Hamilton, Bermuda.......... 5,900 June 20, 2006 London, England............ 10,750 August 10, 2009 Dallas, Texas.............. 14,700 August 31, 2003 New York, New York......... 7,900 September 3, 2003 New York, New York......... 2,800 September 14, 2004 Bradenton, Florida......... 12,350 June 28, 2008 Boca Raton, Florida........ 13,750 January 15, 2005 Southington, Connecticut... 2,460 August 31, 2011
- -MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Revenues from continuing operations of $50.0 million in 2001 represented a $0.9 million decrease versus 2000 revenues from continuing operations of $50.9 million, which were $9.7 million below 1999 revenues from continuing operations of $60.6 million. Net loss from operations of $21.3 million in 2001 compares to a net loss from operations of $27.0 million in 2000 and net loss from operations of $6.7 million in 1999. The decline in revenues from continuing operations in 2001 reflected the difficult market conditions in the brokerage and program business segments, which were partially offset by increased net premium volume written and earned in the insurance segment as the insurance segment retained more busines by reducing the amount of reinsurance purchased for its programs. Expenses from continuing operations, including insurance costs, of $66.4 million in 2001 represent a $3.0 million decrease from 2000 expenses from continuing operations of $69.4 million, which increased $1.4 million over 1999 expenses from continuing operations of $68.0 million. Insurance costs for the year 2001 increased to $26.9 million, compared to $22.6 million in 2000 and $10.1 million in 1999. The increase in insurance costs for the year was primarily due to the increase in net premiums earned.
Loss before tax for the insurance segment of $2.6 million in 2001 represented an improvement of $2.4 million from loss before tax of $5.0 million in 2000, which in turn had increased $2.9 million from loss before tax of $2.1 million in 1999. The decreased loss before tax resulted from an improvement in losses incurred on business written.
Following a review of its operations in early 2001, the Company decided to discontinue its loss-making reinsurance and underwriting management segments effective December 31, 2000. In light of this decision, the Company took a charge against income in 2000 of $5.2 million to write off goodwill in respect of these operations.
The Company's discontinued underwriting management segment comprised companies that primarily underwrote and administered reinsurance business on behalf of independent reinsurance companies. Underwriting management revenues of $0.6 million in 2001 represented a decrease of $1.0 million from underwriting management revenues of $1.6 million in 2000, which had decreased $2.5 million from underwriting management revenues of $4.1 million in 1999.
At December 31, 2001, the Company held cash and marketable securities of $46.6 million, compared to $76.0 million at December 31, 2000. In addition, the Company held cash in fiduciary accounts relating to insurance client premiums amounting to $33.8 million at December 31, 2001, compared to $39.0 million at December 31, 2000. These decreased cash balances reflect the slow-down in the Company's business activities for 2001, the impact of delays in receiving outstanding reinsurance recoveries, and the net loss for the year. Of the $46.6 million of cash and marketable securities held by the Company at year end, $29.4 million (2000--$49.3 million) was held by subsidiaries whose payment of dividends to the Company was subject to regulatory restrictions or possible tax liabilities. At December 31, 2001, the Company's investment portfolio (at fair market value) totalled $30.1 million (2000--$34.6 million). The portfolio consisted primarily of U.S. Treasury obligations, short-term cash and A-rated corporate debt securities.
Shareholders' equity decreased by $21.4 million, to $35.5 million, at December 31, 2001 from $56.9 million at December 31, 2000, due primarily to the net loss incurred for the year.
On February 14, 2002, the Company was advised by Nasdaq that it was not in compliance with certain Nasdaq Marketplace Rules, specifically those relating to the mimnimum bid price of the Company's Ordinary Stock and the minimum market value of its publicly held shares. The Company was further advised that it would have until May 15, 2002 within which to regain compliance with the Marketplace Rules, failing which the Company would be provided with written notification that its securities would be delisted. The Company would be able to appeal any such determination to the Nasdaq Listing Qualifications Panel. The Company has the option, prior to May 15, 2002, to apply to transfer its securities to The Nasdaq SmallCap Market, which application would have the effect of staying notification of delisting but, in the event that the Company's transfer application were not approved, notification of delisting would then be issued, again subject to a possible appeal. The Company cannot presently determine whether it will be in compliance with the applicable Marketplace Rules by May 15, 2002, and is evaluating the decision to file an application to transfer its securities to The Nasdaq SmallCap Market.
