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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, 1999
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 20, 2000, was $241,607,633 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 20, 2000, was 25,033,932.
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of the Registrant's 1999 Annual Report to Shareholders to be
mailed to shareholders on or about April 27, 2000 are incorporated by reference
into 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 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 16,
2000 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.................................................. 18
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 & Qualitative Disclosures about Market Risk.... 21
8. Financial Statements and Supplementary Data................. 21
9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 21
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......................................................... 22
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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, but not
limited to 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
IPCRe Services (as defined herein), "we" or "IPC"), (iv) loss of the Company's
non-admitted status in United States jurisdictions; (v) loss of services of any
one of the Company's executive officers; (vi) the passage of federal or state
legislation subjecting the Company to supervision or regulation in the United
States; (vii) challenges by insurance regulators in the United States or the
United Kingdom to our claim of exemption from insurance regulation under current
laws; or (viii) 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
IPC Holdings, through IPCRe and IPCRe's wholly-owned subsidiary, IPCRe
Europe Limited, 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 1999, approximately 86% of gross
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, 2000, we had 299
clients, including many of the leading insurance companies around the world.
Approximately 46% of our clients in 1999 were based in the United States, and
approximately 38% of gross premiums written during 1999 related primarily to
U.S. risks. Our non-U.S. clients and covered risks are located principally in
Europe, Japan and Australia/New Zealand. At December 31, 1999, we had total
shareholders' investment of $505 million and total assets of $641 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 was incorporated and 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 our
formation, subsidiaries of AIG have provided administrative, investment
management and custodial services to us, 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 us that AIG presently intends to continue
its share ownership in the Company for the foreseeable
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future. See "Item 13. Certain Relationships and Related Transactions." For
discussion of the limitation of voting rights of any 10% or more beneficial
owner of Common Shares (including AIG) to less than 10% of total voting rights,
see Amendment No. 1 to the Company's Registration Statement on Form 8-A, dated
February 9, 1996.
On March 13, 1996, IPC Holdings completed an initial public offering in
which 13,521,739 of the 25,000,000 Common shares outstanding, were sold by
existing shareholders. IPC Holdings' Common Shares are included for trading on
the Nasdaq National Market under the ticker symbol "IPCR".
On September 10, 1998, IPCRe incorporated a subsidiary in Ireland, named
IPCRe Europe Limited. Effective October 1, 1998, IPCRe Europe commenced
underwriting selected reinsurance business in Europe. Currently, IPCRe Europe
retrocedes 90% of the business it underwrites to IPCRe. IPCRe Services Limited,
a subsidiary of IPC Holdings, Ltd., was established in the United Kingdom, from
which European marketing efforts are conducted on behalf of IPCRe and IPCRe
Europe. IPCRe Services ceased operations in January, 2000.
BUSINESS STRATEGY
Our principal strategy is to provide property catastrophe excess-of-loss
reinsurance programs to a geographically diverse, worldwide clientele of primary
insurers with whom we maintain long-term relationships. To a lesser extent, we
also seek to provide these clients with other excess-of-loss short-tail property
reinsurance products. To a limited extent, we also provide similar reinsurance
programs and products to reinsurers. We periodically consider 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 our strategy include:
DISCIPLINED RISK MANAGEMENT. We seek to limit and diversify our loss
exposure through six principal mechanisms: (i) writing substantially all of our
premiums on an excess-of-loss basis, which limits our ultimate exposure per
contract and permits us to determine and monitor our 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 our 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, we establish maximum limitations
on reinsurance accepted in defined geographic zones on the basis of, and as a
proportion of, shareholders' investment.
CLIENT SELECTION AND PROFILE. We believe that establishing long-term
relationships with insurers who have sound capital and risk management
strategies is key to creating long-term value for our shareholders. We have
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. We believe our financial stability and growth of capital are essential for
creating and maintaining these long-term relationships.
CAPITAL MANAGEMENT AND SHAREHOLDER RETURNS. We manage our capital relative
to our 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. We seek growth of our
capital to protect it from major catastrophes, to ensure ongoing customer
relationships and to support premium growth opportunities.
DISCIPLINED INVESTMENT MANAGEMENT. In light of the risks of our business,
our 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, we purchased shares of stock in the companies which comprise the
Standard & Poor's ("S & P") 500 Index. The investment in such equities
represented 13.3% of the total investment
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portfolio at December 31, 1999. On that date, 90.7% 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. We provide treaty reinsurance principally to insurers of personal
and commercial property worldwide. Treaty reinsurance is reinsurance of a
specified type or category of risk defined in a contract. As described below, we
write substantially all reinsurance on an excess-of-loss basis. Our property
catastrophe reinsurance coverages, which accounted for 86% of our gross premiums
written during 1999, are generally "all-risk" in nature, subject to various
policy exclusions. Our predominant exposure under such coverages is to property
damage from unpredictable events such as hurricanes, windstorms, hailstorms,
earthquakes and volcanic eruptions, although we are 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, our property catastrophe
reinsurance coverage generally excludes certain risks such as terrorism, war,
pollution, nuclear contamination and radiation.
Because we underwrite property catastrophe reinsurance and have large
aggregate exposures to natural and man-made disasters, we expect that our loss
experience generally will include infrequent events of great severity.
Consequently, the occurrence of losses from catastrophic events is likely to
cause our financial results to be volatile. In addition, because catastrophes
are an inherent risk of our business, a major event or series of events, such as
occurred during 1998 and 1999, can be expected to occur from time to time. In
the future, such events could have a material adverse effect on our financial
condition or results of operations, possibly to the extent of eliminating our
shareholders' investment. 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 we expect that those factors will increase
the severity of catastrophe losses per year in the future.
We currently seek to limit our loss exposure principally by offering
substantially all of our products 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, our policies contain limitations and exclusions from
coverage and choice of forum. There can be no assurance that our 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 our control, and for which historical experience and
probability analysis may not provide sufficient guidance.
EXCESS-OF-LOSS REINSURANCE CONTRACTS. Our policy is to write substantially
all of our business within excess-of-loss reinsurance contracts. Such contracts
provide a defined limit of liability, permitting us to quantify our 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 our ability to manage our loss exposure through geographical zone
limits and the program limits described below. Excess-of-loss contracts also
help us to control our underwriting results by increasing our flexibility to
determine premiums for reinsurance at specific retention levels, independent of
the premiums charged by primary insurers, and based upon our 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, we diversify our 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 out our gross premiums written and number of
contracts written by type of reinsurance.
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YEAR ENDED DECEMBER 31,
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1999 1998
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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.......... $83,445 85.9% 1,858 $ 92,737 83.3% 1,879
Risk excess-of-loss....... 4,989 5.1% 163 5,633 5.1% 219
Marine reinsurance........ 371 0.4% 124 1,298 1.2% 177
Retrocessional
reinsurance............. 3,198 3.3% 87 4,223 3.8% 108
Aviation(1)............... 4,222 4.3% 24 5,912 5.3% 15
Other..................... 937 1.0% 59 1,462 1.3% 63
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Total........... $97,162 100.0% 2,315 $111,265 100.0% 2,461
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(1) In 1999, aviation included two aviation contracts and two satellite
contracts, written on a pro-rata basis. In 1998, aviation included one
aviation contract and two satellite contracts written 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 our policies are limited to losses occurring during the policy term.
RISK EXCESS-OF-LOSS REINSURANCE. We also write 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 we
participate contain a relatively low loss-per-event limit on our liability.
MARINE REINSURANCE. We also write 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
damage to a vessel and/or its contents.
AVIATION REINSURANCE. We also write a small amount of short-tail aviation
reinsurance on proportional and excess-of-loss bases. 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 1999, the majority of
this business was written in two pro rata aviation contracts, where the
underlying insurance is written on an excess-of-loss basis, and two pro rata
satellite contracts.
POLICY FEATURES. Historically, our 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 specifically requested longer periods, in
part to address concerns regarding Y2K risks. A proportion of our policies in
1999 were for terms of fifteen to eighteen months. However, commencing in the
second quarter of 1999, we declined renewals and submissions of new business
which were on a multi-year basis, because of the general inadequacy of market
pricing. In addition, in
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recent years the industry has offered a variety of experienced-based incentives
such as "no claims" bonuses and profit commissions. A proportion of our policies
now include some or all of these incentives.
GEOGRAPHIC DIVERSIFICATION.
Since inception, we have sought to diversify our exposure across geographic
zones around the world in order to obtain the optimum spread of risk. We divide
our markets into geographic zones and limit coverage we are willing to provide
for any risk located in a particular zone, so as to maintain our 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' investment. 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 we utilize retrocessional coverage (i.e.,
IPC purchasing reinsurance, such as our proportional reinsurance facility),
thereby reducing the net aggregate exposure to the maximum limit permitted, or
less. If we were to suffer a net financial loss in any fiscal year, thus
reducing shareholders' investment, the limits per zone would be reduced in the
next year, with the possible effect that we would thereafter reduce existing
business in a zone exceeding such limit.
Currently, we have divided the United States into 8 geographic zones and
European, Japanese and other markets into a total of 26 zones. We designate as
zones geographic areas which, based on historic catastrophe loss experience
reflecting actual catastrophe events and property development patterns, we
believe 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.
We recognize that events may affect more than one zone, and to the extent
we have accepted reinsurance from a ceding insurer with a loss exposure in more
than one zone, we will consider such potential loss in testing its limits in all
such affected zones. For example, the program for a U.S. national carrier
typically will be subject to limits in each U.S. zone. A program with worldwide
exposure will also be subject to limits in U.S. zones or other zones around the
world, as applicable. This results in very substantial "double-counting" of
exposures in determining utilization of an aggregate within a given zone.
Consequently, the total sum insured will be less than the sums of utilized
aggregates for all of the zones.
The following table sets out gross premiums written, number of written
contracts and the percentage of our premiums allocated to the zones of coverage
exposure.
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YEAR ENDED DECEMBER 31,
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1999 1998
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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............ $37,043 38.1% 847 $ 50,796 45.7% 985
Worldwide(2)............. 14,570 15.0% 277 14,050 12.6% 284
Worldwide (excluding the
U.S.)(3)............... 5,739 5.9% 124 3,513 3.2% 69
Europe (including the
U.K.).................. 19,432 20.0% 457 23,555 21.2% 504
Japan.................... 3,492 3.6% 65 4,139 3.7% 75
Australia/New Zealand.... 7,774 8.0% 161 8,589 7.7% 163
Other.................... 9,112 9.4% 384 6,623 5.9% 381
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Total.......... $97,162 100.0% 2,315 $111,265 100.0% 2,461
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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 out our gross aggregate in-force liability
allocated to various zones of coverage exposure at January 1, 2000 and 1999. Our
aggregate limits will be reduced to the extent that business is ceded to the
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) 2000 1999
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(IN THOUSANDS) (IN THOUSANDS)
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United States
New England............................................... $282,887 $284,527
Atlantic.................................................. 337,982 349,370
Gulf...................................................... 306,848 318,038
North Central............................................. 331,575 349,913
Mid West.................................................. 317,468 320,649
West...................................................... 294,663 336,254
Alaska.................................................... 108,912 132,171
Hawaii.................................................... 122,681 129,475
Total United States(2)............................ 494,442 546,133
Canada...................................................... 57,227 61,288
Worldwide(3)................................................ 85,560 86,167
Worldwide (excluding the U.S.)(4)........................... 72,989 98,229
Europe (including U.K.)..................................... 312,364 331,163
Japan....................................................... 100,033 97,020
Australia/New Zealand....................................... 119,888 148,748
Other....................................................... 85,049 116,563
</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 our ability 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, we use the computer-based systems described
below as one tool in estimating the aggregate losses that could occur under all
our contracts covering U.S. risks as a result of a range of potential
catastrophic events. By evaluating the effects of various potential events, we
monitor
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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 our zone limits is acceptable.
UNDERWRITING AND PROGRAM LIMITS
In addition to geographic zones, we seek to limit our overall exposure to
risk by pursuing a disciplined underwriting strategy which limits the amount of
reinsurance we will supply in accordance with a particular program or contract,
so as to achieve diversification within and across geographical zones. When we
began operations, we 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 we have exceeded these limits. We also attempt to
distribute our exposure across a range of attachment points (i.e., the amount of
claims that have to be borne by the ceding insurer before our reinsurance
coverage applies). 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, we consider the appropriateness of
the cedent, including the quality of its management and its capital and risk
management strategy. In addition, we require that each proposed reinsurance
program received includes 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. We first evaluate 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, we then evaluate the
proposal in terms of its risk/ reward profile to assess the adequacy of the
proposed pricing and its potential impact on our overall return on capital. Once
a program meets our requirements for underwriting and pricing, the program would
then be authorized for acceptance.
