Results of Operations For the Years Ended December 31, 1999, 1998 and 1997.
Net Loss for 1999 was ($6,717) compared to 1998 net income of $16,018 and 1997 net income of $12,993. The results for the year were affected by a number of different factors. The most significant were costs and provisions pertaining to reinsurance related disputes in which the Company was involved during the year, including certain litigation. Provisions and costs relating to these disputes amounted to $11.9 milllion pre-tax for the year. Results for the year were also adversely influenced by significant costs relating to the restructuring and consolidation of the Company's operations and writedowns in connection with investments in affiliates. These restructuring charges and write-downs amounted to $4.3 million pre-tax for the year. Finally, and more generally, the U.S. workers' compensation insurance market, in which the Company conducts most of its business, became increasingly competitive as the year progressed, and the Company experienced signficant deterioration in some of the market segments in which it operates. These difficult conditions resulted in a diminution of revenue and shrinkage in operating margins.
For the Years Ended December 31, -------------------------------- 1997 1998 1999 -------- -------- -------- (dollars in thousands)
Revenues........................ $ 65,310 $ 85,093 $ 67,821 Expenses........................ 49,392 65,285 76,814 -------- -------- -------- Income (loss) before Taxation... 15,918 19,808 (8,993) Taxation........................ (2,925) (3,790) 2,583 -------- -------- -------- Net Income (loss) before cumulative effect of a change in accounting principle..................... 12,993 16,018 (6,410) Cumulative effect of a change in accounting principle..................... -- -- 307 -------- -------- -------- Net Income (loss)............... $ 12,993 $ 16,018 $ (6,717) ======== ======== ======== Net Income (loss) per Share - Basic................ $ 1.55 $ 1.63 ($0.71) Net Income (loss) per Share assuming dilution............. $ 1.53 $ 1.63 ($0.71)
Basic net loss per share was $0.71 in 1999, as compared to basic net income of $1.63 in 1998 and basic net income of $1.55 in 1997 (excluding the profit on disposal of subsidiaries during 1997, basic net income per share was $1.49 during the year). Diluted net loss per share was $0.71 in 1999, as compared to diluted net income per share of $1.63 in 1998 and $1.53 in 1997 (excluding the profit on disposal of subsidiaries during 1997, diluted net income per share was $1.47 during the year).
Segment Revenues Segment Net Income (loss) For the Years Ended For the Years Ended December 31, December 31, ---------------------------- ---------------------------- 1997 1998 1999 1997 1998 1999 -------- -------- -------- -------- -------- -------- (dollars in thousands (dollars in thousands)
The program business segment loss of $2.7 million in 1999 represented a decrease of $7.9 million from segment profit of $5.2 million in 1998, which increased $1.3 million from segment profit of $3.9 million in 1997. The 1999 decrease in segment profits reflects the decrease in program premium volume, together with reduced fee margins. During the year, the Company began a restructuring of its program segment operations, which resulted in the closure of two offices, consolidation of certain operations, and a streamlining of its remaining operations to reduce expenses and increase efficiencies.
The Company has accelerated its development and increased its investment in e-commerce to increase the quality and efficiency of service to its agency network. The Company also has expanded its e-commerce focus to develop new ways to deliver products and services to various market sectors.
Segment profit of $1.4 million in 1999 represented a decrease of $0.3 million from segment profit of $1.7 million in 1998, which in turn reflected a $0.8 million decrease from segment profit of $2.5 million in 1997. The Company's underwriting management segment continued to experience significant competitive pressures as 1999 progressed, with a significant reduction in business being renewed during the year. Consequently the Company expects revenues and profits for this segment to decline in the current year.
