100
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of equity investments......................... (3,633) (80,228) --
Proceeds from sales of equity investments............... 17,804 239 --
Purchases of fixed maturity investments:
Available for sale.................................... (335,087) (372,612) (350,757)
Held to maturity...................................... -- (17,815) (34,006)
Proceeds from sales of fixed maturity investments:
Available for sale.................................... 264,325 363,939 309,664
Held to maturity...................................... -- -- --
Proceeds from maturities of fixed maturity investments:
Available for sale.................................... 34,526 41,734 --
Held to maturity...................................... -- 23,750 13,000
--------- --------- ---------
(22,065) (40,993) (62,099)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Additional share capital................................ 300 266 --
Cash dividends paid to shareholders..................... (51,820) (81,802) (22,313)
--------- --------- ---------
(51,520) (81,536) (22,313)
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents.... 11,220 (14,051) 5,688
Cash and cash equivalents, beginning of year............ 9,746 23,797 18,109
--------- --------- ---------
Cash and cash equivalents, end of year.................. $ 20,966 $ 9,746 $ 23,797
========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements
47
<PAGE> 14
IPC HOLDINGS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND DECEMBER 31, 1997
(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, IPCRe Limited (formerly known as
International Property Catastrophe Reinsurance Company, Ltd. ("IPCRe"), 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. IPCRe's loss experience will generally include infrequent events of
great severity. IPCRe's clients include many of the leading insurance companies
in the world. Approximately 46% of premiums written in 1998 related to U.S.
risks. The balance of IPCRe'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.
On September 10, 1998, IPCRe incorporated a subsidiary in Ireland, named
IPCRe Europe Limited. This company underwrites selected reinsurance business in
Europe.
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, IPCRe, 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
48
<PAGE> 15
IPC HOLDINGS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
provided. Unearned premiums represent the portion of premiums written which is
applicable to the unexpired terms of the policies in force.
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 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.
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.
49
<PAGE> 16
IPC HOLDINGS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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, January 2, 1997 and January 2, 1998, 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) Comprehensive income:
In June, 1997 the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 130, "Comprehensive Income" ("SFAS 130"),
which is effective for financial statements issued for periods beginning after
December 15, 1997. SFAS 130 requires the disclosure of all components of
comprehensive income, including net income and other comprehensive income. For
the three years ended December 31, 1998, 1997, and 1996 respectively,
comprehensive income is calculated as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1998 1997 1996
------- -------- -------
<S> <C> <C> <C>
Net income................................... $67,714 $100,320 $92,565
Other comprehensive income
Holding gains/(losses), net on investments
during period........................... 28,479 9,758 (4,538)
Reclassification adjustment for
(gains)/losses included in net income... (7,014) 3,616 (3,871)
------- -------- -------
21,465 13,374 (8,409)
------- -------- -------
Comprehensive income......................... $89,179 $113,694 $84,156
======= ======== =======
</TABLE>
j) Accounting For Derivatives:
The Financial Accounting Standards Board has also recently issued Statement
of Financial Accounting Standard No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"), which is effective for periods beginning
after June 15, 1999. Management does not expect the impact of the adoption of
SFAS 133 on the Company's financial position or results of operations to be
material.
k) Deposit Accounting:
In October, 1998 the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position 98-7, "Accounting for Insurance and
Reinsurance Contracts that do not Transfer Insurance Risk", which is effective
for fiscal years beginning after June 15, 1999. IPCRe does not currently write
or cede business which would be affected by this Statement.
