<PAGE> 1
Filed Pursuant to Rule 424(b)(3)
Registration No. 333-04195
Prospectus Supplement No. 4
to
Prospectus Dated July 18, 1996
------------------
GCR HOLDINGS LIMITED
ORDINARY SHARES
(par value $0.10 per share)
------------------
See "Risk Factors" on pages 13 through 23 of the Prospectus dated July 18,
1996 for certain considerations relevant to an investment in the Ordinary
Shares.
The Ordinary Shares have been approved for quotation in the Nasdaq National
Market under the symbol "GCREF."
---------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
--------------------
This Prospectus Supplement, together with the Prospectus dated July 18,
1996, has been prepared for and is to be used by Goldman, Sachs & Co. in
connection with offers and sales of the Ordinary Shares related to market-making
transactions, at prevailing market prices, related prices or negotiated prices.
The Company will not receive any of the proceeds of such sales. Goldman, Sachs &
Co. may act as a principal or agent in such transactions. See "Plan of
Distribution."
GOLDMAN, SACHS & CO.
--------------------
The date of this Prospectus Supplement is December 2, 1996.
Page 1 of 102
<PAGE> 2
This Prospectus Supplement is intended to be read in conjunction with the
Prospectus dated July 18, 1996 (the "Prospectus"). Capitalized terms used in
this Prospectus Supplement and not otherwise defined herein have the same
meanings as in the Prospectus.
The closing for the Offering referred to in the Prospectus occurred on July
24, 1996. The underwriters exercised a portion of their over-allotment option
which represented 600,000 shares on July 29, 1996. The closing for the shares
represented by the underwriters' over-allotment option occurred on August 1,
1996.
On November 29, 1996, the Company filed with the Securities and Exchange
Commission (the "Commission"), its Annual Report on Form 10-K (the "Form 10-K"),
a copy of which is attached hereto and deemed to be a part hereof. On November
26, 1996, the Company mailed to its shareholders and filed with the Commission,
its Schedule 14A, including the definitive notice of Annual General Meeting, the
definitive Proxy Statement (the "Proxy Statement") and definitive form of proxy
card. Portions of the Proxy Statement were incorporated by reference into the
Form 10-K. Such portions of the Proxy Statement are attached hereto and deemed
to be a part hereof.
Page 2 of 102
<PAGE> 3
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1996 COMMISSION FILE NO. 0-27220
GCR HOLDINGS LIMITED
(Exact name of Registrant as specified in its charter)
CAYMAN ISLANDS NOT APPLICABLE
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification
Number)
SOFIA HOUSE, 48 CHURCH STREET, HAMILTON HM12 BERMUDA
(Address of principal executive offices)
(441) 292-9415
(Registrant's telephone number, including area code)
<TABLE>
<CAPTION>
<S> <C>
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12 (g) OF THE ACT: ORDINARY SHARES, PAR VALUE $0.10 PER SHARE (THE
"ORDINARY SHARES")
</TABLE>
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 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
nonaffiliates of the Registrant, as of November 21, 1996, was approximately
$513,114,000, based on the last reported sale price of the Ordinary Shares on
the Nasdaq National Market system on that date.
The number of Common Shares outstanding as of November 21, 1996 was 25,674,255.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Annual Report to Shareholders mailed to
shareholders on or about November 25, 1996 (the "Annual Report") are
incorporated by reference into Part II of this Form 10-K. With the exception of
the portions of the Annual Report specifically incorporated by reference herein,
the Annual Report is not deemed to be filed as part of this Form 10-K.
Portions of the Registrant's definitive proxy statement which was filed with the
Securities and Exchange Commission (the "Commission") pursuant to Regulation 14A
under the Securities Exchange Act of 1934, as amended (the "Exchange Act")
relating to the Registrant's Annual Meeting of Shareholders to be held on
December 19, 1996 (the "Proxy Statement") are incorporated by reference into
Part III of this Form 10-K. With the exception of the portions of the Proxy
Statement specifically incorporated by reference herein, the Proxy Statement is
not deemed to be filed as part of this Form 10-K.
-1-
Page 3 of 102
<PAGE> 4
GCR HOLDINGS LIMITED
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I
<S> <C> <C>
Item 1 Business 3
Item 2 Properties 27
Item 3 Legal Proceedings 27
Item 4 Submission of Matters to a Vote of Security Holders 27
PART II
Item 5 Market for Registrant's Securities and Related
Shareholder Matters 32
Item 6 Selected Financial Data 37
Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations 37
Item 8 Financial Statements and Supplementary Data 38
Item 9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 38
PART III
Item 10 Directors and Executive Officers of the Registrant 39
Item 11 Executive Compensation 39
Item 12 Security Ownership of Certain Beneficial Owners
and Management 39
Item 13 Certain Relationships and Related Transactions 39
PART IV
Item 14 Exhibits, Financial Statement Schedules and Reports 40
on Form 8-K
Signatures 46
</TABLE>
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<PAGE> 5
ITEM 1. BUSINESS
Unless the context otherwise requires, references herein to the "Company" mean
GCR Holdings Limited, a Cayman Islands company, and references herein to "GCR"
mean the Company together with its wholly-owned subsidiary Global Capital
Reinsurance Limited, a Bermuda corporation ("Global Capital Re"). Certain terms
used below are defined in the "Glossary of Selected Insurance Terms" appearing
on pages 28-31 of this report. GCR's fiscal year begins on October 1. References
to a specific fiscal year means the fiscal year ending on September 30 of the
specified year. GCR began operations on October 1993 and, because of the
start-up nature of its operations in the first year, comparisons between fiscal
1994 and later periods may not be meaningful.
GENERAL
The Company, through Global Capital Re, its Bermuda-domiciled subsidiary,
provides property catastrophe and, to a limited extent, other short-tail
property reinsurance on a worldwide basis. In fiscal year 1996, approximately
68% of this reinsurance covered property catastrophe risks, of which 92% was
written on an excess-of-loss basis. Substantially all reinsurance written by
Global Capital Re was written for primary insurers rather than reinsurers.
Global Capital Re had 234 clients on September 30, 1996 including many of the
leading insurance companies around the world. At that date, approximately 48.7%
of Global Capital Re's clients were based in the United States and approximately
56% of its premiums written on policies in force related to U.S. risks. The
balance of Global Capital Re's clients and covered risks were located in the
largest international insurance markets, principally in Europe, Japan and
Australia/New Zealand.
GCR was established in October 1993 through the sponsorship of Goldman, Sachs &
Co., a leading international investment banking firm, and Johnson & Higgins, a
leading global provider of insurance and reinsurance brokerage services. These
firms, together with their affiliates, beneficially own approximately 3.8% and
3.7% respectively, of the Ordinary Shares. GCR was formed in response to a
severe imbalance between the global supply of and demand for property
catastrophe reinsurance that developed in 1993. This imbalance resulted from
relatively high levels of worldwide property catastrophe losses in prior years,
particularly 1992 when Hurricane Andrew occurred, causing some reinsurers to
withdraw from the market or curtail their participation and leading to a very
substantial increase in premium rates and retention levels throughout this
market in 1993. Based on industry trade publications and information obtained
from clients and brokers, management believes that, in response to these
developments, over $4.0 billion of capital has entered the Bermuda-based
property catastrophe reinsurance market since November 1992, making Bermuda a
leading global source of this reinsurance.
GCR began operations in October of 1993.
GCR's principal operating objective is to underwrite property catastrophe risks
in a manner that maximizes shareholders' return on equity. Accordingly, its
underwriting strategy is based on two main principles. First, in selecting its
reinsurance programs, GCR targets clients with reputations for quality
underwriting and risks that its analysis indicates have superior risk/return
profiles. Second, in managing its portfolio of reinsurance contracts, GCR seeks
to limit its aggregate loss exposure in any one geographic zone to a specified
level rather than measuring and managing risk primarily in relation to premium
volume.
Although GCR remains focused principally on the property catastrophe reinsurance
market, it continues to explore opportunities to build or acquire new lines of
business throughout the world. Management's objective is to identify new lines
that are compatible with GCR's property catastrophe lines, that do not
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<PAGE> 6
increase the concentration of GCR's exposure to catastrophic events and that
will contribute to shareholder value. To date, these efforts have focused on
expanding GCR's portfolio of marine excess-of-loss reinsurance business, which
represents a growing portion of GCR's premiums written. The Company has also
expanded modestly in the satellite reinsurance business. There can be no
assurance that new opportunities will be identified or as to the effect that any
new lines might have on GCR.
The Company recently announced the formation of a Bermuda-based joint venture
with Capital Re Corporation that will specialize in financial reinsurance,
including financial guaranty, mortgage guaranty and finite risk reinsurance. The
joint venture will be formed with up to $50 million of committed capital,
including $10.0 million of cash and a $15.0 million letter of credit from the
Company, and is expected to begin operations by year-end 1996. See "Item 13.
Certain Relationships and Related Transactions".
THE REINSURANCE INDUSTRY
Historically, property catastrophe reinsurers have experienced significant
fluctuations in operating results due to competition, frequency of occurrence or
severity of catastrophic events, levels of capacity, general economic conditions
and other factors. Demand for reinsurance is influenced significantly by
underwriting results of primary property insurers and prevailing general
economic conditions. The supply of reinsurance is related directly to prevailing
prices and levels of surplus capacity which, in turn, may fluctuate in response
to changes in rates of return on equity being earned in the reinsurance
industry. As a result, the property catastrophe reinsurance business
historically has been a cyclical industry characterized by periods of intense
price competition due to excessive underwriting capacity as well as periods when
shortages of capacity permitted favorable premium levels. Increases in the
frequency and severity of losses suffered by insurers can significantly effect
these cycles. Conversely, the absence of severe or frequent catastrophe events
could result in declining premium rates in the global market, such as appears to
be occurring at present. GCR can be expected to experience the effects of such
cyclicality.
Management believes that, as a result of favorable loss experience in recent
periods, premium rates in the global reinsurance market have declined by an
average of 10% to 15% in 1995 compared to 1994 and by an average of 10% to 15%
in the first nine months of calendar year 1996 compared to the same period last
year. If and while this favorable loss experience continues, management expects
further downward pressure on rates during the remainder of 1996 and into 1997.
These declines have adversely affected the level of premiums written by GCR.
There can be no assurance that the terms and conditions of trade in this market
will not deteriorate further in the future as a result of additional capital
provided by recent or future market entrants, loss experience or other factors.
Reinsurance Products
GCR principally provides treaty reinsurance to insurers of commercial and
personal property worldwide, typically under treaties having a duration of one
year. As described below, GCR writes this reinsurance principally on an
excess-of-loss basis, with attachment points designed to minimize claims from
relatively high frequency, low severity events, although it also provides select
clients with limited coverage on a proportional basis whereby it assumes a
specified percentage of the primary insurers entire loss exposure to a covered
risk. GCR's property catastrophe reinsurance contracts, which include some
written on a proportional basis as well as those written on an excess-of-loss
basis, accounted for 72% of GCR's premiums written during fiscal year 1995 and
67% of those written in fiscal year 1996. Coverage provided under these
contracts is generally "all risk" in nature. The balance of these premiums
written was derived from other property reinsurance, including other
proportional property, single risk excess-of-loss and marine reinsurance.
GCR's predominant exposure under these other coverages is to property
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<PAGE> 7
damage from earthquakes, hurricanes, windstorms and hailstorms, although GCR is
also exposed to losses from sources as diverse as freezes, riots, floods,
industrial explosions, fires and other man-made or natural disasters. In
accordance with market practice, GCR's property reinsurance contracts generally
exclude certain risks such as terrorism, war, pollution, nuclear contamination
and radiation.
Because GCR underwrites property catastrophe reinsurance and has large aggregate
exposures to natural and man-made disasters, management expects that GCR's claim
experience generally will involve infrequent events of great severity. The
occurrence of claims under GCR's reinsurance portfolio, therefore, will be
highly unpredictable and is likely to result in substantial volatility in GCR's
financial results for any fiscal quarter or year. Because catastrophes are an
inherent risk of GCR's business, a major event or series of events can be
expected to occur from time to time and to have a material adverse effect on
GCR's financial condition or results of operations or on its ability to write
new business, pay dividends or meet its obligations to creditors (e.g.,
resulting in a default under the Company's credit agreement with its lenders).
GCR expects that increases in the values and concentrations of insured property
and the effects of inflation will continue to increase the severity of
catastrophe losses in the future, and, furthermore, that its dividend policy
could exacerbate the adverse effects of unfavorable loss experience by utilizing
capital which might otherwise be available to it to sustain losses. GCR's
operating results to date are not necessarily indicative of its future
performance or the effectiveness of its underwriting strategy, particularly in
light of GCR's limited operating history and the fact that its reinsurance
portfolio was not fully established until recently.
GCR seeks to diversify its reinsurance portfolio to moderate the volatility
described in the preceding paragraph. The principal means of diversification are
by type of reinsurance and geographic coverage, by varying attachment points and
imposing coverage limits per program.
TYPES OF REINSURANCE
The following table sets forth GCR's premiums written and number of programs
written by type of reinsurance.
<TABLE>
<CAPTION>
(dollars in thousands)
Year Ended September 30
1996 1995 1994
Premiums Number of Premiums Number of Premiums Number of
Type of Reinsurance Written Programs Written Programs Written Programs
------------------- ------- -------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Catastrophe excess-of-loss ...... $ 74,885 196 $ 91,037 207 $ 78,095 185
Proportional property
reinsurance (1) ........... 27,612 30 28,055 28 13,130 18
Risk excess-of-loss ............. 4,129 29 5,641 29 6,849 22
Marine reinsurance .............. 7,270 41 6,016 25 716 5
Retrocessional reinsurance ...... 4,550 10 5,390 15 2,626 9
Other ........................... 1,356 8 745 8 649 6
======== ======== ======== ======== ======== ========
Total ...................... $119,802 314 $136,884 312 $102,065 245
======== ======== ======== ======== ======== ========
</TABLE>
(1) Includes $7.9 million and $6.1 million of premiums on proportional
reinsurance involving catastrophe risks in the year ended September 30,
1995 and the year ended September 30, 1996 respectively.
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<PAGE> 8
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 insurer exceed the attachment point specified
in the reinsurance contract with the insurer. Most of GCR's property catastrophe
excess-of-loss contracts limit coverage to one occurrence in a contract year,
although these contracts generally provide for coverage of a second occurrence
after the payment of a reinstatement premium.
Proportional Property Reinsurance. GCR writes proportional property reinsurance
treaties when it believes that premium rates are attractive. The substantial
majority of these contracts provide coverage for property loss due to
non-catastrophe events, such as fires. Under these contracts, GCR assumes a
specified percentage of the risk exposure under a portfolio of primary property
insurance contracts written by the ceding insurer and receives an equal
percentage of the premium received by the ceding insurer. The ceding insurer
receives a commission, based upon the premiums ceded to the reinsurers and may
also be entitled to receive a profit commission based on the ratio of losses,
loss adjustment expense and the reinsurer's expenses to premiums ceded. Because
there are no attachment points, a proportional property reinsurer is dependent
upon the ceding insurer's underwriting, pricing and claims administration to
yield an underwriting profit. GCR generally obtains detailed underwriting
information concerning the exposures underlying portfolios of primary insurance
contracts. In addition, almost all of GCR's proportional property reinsurance
contracts have aggregate risk exposure limits per event.
Risk Excess-of-Loss Reinsurance. GCR also writes risk excess-of-loss property
reinsurance. This reinsurance responds to a loss of the reinsured in excess of
its retention level on a single risk, rather than to aggregate losses for all
covered risks, as does catastrophe reinsurance. A risk in this context might
mean the insurance coverage on one building or a group of buildings or the
insurance coverage under a single policy which the reinsured treats as a single
risk. Risk excess contracts are generally all risk in nature, similar to
property catastrophe reinsurance, but tend to cover risks that are substantially
larger and thus more concentrated. Property risk excess-of-loss contracts have
traditionally provided for unlimited reinstatement, sometimes with payment of an
additional premium. Most of the risk excess-of-loss treaties in which GCR
participates contain a relatively low loss-per-event limit on GCR's liability.
Marine Reinsurance. GCR also writes short-tail marine reinsurance for selected
international insurers. Although they primarily involve property damage, certain
marine risks may involve casualty coverage arising from the same event causing
the property damage. Coverage is generally written in excess of a substantial
attachment point, so events likely to cause a claim will occur infrequently but
be relatively severe. Such events might include the destruction of a drilling
platform or the loss of a sizable vessel and its contents. GCR is continuing to
expand its marine reinsurance portfolio.
Retrocessional Reinsurance. Because a provider of retrocessional reinsurance has
limited access to underwriting information about the risk exposures under the
primary contracts, GCR's policy is not to write retrocessional coverage except
in a limited number of special cases, and then only to a highly select number of
clients who can demonstrate a focus on quality underwriting. Pursuant to those
few retrocessional treaties, GCR provides property catastrophe coverage, on
either an excess-of-loss or a proportional basis, to other reinsurers or
retrocedents that in turn provide such coverage generally on an excess-of-loss
basis. GCR provides retrocessional coverage in cases where premium rates are
believed to be exceptionally attractive or the client relationship involves
substantial new business opportunities.
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<PAGE> 9
Geographic Diversification
GCR seeks to diversify its exposure across key geographic zones around the world
in order to obtain the optimum spread of risk. At present GCR writes a higher
percentage of its business (based both on the source of premiums and risk
exposure) within the United States, where catastrophe excess-of-loss rates are
higher than in other markets. Management believes that these higher rates are
due to stronger demand for reinsurance by ceding insurers and reinsurers due to
a higher frequency and severity of catastrophic losses in recent years.
Management believes that, compared to the U.S. market, the incidence of
catastrophic risk events is lower in the European and other non-U.S. markets
and, therefore, intends to increase the portion of its reinsurance portfolio
related to non-U.S. markets. As part of this effort, in October 1994 the Company
opened an office in Brussels, Belgium from which it conducts its marketing
efforts in the European market and recently added an experienced European
underwriter to its Bermuda-based staff. The portion of GCR's premiums written
under contracts with non-U.S. insurers rose from approximately 36% in fiscal
year 1994 to approximately 43% in fiscal year 1995 and 44% in fiscal year 1996.
The principal property catastrophe reinsurance markets outside the United States
(i.e., those in developed countries with an existing insurance industry
infrastructure) are attractive to GCR primarily because they allow GCR to
diversify the geographic loss exposures in its book of business. The Company
believes that this diversification is an important means of enhancing the
long-term viability of GCR and, therefore, the security it can offer to its
clients.
GCR believes, however, that existing relationships between clients and
reinsurers tend to be, as a general matter, more established in these non-U.S.
markets, particularly in Europe, making the development of new client
relationships in these markets somewhat more difficult to achieve. In addition,
particularly in Europe but also to a lesser extent elsewhere in these non-U.S.
markets, catastrophe losses have not been as severe in recent years as they have
been in the United States, resulting in lower premium rates for non-U.S.
business. This rate disparity is reflected in the respective percentages of
GCR's written premiums attributable to contracts with U.S. insurers (56%) and to
those with non-U.S. insurers (44%) in fiscal year 1996, despite the fact that
the respective numbers of such contracts are roughly equal.
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<PAGE> 10
The following table sets forth the amount and percentage of GCR's premiums
written allocated to the territory of coverage exposure.
<TABLE>
<CAPTION>
Year Ended September 30,
1996 1995 1994
---- ---- ----
Geographic Area (dollars in thousands)
(1)
- ----------------------
<S> <C> <C> <C> <C> <C> <C>
United States .......... $ 66,454 55.5% $ 78,069 57.0% $ 65,424 64.1%
Japan .................. 5,700 4.8 11,279 8.2 9,798 9.6
Europe (including
the U.K.) ......... 11,572 9.7 9,898 7.2 6,328 6.2
Australia and
New Zealand ....... 5,573 4.6 7,348 5.4 5,103 5.0
Caribbean .............. 3,074 2.5 5,129 3.8 919 0.9
Worldwide(2) ........... 21,113 17.6 20,133 14.7 8,573 8.4
Worldwide, excluding
U.S. (3) .......... 4,643 3.9 2,433 1.8 2,245 2.2
Other .................. 1,673 1.4 2,595 1.9 3,675 3.6
======== ===== ======== ===== ======== =====
Total ........... $119,802 100.0% $136,884 100.0% $102,065 100.0%
======== ===== ======== ===== ======== =====
</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 located anywhere in the world,
including the United States.
(3) Includes contracts that cover risks located anywhere in the world,
excluding the United States
One of the most important ways that GCR seeks to manage its portfolio risk
exposure is to limit contract coverage by specific geographic zones. Within the
United States, GCR's zones of highest exposure to loss (though not necessarily
the highest risk of loss) are in the southeast, mid-Atlantic and midwest
regions. Outside the United States, GCR's zones of highest exposure to loss are
in the northern regions of Europe (including the United Kingdom) and Sydney,
Australia.
Program Limits
GCR's underwriting guidelines limit catastrophe excess-of-loss exposure under
any single contract, or under all contracts with a single client, to $25 million
for any one catastrophic event. As indicated in the table below, the Company
currently has only six clients that have single event limits between $15 million
and $25 million.
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<PAGE> 11
The following table sets forth the number and percentage of the Company's
clients with catastrophe excess-of-loss programs in force at September 30, 1996
by single event liability limits.
<TABLE>
<CAPTION>
SINGLE EVENT LIABILITY LIMIT NUMBER OF CLIENTS % OF TOTAL
<S> <C> <C>
$20-25 million 2 1.1%
$15-20 million 4 2.2
$10-15 million 13 7.0
$ 5-10 million 30 16.0
Less than $5 million 137 73.7
--- ----
Total 186 100.0%
=== ======
</TABLE>
UNDERWRITING
General
GCR's principal operating objective is to underwrite property catastrophe risks
in a manner that maximizes capital efficiency for shareholders. Accordingly, its
underwriting strategy is based on two main principles, selecting programs with
superior risk/return profiles and managing its aggregate loss exposure by means
of geographic zone limits. These principles are described in more detail below.
GCR requires that each proposed reinsurance program submitted for its review
include detailed information about the nature and locations of the various risks
to be covered, the ceding insurer's loss history for the risks and the
underwriting data reviewed, and the underwriting criteria applied, by the ceding
insurer with respect to these risks. GCR first evaluates the loss exposure
associated with the proposed program, in relation to its zonal limits, program
limits and per-insured limit. If the program meets those requirements GCR then
evaluates the program in terms of its risk/return profile to assess the adequacy
of the proposed pricing. If the program meets GCR's selective pricing criteria,
the program may then be accepted.
At both stages of the evaluation process, GCR uses the computer-based modeling
techniques described under "Computer Modeling" below to assess potential loss
exposure. In addition, the senior underwriter responsible for the U.S. market or
the senior underwriter responsible for the non-U.S. market, as applicable, makes
a detailed review of the data and pricing proposals submitted and, based on his
own analysis and judgment and taking into account the computer-based evaluations
and underwriting guidelines, makes a recommendation to accept or decline the
proposal.
Generally, the proposed terms of coverage, including the premium rate and
retention level for excess-of-loss contracts, are negotiated by one or more
lead underwriters with the client and its broker. If not a lead, GCR, as is
customary, generally does not attempt to vary the proposed terms and either
accepts or declines to participate on the proposed terms. If GCR elects to
participate, it will specify its percentage participation in each layer of
coverage to be provided, and will execute a contract directly with the ceding
insurer, generally for a term of one year. GCR's reinsurance contracts do not
provide benefits to any third party other than the ceding insurer.
GCR's policy is that no reinsurance program may be accepted without the
recommendation of the senior underwriter for the relevant market and the
approval of both the chief actuary and the chief executive officer. In addition,
if the relevant senior underwriter proposes to accept a program that exposes the
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<PAGE> 12
Company to a risk of loss in excess of $10 million or that does not meet GCR's
underwriting guidelines, Global Capital Re's operating committee, composed of
the senior underwriters for both the U.S. and non-U.S. markets, the chief
actuary and the chief executive officer, must meet and approve the exception as
a group. GCR's underwriting guidelines were established and initially reviewed
by a committee designated by the Company's Board of Directors, which included
the members of the Global Capital Re operating committee plus the Chairman of
the Board of the Company. In December 1995 the Company's Board of Directors
established an Executive Committee which has assumed responsibility for
reviewing the underwriting guidelines from time to time.
Generally, about 50% of premiums written by GCR each year are for contracts
which have effective dates in January, about 20% 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 60 days after the due date.
As part of the underwriting process, GCR typically assesses a variety of factors
including the reputation of the proposed cedent and the likelihood of
establishing a long-term relationship with the cedent; the geographic area in
which the cedent does business and its market share; historical loss data for
the cedent and, where available, for the industry as a whole in the relevant
regions, in order to compare the cedent's historical catastrophe loss experience
to industry averages; the cedent's pricing strategies; and the perceived
financial strength of the cedent. GCR's underwriting personnel have substantial
experience in the markets in which GCR currently operates.
GCR attempts to analyze underwriting information about the primary insurers and
the nature and extent of their risk exposure where possible, but the data are
not always available. Moreover, because GCR obtains such data from the primary
insurer rather than the primary insured, management generally is unable to
determine the scope of the data obtained or to verify its accuracy and in this
regard must rely on the varying underwriting practices and reputations of the
primary insurers.
TARGETING SUPERIOR RISK/RETURN PROFILES
GCR targets clients with a reputation for quality underwriting and reinsurance
programs with superior risk/return profiles. In deciding which programs to
underwrite, GCR assesses the adequacy of the proposed pricing terms in the light
of the associated risk, relying on the computer modeling systems described below
and on the analysis and judgment of its experienced underwriting team. As a
result of its selective underwriting practices, in fiscal years 1995 and 1996,
respectively, GCR offered capacity for only 15% and 12% of the new reinsurance
programs submitted for its review (i.e., excluding renewals of existing
programs).
Because GCR writes substantially all its reinsurance for primary insurers,
rather than for reinsurers on a retrocessional basis, management believes that
it is able to obtain more comprehensive and reliable underwriting data about the
underlying risk and is better able to assess the quality of the primary
insurer's underwriting decision to accept the risk than would otherwise be the
case. Avoiding retrocessional business also enables GCR to determine the
geographic location of the underlying risk more accurately, which enhances its
ability to monitor compliance with its geographic limits on aggregate loss
exposure. Moreover, because GCR writes reinsurance through independent brokers,
management believes it is able to reduce the risk of adverse selection that may
exist when a reinsurer deals through a broker affiliated with the client.
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<PAGE> 13
Managing Loss Exposure
Zone Limits. In managing its portfolio of reinsurance contracts, GCR seeks to
limit its aggregate loss exposure in any particular geographic zone to a
specified level rather than measuring and managing risk primarily in relation to
premium volume. GCR has divided its markets into geographic zones and limits the
coverage it is willing to provide for any risk located in a particular zone so
as to maintain its aggregate loss exposure from all contracts covering risks
believed to be located in that zone to a predetermined level. This means that
GCR intends to pursue new business opportunities in markets where its per zone
exposure is generally below the applicable limit, and not necessarily in markets
where premium growth is fastest.