The Company's insurance segment consists of its wholly owned U.S.-based insurance company, Realm National Insurance Company. Revenues of $12.6 million in 1999 represented an increase of $1.5 million from revenues of $11.1 million in 1998, which reflected a $5.7 million increase from revenues of $5.4 million in 1997. Gross written premiums were $47.2 million in 1999, which represented a $1.4 million decrease from $48.6 million in 1998, which reflected a $26.9 million increase from $21.7 million in 1997. Net premiums earned increased to $9.5 million in 1999, which represented a $1.8 million increase from $7.7 million in 1998, which reflected a $4.8 million increase from $2.9 million in 1997. The remainder of the growth in revenues is due to an increase in policy issuance fees. Policy issuance fees increased to $2.5 million in 1999, which represented a $0.4 million increase from $2.1 million in 1998, which reflected a $1.3 million increase from $0.8 million in 1997.
Segment loss of $2.1 million in 1999 represented a decrease of $3.3 million from segment profit of $1.2 million in 1998, which increased $0.7 million from segment profit of $0.5 million in 1997. The results for the year were adversely affected by a provision of $2.2 million against reinsurance recoveries and a $0.5 million accounting charge following the adoption of SOP 98-5.
The Company's reinsurance segment consists of its reinsurance subsidiary, CIRCL. CIRCL primarily reinsures workers' compensation and property and general liability risks. Management determined in early 1999 to cease underwriting new programs in CIRCL. As a result, revenues for 1999 decreased accordingly. Revenues of $3.1 million in 1999 represented a decrease of $7.8 million from revenues of $10.9 million in 1998, which in turn increased $1.5 million from revenues of $9.4 million in 1997. Net premiums earned are the largest component of revenues in CIRCL. Net premiums earned of $2.4 million in 1999 represented a decrease of $7.7 million from net premiums earned of $10.1 million in 1998, which in turn reflected a $1.2 million increase from net premiums earned of $8.9 million in 1997.
Other includes primarily the Company's holding companies and other non-operating subsidiaries, as well as income earned from investments in non-consolidating affiliates. Revenues of $0.7 million in 1999 represented a decrease of $4.6 million from revenues of $5.3 million in 1998, which in turn reflected an increase of $2.1 million from revenues of $3.2 million in 1997. The primary reason for the decrease in revenues during 1999 was a decline in income earned from investments in affiliates and a $2.0 million charge due to a writedown of investments in affiliates. This segment was also affected by significant increases in costs and provisions relating to litigation, advisory fees and costs relating to the restructuring of the Company.
The Company had no outstanding debt at December 31, 1998 and 1999.
The Year 2000 issue is the result of computer programs being written using two digits rather than four digits to define the applicable year. Any of the Company's programs or non-information systems that have date-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in a major system failure or in miscalculations.
In 1997, the Company appointed individuals in each of the Company's geographic regions to review and assess the Company's state of readiness and its ability to process transactions in the Year 2000. These individuals and the overall committee that they are a part of are provided guidance to the operating and support departments, and monitored the progress of efforts made to address the Year 2000 issue. During 1999 the Company implemented its plan and prepared its various computer systems and selected applications for the Year 2000. This process involved taking inventory, testing, evaluating and adjusting all known date-sensitive systems and equipment for Year 2000 compliance. In addition, the Company reviewed its essential non-information technology systems for Year 2000 compliance. The Company also consulted with various third parties, including, but not limited to, outside consultants, outside service providers and infrastructure providers to develop approaches to the Year 2000 issue, to gain insight into problems and to provide additional perspective on solutions. Compliance work with respect to the Company's internal systems was completed during 1999. In the last quarter of 1999, all systems critical to the Company's core businesses were retested and rollover testing was performed. The Company is not aware of any significant internal or external problems occurring to date with respect to the Year 2000 issue.
The Company continues to assess its external relationships with third parties. During 1999 the Company communicated with its significant vendors and large customers to determine the extent to which the Company was vulnerable to those third parties' failure to remediate their own Year 2000 problems. Although there were no problems noted following December 31, 1999, there can be no assurance that the systems of third parties, such as utility companies, regulatory bodies, government entities, insurance related companies or insurance carriers on which the Company's operations rely, will continue to be immune to post-year-end Year 2000 problems that would have a material adverse effect on the Company's operating results. However, management believes that ongoing communication with and assessment of third parties will minimize these risks.
