The Company conducts its business from leased office premises in Bermuda. These facilities are in good condition and are adequate for the requirements of the Company. The Company plans to vacate the premises on February 24, 2006 and the liquidation will be administered from the offices of PricewaterhouseCoopers in Bermuda.
During the three months ended June 30, 2004, OPL classified the operations of OPUS Re as held for sale in contemplation of its proposed sale to OdysseyRe. The sale was completed on November 15, 2004. During the three months ended September 30, 2005, OPL classified the operations of its wholly-owned subsidiary, OPRe, as held for sale in contemplation of the sale to Catalina. The sale was completed on September 22, 2005. In accordance with Statement of Financial Accounting Standards No. 144, all assets pertaining to OPUS Re and OPRe have been recorded as a single line item “Assets relating to former subsidiaries held for sale” and similarly all liabilities have been recorded as a single line item “Liabilities relating to former subsidiaries held for sale”. The net operating results of OPUS Re and OPRe have been recorded as discontinued operations in the statement of income. The summary financial information for prior periods has been restated on a consistent basis.
The following is a discussion and analysis of the results of operations, financial condition, liquidity, and capital resources as of and for the years ended December 31, 2005 and 2004. This discussion and analysis of the Company’s financial condition and results of operations should be read in conjunction with the audited Consolidated Financial Statements and Notes thereto presented under “Item 8 - Financial Statements and Supplementary Data”.
The Company’s financial condition, results of operations and cash flows are affected by a number of business factors and critical accounting policies as discussed further below. References to the “Company” in this Item 7 reflect the combined activities and results of OPL and its subsidiaries, whereas references to “OPL” pertain to the specific activities and results of OPL as a stand-alone company.
The Company’s historical operations were conducted through two segments - reinsurance and real estate & leasing. However, in February 2002, the Company announced its decision to discontinue writing new reinsurance business and begin an orderly runoff of both the reinsurance and real estate & leasing segments. The decision to go into runoff reflected the desire of many of the Company’s shareowners to have greater liquidity for their investment in OPL. As discussed further below, the decision to put the operations into runoff and the subsequent run off activities have significantly impacted the Company’s results of operations and associated cash flows. In particular, the Company’s results of operations and cash flows have varied significantly from year to year and will continue to do so.
b. Current operations and sources of revenue, income and cash flow
Company’s estimated ultimate obligations. Novation involves paying a single amount, with the ceding company’s consent, to another reinsurer who then assumes all of the Company’s risks and obligations under the original reinsurance contract.
OPL’s primary source of revenue from continuing operations since the commencement of the runoff has been investment income earned from OPL’s investment portfolio. The most significant expenses relate primarily to internal general and administrative expenses associated with managing the runoff, including payroll, insurance, shareowner costs and rent. The net income from continuing operations for each of 2005, 2004 and 2003 also reflects the net underwriting results from those reinsurance contracts written by OPL prior to runoff.
Following the success of the aforementioned runoff activities, OPL has scheduled a Special General Meeting of Shareowners on January 31, 2006, for purposes of approving the formal winding up process, including the appointment of joint liquidators. Upon the appointment of the joint liquidators, the general and administrative expenses will comprise the joint liquidators’ fees, shareowner service fees, legal fees and other overheads. There will be no further payroll costs after February 10, 2006 as all remaining employees have been notified that their employment will be terminated as of that date. Investment income will decline in the future as the Company’s asset base is reduced through further liquidating distributions, whereas total general and administrative expenses may not decrease to the same extent. Consequently, it is possible that the Company will incur a net loss in future periods.
other significant restrictions placed on the transfer of shares by the investee; and
The reserve for accrued losses and loss expenses included an estimate of outstanding losses and an estimate for losses incurred but not reported. Outstanding losses were estimated based on ceding company reports and other data considered relevant to the estimation process. The liability for losses incurred but not reported reflected management’s best estimates based on the recommendations of an independent actuary using the past loss experience of the Company and industry data. Inherent in the estimates of ultimate losses are expected trends in claim severity and frequency and other factors, which could vary significantly as claims are ultimately settled. The reserves as established by management were reviewed periodically and adjustments made in the period in which they became known.
The results for the year ended December 31, 2005 reflect the following significant transactions that were effected in accordance with the Company’s runoff goals and objectives. In particular, the Company:
Paid a liquidating distribution to shareowners on May 18, 2005 in the amount of $237.5 million (equivalent to $2 per share) and declared a further distribution of $166.3 million (equivalent to $1.40 per share), that was paid on January 4, 2006;
Eliminated the uncertainty associated with the collection of OPRe’s remaining losses recoverable from reinsurers totaling $30.3 million. Such balances were subject to various disputes with OPRe’s reinsurers and necessitated the initiation of arbitration proceedings which were likely to take at least a year to complete and possibly significantly longer;
During the year ended December 31, 2005 the Company determined that its 16% investment in a privately-held Barbados reinsurance company was other than temporarily impaired. As such, the investment was written-down by $2.5 million to its estimated net realizable value of nil, to reflect recent operational difficulties experienced by the investee.
Underwriting income for the year ended December 31, 2005 of $1.6 million represents the gain on the commutation of OPL’s last open reinsurance contract. For the year ended December 31, 2004 the underwriting loss arose primarily from the commutation of another of OPL’s reinsurance contracts.
Other operating expenses of $6.1 million for the year ended December 31, 2005 and $6.0 million for the year ended December 31, 2004 consist of corporate expenses including payroll, insurance, shareowner costs and rent.