We extensively use sophisticated modeling and other technology in our
underwriting techniques. Each submission received is registered on the "RSG"
reinsurance data system used by us 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, we
obtained a license for "GENIUS" as a reinsurance data system replacement for
RSG, and are in the process of implementing and converting data in readiness for
its usage. Final conversion and implementation is expected to be complete by the
first quarter of 2000.
In addition to the reinsurance data system, we use 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, we have contracted Applied Insurance Research for the use of
CATMAP(R)/2 as part of our modeling approach. These computer-based loss modeling
systems utilize A.M. Best's data and direct exposure information obtained from
our 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 our client base also
use one or more of the various modeling consulting firms in their exposure
management analysis. In addition, we sometimes perform or contract for
additional modeling analysis when reviewing our major commitments. The
combination of reinsurance system information, together with CATMAP(R)/2
modeling, enables us to monitor and control our 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. We, on both U.S. and
non-U.S. business, act in many cases as a lead or consensus lead reinsurer. When
not the lead, we sometimes actively negotiate additional terms or
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<PAGE> 10
conditions. If we elect to authorize a participation, the underwriter will
specify the percentage or monetary participation in each layer, and will execute
a slip to be followed by a contract to formalize coverage.
We have a procedure for underwriting control to ensure that all acceptances
are made in accordance with our 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 we write each year are for contracts which
have effective dates in January, about 15% in April, about 15% 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, we arranged a proportional reinsurance facility
for IPCRe through two leading intermediaries. The business covered by this
facility is property catastrophe business written by IPCRe. The facility
provides coverage of up to $50 million in each of at least 5 named zones, and
potentially other zones of our choosing, provided that the risks in those zones
do not accumulate with those in 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 our discretion. Within these limitations, we 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, taxes and an override commission. AIG, as a participating reinsurer,
has 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. Effective
January 1, 2000 this facility has been renewed, on the same terms, although only
92% participation has been bound. IPCRe will co-participate on the remaining 8%,
and net exposures will be proportionately higher on those treaties ceded to the
facility.
MARKETING
Our 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 we believe 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 our shareholders. During 1999, no single
ceding insurer accounted for more than 5.9% of our gross premiums written.
We market our reinsurance products worldwide through non-exclusive
relationships with more than 50 of the leading reinsurance brokers active in the
U.S. and non-U.S. markets for property catastrophe reinsurance. In addition,
from 1993 to January, 2000 our products were marketed in Europe through IPCRe
Services. As noted above, IPCRe Services ceased operations in January 2000,
because consolidation among our clients and brokers has reduced the need to
maintain a physical presence in the U.K. in order to promote our services.
Based on premiums written during the year ended December 31, 1999, the five
brokers from which we derive the largest portions of our business (with the
approximate percentage of our business derived from such broker) are Marsh &
McLennan and affiliates (33.0%), Aon Corp. and affiliates (19.3%), Benfield
Greig (10.4%), Willis Faber (8.2%) and Herbert Clough (5.0%). During the year
ended December 31, 1999, we had in force reinsurance contracts with only 6
ceding companies which were not derived from a reinsurance broker; otherwise,
our 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.
Our brokers perform data collection, contract preparation and other
administrative tasks, enabling us to market our reinsurance products cost
effectively by maintaining a small staff. By relying largely on reinsurance
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<PAGE> 11
brokers to market our products, we are able to avoid the expense and regulatory
complications of worldwide offices, thereby minimizing fixed costs associated
with marketing activities. We believe that by maintaining close relationships
with brokers, we are able to obtain access to a broad range of potential
reinsureds. We meet 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 we do not believe that conducting our operations in Bermuda has
adversely affected our marketing activities in light of the client base we have
attracted and retained.
RESERVES
Under U.S. generally accepted accounting principles, we are not permitted
to establish loss reserves with respect to our property catastrophe business
until the occurrence of an event which may give rise to a claim. Once such an
event occurs, we establish reserves based upon estimates of total losses
incurred by the ceding insurers as a result of the event and our estimate of the
portion of such loss we have reinsured. With respect to our non-catastrophe
business, we are 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. Our reserves are
adjusted as we receive notices of claims and proofs of loss from reinsureds and
as estimates of severity of damages and our share of the total loss are revised.
We also establish reserves for losses incurred as a result of an event
known but not reported to us. 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, we
review our 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 us and general market
trends in the reinsurance industry, are considered. We have 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 we may
subsequently contest the loss. Our policy is to establish reserves for reported
losses based upon reports received from ceding companies, supplemented by our
reserve estimates.
Loss reserves represent our 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 our 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 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. Our current investment strategy is defined primarily by the need
to safeguard our capital, since we believe that the risks inherent in
catastrophe reinsurance should not be augmented by a speculative investment
policy. For this reason our investment policy is conservative with a strong
emphasis on the quality of investments. At December 31, 1999, other than cash,
our investments consisted of fixed maturity securities, none of which had a
rating of less than A, and shares of stock in the S & P 500 companies. Corporate
bonds represented 48% of total fixed maturity investments at December 31, 1999
and of these 42% and 58% were issued by U.S. and non-U.S. corporations,
respectively. Our investment policy also stresses diversification and
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<PAGE> 12
at December 31, 1999, only the U.S. Treasury and Caisse D'Amort Dette Soc. were
individual issuers whose securities represented more than 5% of our portfolio.
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 our investments and cash
and cash equivalents as of December 31, 1999 and 1998:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
TYPE OF INVESTMENT 1999 1998
- ------------------ -------- --------
(IN THOUSANDS)
<S> <C> <C>
Fixed Maturities Available for Sale
U.S. Government and government agencies.............. $ 79,970 $111,210
Other governments.................................... 131,637 125,240
Corporate............................................ 235,588 200,644
Supranational entities............................... 40,631 47,769
-------- --------
$487,826 $484,863
Equities, available for sale........................... $ 78,859 $ 94,152
Cash and cash equivalents.............................. $ 28,069 $ 20,966
-------- --------
$594,754 $599,981
======== ========
</TABLE>
In June, 1997 we restructured our investment portfolio, with the intention
of reducing the overall potential volatility of its value. We reclassified all
securities which were in the held to maturity portfolio as "available for sale",
and entered transactions designed to shorten the duration of the portfolio. As a
result of the reclassification, both total assets and shareholders' investment
were reduced by $517 thousand representing the unrealized loss on the securities
at the date of transfer. See note 3(g) to our consolidated financial statements.
Our investment guidelines are reviewed periodically and are subject to
change at the discretion of the Board of Directors.
MATURITY AND DURATION OF PORTFOLIO. Currently, we maintain 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, 1999 the fixed maturity portfolio
(including cash and cash equivalents within such portfolio) had an average
maturity of 2.8 years and an average modified duration of 2.2 years. We believe
that, given the relatively high quality of our portfolio, adequate market
liquidity exists to meet our cash demands.
The following table summarizes the fair value by maturities of our fixed
maturity investment portfolio as of December 31, 1999 and 1998. For this
purpose, maturities reflect contractual rights to put or call the securities;
actual maturities may be longer.
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1999 1998
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Available for Sale:
Due in one year or less.............................. $ 56,433 $ 79,473
Due after one year through five years................ 400,844 344,160
Due after five years through ten years............... 30,549 61,230
-------- --------
$487,826 $484,863
======== ========
</TABLE>
QUALITY OF DEBT SECURITIES IN PORTFOLIO. Our 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
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<PAGE> 13
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,
----------------
1999 1998
------ ------
<S> <C> <C>
Cash and cash equivalents......................... 5.4% 4.2%
U.S. Government and government agencies........... 15.5% 22.0%
AAA............................................... 30.5% 21.6%
AA................................................ 39.3% 42.2%
A................................................. 9.3% 10.0%
------ ------
100.0% 100.0%
====== ======
</TABLE>
There are no delinquent securities in our investment portfolio.
REAL ESTATE. Our portfolio does not contain any investments in real estate
or mortgage loans.
FOREIGN CURRENCY EXPOSURE. At December 31, 1999 and 1998, most of our
fixed maturity investments were in securities denominated in U.S. dollars, with
the exception of an Australian dollar time deposit in the amount of
approximately U.S. $4 million (equivalent). 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 we do hold non-U.S. dollar
denominated securities, we have entered and may enter into forward foreign
exchange contracts for purposes of hedging our 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 we 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 twice.
DERIVATIVES. Our 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 us by subsidiaries of AIG.
COMPETITION
The property catastrophe reinsurance industry is highly competitive. We
compete, and will continue to compete, with insurers and property catastrophe
reinsurers worldwide, many of which have greater financial, marketing and
management resources than us. Some of our competitors are large financial
institutions who have reinsurance divisions, while others are specialty
reinsurance companies. In total, there are several hundred companies writing
reinsurance of different types, including property catastrophe. In a recent
ranking of the world's top 125 companies whose predominant source of income is
generated from property and casualty reinsurance compiled by Standard & Poor's,
IPC ranked 35th. The ranking was based on the amount of paid-up capital and
surplus (i.e., shareholders' investment) at the end of 1998. In particular, we
compete with Bermuda-based reinsurers, including XL Mid Ocean Re., Renaissance
Reinsurance Ltd., Partner Reinsurance Company Ltd., LaSalle Re Limited, Tempest
Reinsurance Company Limited, and with established international reinsurers
outside Bermuda 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 we are 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 we underwrite is based on
many factors, including premium charges and other
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<PAGE> 14
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 us.
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 us.
In September 1996, IPCRe was rated by A.M. Best Company, Inc. ("A.M.
Best"), who gave it an initial rating of A+ (Superior). This rating was affirmed
by A.M. Best in all subsequent years. In July, 1997 S & P assigned financial
strength and counter-party credit ratings of A+, which were affirmed
subsequently. Prior to 1996, IPCRe was not rated by any rating agency. During
1999, these ratings were extended to IPCRe Europe. The rating received from A.M.
Best represents the second highest rating on their rating scale. The rating
received from S & P represents the fifth highest rating on their rating scale.
Such ratings are based on factors of concern to cedents and brokers and are not
directed toward the protection of investors. Such ratings are neither a rating
of securities nor a recommendation to buy, hold or sell such securities. While
we believe that IPCRe's ratings will not be a major competitive advantage or
disadvantage, some of our principal competitors have a rating equal to or
greater than that of IPCRe. 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.
We are 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 our clients operate can affect the demand for reinsurance. We
are also aware of many potential initiatives by capital market participants to
produce additional alternative products that may compete with the existing
catastrophe reinsurance markets. We are unable to predict the extent to which
the foregoing new, proposed or potential initiatives may affect the demand for
our products or the risks which may be available for us to consider
underwriting.
EMPLOYEES
As of January 1, 2000, we employed 18 people on a full-time basis including
our Chief Executive Officer, Chief Financial Officer and three underwriters. We
believe that employee relations are good. None of our employees are subject to
collective bargaining agreements, and we know of no current efforts to implement
such agreements at IPC. Effective January 31, 2000, IPCRe Services ceased
trading, and the 4 full-time staff employed there were made redundant, thus
reducing the full-time employee count to 14.
Many of our employees, including most of our senior management, are
employed pursuant to work permits granted by the Bermuda authorities. These
permits expire at various times over the next several years. We have no reason
to believe that these permits would not be extended upon request at their
respective expirations, although recent statements by the Minister of Labour and
Home Affairs in Bermuda have suggested limitations may be placed on the number
of times permits for non-key employees are renewed.
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
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<PAGE> 15
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, IPC Holdings 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, 2000, IPCRe would have been able to pay
approximately $126 million in dividends in accordance with the foregoing
restrictions. We do 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 15 to the Company's consolidated
financial statements, contained in the Annual Report.
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.
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<PAGE> 16
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 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 15 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 a Statutory
Financial Return with the Registrar 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 the directors 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 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
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<PAGE> 17
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 our 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, IPC Holdings 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 IPC Holdings 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. 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 some exceptions, such sale of insurance or reinsurance
within a jurisdiction where the insurer is not admitted to do business is
prohibited. We do 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
16
<PAGE> 18
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.
We do not believe that IPCRe was 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. We believe that IPCRe's manner of conducting business through our
offices in Bermuda has not materially adversely affected its operations to date.
There can be no assurance, however, that our location, regulatory status or
restrictions on our activities resulting therefrom will not adversely affect our
ability to conduct business in the future.
UNITED KINGDOM
Similarly, IPCRe Services was not registered as an insurer in the United
Kingdom or in any other jurisdiction. We believe that IPCRe Services is not
required to be registered as an insurance company in the United Kingdom, and
that the activities of IPCRe Services did 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. We believe that IPCRe
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 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' investment could be materially
adversely affected.