50
<PAGE> 17
IPC HOLDINGS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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, 1998 and December 31, 1997 are as follows:
<TABLE>
<CAPTION>
COST OR GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
--------- ---------- ---------- --------
<S> <C> <C> <C> <C>
DECEMBER 31, 1998
U.S. Government and government
agencies.............................. $110,946 $ 730 $ (466) $111,210
Other governments....................... 123,446 1,851 (57) 125,240
Corporate............................... 197,316 3,328 -- 200,644
Supranational entities.................. 47,098 671 -- 47,769
-------- ------- ------- --------
$478,806 $ 6,580 $ (523) $484,863
======== ======= ======= ========
Equity investments...................... $ 69,268 $28,196 $(3,312) $ 94,152
======== ======= ======= ========
DECEMBER 31, 1997
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>
b) The contractual maturity dates of fixed maturity investments available
for sale as of December 31, 1998 are as follows:
<TABLE>
<CAPTION>
AMORTIZED MARKET
COST VALUE
--------- --------
<S> <C> <C>
Due in one year or less................................ $ 79,022 $ 79,473
Due after one year through five years.................. 339,320 344,160
Due after five years through ten years................. 60,464 61,230
-------- --------
$478,806 $484,863
======== ========
</TABLE>
Expected maturities may differ from contractual maturities because borrowers may
have the right to prepay obligations with or without prepayment penalties.
c) Pledged assets:
In the normal course of business IPCRe 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
IPCRe.
Under an agreement effective September 20, 1994, IPCRe provides the bank
security by giving the bank a lien over certain of IPCRe's investments
in an amount not to exceed the aggregate letters of credit outstanding
to a maximum of $20,000. As of December 31, 1998 and 1997 the bank had
outstanding letters of credit of $12,424 and $7,200, respectively.
51
<PAGE> 18
IPC HOLDINGS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
d) Net investment income:
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Interest on fixed maturity investments................ $30,256 $30,816 $32,216
Interest on cash and cash equivalents................. 781 1,860 1,409
Net amortization of premium on investments............ (542) (1,787) (3,485)
------- ------- -------
30,495 30,889 30,140
Net dividend income from equities..................... 980 428 --
Less: investment expenses............................. (1,422) (1,434) (1,257)
------- ------- -------
Net investment income................................. $30,053 $29,883 $28,883
======= ======= =======
</TABLE>
e) Proceeds from sales of available for sale securities for the years ended
December 31, 1998, 1997 and 1996 were $282,129, $364,178 and $309,664,
respectively. Components of realized gains and losses are summarized in the
following table:
<TABLE>
<CAPTION>
1998 1997 1996
------ ------- -------
<S> <C> <C> <C>
Fixed maturity investments:
Gross realized gains...................................... $4,002 $ 277 $ 6,078
Gross realized losses..................................... (407) (3,925) (2,207)
------ ------- -------
Net realized gains/(losses)............................... 3,595 (3,648) 3,871
------ ------- -------
Equity investments:
Gross realized gains...................................... 3,753 41 --
Gross realized losses..................................... (334) (9) --
------ ------- -------
Net realized gains/(losses)............................... 3,419 32 --
------ ------- -------
Total net realized gains/(losses)........................... $7,014 $(3,616) $ 3,871
====== ======= =======
</TABLE>
Changes in net unrealized gains (losses) were $21,465, $13,374, and $(8,409),
respectively, for the years ended December 31, 1998, 1997 and 1996.
f) 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,
1998 1997
------------ ------------
<S> <C> <C>
Cash and cash equivalents.......................... 4.2% 2.2%
U.S. Government and government agencies............ 22.0% 7.3%
AAA................................................ 21.6% 44.6%
AA................................................. 42.2% 38.1%
A.................................................. 10.0% 7.8%
----- -----
100.0% 100.0%
===== =====
</TABLE>
The primary rating source is Moody's Investors Services Inc. ("Moody's"). When
no Moody's rating is available, Standard & Poor's Corporation ("S & P") ratings
are used.
g) 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.
52
<PAGE> 19
IPC HOLDINGS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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, 1998 and December 31, 1997:
<TABLE>
<CAPTION>
DECEMBER 31, 1998 DECEMBER 31, 1997
-------------------- --------------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Cash and cash equivalents............... $ 20,966 $ 20,966 $ 9,746 $ 9,746
Fixed maturity investments.............. 484,863 484,863 442,328 442,328
Equity investments...................... 94,152 94,152 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.