/s/ Arthur Andersen LLP - ----------------------- Arthur Andersen LLP New York, New York March 13, 2000
We have audited the consolidated balance sheet of Stirling Cooke Brown Holdings Limited and subsidiaries as of December 31, 1998, and the related statements of income and comprehensive income, changes in shareholders' equity and cash flows for each of the years in the two year period ended December 31, 1998. 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.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Stirling Cooke Brown Holdings Limited and subsidiaries as at December 31, 1998 and the results of their operations and their cash flows for each of the years in the two year period ended December 31, 1998, in conformity with United States generally accepted accounting principles.
The accompanying consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States. The following are the significant accounting policies adopted by Stirling Cooke:
These consolidated financial statements include the financial statements of Stirling Cooke and all of its majority-owned subsidiaries (collectively referred to as the "Company"). 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.
Acquisition costs associated with the acquisition of new or renewal business, including commissions, premium taxes and brokerage, are deferred and amortized to income over the periods in which the premiums are earned. The method followed in determining the deferred acquisition expenses limits the amount of the deferral to its realizable value by giving consideration to losses and expenses expected to be incurred as premiums are earned. Future investment income is also anticipated in determining whether a premium deficiency exists.
Losses and related loss adjustment expenses are charged to income as they are incurred and are net of losses recovered and recoverable of $16,866, $44,312 and $53,863 for the years ended December 31, 1997, 1998 and 1999 respectively. Amounts recoverable from reinsurers are estimated in a manner consistent with the underlying liability associated with the reinsured policy. Outstanding losses recoverable are shown separately on the consolidated balance sheets.
The Company establishes reserves for losses and loss adjustment expenses related to reported claims on the basis of the evaluations of independent claims adjusters and the Company's own claims staff. In addition, reserves are established for losses which have occurred but have not yet been reported and for adverse development of reserves on reported losses. The Company's independent actuaries estimate claims and claims expenses arising for losses that have occurred but not yet been reported based upon the Company's and the insurance industry's experience, together with statistical information with respect to the probable number and nature of such claims. The Company believes that the provision for outstanding losses and loss expenses is adequate to cover the ultimate net cost of losses and loss expenses incurred; however, such a provision is an estimate and may ultimately be significantly greater or less than the provision established. The Company has limited historical loss experience available to serve as a basis for the estimation of ultimate losses. It is possible that management will revise the estimate of outstanding losses and loss expenses in the future.
1997 1998 1999 --------- --------- -------- Brokerage fees and commissions............ $23,965 $26,968 $24,577 Managing general agency fees.............. 11,391 14,743 10,164 Underwriting management fees.............. 4,022 3,357 3,900 Program and captive management fees....... 2,876 3,908 2,298 Loss control and audit fees............... 2,627 4,508 7,577 Policy issuance fees...................... 783 2,096 2,496 ------- ------- ------- Total risk management fees...... $45,664 $55,580 $51,012 ======= ======= =======
(iii) Underwriting management fees are initially recorded and earned when the premium is billed in accordance with terms of trade. Fee income for claims handling services is recognized in income over the period that services are performed in accordance with the Company's contractual obligations. Such fees are recognized in income over the period that contractual services are performed, typically up to five years, based on the Company's estimation of expected claims handling requirements in each accounting period. Such estimation is based upon the Company's claims handling experience over recent years. Any subsequent adjustments, including adjustments due to policy cancellations and premium adjustments, are recorded when advised by the client or agent. The portion of recorded fees that will be earned in the future is deferred and reported as deferred income in the consolidated balance sheets.
(v) Loss control and audit fees are included within program business segment revenue, and comprise claims administration handling, loss and safety control fees and premium audit fees. Such fees are recorded as the fees are billed and 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 depending on the type of service provided, based on the Company's estimation of expected claims handling requirements in each accounting period. Such estimation is based upon industry standards. The proportion that will be earned in the future is deferred and reported as deferred income in the consolidated balance sheets.
The United States Dollar is the Company's functional currency. Foreign currency monetary assets and liabilities are translated at exchange rates in effect at the balance sheet date. Fixed assets and deferred income are translated at their historical exchange rates. Foreign currency revenues and expenses are translated at exchange rates in effect at the date of the transaction. Net exchange gains (losses) of $311, $223 and ($117) are included in other income for the years ended December 31, 1997, 1998 and 1999, respectively.