In determining the maximum aggregate loss exposure it is willing to accept for a
particular U.S. zone, GCR uses the proprietary and other computer-based systems
described below to estimate the aggregate losses that could occur under all its
contracts covering risks believed to be located in that zone as a result of a
range of potential catastrophic events. By evaluating the effects of various
potential events ranging from those of relatively high frequency and low
severity to those of relatively low frequency and high severity, management
determines whether the aggregate loss exposure in the zone is acceptable. If a
proposed reinsurance program would cause that level to be exceeded, the program
would be declined (unless an exception to the underwriting guidelines is
approved by Global Capital Re's operating committee). As GCR approaches its
limit in any zone, it will narrow its focus, targeting the highest quality
business with the highest risk/return profiles in the zone, as determined by its
computer models. GCR also seeks to evaluate the geographic distribution of risks
within a particular zone, in order to evaluate the adequacy of a given premium
based on the variance in risks within a given zone and to evaluate the
comparative level of risks to which GCR is exposed among all zones. In order to
apply the zone limits, management has divided the United States into eight
geographic zones and its European, Japanese and other markets into a total of 25
zones. These zones tend to vary in size with the level of population density and
commercial development in a particular area. The zones with the greatest
exposure to loss (though not necessarily the greatest risk of loss) are, in the
United States, the southeast, mid-Atlantic and Mid-West 1 regions and,
elsewhere, in northern Europe and Sydney, Australia. The parameters of these
geographic zones are subject to periodic review and change.
GCR designates as zones geographic areas which it believes, based on historic
catastrophe loss experience reflecting actual catastrophic events and property
development patterns, are most likely to absorb a large percentage of losses
from one catastrophe event. These zones are determined using computer modeling
techniques and underwriting assessments. GCR recognizes that certain events may
affect more than one zone. Management monitors the potential impact of an event
on more than one zone on a periodic basis in order to evaluate whether potential
loss is within acceptable limits.
The zones in the United States with the greatest exposure to loss (though not
necessarily the greatest risk of loss) currently are the southeast zone (Florida
to North Carolina to Louisiana), the mid-Atlantic zone (Virginia to New Jersey
to Pennsylvania) and the Mid-West I zone (Arkansas to Michigan to Minnesota).
GCR's aggregate liability limit under its property catastrophe contracts in each
of these zones represented approximately 14.0%, 13.9% and 14.2%, respectively,
of GCR's aggregate liability limit with respect to all its property catastrophe
contracts in force in the United States at September 30, 1996. The southeast and
mid-Atlantic zones cover areas that historically have experienced the most
severe catastrophic losses in the United States, primarily from hurricanes and
other storms. Thus, these percentages, which reflect policy contract limits, are
not necessarily indicative of the frequency or severity of losses that may be
incurred by GCR in these zones or of GCR's loss experience in these zones
relative to other zones. For example, earthquake loss in the west coast zone can
be severe.
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<PAGE> 14
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, on the
ability of management to determine the actual location of the risks believed to
be covered under a particular reinsurance program and on the degree to which the
historical or simulated event experience coincides with actual experience during
the contract term. For example, as noted above, a catastrophic event could
affect multiple geographic zones, resulting in aggregate losses higher than the
limit intended for any single zone. Similarly, because underwriting data about
the covered risks may not be accurate, a contract may cover risks that
management does not know are located in certain zones, thereby increasing the
risk exposure in those zones beyond anticipated levels.
Other Exposure Limits. GCR also seeks to manage its portfolio loss exposure by
imposing loss-per-event limits on almost all its reinsurance contracts. For
property catastrophe contracts, these limits fall within a range that does not
exceed $25 million per event, and substantially lower limits generally apply to
proportional, risk excess-of-loss and marine contracts. In addition, GCR writes
most of its contracts (including property catastrophe, risk and marine
contracts) on an excess-of-loss basis so as to impose an attachment point that
is high enough to produce a low frequency of claims. GCR also attempts to
distribute its exposure across a range of attachment points. Attachment points
vary and are based upon an assessment of the ceding insurers' 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.
With regard to contracts written on a proportional basis, GCR seeks to manage
its loss exposure by limiting these contracts to situations involving quality
underwriting, attractive pricing and acceptable program limits. GCR's emphasis
on writing excess-of-loss contracts helps it to control its underwriting results
by increasing its flexibility to determine premiums for reinsurance at specific
retention levels independent of the premiums charged by primary insurers and
based upon GCR's own underwriting assumptions. In addition, because primary
insurers typically retain a larger risk exposure under excess-of-loss
contracts, they have a greater incentive to underwrite risks and adjust losses
in a prudent manner.
GCR currently does not, to any significant extent, seek to limit its loss
exposure by reinsuring portions of its contracts with independent reinsurers.
Management believes that in most cases current program rates for retrocessional
coverage are too high and available coverage limits are too low to render such
coverage feasible.
Computer Modeling
GCR uses computer-based modeling systems to estimate loss exposure under its
reinsurance programs in order to evaluate the adequacy of pricing terms and
their effect on GCR's projected rate of return on capital and to monitor
compliance with its geographic zone limits. For U.S. risks, GCR uses NEMESIS, a
proprietary system developed by management, CATMAP, a commercially available
system developed and licensed by Applied Insurance Research, Inc. (AIR), a
Boston-based consulting firm, and for certain risks, IRAS, a commercially
available system developed and licensed by Risk Management Solutions, Inc.
(RMS). These systems generate estimates of losses that could occur under one or
more reinsurance programs as a result of a potential catastrophic event. The
characteristics of these potential events are based, in the case of NEMESIS, on
specific historical events, in the case of CATMAP, on simulated experience, and
in the case of IRAS, on a probabilistic analysis. By analyzing the effects of a
range of potential events, varying by frequency and severity, management is able
to test the potential effects of different coverage terms on loss exposure and
determine the appropriate level of GCR's participation
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<PAGE> 15
accordingly. Management believes that many of its Bermuda-based competitors also
use computer modeling systems (including CATMAP and IRAS) to estimate loss
exposure.
For non-U.S. risks, GCR uses similar though less developed techniques. Because
of the relatively lower historical severity of catastrophic events in GCR's
markets outside the United States and the relatively less developed information
base relating to the impact of these events, loss information for these markets
is more limited. GCR currently is testing EUROCAT, a new system similar to
CATMAP that has been developed by AIR for use in European markets.
Management believes that NEMESIS provides Global Capital Re's underwriters with
an important alternative method of evaluating potential loss exposure. NEMESIS
estimates the losses that could result under a particular reinsurance program if
a specific historical catastrophe were to reoccur in the zone covered by the
program. These estimates are based on the relation between premium rates in
effect in the zone when the event originally occurred and the level of losses
actually caused in the zone by the event, and the relationship between such
historical rates and the rates applicable to the program. In effect, this
methodology uses changes in premium rates over time as an indicator of changes
in property values of covered risks in a particular zone, in order to analyze
the effect that such changes could have on historical loss levels for the zone.
CATMAP uses computer simulation to generate estimates of the frequency and
severity of potential catastrophic events, based on historical experience over a
period of many years utilizing statistical probabilities. IRAS is capable of
both deterministic (single historical or user-defined events) or probabilistic
analysis (probability versus loss for any time period, based on a comprehensive
set of potential events). These systems produce estimates of losses that might
occur under a reinsurance program if actual experience during the contract
period coincided with the computer simulated experience.
From time to time, GCR may consider using additional computer modeling programs
in an effort to supplement its analytic underwriting techniques. In the past
year management consulted with RMS to assess the rate adequacy of catastrophe
treaties in Japan and Australia/New Zealand.
In essence, these modeling systems enable management to estimate losses that
could occur under one or more proposed contracts if historical or simulated
catastrophic events were to occur during the contract term. However, because
actual catastrophic event activity during a particular contract period may bear
little or no relation to historical experience during a different period or to
statistical probabilities, these computer-generated estimates provide no
assurance as to the adequacy of written premiums to cover future claims.
Consequently, while these systems play an important role in GCR's underwriting
process, GCR also relies to a great extent on the experience and skill of its
senior management in making underwriting decisions.
Uncertainty of Underwriting Process
As the foregoing suggests, GCR endeavors to manage its loss exposure to
catastrophic events by establishing underwriting guidelines designed to limit
such exposure by defined geographic zones, by ceding insurer and by event per
policy. However, underwriting is by nature a matter of judgment, involving
important assumptions about matters that are inherently unpredictable and beyond
GCR's control and for which historical experience and probability analyses may
not provide sufficient guidance. In addition, there can be no assurance that
various provisions of GCR's policy forms, such as limitations
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<PAGE> 16
on or exclusions from coverage, will be enforceable in the manner intended by
GCR. Consequently, catastrophic events may result in claims substantially in
excess of management's expectations.
MARKETING
GCR markets its reinsurance products worldwide through non-exclusive
relationships with more than 50 of the leading reinsurance brokers active in the
U.S. and non-U.S. markets for property catastrophe reinsurance. Based on
premiums written under contracts in force on September 30, 1996, the five
brokers from which GCR derives the largest portions of its business are Guy
Carpenter (27%), Willcox (10%), Aon Re (8%), Holborn (8%) and Sedgwick (6%).
Willcox is an affiliate of Johnson & Higgins, a shareholder and founding sponsor
of the Company. GCR does not market reinsurance directly to insurers; its
products are marketed exclusively through brokers. Of the total premiums
attributable to the five largest producing brokers referred to above, less than
one percent are attributable to brokers affiliated with the reinsurers seeking
coverage.
GCR focuses its marketing efforts on quality underwriting companies throughout
the world. Management believes its existing portfolio of business is a valuable
asset given the industry practice of generally offering renewals of reinsurance
programs to existing participants and, therefore, GCR attempts to continually
strengthen relationships with its existing brokers and clients. GCR also targets
prospects which its analysis indicates will enhance the risk/return composition
of its portfolio, are capable of supplying detailed and accurate underwriting
data and will diversify GCR's book of business. During fiscal years 1994, 1995
and 1996, no single ceding insurer accounted for more than 6% of GCR's premiums
written.
Management believes that primary insurers' and brokers' willingness to use a
particular reinsurer is based not solely on pricing terms, but on perceptions of
the quality of a reinsurer's service, willingness to design customized programs,
long-term stability and commitment to provide reinsurance capacity. Management
believes that stability and commitment are perhaps the most important marketing
factors with respect to the type of clients GCR targets, namely, well
capitalized, established, quality underwriting companies. For these companies,
management believes GCR's underwriting strategy of managing its portfolio by
geographic zone loss exposure is highly attractive because it enhances client
security and enables GCR to develop long-term, mutually beneficial relationships
with a preferred clientele.
Given the industry practice of offering renewal opportunities to existing
reinsurers (i.e., the tendency of client companies to prefer a long-term
relationship with well capitalized reinsurers to achieve security and continuity
of coverage in and subsequent to periods of significant loss experience), new
business opportunities are relatively limited, making strong client
relationships particularly important. For the same reason, GCR believes that its
existing reinsurance portfolio is a valuable asset and a competitive advantage
in retaining existing business as it comes up for renewal. This industry
practice was a significant factor in GCR's ability to retain, in fiscal years
1995 and 1996, 99% and 98% respectively, of the programs written in the prior
fiscal year on which it offered capacity. Approximately 66% and 82% of the
programs underwritten by GCR during these periods, respectively, were renewals
of programs underwritten in the prior fiscal year. During these years, GCR
underwrote 105 and 55 programs, respectively, for new clients.
GCR's brokers perform data collection, contract preparation and other
administrative tasks, enabling GCR to market its reinsurance products cost
effectively by maintaining a smaller staff. GCR believes that by maintaining
close relationships with brokers it is able to obtain access to a broad range of
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<PAGE> 17
potential reinsureds. Global Capital Re meets frequently in Bermuda with brokers
and senior representatives of clients and prospective clients. These meetings
provide Global Capital Re with the opportunity to distinguish its capabilities
from those of the market in general. Additionally, the meetings provide Global
Capital Re with an opportunity to discuss in detail the interests and needs of
its clients. All contract submissions are approved in Global Capital Re's
executive offices in Bermuda, and GCR does not believe that conducting its
operations in Bermuda has adversely affected its marketing activities in light
of the client base it has attracted and retained.
By relying exclusively on reinsurance brokers to market its products, GCR is
able to avoid the expense and regulatory complications of worldwide offices and
marketing thereby virtually eliminating any fixed costs associated with
marketing activities. GCR maintains only one branch office, in Brussels,
Belgium, which it opened in October 1994 and from which it conducts its European
marketing efforts.
In accordance with industry practice, GCR pays amounts owing in respect of
claims under its policies to reinsurance brokers, for payment to the ceding
insurers. In the event that a broker failed to make such payment, GCR would
remain liable to the client for the deficiency. Conversely, when premiums for
such policies are paid to reinsurance brokers for payment over to GCR, such
premiums will be deemed to have been paid and the ceding insurer will no longer
be liable to GCR for those amounts whether or not actually received by GCR.
Consequently, GCR assumes a degree of credit risk associated with brokers around
the world.
RESERVES
Under U.S. generally accepted accounting principles ("GAAP"), GCR is not
permitted to establish loss reserves with respect to its property catastrophe
business until the occurrence of an event which may give rise to a loss. Once
such an event occurs, GCR establishes reserves based upon estimates of total
losses incurred by the primary insurers as a result of the event and GCR's
estimate of the portion of such loss it has reinsured. Such reserves will be
adjusted as GCR receives notices of claims and proofs of loss from reinsureds
and as estimates of severity of damages and GCR's share of the total loss are
revised. Claims arising from future catastrophic events may require the
establishment of substantial reserves from time to time.
GCR also establishes reserves for losses incurred as a result of a known event
which has not yet been reported to GCR. These "IBNR" reserves are established
for both catastrophe and other losses, although non-catastrophe losses, having a
relatively higher incidence rate, generally account for most of the reserves at
any given time. To estimate the portion of loss and loss expenses relating to
these claims for the year, GCR classifies the business written into segments
that could reasonably be expected to have similar loss characteristics.
Reporting patterns and initial expected loss ratios are developed based upon
available industry data, actual experience, knowledge of the business written by
GCR and general market trends in the reinsurance industry. GCR employs its own
actuary, who develops the reserves for losses, including losses incurred but not
reported.
Generally, reserves are established without regard to whether the loss may
subsequently be contested by GCR. GCR's policy is to establish reserves for
reported losses based upon reports received from ceding companies, supplemented
by GCR's reserve estimates.
Loss reserves represent GCR's estimates, at a given point in time, of the
ultimate settlement and administration costs of claims incurred, and it is
possible that the ultimate liability may exceed or be less than such estimates.
Such estimates are not precise in that, among other things, they are based on
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<PAGE> 18
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 GCR's results of operations in
the period when the adjustment is determined. (For example, GCR's incurred
losses and loss expense relating to the Northridge, California earthquake in
January 1994 was $17.6 million at September 30, 1994 and thereafter increased to
$23.3 million as of September 30,1996.) Even after such adjustments, ultimate
liability may exceed or be less than the revised estimates. Moreover, reserve
estimates by relatively new property catastrophe reinsurers, such as GCR, may be
inherently less reliable 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, non-casualty property losses tend to be reported promptly and
usually are settled within a shorter period of time. Unlike those of U.S.
insurers, GCR's loss reserves are not regularly examined by insurance
regulators. The establishment of new reserves, or the adjustment of reserves for
previously reported claims, could have a material adverse effect on GCR's
financial condition and results of operations in any particular period and could
reduce the amount of earnings (if any) available for dividends.
INVESTMENTS
GCR's strategy is to maximize its underwriting profitability and fully deploy
its capital through its underwriting activities; consequently, GCR has
established an investment policy which management considers to be conservative.
GCR's investment guidelines stress preservation of capital, diversification of
risk and market liquidity, although investments are subject to market-wide risks
and fluctuations, as well as to risks inherent in particular securities. The
primary objective of the portfolio, as set forth in GCR's guidelines, is to
maximize investment returns consistent with these policies. At present, GCR's
investment portfolio consists exclusively of fixed-income securities,
predominantly of U.S. government and corporate issuers, and having a target
duration of one year and a maximum maturity of three years. GCR's current
investment guidelines are subject to change at the discretion of the Board of
Directors of the Company from time to time.
The following table summarizes the fair value of the investments and cash and
cash equivalents of GCR as of September 30, 1996 and 1995.
<TABLE>
<CAPTION>
SEPTEMBER 30,
TYPE OF INVESTMENT 1996 1995
(dollars in thousands)
<S> <C> <C>
Fixed Maturities Available For Sale
U.S. government and government agency bonds $ 298,865 $ 206,115
U.S. corporate debt securities 53,089 223,432
U.S. asset-backed securities 27,072 55,775
Commercial paper 59,178 -
--------- ---------
Subtotal 438,204 485,322
Cash and cash equivalents 14,070 41,490
--------- ---------
Total investments and cash and cash equivalents $ 452,274 $ 526,812
========= =========
</TABLE>
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<PAGE> 19
The following table summarizes the fair value by maturities of GCR's investment
portfolio as of September 30, 1996 and 1995. For this purpose, maturities
reflect contractual rights to put or call the securities; actual maturities may
be longer.
<TABLE>
<CAPTION>
SEPTEMBER 30,
1996 1995
(dollars in thousands)
<S> <C> <C>
Due in less than one year $ 128,857 $ 229,739
Due in one year through three years 309,347 255,583
Due after more than three years - -
--------- ---------
$ 438,204 $ 485,322
========= =========
</TABLE>
Quality and duration of Portfolio
Currently, GCR maintains a target duration of one year and a maximum maturity of
three years, reflecting management's belief that it is important to maintain a
liquid, short duration portfolio to assure GCR's ability to pay claims on a
timely basis. GCR expects to re-evaluate the target duration in the light of
estimates of the duration of its liabilities and market conditions, including
the level of interest rates, from time to time.
Quality of Debt Securities in Portfolio
GCR's investment guidelines stipulate that the minimum credit rating for
securities purchased for the investment portfolio is BBB and that at least 80%
of the portfolio, including cash and cash equivalents, be rated A- or higher.
Ratings used for this purpose are those of S&P. At September 30, 1996, all of
the issues in GCR's investment portfolio had been rated by S&P.
The following table summarizes the composition of the fair value of the fixed
maturity portfolio by rating, as assigned by S&P, as of September 30, 1996 and
1995.
<TABLE>
<CAPTION>
SEPTEMBER 30,
1996 1995
<S> <C> <C>
Cash and cash equivalents 1.2% 8.0%
U.S. government and government agency bonds 67.4 39.1
AAA 6.1 10.5
A 22.1 26.3
BBB 3.2 16.1
------ -------
100.0% 100.0%
===== =====
</TABLE>
Equity Securities/Real Estate
GCR's portfolio does not contain any direct investments in real estate, mortgage
loans or equity securities.
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<PAGE> 20
Foreign Currency and Interest Rate Exposures
GCR's functional currency is the U.S. dollar. However, the premiums receivable
and losses payable in respect of a substantial portion of GCR's business are
denominated in currencies other than U.S. dollars. Consequently, GCR may, from
time to time, experience significant exchange gains and losses that could affect
its financial position and results of operations. The Company currently does not
- -- and as a practical matter cannot -- hedge its foreign currency exposure with
respect to potential claims until a loss payable in a foreign currency occurs
(after which it may, although to date has not done so, purchase a currency hedge
in some cases). Such exposure could be substantial. GCR also has not hedged its
foreign currency exposure with respect to any premiums receivable, which
generally are collected over the relevant contract term. All of GCR's fixed
maturities are currently invested in securities denominated in U.S. dollars.
The value of the fixed income securities in GCR's investment portfolio is
subject to fluctuation depending on changes in prevailing interest rates. GCR
generally does not hedge its investment portfolio against interest rate risk.
Accordingly, increases in interest rates may result in losses, both realized and
unrealized, on GCR's investments.
Investment Advisers
In 1993, GCR entered into an investment advisory agreement (the "Investment
Advisory Agreement") with Goldman Sachs Asset Management International
("GSAMI"), an affiliate of Goldman, Sachs & Co. GSAMI manages GCR's entire
investment portfolio, subject to GCR's investment guidelines. Under the terms of
the Investment Advisory Agreement, which is automatically renewed each year
subject to year-end termination by either party on 30 days' notice, GCR pays
GSAMI a fee based on the value of Global Capital Re's investment portfolio, and
such fee totaled $674,000 for fiscal year 1996, $559,000 for fiscal year 1995
and $497,000 for fiscal year 1994. The performance of, and the fees paid to,
GSAMI under the Investment Advisory Agreement are reviewed periodically by the
Board of Directors of the Company.
Investment Custodian
Mellon Bank, N.A., London Branch, provides custodial services to the Company
pursuant to a Custodian Agreement on terms and conditions believed to be
customary for an arm's length transaction. In its capacity as investment
custodian, Mellon Bank, N.A., London Branch holds all the investments and
substantially all of the cash of GCR. The Custodian Agreement provides for a
renewable one year term, a maximum annual fee of 0.01% of the value of the
portfolio that is held in U.S. dollar assets, and may be terminated by either
party upon 30 days' notice.
COMPETITION
The property catastrophe reinsurance industry is highly competitive. GCR
competes, and will continue to compete, with insurers and property catastrophe
reinsurers worldwide, some of which have greater financial, marketing and
management resources than GCR. In particular, GCR competes with the
Bermuda-based property catastrophe reinsurers, including Mid Ocean Reinsurance
Company, Renaissance Reinsurance Company and Partner Re. In addition, there may
be established companies or new companies of which GCR is not aware that may be
planning to enter the property catastrophe reinsurance market or existing
reinsurers that may be planning to raise additional capital. In addition,
Lloyd's determined in 1993 to allow its syndicates to accept capital from
corporate investors.
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<PAGE> 21
Competition in the types of reinsurance business that GCR underwrites is based
on many factors, including premium charges and other terms and conditions
offered, services provided, ratings assigned by independent rating agencies,
speed of claims payment, 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 GCR. 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 for the reinsurance contracts of the types written by the
Company.
GCR received an initial rating as to its claims-paying ability of A-
("Excellent") from A.M. Best in April 1996; prior to that time, GCR was not
rated by any rating agency due to its limited operating history. The rating
received by GCR represents the fourth highest in the rating scale used by A.M.
Best. While management believes that its new rating will not be a major
competitive advantage or disadvantage, some of GCR's principal competitors have
higher ratings than GCR. Insurance ratings are used by insurers and reinsurance
brokers as an important means of assessing the financial strength and quality of
reinsurers. In addition, a ceding company's own rating may be adversely affected
by the rating of its reinsurers; therefore, a ceding company could elect to
reinsure with a competitor of GCR that has a higher insurance rating. The loss
or lowering of a rating in the future also could adversely affect GCR's
competitive position.
Global Capital Re is not licensed or admitted as an insurer in any jurisdiction
in the United States and, as a consequence, must generally post letters of
credit or other security to cover outstanding claims of, or unearned premiums
with respect to, ceding insurers in the United States to enable such insurers to
obtain favorable regulatory capital treatment of their reinsurance.
EMPLOYEES
As of September 30, 1996, GCR employed 16 people. GCR believes that its employee
relations are good. None of GCR's employees are subject to collective bargaining
agreements, and GCR knows of no current efforts to implement such agreements at
GCR.
Many of GCR's employees, including most of its senior management, are employed
pursuant to work permits granted by the Bermuda authorities. These permits
expire at various times over the next several years. GCR has no reason to
believe that these permits would not be extended upon request at their
respective expirations.
REGULATION
Bermuda
Global Capital Re is a registered Bermuda insurance company and is subject to
regulation and supervision in Bermuda. The applicable Bermudian statutes and
regulations generally are designed to protect insureds and ceding insurance
companies rather than shareholders. Among other things, such statutes and
regulations require Global Capital Re to maintain minimum levels of capital and
surplus, impose restrictions on the amount and type of investments it may hold,
prescribe solvency standards that it must meet, limit transfers of ownership of
its capital shares and provide for the performance of certain periodic
examinations of Global Capital Re and its financial condition. These regulations
may, in effect, restrict the ability of Global Capital Re to write new business
or distribute funds to the Company, which, as a holding company, will depend on
such distributions as its principal source of
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<PAGE> 22
funds to repay indebtedness or pay dividends on the Ordinary Shares. These
regulations also may impede the Company's ability to effect a business
combination involving a substantial change in the ownership of control of Global
Capital Re or the Company. Although it conducts its operations from Bermuda,
Global Capital Re is not authorized to underwrite local risks in Bermuda.
The Insurance Act 1978. The Insurance Act 1978, and related regulations (the
"Insurance Act"), which regulate the business of Global Capital Re, provide that
no person shall carry on an insurance business in or from within Bermuda unless
registered as an insurer under the Insurance Act. The Bermuda Minister of
Finance (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. In connection
with the applicant's registration, the Minister may impose conditions relating
to the writing of certain types of insurance.
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.
Cancellation of lnsurer's Registration. An insurer's registration may be
canceled 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 of Companies in Bermuda
(the "Registrar"), who is the chief administrative officer under the Insurance
Act. The auditor must be approved by the Minister as the independent auditor of
the insurer. The approved auditor may be the same person or firm which audits
the insurer's financial statements and reports for presentation to its
shareholders.
Loss Reserve Specialist. Global Capital Re, as a Registered Class 4 insurer, is
required to submit an annual loss reserve opinion when filing the Annual
Statutory Financial Return. This opinion must be issued by a Loss Reserve
Specialist, who, in GCR's case, is a member of the senior underwriting team. The
Loss Reserve Specialist, who will normally be a qualified casualty actuary, must
be approved by the Minister.
Statutory Financial Statements. An insurer must prepare annual Statutory
Financial Statements. The Insurance Act prescribes rules for the preparation and
substance of such Statutory Financial Statements (which include, in statutory
form, a balance sheet, income statement, and a statement of capital and surplus,
and notes thereto). The insurer is required to give detailed information and
analyses regarding premiums, claims, reinsurance and investments. The Statutory
Financial Statements are not prepared in accordance with U.S. generally accepted
accounting principles and are distinct from the financial
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<PAGE> 23
statements prepared for presentation to the insurer's shareholders under the
Companies Act 1981 of Bermuda. Such financial statements may be prepared in
accordance with U.S. generally accepted accounting principles. See note 13 to
the consolidated financial statements for information with respect to GCR's
statutory financial statements. The 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 an amount greater than the
prescribed minimum solvency margin which varies with the type of business of the
insurer and the insurer's premiums written and loss reserve level.
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. An insurer is required to file with the
Registrar a Statutory Financial Return no later than four months after the
insurer's financial year end (unless specifically extended). The Statutory
Financial Return includes, among other matters, a report of the approved
independent auditor on the Statutory Financial Statements of the insurer; a
declaration of the statutory ratios; a solvency certificate; the Statutory
Financial Statements themselves; the opinion of the approved Loss Reserve
Specialist and certain details concerning ceded reinsurance. The solvency
certificate and the declaration of the statutory ratios must be signed by the
principal representative and at least two directors of the insurer who are
required to state whether the Minimum Solvency Margin and, in the case of the
solvency certificate, the Minimum Liquidity Ratio, have been met and the
independent approved auditor is required to state whether in its opinion it was
reasonable for them to so state and whether the declaration of the statutory
ratios complies with the requirements of the Insurance Act. The Statutory
Financial Return must include the opinion of the Loss Reserve Specialist in
respect of the loss and loss expense provisions of Global Capital Re. Where an
insurer's accounts have been audited for any purpose other than compliance with
the Insurance Act, a statement to that effect must be filed with the Statutory
Financial Return.
Limitations on Dividends. Global Capital Re may not declare a dividend (or make
a distribution of contributed surplus) if there are reasonable grounds for
believing that after payment it would be unable to pay its liabilities as they
become due, or that the realizable value of Global Capital Re's assets would
thereby be less than the aggregate of its liabilities and its issued share
capital and share premium accounts. In addition, under the Insurance Act, Global
Capital Re may not declare a dividend (or make a distribution of contributed
surplus) in circumstances which would cause it to cease to comply with its
required solvency margin and liquidity ratio, nor declare dividends in any
financial year which would exceed 25% of its total statutory capital and surplus
as shown on its statutory balance sheet in relation to the previous financial
year, unless at least seven days before payment of these dividends, it files
with the Bermuda Registrar of Companies an affidavit which states that the
declaration of those dividends has not caused Global Capital Re to fail to meet
its required margins.