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.
The authorized share capital of the Company as of December 31, 1998 and
December 31, 1997 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, 1998
Voting common shares, par value U.S. $0.01
each......................................... 75,000,000 25,033,932 $250 $299,833
Preferred shares, par value U.S. $0.01 each.... 25,000,000 -- -- --
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>
There are various restrictions on the ability of certain shareholders to
dispose of their shares.
In March, June, September and December 1998, 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 March 1998, the Company paid a
special dividend of $0.80 per share to holders of its common 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.
53
<PAGE> 20
IPC HOLDINGS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
On January 2, 1998 the Company granted options to acquire 51,500 shares to
officers and management employees at an exercise price of $32.1875 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, 1998, 1997
and 1996.
A summary of the status of the Company's stock option plan as of December
31, 1998, 1997 and 1996 and changes during the years then ended is presented in
the table and narrative below:
<TABLE>
<CAPTION>
1998 1997 1996
--------------------- --------------------- ---------------------
NUMBER OF EXERCISE NUMBER OF EXERCISE NUMBER OF EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
--------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding, beginning of
year.......................... 90,767 $ 18.87 80,624 $16.54 -- --
Granted......................... 51,500 $32.1875 38,500 $22.50 85,249 $16.54
Exercised....................... 16,329 $ 18.36 20,153 $16.54 -- --
Forfeited....................... -- 8,204 $18.72 4,625 $16.54
Expired......................... -- -- -- -- --
Outstanding, end of year........ 125,938 $ 24.38 90,767 $18.87 80,624 $16.54
Exercisable, end of year........ 10,969 $ 18.65 -- -- -- --
Weighted average fair value of
options granted (per share)... $ 11.73 $ 7.01 $ 7.16
</TABLE>
The remaining weighted average contractual life of the options outstanding
as of December 31, 1998 is 8.11 years. The fair value of options granted on
January 2, 1998 was estimated using the Black-Scholes option pricing model,
using an assumed risk-free rate of interest of 5.63%; an expected dividend yield
of 3.945%; an expected life of 7 years; and an expected volatility of 45%.
54
<PAGE> 21
IPC HOLDINGS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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, 1998 DECEMBER 31, 1997 DECEMBER 31, 1996
-------------------------------- --------------------------------- --------------------------------
AMOUNT AMOUNT AMOUNT
INCOME SHARES PER SHARE INCOME SHARES PER SHARE INCOME SHARES PER SHARE
------- ---------- --------- -------- ---------- --------- ------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Basic EPS............ $67,714 25,031,211 $2.71 $100,320 25,010,060 $4.01 $92,565 25,000,000 $3.70
Effect of Dilutive
Options............ -- 1,515,851 -- 1,482,341 -- 1,080,744
Diluted EPS.......... $67,714 26,547,062 $2.55 $100,320 26,492,401 $3.79 $92,565 26,080,744 $3.55
</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 IPCRe 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. 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. In addition, IPCRe Europe Limited is party to an agreement with AIG
Insurance Management Services (Europe) Limited ("AIMS"), an affiliate of AIG,
under which AIMS provides administrative services for an annual fee of
approximately $38 per annum.
b) Investment management services:
IPCRe 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. This agreement is subject to termination by
either party on 30 days' written notice. IPCRe 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.
55
<PAGE> 22
IPC HOLDINGS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
c) Investment custodian services:
IPCRe is party to an agreement with AIG Trust Services Limited ("AIGTS"),
an affiliate of AIG, under which AIGTS provides investment custodian services.
IPCRe has agreed to pay fees of 0.04% per annum based on the month end market
value of investments held under custody, plus reimbursement of fees and out-
of-pocket expenses. These fees are included in net investment income in the
accompanying consolidated statements of income. This agreement may be terminated
by either party upon 90 days' written notice.