During the year, the Company was a party to transactions in certain derivative financial instruments, specifically, forward foreign exchange contracts which are used to manage foreign currency exposures on non-U.S. dollar denominated assets and liabilities. The Company does not engage in derivatives for any other purpose. The Company's policy on such derivatives is that forward foreign exchange contracts are recorded at their fair value, and the fair values of open contracts are based on the quoted market prices of forward contracts with similar maturities. Changes in fair values are recognized in other income as appropriate in the period in which the changes occur. Amounts receivable or payable on open positions are recorded in other assets or accounts payable and accrued liabilities as appropriate. See Note 14(c).
As permitted by FASB Statement No. 123, "Accounting for Stock-Based Compensation", the Company has elected to continue to account 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. Any resulting compensation expense is recorded over the shorter of the vesting or service period.
During 1998, the AICPA Accounting Standards Executive Committee issued SOP 98-5, "Reporting on the costs of start-up activities". The accounting guidance of this SOP requires that the costs of start-up activities be expensed as incurred and any costs that are carried as an asset prior to adoption of SOP 98-5 would be written off by reporting a cumulative effect of a change in accounting principle in the statement of income as of January 1, 1999. The cumulative effect of a change in accounting principle that was recorded in the statement of income for 1999 is approximately $307 (net of tax of $188).
---------------- AMORTIZED ESTIMATED --------- --------- COST FAIR VALUE ---- ---------- Due in one year or less.................. $ 2,082 $ 2,080 Due after one year through five years.... 20,179 19,621 Due after five years through ten years... 6,314 6,155 Due after ten years through twenty years. 965 946 ------- ------- $29,540 $28,802 ======= =======
c) Proceeds from sales of investments in debt securities during 1998 and 1999 were $10,680 and $11,469, respectively. Proceeds from sales of investments in equity securities during 1998 and 1999 were $658 and $2,349, respectively. There was $0 of realized losses and $59 of realized gains during 1998. There was $587 of realized losses and $232 of realized gains during 1999.
e) At December 31, 1998 and 1999, there were no individual investments, other than investments in U.S. Government securities, which exceeded 10% of shareholders' equity.
f) Net investment income by source, including realized gains and losses, is as follows:
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, 1998 and 1999. 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.
At December 31, 1999 there were amounts due from three reinsurers that totaled $52,039. These reinsurers are rated `Superior' by A.M. Best. At December 31, 1998 there was an amount due from one reinsurer that totaled $17,276, which was in excess of 10% of the Company's shareholders' equity.
Realm National, a subsidiary of the Company, writes workers compensation, property and general liability business. Workers' compensation comprises the largest proportion of Realm National's written premium. With respect to 1999 and prior years, this business was subject to quota share reinsurance whereby Realm National retained 25% of the first $1,000. A portion of Realm National's retention under its quota share treaties was further protected by common account excess coverages that reduced Realm National's net retention to $3 or $5. In addition, Realm National purchased excess loss coverages on an occurrence basis to limits between $50,000 and $100,000.
Realm National also writes property risks and purchased a property reinsurance program related to 1999 and prior years whereby it retained 25% of the first $1,000 on any one risk and purchased facultative per risk reinsurance for limits above $1,000. In addition, Realm National's net retention was further protected by a per risk excess of loss cover which reduced the maximum loss on any one risk to $125.
With respect to its general liability risks Realm National purchased a reinsurance program whereby it retained 25% of the first $300 on any one risk and purchased facultative per risk excess reinsurance for limits above $300 to $1,000.
CIRCL also assumed bodily injury, difference in conditions, and property risks on a general liability treaty covering risks in the construction industry. CIRCL's exposure under the reinsurance contracts assumed is limited in most instances to $250 per occurrence. CIRCL limited in most instances this exposure through the purchase of reinsurance covering losses in excess of $63 per occurrence. In addition, CIRCL purchased aggregate reinsurance with limits based on various percentages of original gross written premium income.