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<PAGE> 24
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, the Minister may direct the insurer not to take on any new insurance
business; not to vary any insurance contract if the effect would be to increase
the insurer's liabilities; not to make certain investments; to realize certain
investments; to maintain in Bermuda, or transfer to the custody of a Bermuda
bank, certain assets; and 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 Global Capital Re is at Global Capital
Re's offices at Hamilton, Bermuda and the Company's Chief Financial Officer is
the principal representative of Global Capital Re. Without a reason acceptable
to the Minister, an insurer may not terminate the appointment of its principal
representative, and the principal representative may not cease to act as such,
unless 30 days' notice in writing to the Minister is given of the intention to
do so. It is the duty of the principal representative, within 30 days of his
reaching the view that there is a likelihood of the insurer for which he acts
becoming insolvent or its coming to his knowledge, or his having reason to
believe, that an "event" has occurred to make a report in writing to the
Minister setting out all the particulars of the case that are available to him.
Examples of such an "event" include failure by the reinsurer to comply
substantially with a condition imposed upon the reinsurer by the Minister
relating to a solvency margin or a liquidity or other ratio.
Although Global Capital Re is incorporated in Bermuda, it is classified as
non-resident of Bermuda for exchange control purposes by the Bermuda Monetary
Authority. Pursuant to its nonresident status, Global Capital Re may hold any
currency other than Bermuda dollars and convert that currency into any other
currency (other than Bermuda dollars) without restriction.
The Companies Act 1981. The Company has obtained a permit pursuant to Part XI of
the Companies Act 1981 (the "Companies Act") enabling it to engage in business
in or from within Bermuda. As a consequence, sections of the Companies Act
dealing with prospectuses and public offers, registration of charges, overseas
companies and liquidations (with the exception of sections dealing exclusively
with member's voluntary liquidations) apply to the Company.
Exchange Control. The Company and Global Capital Re have each been designated as
non-resident of Bermuda for exchange control purposes by the Bermuda Monetary
Authority, Controller of Foreign Exchange. The transfer of shares in the Company
between persons regarded as non-resident of Bermuda for exchange control
purposes may be effected without further consent under the Exchange Control Act
of 1972 and regulations thereunder for so long as the shares are listed on an
"appointed stock exchange" within the meaning of section 2(9) of the Companies
Act. Issues and transfers of shares to any person regarded as resident of
Bermuda for exchange control purposes require specific approval under the
Exchange Control Act of 1972. In granting such permission, the Bermuda Monetary
Authority and the Registrar of Companies in Bermuda will accept no
responsibility for the financial soundness of the Company or the transactions
described herein or for the correctness of any of the statements made or
opinions expressed in this document.
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<PAGE> 25
United States and Other
Global Capital Re is not admitted to do business in any jurisdiction except
Bermuda. Although GCR conducts its operations from Bermuda, it is not permitted
to underwrite local risks. The insurance laws of each state of the United States
and of many countries regulate the sale of insurance and reinsurance within
their jurisdictions by alien insurers and reinsurers such as Global Capital Re,
which are not admitted to do business within such jurisdictions. With some
exceptions, such sale of insurance or reinsurance within a jurisdiction where
the insurer is not admitted to do business is prohibited. Global Capital Re does
not intend to maintain an office or to solicit, advertise, settle claims or
conduct other insurance activities in any jurisdiction other than Bermuda where
the conduct of such activities would require that Global Capital Re be so
admitted.
Although neither the Company nor Global Capital Re is admitted to do business in
any jurisdiction in the United States, a substantial portion of GCR's premiums
come from, and is expected to continue to come from, ceding insurers in the
United States. Because GCR does not maintain an office, and its personnel do not
solicit, advertise, settle claims or conduct other insurance activities, in the
United States, GCR does not believe it is in violation of insurance laws of any
jurisdiction in the United States. There can be no assurance, however, that
inquiries or challenges to GCR's insurance activities will not be raised in the
future. Because Bermudian insurance regulation applicable to GCR is less
restrictive in some respects than that of U.S. jurisdictions, there is no
assurance that, in the event GCR were found to be subject to U.S. insurance
regulation, it would be able to comply with such regulation at an acceptable
cost.
In addition to the regulatory requirements imposed by the jurisdiction 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 unearned premiums and
loss reserves and loss expense reserves ceded to the reinsurers. Global Capital
Re is not licensed, accredited or approved in any state in the United States.
The great majority of states, however, permit a credit to statutory surplus
resulting from reinsurance obtained from a non-licensed or non-accredited
reinsurer to be off set to the extent that the reinsurer provides a letter of
credit or other acceptable security arrangement. For this reason, Global Capital
Re's reinsurance contracts with U.S. insurers generally require it to post a
letter of credit or provide other security to cover outstanding claims and/or
unearned premiums. In order to post these letters of credit, Global Capital Re
is generally required to provide the issuing banks with collateral equal to or
greater than the amount of claims and/or unearned premiums posted. 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.
Recently, the insurance and reinsurance regulatory framework has been subject to
increased scrutiny in many jurisdictions including the United States, various
states within the United States, the United Kingdom and elsewhere. This has led
to a number of new, proposed or potential legislative or industry changes that
may affect the worldwide demand for property catastrophe reinsurance. For
example, California is currently proposing the formation of the California
Earthquake Authority to provide limited earthquake insurance for California
residents; similarly, it has proposed that part of the reinsurance protection
may be placed outside of the traditional market. Management is unable to predict
the extent to
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<PAGE> 26
which the foregoing new, proposed or potential initiatives may affect the demand
for GCR's products or the risks which may be available for GCR to consider
underwriting.
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 ordinary
shares of the company. It does not address all relevant tax considerations that
may be relevant to holders of ordinary 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 the
federal, state, local and non-U.S. tax consequences of ownership and disposition
of ordinary shares.
Taxation of the Company and Global Capital Re
The Company is a Cayman Islands company and Global Capital Re is a Bermuda
corporation; neither files United States tax returns. Global Capital Re believes
that it operates in such a manner that it will not be 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 business in
the United States. There can be no assurance, however, that Global Capital Re
will not be subject to U.S. tax because U.S. law does not provide definitive
guidance as to the circumstances in which Global Capital Re would be considered
to be doing business in the United States. If Global Capital Re were engaged in
business in the United States (and, if Global Capital Re were to qualify for
benefits under the income tax treaty between the United States and Bermuda
attributable to a "permanent establishment" in the United States), Global
Capital Re would be subject to U.S. tax at regular corporate rates on its income
that is effectively connected with its U.S. business plus an additional 30%
"branch profits" tax on income remaining after the regular tax.
Controlled Foreign Corporation Rules
Each "United States shareholder" of a "controlled foreign company" ("CFC") who
owns shares in the CFC on the last day of the CFC's taxable year must include in
its gross income for United States federal income tax purposes its pro rata
share of the CFC's "subpart F income", even if the subpart F income is not
distributed. For these purposes, any U.S. person who owns, directly or
indirectly through foreign persons, or is considered to own under applicable
constructive ownership rules, 10% or more of the total combined voting power of
all classes of stock of the foreign corporation will be considered to be a
"United States shareholder". In general, a foreign insurance company such as
Global Capital Re is treated as a CFC only if such "United States shareholders"
collectively own or are considered to 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. As of November 21, 1996, the Company
estimates that the number of total "Controlled Shares" attributable to "Goldman
Sachs Persons" pursuant to the Company's Amended and Restated Articles of
Association exceeded 10% of the Ordinary Shares. The Company believes that,
because of the current dispersion of the Company's share ownership among holders
and because under the Company's Articles the voting power associated with shares
held by any U.S. person, directly or by attribution (including Controlled Shares
attributable Goldman Sachs Persons), is limited to less than 10% of the total
combined voting power of the Company, shareholders of the Company should not be
viewed as shareholders of a CFC for purposes of these rules. There can be no
assurance, however, that the current dispersion of the Company's share ownership
will continue (particularly if certain restrictions on transfer terminate as
described under "Item 5. Market for Registrant's Equity and Related Shareholder
Matters -- Certain Legal
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<PAGE> 27
Matters -- Restrictions on Transfer") or, therefore, that these rules
will not apply to shareholders of the Company. Accordingly, U.S. persons who
might, directly or through attribution (by application of the rules of
constructive ownership set forth in section 958(b) of the Internal Revenue Code
of 1986, as amended (the "Code"), generally applying to family members,
partnerships, estates, trusts or controlled corporations or holders of certain
options), acquire or hold 10% or more of the Ordinary Shares of the Company
should consider the possible application of the CFC rules.
Related Person Insurance Income Risks
If Global Capital Re's related person insurance income ("RPII") were to equal or
exceed 20% of Global Capital Re's gross insurance income in any fiscal year, a
U.S. person who owns Ordinary Shares in the Company on the last day of the
taxable year would be required to include in its income for U.S. federal income
tax purposes the shareholder's pro rata share of Global Capital Re's RPII for
the taxable year, determined as if such RPII were distributed proportionately
only to such holders regardless of whether such income is distributed. The
amount of the RPII earned by Global Capital Re (generally, premium and related
investment income from the direct or indirect insurance or reinsurance of any
direct or indirect U.S. shareholder of Global Capital Re or any related person,
including the Company) will depend on a number of factors, including the
geographic distribution of Global Capital Re's business and the identity of
persons directly or indirectly insured or reinsured by Global Capital Re.
Although Global Capital Re does not believe that it had any RPII in fiscal years
1994, 1995 or 1996, some of these factors which determine the extent of RPII in
any period may be beyond the control of Global Capital Re. Consequently, there
can be no assurance that Global Capital Re's RPII will not equal or exceed 20%
of its gross insurance income in any fiscal 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 Ordinary Shares because the Company is not itself directly
engaged in the insurance business and because proposed U.S. Treasury regulations
should be interpreted as applying to 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 proposed regulations will not be promulgated in final form in a
manner that would cause these rules to apply to dispositions of Ordinary Shares.
Tax-Exempt Shareholders
Recently enacted legislation generally requires tax-exempt entities to treat
certain subpart F insurance income, including RPII, that is includible in income
by the tax-exempt entity as unrelated business taxable income.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains statements that may be considered
forward-looking statements within the meaning of Section 27A of the U.S.
Securities Act of 1933 and Section 21E of
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<PAGE> 28
the U.S. Securities Exchange Act of 1934, including, insofar as they may be
considered forwarding looking, statements (i) in "-- The Reinsurance Industry"
about the trend in premium rates in the global property catastrophe reinsurance
market and its possible effects on GCR's results of operations, (ii) in "Item 5.
Market for Registrant's Common Equity and Related Shareholder Matters --
Dividend Policy" about GCR's targets for dividend payments, (iii) in "--
Underwriting -- Managing Loss Exposure" about GCR's efforts to limit its
aggregate loss exposure, (iv) in "-- Marketing" about GCR's ability to attract
and develop long-term relationships with preferred clients and to retain
existing business as it comes up for renewal, (v) in "-- Marketing" about GCR's
ability to penetrate the European market and opportunities in new business and
product lines, (vi) in "-- Regulation -- Certain United States Federal Income
Tax Considerations" and "Item 7. Management's Discussion and Analysis of Results
of Operations and Financial Condition -- Bermuda Regulatory Capital
Requirements" about the effect of Bermuda regulatory requirements on GCR's
liquidity and GCR's belief that it is not subject to insurance regulation or tax
in certain jurisdictions such as the United States and (vii) variations of the
foregoing statements whereever they appear in this Annual Report. In addition,
from time to time the Company may make public filings or issue press releases,
and officers of the Company or others acting on its behalf may make public oral
statements, with respect to the Company that may be considered forward-looking.
Such filings, releases and oral statements could include statements about GCR's
results of operations in future periods or its pursuit of new business
opportunities.
All forward-looking statements, whether made in this Annual Report or in future
filings or press release or orally, address matters that involve risks and
uncertainties; consequently, there are or will be important factors that could
cause actual results to differ materially from those indicated in such
statements. The Company believes that these important factors include the
following:
- - Because catastrophes are an inherent risk of GCR's business, a major event
or a series of events can be expected to occur from time to time and to
have a material adverse effect on GCR's financial condition, results of
operations or ability to pay dividends. The effects of such events on GCR's
results of operations, cash flows and financial position are unpredictable
as to timing and severity. See " -- Reinsurance Products -- General" and
"Item 7. Management's Discussion and Analysis of Results of Operations and
Financial Condition -- Liquidity and Capital Resources".
- - The effectiveness of GCR's underwriting strategy and guidelines in
controlling its loss exposure is inherently uncertain, particularly in
light of GCR's limited operating history. See "Underwriting".
- - GCR is not permitted to establish loss reserves for property catastrophe
reinsurance until the occurrence of an event that may give rise to a claim,
and the adequacy of loss reserves that are established cannot be determined
with certainty. See "--Reserves".
- - Trends in premium rates in the global reinsurance market are determined by
market and other factors, such as the severity and frequency of catastrophe
events, rates of return on reinsurers' investment portfolios, competition
and general economic conditions, that the Company cannot predict or
control. See "--The Reinsurance Industry".
- - Competition in the property catastrophe reinsurance market is intense and
could increase, due to the entry of new or established firms into the
market, improved capitalization of existing competitors (e.g., Lloyd's),
legislative, regulatory or new product initiatives that could reduce demand
for reinsurance of the type provided by GCR or changes in ratings assigned
to GCR or its competitors. See " -- Competition".
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<PAGE> 29
- - Future changes in interest, currency exchange and inflation rates, as well
as other financial market developments, are unpredictable and could
adversely affect the value of and returns on GCR's investment portfolio,
its premiums receivable, its claims payable and its loss reserves. See "--
Investments", "--Reserves" and "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations".
- - Insurance regulations in the United States or other jurisdictions could be
found to apply to GCR, or could be changed, in a manner that required GCR
to become admitted or approved to do business in those jurisdictions, and
to comply with costly or burdensome regulatory requirements, or to cease
writing reinsurance for ceding insurers located in those jurisdictions.
Such changes also could make it uneconomical for ceding insurers in those
jurisdictions to obtain reinsurance from a non-admitted reinsurer like GCR.
Similarly, regulation in Bermuda, to which Global Capital Re is subject,
could change in a manner that impedes GCR's ability to make certain
investments, write new business, pay dividends or undertake certain other
activities. See "-- Regulation".
- - The Company or Global Capital Re could be found to be conducting a trade or
business in the United States or other jurisdictions and thus be required
to pay income or other taxes in those jurisdictions, or the Company could
be deemed to be a "controlled foreign company" or its shareholders could be
subject to the RPII rules under U.S. federal tax law. See "--Certain United
States Federal Income Tax Considerations".
The factors referred to above should be considered by investors when reviewing
any forward-looking statements contained in this Annual Report, in any of the
Company's future public filings or press releases or in any future oral
statements made by the Company or any of its officers or other persons acting on
its behalf. The important factors that could affect forward-looking statements
are subject to change and the Company does not intend to update the foregoing
list of certain of these factors. By means of this cautionary note, the Company
intends to avail itself of the safe harbor from liability with respect to
forward-looking statements that is provided by Section 27A and Section 21E
referred to above.
ITEM 2. PROPERTIES
GCR leases office space in Bermuda at which its executive offices are located.
GCR's principal executive offices are located at Sofia House, 48 Church Street,
Hamilton HM 12, Bermuda and its telephone number is (441) 292 9415.
ITEM 3. LEGAL PROCEEDINGS
GCR will be subject to litigation and arbitration in the ordinary course of its
business. GCR currently is not involved in any 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 during the fourth quarter of
fiscal year 1996.
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<PAGE> 30
GLOSSARY OF SELECTED INSURANCE TERMS
<TABLE>
<CAPTION>
<S> <C>
Attachment point The amount of loss (per occurrence or in
the aggregate, as the case may be) above
which excess-of-loss reinsurance becomes
operative.
Broker One who negotiates contracts of insurance
or reinsurance, receiving a commission
for placement and other services
rendered, between (1) a policy holder and
a primary insurer, on behalf of the
insured party, (2) a primary insurer and
reinsurers on behalf of the primary
insurer, or (3) a reinsurer and a
retrocessionaire, on behalf of the
reinsurers.
Catastrophe excess-of-loss
reinsurance A form of excess-of-loss reinsurance
that, subject to a specified limit,
indemnifies the ceding company for the
amount of loss in excess of a specified
retention with respect to an accumulation
of losses resulting from a catastrophic
event. The actual reinsurance document is
called a "catastrophe cover".
Change in Unearned
Premiums The change in the sum of the portions of
premiums written that are applicable to
the unexpired terms of policies in force
between the beginning and the end of an
accounting period.
Cede; Cedant; Ceding
company When a party reinsurers all or part of
its liability with another, it "cedes"
business and is referred to as the
"cedent" or "ceding company".
Clash reinsurance A reinsurance policy covering losses
arising from a single set of
circumstances (occurrence) covered by
more than one insurance policy. For
example, if an insurer covers the owner
of a hotel, the manager of the hotel, and
the entity(ies) which provided
furnishings to the hotel, and there was a
hotel fire, clash reinsurance would
protect the insurer from suffering a loss
in the full amount of these multiple
policies. Clash reinsurance would pay to
the insurer a portion of the loss in
excess of a specified per occurrence
retention up to the reinsurance limit
amount.
Combined ratio A combination of the underwriting expense
ratio and the loss/ loss expense ratio.
The underwriting expense ratio measures
the ratio of underwriting expenses to
earned premiums. The loss/loss expense
ratio measures the ratio of losses and
loss expenses to earned premiums. A
combined ratio below 100% generally
indicates profitable underwriting prior
to the consideration of investment
income. A combined ratio over 100%
generally indicates unprofitable
underwriting prior to the consideration
of investment income.
</TABLE>
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<PAGE> 31
<TABLE>
<CAPTION>
<S> <C>
Excess-of-loss property
reinsurance A generic term describing property
reinsurance that indemnifies the
reinsured against all or a specified
portion of losses on underlying insurance
policies in excess of a specified amount,
which is called a "level" or "retention".
Also known as nonproportional
reinsurance. Excess-of-loss reinsurance
is written in layers. A reinsurer or
group of reinsurers accepts a band of
coverage up to a specified amount. The
total coverage purchased by the cedent is
referred to as a "program" and will
typically be placed with predetermined
reinsurers in prenegotiated layers. Any
liability exceeding the outer limit of
the program reverts to the ceding
company, which also bears the credit risk
of a reinsurer's insolvency.
Incurred but not reported Reserves for estimated losses that have
been incurred by insureds and reinsureds
but not yet reported to the insurer or
reinsurer including estimated future
developments on losses which are known to
the insurer or reinsurers.
Loss expenses The expenses of settling losses,
including legal and other fees, and the
portion of general expenses allocated to
loss settlement costs.
Loss reserves Liabilities established by
insurers and reinsurers to reflect the
estimated cost of loss payments and the
related expenses that the insurer or
reinsurer will ultimately be required to
pay in respect of insurance or
reinsurance it has written. Reserves are
established for losses and for loss
adjustment expenses.
Marine reinsurance Reinsurance of insurers that underwrite
marine risks, which include, but are not
limited to, ships, cargo, oil and gas
exploration property, yachts, marine
liabilities and war.
Premiums written Premiums written for a given period.
Proportional reinsurance A generic term describing all forms of
reinsurance in which the reinsurer shares
a proportional part of the original
premiums and losses of the reinsured.
(Also known as pro-rata reinsurance,
quota share reinsurance or participating
reinsurance.) In proportional reinsurance
the reinsurer generally pays the ceding
company a ceding commission. The ceding
commission generally is based on the
ceding company's cost of acquiring the
business being reinsured (including
commissions, premium taxes, assessments
and miscellaneous administrative expense)
and also may include a profit factor.
Rating scale A scale of classifications assigned by
the A.M. Best Company to certain
insurance and reinsurance companies as a
measure of their financial strength and
ability to meet their claims-paying
obligations, both currently and in the
near future. The scale encompasses
several rating levels from A++ (the
highest) to F (the lowest), including:
</TABLE>
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<PAGE> 32
<TABLE>
<CAPTION>
<S> <C>
A++, A+ SUPERIOR: Assigned to companies
which have achieved superior overall
performance when compared to the
standards established by the A.M. Best
Company. A++ and A+ (Superior) companies
have a very strong ability to meet their
obligations to policyholders over a long
period of time.
A, A- EXCELLENT: Assigned to companies
which have achieved excellent overall
performance when compared to the
standards established by the A.M. Best
Company. A and A-(Excellent) companies
have a strong ability to meet their
obligations to policyholders over a long
period of time.
An A.M. Best's rating is based upon both
a quantitative and qualitative evaluation
of the factors affecting the overall
performance of an insurance company. Such
rating is the opinion of A.M. Best and is
not directed toward the protection of
investors.
Reinstatement premium The premium charged for the restoration
of the reinsurance limit of a
catastrophe contract to its full amount
after payment by the reinsurer of losses
as a result of an occurrence.
Reinsurance An arrangement in which an insurance
company, the reinsurer, agrees to
indemnify another insurance or
reinsurance company, the ceding company,
against all or a portion of the insurance
or reinsurance risks underwritten by the
ceding company under one or more
policies. Reinsurance can provide a
ceding company with several benefits,
including a reduction in net liability on
individual risks and catastrophe
protection from large or multiple losses.
Reinsurance also provides a ceding
company with additional underwriting
capacity by permitting it to accept
larger risks and write more business than
would be possible without a concomitant
increase in capital and surplus, and
facilitates the maintenance of acceptable
financial ratios by the ceding company.
Reinsurance does not legally discharge
the primary insurer from its liability
with respect to its obligations to the
insured.
Retention The amount or portion of risk that an
insurer retains for its own account.
Losses in excess of the retention level
are paid by the reinsurers. In
proportional treaties, the retention may
be a percentage of the original policy's
limit. In excess-of-loss business, the
retention is a dollar amount of loss, a
loss ratio or a percentage.
Retrocessional Reinsurance;
Retrocessionaire A transaction whereby a reinsurer cedes
to another reinsurer the
retrocessionaire, all or part of the
reinsurance that the first reinsurer has
assumed. Retrocessional reinsurance does
not legally discharge the ceding
reinsurer from its liability with respect
to its obligations
</TABLE>
-30-
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<PAGE> 33
<TABLE>
<CAPTION>
<S> <C>
to the reinsured. Reinsurance companies
cede risks to retrocessionaires for
reasons similar to those that cause
primary insurers to purchase reinsurance:
to reduce net liability on individual
risks, to protect against catastrophic
losses, to stabilize financial ratios and
to obtain additional underwriting
capacity.
Risk excess-of-loss property
reinsurance A form of excess-of-loss property
reinsurance that covers a loss of the
reinsured on a single "risk" in excess of
its retention level of the type
reinsured, rather than to aggregate
losses for all covered risks, as does
catastrophe excess-of-loss 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.
Tail The period of time that elapses between
the writing of the applicable insurance
policy or the loss event (or the
insurer's knowledge of the loss event)
and the payment in respect thereof.
Underwriting The insurer's or reinsurer's process of
reviewing applications submitted for
insurance coverage, deciding whether to
accept all or part of the coverage
requested and determining the applicable
premiums.
Underwriting capacity The maximum amount that an insurance
company can underwrite. The limit
is generally determined by the
company's retained earnings and
investment capital. Reinsurance serves to
increase a company's underwriting
capacity by reducing its exposure from
particular risks.
Underwriting expenses The aggregate of policy acquisition
costs, including commissions, and
the portion of administrative,
general and other expenses attributable
to underwriting operations.
U.S. generally accepted
accounting principles
("GAAP") United States accounting principles as
set forth in opinions of the Accounting
Principles Board of the American
Institute of Certified Public Accountants
and/or statements of the Financial
Accounting Standards Board and which are
applicable in the circumstances as of
the date in question.
</TABLE>
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<PAGE> 34
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS.
Ordinary Shares have been included for trading on The Nasdaq National Market
since December 19, 1995, under the symbol GCREF.
The following table sets forth the high and low bid quotations for the Ordinary
Shares as reported by The Nasdaq National Market for the period from December
19, 1995 through December 31, 1995 and for each of the fiscal quarters from
December 31, 1995 through to September 30, 1996.
<TABLE>
<CAPTION>
HIGH LOW
<S> <C> <C> <C>
December 19, 1995 through December 31, 1995 $23.000 $19.875
Second Quarter ended March 31, 1996 25.750 21.500
Third Quarter ended June 30, 1996 27.125 24.250
Fourth Quarter ended September 30, 1996 26.875 21.500
</TABLE>
As of the close of business on November 21, 1996, there were approximately 477
holders of the Company's Ordinary Shares. The Company estimates that, as of
September 30, 1996, approximately 12,680,000 of the outstanding Ordinary Shares
were not publicly traded of which approximately 11,790,000 became eligible for
resale into the public market pursuant to Rule 144 under the Securities Act in
October 1996. The Company also estimates that, of these shares, all but
approximately 1,190,000 are eligible for resale pursuant to paragraph (k) of
Rule 144 -- i.e., without regard to the volume limit and other requirements of
Rule 144. The number of shares eligible for resale may have declined as a result
of recent transactions and does not reflect shares issuable on exercise of
outstanding options.
DIVIDENDS
The following table sets forth for the fiscal quarters of the two most recent
fiscal years all dividends per share declared during such periods:
<TABLE>
<CAPTION>
<S> <C> <C>
1995 Fourth Quarter $9.00
1996 Second Quarter $0.62
Third Quarter $0.62
Fourth Quarter $0.62
</TABLE>
On August 17, 1995, the Board of Directors declared a distribution of $9.00 per
ordinary share payable on August 18, 1995 to shareholders of record on the date
of declaration. The total amount of the distribution was $201.3 million and was
funded in part by borrowings under the Company's credit agreement with certain
lenders (the "Credit Agreement"). The balance of the distribution was funded by
the liquidation of certain investments. The distribution was accounted for as a
distribution of all retained earnings as of June 30, 1995, and the balance as a
distribution from additional paid-in capital.
The Company paid dividends of $0.62 per share in February 1996 ($15.9 million),
May 1996 ($15.9 million) and August 1996 ($15.3 million) and a dividend of $0.62
per share ($15.3 million) on November 27, 1996 (to holders of record on November
14, 1996).
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<PAGE> 35
In the fourth quarter of fiscal year 1996, certain shareholders of the Company
completed a public offering of Ordinary Shares. Global Capital Re purchased
1,000,000 of those shares in the offering for an aggregate purchase price of
$20.92 million (the "GCR Repurchase") and continues to hold such shares. These
shares will carry the voting, dividend and other rights associated with the
Ordinary Shares until such time (if any) as the shares are transferred to the
Company and retired. However, for purposes of the Company's consolidated
financial statements, any shares held by Global Capital Re have been treated as
if they had been retired by the Company. The Company proposes to purchase these
shares from Global Capital Re and retire them, subject to receipt of shareholder
approval at the Company's annual general meeting on December 19, 1996.
Dividend Policy
In December 1995, the Company adopted a policy with regard to the payment of
dividends. Under this policy, the Company currently intends to distribute a
substantial portion of its earnings each year. Currently, the Company's Board of
Directors has targeted a dividend payout that would total, in each fiscal year,
approximately 60% to 80% of the Company's net operating earnings (which exclude
any realized investment gains and losses), if any, in the prior fiscal year.
Dividends would be paid on a quarterly basis, in February, May, August and
November of each year.
Notwithstanding this policy, dividends will be paid only when, as and if
determined by the Company's Board of Directors out of funds legally available
therefor. The actual amount and timing of dividends (if any) will depend on
GCR's financial condition, results of operations, business prospects and such
other matters as the Board may deem relevant, and in particular on the level of
losses incurred by Global Capital Re, which can be expected to substantially
reduce or eliminate earnings available for dividends in some periods. Even if
earnings are available for dividends, the Board could determine that such
earnings should be retained for an extended period of time after any period in
which loss experience is unfavorable in order to replenish GCR's capital base,
as well as to expand GCR's business, to enhance its competitive position or for
any other proper purpose. In addition, as described below, in order to pay cash
dividends, the Company, as a holding company, will depend on distributions from
Global Capital Re, which will be subject to regulatory capital restrictions, and
dividend payments would be subject to net worth maintenance requirements and
dividend limitation restrictions under the Credit Agreement. Consequently, there
can be no assurance as to the amount or timing of dividend payments, and the
Company's dividend policy is subject to change at any time.