Currently, 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
17
<PAGE> 19
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 our Bye-laws, the combined
voting power of these shares is limited to less than 10% of the combined voting
power of all shares. We believe 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 we do not believe that the 20% threshold was met in taxable years 1994,
1995, 1996, 1997, 1998 or 1999, some of the factors which determine the extent
of RPII in any period may be beyond our control. 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, 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
18
<PAGE> 20
principal executive offices is American International Building, 29 Richmond
Road, Pembroke HM 08, Bermuda and our telephone number is (441) 298-5100.
ITEM 3. LEGAL PROCEEDINGS
We will be subject to litigation and arbitration in the ordinary course of
our business. We are not currently 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, 1999.
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 "IPCR".
The following table sets out, 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>
1999
Quarter ended March 31, 1999.............................. $23.1875 $ 19.7500
Quarter ended June 30, 1999............................... 21.6250 17.3750
Quarter ended September 30, 1999.......................... 22.5000 18.5625
Quarter ended December 31, 1999........................... 20.3750 14.2500
1998
Quarter ended March 31, 1998.............................. $32.7500 $ 29.5625
Quarter ended June 30, 1998............................... 33.2500 29.1250
Quarter ended September 30, 1998.......................... 30.6250 21.1875
Quarter ended December 31, 1998........................... 26.3750 19.0000
</TABLE>
As of February 29, 2000, there were 104 holders of record of common shares.
In each of March, June, and September, 1999, IPC Holdings aid dividends of
$0.3175 per common share. In December 1999, IPC Holdings paid a dividend of
$0.16 per common share. In each of March, June, September, and December 1998,
IPC Holdings paid dividends of $0.3175 per common share. In addition, in March
1998, IPC Holdings paid a special dividend of $0.80 per common share. The actual
amount and timing of any future dividends is at the discretion of the Board and
is dependent upon our profits and financial requirements, as well as loss
experience, business opportunities and any other factors that the Board deems
relevant. In addition, if we have funds available for distribution, we may
nevertheless determine that such funds should be retained for the purposes of
replenishing capital, expanding premium writings or other purposes. IPC Holdings
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 IPC
Holdings 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 Bank One N.A.(formerly the First National
Bank of Chicago). The credit facility limits the amount of dividends that may be
paid by IPCRe to IPC Holdings 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
19
<PAGE> 21
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 IPC Holdings at January 1, 2000
without such notification is approximately $125,677,000. 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 our
dividend policy will not change or that we 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, 1999, 1998, 1997, 1996, and 1995 were
derived from our consolidated financial statements which are incorporated herein
by reference to the Annual Report. The selected consolidated financial data
should be read in conjunction with our 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,
-------------------------------------------------------------------
1999 1998 1997 1996 1995
----------- ----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA
Gross premiums written.......... $ 97,162 $ 111,265 $ 117,050 $ 111,569 $ 104,096
Net premiums earned............. 94,967 120,125 112,486 113,642 101,541
Net investment income........... 30,327 30,053 29,883 28,883 22,855
Loss and loss expenses
incurred...................... 129,362 61,459 14,708 32,732 36,657
Acquisition costs............... 13,028 16,968 13,487 11,849 10,315
General & administrative
expenses(1)................... 10,052 11,051 10,238 9,250 6,112
Realized gains/(losses), net on
investments................... 30,355 7,014 (3,616) 3,871 2,973
Net income...................... $ 3,207 $ 67,714 $ 100,320 $ 92,565 $ 74,285
Net income per common
share(2)...................... $ 0.12 $ 2.55 $ 3.79 $ 3.55 $ 2.90
Weighted average shares
outstanding(2)................ 25,988,116 26,547,062 26,492,401 26,080,744 25,618,719
Dividend per common share(3).... $ 1.1125 $ 2.07 $ 3.27 $ 0.8925 --
OTHER DATA
Loss and loss expense
ratio(4)...................... 136.2% 51.2% 13.1% 28.8% 36.1%
Expense ratio(4)................ 23.9% 23.0% 19.7% 19.2% 17.4%
Combined ratio(4)............... 160.1% 74.2% 32.8% 48.0% 53.5%
Return on average equity(5)..... 0.6% 12.4% 19.6% 19.9% 19.1%
</TABLE>
20
<PAGE> 22
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------
1999 1998 1997 1996 1995
----------- ----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
(AT END OF PERIOD)
Total cash and investments...... $ 594,754 $ 599,981 $ 538,759 $ 503,846 $ 444,082
Reinsurance balances
receivable.................... 21,460 20,747 27,723 25,687 25,451
Total assets.................... 640,942 643,091 585,019 548,081 485,248
Reserve for losses and loss
expenses...................... 111,441 52,226 27,590 28,483 24,717
Unearned premiums............... 16,364 17,602 26,462 21,898 23,971
Total shareholders'
investment.................... $ 504,931 $ 565,952 $ 528,293 $ 496,135 $ 434,292
Book value per common
share(6)...................... $ 19.43 $ 21.32 $ 19.94 $ 19.02 $ 16.58
</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, 1999, 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' investment 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.
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.
21
<PAGE> 23
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.
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 IPC Holdings and Report
of Independent Auditors are incorporated herein by reference to pages 18 to 39
of the Annual Report:
Report of Independent Public Accountants
Consolidated balance sheets as of December 31, 1999 and 1998
Consolidated statements of income for the years ended December 31, 1999,
1998 and 1997
Consolidated statements of comprehensive (loss) income for the years ended
December 31, 1999, 1998 and 1997
Consolidated statements of changes in shareholders' investment for the
years ended December 31, 1999, 1998 and 1997
Consolidated statements of cash flows for the years ended December 31,
1999, 1998 and 1997
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, 1999, 1998 and 1997.
Schedule IV -- Supplementary Information concerning Reinsurance for the
years ended December 31, 1999, 1998 and 1997.
Certain schedules have been omitted, either because they are not
applicable, or because the information is included in our consolidated financial
statements incorporated by reference to the Annual Report.
22
<PAGE> 24
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+ Amended and Restated IPC Holdings, Ltd. Stock Option Plan... Filed herewith
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+ Amended and Restated IPC Holdings, Ltd. Deferred
Compensation Plan........................................... [ ]
10.12 Credit Agreement between IPCRe Limited, the First National
Bank of Chicago, and other Lenders named therein............ ++
10.13 Form of Limited Waiver to Credit Agreement between IPCRe
Limited, Bank One N.A. 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.................................. 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).
[ ] Incorporated by reference to Exhibits 10.1 and 10.2 to the Company's Form
10-Q for the quarter ended September 30, 1999 (File No. 0-27662).
+ Management contract or compensatory plan, contract or arrangement.
(b) Reports on Form 8-K.
No reports were filed on Form 8-K during the fourth quarter of 1999.
23
<PAGE> 25
IPC HOLDINGS, LTD.
INDEX TO SCHEDULES
<TABLE>
<CAPTION>
SCHEDULE/REPORT PAGE
--------------- ----
<S> <C> <C>
Report of Independent Public Accountants on Schedules......................... 25
Schedule II Consolidated Financial Information of the Registrant........ 26
Schedule III Supplementary Insurance Information of Subsidiary for the 29
years ended December 31, 1999, 1998 and 1997................
Schedule IV Supplementary Information concerning Reinsurance for the 30
years ended December 31, 1999, 1998 and 1997................
</TABLE>
24
<PAGE> 26
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
4, 2000. 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
Hamilton, Bermuda
February 4, 2000
25
<PAGE> 27
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,
--------------------
1999 1998
-------- --------
<S> <C> <C>
ASSETS:
Cash........................................................ $ 22 $ 69
Investment in wholly-owned subsidiaries..................... 506,410 566,809
Other assets................................................ 1,548 1,577
-------- --------
Total assets...................................... $507,980 $568,455
======== ========
LIABILITIES:
Payable to subsidiaries..................................... $ 2,896 $ 2,481
Other liabilities........................................... 154 22
-------- --------
Total liabilities................................. 3,050 2,503
-------- --------
SHAREHOLDERS' INVESTMENT:
Share Capital -- 1999 and 1998: 25,033,932 shares
outstanding, par value $0.01............... 250 250
Additional paid in capital.................................. 299,833 299,833
Retained earnings........................................... 210,285 234,928
Accumulated other comprehensive income...................... (5,438) 30,941
-------- --------
Total shareholders' investment.................... 504,930 565,952
-------- --------
Total liabilities and shareholders' investment.... $507,980 $568,455
======== ========
</TABLE>
26
<PAGE> 28
SCHEDULE II
IPC HOLDINGS, LTD.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT -- (CONTINUED)
STATEMENT OF INCOME
(PARENT COMPANY)
(EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1999 1998 1997
------ ------- --------
<S> <C> <C> <C>
Interest income............................................. $ 5 $ 15 $ 25
Expenses:
Operating costs and expenses, net......................... 779 889 1,490
------ ------- --------
(Loss)/profit before equity in net income of wholly-owned
subsidiaries.............................................. (774) (874) (1,465)
Equity in net income of wholly-owned subsidiaries........... 3,981 68,588 101,785
------ ------- --------
Net income available to common shareholders................. $3,207 $67,714 $100,320
====== ======= ========
</TABLE>
STATEMENT OF COMPREHENSIVE (LOSS) INCOME
(PARENT COMPANY)
(EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS)
<TABLE>
<CAPTION>
1999 1998 1997
-------- ------- --------
<S> <C> <C> <C>
Net income.................................................. $ 3,207 $67,714 $100,320
-------- ------- --------
Other comprehensive (loss) income:
Holding (losses) gains, net on investments during
period................................................. (6,024) 28,479 9,758
Reclassification adjustment for (gains) losses included in
net income............................................. (30,355) (7,014) 3,616
-------- ------- --------
(36,379) 21,465 13,374
-------- ------- --------
Comprehensive (loss) income................................. $(33,172) $89,179 $113,694
======== ======= ========
</TABLE>
27
<PAGE> 29
SCHEDULE II
IPC HOLDINGS, LTD.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT -- (CONTINUED)
STATEMENT OF CASH FLOWS
(PARENT COMPANY)
(EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1999 1998 1997
-------- -------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income................................................ $ 3,207 $ 67,714 $ 100,320
Adjustments to reconcile net income to cash provided by:
Equity in net income from subsidiaries.................. (3,981) (68,588) (101,785)
Changes in, net:
Other assets......................................... 29 (295) (919)
Payable to subsidiaries.............................. 415 -- 856
Other liabilities.................................... 132 (44) 35
-------- -------- ---------
(198) (1,213) (1,493)
-------- -------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Additional share capital.................................. -- 300 266
Dividends received from subsidiaries...................... 28,000 52,450 82,801
Dividends paid to shareholders............................ (27,849) (51,820) (81,802)
-------- -------- ---------
151 930 1,265
-------- -------- ---------
Net increase (decrease) in cash and cash equivalents...... (47) (283) (228)
Cash and cash equivalents, beginning of year.............. 69 352 580
-------- -------- ---------
Cash & cash equivalents, end of year...................... $ 22 $ 69 $ 352
======== ======== =========
</TABLE>
28
<PAGE> 30
SCHEDULE III
IPC HOLDINGS, LTD. AND SUBSIDIARIES
SUBSIDIARY SUPPLEMENTARY INSURANCE INFORMATION
(EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS)
<TABLE>
<CAPTION>
FUTURE POLICY BENEFITS, AMORTIZATION
DEFERRED BENEFITS, CLAIMS, OF DEFERRED
POLICY LOSSES, CLAIMS NET LOSSES AND POLICY OTHER
ACQUISITION AND LOSS UNEARNED PREMIUM INVESTMENT SETTLEMENT ACQUISITION OPERATING
SEGMENT COSTS EXPENSE PREMIUMS REVENUE INCOME EXPENSES COSTS EXPENSES
- ------- ----------- ----------------- -------- -------- ---------- ---------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1999:
Property & Similar... $1,980 $111,441 $16,364 $ 94,967 $30,322 $129,362 $13,028 $8,912
1998:
Property & Similar... 2,048 52,226 17,602 120,125 30,038 61,459 16,968 9,856
1997:
Property & Similar... 2,593 27,590 26,462 112,486 29,858 14,708 13,487 7,272
<CAPTION>
GROSS
PREMIUMS
SEGMENT WRITTEN
- ------- --------
<S> <C>
1999:
Property & Similar... $ 97,162
1998:
Property & Similar... 111,265
1997:
Property & Similar... 117,050
</TABLE>
29
<PAGE> 31
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>
1999:
Property & Similar................ $-- $3,816 $ 97,162 $ 93,346 104%
1998:
Property & Similar................ -- -- 111,265 111,265 100%
1997:
Property & Similar................ -- -- 117,050 117,050 100%
</TABLE>
- ---------------
(1) Premiums Written
30
<PAGE> 32
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, 2000.