The Company had no outstanding debt at December 31, 2000 and 2001.
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions for those transactions that are not yet complete or for which the ultimate effects cannot be precisely determined. Such estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The most significant estimates include those used in determining the liability for outstanding losses and loss expenses, uncollectible insurance and reinsurance balances receivable and recoverable, and potential losses from litigation. Although some variability is inherent in these estimates, management believes the amounts provided for are adequate. The Company has identified the following critical accounting policies and estimates utilized by management in the preparation of the Company's financial statements; losses and loss expenses, and premiums written, assumed and ceded.
In June 1999, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standard ("SFAS") No. 137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133". This statement amends SFAS No. 133 to defer its effective date for one year, to fiscal years beginning after June 15, 2000. In June 2000, the Financial Accounting Standards Board issued SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities." This statement is an amendment of SFAS No. 133 with respect to the accounting and reporting standards for certain derivative instruments and certain hedging activities. The Company adopted this standard effective January 1, 2001, and it did not have a significant impact on the Company's financial position or results of operations.
In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible Assets." Under SFAS No. 142, amortization of goodwill is precluded; however, its fair value is periodically (at least annually) reviewed and tested for impairment. Goodwill must be tested for impairment in the year of adoption, including an initial test performed within six months. If the initial test indicates a potential impairment, then a more detailed analysis to determine the extent of impairment must be completed within twelve months. SFAS No. 142 requires that useful lives for intangibles other than goodwill be reassessed and remaining amortization periods be adjusted accordingly. The reassessment must be completed prior to the first quarter of 2002. The provisions of SFAS No. 142 are effective for financial statements issued for fiscal years beginning after December 15, 2001. All provisions of SFAS No. 142 will be applied beginning January 1, 2002, to goodwill and other intangible assets. Goodwill amortization totaled $928 in 2001, and the Company expects it would have approximated $150 in 2002 before application of the non-amortization provisions of this statement. The Company is in the process of assessing the impacts from the implementation of the other provisions of SFAS No. 142.
In August 2001, the FASB issued Statement No. 144, "Accounting for the Impairment or Disposal of Long Lived Assets," which updates and clarifies the accounting and reporting for impairment of assets held in use and to be disposed of. SFAS No. 144, among other things, will require the Company to classify the operations and cash flow of properties to be disposed of as discontinued operations. The provisions of SFAS No. 144 are effective for financial statements issued for fiscal years beginning after December 15, 2001, and interim periods within those fiscal years, with early application encouraged. The provisions of SFAS No. 144 generally are to be applied prospectively. The Company expects to adopt the provisions of the Statement January 1, 2002, and does not expect it to have a material impact on the Company's financial position or results from operations.
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for forward-looking statements. This Form 10-K, or any oral or written statements made by or on behalf of the Company, may include forward-looking statements which reflect the Company's current views with respect to future events and financial performance. These forward-looking statements are identified by their use of such terms and phrases as "intends," "intend," "intended," "goal," "estimate," "estimates," "expects," "expect," "expected," "project," "projected," "projections," "plans," "anticipates," "anticipated," "should," "designed to," "foreseeable future," "believe," "believes," "scheduled" and similar expressions. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date the statement was made. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
PAGE # Report of Independent Public Accountants........................ 23 Consolidated Balance Sheets..................................... 25 Consolidated Statements of Income and Comprehensive Income...... 26 Consolidated Statements of Changes in Shareholders' Equity...... 27 Consolidated Statements of Cash Flows........................... 28 Notes to Consolidated Financial Statements...................... 29-50
We have audited the consolidated balance sheets of Stirling Cooke Brown Holdings Limited and subsidiaries as of December 31, 2000 and 2001, and the related consolidated statements of income and comprehensive income, changes in shareholders' equity and cash flows for each of the three years in the period ended December 31, 2001. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
STIRLING COOKE BROWN HOLDINGS LIMITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1999, 2000 AND 2001 (EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS, EXCEPT SHARE AND PER SHARE DATA)
These consolidated financial statements include the financial statements of Stirling Cooke Brown Holdings Limited and all of its majority-owned subsidiaries. All significant intercompany balances and transactions have been eliminated on consolidation. The results of a number of subsidiaries have been included from the dates of their acquisition.