Restrictions on Dividends
The Company's ability to pay dividends on the Ordinary Shares is subject to
certain Bermudian regulatory restrictions on the payment of dividends by Global
Capital Re to the Company. Global Capital Re is obliged to comply with various
provisions of the Insurance Act regarding solvency and liquidity. In particular,
these provisions prohibit the payment of dividends or other distributions by
Global Capital Re that would result in its statutory capital and surplus
(calculated pursuant to Bermuda statutory accounting practices, which differ
from U.S. generally accepted accounting practices) to fall below the greater of
$100 million, 50% of net premiums written (with maximum credit of 25% for
reinsurance ceded) or 15% of loss reserves, in each case determined as of the
end of the latest fiscal year. At September 30, 1996, the required minimum was
$100 million and Global Capital Re's actual statutory capital and surplus was
$429.2 million. Statutory net income of Global Capital Re was $99.7 million and
$88.3 million for the years ended September 30, 1996 and 1995, respectively.
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<PAGE> 36
In addition, regulations in Bermuda limit the maximum amount of annual dividends
or other distributions available to shareholders 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 Global
Capital Re to the Company during fiscal 1997 without such notification is $107.3
million. For further discussion of the capital and other requirements applicable
to Global Capital Re, see "-- Regulation -- Bermuda".
The Company's ability to pay dividends is also subject to the requirements of
the Credit Agreement that consolidated net worth, and net worth of Global
Capital Re, of $250 million be maintained (at September 30, 1996 such amounts
were $417.0 million and $438.7 million, respectively) and that dividends paid in
any fiscal year not exceed consolidated net income in the prior fiscal year.
CERTAIN LEGAL MATTERS
The Company is a Cayman Islands company and certain of its officers and
directors are residents of various jurisdictions outside the United States. All
or a substantial portion of the assets of the Company and of such officers and
directors, at any one time, are or may be located in jurisdictions outside the
United States. In addition, Global Capital Re, the Company's sole subsidiary
through which it conducts all its operations, is a Bermuda corporation.
Consequently, with regard to any action in a U.S. federal or state court, it may
be difficult for shareholders or others to effect service of process upon the
Company, Global Capital Re or such officers and directors or to enforce any
judgment obtained in such a court against such entities or persons or their
respective assets. Moreover, courts of the Cayman Islands or Bermuda may not,
and in some cases likely will not, enforce claims predicated on U.S. federal or
state laws (including the federal securities laws) against such entities or
persons.
The Company's Amended and Restated Articles of Association (the "Articles")
contain restrictions on voting rights and transfers of Ordinary Shares, as
described briefly below, and other provisions that may have the effect of
discouraging an attempt to gain control of the Company. The Articles have been
filed as an exhibit to this Annual Report and are described more fully in the
Company's Registration Statement on Form 8-A (File No. 0-27220), as amended,
which was filed with the Commission in November 1995.
Limitation on Voting Rights
Each Ordinary Share has one vote in a poll of the shareholders, except that, if
and for as long as the number of issued Controlled Shares (as defined below) of
any U.S. person would constitute 10% or more of the issued shares of the Company
(after giving effect to any prior reduction in voting power as described below),
each such issued Controlled Share, regardless of the identity of the registered
holder thereof, will confer a fraction of a vote as determined by the following
formula (the "Formula"):
(T - C) / (9.1 X C)
Where: "T" is the aggregate number of votes conferred by all the issued voting
shares immediately prior to that application of the Formula with
respect to any particular shareholder, adjusted to take into account
any prior reduction taken with respect to any other shareholder
pursuant to the "sequencing provision" described below; and
"C" is the number of issued Controlled Shares attributable to such
person. "Controlled Shares" of any U.S. person refers to all voting
shares owned by such person, whether directly
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<PAGE> 37
or by application of the constructive ownership rules of Sections
958(a) and 958(b) of the Code, (generally applying to family members,
partnerships, estates, trusts or controlled corporations or holders of
certain options) together with all shares that such person is deemed to
own beneficially, directly or indirectly, within the meaning of Section
13(d) (3) of the Exchange Act and the rules and regulations thereunder
(including shares as to which beneficial ownership is disclaimed or
would not otherwise exist by reason of certain statutory exceptions).
With respect to any broker, dealer or investment adviser registered as
such under the U.S. federal securities laws (and its affiliates),
"Controlled Shares" do not include shares that are Controlled Shares
solely because such broker, dealer or adviser has discretionary
authority to vote or dispose of such shares on behalf of a client, if
the voting rights carried by such shares are not being exercised by
such broker, dealer or adviser (and the Company has received
satisfactory assurances of the same).
The Formula will be applied successively as many times as may be necessary to
ensure that no person will be a United States 10% Shareholder (as defined below)
at any time (the "sequencing provision"). For the purposes of determining the
votes exercisable by shareholders as of any date, the Formula will be applied to
the shares of each shareholder in declining order based on the respective
numbers of total Controlled Shares attributable to all shareholders. Thus, the
Formula will be applied first to the votes of shares held by the shareholder to
whom the largest number of total Controlled Shares is attributable and
thereafter sequentially with respect to the shareholder with the next largest
number of total Controlled Shares. In each case, calculations are made on the
basis of the aggregate number of votes conferred by the issued voting shares as
of such date, as reduced by the application of the Formula to any issued shares
of any shareholder with a larger number of total Controlled Shares as of such
date. "United States 10% Shareholder" means a U.S. person who owns, directly or
by application of the constructive ownership rules of Sections 958(a) and 958(b)
of the Code, issued shares of the Company carrying 10% or more of the total
combined voting rights attaching to all issued shares.
As a result of the provisions described above, the grant by a shareholder of a
revocable proxy to vote his shares (whether in the context of a proxy contest
for the election of the Company's directors or any other matter requiring a
shareholder vote) could result in a reduction of the voting power associated
with such shares. This could occur because, as a result of the proxy grant, the
grantee (and certain related persons) could be deemed to have acquired
beneficial ownership of the proxy shares and, if the grantee (or any such
related person) were a U.S. person, the proxy shares would become Controlled
Shares of the grantee (or such related persons). If the grantee and (and such
related persons) already held a sufficiently large number of Controlled Shares
so that, after the grant, his (or their) Controlled Shares exceeded the 10%
threshold described above, then all his (or their) Controlled Shares, including
the proxy shares, would be subject to a reduction in voting power pursuant to
the provisions described above, even though the proxy shares were held by the
grantor and in the absence of the proxy grant would not have been subject to
such a reduction. This would not apply with respect to proxies solicited by the
Company in connection with its annual general meetings or other matters unless
otherwise stated by the Company.
The directors are empowered to require any shareholder to provide information as
to that shareholder's beneficial share ownership, the names of persons having
beneficial ownership of the shareholder's shares, relationships with other
members or any other facts the directors may deem relevant to a determination of
the number of Controlled Shares attributable to any person. The directors may
disregard the votes attached to shares of any holder failing to respond to such
a request or submitting incomplete or untrue information.
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<PAGE> 38
The directors retain limited discretion to make such final adjustments to the
aggregate number of votes attaching to the voting shares of any shareholder that
they consider fair and reasonable in all the circumstances to ensure that no
person will be a United States 10% Shareholder at any time.
Restrictions on Transfer
The Articles contain several provisions restricting the transferability of
Ordinary Shares. The directors are required to decline to register a transfer of
shares if they have reason to believe that the result of such transfer would be
(i) to increase the number of total Controlled Shares of any U.S. person other
than a Goldman Sachs Person to 10% or more of the shares of the Company, (ii) to
increase the number of total Controlled Shares of any Goldman Sachs Person to
10% or more of the shares of the Company without the prior written consent of
Goldman Sachs & Co. or (iii) that a Goldman Sachs Person would become or
continue to be a United States 25% Shareholder, in each case without giving
effect to the limitation on voting rights described above. "Controlled Shares"
of any U.S. person means, in general, voting shares of the Company that such
person owns directly or by application of the constructive ownership rules of
Sections 958(a) and 958(b) of the Code or is deemed to beneficially own for
purposes of Section 13(d) of the Exchange Act and the Commission's rules
thereunder. "Goldman Sachs Person" means any of Goldman Sachs & Co. and their
affiliates and "United States 25% Shareholder" means a U.S. person who owns,
directly or by application of such constructive ownership rules, more than 25%
of either (i) the total combined voting rights attaching to the issued Ordinary
Shares and the issued shares of any other class of the Company or (ii) the total
combined value of the issued Ordinary Shares and any other issued shares of the
Company, determined pursuant to Section 957 of the Code. Similar restrictions
apply to the Company's ability to issue or repurchase shares. These transfer,
issuance and repurchase restrictions would terminate at any time when no Goldman
Sachs Person is deemed to have total Controlled Shares representing 10% or more
of the Company's shares, regardless of any subsequent increase in the number of
such Controlled Shares.
These restrictions provide an exception for Goldman Sachs & Co. to exceed the
25% threshold solely in connection with market-making transactions, as long as
they do not exceed the 25% threshold for more than 29 consecutive days at any
time or for more than 29 days during any single calendar quarter, and as long as
they do not exceed a 29% ownership threshold at any time. In addition, these
restrictions would permit share transfers or issuances to any person acting as
an underwriter pursuant to an agreement with the Company.
Based on its share registry and other information, the Company estimates that
the number of total Controlled Shares attributable to Goldman Sachs Persons
under the Articles represented more than 10% of the Ordinary Shares outstanding
on November 21, 1996. The Company further believes that, if the one million
Ordinary Shares currently held by Global Capital Re as a result of the GCR
Repurchase are purchased and retired by the Company, as the Company proposes to
do if its shareholders approve such transaction at their upcoming annual general
meeting, the Controlled Shares attributable to Goldman Sachs Persons will
continue to exceed this 10% threshold but by a smaller amount than would
otherwise be the case and thus could fall below this threshold, causing the
transfer, issuance and repurchase restrictions described above to terminate.
Whether and when these restrictions will terminate will depend on the share
ownership positions of the relevant persons going forward. For information about
the share ownership levels of certain persons, see "Item 12. Security Ownership
of Certain Beneficial Owners and Management".
For the reasons described above under "Item 1. Business -- Certain United States
Federal Income Tax Considerations", a U.S. shareholder whose Controlled Shares
exceed the 10% threshold described
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Page 38 of 102
<PAGE> 39
above - whether intentionally due to share acquisitions or inadvertently due to
the application of the constructive ownership rules under the Code - could be
exposed to adverse U.S. federal income tax treatment in the event that the
Controlled Shares of other U.S. shareholders also exceed such threshold and,
taken together, all such Controlled Shares exceed the 25% threshold described
above. Termination of the transfer, issuance and repurchase restrictions
described above could make it more likely that the Controlled Shares
attributable to any U.S. shareholder might exceed the 10% threshold.
Whether or not the transfer restrictions described above remain in effect, the
directors may, in their absolute discretion, decline to register the transfer of
any shares if they have reason to believe (i) that such transfer may expose the
Company, any subsidiary thereof, any shareholder or any person ceding insurance
to the Company or any such subsidiary to adverse tax or regulatory treatment in
any jurisdiction (including treatment of shareholders as United States
shareholders of a CFC after the restriction described above is no longer in
effect) or (ii) that registration of such transfer under the Securities Act or
under any U.S. state securities laws or under the laws of any other jurisdiction
is required and such registration has not been duly effected.
The Company is authorized to request information from any holder or prospective
acquiror of shares as necessary to give effect to the transfer, issuance and
repurchase restrictions described above, and may decline to effect any such
transaction if complete and accurate information is not received as requested.
Also, the Board may suspend the registration of transfers for any reason and for
such periods as the Board may determine, provided that they may not suspend the
registration of transfers for more than 45 days in any period of 365 consecutive
days.
A registered holder of Ordinary Shares will be deemed to own such Ordinary
Shares for all purposes (including dividend, voting and reporting purposes)
until a transfer of such Ordinary Shares has been registered on the stock
transfer records of the Company, including in the case of a purported transfer
of Ordinary Shares in violation of the restrictions on transfer, and as to which
registration is refused. However, a purported transfer as to which registration
is refused may give rise to certain beneficial rights of the proposed transferee
as against the proposed transferor.
The directors may designate the Company's Chief Executive Officer to exercise
their authority to decline to register transfers or to limit voting rights as
described above, or to take any other action, for as long as such officer is
also a director.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data of GCR as of September 30, 1996, 1995
and 1994 and for the fiscal years ended September 30, 1996, 1995 and 1994 are
included on page 4 under the caption "Financial Highlights" in the Company's
Annual Report to Shareholders for the fiscal year ended September 30, 1996 and
are incorporated herein by reference in response to this item.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
This item is incorporated by reference to "Management's Discussion and Analysis
of Results of Operations and Financial Condition" contained on pages 11 to 16 in
the Company's Annual Report to Shareholders for the fiscal year ended September
30, 1996.
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<PAGE> 40
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
This item is incorporated by reference to the Consolidated Financial Statements,
"Report of Independent Public Accountants" thereon and "Unaudited Quarterly
Financial Data" contained on pages 17 to 31 in the Company's Annual Report to
Shareholders for the fiscal year ended September 30, 1996.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
During the two years ended September 30, 1996 the Company has not changed its
independent accountants.
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Page 40 of 102
<PAGE> 41
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
This information with respect to Directors and Executive Officers of the
Registrant is contained under the captions "I. Election of Directors --
Nominees for Whom Proxies Will be Voted", "I. Board of Directors" and "II.
Executive Officers" on pages 4 to 6, 24-27 and 27-28, respectively, of the Proxy
Statement, which was filed with the Securities and Exchange Commission not later
than 120 days after fiscal year 1996 pursuant to Regulation 14A of the
Commission, and is incorporated herein by reference in response to this item.
ITEM 11. EXECUTIVE COMPENSATION
This information with respect to Executive Compensation has been contained under
the caption "III. Executive Compensation" on pages 28 to 32 of the Proxy
Statement, which was filed with the Commission not later than 120 days after
fiscal year 1996 pursuant to Regulation 14A of the Commission, and is
incorporated herein by reference in response to this item.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
This information with respect to Security Ownership of Certain Beneficial Owners
and Management is contained under the caption "IV. Beneficial Ownership of
Ordinary Shares" on pages 36 to 37 of the Proxy Statement, which was filed
with the Commission not later than 120 days after fiscal year 1996 pursuant to
Regulation 14A of the Commission, and is incorporated herein by reference in
response to this item.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
This information with respect to Certain Relationships and Related Transactions
is contained under the caption "V. Certain Relationships And Related Party
Transactions" on pages 38 to 40 of the Proxy Statement, which was filed with the
Commission not later than 120 days after fiscal year 1996 pursuant to Regulation
14A of the Commission, and is incorporated herein by reference in response to
this item.
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<PAGE> 42
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
A. FINANCIAL STATEMENTS AND EXHIBITS
(1) CONSOLIDATED FINANCIAL STATEMENTS
The following Consolidated Financial Statements of GCR Holdings Limited
and Report of Independent Public Accountants are incorporated by
reference to pages 17 through 31 of the Registrant's 1996 Annual
Report:
Report of Independent Public Accountants
Consolidated Balance Sheets, as of September 30, 1996 and 1995
Consolidated Statements of Income, years ended September 30, 1996, 1995
and 1994
Consolidated Statements of Changes in Shareholders' Equity,
years ended September 30, 1996, 1995 and 1994
Consolidated Statements of Cash Flows, years ended September 30, 1996,
1995 and 1994.
Notes to the Consolidated Financial Statements
(2) FINANCIAL STATEMENT SCHEDULES
The Schedules to the Consolidated Financial Statements of the Company
are listed in the accompanying Index to Schedules to Consolidated
Financial Statements and are filed as part of this Report.
(3) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION PAGE
NUMBER NUMBER
<S> <C> <C>
*3.1 Amended and Restated Memorandum of Association of the Company
(incorporated by reference to the Company's Registration Statement on
Form S-1 (File No. 333-04195)) ................................................................
*3.2 Amended and Restated Articles of Association of the Company
(incorporated by reference to the Company's Registration Statement on
Form S-1 (File No. 333-04195)) ................................................................
*3.3 Amended and Restated Shareholders Agreement, dated as of
December 18, 1995, among the Shareholders (as defined therein)
and the Company (incorporated by reference to the Company's
Registration Statement on Form S-1 (File No. 333-04195)) ......................................
*3.4 Registration Rights Agreement, dated December 18, 1995, between the
Company and The Goldman Sachs Group, L.P. and Johnson & Higgins
(incorporated by reference to the Company's Registration Statement on
Form S-1 (File No. 333-04195)) ...............................................................
</TABLE>
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<PAGE> 43
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION PAGE
NUMBER NUMBER
<S> <C> <C>
*4 Form of Share Certificate (incorporated by reference to the Company's
Registration Statement on Form S-1 (File No. 33-97736)) .......................................
*10.1 Employment Agreement, dated as of June 16, 1993, between the Company
and Lawrence S. Doyle (the "Doyle Employment Agreement") (incorporated
by reference to the Company's Registration Statement on Form S-1 (File
No. 33-97736)) ................................................................................
*10.1A Amendment to the Doyle Employment Agreement, dated as of December 12,
1995 (incorporated by reference to the Company's Registration Statement
on Form S-1 (File No. 333-04195)) .............................................................
*10.2 Employment Agreement dated as of August 16, 1993, between the Company
and Frederick W. Deichmann (the "Deichmann Employment Agreement")
(incorporated by reference to the Company's Registration Statement on
Form S-1 (File No. 33-97736)) .................................................................
*10.2A Amendment to the Deichmann Employment Agreement, dated as of
December 12, 1995 (incorporated by reference to the Company's Registration
statement on Form S-1 (File No. 333-04195)) ...................................................
*10.3 Employment Agreement dated as of January 15, 1994, between the Company
and William G. Fanning (the "Fanning Employment Agreement")
(incorporated by reference to the Company's Registration Statement on
Form S-1 (File No. 33-97736)) .................................................................
*10.3A Amendment to Fanning Employment Agreement, dated as of December 12,
1995 (incorporated by reference to the Company's Registration Statement on
Form S-1 (File No. 333-04195)) ................................................................
*10.4 Employment Agreement, dated as of June 16, 1993, between the Company
and Robert L. Nason (the "Nason Employment Agreement") (incorporated
by reference to the Company's Registration Statement on Form S-1 (File
No. 33-97736)) ................................................................................
*10.4A Amendment to the Nason Employment Agreement, dated as of December 12,
1995 (incorporated by reference to the Company's Registration Statement on
Form S-1 (File No. 333-04195)) ................................................................
*10.5 Employment Agreement, dated as of June 16, 1993, between the Company
and Stephen S. Outerbridge (the "Outerbridge Employment Agreement")
(incorporated by reference to the Company's Registration Statement on
Form S-1 (File No. 33-97736)) .................................................................
</TABLE>
-41-
Page 43 of 102
<PAGE> 44
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION PAGE
NUMBER NUMBER
<S> <C> <C>
*10.5A Amendment to the Outerbridge Employment Agreement, dated as of
December 12, 1995 (incorporated by reference to the Company's Registration
Statement on Form S-1 (File No. 333-04195)) ...................................................
*10.6 Non-Recourse Note, dated as of October 8, 1993, between the Company and
Steven H. Newman (the "Newman Note") (incorporated by reference to the
Company's Registration Statement on Form S-1 (File No. 33-97736)) .............................
*10.6A Amendment to the Newman Note dated as of April 30, 1996
(incorporated by reference to the Company's Registration
Statement on Form S-1 (File No. 333-04195)) ...................................................
*10.7 Non-Recourse Note, dated as of October 8, 1993, between the Company and
Lawrence S. Doyle (the "Doyle Note") (incorporated by reference to the
Company's Registration Statement on Form S-1 (File No. 33-97736)) .............................
*10.7A Amendment to the Doyle Note dated as of April 30, 1996
(incorporated by reference to the Company's Registration
Statement on Form S-1 (File No. 333-04195)) ...................................................
*10.8 Non-Recourse Note, dated as of October 8, 1993, between the Company and
Frederick W. Deichmann (the "Deichmann Note") (incorporated by reference
to the Company's Registration Statement on Form S-1 (File No. 33-97736)) ......................
*10.8A Amendment to the Deichmann Note dated as of April 30, 1996 (incorporated
by reference to the Company's Registration Statement on Form S-1
(File No. 333-04195)) .........................................................................
*10.9 Non-Recourse Note, dated as of January 15, 1994, between the Company and
William G. Fanning (the "Fanning Note") (incorporated by reference to the
Company's Registration Statement on Form S-1 (File No. 33-97736)) .............................
*10.9A Amendment to the Fanning Note dated as of April 30, 1996
(incorporated by reference to the Company's Registration
Statement on Form S-1 (File No. 333-04195)) ...................................................
*10.10 Non-Recourse Note, dated as of October 8, 1993, between the Company
and Robert L. Nason (the "Nason Note") (incorporated by reference to
the Company's Registration Statement on Form S-1 (File No. 33-97736)) .........................
*10.10A Amendment to the Nason Note dated as of April 30, 1996 (incorporated
by reference to the Company's Registration Statement on Form S-1
(File No. 333-04195)) .........................................................................
</TABLE>
-42-
Page 44 of 102
<PAGE> 45
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION PAGE
NUMBER NUMBER
<S> <C> <C>
*10.11 Non-Recourse Note, dated as of October 8, 1993, between the Company
and Stephen S. Outerbridge (the "Outerbridge Note") (incorporated by
reference to the Company's Registration Statement on Form S-1 (File
No. 33-97736)) ................................................................................
*10.11A Amendment to the Outerbridge Note dated as of April 30, 1996
(incorporated by reference to the Company's Registration Statement on
Form S-1 (File No. 333-04195)) ................................................................
*10.16 Chairman's Incentive Agreement, dated as of June 16, 1993, between
the Company and Steven H. Newman (incorporated by reference to the
Company's Registration Statement on Form S-1 (File No. 33-97736)) .............................
*10.16A Amended and Restated Chairman's Incentive Agreement, dated as of
November 16, 1995, between the Company and Steven H. Newman
(incorporated by reference to the Company's Registration Statement on
Form S-1 (File No. 33-97736)) .................................................................
*10.17 The Company's Share Option Plan (incorporated by reference to the
Company's Registration Statement on Form S-1 (File No. 33-97736)) .............................
*10.17A The Company's Amended and Restated Share Option Plan (incorporated
by reference to the Company's Registration Statement on Form S-1
(File No. 33-97736)) ..........................................................................
*10.18 The Company's Incentive Compensation Plan (incorporated by
reference to the Company's Registration Statement on Form S-1 (File
No. 33-97736)) ................................................................................
*10.18A The Company's Amended and Restated Incentive Compensation Plan
(incorporated by reference to the Company's Registration Statement on
Form S-1 (File No. 33-97736)) .................................................................
*10.19 Custodian Agreement, dated December 16, 1994, between Global
Capital Re and Mellon Bank, N.A., London Branch (incorporated
by reference to the Company's Registration Statement on Form
S-1 File No. 33-97736)) .......................................................................
*10.20 Discretionary Investment Advisory Agreement, dated October 8,
1993, between Global Capital Re and Goldman Sachs Asset
Management International, as amended by letter dated February
28, 1994 (incorporated by reference to the Company's
Registration Statement on Form S-1 (File No. 333-04195)) ......................................
</TABLE>
-43-
Page 45 of 102
<PAGE> 46
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION PAGE
NUMBER NUMBER
<S> <C> <C>
*10.21 Credit Agreement, dated as of August 17, 1995, among the Company,
the Lenders named therein and The First National Bank of Chicago,
as Agent (the "Credit Agreement") (incorporated by reference to the
Company's Registration Statement on Form S-1 (File No. 33-97736)) .............................
*10.22 Amendment No. 1 to the Credit Agreement, dated as of October 27,
1995 (incorporated by reference to the Company's Registration
Statement on Form S-1 (File No. 33-97736)) ....................................................
*10.23 Share Pledge Agreement, dated as of September 29, 1995,
between the Company and The First National Bank of Chicago, as
Agent (incorporated by reference to the Company's Registration
Statement on Form S-1 (File No. 33-97736)) ....................................................
*10.24 Software License Agreement, dated October 8, 1993, between Applied
Insurance Research, Inc. and Global Capital Re (incorporated by
reference to the Company's Registration Statement on Form S-1
(File No. 33-97736)) ..........................................................................
*10.25 The Company's Amended and Restated Nonemployee Directors Share
Option Plan, dated April 18, 1996 (incorporated by reference
to the Company's Registration Statement on Form S-1 (File No.
333-04195)) ...................................................................................
*10.26 The Company's Amended and Restated 1995 Share Option Plan,
dated as of April 18, 1996 (incorporated by reference to the Company's
Registration Statement on Form S-1 (File No. 333-04195)) ......................................
*10.27 Amendment No. 2 to the Credit Agreement, dated as of February 28,
1996 (incorporated by reference to the Company's Registration
Statement on Form S-1 (File No. 333-04195)) . . . . . . . . . . . . . . . . . . . . . . . . . .
*10.28 Form of Share Option Agreement between the Company and employees
of the Company who received grants of options pursuant to the
Company's 1995 Share Option Plan (incorporated by reference to the
Company's Registration Statement on Form S-1 (File No. 333-04195)) ............................
*10.29 Form of Restricted Share Agreement between the Company and
employees of the Company who received grants of Restricted
Shares of the Company pursuant to the Company's 1995 Share
Option Plan (incorporated by reference to the Company's
Registration Statement on Form S-1 (File No. 333-04195)) ......................................
</TABLE>
-44-
Page 46 of 102
<PAGE> 47
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION PAGE
NUMBER NUMBER
<S> <C> <C>
*10.30 Form of Share Option Agreement between the Company and the
directors of the Company who received grants of options
pursuant to the Company's Nonemployee Directors Share Option
Plan (incorporated by reference to the Company's Registration
Statement on Form S-1 (File No. 333-04195)) ...................................................
11 Statement regarding computation of per share earnings .........................................
13 Portions of the Company's 1996 Annual Report to Shareholders
under the captions "Financial Highlights", "Management's
Discussion and Analysis of Results of Operations and
Financial Condition" and "Consolidated Financial Statements" at
pages 4, 11-16 and 17-31, respectively, are expressly incorporated
by reference in this Annual Report on Form 10-K and filed
herewith as part of this Report. The 1996 Annual Report to
Shareholders of the Company was furnished to the Commission
on November 26, 1996 pursuant to Rule 14a-3(c) under the
Exchange Act for the information of the Commission only, and except
for those portions thereof which are expressly incorporated by
reference in this Annual Report on Form 10-K, is not to be deemed
filed as part of this Report ..................................................................
*21 Subsidiary of the Company (incorporated by reference to the
Company's Registration Statement on Form S-1 (File No. 33-97736)) .............................
24. Powers of Attorney ............................................................................
27. Financial Data Schedule .......................................................................
</TABLE>
* Incorporated by reference
(B) REPORTS ON FORM 8-K
There were no reports on Form 8-K filed during the fourth quarter of the
Company's fiscal year ended September 30, 1996.
-45-
Page 47 of 102
<PAGE> 48
SIGNATURES
Pursuant to the requirements of Section 13 or 15d of the Securities Exchange Act
of 1934, the Registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized, in Hamilton, Bermuda on November
29, 1996.