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, 2000
- ----------------------------------------------------- Directors
Joseph C.H. Johnson
/s/ JOHN P. DOWLING President, Chief Executive March 22, 2000
- ----------------------------------------------------- Officer and Director
John P. Dowling
/s/ JOHN R. WEALE Vice President and Chief March 22, 2000
- ----------------------------------------------------- Financial Officer
John R. Weale
/s/ RUSSELL FISHER Deputy Chairman of Board of March 22, 2000
- ----------------------------------------------------- Directors
Russell Fisher
/s/ ANTHONY PILLING Director March 22, 2000
- -----------------------------------------------------
Anthony M. Pilling
/s/ CLARENCE JAMES Director March 22, 2000
- -----------------------------------------------------
Dr. The Honourable Clarence E. James
/s/ FRANK MUTCH Director March 22, 2000
- -----------------------------------------------------
Frank Mutch
/s/ JOHN SCHMIDT Director March 22, 2000
- -----------------------------------------------------
John T. Schmidt
</TABLE>
31
<PAGE> 33
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+ Amended and Restated IPC Holdings, Ltd. Stock Option Plan... Filed herewith
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+ Amended and Restated IPC Holdings, Ltd. Deferred
Compensation Plan........................................... #
10.12 Credit Agreement between IPCRe Limited, the First National
Bank of Chicago, and other Lenders named therein............ ++
10.13 Form of Limited Waiver to Credit Agreement between IPCRe
Limited, Bank One N.A. 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.................................. 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).
# Incorporated by reference to Exhibits 10.1 and 10.2 to the Company's Form
10-Q for the quarter ended September 30, 1999 (File No. 0-27662).
+ Management contract or compensatory plan, contract or arrangement.
32
<PAGE> 1
EXHIBIT 10.3
IPC HOLDINGS, LTD.
------------------
STOCK OPTION PLAN*
1. ESTABLISHMENT.
IPC Holdings, Ltd. (the "Company") hereby adopts this IPC
Holdings, Ltd. Stock Option Plan, the purpose of which is to enable the Company
and its subsidiaries to provide certain employees with an additional incentive
to contribute to the success of the Company by giving them an opportunity to
acquire a proprietary interest in the Company, as well as to attract to such
corporations persons of training, experience and ability.
2. DEFINITIONS.
The following terms shall have the respective meanings
assigned to them as used herein:
"Appraised Value" shall mean the result of dividing (A) the shareholders' equity
attributable to the Company's Common Stock on a fully diluted basis, as
determined by the latest audited consolidated financial statement of the
Company, by (B) the total number of issued shares of the Company's Common Stock
on a fully diluted basis.
"Board" shall mean the Board of Directors of the Company.
"Committee" shall mean a committee of the Board to be drawn solely from members
of the Board who are not eligible to participate in the Plan and who have not
been eligible for one year prior to serving on the Committee and who are
otherwise eligible under Rule 16b-3 under the United States Securities Exchange
Act of 1934 to administer the Plan.
"Common Stock" shall refer to each of the Company's Voting Common Stock and the
Company's Common Shares.
"Common Shares" shall mean the Company's Common Shares, par value U.S. $0.01 per
share, to be authorized and outstanding upon consummation of the Company's
initial public offering.
"Disability" shall mean the inability of a Participant, for reasons of health,
to carry out the functions of his or her duties for the Company or its
subsidiaries for a total of six months during any twelve-month period.
"Option" shall mean an option to purchase Common Stock granted under the Plan.
"Participant" shall mean an employee of the Company or its subsidiaries who has
been granted an Option.
"Plan" shall mean this IPC Holdings, Ltd. Stock Option Plan.
"Public Market Value" of one Common Share shall mean, when the Company's Common
Shares are publicly traded, (i) the average of the closing prices of a Common
Share on the principal securities exchange on which the Common Shares are listed
or, if not so listed, as traded in the NASDAQ National Market, if traded
therein, on each of the ten consecutive trading days prior to the date of
determination, or (ii) if the Common Shares are not so listed or traded, the
average of the bid and asked prices of a Common Share as otherwise quoted on the
NASDAQ system or any successor system in use on the most recent date prior to
the date of determination on which such quoted prices exist.
"Recapitalization" shall mean the conversion of each share of the currently
authorized, issued and outstanding shares of Voting Common Stock and Non-Voting
Common Stock, par value $200 per share, into 25,000 of the Company's Common
Shares, to be effected upon consummation of the Company's initial public
offering.
- --------------
* As amended through February 15, 2000.
32
<PAGE> 2
"Voting Common Stock" shall mean the Company's Voting Common Stock, par value
$200 per share, currently authorized and outstanding.
3. PLAN ADMINISTRATION.
3.1. AUTHORITY. The Plan shall be administered by the Committee, which
shall have full power and authority to interpret the Plan, to establish, amend
and rescind rules and regulations relating to the Plan, to determine the terms
of Options to be issued under the Plan, to provide for conditions and assurances
deemed necessary or advisable to protect the interests of the Company and to
make all other determinations necessary or advisable for the administration of
the Plan.
The Committee shall determine the time or times at which
Options shall be granted, the number of Options to be granted to each
Participant, the duration of each of the Options and the time or times within
which (during the term of such Options) all or a portion of each of the Options
may be exercised.
3.2. DECISIONS ARE FINAL AND CONCLUSIVE. The determination of the
Committee as to any question arising under the Plan, including questions of
construction and interpretation, shall be final, binding and conclusive upon all
persons, including the Company, its shareholders and persons having any interest
in the Options.
4. ELIGIBILITY.
All employees of the Company and its subsidiaries, including officers
(whether or not directors), are eligible for the grant of Options by the
Committee. Directors who are not employees of the Company or any subsidiary
shall not be eligible for the grant of Options under the Plan.
5. SHARES SUBJECT TO THE PLAN.
5.1. NUMBER. The aggregate number of shares of Common Stock that may be
subject to Options granted under the Plan shall not exceed in the aggregate 11.1
shares of Voting Common Stock (if granted prior to the Recapitalization) or
577,500 Common Shares (following consummation of the Recapitalization, inclusive
of any Options to purchase Voting Common Stock granted prior to the
Recapitalization adjusted to reflect the Recapitalization in the manner provided
in Section 5.2). The shares of Common Stock obtainable pursuant to Options shall
be authorized but unissued shares. Upon the expiration or termination (in whole
or in part) of unexercised Options, shares of Common Stock subject thereto shall
again be available for option under the Plan.
5.2. ADJUSTMENT IN CAPITALIZATION. If there is any change in the number
or nature of outstanding shares of the Company's capital stock by reason of a
share dividend, recapitalization, merger, consolidation, scheme of arrangement,
share split, combination or exchange, share repurchase or otherwise, or if there
is any non-cash distribution in respect of any such shares, which in any such
case has a dilutive or anti-dilutive effect on the Common Stock, the number of
shares of Common Stock subject to each outstanding Option, the exercise price
thereof and/or other terms thereof shall be appropriately adjusted by the
Committee. With respect to the Recapitalization, each Option to purchase Voting
Common Stock granted prior to the Recapitalization shall be adjusted to give
effect to the 25,000 for-one ratio of Common Shares to shares of Voting Common
Stock to be effected by the Recapitalization, such adjustment to occur
automatically without action of any person.
6. TERMS AND CONDITIONS OF OPTIONS.
6.1. GRANT OF OPTIONS. The Committee shall determine in its sole
discretion from time to time the employees of the Company and its subsidiaries
who shall be granted Options, the number of shares of Common Stock which shall
be subject to each Option and, subject to Section 6.5 hereof, the term of each
Option.
6.2. EXERCISE PRICE. The exercise price for each Option shall be as
determined by the Committee in its sole discretion, including, but not limited
to, at Appraised Value or Public Market Value on any date designated by the
Committee.
6.3. VESTING. Unless determined otherwise by the Committee, each Option
granted under the Plan shall vest and become exercisable in four equal annual
installments on each of the next four anniversaries of the date of
33
<PAGE> 3
grant of the Option. Any shares not purchased on the applicable installment date
may be purchased thereafter at any time prior to the final expiration of the
Option.
In addition, all Options shall vest immediately and become
exercisable in the event of a "Change of Control", which shall be deemed to
occur if (i) any "person" (as such term is defined in Section 3(a)(9) and as
used in Sections 13(d) and 14(d) of the United States Securities Exchange Act of
1934, as amended (the "Exchange Act")), excluding the Company or any of its
subsidiaries, a trustee or any fiduciary holding securities under an employee
benefit plan of the Company or any of its subsidiaries, an underwriter
temporarily holding securities pursuant to an offering of such securities or a
corporation owned, directly or indirectly, by shareholders of the Company in
substantially the same proportion as their ownership of the Company, is or
becomes the "beneficial owner" as defined in Rule 13d-3 under the Exchange Act),
directly or indirectly, of securities of the Company representing 50% or more of
the combined voting power of the company's then outstanding securities ("Voting
Securities"); (ii) during any period of not more than two years, individuals who
constitute the Board as of the beginning of the period and any new director
(other than a director designated by a person who has entered into an agreement
with the Company to effect a transaction described in clause (i) or (iii) of
this sentence) whose election by the Board or nomination for election by the
Company's shareholders was approved by a vote of at least two-thirds (2/3) of
the directors then still in office who either were directors at such time or
whose election or nomination for election was previously so approved, cease for
any reason to constitute a majority thereof; (iii) the shareholders of the
Company approve a merger, consolidation, amalgamation or reorganization or a
court of competent jurisdiction approves a scheme of arrangement of the Company,
other than a merger, consolidation, amalgamation, reorganization or scheme of
arrangement which would result in the Voting Securities of the Company
outstanding immediately prior thereto continuing to represent (either by
remaining outstanding or by being converted into Voting Securities of the
surviving entity) at least 50% of the combined voting power of the Voting
Securities of the Company or such surviving entity outstanding immediately after
such merger, consolidation, amalgamation, reorganization or scheme of
arrangement; or (iv) the shareholders of the Company approve a plan of complete
liquidation of the Company or any agreement for the sale or disposition by the
Company of all or substantially all of the Company's assets.
6.4. OPTION AGREEMENT. Each Option granted under the Plan shall be
evidenced by a written share option agreement setting forth the terms under
which the Option is granted.
6.5. TERM OF OPTIONS. All rights to exercise an Option shall expire not
later than ten years from the date on which such Option is granted.
6.6. NONTRANSFERABILITY. No Option shall be assignable or transferable,
and no right or interest of any Participant shall be subject to any lien,
obligation or liability of the Participant, except by will or the laws of
descent and distribution. During a Participant's lifetime, an Option shall be
exercisable only by the Participant. Each written share option agreement shall
set forth transfer restrictions upon the shares of Common Stock obtainable upon
exercise thereof in a form approved by the Committee.
6.7. TERMINATION OF EMPLOYMENT. No part of any Option may be exercised
after the termination of employment of a Participant with the Company or any
subsidiary, except that:
(i) If such termination of employment is at or after
normal retirement age or due to Disability, any
portion of an Option, whether or not exercisable at
the time of such termination, may be exercised by the
Participant at any time within the term of the
Option; and
(ii) if such termination of employment is not at or after
normal retirement age or due to Disability or death,
with the approval of the Board, any portion of an
Option may be exercised by the Participant within
such period as the Board may determine after such
termination, but only to the extent such Option was
exercisable at the time of such termination unless
the Board otherwise determines.
6.8. DEATH OF PARTICIPANT. In the event of the death of the Participant
(whether during or after the termination of his employment) any portion of an
Option exercisable at the time of death may be exercised within 12 months after
the death of the Participant (but in no event after the expiration of the term
of the Option) by the person or persons to whom the Participant's rights under
such Option are transferred by will or the laws of descent and distribution. In
the event of the death of the Participant during his or her employment but prior
to the time an
34
<PAGE> 4
Option would normally become fully exercisable, such Option shall be considered
fully exercisable at the time of the death.
6.9. OTHER TERMS AND CONDITIONS. Options may contain such other terms,
conditions and restrictions, which shall not be inconsistent with the provisions
of the Plan, as the Committee shall deem appropriate in its sole discretion.
7. EXERCISE OF OPTIONS.
7.1. WRITTEN NOTICE. A Participant who wishes to exercise an Option, or
a portion of an Option, shall give written notice thereof to the Company. The
date the Company receives such notice shall be considered as the date such
Option was exercised as to the Common Stock specified in such notice.
7.2. PAYMENT. A Participant who exercises an Option shall pay to the
Company at the date of exercise and prior to the delivery of the Common Stock
for which the Option is being exercised (i) the aggregate exercise price of all
shares of Common Stock pursuant to such exercise of the Option and (ii) an
amount equal to the income and other taxes, if any, required to be withheld and
paid by the Company as a result of such exercise, unless such taxes are withheld
or otherwise collected from the Participant. All payments shall be made in cash
or by certified check payable to the order of the Company; provided, however,
the aggregate exercise price may be paid all or in part in shares of Common
Stock, valued as of the date of exercise (at fair market value as determined by
the Committee), of the same class as those to be transferred upon exercise of
the Option.