Management decided in early 1999 to cease underwriting any new programs in CIRCL due to unfavourable results and a number of existing contracts were not renewed for the 1999 year.
During 1996, the Company issued 2,000,000 ordinary shares and 25 Class "A" non-voting shares to a private investor group. The 2,000,000 ordinary shares and related 25 Class "A" shares were subject to a put option whereby, after 2004, the holders of such shares could request that the Company repurchase the shares for fair market value at that date. As such shares were subject to redemption at the option of the holder, the aggregate subscription price was classified outside of shareholders' equity as at December 31, 1996. The put option expired upon the consummation by the Company of an Initial Public Offering ("IPO") in December 1997 and accordingly the shares were reclassified into shareholders' equity at that date.
On June 30, 1997, certain shareholders exercised options to purchase 600,000 ordinary shares in the Company (see Note 11 to the consolidated financial statements) at an exercise price of $2.71 per share. Contemporaneously, 288,888 ordinary shares of par value of $0.25 each were issued to the holders of the Class "A" shares pursuant to certain anti-dilution rights, and the Class "A" shares were repurchased by the Company for nominal consideration. The $72 excess of the par value of the ordinary shares issued over the original par value of the Class "A" shares was recorded as a deduction from additional paid-in-capital. On the same date the Company loaned the shareholders $1,625, an amount equal to the aggregate exercise price of the options. Such loans were evidenced by promissory notes, bearing interest at 7% per annum until maturity in June 1998 or earlier in the event of early repayment. Included within notes receivable were $325, $866 and $109 due from Messrs. Cooke, Brown and Jones, respectively. The loans were repaid in full in December 1997 following the successful completion of the IPO of the Company's ordinary shares.
In October 1998, the Company purchased a further 47,000 of its ordinary shares on the open market for a total cost of $567. These shares were held as treasury stock at cost at December 31, 1998 and 1999.
Employees and directors have been granted options to purchase Ordinary Shares in the Company. These options have been issued in three series:
In 1996, the Company granted 600,000 options to certain employee shareholders replacing an earlier agreement entered into in 1995. The options had an exercise price of $2.71 per share, which reflected the estimated fair value of the shares at the original grant date. The options were fully vested at the grant date and were able to be exercised at any time prior to January 23, 2003.
On October 26, 1999 the Company granted 285,000 options to certain officers and directors.
Expected dividend yield.......... 4.5% Expected stock price volatility.. 87.46% Risk-free interest rate.......... 6.72% Expected life of options......... 10 years
Income tax expense (benefit) attributable to income from continuing operations and change in accounting method was $2,925, $3,790 and ($2,771) for the years ended December 31, 1997, 1998 and 1999 respectively, and differed from the amounts computed by applying the U.S. federal income tax rate of 34% to income before taxation as a result of the following:
There was no valuation allowance for deferred tax assets as of December 31, 1998 or 1999, as management believes that it is more likely than not that the deferred tax assets will be realized. However, the amount of deferred tax assets could be reduced in the near term if estimates of taxable income are reduced.
The Company has 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). The Company does not expect those unremitted earnings to become taxable in the foreseeable future. A deferred tax liability will be recognized when the Company expects that it will recover those undistributed earnings in a taxable manner, such as the receipt of dividends. The deferred tax liability relating to these unremitted earnings, which is not recognized by the Company, is approximately $542, $986 and $2,442 at December 31, 1997, 1998, and 1999, respectively.
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:
Marketable securities: The fair values of debt and equity securities are based on quoted market prices and dealer quotes at the consolidated balance sheet dates.
Concentrations of credit risk with respect to other financial instruments are to some extent limited due to the number of reinsurers, agents and customers comprising the Company's receivable base. At December 31, 1999 there were amounts due from three reinsurers that totaled $52,039, as discussed in Note 8. As at December 31, 1999, management believes that approximately $6,742 (1998 - $2,500) of paid and outstanding losses recoverable from reinsurers may prove uncollectible and has established a provision for doubtful accounts accordingly, as discussed in Note 8.