GCR HOLDINGS LIMITED
/s/ Frederick W. Deichmann
--------------------------
Frederick W. Deichmann
Attorney-in-Fact
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons on behalf of the Registrant in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
/s/ Lawrence S Doyle* President, Chief Executive November 29, 1996
- --------------------- Officer and Director (Principal
Lawrence S. Doyle Officer)
/s/ Frederick W. Deichmann Chief Financial Officer and November 29, 1996
- --------------------- Secretary (Principal Financial
Frederick W. Deichmann and Accounting Officer)
/s/ Steven H. Newman* Chairman of the Board of Directors November 29, 1996
- ---------------------
Steven H. Newman
/s/ Loay Al-Naqib* Director November 29, 1996
- ---------------------
Loay Al-Naqib
/s/ J. Markham Green* Director November 29, 1996
- ---------------------
J. Markham Green
/s/ Al Lerner* Director November 29, 1996
- ---------------------
Alfred Lerner
/s/ John P. McNulty* Director November 29, 1996
- ----------------------
John P McNulty
/s/ David A. Olsen* Director November 29, 1996
- ----------------------
David A. Olsen
/s/ Joseph D. Roxe Director November 29, 1996
- ----------------------
Joseph D. Roxe
/s/ Jerry S. Rosenbloom* Director November 29, 1996
- ------------------------
Jerry S. Rosenbloom
/s/ Michael E. Satz* Director November 29, 1996
- ----------------------
Michael E. Satz
/s/ Donald J. Zuk* Director November 29, 1996
- ----------------------
Donald J. Zuk
</TABLE>
* by Frederick W. Deichmann as attorney-in-fact
-46-
Page 48 of 102
<PAGE> 49
GCR HOLDINGS LIMITED
INDEX TO SCHEDULES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
REPORT PAGES
<S> <C>
Report of Independent Public Accountants on Schedules S-2
I Summary of Investments Other Than Investments in Related Parties at
September 30, 1996, 1995 and 1994 S-3
III Condensed Financial Information of the Registrant S-5
IV Supplementary Information Concerning Reinsurance for the years
ended September 30, 1996, 1995 and 1994 S-8
V Supplementary Insurance Information for the years ended September 30, 1996,
1995 and 1994 S-9
X Supplementary Information Concerning Property-Casualty Insurance
Operations S-10
Schedules other than those listed above are omitted for the reason that they are not applicable
</TABLE>
S-1
Page 49 of 102
<PAGE> 50
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of GCR Holdings Limited:
We have audited in accordance with generally accepted accounting standards the
consolidated financial statements of GCR Holdings Limited and subsidiary as of
September 30, 1996 and 1995 and for each of the three years in the period ended
September 30, 1996 included in GCR Holdings Limited's annual report to
shareholders incorporated by reference in this Form 10-K, and have issued our
report thereon dated October 21, 1996. Our audit was made for the purpose of
forming an opinion on the basic financial statements taken as a whole. The
schedules listed in the accompanying index are presented for purposes of
complying with the Securities and Exchange Commissions rules and are not part of
the basic financial statements. These schedules have been subjected to the
auditing procedures applied in the audit 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.
/s/ ARTHUR ANDERSEN & CO.
Hamilton, Bermuda
October 21, 1996
S-2
Page 50 of 102
<PAGE> 51
SCHEDULE I
GCR HOLDINGS LIMITED AND SUBSIDIARY
SUMMARY OF INVESTMENTS
OTHER THAN INVESTMENTS IN RELATED PARTIES
(Expressed in thousands of United States dollars)
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1996
---------------------------------------
AMOUNT AT
WHICH SHOWN
IN THE
AMORTIZED MARKET BALANCE
COST VALUE SHEET
-------- -------- --------
<S> <C> <C> <C>
TYPE OF INVESTMENT:
Fixed Maturities Available for Sale:
U.S. government and government
agency bonds $299,081 $298,865 $298,865
U.S. corporate bonds 52,815 53,089 53,089
U.S. asset-backed securities 27,300 27,072 27,072
Commercial paper 59,197 59,178 59,178
-------- -------- --------
Subtotal 438,393 438,204 438,204
Cash and Cash Equivalents 14,010 14,070 14,070
-------- -------- --------
Total Investments and Cash and Cash
Equivalents $452,403 $452,274 $452,274
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1995
---------------------------------------
AMOUNT AT
WHICH SHOWN
IN THE
AMORTIZED MARKET BALANCE
COST VALUE SHEET
-------- -------- --------
<S> <C> <C> <C>
TYPE OF INVESTMENT:
Fixed Maturities Available for Sale:
U.S. government and government
agency bonds $205,517 $206,115 $206,115
U.S. corporate bonds 223,497 223,432 223,432
U.S. asset-backed securities 55,844 55,775 55,775
-------- -------- --------
Subtotal 484,858 485,322 485,322
Cash and Cash Equivalents 41,490 41,490 41,490
-------- -------- --------
Total Investments and Cash and Cash
Equivalents $526,348 $526,812 $526,812
======== ======== ========
</TABLE>
S-3
Page 51 of 102
<PAGE> 52
SCHEDULE I (CONTINUED)
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1994
---------------------------------------
AMOUNT AT
WHICH SHOWN
IN THE
AMORTIZED MARKET BALANCE
COST VALUE SHEET
--------- --------- ---------
<S> <C> <C> <C>
TYPE OF INVESTMENT:
Fixed Maturities Available for Sale:
U.S. government and government
agency bonds $105,371 $105,004 $105,004
U.S. corporate bonds 190,782 188,599 188,599
U.S. asset-backed securities 67,417 67,210 67,210
-------- -------- --------
Subtotal 363,570 360,813 360,813
Cash and Cash Equivalents 121,496 121,496 121,496
-------- -------- --------
Total Investments and Cash and Cash
Equivalents $485,066 $482,309 $482,309
======== ======== ========
</TABLE>
S-4
Page 52 of 102
<PAGE> 53
SCHEDULE III
PART 1
GCR HOLDINGS LIMITED AND SUBSIDIARY
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
GCR HOLDINGS LIMITED
BALANCE SHEETS
(PARENT COMPANY)
(Expressed in thousands of United States dollars, except for per share amounts)
<TABLE>
<CAPTION>
SEPTEMBER 30,
1996 1995
--------- ----------
<S> <C> <C>
ASSETS
Cash $ 3,563 $ 5,428
Investment in wholly-owned subsidiary 414,565 496,209
Accrued investment income 185 256
Prepaid expenses 124 109
- -------------------------------------------------------------------------
TOTAL ASSETS $ 418,437 $ 502,002
=========================================================================
LIABILITIES
Loan payable $ 0 $ 142,000
Loan interest and payable 0 1,017
Accrued expenses and accounts payable 1,367 1,630
Other liabilities 33 958
- -------------------------------------------------------------------------
TOTAL LIABILITIES 1,400 145,605
- -------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
Ordinary shares, 24,674,255 and 22,361,600
shares outstanding, par value US$0.10 2,467 2,236
Additional paid-in capital 355,295 338,353
Notes receivable for shares issued (1,359) (1,783)
Unrealized gains (losses) on investments (129) 464
Retained earnings 60,763 17,127
- -------------------------------------------------------------------------
SHAREHOLDERS' EQUITY 417,037 356,397
- -------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 418,437 $ 502,002
=========================================================================
</TABLE>
S-5
Page 53 of 102
<PAGE> 54
SCHEDULE III
PART 2
GCR HOLDINGS LIMITED AND SUBSIDIARY
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
GCR HOLDINGS LIMITED
STATEMENTS OF INCOME
(PARENT COMPANY)
(Expressed in thousands of United States dollars)
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
1996 1995 1994
---- -------- --------
<S> <C> <C> <C>
REVENUES
Investment income, net $ 219 $ 3,258 $ 154
- ----------------------------------------------------------------------------------------------
TOTAL REVENUES 219 3,258 154
==============================================================================================
EXPENSES
General and administrative expenses 3,943 3,254 1,467
- ----------------------------------------------------------------------------------------------
Interest expense 3,724 1,964
- ----------------------------------------------------------------------------------------------
TOTAL EXPENSES 7,667 5,218 1,467
- ----------------------------------------------------------------------------------------------
Net income before equity in net income of
wholly-owned subsidiary (7,448) (1,960) (1,313)
Equity in net income of wholly-owned subsidiary 98,210 92,616 31,128
- ----------------------------------------------------------------------------------------------
NET INCOME $ 90,762 $ 90,656 $ 29,815
==============================================================================================
</TABLE>
S-6
Page 54 of 102
<PAGE> 55
SCHEDULE III
PART 3
GCR HOLDINGS LIMITED AND SUBSIDIARY
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
GCR HOLDINGS LIMITED
STATEMENTS OF CASH FLOWS
(PARENT COMPANY)
(Expressed in thousands of United States dollars)
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
1996 1995 1994
------------- ------------- -------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income before equity in net income of wholly-owned $ (7,448) $ (1,960) $ (1,313)
subsidiary
Adjustments to reconcile net income to cash provided by
operating activities:
Dividends paid by wholly-owned subsidiary 158,960 28,000 0
Add (deduct) changes in assets and liabilities:
Accrued investment income 71 (113) (144)
Prepaid expenses (15) (109) 0
Loan interest payable (1,017) 1,017 0
Accrued expenses and accounts payable (263) 1,630 0
Other liabilities (925) 440 518
- ---------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 149,363 28,905 (939)
- ---------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in wholly-owned subsidiary 40,000 (440,000)
- ---------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 0 40,000 (440,000)
- ---------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issue of shares 38,093 20 451,241
Less: Placement costs (8,168)
Less: Issued for notes receivable (2,100)
Retirement of shares (4,593)
Repayment of notes receivable 424 317
(Repayment) proceeds of borrowing (142,000) 142,000
Dividends to shareholders (47,747) (201,255)
- ---------------------------------------------------------------------------------------------------------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (151,230) (63,511) 440,973
- ---------------------------------------------------------------------------------------------------------
NET (DECREASE) INCREASE IN CASH (1,867) 5,394 34
Cash at the beginning of the year 5,428 34 0
=========================================================================================================
CASH AT THE END OF THE YEAR $ 3,561 $ 5,428 $ 34
=========================================================================================================
</TABLE>
S-7
Page 55 of 102
<PAGE> 56
SCHEDULE IV
GCR HOLDINGS LIMITED AND SUBSIDIARY
SUPPLEMENTARY INFORMATION CONCERNING
REINSURANCE
(Expressed in thousands of United States dollars)
<TABLE>
<CAPTION>
Year ended September 30, 1996
------------------------------------------------------------------------------------------
Percentage
Ceded to Assumed of Amount
Gross Other from Other Net Assumed
Amount Companies Companies Amount to Net
<S> <C> <C> <C> <C> <C>
Property Premiums Written $119,802 $0 $119,802 $119,802 100%
================= ========================================================================
</TABLE>
<TABLE>
<CAPTION>
Year ended September 30, 1995
------------------------------------------------------------------------------------------
Percentage
Ceded to Assumed of Amount
Gross Other from Other Net Assumed
Amount Companies Companies Amount to Net
<S> <C> <C> <C> <C> <C>
Property Premiums Written $136,884 $0 $136,884 $136,884 100%
================= ========================================================================
</TABLE>
<TABLE>
<CAPTION>
Year ended September 30, 1994
------------------------------------------------------------------------------------------
Percentage
Ceded to Assumed of Amount
Gross Other from Other Net Assumed
Amount Companies Companies Amount to Net
<S> <C> <C> <C> <C> <C>
Property Premiums Written $102,065 $0 $102,065 $102,065 100%
================= ========================================================================
</TABLE>
S-8
Page 56 of 102
<PAGE> 57
SCHEDULE V
GCR HOLDINGS LIMITED AND SUBSIDIARY
SUPPLEMENTARY INSURANCE INFORMATION
(Expressed in thousands of United States dollars)
<TABLE>
<CAPTION>
As of September 30, 1996 For the year ended September 30, 1996
---------------------------------------------------------------------------------------------------------------------------
Future
Policy Benefits, Amortization
Deferred Benefits, Claims, of Deferred
Policy Losses Net Losses and Policy Other
Acquisition Claims and Unearned Premium Investment Settlement Acquisition Operating Premiums
Costs Expenses Premiums Revenue Income Expenses Costs Expenses Written
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Property $9,416 $39,934 $57,029 $124,461 $28,964 $28,028 $20,025 $14,446 $119,802
============ =============== ============ ============ ============== ============= ============== ============= =========
As of September 30, 1995 For the year ended September 30, 1995
---------------------------------------------------------------------------------------------------------------------------
Future
Policy Benefits, Amortization
Deferred Benefits, Claims, of Deferred
Policy Losses Net Losses and Policy Other
Acquisition Claims and Unearned Premium Investment Settlement Acquisition Operating Premiums
Costs Expenses Premiums Revenue Income Expenses Costs Expenses Written
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Property $10,257 $33,390 $61,688 $120,556 $32,651 $35,293 $17,063 $10,566 $136,884
============ =============== ============ ============= ============= ============= ============== ============= ==========
As of September 30, 1994 For the year ended September 30, 1994
---------------------------------------------------------------------------------------------------------------------------
Future
Policy Benefits, Amortization
Deferred Benefits, Claims, of Deferred
Policy Losses Net Losses and Policy Other
Acquisition Claims and Unearned Premium Investment Settlement Acquisition Operating Premiums
Costs Expenses Premiums Revenue Income Expenses Costs Expenses Written
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Property $5,975 $19,705 $45,360 $56,705 $20,095 $25,278 $6,743 $5,277 $102,065
============ ================ =========== ============== ============ ============= ============== ============= ==========
</TABLE>
S-9
Page 57 of 102
<PAGE> 58
SCHEDULE X
GCR HOLDINGS LIMITED AND SUBSIDIARY
SUPPLEMENTARY INFORMATION CONCERNING
PROPERTY/CASUALTY INSURANCE OPERATIONS
(Expressed in thousands of United States dollars)
<TABLE>
<CAPTION>
Deferred Reserve for
Policy Unpaid Claims Discount, if Net
Acquisition and Claims any, Unearned Earned Investment
Costs Expenses Deducted Premiums Premiums Income
Affiliation with Registrant
<S> <C> <C> <C> <C> <C> <C>
Consolidated Subsidiary
Year ended September 30, 1996 $ 9,416 $ 39,934 $ 0 $ 57,029 $124,461 $ 28,964
==========================================================================
Year ended September 30, 1995 $ 10,257 $ 33,390 $ 0 $ 61,688 $120,556 $ 32,651
==========================================================================
Year ended September 30, 1994 $ 5,975 $ 19,705 $ 0 $ 45,360 $ 56,705 $ 20,095
==========================================================================
<CAPTION>
Claims and Claims Expenses Amortization of
Related to Deferred
-------------------------- Policy Paid Claims
Current Prior Acquisition and Claims Premium
Year Years Costs Expenses Written
<S> <C> <C> <C> <C> <C>
Affiliation with Registrant
Consolidated Subsidiary
Year ended September 30, 1996 $ 31,174 ($ 3,146) $ 20,025 $ 21,484 $119,802
=================================================================
Year ended September 30, 1995 $ 29,880 $ 5,413 $ 17,063 $ 21,608 $136,884
=================================================================
Year ended September 30, 1994 $ 25,278 $ 0 $ 6,743 $ 5,573 $102,065
=================================================================
</TABLE>
S-10
Page 58 of 102
<PAGE> 59
EXHIBIT 11
GCR HOLDINGS LIMITED AND SUBSIDIARY
COMPUTATION OF EARNINGS PER SHARE (unaudited)
(in thousands of U.S. dollars, except per share amounts)
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
PRIMARY:
Net Income ................................ $ 90,763 $ 90,656 $ 29,815
Weighted Average
Ordinary Shares Outstanding ............... 24,722,039 22,484,435 22,556,530
Dilutive Effect of:
Stock Options ...................... 267,467 35,442 7,745
Warrants ........................... -- 489,951 120,330
============ =========== ==========
Total ..................... 24,989,506 23,009,828 22,684,606
============ =========== ==========
Net Income per Ordinary Share (after giving
effect to the Share Split) ........... $ 3.63 $ 3.94 $ 1.32
FULLY DILUTED:
Net Income ................................ $ 90,763 $ 90,656 $ 29,815
Weighted Average
Ordinary Shares Outstanding ............... 24,722,039 22,484,435 22,556,530
Dilutive Effect of:
Stock Options ...................... 292,689 40,606 7,745
Warrants ........................... -- 558,339 120,330
============ =========== ==========
Total ..................... 25,014,727 23,083,380 22,684,606
============ =========== ==========
Net Income per Ordinary Share (after giving
effect to the Share Split) ........... $ 3.63 $ 3.93 $ 1.32
</TABLE>
The calculation of fully diluted earnings per share is submitted in accordance
with Regulation S-K item 601 (b) (11) although not required by footnote 2 to
paragraph 14 of APB Opinion No. 15 because it results in dilution of less than
3%
Page 59 of 102
<PAGE> 60
EXHIBIT 13. ANNUAL REPORT TO SHAREHOLDERS
FINANCIAL HIGHLIGHTS
(Expressed in thousands of US dollars, except per share amounts)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
SEPTEMBER 30,
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Premiums written $ 119,802 $ 136,884 $ 102,065
Premiums earned 124,461 120,556 56,705
Net income $ 90,762 $ 90,656 $ 29,815
Net income per share $ 3.63 $ 3.94 $ 1.32
Pro forma net income per share (1) $ 3.64 $ 3.65 1.20
Dividends declared per share (2) $ 1.86 $ 9.00 $ -
Weighted average shares outstanding 24,989,506 23,009,828 22,684,606
Loss and loss expense ratio 22.5% 29.3% 44.6%
Expense ratio 21.5% 18.6% 18.6%
Combined ratio 44.0% 47.9% 63.2%
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30,
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Total assets $ 516,840 $597,641 $534,014
Shareholders' equity $ 417,037 $356,397 $468,067
Book value per share $ 16.90 $ 15.94 $ 20.76
</TABLE>
Share Price Range:
<TABLE>
<CAPTION>
HIGH LOW
<S> <C> <C>
Quarter ended December 31, 1996 (from December 18, 1996) $ 23.000 $ 19.875
Quarter ended March 31, 1996 $ 25.750 $ 21.500
Quarter ended June 30, 1996 $ 27.125 $ 24.250
Quarter ended September 30, 1996 $ 26.875 $ 21.500
</TABLE>
- ---------------
(1) Assuming 3.3 million shares issued pursuant to sponsor warrants in December
1995 and 1.0 million shares repurchased in July 1996 were effected October
31, 1993.
(2) The 1995 fiscal year dividend was a one-time distribution which preceded
establishment of the Company's current dividend policy.
Page 60 of 102
<PAGE> 61
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
GENERAL
GCR commenced operations in October 1993. The financial data included in the
following discussion are as of September 30, 1996 and 1995 and for the years
ended September 30, 1996, 1995 and 1994. Because GCR has a limited operating and
loss history, the financial data included herein are not necessarily indicative
of the financial condition or results of operations of GCR in the future.
Renewal dates for property catastrophe reinsurance policies are generally
concentrated in the first quarter of each calendar year - i.e., in the second
quarter of the Company's fiscal year. Approximately half of GCR's reinsurance
programs and more than half of its premiums written are related to contracts
with renewal dates (primarily January 1 ) in the second quarter of the Company's
fiscal year - i.e., the quarter ending March 31. Nevertheless, because premiums
generally are earned over the term in which the related reinsurance coverage is
provided, GCR's premiums earned are not concentrated in any interim period.
Earned premiums in the year ended September 30, 1994 and, to a lesser extent, in
the year ended September 30, 1995 reflect the start-up nature of the Company's
operations during these fiscal years.
RESULTS OF OPERATIONS, YEARS ENDED SEPTEMBER 30, 1996 AND 1995
Written premiums for the year ended September 30, 1996 were $119.8 million, a
decrease of 12.5% compared to written premiums for the prior fiscal year. This
decrease was the result of several factors: increasing price competition in
GCR's property catastrophe line of business, a reduction in reinstatement
premium associated with favorable loss experience and negative adjustments of
premium associated with proportional business. Price competition has caused GCR
to reduce, and in some cases cancel, its participation in business it does not
consider to be adequately priced. Premium rates in the global property
catastrophe market have decreased in recent periods due to favorable loss
experience in the industry. Further downward pressure on rates and on GCR's
written premiums in 1997 can be expected if and while this favorable loss
experience continues.
For the current fiscal year, premiums earned were $124.5 million, an increase of
3.2% compared to the prior fiscal year. This increase reflects the practice of
earning premiums ratably over the reinsurance contract period (generally one
year) and, therefore, the earning of some premiums written in fiscal year 1995,
when GCR achieved significant growth in new business from new and existing
clients.
For the year ended September 30, 1996 losses and loss expenses were $28.0
million compared to $35.3 million for the prior fiscal year, a decline of 20.6%.
GCR was affected by only two catastrophic events in the most recent period -
Hurricane Opal, which struck the Florida Panhandle in early October 1995 and for
which the Company
Page 61 of 102
<PAGE> 62
incurred losses and loss expenses of $3.3 million and Hurricane Fran, which
struck the coast of North Carolina in September 1996 and for which the Company
incurred losses and loss expenses of $6.8 million, and saw favorable loss
development of $3.1 million related to previous periods. GCR's loss ratio was
22.5% for the year ended September 30, 1996, compared to 29.3% for the prior
fiscal year. While loss experience for the year was favorable, GCR is subject to
infrequent but severe effects of natural and man-made catastrophes, which can
lead to volatile losses and financial results.
Investment income was $29.0 million for the year ended September 30, 1996. The
11.3% decrease from $32.7 million in the year ended September 30, 1995 is the
result of declining interest rates and the use of cash generated from the sale
of investment assets to repay borrowings under the Credit Agreement (described
below) in February 1996, which more than offset the effects of positive cash
flow from operations added to the investment portfolio. The average yield on the
investment portfolio was 6.1% in fiscal 1996, compared to 6.6% in the prior
fiscal year.
Acquisition expenses were $20.0 million for the fiscal year 1996, compared to
$17.1 million for the fiscal year 1995. The increase in acquisition expenses is
related to growth of international property catastrophe business and higher
commission rates on proportional business.
General and administrative expenses increased 24.6% to $10.7 million for the
year ended September 30, 1996 compared to the prior year. This increase reflects
an increase in GCR's staff, compensation expense of $1.6 million related to an
adjustment in the exercise price of certain outstanding options and certain
non-recurring expenses associated with the public offerings in December 1995 and
July 1996. GCR's expense ratio was 21.5% for the year ended September 30, 1996,
compared to 18.6% for the year ended September 30, 1995.
Interest expense of $2.0 million for fiscal year 1995 and $3.7 million for the
fiscal year 1996 reflects the borrowing under the Credit Agreement in August
1995 of $142.0 million at 6.7% per annum. The borrowing was repaid by February
1996.
For the fiscal years 1996 and 1995, respectively, net income was $90.8 million
and $90.7 million, or $3.63and $3.94 per share.
RESULTS OF OPERATIONS, YEARS ENDED SEPTEMBER 30, 1995 AND 1994
In the year ended September 30, 1995, GCR produced written premiums of $136.9
million, reflecting growth in new business from new and existing clients, offset
in part by modest rate reductions. GCR established itself in the worldwide
property catastrophe reinsurance market in its first year of operations, which
ended September 30, 1994, and produced written premiums of $102.1 million in
that year. Premiums earned for the years ended September 30, 1995 and 1994 were
$120.6 million and $56.7 million, respectively,
Page 62 of 102
<PAGE> 63
with the increase principally reflecting GCR's continuing efforts to establish
new reinsurance clients and, to a lesser extent, growth in business from
existing clients.
Investment income was $32.7 million and $20.1 million for the years ended
September 30, 1995 and 1994, respectively. The 1994 fiscal year results reflect
interest rates that were low by historical standards. The average yield on GCR's
investment portfolio for the years ended September 30, 1995 and 1994 was 6.6%
and 4.6%, respectively. Realized gains (losses) on investments were $0.4 million
for the year ended September 30, 1995 and $(10.2) million in the year ended
September 30, 1994. Approximately $6.0 million of the realized losses in the
1994 fiscal year reflected a decision to shorten the average maturity of the
portfolio in November 1993, which in large measure, but not completely,
insulated the Company from the most serious effects of rising interest rates
later in that fiscal year.
Losses and loss expenses for the years ended September 30, 1995 and 1994 were
$35.3 million and $25.3 million, respectively. Of the 1994 amount, $17.6 million
was the result of catastrophe losses sustained in the earthquake in Northridge,
California on January 17, 1994. The 1995 losses included $5.8 million of loss
development reported in 1995 related to the Northridge earthquake. Losses
incurred in the fourth quarter of the 1995 fiscal year were $15.0 million,
including provisions for losses from Hurricanes Luis and Marilyn and a hailstorm
in Germany. The Company's loss ratio - i.e., the ratio of losses and loss
expenses to earned premium - was 29.3% and 44.6% for the years ended September
30, 1995 and 1994, respectively. The decline in the loss ratio during fiscal
year 1995 was primarily due to the absence of a significant loss event during
that year compared to the prior year, in which the 1994 Northridge earthquake
occurred.
Acquisition expenses, primarily commission and brokerage related to the
production of premiums, were $17.1 million and $6.7 million for the years ended
September 30, 1995 and 1994, respectively. The increase in acquisition expenses
for the 1995 fiscal year is directly related to the growth in earned premiums
during that year. General and administrative expenses were $8.6 million and $5.3
million in the years ended September 30, 1995 and 1994, respectively. The growth
in these expenses in fiscal year 1995 reflects growth in staff size, travel
expenses and the opening of GCR's office in Belgium, as well as expenses
associated with the line of credit established in August 1995 and with the
initial public offering.
Net income for the year ended September 30, 1995 was $90.7 million, or $3.94 per
ordinary share. Net income for the 1994 fiscal year was $29.8 million, or $1.32
per ordinary share, The increase in net income is principally attributable to
the start-up nature of GCR's business during these periods, as well as to the
occurrence of the Northridge earthquake in fiscal year 1994 and the absence of
any catastrophic event of comparable severity during the subsequent fiscal year.
Page 63 of 102
<PAGE> 64
LIQUIDITY AND CAPITAL RESOURCES
The Company raised approximately $441.0 million in cash, net of placement costs,
through an initial placement of ordinary shares in October 1993. Of this amount,
$440.0 million was contributed to Global Capital Re.
The Company is a holding company that conducts no operations of its own and
whose assets essentially consist of its equity interest in Global Capital Re.
Consequently, the Company's cash flows are limited to distributions from Global
Capital Re and borrowings under the Credit Agreement, which are its only sources
of cash to pay creditors and to pay any dividends to holders of ordinary shares.
Distributions by Global Capital Re to the Company are limited pursuant to
statutory capital and surplus requirements. As a result of the application of
those requirements to the financial position of Global Capital Re as of
September 30, 1996, Global Capital Re would be required to notify Bermuda
authorities before making any distribution to the Company in excess of
approximately $107.3 million during the 1997 fiscal year. This amount is
determined based on Global Capital Re's financial position as of September 30 of
each year and is subject to annual adjustment. In addition, the full $150.0
million is currently available to the Company for borrowing under the Credit
Agreement, assuming the Company is able to continue meeting the minimum net
worth and other requirements thereunder.
GCR generated cash flow from operations of $97.9 million, $104.9 million and
$55.0 million during the years ended September 30, 1996, 1995 and 1994,
respectively. These amounts represent the excess of premiums and net investment
income collected over losses, loss expenses and underwriting and other expenses
paid. Net cash flows from operating activities are added to funds available for
investment. GCR can be expected to incur significant catastrophe losses from
time to time and, as a result, generate substantially reduced or even negative
cash flow from operating activities.