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, 1998................ $3,012 $1,075 $347
Year ended December 31, 1997................ 2,812 1,121 313
Year ended December 31, 1996................ 2,816 1,017 240
</TABLE>
The following amounts were payable as of the balance sheet date to
affiliates of AIG:
<TABLE>
<S> <C>
December 31, 1998................................... $1,689
December 31, 1997................................... 758
</TABLE>
d) Related Party Business:
IPCRe assumed premiums from companies affiliated with two shareholders of
the Company. Premiums assumed were $9,858, $11,359 and $9,628, respectively, for
the years ended December 31, 1998, 1997 and 1996. IPCRe also assumed premiums
from its subsidiary, IPCRe Europe Limited following its incorporation in
September, 1998. Premiums assumed were $394 for the year ended December 31,
1998. In addition, IPCRe assumed premiums through brokers related to
shareholders of the Company totaling $6,080, $7,903 and $19,429, respectively,
for the years ended December 31, 1998, 1997 and 1996. Brokerage fees and
commissions incurred in respect of this business were approximately $601, $790
and $1,943, respectively, for the years ended December 31, 1998, 1997 and 1996.
All such transactions were undertaken on normal commercial terms. Reinsurance
premiums receivable due from related parties as of December 31, 1998 and
December 31, 1997 were $3,653 and $4,418, respectively.
e)A director and executive officer of various AIG subsidiaries and affiliates
serves as the Chairman of the Board of Directors of IPC. In addition, the
managing director of AIMS serves as a director of IPCRe Europe Limited.
56
<PAGE> 23
IPC HOLDINGS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. RESERVE FOR LOSSES AND LOSS ADJUSTMENT EXPENSES:
Activity in the reserve for losses and loss adjustment expenses is
summarized as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Balance, beginning of year.................... $27,590 $28,483 $24,717
Losses incurred related to:
Current year................................ 55,815 15,368 32,192
Prior years................................. 5,644 (660) 540
------- ------- -------
Total incurred...................... 61,459 14,708 32,732
------- ------- -------
Paid losses related to:
Current year................................ (22,256) (1,658) (15,670)
Prior years................................. (15,100) (13,531) (13,274)
------- ------- -------
Total paid losses................... (37,356) (15,189) (28,944)
------- ------- -------
Effect of foreign exchange movements.......... 533 (412) (22)
------- ------- -------
Balance, end of year.......................... $52,226 $27,590 $28,483
======= ======= =======
</TABLE>
Losses incurred in the year ended December 31, 1998 in respect of prior
years included late reported losses in respect of a number of per risk treaties,
including events in Brazil and Malaysia, claim development for Marine business,
offset by some reductions to previously reported claims from some per risk
treaties.
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.
An independent firm of actuaries has reviewed the Company's loss reserves.
57
<PAGE> 24
IPC HOLDINGS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. WRITTEN PREMIUM BY GEOGRAPHIC REGION:
Financial information relating to reinsurance premiums written by
geographic region is as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1998 DECEMBER 31, 1997 DECEMBER 31, 1996
------------------ ------------------ ------------------
PREMIUMS PREMIUMS PREMIUMS
WRITTEN % WRITTEN % WRITTEN %
--------- ------ --------- ------ --------- ------
<S> <C> <C> <C> <C> <C> <C>
Geographic Area(1)
United States.................. $ 50,796 45.7% $ 54,200 46.3% $ 51,641 46.3%
Worldwide(2)................... 14,050 12.6% 16,141 13.8% 20,044 18.0%
Worldwide (excluding the
U.S.)(3).................... 3,513 3.2% 2,497 2.1% 2,429 2.2%
United Kingdom................. 13,533 12.2% 12,392 10.6% 11,403 10.2%
Europe (excluding the U.K.).... 10,022 9.0% 11,232 9.6% 6,523 5.8%
Japan.......................... 4,139 3.7% 2,794 2.4% 5,088 4.6%
Australia/New Zealand.......... 8,589 7.7% 9,433 8.1% 6,308 5.6%
Other.......................... 6,623 5.9% 8,361 7.1% 8,133 7.3%
-------- ----- -------- ----- -------- -----
$111,265 100.0% $117,050 100.0% $111,569 100.0%
======== ===== ======== ===== ======== =====
</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, 1998 and December 31, 1997, IPC held U.S. Treasury notes
which represented approximately 13% and 6%, 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 25%, 22% and 19%, respectively,
of total premiums written for the years ended December 31, 1998, 1997 and 1996.