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions for those transactions that are not yet complete or for which the ultimate effects cannot be precisely determined. Such estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The most significant estimates include those used in determining the liability for outstanding losses and loss expenses, uncollectible insurance and reinsurance policies receivable and recoverable, and potential losses from litigation. Although some variability is inherent in these estimates, management believes the amounts provided for are adequate.
Premiums written and assumed are recorded on an accrual basis and included in income on a pro-rata basis over the life of the policies or reinsurance agreements to which they relate, with the unearned portion deferred in the consolidated balance sheets. Adjustment premiums arising from premium audits are recorded in the period in which they are determined. Reinsurance premiums ceded are similarly pro-rated over the term of the reinsurance contract, with the unearned portion being deferred in the consolidated balance sheets as deferred reinsurance premiums ceded.
(ii) Managing general agency fees are included within program business segment revenue and are reported net of commission expense to agents. These fees and are initially recorded as of the effective date of the related insurance policy and are recognized in income over the period of the underlying policy (which is typically one year). Fees for claims handling services are recognized in income over the period that services are performed in accordance with the Company's contractual obligations, typically ranging up to five years, based on the Company's estimation of expected claims handling requirements in each accounting period. Such estimation is based upon industry standards. Any subsequent adjustments, including adjustments due to policy cancellation and premium adjustments, are recorded when advised by the client or agent. The portion that will be earned in the future is deferred and reported as deferred income in the consolidated balance sheets.
(iii) Program and captive management fees are included within program business segment revenue, and are initially recorded as of the effective date of the insurance policy or, in the case of installment premiums, when the installment is billed and are earned in income over the period of the underlying policy (which is typically one year) in proportion to the level of services provided in accordance with the Company's contractual obligations. Any subsequent adjustments are recognized in income when advised by the client or agent. The portion of recorded management fees that will be earned in the future is deferred and reported as deferred income in the consolidated balance sheets.
Earnings (loss) per share have been calculated in accordance with Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share". Net income (loss) per share is calculated by dividing income (loss) available to ordinary shareholders by the weighted average number of ordinary shares outstanding. Shares held in treasury are not considered outstanding for purposes of the computation. Net income (loss) per share assuming dilution is computed by dividing income available to ordinary shareholders by the weighted average number of ordinary shares and potentially dilutive securities such as stock options. During the years 1999, 2000 and 2001 stock options were not included in the calculation as the effect would be anti-dilutive.
Following a review of its operations, the Company decided on March 6, 2001 to discontinue its reinsurance and underwriting management segments and put these segments into run-off.
The Company's reinsurance segment consists of its reinsurance subsidiary, Comp Indemnity Reinsurance Company Limited ("CIRCL"). CIRCL primarily reinsured workers' compensation and property and general liability risks. Management determined in early 1999 to cease underwriting new programs in the reinsurance segment due to unfavourable results, and for this reason, a number of exisiting contracts were not renewed for the 1999 year. During 2000, further losses were realized in this segment, primarily due to a strengthening of reserves on discontinued programs, together with an increase in provisions against reinsurance recoveries. Due to the history of operating losses for the segment, together with the cessation of writing new programs, the Company decided to completely discontinue the segment and place the operation into run-off. At December 31, 2001, reinsurance segment assets were primarily cash and cash equivalents, insurance and reinsurance balances receivable, and paid and outstanding losses recoverable from reinsurers. Segment liabilities were primarily insurance and reinsurance balances payable, and outstanding losses and loss expenses.
The Company's underwriting management segment is comprised of companies that primarily underwrote and administered reinsurance business on behalf of independent reinsurance companies. Since 1999, the underwriting management segment has experienced a significant reduction in business written, which has led to decreasing revenues over the period. In view of the reduction in revenues, the resulting loss, and the ongoing business prospects for the segment, the Company decided to discontinue the segment and place the operation into run-off. At December 31, 2001, underwriting management segment assets were primarily cash and cash equivalents, and insurance and reinsurance balances receivable. Segment liabilities were primarily insurance and reinsurance balances payable.