Substantially all of GCR's funds have been invested in a portfolio of short
duration, high quality fixed income investments. At September 30, 1996, the fair
value of GCR's fixed investment portfolio was $438.2 million, all of which was
invested in securities rated investment grade by Standard & Poor's Corporation.
GCR's investment portfolio is structured to provide liquidity to meet
requirements for large loss payments to clients in the event of significant
catastrophes. All of GCR's investments are currently classified as securities
available for sale and are carried at fair value in the financial statements.
Cash flow used in investing activities (i.e., the net purchase of investments
for GCR's portfolio), amounted to $121.4 million in fiscal 1995 and $374.5
million in fiscal year 1994. Cash flow provided by investing activities (i.e.,
the net liquidation of investments in GCR's portfolio) was $46.2 million in the
year ended September 30, 1996. In the 1996 fiscal year, investments were
liquidated to provide funds to repay borrowings under the Credit Agreement.
Page 64 of 102
<PAGE> 65
In the 1996 fiscal year, net cash used in financing activities was $171.5
million reflecting the repayment of funds borrowed under the Credit Agreement
and the payment of quarterly dividends to shareholders, offset in part by the
proceeds from exercise of sponsor warrants in December 1995. The Company paid
dividends in respect of its ordinary shares, of $0.62 per share, on February 27,
1996 ($15.9 million), May 15, 1996 ($15.9 million) and August 20, 1996 ($15.3
million). In fiscal year 1995, significant financing activity consisted of
borrowing under the Credit Agreement, substantially all of which was used to pay
a portion of the August 1995 distribution to shareholders, resulting in a net
use of funds of $63.5 million. In fiscal year 1994, cash flow from financing
activity related primarily to the initial funding of the Company and amounted to
$441.0 million in cash.
In August 1995, the Company entered into the Credit Agreement with various
commercial banks, for which The First National Bank of Chicago is acting as
agent, and borrowed approximately $142.0 million under the facility. The Company
used substantially all of these borrowed funds, together with available cash
generated from the sale of the investments, to pay a distribution to
shareholders on August 18, 1995 of $201.3 million. Of these borrowings, $34.0
million was repaid out of the proceeds of the exercise of the sponsors' warrants
on December 22, 1995 and the remaining $108.0 million was repaid out of the
proceeds of the liquidation of investments on February 22, 1996.
In the 1995 initial public offering, which closed on December 22, 1995,
7,618,750 shares were sold on behalf of the Company's original shareholders at a
price of $18.50 per share. All offering proceeds were received by the selling
shareholders. In connection with the 1995 offering, the Company's shareholders
approved an increase in the Company's authorized capital and a 5:1 share split,
which was effected in the form of a share dividend on December 22, 1995. In
addition, the Company's sponsors exercised all of their options to acquire
3,303,655 ordinary shares at an aggregate exercise price of $36.3 million
($11.00 per share), substantially all of which was used to repay a portion of
the outstanding borrowings under the Credit Agreement.
In the July 1996 offering, 5,350,000 shares were sold on behalf of the Company's
original shareholders at an offering price of $22.00 per share. All offering
proceeds were received by the selling shareholders. Global Capital Re
repurchased 1,000,000 of the shares sold in the July 1996 offering, at the
public offering price net of the underwriting discount. This repurchase reduced
shareholders' equity by approximately $20.9 million. The shares purchased by
Global Capital Re, while held by it, will continue to carry the dividend, voting
and other rights associated with outstanding ordinary shares but, for purposes
of GCR's consolidated financial statements, such shares will be treated as if
they have been retired when repurchased.
Page 65 of 102
<PAGE> 66
BERMUDA REGULATORY CAPITAL REQUIREMENTS
The Company's ability to pay dividends to shareholders is limited by the Bermuda
Insurance Act 1978, which requires Global Capital Re to maintain a minimum
solvency margin and a minimum liquidity ratio. The solvency margin requirement
is the greater of $100.0 million, 50% of net premiums written (with maximum
credit of 25% for reinsurance ceded) or 15% of loss reserves. If Global Capital
Re were to reduce its 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 of Finance for approval and file certain required
information, including an affidavit declaring that it would remain in compliance
with the required solvency margin and continue to have $100 million of statutory
capital and surplus. The Company does not expect these requirements to impose
any significant limitations on the Company's liquidity, based on Global Capital
Re's current capital structure and operating results.
THE CREDIT AGREEMENT
The Company currently has no outstanding borrowings under the Credit Agreement.
The Credit Agreement provides that the Company may not pay dividends or make
other distributions in any fiscal year in amounts that, in the aggregate, would
exceed GCR's consolidated net income for the prior fiscal year or if any
material or incipient default exists under the facility. Pursuant to the Credit
Agreement, the Company has also agreed, among other things, that (i) it will use
the funds borrowed under the facility only to meet its general needs and those
of Global Capital Re; (ii) other than pursuant to the Credit Agreement, it will
not incur indebtedness in excess of $5.0 million, or grant any lien, subject to
certain limited exceptions; (iii) it will not effect any merger, asset sale or
other significant business combination; (iv) it will not dispose of more than
10% of its assets on a consolidated basis; (v) it will limit its investments to
certain specified categories; and (vi) it will maintain a consolidated net
worth, and cause Global Capital Re to maintain a net worth, of at least $250.0
million (as of September 30, 1996, such consolidated net worth of the Company
was approximately $417.0 million), and will cause Global Capital Re to maintain
a ratio of premiums written to net worth, determined as of the end of each
fiscal quarter for the four fiscal quarters ending on such date, of not more
than 0.75 to 1.0 (as of September 30, 1996, such ratio was less than 0.28 to 1).
As security for its obligations under the Credit Agreement, the Company has
pledged to the agent for the lenders all of the capital shares of Global Capital
Re. The Credit Agreement terminates on August 17, 1998.
The Credit Agreement provides for advances in the form of Eurodollar loans
bearing interest at the London Interbank Offered Rate ("LIBOR") plus 60 or 70
basis points, depending upon the amount of outstanding borrowings, or in the
form of U.S. floating rate loans bearing interest at an annual rate equal to the
higher of the federal funds rate plus 50 basis points per annum or the corporate
base rate of The First National Bank of Chicago, as announced from time to time.
Page 66 of 102
<PAGE> 67
The Company has agreed to pay to the lenders under the Credit Agreement a
commitment fee of between 0.175% and 0.20% of the daily unborrowed portion of
the facility. The Company can permanently reduce the total commitment of the
lenders (and therefore its commitment fee) by giving three days' notice to the
agent for the lenders.
A default under the Credit Agreement will occur when, among other occurrences,
the Company (i) fails to repay any principal or interest; (ii) fails to comply
with the covenants referred to above; (iii) fails, or Global Capital Re fails,
to pay any material amount due under indebtedness to any other person; (iv)
files, or Global Capital Re files, for bankruptcy or otherwise becomes unable to
pay its debts generally as they become due; (v) there occurs a change of control
(defined generally as the acquisition by any person or group (other than
Goldman, Sachs & Co. and their affiliates) of beneficial ownership of 20% or
more of the ordinary shares or the turnover within a 25-month period of a
majority of the Company's Board of Directors); or (vi) Global Capital Re has any
regulatory proceedings instituted against it. Upon a default (other than a
default under (iv) above with respect to which acceleration would be automatic),
the lenders holding at least 66 2/3% of the outstanding loans under the facility
may accelerate the maturity of all borrowings thereunder and the agent for the
lenders may foreclose upon, and hold or dispose of, the capital shares of Global
Capital Re in satisfaction of any amounts owed thereunder.
CURRENCY
GCR's functional currency is the U.S. dollar. However, while substantially all
of GCR's investments are in U.S. dollar-denominated instruments, the premiums
receivable and losses payable in respect of a substantial portion of GCR's
business are denominated in currencies other than U.S. dollars. GCR has not
hedged its currency exposure with respect to premiums receivable or losses
payable. With respect to losses payable, GCR does not hedge its currency
exposure prior to the occurrence of an event that may give rise to a claim,
although it may purchase a currency hedge after a major event occurs. After a
catastrophe occurs, GCR's loss settlement cost may increase if the related
claims are denominated in a foreign currency that appreciates against the U.S.
dollar during the claim settlement period. To date, GCR has not incurred any
significant claims that are payable in currencies other than U.S. dollars.
GCR's investment portfolio does not currently include options, warrants, swaps,
hedges, collars or similar derivative instruments. GCR has no plans to change
its investment strategy to provide for the purchase of such instruments other
than in the limited circumstances described above.
EFFECTS OF INFLATION
GCR estimates the effects 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, GCR
generally does not take into account the effects of inflation when estimating
reserves. The actual effects of inflation on the results of GCR cannot be
accurately known until claims are ultimately settled.
Page 67 of 102
<PAGE> 68
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
We have audited the accompanying consolidated balance sheets of GCR Holdings
Limited (a Cayman Islands company) as of September 30, 1996 and 1995 and the
related consolidated statements of income, changes in shareholders' equity, and
cash flows for each of the three years in the period ended September 30, 1996.
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 consolidated financial position of GCR
Holdings Limited as of September 30, 1996 and 1995 and the consolidated results
of its operations and its cash flows for each of the three years in the period
ended September 30, 1996 in conformity with accounting principles generally
accepted in the United States.
ARTHUR ANDERSEN & CO.
Hamilton, Bermuda
October 21, 1996
Page 68 of 102
<PAGE> 69
CONSOLIDATED BALANCE SHEETS
September 30, 1996 and 1995
(Expressed in thousands of United States dollars, except for per share amounts)
<TABLE>
<CAPTION>
1996 1995
----------- ----------
<S> <C> <C>
ASSETS
Fixed maturity investments, at fair value
(amortized cost: $438,393 and $484,858) $ 438,204 $ 485,322
Cash and cash equivalents 14,070 41,490
Premiums receivable 45,542 49,716
Accrued investment income 8,941 10,073
Deferred acquisition costs 9,416 10,257
Other assets 667 783
- -------------------------------------------------------------------
TOTAL ASSETS $ 516,840 $ 597,641
===================================================================
LIABILITIES
Reserve for losses and loss expenses $ 39,934 $ 33,390
Unearned premium reserve 57,029 61,688
Loan payable -- 142,000
Loan interest payable -- 1,017
Accrued expenses and accounts payable 2,840 3,149
- -------------------------------------------------------------------
TOTAL LIABILITIES 99,803 241,244
- -------------------------------------------------------------------
SHAREHOLDERS' EQUITY
Ordinary shares, 24,674,255 and 22,361,600
shares outstanding, par value US$0.10 2,467 2,236
Additional paid-in capital 355,295 338,353
Notes receivable for shares issued (1,359) (1,783)
Unrealized gains (losses) on investments (129) 464
Retained earnings 60,763 17,127
- -------------------------------------------------------------------
SHAREHOLDERS' EQUITY 417,037 356,397
- -------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 516,840 $ 597,641
===================================================================
</TABLE>
The accompanying notes to the Consolidated Financial Statements are an integral
part of these Balance Sheets.
Page 69 of 102
<PAGE> 70
CONSOLIDATED STATEMENTS OF INCOME
For the years ended September 30, 1996, 1995 and 1994
(Expressed in thousands of United States dollars, except for per share amounts)
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
REVENUES
Premiums written $ 119,802 $ 136,884 $ 102,065
Change in unearned premiums 4,659 (16,328) (45,360)
- ------------------------------------------------------------------------------------------
Premiums earned 124,461 120,556 56,705
Investment income, net 28,964 32,651 20,095
Realized gains (losses) on investments, net (17) 391 (10,216)
Exchange gains (losses), net (147) (20) 529
- ------------------------------------------------------------------------------------------
TOTAL REVENUES 153,261 153,578 67,113
- ------------------------------------------------------------------------------------------
EXPENSES
Losses and loss expenses 28,028 35,293 25,278
Acquisition expenses 20,025 17,063 6,743
General and administrative expenses 10,722 8,602 5,277
Interest expense 3,724 1,964 --
- ------------------------------------------------------------------------------------------
TOTAL EXPENSES 62,499 62,922 37,298
- ------------------------------------------------------------------------------------------
NET INCOME $ 90,762 $ 90,656 $ 29,815
==========================================================================================
Net income per ordinary share $ 3.63 $ 3.94 $ 1.32
Weighted average number of ordinary shares 24,989,506 23,009,828 22,684,606
</TABLE>
The accompanying notes to the Consolidated Financial Statements are an integral
part of these Statements.
Page 70 of 102
<PAGE> 71
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
For the years ended September 30, 1996, 1995 and 1994
(Expressed in thousands of United States dollars, except for share amounts)
<TABLE>
<CAPTION>
ADDITIONAL UNREALIZED
SHARES PAR PAID-IN NOTES INVESTMENT RETAINED
OUTSTANDING VALUE CAPITAL RECEIVABLE GAINS (LOSSES) EARNINGS
<S> <C> <C> <C> <C> <C> <C>
Balance October 1, 1993 - $ - $ - $ - $ - $ -
Issuance of shares 22,562,050 2,256 440,817 (2,100)
Change in unrealized gains
(losses) on investments (2,721)
Net income 29,815
- ---------------------------------------------------------------------------------------------------------------------------
Balance September 30, 1994 22,562,050 2,256 440,817 (2,100) (2,721) 29,815
Issuance of shares 965 20
Repurchase of shares (201,415) (20) (4,573)
Payments on notes receivable 317
Change in unrealized gains
(losses) on investments 3,185
Net income 90,656
Dividends to shareholders (97,911) (103,344)
- ---------------------------------------------------------------------------------------------------------------------------
Balance September 30, 1995 22,361,600 2,236 338,353 (1,783) 464 17,127
Issuance of shares 3,312,655 331 37,762
Repurchase of shares (1,000,000) (100) (20,820)
Payments on notes receivable 424
Change in unrealized gains
(losses) on investments (593)
Net income 90,762
Dividends to shareholders (47,126)
- ---------------------------------------------------------------------------------------------------------------------------
Balance September 30, 1996 24,674,255 $2,467 $355,295 $(1,359) $ (129) $ 60,763
===========================================================================================================================
</TABLE>
The accompanying notes to the Consolidated Financial Statements are an integral
part of these Statements.
Page 71 of 102
<PAGE> 72
CONSOLIDATED STATEMENTS CASH FLOWS
For the years ended September 30, 1996, 1995 and 1994
(Expressed in thousands of United States dollars)
<TABLE>
<CAPTION>
1996 1995 1994
------------- ------------- -----------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 90,762 $ 90,656 $ 29,815
Adjustments to reconcile net income to cash provided by
operating activities:
Depreciation and amortization 435 314 216
Realized (gains) losses on sale of investments 17 (391) 10,216
Add (deduct) changes in assets and liabilities:
Premiums receivable 4,174 (11,857) (37,859)
Accrued investment income 1,132 (2,778) (7,295)
Deferred acquisition costs 841 (4,282) (5,975)
Other assets (83) (102) (52)
Reserve for losses and loss expenses 6,544 13,685 19,705
Unearned premium reserve (4,575) 16,328 45,360
Loan interest payable (1,017) 1,017
Accrued expenses and accounts payable (309) 2,267 882
- ----------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 97,921 104,857 55,013
- ----------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales and maturities of investments 684,680 677,375 1,355,700
Purchases of investments (638,172) (798,308) (1,729,451)
Purchases of fixed assets (320) (419) (739)
- ----------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 46,188 (121,352) (374,490)
- ----------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issue of shares 38,093 20 451,241
Less: Placement costs (8,168)
Less: Issued for notes receivable (2,100)
Repurchase of shares (20,920) (4,593)
Repayment of notes receivable 424 317
(Repayment) proceeds of borrowing (142,000) 142,000
Dividends to shareholders (47,126) (201,255)
- ----------------------------------------------------------------------------------------------------------------------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (171,529) (63,511) 440,973
- ----------------------------------------------------------------------------------------------------------------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (27,420) (80,006) 121,496
Cash and cash equivalents at the beginning of the year 41,490 121,496
======================================================================================================================
CASH AND CASH EQUIVALENTS AT THE END OF THE YEAR $ 14,070 $ 41,490 $ 121,496
======================================================================================================================
</TABLE>
The accompanying notes to the Consolidated Financial Statements are an integral
part of these Statements.
Page 72 of 102
<PAGE> 73
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996
1. GENERAL
GCR Holdings Limited (the "Company") was incorporated on May 14, 1993, under the
laws of the Cayman Islands. The Company conducts business through its wholly-
owned subsidiary, Global Capital Reinsurance Limited ("Global Capital Re"),
which was incorporated in Bermuda on June 11, 1993, and is licensed to write
insurance business. Global Capital Re, which specializes in worldwide property
catastrophe reinsurance written on an excess-of-loss basis, began writing
business as of October 1, 1993.
Global Capital Re underwrites property catastrophe reinsurance and has large
aggregate exposures to natural and man-made disasters. Management expects that
Global Capital Re's loss experience generally will involve infrequent events of
great severity. Consequently, the occurrence of losses from catastrophic events
is likely to result in substantial volatility in the financial results.
An initial public offering of 7.6 million shares of the Company held by existing
shareholders was completed in December 1995. In connection with the initial
public offering, the shareholders approved an increase in the Company's
authorized capital and the Board of Directors approved a share split in the form
of a share dividend effected at a ratio of 5:1. In addition, the Company's
sponsors exercised warrants to acquire 3.3 million shares at an aggregate
exercise price of $36.3 million ($11.00 per share). Of that amount, $34.0
million was used to reduce outstanding borrowings. Net income per share is set
forth in the consolidated statements of income for all periods after giving
effect to the share split.
A secondary public offering of 5.4 million shares of the Company held by
existing shareholders was completed in July, 1996.
2. SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements have been prepared using accounting
principles generally accepted in the United States. These statements include the
accounts of GCR Holdings Limited and its wholly-owned subsidiary, Global Capital
Re (together, "GCR"). All significant intercompany transactions have been
eliminated. Certain reclassifications have been made to the 1994 and 1995
balances to conform to the 1996 presentation. 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 at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting year. Actual
results could differ from those estimates.
Page 73 of 102
<PAGE> 74
PREMIUMS. Written premiums are recognized on policies which have effective dates
within the period of the consolidated income statement. Written premiums are
recorded based on information provided by clients. Any subsequent premium
adjustments are recognized in the period in which they are determined. Premiums
are earned on a pro rata basis over the policy coverage period. Unearned
premiums represent the portion of premiums written in respect of coverage
applicable to the unexpired terms of policies in force.
DEFERRED ACQUISITION COSTS. Acquisition costs, consisting of commissions and
brokerage expenses incurred at policy issuance, are deferred and amortized on
the same basis as the underlying policy premiums. Deferred acquisition costs are
limited to estimated realizable value based on related unearned premiums, and
take into account anticipated claims and expenses, based on experience, and
anticipated investment income.
LOSSES AND LOSS EXPENSES. The reserve for losses and loss expenses includes
reserves for unpaid losses and loss expenses and for losses incurred but not
reported. The reserve for losses and loss expenses is established by management
based on information received from clients, modified as necessary using
management's industry experience and judgment. The methods used to estimate the
reserves are periodically reviewed to ensure that the assumptions made continue
to be appropriate. Any adjustments resulting therefrom are reflected in income
in the period in which the adjustments are made. For certain catastrophic events
there is considerable uncertainty underlying the assumptions and associated
estimated reserves for losses and loss adjustment expenses.
Management believes that the reserve for losses and loss expenses is adequate to
cover the ultimate net cost of losses and loss expenses incurred. However, the
reserve is necessarily an estimate and the amount ultimately paid may be more or
less than the estimate.
INVESTMENTS. Investments are considered available for sale in response to
changes in market interest rates, changes in liquidity needs or other factors,
and are carried at fair value based on quoted market prices. Investments are
recorded on a trade date basis with balances pending settlement accrued in the
balance sheet. Realized gains and losses on sales of investments are determined
on the basis of specific identification of the cost of securities sold. The net
unrealized gain or loss on investments available for sale is included as a
separate component of shareholders' equity. Investment income is recognized when
earned and includes the amortization of bond premium and accretion of bond
discount.
Page 74 of 102
<PAGE> 75
FAIR VALUE OF FINANCIAL INSTRUMENTS. Fair value disclosures with respect to
certain financial instruments are included separately herein when appropriate.
The carrying values of other financial instruments, including the loan payable,
premiums receivable and accrued investment income, approximate their fair value
due to the short-term nature of the balances.
CASH AND CASH EQUIVALENTS. Cash and cash equivalents includes amounts due from
banks and short-term investments having maturities within three months of date
of purchase. The carrying value approximates fair value due to the short
maturity of these instruments.
PREMIUMS RECEIVABLE. Reinsurance premiums receivable are stated net of an
allowance for doubtful accounts. The allowance for doubtful accounts is nil at
September 30, 1996 and 1995.
FOREIGN EXCHANGE. The consolidated financial statements are expressed in United
States dollars. Transactions denominated in other currencies have been
translated into United States dollars using the rate of exchange in effect at
the date of the transaction. The components of the consolidated balance sheets
have been translated at the rates in effect at the balance sheet date, except
for the unearned premium reserve and deferred acquisition costs, which are
translated at historical rates of exchange.
STOCK INCENTIVE COMPENSATION PLANS. 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. For certain of the stock options outstanding, the
declaration of dividends results in a change in the option price and a new
measurement date.
START-UP EXPENSES AND OFFERING COSTS. Expenses incurred in the incorporation of
GCR and the public offerings have been charged to the consolidated statements of
income.
INCOME PER SHARE. Income per share is based upon the weighted average number of
shares and share equivalents outstanding during the year. Stock options and
warrants were considered share equivalents and were included in the number of
weighted average shares outstanding using the treasury stock method. There is no
material difference between primary and fully diluted net income per ordinary
share.
Page 75 of 102
<PAGE> 76
3. INVESTMENTS AVAILABLE FOR SALE
Amortized cost, fair value and related unrealized gains and losses on
investments available for sale were as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
-------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- -------- ------ ---------
(in thousands of United States dollars)
<S> <C> <C> <C> <C>
US Government and Government
Agency Bonds $299,081 $ 269 $ 485 $298,865
US Corporate bonds 52,815 274 53,089
US Asset-backed securities 27,300 4 232 27,072
Commercial Paper 59,197 19 59,178
-------- ------ ----- --------
$438,393 $ 547 $ 737 $438,204
======== ====== ===== ========
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1995
-------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- -------- ------ ---------
(in thousands of United States dollars)
<S> <C> <C> <C> <C>
US Government and Government
Agency bonds $205,517 $ 598 $ $206,115
US Corporate bonds 223,497 711 776 223,432
US Asset-backed securities 55,844 15 84 55,775
-------- ------ ----- --------
$484,858 $1,324 $ 860 $485,322
======== ====== ===== ========
</TABLE>
Page 76 of 102
<PAGE> 77
3. INVESTMENTS AVAILABLE FOR SALE (CONTINUED)
The contractual maturity of investments available for sale is shown below. The
actual maturity of investments may differ because borrowers may have the right
to call or prepay certain obligations.
<TABLE>
<CAPTION>
30 SEPTEMBER, 1996
--------------------------------------
AMORTIZED FAIR
COST VALUE
(in thousands of United States dollars)
- -------------------------------------- --------------------------------------
<S> <C> <C>
Due in less than one year $ 128,676 $ 128,857
Due after one year through three years 309,717 309,347
Due after more than three years - -
- -------------------------------------- --------------------------------------
$ 438,393 $ 438,204
====================================== ======================================
</TABLE>
The following table summarizes the composition of the portfolio by ratings
assigned by Standard & Poor's Corporation or, with respect to non-rated issues,
as estimated by GCR's investment advisor.
<TABLE>
<CAPTION>
SEPTEMBER 30,
1996 1995
% %
- --------------------------------------------------------------------------------
<S> <C> <C>
Cash and cash equivalents 1.2% 8.0%
US Government and Government Agency 67.4% 39.1%
AAA 6.1% 10.5%
A 22.1% 26.3%
BBB 3.2% 16.1%
- --------------------------------------------------------------------------------
100.0% 100.0%
================================================================================
</TABLE>
Page 77 of 102
<PAGE> 78
3. INVESTMENTS AVAILABLE FOR SALE (CONTINUED)
Realized gains and losses included in income were as follows:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
1996 1995 1994
(in thousands of United States dollars)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Realized gains $ 2,226 $ 2,007 $ 4,732
Realized losses (2,243) (1,616) (14,948)
- --------------------------------------------------------------------------------
Net realized gains $ (17) $ 391 $ (10,216)
================================================================================
</TABLE>
Unrealized gains and losses included in shareholders' equity were as follows:
<TABLE>
<CAPTION>
SEPTEMBER, 30
1996 1995
---- ----
(in thousands of United States dollars)
<S> <C> <C>
Unrealized gains (1996 includes $60 related to cash equivalents) $ 607 $ 1,324
Unrealized losses (736) (860)
- -------------------------------------------------------------------------------------------------------
Net unrealized gains (losses) $ (129) $ 464
=======================================================================================================
</TABLE>
Investment income was as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
(in thousands of United States dollars)
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest income $29,697 $33,334 $20,942
Investment expenses (733) (683) (847)
- -------------------------------------------------------------------------------------------------------
Net investment income $28,964 $32,651 $20,095
=======================================================================================================
</TABLE>
Fixed maturity investments and cash and cash equivalents pledged to secure
letters of credit were $21.5 million and $15.7 million as of September 30, 1996
and 1995 respectively.
Page 78 of 102
<PAGE> 79
4. RESERVE FOR LOSSES AND LOSS EXPENSES
Activity in the reserve for losses and loss expenses is summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
1996 1995 1994
(in thousands of United States dollars)
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at the beginning of the year $33,390 $19,705 $ -
Incurred related to:
Current year 31,174 29,880 25,278
Prior years (3,146) 5,413 -
- ----------------------------------------------------------------------------
Total incurred 28,028 35,293 25,278
- ----------------------------------------------------------------------------
Paid related to:
Current year 10,225 6,128 5,573
Prior years 11,259 15,480 -
- ----------------------------------------------------------------------------
- ----------------------------------------------------------------------------
Total paid 21,484 21,608 5,573
- ----------------------------------------------------------------------------
- ----------------------------------------------------------------------------
Balance at the end of the year $39,934 $33,390 $19,705
============================================================================
</TABLE>
Losses incurred in the year ended September 30, 1996, in respect of the prior
year reflect favorable development of the proportional and per risk lines of
business. Losses incurred in the year ended September 30, 1995 in respect of the
prior year included approximately $5,800,000 of loss development reported in
1995 related to the Northridge earthquake, offset in part by favorable
developments in other lines of business.
Page 79 of 102
<PAGE> 80
5. SHARE CAPITAL
The Company raised approximately $443.1 million, net of placement costs, through
a private placement of ordinary shares in October, 1993. The authorized share
capital of the Company is $7.5 million consisting of 50,000,000 ordinary shares
of U.S.$0.10 par value and 25,000,000 other shares of U.S.$0.10 par value. Other
shares, of which none are outstanding, may be issued with such rights and
preferences as the Board of Directors may authorize, subject to the Company's
articles of association and applicable laws.
The following number of shares were issued and outstanding:
<TABLE>
<CAPTION>
SEPTEMBER 30,
1996 1995 1994
---- ---- ----
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Ordinary shares outstanding 24,674,255 22,361,600 22,562,050
Share capital $ 2,467,426 $ 2,236,160 $ 2,256,205
================================================================================
</TABLE>
In July 1996, Global Capital Re purchased 1,000,000 of the Company's shares for
an aggregate price of $20.9 million. For purposes of these consolidated
financial statements, these shares are treated as though they have been retired.
In 1993, the Company loaned $2,100,000 to officers to purchase an aggregate of
105,000 ordinary shares. The notes receivable are secured by a portion of the
shares, bear interest at 7% per annum and mature at various dates in 2000 and
2001.