The Company's functional currency is the U.S. dollar; however, as the Company operates internationally, it has exposure to changes in foreign currency exchange rates. These exposures include net cash inflows on non-U.S. dollar-denominated transactions.
To manage the Company's exposure to these risks, the Company enters into forward foreign exchange contracts in the currencies to which the Company is exposed. These contracts generally involve the exchange of one currency for another at some future date. The Company had no notional principal amounts outstanding at December 31, 1998 and 1999, respectively, relating to contracts to buy British Pounds Sterling in the future. A net realized gain (loss) of $(22), $182 and $0 is included in other income in the consolidated statements of income in respect of such contracts during the years ended December 31, 1997, 1998 and 1999, respectively.
(a) The Company has five main business segments; Brokerage, Program Business, Underwriting Management, Insurance, and Reinsurance. The brokerage segment comprises subsidiaries that receive a fee or commission for brokering insurance and reinsurance contracts. The program business segment comprises subsidiaries that market insurance products and manage programs developed by the Company. Underwriting Management companies are authorized to underwrite and administer reinsurance business on behalf of unaffiliated insurance and reinsurance companies. The insurance and reinsurance segments represent companies that underwrite and retain, subject to their own reinsurance, certain insurance and reinsurance risks, and their revenues include premiums earned on insurance and reinsurance polices, investment income and policy issuance fees. Other includes the Company's holding companies, group services companies, and income earned from investments in affiliated companies(1997 - $1,266, 1998 - $2,631, 1999 - $Nil). Intercompany transactions are recorded under normal terms of trade. Adjustments and eliminations to revenue are in respect of intersegment revenues that are eliminated at the consolidated level. Adjustments and eliminations to assets are primarily in respect of intersegment insurance balances receivable that are eliminated at the consolidated level.
(b) Summarized financial information by geographic location of subsidiary for the years ended December 31, 1997, 1998 and 1999 is as follows:
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.
1998 1999 -------- ------- Total capital and surplus at December 31,... $18,889 $17,177 Net income for year ended December 31,...... $ 663 $ 219
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 greater of a percentage of outstanding losses and loss expenses (net of reinsurance recoverable) or a given fraction of net written premiums. At December 31, 1998 and 1999, respectively, CIRCL was required to maintain a minimum statutory capital and surplus of $2,135 and $2,024. Accordingly, approximately $2,024 of contributed surplus and retained earnings is restricted from distribution.
1998 1999 -------- ------- Total surplus at December 31...................... $ 2,304 $2,857 Net loss for year ended December 31............... $(3,558) ($5,227)
Goldman, Sachs & Co. or certain of its affiliates maintain certain contractual relationships with the Company and have provided investment banking services to the Company. Goldman, Sachs & Co. also provides investment management services to Realm National pursuant to a Corporate Account Agreement dated December 24, 1996 and received customary fees and expenses of approximately $32 during 1999 (1998 - $20) for such services.
(a) The civil action filed on March 29, 1999 against the Company, certain of its subsidiaries, and others in the U.S. District Court for the Southern District of New York by Odyssey Re (London) ("Odyssey") was dismissed by the Court on February 25, 2000. The amended complaint in that case asserted claims against the Company, certain of its subsidiaries, and others under the Racketeering Influenced and Corrupt Organizations (RICO) Act, and for common law fraud. The Court dismissed the amended complaint on the ground of "forum non conveniens," finding that Odyssey's claims should be asserted in the English courts. There is no counterpart to the U.S. RICO law in England, nor does English law allow imposition of treble damages.
One of the arbitration awards referenced above allowed a reinsurer to avoid 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 investigation is at an early stage and it is uncertain when it will be completed.
The Company understands that substantial progress has been and is being made by various market participants in settling ongoing reinsurance disputes, including many of the market participants that are parties to the arbitrations and other proceedings described above.
Although no assurances can be given as to the outcome of the pending U.K. arbitrations or pending or potential judicial proceedings related to the LMX spiral reinsurance arbitrations and their effect on the Company, the Company believes, based on the information presently available to it, that any such effect should not have a material adverse effect on the Company's financial condition.