In the normal course of insurance and reinsurance operations the Company's bankers have issued letters of credit totaling $14,609 and $7,629 at December 31, 2000 and 2001, respectively in favor of ceding insurance companies. At December 31, 2000 and 2001, $14,609 and $7,629, respectively, of cash and cash equivalents were pledged as collateral for these letters of credit.
One of the Company's subsidiaries was registered with the Society of Lloyd's as a registered Lloyd's Broker. Until July 3, 2000, as required by Lloyd's Brokers Byelaw (No. 5 of 1988), the subsidiary entered into a trust deed under which all insurance broking account assets were subject to a floating lien held in trust for the Society of Lloyd's for the benefit of the insurance creditors. With effect from July 3, 2000, in common with all Lloyd's Brokers, the security held under the trust deed was released as a result of changes to Lloyd's Distribution Policy enacted by Lloyd's Regulatory Bulletin dated May 31, 2000.
c) Proceeds from sales of investments in debt securities during 2000 and 2001 were $3,319 and $22,958, respectively. Proceeds from sales of investments in equity securities during 2000 and 2001 were $3,659 and $965, respectively. There were $27 of realized losses and $784 of realized gains during 2000. There were $110 of realized losses and $362 of realized gains during 2001.
d) At December 31, 2000 and 2001, debt securities having an amortized cost of $1,630 and $1,600, respectively, were on deposit with government authorities as required by law.
Certain of the Company's reinsurance contracts, referred to as rent-a-captive programs, do not satisfy the conditions for reinsurance accounting as the maximum exposure to loss is fully funded by premium, cash and other collateral and indemnity agreements. Accordingly, these contracts are accounted for as deposit liabilities. The assets related to these programs represent funds under management as the insured retains the risks and rewards of ownership. Such assets are recorded as assets related to deposit liabilities in the consolidated balance sheets. These assets comprised cash and short-term deposits at December 31, 2000 and 2001. The Company receives a fee based on a percentage of premiums written and investment income earned for structuring and providing ongoing management of the programs.
In addition, deposit liabilities and related assets include $2,629 and $1,664 of deposits received from customers as security for the timely payment of premiums for workers' compensation insurance at December 31, 2000 and 2001, respectively. The deposit is restricted from use by the Company, and is the property of the customer. The deposit is refunded to the customer after the policy expires or is canceled and all claims related to the insurance policy have been settled. The interest income earned by these restricted deposit accounts is the property of the customer, and is therefore excluded from the Company's operating results.
Realm National is a property and casualty insurance company, and writes principally workers compensation, commercial fire, allied lines, and general liability.
With respect to 1999 and prior years, one of the programs was subject to quota share reinsurance whereby Realm National retained 25% of the first $1,000 on any one risk and purchased excess of loss per occurrence reinsurance for limits above $1,000. A portion of Realm National's retention under its quota share treaties was further protected through the use of excess coverage that reduced Realm National's net retention to under $20 on any one risk. In addition, Realm National purchased excess of loss reinsurance above the quota share treaty with limits of at least $100,000. For the year 2000, Realm National purchased excess of loss reinsurance above $250. The excess of Loss limit was $50,000. In addition, Realm National purchased an 80% quota share reinsurance cover to further protect the $250 net retention that reduced Realm National's net retention to $50. In 2001, Realm National purchased excess of loss reinsurance above $250. The excess of loss limit was $50,000.
Due to the diminished availability of cost-effective reinsurance during 2000 and 2001, Realm National decreased the level of reinsurance it purchased on its programs, resulting in a greater retention of premium but also a greater exposure to the underwriting risk on those programs. Further, the events of September 11, 2001, have prompted reinsurers to restrict terms under their agreements, as they are no longer willing to provide automatic coverage for exposure of loss caused by acts of terrorism. Beginning in 2002, most reinsurance agreements now contain a specific exclusion for terrorism coverage. Simultaneously, two states (including New York, from which Realm National derives most of its business) have precluded primary insurance companies from exclusion of terrorism risk. As such, primary companies in those states are forced to carry the exposure alone. While the United States Federal Government and emerging reinsurance markets are exploring and introducing options for potential relief, management has adopted new guidelines in underwriting in an effort to measure and mitigate its exposure to loss.