Page 80 of 102
<PAGE> 81
6. SHARE OPTIONS AND WARRANTS
The Company has issued share options to officers and directors to purchase
ordinary shares, U.S.$0.10 par value, as follows:
<TABLE>
NUMBER OPTION PRICE
OF SHARES ------------
---------
YEAR ENDED SEPTEMBER 30, 1994
<S> <C> <C>
Granted 212,680 $9.14
Exercised
Cancelled
Outstanding, end of year 212,680 $9.14
Exercisable, end of year 42,536 $9.14
YEAR ENDED SEPTEMBER 30, 1995
Granted 35,245 $9.90
Exercised
Cancelled
Outstanding, end of year 247,925 $9.14-$9.90
Exercisable, end of year 42,536 $9.14
YEAR ENDED SEPTEMBER 30, 1996
Granted 387,000 $15.24
Exercised 9,000 $15.24
Cancelled
Outstanding, end of year 625,925 $9.14-$15.24
Exercisable, end of year 111,883 $9.14-$15.24
</TABLE>
Options issued to officers and directors on October 8, 1993 vest at the rate of
20% annually. Other options vest at the rate of 25% annually. All options lapse
on the tenth anniversary of issue. The option prices for options granted in
fiscal 1994 and 1995 have been adjusted to reflect dividends paid. Compensation
expense related to stock option price adjustment of $1.6 million, $0.4 million
and $0 has been recognized for the years ended September 30, 1996, 1995 and 1994
respectively.
Under the Company's share option plan, 1,104,755 shares are available for grant
to key employees based on achievement of performance goals. Any such options
will be granted at the market price on the date of the grant.
Coincident with the private placement in 1993, the Company granted to sponsors
warrants to purchase 3,303,655 ordinary shares at an exercise price of
U.S.$11.00 per share between October 8, 1993, and October 8, 2003. These
warrants were exercised in December 1995 (see note 1).
Page 81 of 102
<PAGE> 82
7. PREMIUMS WRITTEN BY GEOGRAPHIC AREA
Premiums written by geographic area of operations were as follows:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
1996 1995 1994
---------------------- --------------------- -----------------------
(in thousands of United States dollars)
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
United States * $ 66,454 55.5% $ 78,069 57.0% $ 65,424 64.1%
Japan 5,700 4.8 11,279 8.2 9,798 9.6
Europe including the UK 11,572 9.7 9,898 7.2 6,328 6.2
Australia/New Zealand 5,573 4.6 7,348 5.4 5,103 5.0
Caribbean 3,074 2.5 5,129 3.8 919 0.9
Worldwide ** 21,113 17.6 20,133 14.7 8,573 8.4
Worldwide, excluding US *** 4,643 3.9 2,433 1.8 2,245 2.2
Other 1,673 1.4 2,595 1.9 3,675 3.6
- ----------------------------------------------------------------------------------------------------------------
$ 119,802 100.0% $ 136,884 100.0% $ 102,065 100.0%
================================================================================================================
</TABLE>
* Policies covering risk events only in the United States
** Policies covering risk events anywhere in the world including the United
States
*** Policies covering risk events anywhere in the world other than the United
States
8. RELATED PARTY TRANSACTIONS
Goldman Sachs Asset Management International provides investment advisory
services to GCR and, in that capacity, exercises discretionary authority with
respect to GCR's entire investment portfolio. Goldman Sachs Asset Management
International is an affiliate of Goldman, Sachs & Co., a sponsor of and (through
affiliates) an investor in the Company. Fees for these services were $674,000,
$559,000 and $497,000 for the years ended September 30, 1996, 1995 and 1994,
respectively. In addition, Goldman, Sachs & Co. acted as placement agents for
the private placement for which it received fees of $6,900,000 and as one of the
representatives of the underwriters in the Company's initial and secondary
public offerings, in which the underwriters received aggregate underwriting
discounts and commissions of approximately $15,158,800 from the selling
shareholders. One director of the Company is a limited partner of Goldman, Sachs
& Co. and another director of the Company is a general partner of Goldman, Sachs
& Co.
9. CONCENTRATION OF CREDIT RISK
Other than investments in instruments issued by the U.S. Government or U.S.
Government agencies, GCR does not have any investment in a single issuer
exceeding 10% of consolidated shareholders' equity.
Page 82 of 102
<PAGE> 83
10. LEASE
The Company leases its office under a three year non-cancelable lease. Annual
occupancy costs are estimated to be $250,000, including services and taxes.
11. TAXATION
At the present time, no income or capital taxes are levied in the Cayman
Islands, and no income, profit, capital or capital gains taxes are levied in
Bermuda. In the event such taxes are levied, the Company has received an
undertaking exempting it from such Cayman Islands taxes until 2013. Global
Capital Re has received an undertaking from the Bermuda Government exempting it
from such Bermuda taxes until 2016.
The Company is not engaged in trade or business in the United States and,
accordingly, does not expect to be subject to United States income taxation.
12. CREDIT AGREEMENT
On August 17, 1995, the Company entered into a three-year revolving credit
agreement (as amended, the "Credit Agreement") with a group of commercial banks.
Under that agreement, the Company can borrow up to $150.0 million in the form
of, at the Company's option, Eurodollar loans at an annual interest rate of
LIBOR plus 60 or 70 basis points depending on the amount outstanding, or U.S.
floating rate loans at an annual interest rate equal to the lead bank's
corporate base rate or the U.S. Federal Funds rate plus 1/2%, whichever is
higher. The capital shares of Global Capital Re are pledged as security for
borrowings under the Credit Agreement. Prepayments of amounts borrowed may be
made without penalty.
On August 17, 1995 the Company borrowed $142.0 million under the Credit
Agreement for an initial period of six months at an interest rate of 6.7%. The
proceeds were used to fund, in part, the distribution made in August 1995 (see
Note 13). The Company has agreed to pay to the lenders under the Credit
Agreement a commitment fee of between 0.175% and 0.20% of the daily unborrowed
portion of the facility. Borrowings under the line of credit have been repaid;
$34.0 million in December 1995 and the balance in February 1996. Interest paid
was $3.7 million and $2.0 million in the years ended September 30, 1996 and
1995, respectively.
The Credit Agreement contains various financial and non-financial covenants,
including a requirement to maintain consolidated net worth of the Company and
net worth of Global Capital Re of at least $250.0 million in each case. The
Company was in compliance with all covenants under the Credit Agreement as of
September 30, 1996.
Page 83 of 102
<PAGE> 84
13. DIVIDENDS
The Company paid dividends of $0.62 per share in each of February 1996 ($15.9
million), May 1996 ($15.9 million) and August 1996 ($15.3 million).
On August 17, 1995, the Board of Directors declared a distribution of $9.00 per
ordinary share payable on August 18, 1995 to shareholders of record on the date
of declaration. The total amount of the distribution was $201.3 million and was
funded in part by borrowings under the Credit Agreement. The balance of the
distribution was funded by the liquidation of certain investments. The
distribution was accounted for as a distribution of all retained earnings as of
June 30, 1995, and the balance as a distribution from additional paid-in
capital.
The Company's ability to pay dividends is subject to certain regulatory
restrictions on the payment of dividends by Global Capital Re. Global Capital Re
is registered under the Bermuda Insurance Act 1978 and Related Regulations (the
"Act") and is obliged to comply with various provisions of the Act regarding
solvency and liquidity. These provisions have been met. The Registrar of
Companies in Bermuda, in which Global Capital Re is domiciled, recognizes as net
income and surplus (shareholders' equity) those amounts determined in conformity
with statutory accounting practices prescribed or permitted in Bermuda, which
differ in certain respects from generally accepted accounting principles. Under
Bermuda regulations, the required minimum statutory capital and surplus at
September 30, 1996 was $100.0 million. Global Capital Re's actual statutory
capital and surplus at that date was $429.2 million. Statutory net income of
Global Capital Re was $99.7million, $88.3 million and $25.2 million for the
years ended September 30, 1996, 1995 and 1994, respectively.
In addition, regulations in Bermuda limit the maximum amount of annual dividends
or other distributions available to shareholders 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 Global
Capital Re to the Company during fiscal 1997 without such notification is
approximately $107.3 million.
The Company's ability to pay dividends is also subject to the requirements of
the Credit Agreement that consolidated net worth, and net worth of Global
Capital Re, of $250.0 million be maintained and that dividends paid in any
fiscal year not exceed consolidated net income in the prior fiscal year.
Page 84 of 102
<PAGE> 85
14. PENSION PLANS
Effective October 8, 1993, Global Capital Re adopted combined savings and
defined contribution pension plans for its officers and employees. Under these
plans, Global Capital Re contributes 10% of participants' base salaries. Pension
costs are fully funded and amounted to approximately $194,000, $171,000 and
$120,000 for the years ended September 30, 1996, 1995 and 1994, respectively.
15. FOREIGN EXCHANGE GAINS AND LOSSES
The exchange gains (losses) comprise the net effect of realized and unrealized
exchange gains and losses, excluding exchange gains and losses earned on the
investment portfolio which are included in investment income. The unrealized
component arises from the revaluation of certain foreign currency assets and
liabilities at the balance sheet dates. The realized component arises from the
difference between amounts previously recorded for foreign currency assets and
liabilities and actual amounts received or paid during the year.
16. ACCOUNTING STANDARDS
The Financial Accounting Standards Board has issued Statement No. 123,
"Accounting for Stock Based Compensation", effective for fiscal years beginning
after December 15, 1995, recognizing awards granted in the first fiscal year
after December 15, 1994. This Statement defines a fair value based method of
accounting for stock options or similar equity instruments in which an entity
acquires goods or services by issuing stock. Entities can either adopt the new
method or continue to use APB Opinion No. 25, providing pro forma disclosure of
net income and earnings per share as if the fair value based method had been
adopted. The Company intends to follow the latter alternative, providing the
necessary disclosure for its 1997 fiscal year.
Page 85 of 102
<PAGE> 86
17. UNAUDITED QUARTERLY FINANCIAL DATA
<TABLE>
<CAPTION>
FOR THE QUARTER ENDED
-----------------------------------------------------------
DEC. 31, MARCH 31, JUNE 30, SEPT. 30,
1995 1996 1996 1996
(in thousands of United States dollars except per share data)
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Premiums written $ 7,555 $66,469 $25,715 $20,063
Premiums earned 32,894 30,610 30,507 30,450
Investment income, net 8,294 7,650 6,661 6,359
Realized gains (losses) on investments, net 763 377 (1,045) (112)
Losses and loss expenses 10,210 3,184 4,054 10,580
Net income (loss) $22,716 $26,443 $23,973 $17,630
Net income (loss) per share $ 0.99 $ 1.02 $ 0.92 $ 0.70
DEC. 31, MARCH 31, JUNE 30, SEPT. 30,
1994 1995 1995 1995
- -----------------------------------------------------------------------------------------------------------
Premiums written $ 7,229 $72,061 $40,455 $17,139
Premiums earned 25,181 30,651 31,848 32,876
Investment income, net 7,179 8,044 8,675 8,753
Realized gains (losses) on investments, net (1,042) (431) 146 1,718
Losses and loss expenses 6,177 11,016 3,085 15,015
Net income (loss) $20,259 $22,614 $30,656 $17,127
Net income (loss) per share $ 0.89 $ 0.99 $ 1.33 $ 0.73
</TABLE>
Page 86 of 102
<PAGE> 87
EXHIBIT 24
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below
constitutes and appoints Lawrence S. Doyle and Frederick W. Deichmann, and each
of them, with full power to act without the other, his true and lawful
attorneys-in-fact and agents, with full and several power of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign the Annual Report on Form 10-K of GCR Holdings Limited and
any or all amendments thereto, and any and all documents in connection
therewith, and file the same, with all exhibits thereto and all documents in
connection therewith, with the Securities and Exchange Commission, granting
unto said attorneys-in-fact and agents full power and authority to do and
perform each and every act and thing requisite and necessary to be done as
fully as to all intents and purposes as he might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact and agents or any of
them may lawfully do or cause to be done by virtue thereof.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
/s/ Lawrence S Doyle President, Chief Executive October 31, 1996
- --------------------- Officer and Director (Principal
Lawrence S. Doyle Officer)
/s/ Frederick W. Deichmann Chief Financial Officer and October 31, 1996
- --------------------- Secretary (Principal Financial
Frederick W. Deichmann and Accounting Officer)
/s/ Steven H. Newman Chairman of the Board of Directors October 31, 1996
- ---------------------
Steven H. Newman
/s/ Loay Al-Naqib Director October 31, 1996
- ---------------------
Loay Al-Naqib
/s/ J. Markham Green Director October 31, 1996
- ---------------------
J. Markham Green
/s/ Al Lerner Director October 31, 1996
- ---------------------
Alfred Lerner
/s/ John P. McNulty Director October 31, 1996
- ----------------------
John P McNulty
/s/ David A. Olsen Director October 31, 1996
- ----------------------
David A. Olsen
/s/ Joseph D. Roxe Director October 31, 1996
- ----------------------
Joseph D. Roxe
/s/ Jerry S. Rosenbloom Director October 31, 1996
- ------------------------
Jerry S. Rosenbloom
/s/ Michael E. Satz Director October 31, 1996
- ----------------------
Michael E. Satz
/s/ Donald J. Zuk Director October 31, 1996
- ----------------------
Donald J. Zuk
</TABLE>
Page 87 of 102
<PAGE> 88
I. ELECTION OF DIRECTORS
The Company has nominated 10 of its current directors for election as
directors at the Fiscal 1996 Annual General Meeting (Mr. Lerner, the 11th
current director, has notified the Company of his intention to retire from the
Board upon the conclusion of the meeting). Each nominee elected as a director at
the meeting will hold office until the conclusion of the next annual general
meeting of shareholders, which, if the Sixth Resolution is adopted, is expected
to be held within 123 days after the end of fiscal year 1997, and until his
successor is elected or appointed and qualified (in each case subject to prior
death, resignation, retirement or removal from office). Except for Mr. Al-Naqib,
who was appointed a director by the Board in July 1996, each of the nominees has
served as a director (or, in one case, an alternate director) of the Company
since October 1993.
The name, principal occupation and other information concerning each
nominee, each of whom is currently a director, is set forth below.
NOMINEES FOR WHOM PROXIES WILL BE VOTED
STEVEN H. NEWMAN (age: 53) has been Chairman of the Board of Directors
of the Company since 1993. He has been CEO and Chairman of the Board of
Directors of Underwriters Re since February 1987 and was President from 1987
until 1994. Mr. Newman is a Fellow and past President of the Casualty Actuarial
Society, a member of the International Actuarial Association and is a member and
past Chairman of the Board of Directors of the Reinsurance Association of
America. Mr. Newman is also a director of Capital Re Corporation, of which
another director of the Company, Michael Satz, is the Chairman, President and
Chief Executive Officer, and is a director of the Chicago Title and Trust
Company and World Minerals Corporation.
LOAY AL-NAQIB (age: 44) has been a director of the Company since July
1996. He is Deputy Chairman and Chief Executive Officer of Imperial Fire &
Marine Re-Insurance Company Ltd. in London. Mr. Al-Naqib had been Deputy
Chairman and Chief Executive Officer of Arig Insurance Company, also in London,
from 1991 to 1996. He is a director of the International Insurance Foundation in
New York.
LAWRENCE S. DOYLE (age: 53) has been President, Chief Executive Officer
and a director of the Company since 1993. He was President and CEO of the New
England Reinsurance Corporation, First State Insurance Company and the New
England Insurance Company from 1986 to 1993. Mr. Doyle was also Senior Vice
President of ITT Hartford Insurance Group and President of ITT Hartford's
International Division from 1983 to 1993.
J. MARKHAM GREEN (age: 53) has been a director of the Company since
1993. He was a general partner of Goldman, Sachs & Co. from 1984 to 1992 and has
been a limited partner of that firm since 1992. During his tenure as a general
partner, Mr. Green was co-head of the Financial Services Industry Group in the
Investment Banking Division.
JOHN P. MCNULTY (age: 44) has been a director of the Company since
1993. He has been a general partner of Goldman, Sachs & Co. from 1989 to 1994, a
limited partner of that firm during most of 1995 and, since November 25, 1995, a
general partner of that firm, a member of its Operating Committee and co-head of
Goldman Sachs Asset Management since November 25, 1995.
DAVID A. OLSEN (age: 58) has been a director of the Company since 1993.
He has been Chairman and Chief Executive Officer of Johnson & Higgins since 1991
and 1990, respectively, and has held various positions with Johnson & Higgins
since 1966. Mr. Olsen is a Trustee of The College of Insurance and of the
American Institute for Chartered Property Casualty Underwriters and the
Insurance Institute of America.
JERRY S. ROSENBLOOM (age: 57) has been a director of the Company since
1993. He has been Frederick H. Ecker Professor of Insurance and Risk Management
and Academic Director, Certified Employee Benefit
Page 88 of 102
<PAGE> 89
Specialist Program at the Wharton School of the University of Pennsylvania since
1990 and 1974, respectively. Mr. Rosenbloom is currently a member of the Boards
of Directors of Mutual Risk Management, Ltd. and the Harleyville Insurance
Companies.
JOSEPH D. ROXE (age: 60) has been a director of the Company since
November 1995 and an alternate director since October 1993. He has been Senior
Vice President and Chief Financial Officer of Johnson & Higgins since 1987 and a
director of Johnson & Higgins since 1988.
MICHAEL E. SATZ (age: 48) has been a director of the Company since
1993. He has been Chairman, President and Chief Executive Officer of Capital Re
Corporation since its founding in 1988. Mr. Satz founded and was the first
president of the Association of Financial Guaranty Insurers.
DONALD J. ZUK (age: 60) has been a director of the Company since 1993.
He has been President and Chief Executive Officer of the Southern California
Physicians Insurance Exchange since 1989.
The First Resolution, which is set forth in Annex A to this Proxy
Statement, provides for shareholder approval of each of the nominees named
above. Unless voting authority is withheld by a shareholder in the manner
provided in the enclosed Proxy card it is the intention of the Proxy holders to
vote for all of the nominees named above. All of the nominees have consented to
serve if elected, but if any becomes unavailable to serve, the Proxy holders may
exercise their discretion to vote for a substitute nominee.
YOUR BOARD OF DIRECTORS RECOMMENDS A VOTE FOR ALL 10 OF THE NOMINEES
NAMED IN THE FIRST RESOLUTION.
Page 89 of 102
<PAGE> 90
I. BOARD OF DIRECTORS
INCUMBENT DIRECTORS
The following persons were, at September 30, 1996, and are currently
serving on the Board of Directors of the Company. All of them have been
nominated for election at the Fiscal 1996 Annual General Meeting, other than Mr.
Lerner, who has indicated to the Company that he intends to retire from the
Board upon conclusion of the meeting. Information about the ages and principal
occupations of the directors who are nominees for election is set forth in Part
One of this Proxy Statement, under "I. Election of Directors." Information
regarding Mr. Lerner is set forth below.
Steven H. Newman (Chairman) (1)(2)
Loay Al-Naqib
Lawrence S. Doyle (1)
J. Markham Green (2)(3)
Alfred Lerner (1)
John P. McNulty (1)
David A. Olsen (3)
Jerry S. Rosenbloom (2)(3)
Joseph D. Roxe (1)(2)
Michael E. Satz (3)
Donald J. Zuk (2)(3)
- ---------------
(1) Member of the Executive Committee
(2) Member of the Audit Committee
(3) Member of the Compensation Committee
ALFRED LERNER (age: 63) has been a director of the Company since 1993.
He has been Chairman and Chief Executive Officer of MBNA Corporation since its
inception in January 1991 and has been a director of MBNA America Bank, N.A.
since December 1991. He has been Chairman and Chief Executive Officer of The
Town and Country Trust since August 1993. He is a member of the Boards of
Trustees of Columbia University, of the Cleveland Clinic Foundation and of Case
Western Reserve University and President of the Cleveland Clinic Foundation.
NUMBER AND TERMS OF DIRECTORS
The Board of Directors currently consists of eleven members, each of
whose current term of office will expire at the conclusion of the Fiscal 1996
Annual General Meeting and when his successor is elected or appointed and
qualified. Under the Articles, directors will be elected at an annual general
meeting by an ordinary resolution of the shareholders. Candidates for election
by shareholders will be nominated by the Board and, subject to certain notice
and other requirements, may be nominated by shareholders.
The Articles provide for a minimum of three and a maximum of 20
directors (subject to modification by ordinary resolution of the shareholders)
and empower the Board to fix the exact number of directors within these limits
and to appoint persons to fill, or to eliminate, any vacancies on the Board.
Vacancies on the Board are filled by action of a majority of the Board remaining
in office, with each such appointed director holding office until the next
following annual general meeting of shareholders and his or her successor is
elected or appointed and qualified. Shareholders are not entitled to fill
vacancies except at a general meeting called by the Board for the election of
directors or to fill a vacancy created by removal of a director. Directors may
not be removed during their term of office except by ordinary resolution of the
shareholders and only for willful neglect or default. Because Mr. Lerner intends
to retire from the Board at the conclusion of the Fiscal 1996 Annual General
Meeting, the Board has resolved that the number of directors be reduced to ten
at such time and until otherwise determined by the Board.
Page 90 of 102
<PAGE> 91
Directors may take action by a majority of their number present at a
duly called and held meeting at which a quorum is present. The majority of
directors in office at any time will be a quorum for all purposes.
A director who expects to be unable to attend any meeting of the Board
or any committee thereof for any reason may appoint any person as an alternate
director to attend and act in his place. A director also may be represented at
any meeting of the Board or any committee by a proxy appointed by him.
During fiscal year 1996, the Board held six meetings. Each incumbent
director attended at least 75% of all meetings of the Board, and of the
committees thereof on which he served, held during the fiscal year 1996 (or the
portion thereof in which he served).
The Company is a Cayman Islands company and its Articles and corporate
governance matters are governed by Cayman Islands law.
COMMITTEES OF BOARD OF DIRECTORS
The Board of Directors established Audit and Compensation Committees in
October 1993 and an Executive Committee in November 1995. Each such committee
reports to the Board. The Board has not established a nominating committee.
Executive Committee. The Board appoints an Executive Committee to
exercise all of the authority of the Board between meetings of the full Board.
The Executive Committee does not, however, have authority to (i) declare
dividends, (ii) issue shares of the Company, (iii) recommend to the shareholders
any action which requires shareholder approval, (iv) alter, amend or repeal any
resolution of the Board relating to the Executive Committee or (v) take any
other action which legally may be taken only by the full Board. In addition, the
Executive Committee may review any aspects of GCR's business (including Global
Capital Re's underwriting guidelines) and report or make recommendations to the
Board thereon. The Executive Committee currently consists of five directors
(Messrs. Newman (Chairman), Doyle, Lerner, McNulty and Roxe). The Executive
Committee met once in fiscal year 1996.
Audit Committee. The Board appoints an Audit Committee to nominate the
independent accountants to be the auditors of the Company and, in consultation
with the auditors, review the scope of their audit and the accounting policies
and procedures of the Company. The Audit Committee currently consists of five
directors (Messrs. Zuk (Chairman), Green, Newman, Rosenbloom and Roxe), none of
whom is an officer or employee of the Company or Global Capital Re. The Audit
Committee met four times in fiscal year 1996.
Compensation Committee. The Board appoints a Compensation Committee to
review the performance of corporate officers and the Company's compensation
policies and procedures and to make recommendations to the Board with respect to
such policies and procedures. The Compensation Committee also administers the
share option, restricted share and incentive compensation plans of the Company.
The Compensation Committee currently consists of five directors (Messrs.
Rosenbloom (Chairman), Green, Olsen, Satz and Zuk), none of whom is an officer
or employee of the Company or Global Capital Re. The Compensation Committee met
three times in fiscal year 1996.
The Company expects that, if the current directors (other than Mr.
Lerner) are elected at the Fiscal 1996 Annual General Meeting as proposed, those
of such directors who are currently members of the foregoing committees will be
reappointed to their respective committee roles by the Board after the meeting.
OTHER SUPERVISORY ARRANGEMENTS
The Board of Directors of Global Capital Re appoints an Investment
Committee to review the guidelines governing the investment of Global Capital
Re's funds and to make recommendations to the Global Capital Re Board with
respect to such guidelines. The Investment Committee also reviews the
performance of
Page 91 of 102
<PAGE> 92
Global Capital Re's investment manager, Goldman Sachs Asset
Management International. The Investment Committee presently consists of Messrs.
Satz (Chairman), Doyle, Lerner, Newman and Roxe. The Investment Committee met
four times in fiscal year 1996.
COMPENSATION OF DIRECTORS
Directors, other than directors who are employees or officers of the
Company or Global Capital Re, are entitled to remuneration for their services as
determined by the Board from time to time. Such remuneration is currently fixed
at $25,000 per annum plus a $1,000 fee for each Board meeting attended
(including meetings of committees of the Board). In addition, directors are
reimbursed for travel and out-of-pocket expenses incurred to attend meetings of
the Board and its committees. Non-Employee Directors also participate in the
Director Option Plan, which is summarized under "III. Approval of Existing
Option Plans -- Director Option Plan" in Part One of this Proxy Statement.
Mr. Newman and the Company are party to the Amended and Restated
Chairman's Incentive Agreement. Under this agreement, in 1993 Mr. Newman
received options to purchase 70,480 Ordinary Shares at an exercise price of
$11.00 per share. These options constitute "Initial Options" as defined below
under "--Executive Compensation--Management Options" and are subject to the
vesting and adjustment provisions described thereunder. Pursuant to this
agreement, in 1993 Mr. Newman also invested $950,000 in Ordinary Shares at a
purchase price of $20.00 per share. This investment was financed by a
non-recourse loan from the Company, which is secured by the Ordinary Shares
purchased, matures on October 8, 2000 (or, if earlier, 60 days after Mr. Newman
ceases to be a director) and bears interest (payable at maturity) at the rate of
7% per annum. As of September 30, 1996, the amount outstanding on the loan was
$619,400. This loan can be forgiven in an amount not to exceed 30% of the
initial principal amount plus interest thereon each year, as determined by the
Compensation Committee in accordance with a sliding scale based on the Company's
short-term and long-term return on consolidated shareholders' equity.
Page 92 of 102
<PAGE> 93
II. EXECUTIVE OFFICERS
The executive officers of the Company are elected by and serve at the
discretion of the Board of Directors. As of September 30, 1996, the executive
officers of the Company were as follows:
EXECUTIVE OFFICERS
LAWRENCE S. DOYLE (age: 53) has been President, Chief Executive Officer
and a director of the Company since 1993. He was President and CEO of the New
England Reinsurance Corporation, First State Insurance Company and the New
England Insurance Company from 1986 to 1993. Mr. Doyle was also Senior Vice
President of ITT Hartford Group and President of ITT Hartford's International
Division from 1981 to April 1993.
ROBERT L. NASON (age: 45) has been Senior Vice President -- North
American Underwriting of the Company since 1993. He was Senior Vice President
and Director from 1988 to 1993 and Vice President from 1983 to 1988 of Trenwick
America Reinsurance Company.
STEPHEN S. OUTERBRIDGE (age: 45) has been Senior Vice President --
International Underwriting of the Company since 1993. He was Chief Underwriting
Officer -- International from 1992 to 1993, Director -- International
Reinsurance Underwriting and Head Underwriter from 1988 to 1992 and Manager --
International Property and Casualty from 1984 to 1988 of Hartford Fire
International Reinsurance.
JOHN K. WITHERSPOON, JR. (age: 58) has been Director of Marine
Underwriting of the Company since 1994. He was Vice President of BEP
International from 1992 to 1994 and President of Bell Nicholson Henderson (USA)
Inc. from 1986 to 1991. He is a past President of the American Marine Insurance
Forum and is a Chartered Property Casualty Underwriter.