7.3. NO PRIVILEGES OF SHAREHOLDER. A Participant shall not have any of
the rights or privileges of a shareholder of the Company with respect to the
shares of Common Stock subject to an Option unless and until such shares of
Common Stock have been duly issued and vested and have been registered in the
Participant's name.
7.4. FURTHER ASSURANCES. Any person exercising an Option shall make
such representations and agreements and furnish such information as the
Committee may in its discretion deem necessary or desirable to assure compliance
by the Company, on terms acceptable to the Company, with the provisions of the
United States Securities Act of 1933 and any other applicable legal
requirements. If a Participant so requests, shares purchased may be issued in
the name of the Participant and another jointly with the rights of survivorship.
8. DURATION.
The Plan shall remain in effect for a period of ten years after the
effective date of the Plan, unless sooner terminated by the Board. Options
theretofore granted may extend beyond that date in accordance with the
provisions of the Plan.
9. NO RIGHT TO EMPLOYMENT.
Nothing contained in the Plan or in any option agreement shall give a
Participant any right to continue employment with the Company or its
subsidiaries.
10. TERMINATION OR AMENDMENT OF PLAN.
The Board may at any time terminate the Plan with respect to any shares
of Common Stock of the Company not at the time subject to option, and may from
time to time alter or amend the Plan or any part thereof, provided that no
change may be made in any Option theretofore granted which would impair the
rights of a Participant without the consent of such Participant, and further,
that no alteration or amendment may be made without the approval of shareholders
if such approval is required by Rule 16b-3 under the United States Securities
Exchange Act of 1934 for transactions pursuant to the Plan to be exempt
thereunder.
11. GOVERNMENT REGULATIONS.
The Plan, the grant and exercise of Options hereunder and the
obligation of the Company to sell and deliver shares of Common Stock pursuant to
such Options shall be subject to all applicable laws, rules and regulations, and
to any required approvals by any governmental agencies.
35
<PAGE> 5
12. EFFECTIVE DATE.
This Plan shall be effective as of February 15th, 1996 and shall
continue in full force and effect regardless of any abandonment of the Company's
proposed initial public offering.
36
<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>
BASIC Year ended December 31,
- ----- ------------------------------
1999 1998
----------- -----------
(audited) (audited)
<S> <C> <C>
Net income $ 3,207 $ 67,714
Common shares outstanding at January 1 25,033,932 25,017,603
Common shares outstanding at December 31 25,033,932 25,033,932
Weighted average common shares outstanding 25,033,932 25,031,211
Net income per common share $ 0.13 $ 2.71
DILUTED
Net income $ 3,207 $ 67,714
Weighted average common shares outstanding 25,033,932 25,031,211
Dilutive effect of share options 954,184 1,515,851
----------- -----------
Total 25,988,116 26,547,062
----------- -----------
Net income per common share $ 0.12 $ 2.55
</TABLE>
37
<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. References to "we", "our" or "IPC" mean IPC
Holdings together with its wholly-owned subsidiaries, IPCRe Limited ("IPCRe"),
and IPCRe Services Limited. This discussion should be read in conjunction with
our Consolidated Financial Statements and related notes, for the year ended
December 31, 1999.
GENERAL
We commenced operations in July 1993. Because of the volatile nature of
property catastrophe reinsurance, the financial data included in this discussion
are not necessarily indicative of our future financial condition or results of
operations.
In our discussion below, when we refer to written premiums, we 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 we write each year
are for contracts which have effective dates in January, about 15% in April,
about 15% 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.
Property catastrophe reinsurers tend to experience significant
fluctuations in operating results because of, among other factors, competition,
frequency of occurrence or severity of catastrophic events, changes in levels of
underwriting capacity, and general economic conditions. Underwriting results of
primary property insurers and prevailing general economic conditions
significantly influence demand for reinsurance. After suffering from
deteriorating financial results because of increased severity or frequency of
claims, some primary insurers seek to protect their balance sheets or improve
their future earnings by purchasing more reinsurance. The supply of reinsurance
is related to prevailing prices, the levels of insured losses and the level of
industry capital which, in turn, may fluctuate in response to changes in rates
of return on investments being earned in the reinsurance industry. As a result
of these factors, the property catastrophe reinsurance business is a cyclical
industry characterized by both periods of intense price competition due to
excessive underwriting capacity and periods when shortages of capacity permit
favourable premium levels. Since underwriting capacity reflects the amount of
shareholders' investment (also known as "policyholders' surplus" in mutual
companies), increases in the frequency and severity of losses suffered by
insurers can significantly affect these cycles. Conversely, the absence of
severe or frequent catastrophic events could result in declining premium rates
in the global market. We have experienced and expect to continue to experience,
the effects of both types of cyclicality.
Events from 1996 to 1999 demonstrate the volatility of catastrophe
reinsurance business. In 1996 and 1997, few catastrophic events occurred.
Consequently, few claims were made on IPCRe. Conversely, many catastrophic
events occurred in 1998 and 1999 in many parts of the world, including Hurricane
Georges (estimated industry-wide insured losses in excess of U.S.$4 billion), a
hailstorm which struck Sydney, Australia (U.S.$1.6 billion), Hurricane Floyd
(U.S.$2.2 billion) and windstorms that struck several parts of Europe in
December, 1999 ( in excess of U.S.$6 billion).
From 1996 to 1999, there was an increase in the supply of reinsurance
capacity, which caused downward pressure on pricing. For the January 1998 and
1999 renewal cycles, premium rates declined by an average of 15% and 10%,
respectively. For the January 2000 renewals, because of the increased levels of
claim activity, premium rates were at a similar level to 1999, with some
contracts having small rate increases, while others had minor decreases. If
there are no major catastrophes in the remainder of 2000, we expect further
downward pressure on rates for property catastrophe reinsurance in 2001.
RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
In the twelve months ended December 31, 1999, IPCRe wrote gross
premiums of $97.2 million, compared to $111.3 million and $117.1 million written
in the years ended December 31, 1998 and 1997, respectively. These writings
included reinstatement premiums, which are premiums paid by ceding companies to
reinstate reinsurance coverage following a claim. Reinstatement premiums were
$9.8 million, $6.3 million and $2.5 million, for the
38
<PAGE> 2
years ended December 31, 1999, 1998 and 1997, respectively. In addition, in 1999
IPCRe had increased participation and additional business from existing clients,
and selectively wrote business for new clients. These increases, however, were
more than offset by rate reductions during the same period. Reflecting general
market conditions, these rate reductions were generally in the range of 10%, but
in some cases were as high as 15%. In addition, IPCRe decided not to renew some
contracts with unsatisfactory rates or terms.
Our written premiums were further affected in 1999 by cessions of
premiums to a proportional reinsurance facility, which became effective January
1, 1999. (See Note 5 to the Consolidated Financial Statements - "Ceded
Reinsurance"). During 1999, premiums ceded to this facility were $3.8 million,
reducing net premium writings for the year to $93.3 million, 16.1% less than our
written premiums for 1998.
Premiums earned were $95.0 million, $120.1 million and $112.5 million
in the years ended December 31, 1999, 1998 and 1997, respectively, representing
changes of (20.9)% and 6.8%. Earned premiums declined as a result of the
decrease in written premiums, but also changed disproportionately to written
premiums, primarily because some contracts written in 1999 had policy periods
greater than twelve months. Excluding reinstatement premiums, which are fully
earned when written, net premiums earned increased by 3.4% from $110.0 million
in the year ended December 31, 1997 to $113.8 million in the year ended December
31, 1998, and then declined 25.2% to $85.1 million in 1999.
Net investment income for 1999 increased to $30.3 million from $30.1
million in the year ended December 31, 1998, which was up from $29.9 million
from the year ended December 31, 1997. These amounts are net of investment
expenses, primarily investment management and custodial fees payable to
subsidiaries of American International Group, Inc. ("AIG") . (See Note 9 to the
Consolidated Financial Statements - "Related Party Transactions"). These fees
totaled $1.6 million, $1.4 million and $1.4 million in the years ended December
31, 1999, 1998 and 1997, respectively. The increases in net investment income
resulted from a higher average investment asset base, which increased 9.2% from
$521.3 million during 1997 to $569.4 million during 1998 and a further 4.9% to
$597.4 million during 1999. These increases were offset in part by lower average
yields of approximately 5.1% and 5.3% in the years ended December 31, 1999 and
1998, respectively, compared to the average yield of 5.7% in the year ended
December 31, 1997. 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 were made to reduce the volatility in the value of the
portfolio. At December 31, 1999 the portfolio consisted of high quality, fixed
maturity investments, and shares of stock in the companies which comprise the S
& P 500.
With respect to net realized gains and losses from the sale of
investments, we had a $30.4 million gain for the year ended December 31, 1999,
compared to a $7.0 million gain and a $3.6 million loss for the years ended
December 31, 1998 and 1997, respectively. In May, 1999, we realized substantial
gains from the sale, and subsequent repurchase, of our equity portfolio. Net
gains and losses generally fluctuate from period to period, depending on the
securities sold, as recommended by our investment advisor. Net unrealized losses
on our investment portfolio (see Note 3 to the Consolidated Financial Statements
- - "Investments") were $(5.4) million at December 31, 1999, compared to net
unrealized gains of $30.9 million at December 31, 1998, and $9.5 million at
December 31, 1997. The reductions in value in 1999 were primarily the result of
increases in intermediate term interest rates, offset by the restructuring of
the investment portfolio noted above, which had also contributed to the
significant increase in value of the portfolio in 1998.
Losses and loss adjustment expenses incurred were $129.4 million, $61.5
million and $14.7 million in the years ended December 31, 1999, 1998 and 1997,
respectively. The level of catastrophic events around the world significantly
increased during 1999 and 1998, compared to the low level of events during 1997,
when catastrophe associated insured losses were the lowest for over ten years in
the United States.
During 1999, significant catastrophes included:
- The explosion at the Rouge Industries steel mill in Michigan in March;
- An April hailstorm in Sydney which caused a record amount of insured
losses for Australia;
- Record-breaking losses from tornadoes in the mid-Western United States
in May;
- Earthquakes in Turkey and Taiwan;
- Various hurricanes, most notably Hurricane Floyd in September;
- Typhoon Bart in Japan in late September;
- Windstorm Anatol in Scandinavia in December; and
- The worst windstorms in about 400 years to hit France and other parts
of western Europe.
39
<PAGE> 3
In 1998, catastrophic events included:
- - 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
- - Two satellite failures.
Of our net incurred losses in 1999, $35 million related to the Sydney
hailstorm, $35 million to the European windstorms in December, and $11 million
to Hurricane Floyd. In 1998, $24.0 million related to Hurricane Georges. Other
losses for all three years resulted from various other natural and man-made
disasters, as well as from the development of claims from current and prior year
marine and aviation business. Loss payments during the years ended December 31,
1999, 1998 and 1997 were $74.3 million, $37.4 million and $15.2 million,
respectively. Our loss and loss expense ratio (the ratio of losses and loss
adjustment expenses incurred to premiums earned) for 1999 was 136.2%, compared
to 51.2% in 1998 and 13.1% in 1997.
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 written premiums. Acquisition costs incurred were $13.0
million, $17.0 million and $13.5 million for the years ended December 31, 1999,
1998 and 1997, respectively, after deferring those costs related to the unearned
portion of premiums written. These represent a decrease of 23.2% during 1999,
and an increase of 25.8% during 1998, respectively. The changes are due,
primarily, to the changes in earned premiums. In addition, certain contracts
contain 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. These contracts also contributed to the changes in the levels
of acquisition costs as a percentage of premiums earned in both 1999 and 1998.
General and administrative expenses were $9.6 million, $10.7 million
and $8.7 million for the years ended December 31, 1999, 1998 and 1997,
respectively. These figures include fees paid to subsidiaries of AIG for
administrative services, which are based on a percentage of premiums written,
and were $2.5 million, $3.0 million and $2.8 million for the years ended 1999,
1998 and 1997 respectively. In 1999, those costs which were at a lower level
than 1998 included: travel, legal fees, data processing, and credit facility
fees. 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, increased data processing
costs relating to the implementation of new computer software, and the cost of a
research project involving the U.K. Meteorological Office. Our expense ratio
(the ratio of acquisition costs plus general and administrative expenses, to
earned premiums) was 23.9%, 23.0% and 19.7% for the years ended December 31,
1999, 1998 and 1997, respectively. The expense ratio increased, even though
actual expenses declined, because net earned premiums were significantly lower.