Outstanding losses and loss expenses relate to the insurance and reinsurance activities of Realm National and CIRCL.
The adverse development during 2000 and 2001 on prior years in continuing operations primarily reflects the strengthening of loss reserves at the Company's U.S.-based insurance carrier relating primarily to two programs terminated in 2000.
The adverse development during 1999, 2000 and 2001 on prior years in discontinued operations primarily reflects the increase in provisions for doubtful reinsurance recoveries of 2.1 million in 1999, $2.4 million in 2000 and $1.0 million in 2001, as discussed in Note 9, as well as an increase in claims frequency on one particular program that covers bodily injury and property risks in the construction industry.
On November 25, 1997 the Company granted 300,000 options to certain employees. The options have an exercise price of $22 per share, which reflected the estimated fair value of the shares at the grant date. The options vest ratably over a three-year period and may be exercised at any time prior to November 25, 2007. At December 31, 2000 and 2001, 140,850 and 94,800 of these options remained outstanding. The balance of the options were forfeited.
On October 26, 1999 the Company granted 285,000 options to certain officers and directors. The options have an exercise price of $2.31 per share, which reflected the market price of the shares on that date. The options vest ratably over a three-year period and may be exercised at any time prior to October 26, 2009. All of these options were outstanding at December 31, 2001.
On March 7, 2000, the Company granted 25,000 options to an officer. The options have an exercise price of $3.25 per share, which reflected the estimated fair value of the shares at the grant date. The options vest ratably over a three-year period and may be exercised at any time prior to March 7, 2010. All of these options were outstanding at December 31, 2001.
On January 16, 2001, the Company granted 10,000 options to certain employees. The options have an exercise price of $1.38 per share, which reflected the estimated fair value of the shares at the grant date. The options vest ratably over a three-year period and may be exercised at any time prior to January 16, 2011. All of these options were outstanding at December 31, 2001.
These pro forma compensation costs may not be representative of those to be expected in future years due to the timing of option issuances and pro-ration of the corresponding compensation costs.
The weighted average fair value of each option grant is estimated on the date of the grant using the Black-Scholes option pricing model, with the following assumptions used:
1999 2000 2001 ---- ---- ---- Expected dividend yield.......... 4.5% 3.7-5.8% 0% Expected stock price volatility.. 87.46% 92% 90% Risk-free interest rate.......... 6.72% 6.07-6.64% 5.35-5.39% Expected life of options......... 10 years 10 years 10 years
Income tax benefit attributable to income from continuing operations consists of:
A valuation allowance of $2,624 has been recorded as of December 31, 2001 ($1,800 at December 31, 2000) against the tax effect of losses in connection with the Company's U.K. operations. With respect to U.S. taxation, a valuation allowance of $3,127 has been recorded as of December 31, 2001, ($Nil at December 31, 2000) against the value of net operating loss carryforwards, as management believes that portions of the net operating loss carryforwards may not be utilized within the next five years. U.S. federal and state tax loss carryforwards in the amount of approximately $11,000 are available to offset future U.S. federal and state taxable income. The federal net operating loss carryforwards are scheduled to expire in 2020 and 2021.
As of December 31, 1999 the Company had not recognized a deferred tax liability for the undistributed earnings of its United States subsidiaries. (A 30% tax is generally imposed in the United States on dividends paid by United States corporations to non-United States shareholders). As of December 31, 2000 and 2001 the Company had no undistributed earnings of its U.S. subsidiaries on a consolidated basis. The deferred tax liability relating to these unremitted earnings, which is not recognized by the Company, is approximately $2,442, $Nil and $Nil at December 31, 1999, 2000, and 2001, respectively.