Five brokers accounted for approximately 71%, 68% and 48%, respectively, of
total premiums written for the years ended December 31, 1998, 1997 and 1996.
12. COMMITMENTS AND CONTINGENCIES:
Since July 1995, IPCRe has entered into forward foreign exchange contracts
for purposes of hedging its investment portfolio. 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. 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, 1998, 1997 and 1996 were $0, $849 and $597,
respectively, and are included in realized gains (losses), net in the
accompanying consolidated statements of income. As of December 31, 1998 IPCRe
had no forward foreign exchange contracts outstanding. IPCRe 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.
58
<PAGE> 25
IPC HOLDINGS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
13. CREDIT FACILITY:
In July 1998, IPCRe entered into a five year, revolving credit agreement
with a syndicate of financial institutions in the amount of $300,000. The
proceeds of this facility can be used for general corporate purposes. This
facility has certain financial covenants, including minimum net worth
provisions, restrictions on the amount of dividends that IPCRe may pay to net
income of the previous twelve months, and certain investment restrictions. At
December 31, 1998 no amounts have been drawn under this facility, and IPCRe was
in compliance with all covenants under this facility
14. STATUTORY CAPITAL AND SURPLUS:
IPCRe 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 amended in May, 1995,
IPCRe 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, 1998 DECEMBER 31, 1997
----------------- -----------------
<S> <C> <C>
Actual statutory capital and surplus....... $563,122 $525,841
Minimum statutory capital and surplus...... $100,000 $100,000
</TABLE>
IPCRe's statutory net income for the years ended December 31, 1998, 1997
and 1996, was $69,083, $101,504 and $95,828, respectively.
The Act limits the maximum amount of annual dividends or distributions paid
by IPCRe 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 IPCRe to the Company at January 1, 1999
without such notification is approximately $140,780.
15. 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. In addition, IPC has entered into individual
pension arrangements with a number of specific employees. Pursuant to these
plans, IPC contributes an amount equal to 5% of each participant's salary. IPC's
contributions under the various plans are fully funded, and amounted to
approximately $98, $80 and $183 in 1998, 1997 and 1996, respectively.
16. 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
IPCRe 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.
IPC Re Services Limited is a tax-paying entity subject to the jurisdiction
of the Government of the United Kingdom. The amount of taxes incurred for 1998
and 1997 is not material to the consolidated financial statements.
IPCRe Europe Limited, upon commencement of operations, is a tax-paying
entity subject to the jurisdiction of the Government of Ireland. The amount of
taxes incurred for 1998 is not material to the consolidated financial
statements.
59
<PAGE> 26
IPC HOLDINGS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
17. EXCHANGE GAINS & LOSSES:
The exchange gain or 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.