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, 1999, 1998 and 1997, respectively:
<TABLE>
<CAPTION>
Year ended December 31,
------------------------------------
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
Loss and loss expense ratio 136.2% 51.2% 13.1%
Expense ratio 23.9% 23.0% 19.7%
Combined ratio 160.1% 74.2% 32.8%
</TABLE>
Net income for the years ended December 31, 1999, 1998 and 1997 was
$3.2 million, $67.7 million and $100.3 million, respectively. Excluding the
effects of realized gains and losses arising from the sale of investments, the
net operating loss was $(27.1) million for the year ended December 31, 1999,
compared to net operating income of $60.7 and $103.9 million for the years ended
December 31, 1998 and 1997, respectively. Net operating (loss) income amounts
are equivalent to $(1.04), $2.29 and $3.92 per common share, respectively, on a
diluted basis.
40
<PAGE> 4
LIQUIDITY AND CAPITAL RESOURCES
IPC Holdings is a holding company that conducts no reinsurance
operations of its own. During 1997, IPC Holdings incorporated a subsidiary in
the United Kingdom called IPCRe Services Limited, which carried out a
representative function in Europe on behalf of IPCRe. IPCRe Services ceased
trading in January, 2000. During 1998, IPCRe incorporated a subsidiary in
Ireland called IPCRe Europe Limited, which underwrites selected reinsurance
business in Europe. IPC Holdings' 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 greater than 25% of its statutory capital and surplus at the prior
year end, unless it has filed an affidavit with the Bermuda Registrar of
Companies stating that the declaration of those dividends has not caused IPCRe
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, 2000 was approximately $126 million.
IPCRe maintains a five-year, $300 million revolving credit facility
with a syndicate of lenders led by Bank One N.A. (formerly the First National
Bank of Chicago). The credit facility limits the amount of dividends that may
be paid by IPCRe to IPC Holdings 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, or ii) IPCRe's positive consolidated net income for the prior four
fiscal quarters over the aggregate amount of all dividends and distributions
paid during the same period. IPCRe obtained waivers for this covenant from the
lenders in the facility, in order to pay dividends in September and December,
1999.
Our sources of funds consist of premiums written, losses recovered from
retrocedents, 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, premiums retroceded, general and
administrative expenses and dividends. We generated cash flows from operations
of $28.7 million, $84.8 million and $108.5 million in the years ended December
31, 1999, 1998 and 1997 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, we have invested all cash flows not
required for operating purposes or payment of dividends. 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. As
noted above, loss payments during the years ended December 31, 1999 and 1998
were $74.3 million and $37.4 million, respectively.
Under U.S. generally accepted accounting principles, we are not
permitted to establish loss reserves with respect to 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.
Setting appropriate reserves for catastrophes is an inherently
uncertain process. Loss reserves represent our estimates, at a given point in
time, of ultimate settlement and administration costs of losses incurred
(including incurred but not reported losses). We regularly review and update
these estimates, using the most current information available to us.
Consequently, the ultimate liability for a catastrophic loss is likely to differ
from the original estimate. Whenever we determine that any existing loss
reserves are inadequate, we are required to increase the loss reserves with a
corresponding reduction, which could be material, in our 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 result in
significant upward or downward changes to our financial condition or results of
operations in any particular period.
With the exception of cash holdings, our 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. We do not hedge our investment portfolio against
interest rate risk. Accordingly, an increase in interest rates may result in
losses, both realized and unrealized, on our investments (see "Quantitative and
Qualitative Disclosure about Market Risk" below for further explanation).
41
<PAGE> 5
We have adopted Statement of Financial Accounting Standard No. 115 to
account for our marketable securities. As of December 31, 1999 all of our
investments were classified as "Available for Sale". Investments are carried at
fair market value and any unrealized gains or losses are reported as accumulated
other comprehensive income within shareholders' investment. At December 31, 1999
and 1998, shareholders' investment was $504.9 million and $566.0 million,
respectively.
At December 31, 1999, 90.7% of our 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, 1999 the portfolio had an average life
of 2.8 years and an average modified duration of 2.2 years.
Our functional currency is the U.S. dollar. Our operating currency is
generally also the U.S. dollar. However, premiums receivable and losses payable
in respect of a significant portion of our business are denominated in
currencies of other countries, principally industrial countries. Consequently,
we may, from time to time, experience currency exchange gains and losses that
could affect our financial position and results of operations. We currently do
not - and as a practical matter cannot - hedge our U.S. dollar currency exposure
with respect to potential claims until a loss payable in a non-U.S. dollar
currency occurs, after which we may match such liability with assets denominated
in the same currency, as we have done on two occasions, or purchase a currency
hedge, although we have not done so to date. This type of exposure could be
substantial. We also have not hedged our non-U.S. dollar currency exposure with
respect to premiums receivable, which generally are collected over the relevant
contract term. Our 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, 1999, we had
no forward contract hedges outstanding.
Our investment portfolio does not currently include options, warrants,
swaps, collars or similar derivative instruments. Our 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 with U.S.-based companies must provide
security to reinsureds to cover unpaid liabilities in a form acceptable to state
insurance commissioners. Typically, this type of 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 $27.5 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
$27.5 million. At December 31, 1999, 1998 and 1997, there were outstanding
letters of credit of $23.8 million, $12.4 million and $7.2 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. We believe that this facility, and
the relatively high quality of our investment portfolio, provides sufficient
liquidity to meet our cash demands.
Neither IPC Holdings nor IPCRe or their subsidiaries have any material
commitments for capital expenditures.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
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 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.
We believe 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.
42
<PAGE> 6
IPCRe, through AIG Global Investment Corp. (Ireland) Limited, an
indirect, wholly-owned 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.
The independent analyst calculated the VaR with respect to the net fair
value of IPCRe's financial instrument assets as of December 31, 1999. 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 year period ended December 31, 1999. 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,
1999 the VaR of IPCRe's investment portfolio was approximately $11.5 million.
The following table presents the VaR of each component of market risk
of IPCRe's investment portfolio at December 31, 1999:
<TABLE>
<S> <C>
MARKET RISK $ (000)
Currency 283
Interest Rate 6,930
Equity 8,644
- ----------------------------------------------------------------
Sum of Risk 15,857
Diversification Benefit (4,358)
- ----------------------------------------------------------------
TOTAL NET RISK 11,499
- ----------------------------------------------------------------
</TABLE>
IPCRe's balances receivable from reinsurance contracts it has written
are also exposed to the risk of loss of fair value, resulting from adverse
fluctuations in foreign currency exchange rates. We do not believe that the
amount of such currency risk was material to IPCRe's financial position or
results of operations at December 31, 1999.
YEAR 2000 ISSUE
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. This problem is commonly known
as the "Y2K", "Millennium Bug" and/or "Year 2000" issue. 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
Based upon performance from January 1, 2000 to date, we believe that
all of our critical systems, including hardware and software, are compliant. Our
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 performed on these systems. The testing was completed by September
30, 1998 and audited by technology consultants provided through AIG.
Accordingly, while there can be no assurance that these systems will continue
to be free from failure, we believe that any failure will not result in
material additional costs or loss of income.
Third Party Dependencies
Our Y2K compliance programme included a review of third party
dependencies, which includes non-information technology areas, including office
equipment, power supply, telecommunications and building infrastructure. To
date, we have not encountered any material problems with third parties which
resulted from lack of Y2K compliance.
43
<PAGE> 7
Costs
The costs we incurred up to December 31, 1999 in effecting Y2K
compliance of our systems are nominal and we do not anticipate that the future
costs of IPC's Year 2000 evaluation and compliance implementation will be
material. In addition, American International Company, Limited ("AICL"), an
indirect, wholly-owned subsidiary of AIG is responsible for the cost of
compliance of the administrative services that it supplies to us. Therefore, it
is not anticipated that the total costs incurred in relation to the Y2K issue
will result in significant additions to our expenses.
Policy Risks
The extent of worldwide property damage (whether insured or uninsured)
that resulted from failure or malfunction of non-compliant systems is not known.
Many of the insurance markets around the world in which our clients operate did
not established a clear position on whether to include or exclude Y2K risk in
policies available in those markets. Although Y2K exclusion clauses were
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 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.
IPCRe's reinsurance policies did not specifically include Y2K as a covered event
and IPCRe did not intend to provide specific coverage for losses arising from
Y2K events. We carefully monitored the terms of policy renewals with respect to
the extent that they oblige us to provide such coverage and, with respect to the
January 1, 1999 renewals, we declined certain business. 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 that coverage, if IPCRe is
obliged to provide such coverage or its policies are held to cover those losses,
there can be no assurance that those losses would not be significant or
significantly reduce our shareholders' investment, 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. The actual effects of inflation on the results of
IPCRe cannot be accurately known until claims are ultimately settled. Levels of
inflation also affect investment returns.
SUBSEQUENT EVENT
Because of the net loss of $22.7 million incurred in the fourth quarter
of 1999, on February 15, 2000, IPC Holdings announced that the Board of
Directors did not declare a quarterly dividend at its February meeting.
44
<PAGE> 8
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, 1999 and 1998, and
the related consolidated statements of income, comprehensive income,
shareholders' investment and cash flows for each of the years in the three year
period ended December 31, 1999. 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, 1999 and 1998 and the results of their
operations and their cash flows for each of the years in the three year period
ended December 31, 1999 in conformity with accounting principles generally
accepted in the United States.