Potential shares that are issued during a year are normally considered as outstanding throughout the year for purposes of calculating net income (loss) per share assuming dilution unless a net loss is incurred, in which case the shares are considered anti-dilutive and are therefore excluded from the calculation. Due to losses in both continuing operations and total operations during 2000 and 2001, the anti-dilutive effect of the restricted share issuance described in Note 11 is excluded from the calculation of net loss per share assuming dilution.
See Notes 11 and 12 to the consolidated financial statements for further discussion of share capital and share option transactions.
The carrying values of all financial instruments, as defined by SFAS 107 and as recorded in the consolidated balance sheets, approximate their fair value. The Company does not have any significant off-balance-sheet financial instruments. The following methods and assumptions were used by the Company in estimating fair values:
The Company maintains a substantial portion of its cash and cash equivalents in two financial institutions that the Company considers of high credit quality.
(b) Summarized financial information by geographic location of subsidiary for the years ended December 31, 1999, 2000 and 2001, is as follows:
December 31, 1999 2000 2001 ---- ---- ---- CONTINUING OPERATIONS: Insurance 0% 17% 25% Program business 70% 74% 92% Brokerage 19% 14% 11% Other 0% 0% 0% -- -- -- Total for continuing operations 34% 33% 37%
DISCONTINUED OPERATIONS: Underwriting management 91% 100% 62% Reinsurance 72% 74% 0% --- --- -- Total for Discontinued 83% 85% 73% operations --- --- --- Total for all operations 39% 37% 37%
2002.................. $ 2,023 2003.................. 1,795 2004.................. 1,549 2005.................. 1,060 2006.................. 949 2007 and thereafter... 2,519 ------- $ 9,895
Total rental expense for continuing operations for the years ended December 31, 1999, 2000 and 2001, was $3,089, $1,854, and $2,175, respectively. Total rental expense for discontinued operations for the years ended December 31, 1999, 2000 and 2001, was $114, $117, and $120, respectively.
Certain lease commitments are subject to annual adjustment, under escalation clauses, for real estate taxes and the landlord's operating expenses. Such adjustments will not be material to the Company.
New York insurance law does not allow deferred tax assets to be carried as an admitted asset and included in statutory surplus. NAIC rules do allow the asset to be included in statutory surplus. Total capital and surplus was $14,699 at December 31, 2001 on the NAIC basis.
d) The Company's Bermuda reinsurance subsidiary, CIRCL, is required by its license to maintain capital and surplus greater than a minimum statutory amount determined as the greatest of $1,000, a percentage of outstanding losses and loss expenses (net of reinsurance recoverable) or a given fraction of net written premiums. At December 31, 2000 and 2001, respectively, CIRCL was required to maintain a minimum statutory capital and surplus of $1,272 and $1,000. CIRCL is currently unable to meet this minimum statutory requirement.
2000 2001 ------ ------ Total surplus (deficit) at December 31....... $ 752 $(4,333) Net loss for year ended December 31.......... $(5,641) $(5,678)
Increases in loss reserves caused CIRCL's shareholder equity to become negative in the third quarter of 2001, and CIRCL is therefore insolvent and remained insolvent at December 31, 2001. Additionally, as CIRCL has not met its two key statutory requirements, management of CIRCL have been in contact wtih the Regulators to fully apprise them of current and intended action. Detailed discussions have also been held with CIRCL's principal creditors regarding the insolvency and the various alternatives of action that may be taken. It is the Company's intention not to provide additional funds to CIRCL for losses it has incurred. CIRCL's insolvency, therefore, will not have a material effect on the consolidated financial position of the Company.
Goldman, Sachs & Co. or certain of its affiliates maintained certain contractual relationships with the Company and provided investment banking services to the Company. Goldman, Sachs & Co. also provided investment management services to Realm National until December 31, 2000, pursuant to a Corporate Account Agreement dated December 24, 1996 and received customary fees and expenses of approximately $35 during 2000 and $Nil during 2001 for such services.