The income tax benefit of $0.9 million for the year ended December 31, 2005 was due to the recovery of Massachusetts state taxes that were previously paid for the 2001 tax year but have now been refunded following the favorable resolution of a subsequent tax audit. As noted earlier, the Company has either liquidated or sold all of its United States based subsidiaries, so OPL no longer has any subsidiaries that are subject to United States income taxes and management believes that OPL does not have any remaining United States income tax liabilities. However, the statutes of limitations for the tax returns filed by certain of OPL’s former wholly-owned real estate subsidiaries have not yet expired. The IRS or State Tax Commissioners may audit such tax returns and may seek to impose additional taxes on the Company.
Net income from discontinued operations of OPRe and OPUS Re for the year ended December 31, 2004 was $65.1 million. The main factors that contributed to this result are discussed below in “Results of Operations - Year Ended December 31, 2004 Compared to Year Ended December 31, 2003”.
Sold OPUS Re for cash proceeds of $43 million generating a loss of approximately $25.9 million. The sale eliminated the risk of adverse claims experience on accrued losses and loss expense reserves of approximately $143 million, saved the ongoing costs associated with the runoff and also enabled additional capital to be released for distribution to shareowners;
Continued to position OPRe for sale through (i) the continued commutation of a number of its reinsurance contracts, generating savings compared to carried reserves of approximately $73 million. The commutations also reduce the exposure to future adverse claims experience while also releasing capital from OPRe for distribution to OPL shareowners, and (ii) the commutation of a portion of OPRe’s aviation excess of loss reinsurance protection, at a net cost of $3.9 million. Such results are reported as part of net income from discontinued operations following the classification of OPRe as a subsidiary held for sale; and
The investment portfolio generated income of $2.0 million. The investment income was affected by a write-down in the cost basis of the Company’s investment in a Bermuda based life reinsurer of $0.4 million as the decline in value was considered other than temporary. In accordance with SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities”, such a write-down was recognized as a realized loss in the income statement, even though there was no sale of the security;
Other operating expenses of $6.0 million, including payroll, insurance, shareowner costs and rent; and
An income tax benefit of $1.0 million primarily due to the recovery of $0.8 million of Massachusetts state taxes that were previously paid for the 1998 to 2000 tax years but have now been refunded following the favorable resolution of a subsequent tax audit.
$88.3 million of operating income generated by OPRe due to (i) net savings of approximately $69 million, generated through commutations of both OPRe’s assumed loss reserves and portions of its aviation excess of loss reinsurance protection, (ii) approximately $32 million of investment income, and (iii) loss adjustment and operating expenses of approximately $13 million; and
Other operating expenses of $14.3 million, including $10.0 million of costs to settle a class action lawsuit; and
An income tax benefit of $15.4 million arising from the loss on sale of the distribution facility and the premium paid to repurchase and cancel the long-term debt.
The net income from discontinued operations for the year ended December 31, 2003 of $67.4 million comprised the following:
$77.4 million of operating income generated by OPRe, including approximately $109 million of net investment income partially offset by underwriting losses on unexpired risks and reserve strengthening totaling approximately $15 million and operating expenses of approximately $16 million;
A net loss of $10.0 million from OPUS Re, including an operating loss of $11.6 million (including an asset impairment charge of $5.8 million to write-down the capitalized cost of insurance licenses following the classification of OPUS Re as held for sale) and a tax benefit of $1.6 million.
Liquidity is a measure of a company’s ability to generate sufficient cash flows to meet the short-term and long-term cash requirements of its business operations.
Since going into runoff, OPL has sold all of its real estate holdings, extinguished all indebtedness associated with the real estate investments, dissolved or sold all of its former real estate and reinsurance operating subsidiaries and settled all of its own reinsurance liabilities. As such, OPL’s ongoing liquidity needs are limited to operating overhead and costs associated with the winding-up and liquidation process. At December 31, 2005 the Company had approximately $228 million of cash and highly liquid investments, including approximately $166 million that was paid as a liquidating distribution on January 4, 2006. The investments were all sold in January 2006 and the proceeds are being held as cash. Management believes that the current cash holdings are adequate for the payment of current creditors and future operating and liquidation expenses. Any excess capital will be returned to shareowners as liquidating distributions. See Note 4 to the Consolidated Financial Statements included in “Item 8 - Financial Statements and Supplementary Data” for further information on the composition, value and scheduled maturities of our investment portfolio.
received $1.6 million for the commutation of the Company’s last remaining reinsurance contract;
received $1.1 million of tax refunds relating to our former real estate and leasing operations;
received $6.4 million from OPRe in exchange for OPL assuming responsibility for the payment of rent and employee severance and retention costs previously accrued by OPRe.
reinsurance underwriting operations used $78.8 million, primarily to commute two of the Company’s remaining reinsurance contracts, one of which resulted in the release of approximately $75.2 million of restricted cash;
received $20.0 million of tax refunds relating to our former real estate and leasing operations; and
used $18.2 million for the payment of other operating expenses, including $10 million as final settlement of a class action lawsuit and $4 million for the cost of prepaid Directors and Officers and Corporate Reimbursement runoff insurance coverage.
During the year ended December 31, 2005 the Company sold $12.2 million of available-for-sale investments. During the year ended December 31, 2004 the Company purchased $47.3 million and sold $234.2 million of available-for-sale investments. The net sales proceeds were used to partially fund the liquidating distributions to shareowners. During the year ended December 31, 2004 the Company’s restricted cash and cash equivalents reduced by $79.4 million, primarily due to the commutation discussed previously under “Operating activities”.
The Company does not have any contractual obligations as of December 31, 2005.
The impact of inflation on the Company’s remaining assets, liabilities and future operations is not expected to be significant given the Company’s plans to liquidate in the near future.
The Consolidated Financial Statements of OPL are filed together with this Report: see pages to, which are incorporated herein by reference.