Hamilton, Bermuda
February 4, 2000
45
<PAGE> 9
IPC HOLDINGS, LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1999 AND 1998
(Expressed in thousands of United States dollars except for per share amounts)
<TABLE>
<CAPTION>
1999 1998
--------- ---------
<S> <C> <C>
ASSETS:
Fixed maturity investments:
Available for sale, at fair market value (Amortized cost 1999: $501,424;
1998: $478,806) $ 487,826 $ 484,863
Equity investments, available for sale (Cost 1999: $70,699; 1998: $69,268) 78,859 94,152
Cash and cash equivalents 28,069 20,966
Reinsurance balances receivable 21,460 20,747
Funds held by reinsured companies - 2,434
Deferred premiums ceded 384 -
Loss reserves recoverable 4,585 -
Accrued investment income 13,689 14,752
Deferred acquisition costs 1,980 2,048
Prepaid expenses and other assets 4,090 3,129
--------- ---------
$ 640,942 $ 643,091
========= =========
LIABILITIES:
Reserve for losses and loss adjustment expenses $ 111,441 $ 52,226
Unearned premiums 16,364 17,602
Reinsurance balances payable 1,190 -
Deferred commissions 33 -
Accounts payable and accrued liabilities 6,983 7,311
--------- ---------
136,011 77,139
--------- ---------
SHAREHOLDERS' INVESTMENT:
Share capital - 1999: 25,033,932 shares outstanding, par value $0.01;
1998: 25,033,932 shares outstanding, par value $0.01 250 250
Additional paid-in capital 299,833 299,833
Retained earnings 210,286 234,928
Accumulated other comprehensive (loss) income (5,438) 30,941
--------- ---------
504,931 565,952
--------- ---------
$ 640,942 $ 643,091
========= =========
</TABLE>
APPROVED BY THE BOARD:
________________________ Director
________________________ Director
46
<PAGE> 10
IPC HOLDINGS, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR EACH OF THE YEARS IN THE THREE YEAR PERIOD ENDED DECEMBER 31, 1999
(Expressed in thousands of United States dollars except for per share amounts)
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
REVENUES:
Gross premiums written $ 97,162 $ 111,265 $ 117,050
Premiums ceded (3,816) - -
------------ ------------ ------------
Net premiums written 93,346 111,265 117,050
Change in unearned premiums 1,621 8,860 (4,564)
------------ ------------ ------------
Premiums earned 94,967 120,125 112,486
Net investment income 30,327 30,053 29,883
Realized gains (losses), net on investments 30,355 7,014 (3,616)
------------ ------------ ------------
155,649 157,192 138,753
------------ ------------ ------------
EXPENSES:
Losses and loss adjustment expenses 129,362 61,459 14,708
Acquisition costs 13,028 16,968 13,487
General and administrative expenses 9,641 10,680 8,676
Exchange loss, net 411 371 1,562
------------ ------------ ------------
152,442 89,478 38,433
------------ ------------ ------------
NET INCOME $ 3,207 $ 67,714 $ 100,320
============ ============ ============
Basic net income per common share $ 0.13 $ 2.71 $ 4.01
Diluted net income per common share $ 0.12 $ 2.55 $ 3.79
Weighted average number of common shares - basic 25,033,932 25,031,211 25,010,060
Weighted average number of common shares - diluted 25,988,116 26,547,062 26,492,401
</TABLE>
47
<PAGE> 11
IPC HOLDINGS, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
FOR EACH OF THE YEARS IN THE THREE YEAR PERIOD ENDED DECEMBER 31, 1999
(Expressed in thousands of United States dollars)
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
NET INCOME $ 3,207 $ 67,714 $100,320
-------- -------- --------
OTHER COMPREHENSIVE (LOSS) INCOME:
Holding (losses) gains, net on investments during period (6,024) 28,479 9,758
Reclassification adjustment for (gains) losses included in
net income (30,355) (7,014) 3,616
-------- -------- --------
(36,379) 21,465 13,374
-------- -------- --------
COMPREHENSIVE (LOSS) INCOME $(33,172) $ 89,179 $113,694
======== ======== ========
</TABLE>
48
<PAGE> 12
IPC HOLDINGS, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' INVESTMENT
FOR EACH OF THE YEARS IN THE THREE YEAR PERIOD ENDED DECEMBER 31, 1999
(Expressed in thousands of United States dollars except for per share amounts)
<TABLE>
<CAPTION>
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
COMMON SHARES PAR VALUE $0.01:
Balance, beginning of year $ 250 $ 250 $ 250
Additional shares issued - - -
--------- --------- ---------
Balance, end of year $ 250 $ 250 $ 250
========= ========= =========
ADDITIONAL PAID-IN CAPITAL:
Balance, beginning of year $ 299,833 $ 299,533 $ 299,267
Additional paid-in capital on shares issued - 300 266
--------- --------- ---------
Balance, end of year $ 299,833 $ 299,833 $ 299,533
========= ========= =========
RETAINED EARNINGS:
Balance, beginning of year $ 234,928 $ 219,034 $ 200,516
Net income 3,207 67,714 100,320
Dividends (27,849) (51,820) (81,802)
--------- --------- ---------
Balance, end of year $ 210,286 $ 234,928 $ 219,034
========= ========= =========
ACCUMULATED OTHER COMPREHENSIVE (LOSS) INCOME:
Balance, beginning of year $ 30,941 $ 9,476 $ (3,898)
Other comprehensive (loss) income (36,379) 21,465 13,374
--------- --------- ---------
Balance, end of year $ (5,438) $ 30,941 $ 9,476
========= ========= =========
</TABLE>
49
<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, 1999
(Expressed in thousands of United States dollars)
<TABLE>
<CAPTION>
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 3,207 $ 67,714 $ 100,320
Adjustments to reconcile net income to cash provided by
operating activities:
Amortization of investment premium, net 9 542 1,787
Realized (gains) losses, net on investments (30,355) (7,014) 3,616
Changes in, net:
Reinsurance balances receivable (713) 6,976 (2,036)
Funds held by reinsured companies 2,434 (2,422) (12)
Deferred premiums ceded (384) - -
Loss reserves recoverable (4,585) - -
Accrued investment income 1,063 (378) 641
Deferred acquisition costs 68 545 (239)
Prepaid expenses and other assets (961) (1,571) (379)
Reserve for losses and loss adjustment expenses 59,215 24,636 (893)
Unearned premiums (1,238) (8,860) 4,564
Reinsurance balances payable 1,190 - -
Deferred commissions 33 - -
Accounts payable and accrued liabilities (328) 4,637 1,109
--------- --------- ---------
28,655 84,805 108,478
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of equity investments (81,908) (3,633) (80,228)
Proceeds from sales of equity investments 110,798 17,804 239
Purchases of fixed maturity investments:
Available for sale (315,316) (335,087) (372,612)
Held to maturity - - (17,815)
Proceeds from sales of fixed maturity investments:
Available for sale 233,673 264,325 363,939
Proceeds from maturities of fixed maturity investments:
Available for sale 59,050 34,526 41,734
Held to maturity - - 23,750
--------- --------- ---------
6,297 (22,065) (40,993)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Additional share capital - 300 266
Cash dividends paid to shareholders (27,849) (51,820) (81,802)
--------- --------- ---------
(27,849) (51,520) (81,536)
--------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
7,103 11,220 (14,051)
--------- --------- ---------
CASH AND CASH EQUIVALENTS, beginning of year 20,966 9,746 23,797
--------- --------- ---------
CASH AND CASH EQUIVALENTS, end of year $ 28,069 $ 20,966 $ 9,746
========= ========= =========
</TABLE>
50
<PAGE> 14
IPC HOLDINGS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
(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 38% of premiums written in 1999 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 IPCRe Services Limited. This subsidiary's purpose was to perform the same
functions that were previously performed by the Company's representative office
in London. IPCRe Services Limited ceased trading in January, 2000.
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 IPCRe Services Limited
(together "IPC"). All significant intercompany transactions have been
eliminated in consolidation.
51
<PAGE> 15
b) Premiums and acquisition costs
Premiums written are recorded at the policy inception date and are based on
information received from ceding companies. Subsequent premium adjustments,
if any, are recorded in the period in which they are determined. Premiums
are earned on a pro-rata basis over the period for which reinsurance
coverage is provided. Unearned premiums represent the portion of premiums
written which is applicable to the unexpired terms of the policies in
force.
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" ("SFAS 115") as of
December 31, 1993. Upon adopting SFAS 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.
52
<PAGE> 16
f) Cash and cash equivalents
Cash and cash equivalents include amounts held in banks and time deposits
with maturities of less than three months from the date of purchase.
g) Net income per common share
The Company has adopted Statement of Financial Accounting Standards No.
128, "Earnings per Share", which requires dual presentation of basic and
diluted earnings per share. Diluted net income per common share is computed
by dividing net income by the weighted average number of shares of common
stock and common stock equivalents outstanding during the year. Stock
options granted to a shareholder of the Company were considered common
stock equivalents and were included in the number of weighted average
shares outstanding using the treasury stock method. Stock options granted
to employees on February 15, 1996, July 25, 1996, January 2, 1997, January
2, 1998, and January 4, 1999, as discussed in Note 7, 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) Accounting For Derivatives
The Financial Accounting Standards Board has recently issued Statement of
Financial Accounting Standard No. 137 ("SFAS 137"), which is an amendment
to Statement of Financial Accounting Standard No. 133, "Accounting for
Derivative Instruments and Hedging Activities," ("SFAS 133"). SFAS 137
defers the effective date of SFAS 133 to periods beginning after June 15,
2000. Management does not expect the impact of the adoption of SFAS 137/133
on the Company's financial position or results to be material.
j) 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.
53
<PAGE> 17
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, 1999 and December 31, 1998 are as follows:
<TABLE>
<CAPTION>
Cost or Gross Gross
Amortized Unrealized Unrealized Market
December 31, 1999 Cost Gains Losses Value
----------------- --------- --------- --------- ---------
<S> <C> <C> <C> <C>
U.S. Government and government agencies $ 84,901 $ 15 $ (4,946) $ 79,970
Other governments 133,913 2 (2,278) 131,637
Corporate 241,668 92 (6,172) 235,588
Supranational entities 40,942 15 (326) 40,631
--------- --------- --------- ---------
$ 501,424 $ 124 $ (13,722) 487,826
========= ========= ========= =========
Equity investments $ 70,699 $ 14,167 $ (6,007) $ 78,859
========= ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
Cost or Gross Gross
Amortized Unrealized Unrealized Market
December 31, 1998 Cost Gains Losses Value
----------------- --------- --------- --------- ---------
<S> <C> <C> <C> <C>
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
========= ========= ========= =========
</TABLE>
b) The contractual maturity dates of fixed maturity investments available for
sale as of December 31, 1999 are as follows:
<TABLE>
<CAPTION>
Amortized Market
Cost Value
-------- --------
<S> <C> <C>
Due in one year or less $ 56,463 $ 56,433
Due after one year through five years 411,665 400,844
Due after five years through ten years 33,296 30,549
-------- --------
$501,424 $487,826
======== ========
</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.
54
<PAGE> 18
Under an agreement effective September 20, 1994, amended in 1999, 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 $27,500 (1998: $20,000). As of December
31, 1999 and 1998 the bank had outstanding letters of credit of $23,774 and
$12,424, respectively.
d) Net investment income
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Interest on fixed maturity investments $ 29,315 $ 30,256 $ 30,816
Interest on cash and cash equivalents 1,844 781 1,860
Net amortization of premium on investments 9 (542) (1,787)
-------- -------- --------
31,168 30,495 30,889
Net dividend income from equities 748 980 428
Less: investment expenses (1,589) (1,422) (1,434)
-------- -------- --------
Net investment income $ 30,327 $ 30,053 $ 29,883
======== ======== ========
</TABLE>
e) Proceeds from sales of available for sale securities for the years ended
December 31, 1999, 1998 and 1997 were $344,471, $282,129 and $364,178,
respectively. Components of realized gains and losses are summarized in the
following table:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Fixed maturity investments:
Gross realized gains $ 1,021 $ 4,002 $ 277
Gross realized losses (987) (407) (3,925)
-------- -------- --------
Net realized gains/(losses) 34 3,595 (3,648)
-------- -------- --------
Equity investments:
Gross realized gains 33,604 3,753 41
Gross realized losses (3,283) (334) (9)
-------- -------- --------
Net realized gains 30,321 3,419 32
-------- -------- --------
Total net realized gains/(losses) $ 30,355 $ 7,014 $ (3,616)
======== ======== ========
</TABLE>
Changes in net unrealized (losses) gains were $(36,379), $21,465, and
$13,374, respectively, for the years ended December 31, 1999, 1998 and
1997.
55
<PAGE> 19
f) The following table summarizes the composition of the fair value of all
cash and cash equivalents and fixed maturity investments by rating:
<TABLE>
<CAPTION>
December 31, December 31,
1999 1998
------ ------
<S> <C> <C>
Cash and cash equivalents 5.4% 4.2%
U.S. Government and government agencies 15.5% 22.0%
AAA 30.5% 21.6%
AA 39.3% 42.2%
A 9.3% 10.0%
------ ------
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.
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, 1999 and December 31, 1998:
<TABLE>
<CAPTION>
December 31, 1999 December 31, 1998
---------------------------- -----------------------------
Carrying Fair Carrying Fair
Value Value Value Value
-------- -------- --------- --------
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 28,069 $ 28,069 $ 20,966 $ 20,966
Fixed maturity investments 487,826 487,826 484,863 484,863
Equity investments 78,859 78,859 94,152 94,152
</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.
56
<PAGE> 20
5. CEDED REINSURANCE
IPCRe utilizes reinsurance to reduce its exposure to large losses. Effective
January 1, 1999, IPCRe arranged a proportional reinsurance facility. 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. A
subsidiary of AIG is a participating reinsurer, and 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. Although reinsurance
agreements contractually obligate the reinsurers to reimburse IPCRe for the
agreed upon portion of its gross paid losses, they do not discharge IPCRe's
primary liability. Management believes that the risk of non-payment by the
reinsurers is minimal.
Premiums ceded to the reinsurance facility for the year ended December 31, 1999
were $3,816 written, of which $3,432 were earned. Balances payable to the
participants are displayed as reinsurance balances payable on the Balance Sheet.
6. 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, 1999 and December
31, 1998 consisted of the following:
<TABLE>
<CAPTION>
Shares Additional
Authorized Issued and Share Paid-in
Shares Fully Paid Capital Capital
---------- ---------- ----------- -------------
<S> <C> <C> <C> <C>
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 - - -
</TABLE>
There are various restrictions on the ability of certain shareholders to dispose
of their shares.
In March, June, September and December 1999, respectively, the Company paid
quarterly dividends of $0.3175, $0.3175, $0.3175 and $0.16, per share to holders
of its common 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.
57
<PAGE> 21
7. SHARE PURCHASE OPTIONS
In conjunction with the private placement offering discussed in Note 6, 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 amended Plan, approved by shareholders in June 1999, at the
discretion of the Compensation Committee of the Board of Directors (the
"Committee"), the Company may grant to certain employees up to 577,500 common
shares, $0.01 par value (1998: 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. On January 4, 1999 the Company
granted options to acquire 61,875 shares to officers and management employees at
an exercise price of $22.8125 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, 1999, 1998
and 1997.
A summary of the status of the Company's stock option plan as of December 31,
1999, 1998 and 1997 and changes during the years then ended is presented in the
table and narrative below:
<TABLE>
<CAPTION>
1999 1998 1997
------------------------- ---------------------- ------------------------
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 125,938 $ 24.38 90,767 $ 18.87 80,624 $ 16.54
Granted 61,875 $22.8125 51,500 $32.1875 38,500 $ 22.50
Exercised -- -- 16,329 $ 18.36 20,153 $ 16.54
Forfeited -- -- -- -- 8,204 $ 18.72
Expired -- -- -- -- -- --
Outstanding, end of year 187,813 $ 23.87 125,938 $ 24.38 90,767 $ 18.87
Exercisable, end of year 50,642 $ 22.02 10,969 $ 18.65 -- --
Weighted average fair value of
options granted (per share) $ 6.66 $11.73 $ 7.01
</TABLE>
The remaining weighted average contractual life of the options outstanding as of
December 31, 1999 is 7.73 years.