18. UNAUDITED QUARTERLY FINANCIAL DATA:
<TABLE>
<CAPTION>
QUARTER QUARTER QUARTER QUARTER
ENDED ENDED ENDED ENDED
MARCH 31, JUNE 30, SEPT. 30, DEC. 31,
1998 1998 1998 1998
--------- -------- --------- --------
<S> <C> <C> <C> <C>
Premiums written................................... $72,173 $18,398 $15,671 $ 5,023
Premiums earned.................................... 28,944 31,264 29,427 30,490
Net investment income.............................. 7,262 7,450 7,726 7,615
Realized gains (losses), net....................... 2,604 1,084 342 2,984
Losses and loss adjustment expenses................ 4,125 10,332 18,922 28,080
Net income......................................... 28,792 22,156 11,061 5,705
Net income per common share -- basic............... $ 1.15 $ 0.89 $ 0.44 $ 0.23
Net income per common share -- diluted............. $ 1.08 $ 0.83 $ 0.42 $ 0.22
</TABLE>
<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>
60
<PAGE> 27
IPC HOLDINGS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
19. SUBSIDIARY FINANCIAL DATA:
Summarized consolidated financial data of the subsidiary, IPCRe, is as
follows:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, 1998 DECEMBER 31, 1997 DECEMBER 31, 1996
----------------- ----------------- -----------------
<S> <C> <C> <C>
Written premiums.................. $111,265 $117,050 $111,569
Premiums earned................... 120,125 112,486 113,642
Investment income................. 30,038 29,858 28,833
Realized gain (loss), net......... 7,014 (3,616) 3,871
Incurred losses................... (61,459) (14,708) (32,732)
Acquisition costs................. (16,968) (13,487) (11,849)
General & admin. expenses and
exchange gain (loss), net....... (10,220) (8,790) (6,024)
-------- -------- --------
Net Income........................ $ 68,530 $101,743 $ 95,741
======== ======== ========
Loss ratio........................ 51.2% 13.1% 28.8%
Expense ratio (excluding exchange
gain (loss), net)............... 22.3% 18.4% 16.3%
Combined ratio.................... 73.5% 31.5% 45.1%
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1998 DECEMBER 31, 1997
----------------- -----------------
<S> <C> <C> <C>
Cash & investments................ $599,872 $538,287
Reinsurance balances receivable... 20,746 27,723
Other assets...................... 23,356 19,751
-------- --------
Total Assets...................... $643,974 $585,761
======== ========
Unearned premiums................. $ 17,602 $ 26,462
Reserves for losses............... 52,226 27,590
Other liabilities................. 7,438 2,546
-------- --------
Total Liabilities................. 77,266 56,598
-------- --------
Common stock...................... 250,000 250,000
Additional paid-in capital........ 49,500 49,500
Retained earnings................. 236,267 220,187
Accumulated other comprehensive
income.......................... 30,941 9,476
-------- --------
Total Liabilities and
Shareholder's Equity............ $643,974 $585,761
======== ========
</TABLE>
61
<PAGE> 1
EXHIBIT 21.1
SUBSIDIARIES OF THE REGISTRANT
IPCRe Limited
IPC Re Services Limited
62
<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 5, 1999,
incorporated by reference in this Annual Report on Form 10-K.
ARTHUR ANDERSEN & CO.
Hamilton, Bermuda
March 19, 1999
63
<TABLE> <S> <C>
<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, 1998 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FINANCIAL STATEMENTS (AND THE
NOTES THERETO) CONTAINED IN SUCH REPORT.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<DEBT-HELD-FOR-SALE> 484,863
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 94,152
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 579,015
<CASH> 20,966
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 2,048
<TOTAL-ASSETS> 643,091
<POLICY-LOSSES> 52,226
<UNEARNED-PREMIUMS> 17,602
<POLICY-OTHER> 4,274
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 0
0
0
<COMMON> 250
<OTHER-SE> 565,702
<TOTAL-LIABILITY-AND-EQUITY> 643,091
120,125
<INVESTMENT-INCOME> 30,053
<INVESTMENT-GAINS> 7,014
<OTHER-INCOME> 0
<BENEFITS> 61,459
<UNDERWRITING-AMORTIZATION> 16,968
<UNDERWRITING-OTHER> 10,680
<INCOME-PRETAX> 67,714
<INCOME-TAX> 0
<INCOME-CONTINUING> 67,714
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 67,714
<EPS-PRIMARY> 2.71
<EPS-DILUTED> 2.55
<RESERVE-OPEN> 27,590
<PROVISION-CURRENT> 55,815
<PROVISION-PRIOR> (5,644)
<PAYMENTS-CURRENT> (22,256)
<PAYMENTS-PRIOR> (15,100)
<RESERVE-CLOSE> 52,226
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