(a) The trial in the proceedings which Sphere Drake Insurance Limited ("Sphere Drake") caused to be issued on February 29, 2000 in the London Commercial Court (equivalent to a civil complaint in U.S. jurisdictions) against two of the Company's U.K. subsidiaries, two former officers of those subsidiaries and others, is underway and currently is expected to conclude during the second quarter of 2002. Sphere Drake alleges, in substance, that each and every contract placed with it through its underwriting agent by the Company's U.K. broker subsidiary was commercially unreasonable. Sphere Drake further alleges that this was obvious to the broker and that, accordingly, the London Commercial Court should infer a conspiracy between the broker and the underwriting agent to defraud Sphere Drake, thereby allowing it to treat as void from the outset all of the inwards reinsurance contracts placed with Sphere Drake through its underwriting agent by the Company's broker subsidiary.
It is the opinion of management that the claims described in Sphere Drake's action are without merit and the case is being and will be defended vigorously.
(b) On December 6, 2001, the jury returned a verdict dismissing all of the claims asserted against the Company, together with one of its London subsidiaries and a former employee of that subsidiary, in a third party action in the New York State Supreme Court brought by AXA Reassurance S.A. ("AXA"). The verdict also encompassed all of the claims asserted against these same defendants by New Hampshire Insurance Company ("NHIC"). In that action, AXA had sought indemnity and damages resulting from its efforts to void reinsurance contracts entered into in connection with certain "reinsurance-backed gap film financing" arrangements ("Film Finance Covers") brokered by the Company's London subsidiary. Certain claims in the action relating to other parties remain to be resolved by the Court, with the result that a final judgment subject to appeal has not yet been entered.
Two of the Company's London subsidiaries have been named as third party defendants in a federal court action instituted by Silicon Valley Bank in California involving a different Film Finance Cover. These subsidiaries also were named as defendants in a federal district court action by NHIC, which action has been dismissed without prejudice. The tolling agreement referred to above also applies to these claims.
Two of the Company's London subsidiaries, together with other unrelated parties, have been named as third-party defendants in an existing action in the New York State Supreme Court, filed on March 16, 2001 by NHIC. Each pleading alleges identical claims of fraudulent inducement and negligent misrepresentation against two of the Company's London subsidiaries in connection with another Film Finance Cover. A motion to dismiss has been made and is awaiting decision by the court.
It is the opinion of management that the claims described in these actions are without merit and the cases are being and will be defended vigorously.
(c) Several arbitration proceedings currently are pending in England between reinsurers and ceding insurers relating to reinsurance transactions involving the personal accident excess of loss market in London ("LMX") for the account years 1993, 1994, 1995, 1996, 1997 and 1998. Although neither the Company nor any of its broker subsidiaries is a party to any of these arbitrations, certain of the Company's subsidiaries acted as a reinsurance broker for ceding insurer clients that are parties to certain of the arbitrations.
In addition, the Company's reinsurance subsidiary is party to one of the LMX arbitrations. This particular arbitration has been dormant for some time.
The reinsurers generally have alleged that they sustained losses due to an "artificial" spiral in the LMX market, the existence of which, as well as other information, was not disclosed to them by the ceding insurers or their reinsurance brokers. In others, there are specific misrepresentation and non-disclosure allegations that are not of a generic nature. As a consequence, these reinsurers have asserted that they are no longer obliged to honor their reinsurance agreements and have suspended payment of claims.
One of the arbitration awards referenced above allowed a reinsurer to avoid certain of its reinsurance contracts with a Lloyd's syndicate. According to reports in the London press, that award may have caused the syndicate's liabilities to increase beyond the financial resources available to it and its Names, requiring the syndicate to avail itself of the Lloyd's Central Fund. Thereafter, Lloyd's initiated an investigation of that syndicate and all "market participants," including the Company's U.K. subsidiaries. The Company is aware that the investigation is ongoing, but has no other information as to the progress of the investigation or when it will be completed.
A subsidiary of the Company has been notified of a potential claim by one of the parties to the 1994 Year of Account Settlement for the recovery of costs arising out of the settlement as well as for the costs and expenses incurred by the party in connection with its overall involvement in the LMX market. The subsidiary has denied any liability for this potential claim.
(e) The Company is subject to other litigation and arbitration in the ordinary course of its business. While any of these proceedings contains an element of uncertainty, management presently believes the outcome of these currently pending proceedings will not have a material adverse effect on the Company's financial condition.