58
<PAGE> 22
The fair value of options granted on January 4, 1999 was estimated using the
Black-Scholes option pricing model, using an assumed risk-free rate of interest
of 4.62%; an expected dividend yield of 5.567%; an expected life of 7 years; and
an expected volatility of 45%.
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%.
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%.
8. 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>
Amount
Income Shares per Share
------------------------ ---------
December 31, 1999
-----------------
<S> <C> <C> <C>
Basic EPS $ 3,207 25,033,932 $ 0.13
Effect of Dilutive Options 954,184
Diluted EPS $ 3,207 25,988,116 $ 0.12
December 31, 1998
-----------------
Basic EPS $ 67,714 25,031,211 $ 2.71
Effect of Dilutive Options 1,515,851
Diluted EPS $ 67,714 26,547,062 $ 2.55
December 31, 1997
-----------------
Basic EPS $ 100,320 25,010,060 $ 4.01
Effect of Dilutive Options 1,482,341
Diluted EPS $ 100,320 26,492,401 $ 3.79
</TABLE>
9. RELATED PARTY TRANSACTIONS
In addition to the share purchase options discussed in Note 7, 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 indirect wholly-owned
subsidiary 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 indirect wholly-owned subsidiary of
AIG, under which AIMS provides administrative services for an annual fee of
approximately $38 per annum. This agreement may be terminated by either
party subject to three months' written notice.
59
<PAGE> 23
b) Investment management services
IPCRe is party to an agreement with AIG Global Investment Corp. (Ireland)
Limited ("AIGGIC"), an indirect wholly-owned subsidiary 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.
c) Investment custodian services
IPCRe is party to an agreement with AIG Trust Services Limited ("AIGTS"),
an indirect wholly-owned subsidiary 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 wholly-owned
subsidiaries of AIG:
<TABLE>
<CAPTION>
Investment Investment
Administrative Management Custodian
Services Services Services
-------- -------- --------
<S> <C> <C> <C>
Year ended December 31, 1999 $2,454 $1,219 $370
Year ended December 31, 1998 3,012 1,075 347
Year ended December 31, 1997 2,812 1,121 313
</TABLE>
The following amounts were payable as of the balance sheet date to
subsidiaries of AIG for these services:
<TABLE>
<S> <C>
December 31, 1999 $ 567
December 31, 1998 1,689
</TABLE>
d) Related Party Business
IPCRe assumed premiums from companies affiliated with two shareholders of
the Company. Premiums assumed were $8,862, $9,858 and $11,359,
respectively, for the years ended December 31, 1999, 1998 and 1997. In
addition, IPCRe assumed premiums through brokers related to shareholders of
the Company totaling $4,870, $6,080 and $7,903, respectively, for the years
ended December 31, 1999, 1998 and 1997. Brokerage fees and commissions
incurred in respect of this business were approximately $467, $601 and
$790, respectively, for the years ended December 31, 1999, 1998 and 1997.
IPCRe ceded premiums to a company affiliated with a shareholder (see Note
5). Premiums ceded were $382, $0 and $0, respectively, for the years ended
December 31, 1999, 1998 and 1997. All such transactions were undertaken on
normal commercial terms. Reinsurance premiums receivable due from related
parties as of December 31, 1999 and December 31, 1998 were $3,886 and
$3,653, respectively. Reinsurance balances payable to related parties as of
December 31, 1999 and 1998 were $119 and $0, 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.
60
<PAGE> 24
10. RESERVE FOR LOSSES AND LOSS ADJUSTMENT EXPENSES
Activity in the reserve for losses and loss adjustment expenses is summarized as
follows:
<TABLE>
<CAPTION>
1999 1998 1997
--------- -------- --------
<S> <C> <C> <C>
Balance, beginning of year $ 52,226 $ 27,590 $ 28,483
--------- -------- --------
Net losses incurred related to:
Current year 116,322 55,815 15,368
Prior years 13,040 5,644 (660)
--------- -------- --------
129,362 61,459 14,708
--------- -------- --------
Net paid losses related to:
Current year (37,013) (22,256) (1,658)
Prior years (37,270) (15,100) (13,531)
--------- -------- --------
(74,283) (37,356) (15,189)
Effect of foreign exchange movements (449) 533 (412)
--------- -------- --------
Total net reserves, end of year 106,856 52,226 27,590
Loss reserves recoverable, end of year 4,585 -- --
--------- -------- --------
Gross loss reserves, end of year $ 111,441 $ 52,226 $ 27,590
========= ======== ========
</TABLE>
Losses incurred in the year ended December 31, 1999 in respect of prior years
included increases related to Typhoon Vicki, the cyclone which struck Gujarat
State in India, Cats# 47, 51, 54 and 56 in the United States, as well as
Hurricanes Bonnie and Mitch. In addition, there were late reported claims from
Italian crop-hail covers, a hailstorm which struck Brisbane, Australia and
winter storms which struck Ireland, in December 1998.
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.
An independent firm of actuaries has reviewed the Company's loss reserves.
61
<PAGE> 25
11. WRITTEN PREMIUM BY GEOGRAPHIC REGION
Financial information relating to reinsurance premiums written by geographic
region is as follows:
<TABLE>
<CAPTION>
December 31, 1999 December 31, 1998 December 31, 1997
--------------------- --------------------- ---------------------
Premiums Premiums Premiums
Written % Written % Written %
--------------------- --------------------- ---------------------
<S> <C> <C> <C> <C> <C> <C>
Geographic Area (1)
- ---------------
United States $ 37,043 38.1% $ 50,796 45.7% $ 54,200 46.3%
Worldwide (2) 14,570 15.0% 14,050 12.6% 16,141 13.8%
Worldwide
(excluding the U.S.) (3) 5,739 5.9% 3,513 3.2% 2,497 2.1%
United Kingdom 9,684 10.0% 13,533 12.2% 12,392 10.6%
Europe (excluding the U.K.) 9,748 10.0% 10,022 9.0% 11,232 9.6%
Japan 3,492 3.6% 4,139 3.7% 2,794 2.4%
Australia/New Zealand 7,774 8.0% 8,589 7.7% 9,433 8.1%
Other 9,112 9.4% 6,623 5.9% 8,361 7.1%
-------------------- -------------------- -------------------
$ 97,162 100.0% $111,265 100.0% $117,050 100.0%
==================== ==================== ===================
</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.
12. CONCENTRATION AND CREDIT RISK
As of December 31, 1999 and December 31, 1998, IPC held U.S. Treasury notes
which represented approximately 8% and 13%, respectively, of shareholders'
investment.
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 33%, 25% and 22%, respectively, of
total premiums written for the years ended December 31, 1999, 1998 and 1997.
Five brokers accounted for approximately 76%, 71% and 68%, respectively, of
total premiums written for the years ended December 31, 1999, 1998 and 1997.
13. 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 IPCRe 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, 1999, 1998 and 1997 were $0, $0 and $849, respectively, and
are included in realized gains (losses), net in the accompanying consolidated
statements of income. As of December 31, 1999 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.
62
<PAGE> 26
14. 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,
1999 no amounts have been drawn under this facility, and IPCRe was in compliance
with all covenants under this facility, other than one for which a waiver had
been given by the participants.
15. 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, 1999 December 31, 1998
----------------- -----------------
<S> <C> <C>
Actual statutory capital and surplus $502,709 $563,122
Minimum statutory capital and surplus $100,000 $100,000
</TABLE>
IPCRe's statutory net income for the years ended December 31, 1999, 1998 and
1997, was $4,018, $69,305 and $101,390, 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, 2000 without
such notification is approximately $125,677.
16. 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
contributions under the various plans are fully funded, and amounted to
approximately $99, $98 and $80 in 1999, 1998 and 1997, respectively.
17. 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.
IPCRe Services Limited is a tax-paying entity subject to the jurisdiction of the
Government of the United Kingdom. The amount of taxes incurred for 1999, 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 1999 and 1998 is not material to the consolidated financial
statements.
63
<PAGE> 27
18. 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.
19. UNAUDITED QUARTERLY FINANCIAL DATA
<TABLE>
<CAPTION>
Quarter Quarter Quarter Quarter
Ended Ended Ended Ended
March 31, June 30, Sept. 30, Dec. 31,
1999 1999 1999 1999
------- ------- ------- --------
<S> <C> <C> <C> <C>
Gross premiums written $65,315 $18,384 $ 8,750 $ 4,713
Net premiums earned 23,778 26,932 21,299 22,958
Net investment income 7,413 7,651 7,511 7,752
Realized gains (losses), net 6,545 23,633 286 (109)
Losses and loss adjustment expenses 16,773 49,142 16,109 47,338
Net income 15,216 2,913 7,797 (22,719)
Net income per common share - basic $ 0.61 $ 0.12 $ 0.31 $ (0.91)
Net income per common share - diluted $ 0.58 $ 0.11 $ 0.30 $ (0.91)
</TABLE>
<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>
Gross premiums written $72,173 $18,398 $15,671 $ 5,023
Net 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>
64
<PAGE> 28
20. SUBSIDIARY FINANCIAL DATA
Summarized consolidated financial data of the subsidiary, IPCRe Limited, is as
follows:
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
Statement of Income December 31, 1999 December 31, 1998 December 31, 1997
----------------- ----------------- -----------------
<S> <C> <C> <C>
Gross written premiums $ 97,162 $ 111,265 $ 117,050
Net premiums earned 94,967 120,125 112,486
Investment income 30,322 30,038 29,858
Realized gain (loss), net 30,355 7,014 (3,616)
Incurred losses (129,362) (61,459) (14,708)
Acquisition costs (13,028) (16,968) (13,487)
General & admin. expenses and exchange
gain (loss), net (9,362) (10,220) (8,790)
--------- --------- ---------
Net Income $ 3,892 $ 68,530 $ 101,743
========= ========= =========
Loss ratio 136.2% 51.2% 13.1%
Expense ratio (excluding exchange gain
(loss), net) 23.1% 22.3% 18.4%
Combined ratio 159.3% 73.5% 31.5%
</TABLE>
<TABLE>
<CAPTION>
Balance sheet at December 31, 1999 December 31, 1998
----------------- -----------------
<S> <C> <C>
Cash & investments $ 594,684 $599,871
Reinsurance balances receivable 21,459 20,747
Other assets 26,069 23,356
--------- --------
Total assets $ 642,212 $643,974
========= ========
Unearned premiums $ 16,364 $ 17,602
Reserves for losses 111,441 52,226
Other liabilities 8,186 7,438
--------- --------
Total liabilities 135,991 77,266
--------- --------
Common stock 250,000 250,000
Additional paid-in capital 49,500 49,500
Retained earnings 212,159 236,267
Accumulated other comprehensive (loss)
income (5,438) 30,941
--------- --------
Total liabilities and shareholders'
investment $ 642,212 $643,974
========= ========
</TABLE>
65
<PAGE> 1
EXHIBIT 21.1
SUBSIDIARIES OF THE REGISTRANT
IPCRe Limited
IPCRe Services Limited
66
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference in this Form 10-K to all previously filed registration statements on
Form S-8 of IPC Holdings, Ltd. of our reports dated February 4, 2000.
_________________
ARTHUR ANDERSEN
Hamilton, Bermuda
March 22, 2000
67
<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, 1999 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FINANCIAL STATEMENTS (AND THE
NOTES THERETO) CONTAINED IN SUCH REPORT.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JAN-01-1999
<PERIOD-START> DEC-31-1999
<PERIOD-END> DEC-31-1999
<DEBT-HELD-FOR-SALE> 487,826
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 78,859
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 566,685
<CASH> 28,069
<RECOVER-REINSURE> 4,585
<DEFERRED-ACQUISITION> 1,980
<TOTAL-ASSETS> 640,942
<POLICY-LOSSES> 111,441
<UNEARNED-PREMIUMS> 16,364
<POLICY-OTHER> 4,181
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 0
250
0
<COMMON> 0
<OTHER-SE> 504,681
<TOTAL-LIABILITY-AND-EQUITY> 640,942
94,967
<INVESTMENT-INCOME> 30,327
<INVESTMENT-GAINS> 30,355
<OTHER-INCOME> 0
<BENEFITS> 129,362
<UNDERWRITING-AMORTIZATION> 13,028
<UNDERWRITING-OTHER> 9,641
<INCOME-PRETAX> 3,207
<INCOME-TAX> 0
<INCOME-CONTINUING> 3,207
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,207
<EPS-BASIC> 0.13
<EPS-DILUTED> 0.12
<RESERVE-OPEN> 52,226
<PROVISION-CURRENT> 116,322
<PROVISION-PRIOR> 13,040
<PAYMENTS-CURRENT> (37,013)
<PAYMENTS-PRIOR> (37,270)
<RESERVE-CLOSE> 111,441
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