FREDERICK W. DEICHMANN (age: 54) has been Chief Financial Officer and
Secretary of the Company since 1993. He was Vice President from 1988 to 1993 of
General Re Corporation and Vice President of Aetna Life & Casualty from 1985 to
1988. He is a member of the American Institute of Certified Public Accountants
and has served on its Insurance Companies Committee.
WILLIAM G. FANNING (age: 38) has been Chief Actuary of the Company
since 1994. He was Commercial Pricing Director and Actuary from 1992 to 1993 and
Actuary-Reinsurance Pricing from 1987 to 1991 at Allstate Insurance Company. Mr.
Fanning is a Fellow of The Casualty Actuarial Society and a member of the
American Academy of Actuaries.
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Section 16(a) of the Exchange Act requires the Company's executive
officers and directors, and persons who beneficially own more than ten percent
of the Company's Ordinary Shares, to file reports of ownership as well as
changes in ownership with the Commission and the National Association of
Securities Dealers, Inc. ("NASD"). Such persons are required by Commission
regulations to furnish the Company with copies of all Section 16(a) forms they
file.
Based solely upon its review of the copies of such forms received by
it, the Company believes that during fiscal year 1996 all filing requirements
applicable to its executive officers, directors and greater than ten percent
beneficial owners were complied with, subject to the exceptions set forth below.
The Company's directors and executive officers and The Goldman Sachs
Group, L.P. made late filings of initial ownership reports on Form 3 following
the Company's initial public offering in December 1995, although all information
required to be filed on such forms was disclosed in the Company's registration
statement on Form S-1 filed with the Commission in connection with the offering
prior to the time required for filing the Form 3 reports. All such Form 3
reports have been filed (and in most cases were filed within three days of the
required date). Joseph D. Roxe, a director, also made late filings of three
transaction reports on Form 4.
Page 93 of 102
<PAGE> 94
III. EXECUTIVE COMPENSATION
SUMMARY OF CASH AND CERTAIN OTHER COMPENSATION
The following table sets forth in summary form all compensation for all
services rendered in all capacities to the Company and its subsidiary for the
years ended September 30, 1994, 1995 and 1996 to the Chief Executive Officer of
the Company and the other four most highly compensated executive officers of the
Company each of whose total annual salary and bonus exceeded $100,000
(collectively with the Chief Executive Officer, the "Named Executives"):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM COMPENSATION
-------------------------------------------- ---------------------------
OTHER ANNUAL INITIAL OPTIONS OTHER ALL OTHER
FISCAL SALARY BONUS COMPENSATION ON SHARES OPTIONS ON COMPENSATION
YEAR $ $(1) $(2) #(3) SHARES(3) $(4)
----- ------- ------- ------------ --------------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Lawrence S. Doyle, President 1996 421,867 457,000 116,167 0 121,000 45,102
and Chief Executive Officer 1995 401,775 292,000 167,548 58,730 12,335 43,089
1994 370,500 93,000 217,808 0 0 38,371
Robert L. Nason, Senior Vice 1996 257,292 206,000 138,410 0 69,000 27,199
President - North American 1995 228,750 175,000 139,165 23,495 7,050 24,344
Underwriting 1994 205,833 64,000 132,541 0 0 21,291
Stephen S. Outerbridge, Senior Vice 1996 215,833 172,000 139,881 0 69,000 23,053
President - International 1995 199,375 145,000 140,766 23,495 7,050 21,403
Underwriting 1994 184,375 43,500 128,153 0 0 19,323
Frederick W. Deichmann, Chief 1996 205,833 165,000 110,459 0 43,000 23,466
Financial Officer 1995 182,500 135,000 109,083 15,740 4,405 20,868
1994 162,500 43,500 137,338 0 0 16,648
William G. Fanning, Chief Actuary 1996 185,625 150,000 114,419 0 43,000 20,018
1995 160,625 122,000 102,312 15,740 41,405 17,499
1994 123,295 30,000 120,228 0 0 12,654
</TABLE>
- --------------
(1) Amounts are awarded pursuant to the Company's Amended and Restated
Employee Incentive Compensation Plan (the "Employee Incentive Plan"),
based on individual and Company performance, with the latter being
based one-half on the annual ROE of the Company and one-half on the
annual ROE compared to the ROE of a peer group of companies. An annual
award may not exceed 75% (175% beginning in fiscal year 1997) of the
recipient's base salary.
(2) Includes amounts in respect of reimbursement for certain travel
expenses, automobile expenses, club dues and relocation expenses and
also includes housing expenses of $132,000, $144,000 and $102,874;
$110,000, $120,000 and $125,000; $120,000, $120,000 and $120,000;
$96,000, $96,000 and $96,000; and $72,000, $96,000 and $104,000 for
Messrs. Doyle, Nason, Outerbridge, Deichmann and Fanning, respectively,
for fiscal years 1994, 1995 and 1996, respectively.
(3) For a description of Initial Options and Other Options, see "Management
Options" below. Does not include options on 360,000 Ordinary Shares
granted in October 1996 to fourteen employees at an exercise price of
$23.25, including options on 108,000, 60,000, 60,000, 52,000 and 52,000
shares to Messrs. Doyle, Nason, Outerbridge, Deichmann and Fanning,
respectively.
(4) Includes payments made in connection with life insurance premiums and
retirement plan contributions. Includes life insurance premiums of
$1,321, $2,911 and $2,911; $708, $1,469 and $1,469; $885, $1,465 and
$1,470; $398, $2,618 and $2,883; and $324, $1,436 and $1,456 and
retirement plan contributions of $37,050, $40,178 and $42,191; $20,583,
$22,875 and $25,729; $18,438, $19,938 and $21,583; $16,250, $18,250 and
$20,583; and $12,330, $16,063 and $18,562 for Messrs. Doyle, Nason,
Outerbridge, Deichmann and Fanning, respectively, for fiscal years
1994, 1995 and 1996, respectively.
Page 94 of 102
<PAGE> 95
MANAGEMENT OPTIONS
To date, two types of options have been granted to employees of the
Company since its inception in 1993: Initial Options, which were granted to the
Named Executives in connection with the commencement of their employment in 1993
(1994 for Mr. Fanning), and Other Options, which were granted to key employees
of the Company and Global Capital Re, including the Named Executives, pursuant
to the 1995 Employee Option Plan and the Company's Amended and Restated Share
Option Plan (the "Initial Employee Option Plan"). The 1995 Employee Option Plan
is summarized under "III. Approval of Existing Option Plans" in Part One of this
Proxy Statement. The terms of the Initial Employee Option Plan are similar to
those of the 1995 Employee Option Plan, except that under the initial plan
annual grants were not limited by performance criteria, the exercise price per
share for an outstanding option is reduced automatically by the amount of any
cash dividend paid in respect of an Ordinary Share and plan participants do not
receive restricted shares in respect of such dividends. Options on 35,245
Ordinary Shares have been granted under the Initial Employee Option Plan, of
which none has been exercised to date, and no further options are available for
grant under that plan. The information in this section III does not reflect the
Restricted Shares Grants made under the 1995 Employee Option Plan or the
performance share awards made under the New Share Plan, all of which are
conditioned on shareholder approval as described in sections III and IV of Part
One of this Proxy Statement.
For each option granted under the Company's compensation plans to date,
the number of shares issuable thereunder and the exercise price per share, as
set forth herein, have been adjusted as necessary to reflect a five-for-one
split of the Ordinary Shares in the form of a share dividend in December 1995, a
distribution by the Company of approximately $201 million in cash to its
shareholders in August 1995 and the quarterly cash dividends paid by the Company
in February, May and August 1996, in each case to the extent such adjustments
apply. No adjustment is reflected in respect of the quarterly cash dividend
payable in November 1996.
Option Grants in Fiscal Year 1996. The following table contains
information concerning the share options granted to each of the Named Executives
during fiscal year 1996. The Company has not authorized the grant of any share
appreciation rights.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE VALUE AT
ASSUMED ANNUAL RATES OF
SHARE PRICE APPRECIATION FOR
INDIVIDUAL GRANTS OPTION TERM(3)
---------------------------------------------------------- -----------------------------
NUMBER OF
SECURITIES PERCENT OF TOTAL EXERCISE MARKET
UNDERLYING OPTIONS GRANTED TO OR BASE PRICE ON
OPTIONS EMPLOYEES IN FISCAL PRICE PER DATE OF EXPIRATION
NAME GRANTED(1) YEAR SHARE(2) GRANT(2) DATE 5% 10%
- ---- ---------- ------------------- --------- -------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Lawrence S. Doyle 121,000 33.60 15.24 15.24 11/16/05 1,161,745 2,932,024
Robert L. Nason 69,000 19.20 15.24 15.24 11/16/05 662,483 1,671,980
Stephen S. Outerbridge 69,000 19.20 15.24 15.24 11/16/05 662,483 1,671,980
Frederick W. Deichmann 43,000 11.90 15.24 15.24 11/16/05 412,852 1,041,959
William G. Fanning 43,000 11.90 15.24 15.24 11/16/05 412,852 1,041,959
</TABLE>
- -----------------
(1) Does not reflect options on 15,000 shares granted to employees (other
than Named Executives) in fiscal year 1996.
(2) All options were granted at fair market value, as determined by the
Compensation Committee of the Board, on the date of grant. All options
vest and become exercisable at a rate of 25% on each of the first
through
Page 95 of 102
<PAGE> 96
fourth anniversaries of the grant date for as long as the Named
Executive remains employed by the Company.
(3) The 5% and 10% assumed annual rates of compounded share price
appreciation are mandated by rules of the Commission and have been
calculated based upon the market price on the date of grant as
described in note (2) above. There can be no assurance that the actual
share price appreciation over the 10-year option term will be at the
assumed 5% and 10% levels or at any other defined level and such
assumed rates are not intended to forecast the future appreciation of
Ordinary Shares. Unless the market price of the Ordinary Shares
appreciates over the option term, no value will be realized from the
option grants made to the Named Executives.
Aggregated Option Exercises in Fiscal Year 1996 and 1996 Fiscal
Year-End Option Values. The following table contains information for each Named
Executive with regard to the number of Ordinary Shares underlying unexercised
options and the value of such options, in each case at September 30, 1996. No
options have been exercised by Named Executives.
<TABLE>
<CAPTION>
NUMBER OF ORDINARY SHARES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED OPTIONS AT OPTIONS AT SEPTEMBER 30,
SEPTEMBER 30, 1996(#) 1996($)(1)
EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
--------------------------------- -------------------------
<S> <C> <C>
Lawrence S. Doyle 26,576/165,489 $386,195/$1,824,362
Robert L. Nason 11,161/88,384 161,827/952,823
Stephen S. Outerbridge 1,161/88,384 161,827/952,823
Frederick W. Deichmann 7,398/55,748 107,311/603,541
William G. Fanning 7,397/55,748 107,311/603,541
</TABLE>
- -----------------
(1) No effect is given to any exercise price adjustment in respect of the
November 1996 cash dividend or any subsequent cash dividend that may be
paid. All options were granted at fair market value, as determined by
the Compensation Committee of the Board, on the date of grant. Value
calculated on the basis of the market value of the underlying shares as
of September 30, 1996 ($24.125).
Employment Contracts, Termination of Employment and Change-of-Control
Arrangements. The Company has entered into employment agreements with each of
the Named Executives, which are substantially identical. Unless otherwise
indicated, the following discussion pertains to Mr. Doyle's agreement and
addresses material differences applicable to the other agreements.
Each employment agreement provides for a term of five years, commencing
on October 8, 1993 (January 15, 1994 for Mr. Fanning). During the period of each
agreement, the relevant Named Executive is entitled to receive a base salary as
set forth in the agreement, subject to review and increase annually by the
Board, to participate in all employee benefit plans of the Company and to
receive reimbursement for certain relocation and travel expenses, a monthly
housing allowance, the use of an automobile and the costs of a club membership.
Upon signing his employment agreement, the Named Executive also received Initial
Options to purchase Ordinary Shares having a five-year vesting schedule, with
20% of such options being immediately exercisable and an additional 20% becoming
exercisable on each of the second through fifth anniversaries of the grant date
for as long as the Named Executive remains employed. No Initial Option will
become exercisable after the termination of the Named Executive's employment. No
Initial Option that is otherwise exercisable may be exercised more than ninety
days after the termination of employment for any reason other than death or
disability or more than six months after termination for death or disability,
and in no event more than 10 years after the grant date. To date, no Initial
Options have been exercised.
Page 96 of 102
<PAGE> 97
Pursuant to his employment agreement, each Named Executive invested
$400,000 ($800,000 for Mr. Doyle and $190,000 for Mr. Fanning) in Ordinary
Shares at a price of $20.00 per share. One half of each of these investments
($150,000 for Mr. Fanning) was financed by a non-recourse loan (each an
"Employee Loan") from the Company, which is secured by a proportionate number of
the Ordinary Shares, matures on October 8, 2000 (January 15, 2001 for Mr.
Fanning) or, if earlier, three months after his employment ends and bears
interest (payable at maturity) at the rate of 7% per annum. At the Named
Executive's option, up to one-half of his bonus award under the Employee
Incentive Plan can be applied to forgiveness of his loan, in which event 200% of
the amount elected will be so applied, provided that no more than 20% of the
original amount of the loan plus accrued interest may be forgiven in any one
year.
The employment of any Named Executive may be terminated by the Company
for "Serious Cause" (as defined in the agreements), after which the executive
cannot compete with the Company for 18 months (two years for Mr. Doyle), or by
the executive for "Good Reason" (as defined), after which only Mr. Doyle may not
compete with the Company (for one year). Any executive who voluntarily
terminates his employment without Good Reason may not compete for 18 months (two
years for Mr. Doyle).
Upon termination of employment by the Named Executive for Good Reason
or by the Company for other than Serious Cause, or if the Company liquidates or
the Board elects to discontinue permanently operating the Company, the executive
is entitled to receive his salary for a period of one year after termination and
benefits as provided in his agreement. If a Change of Control occurs and the
executive remains employed for at least 60 days, the executive is entitled to
receive (i) one year's salary (at the rate in effect immediately prior to the
Change of Control), (ii) immediate vesting of options, restricted shares and
other awards and (iii) after one year of employment following such transaction,
the forgiveness of his Employee Loan. If a Change of Control occurs and the
executive's employment is terminated by him for Good Reason or by the Company
other than for Serious Cause within one year thereafter, the executive is
entitled to receive (in lieu of the benefits described in the first sentence but
in addition to those described in the second sentence of this paragraph) (i) his
salary for two years (at the rate referred to above), (ii) automobile and
housing allowances for one year, (iii) forgiveness of his Employee Loan and (iv)
immediate vesting of options, restricted shares and other awards. For a
description of the term "Change of Control," see "III. Approval of Existing
Option Plans --Director Option Plan" in Part One of this Proxy Statement.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee during fiscal year 1996 consisted of Messrs.
Rosenbloom (Chairman), Green, Olsen, Satz and Zuk, none of whom is or was an
officer or employee of the Company or Global Capital Re. Mr. Green is a limited
partner of The Goldman Sachs Group, L.P. and Mr. Olsen is an officer of Johnson
& Higgins. See "Certain Relationships and Related Party Transactions."
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IV. BENEFICIAL OWNERSHIP OF ORDINARY SHARES
The table below sets forth certain information as of November 21, 1996
(unless otherwise specified) with respect to the beneficial ownership of the
Company's Ordinary Shares by each person who is known to the Company to
beneficially own more than 5% of the outstanding Ordinary Shares, each person
currently serving as a director, each Named Executive and all directors and
executive officers as a group.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP(1)
------------------------
NAME AND ADDRESS OF BENEFICIAL OWNER NUMBER PERCENT
------------------------------------ ------ -------
<S> <C> <C>
5% BENEFICIAL OWNERS, DIRECTORS AND EXECUTIVE OFFICERS:
The Goldman Sachs Group, L.P. .................................. 977,130(2) 3.8
85 Broad Street
New York, NY 10004
Johnson & Higgins .............................................. 904,429(3) 3.7
125 Broad Street
New York, NY 10004
Alfred Lerner .................................................. 0 *
Steven H. Newman ............................................... 89,788(4) *
Lawrence S. Doyle .............................................. 111,656(5) *
Robert L. Nason ................................................ 44,872(6) *
Stephen S. Outerbridge ......................................... 54,872(6) *
William G. Fanning ............................................. 29,714(7) *
Frederick W. Deichmann ......................................... 42,597(8) *
Loay Al-Naqib .................................................. 0 *
J. Markham Green ............................................... 3,389 *
John P. McNulty ................................................ 3,000(9) *
David A. Olsen ................................................. 6,000(10) *
Jerry S. Rosenbloom ............................................ 3,000(10) *
Joseph D. Roxe ................................................. 7,668(10) *
Michael E. Satz ................................................ 3,000(10) *
Donald J. Zuk .................................................. 4,000(11) *
All Directors and Executive Officers as a group (16 persons).... 410,306 1.65
</TABLE>
- ----------------
* Less than 1% of the outstanding shares.
(1) In accordance with the rules of the Commission, each beneficial owner's
holdings have been calculated assuming full exercise of outstanding
options exercisable by such owner within 60 days after November 21,
1996, but no exercise of outstanding options held by any other person.
For the purposes of these calculations, the one million shares
purchased by Global Capital Re in July 1996 are treated as if they
have ceased to be outstanding (although such shares continue to carry
voting, dividend and other rights). For further information about the
calculation of beneficial ownership, see the footnotes below. For a
discussion of the "Controlled Shares" attributable to certain
shareholders for purposes of the Articles, see the introductory section
of this Proxy Statement.
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(2) Includes 377,209 Ordinary Shares beneficially owned by certain
investment limited partnerships, including GS Capital Partners, L.P.,
or their general or managing general partners which are affiliates of
The Goldman Sachs Group, L.P. ("GS Group"). GS Group disclaims
beneficial ownership of shares held by such investment partnerships to
the extent partnership interests in such partnerships are held by
persons other than GS Group and its affiliates. Also includes 596,921
Ordinary Shares beneficially owned by Goldman, Sachs & Co., an
affiliate of GS Group. In addition, 3,000 Ordinary Shares are issuable
upon the exercise of options held by Mr. McNulty, a general partner of
GS Group who holds such options for the benefit of GS Group. Does not
include certain shares held in customer accounts managed by affiliates
of GS Group or any shares which may be held by Goldman, Sachs & Co. and
certain of its affiliates as a result of market-making activities.
These excluded shares, together with the shares of GS Group set forth
in the table above, represent approximately 8.1% of the Ordinary Shares
outstanding as of November 21, 1996. GS Group disclaims beneficial
ownership of shares held in such customer accounts.
(3) Consists of Ordinary Shares beneficially owned by Johnson & Higgins
(Bermuda) Limited, a subsidiary of Johnson & Higgins. Does not include
shares beneficially owned by Messrs. Olsen and Roxe, officers of
Johnson & Higgins and directors of the Company.
(4) Includes 42,288 Ordinary Shares issuable upon the exercise of options;
does not include 165,324 shares held by Underwriters Reinsurance
Company, a subsidiary of Allegheny Corporation.
(5) Includes 71,656 Ordinary Shares issuable upon the exercise of options.
(6) Includes 34,872 Ordinary Shares issuable upon the exercise of options.
(7) Includes 22,397 Ordinary Shares issuable upon the exercise of options.
(8) Includes 22,397 Ordinary Shares issuable upon the exercise of options.
Also includes 200 Ordinary Shares held by Mr. Deichmann for the benefit
of his children and as to which he disclaims beneficial ownership.
(9) Includes 3,000 Ordinary Shares issuable upon the exercise of options,
which are held by Mr. McNulty for the benefit of GS Group. Does not
include Ordinary Shares which otherwise may be deemed to be
beneficially owned by GS Group. See note (2) above. The general
partners of GS Group may be deemed to share beneficial ownership of the
shares shown as beneficially owned by GS Group. Mr. McNulty, who is a
general partner of GS Group, disclaims beneficial ownership of the
shares owned by GS Group and certain of its affiliates. Also does not
include a limited number of shares held by a charitable organization.
(10) Includes 3,000 Ordinary Shares issuable upon the exercise of options.
(11) Includes 3,000 Ordinary Shares issuable upon the exercise of options.
Does not include 188,373 shares held by Southern California Physicians
Insurance Exchange.
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<PAGE> 100
V. CERTAIN RELATIONSHIPS AND RELATED PARTY
TRANSACTIONS
TRANSACTIONS WITH MANAGEMENT AND OTHERS
Upon assuming their current positions with the Company, each of the
Named Executives and Mr. Newman has given a non-recourse note to the Company, in
amounts ranging from $150,000 to $950,000, to finance purchases of Ordinary
Shares.
CERTAIN BUSINESS RELATIONSHIPS
Goldman, Sachs & Co., an affiliate of The Goldman Sachs Group, L.P.
("GS Group"), was a founding sponsor of the Company. Together with certain
affiliated investment partnerships and other affiliates, GS Group owned 977,130
Ordinary Shares as of November 21, 1996 (on the basis described above in "IV.
Beneficial Ownership of Ordinary Shares"). One of the Company's directors is a
limited partner of GS Group and another is a general partner of GS Group.
Goldman, Sachs & Co. acted as financial adviser and placement agent for
the Company in connection with the Company's organization and initial share
placement in 1993, for which they received fees totaling approximately $6.9
million and reimbursement of certain expenses. In addition. as partial
consideration for those services. the Company granted to Goldman, Sachs & Co.
and certain affiliated investment partnerships warrants to purchase 2,317,640
Ordinary Shares, all of which had an exercise price of $11.00 per share, or
$25.5 million in the aggregate. These entities exercised their warrants in full
immediately prior to the closing for the Company's initial public offering in
December 1995 and sold a total of 1,450,151 Ordinary Shares in that offering.
These entities sold an additional 883,646 shares in a public offering in July
1996. Goldman, Sachs & Co. acted as lead manager of the underwriters in both
public offerings, in which the underwriters received aggregate underwriting
discounts of approximately $9.1 million and $5.8 million, respectively, from the
selling shareholders in such offerings. The Company has agreed to indemnify
Goldman, Sachs & Co. and their affiliates against certain liabilities in
connection with the organization of the Company and the public offerings.
GSAMI, an affiliate of Goldman, Sachs & Co., performs asset management
services for Global Capital Re pursuant to an investment advisory agreement.
This agreement provides for an annual fee based on the value of Global Capital
Re's investment portfolio and may be terminated by either party upon 30 days'
notice. In addition, this agreement provides that GSAMI may effect portfolio
transactions for Global Capital Re with or through GSAMI or any of its
affiliates, acting as agent or as principal, and in each such case GSAMI or such
affiliate may earn commissions in addition to the advisory fees under the
agreement. GSAMI may also invest a portion of the portfolio in funds managed by
affiliates of Goldman, Sachs & Co. Pursuant to this agreement, the Company paid
advisory fees and brokerage commissions to GSAMI and its affiliates totaling
$497,000, $559,000 and $674,000 during fiscal years 1994, 1995 and 1996,
respectively.
Goldman, Sachs & Co. and its affiliates have provided, and currently
provide, other investment banking services to GCR from time to time for which
they have received or will receive customary fees.
Goldman, Sachs & Co. has entered into an undertaking and
indemnification agreement with the Company pursuant to which it has agreed, in
general, that if any Goldman Sachs Person
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<PAGE> 101
becomes a United States 25% Shareholder (in compliance with certain provisions
of the Articles), no Goldman Sachs Person would be a United States 25%
Shareholder for a period of 29 consecutive days or more at any time or for a
period of 29 days or more during any single calendar quarter and no Goldman
Sachs Person would exceed a 29% ownership threshold at any time. (Capitalized
terms used in this paragraph are defined in the Articles.)
Johnson & Higgins was a founding sponsor of the Company. Through an
affiliate, Johnson & Higgins beneficially owns 904,429 Ordinary Shares (on the
basis described above in "IV. Beneficial Ownership of Ordinary Shares"). Two of
the Company's directors are officers of Johnson & Higgins.
Johnson & Higgins provided reinsurance advice in connection with the
organization of the Company in 1993 and, in consideration therefore, the Company
granted to Johnson & Higgins affiliates warrants to purchase 986,015 Ordinary
Shares at an exercise price of $11.00 per share, or $10.8 million in the
aggregate. These affiliates exercised these warrants in full immediately prior
to the closing of the Company's initial public offering in December 1995 and
sold a total of 327,659 Ordinary Shares in that offering. A Johnson & Higgins
affiliate also sold 739,989 shares in the July 1996 public offering. The Company
reimbursed Johnson & Higgins for certain expenses relating to the organization
of the Company.
On November 19, 1996, the Company announced the formation of a joint
venture between Global Capital Re and Capital Re Corporation. The joint venture
company, Capital Global Underwriters Limited, will be a Bermuda-domiciled
reinsurance company specializing in financial reinsurance, including financial
guaranty, mortgage guaranty and finite risk reinsurance. The joint venture will
have up to $50 million of committed capital and is expected to begin operations
by year end 1996. The Company has committed to provide $10 million in cash and a
$15 million letter of credit to the venture. The Company will hold most of the
voting shares of the joint venture company. Global Capital Underwriters Limited
will be managed by an affiliate of Capital Re which will receive reimbursement
of expenses and an annual commission based on the profit of the venture. Michael
E. Satz, the Chairman, President and Chief Executive Officer of Capital Re, is a
director of the Company.
Underwriters Reinsurance Company holds 165,324 Ordinary Shares, which
it purchased in the Company's initial share placement in 1993 at the offering
price of $20.00 per share. Steven H. Newman, the Chairman of Underwriters
Reinsurance Company, a subsidiary of Alleghany Corporation, is the non-executive
Chairman of the Board of Directors of the Company and holds 47,500 Ordinary
Shares and options to purchase 70,480 additional Ordinary Shares. Underwriters
Reinsurance Company is engaged in the reinsurance business, including the
writing of property catastrophe reinsurance.
Donald J. Zuk, a member of the Board, is also President and Chief
Executive Officer of the Southern California Physicians Insurance Exchange,
which holds 113,000 Ordinary Shares. Mr. Zuk holds 1,000 Ordinary Shares and
options to purchase 3,000 additional Ordinary Shares.
REGISTRATION RIGHTS
In connection with its initial public offering in December 1995, the
Company agreed to provide Goldman, Sachs & Co. and Johnson & Higgins (each, a
"Rightholder") with registration rights for Ordinary Shares held by them and
certain of their affiliates (collectively, a "Holder Group"). Under this
agreement, each Rightholder has the right to require the Company, on one
occasion, to register Ordinary Shares (not previously registered or sold into
the public market)
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<PAGE> 102
under the Securities Act for sale into the public market, in
an underwritten offering, block trades from time to time or otherwise, and the
other Holder Group not making the demand will have the right to participate in
such registration on a second-priority basis. The Company generally may include
other Ordinary Shares in any such demand registration, on a third-priority basis
subject to a customary underwriter's reduction. The total aggregate public
offering price of shares registered pursuant to any such demand must equal or
exceed $10 million. In addition, if the Company proposes to file a registration
statement covering Ordinary Shares at any time, each Rightholder will have the
right to include Ordinary Shares held by its Holder Group in the registration,
in each case on a first-priority basis with any other shareholders and on a
second-priority basis with the Company, pro rata according to the relevant
respective holdings and subject to a customary underwriter's reduction. The
Company has agreed to indemnify each Rightholder and certain of its affiliates
in respect of certain liabilities, including civil liabilities under the
Securities Act, and to pay certain expenses relating to such registrations. Each
Rightholder's rights under the agreement terminate when its Holder Group ceases
to hold at least 50% (in the case of the demand rights) or 25% (in the case of
joining rights) of the unregistered Ordinary Shares held by it immediately after
the Company's initial public offering (subject to certain adjustments). The
Company has also agreed to maintain a registration statement covering sales that
may be effected by Goldman, Sachs & Co. from time to time in connection with
market-making transactions.
Page 102 of 102
