(1) Includes the operations of Realm Investments Limited from its January 1996 acquisition by the Company. Realm National from its September 1996 acquisition by the Company and the operations of North American Risk, Inc. from its July 1996 acquisition by the Company. All of such acquisitions were accounted for as purchases. See "Management's Discussion and Analysis of Financial Condition and Results of Operations". (2) See Note 2(k) of Notes to the Consolidated Financial Statements for an explanation of the methods used to determine Net Income per share. (3) Total assets comprise corporate assets together with cash held and insurance balances receivable in a fiduciary capacity. See Note 4 to the Consolidated Financial Statements. (4) The Ordinary Shares subject to redemption were reclassified to shareholders' equity upon consummation of the Initial Public Offering since those shares were no longer redeemable.
Stirling Cooke Brown Holdings Limited (the "Company") was incorporated in Bermuda on December 12, 1995. The Company is a holding company engaged, through its subsidiaries, in providing insurance services primarily in the United States, Bermuda and the U.K. The Company's activities include brokerage, program business, underwriting management, insurance and reinsurance. In January 1996, the Company acquired all the outstanding common shares of Realm Investments Ltd. in exchange for 1,999,980 of its newly issued ordinary shares. The Company also acquired in September 1996 its own United States domiciled insurance company (Realm National) which, together with the Company's Bermuda based reinsurance company (CIRCL), writes insurance and reinsurance business. Realm National also earns policy issuance fees. The Company specializes in the North American occupational accident and workers' compensation alternative risk transfer markets.
Results of Operations For the Years Ended December 31, 1996, 1997 and 1998.
Revenues of $85.1 million in 1998 represents a $19.8 million or 30.3% increase over 1997 revenues of $65.3 million which was in turn a $18.2 million or 38.8% increase over the 1996 revenues of $47.1 million. Net income of $16.0 million in 1998 represents a $3.0 million or 23.3% increase over 1997 net income of $13.0 million which was in turn a $3.1 million or 31.0% increase over the 1996 net income of $9.9 million.
Basic net income per share increased to $1.63 in 1998 from $1.55 in 1997 (excluding the profit on disposal of subsidiaries during 1997, basic net income per share was $1.49 during the year) and $1.22 in 1996. Diluted net income per share increased to $1.63 in 1998 from $1.53 in 1997 (excluding the profit on disposal of subsidiaries during 1997, diluted net income per share was $1.47 during the year) and $1.19 in 1996.
Revenues of $27.1 million in 1998 represented an increase of $3.8 million or 16.1% from revenues of $23.4 million in 1997 which was in turn a $4.2 million or 21.7% increase from revenues of $19.2 million in 1996. Despite competitive pressures in the marketplace, the brokerage operations, primarily based in the United Kingdom, provided growth throughout the year.
The brokerage segment's profit of $11.5 million in 1998 represented an increase of $2.9 million or 33.9% from segment profit of $8.6 million in 1997 which was in turn a $2.6 million or 43.7% increase from segment profit of $6.0 million in 1996. The segment benefited from increased margins due to volume efficiencies.
The Company's underwriting management segment continued to experience significant competitive pressures during 1998 following the already competitive market in 1997. Revenues of $3.6 million in 1998 represented a decrease of $0.6 million or 14.9% from revenues of $4.2 million in 1997 which was in turn a $0.1 million or 2.4% decrease from revenues of $4.3 million in 1996. The Company has not seen any change in market conditions in the early part of 1999 and consequently expects revenues for this segment to continue to decline until market conditions improve.
The Company's insurance segment comprising Realm National experienced significant growth in 1998 following 1997 which also saw significant growth. During 1998 Realm National continued its relicensing process to facilitate the growth of its business during the year and promote the opportunity for growth in the years ahead. By the end of the year, Realm National was fully licensed in 20 states and partially licensed in 8 states. During 1998, Realm National wrote business in 15 states compared to 12 states in 1997 and 18 states in 1996. Revenues of $11.1 million in 1998 represented an increase of $5.7 million or 105.1% from revenues of $5.4 million in 1997 which was in turn a $4.0 million or 278.6% increase from revenues of $1.4 million in 1996 (1996 figures for Realm National reflect amounts from the Company's acquisition in September of 1996). A useful indicator of Realm National's growth is the increase in gross written premiums which were $48.6 million in 1998 which represents a $26.9 million or 123.6% increase from $21.7 million in 1997 which represented a $17.7 million or 442.4% increase from $4.0 million in 1996. Net premiums earned increased to $7.7 million in 1998 which represents a $4.8 million
or 164.2% increase from $2.9 million in 1997 which represented a $2.1 million or 248.8% increase from $0.8 million in 1996. The remainder of the growth in revenues is due to policy issuance fees and interest income. Policy issuance fees increased to $2.1 million in 1998 which represents a $1.3 million or 167.8% increase from $0.8 million in 1997 which represented a $0.6 million or 257.8% increase from $0.2 million in 1996.
Market conditions in the workers compensation insurance market in which Realm National writes the majority of its business grew increasingly competetive during 1998 and this trend has continued into 1999. While these competitive market conditions continue they are likely to restrict Realm National's ability to continue its rate of expansion in its workers compensation book of business during 1999. Realm National is continuing to seek to expand its volume of business in other lines of insurance, where market conditions are less competetive.
At December 31, 1998, the Company held cash and marketable securities of $97.4 million compared to $71.7 million at December 31, 1997 and $38.2 million at December 31, 1996. In addition, the Company held cash in fiduciary accounts relating to insurance client premiums amounting to $63.9 million at December 31, 1998 compared to $60.2 million at December 31, 1997 and $50.2 million at December 31, 1996. These increased cash balances reflect the growth in the Company's business activities for 1998 together with the cash held following completion of the initial public offering. Of the $97.4 million of cash and marketable securities held by the Company at December 31, 1998 (1997--$71.7 million, 1996--$38.2 million), $58.9 million (1997--$40.9 million, 1996--$35.9 million) were held by subsidiaries whose payment of dividends to the Company was subject to regulatory restrictions or possible tax liabilities. At December 31, 1998, the Company's investment portfolio (at fair market value) totalled $29.2 million (1997--$21.0 million, 1996--$22.6 million). The portfolio consisted primarily of U.S. Treasury, short-term cash and A-rated corporate debt securities.
During 1998, the Company's operating activities generated $28.7 million of net cash, compared to generating $8.1 million of net cash during 1997 and $14.8 million in 1996. The cash generated from operating activities varies according to the timing of collections and payments of insurance and reinsurance balances. The Company expects its operations will continue to generate positive cash flow for 1999.
Shareholders' equity increased by $14.5 million, to $97.6 million, at December 31, 1998 from $83.1 million at December 31, 1997 due primarily to net income earned during the year. Shareholders' equity increased by $54.1 million, to $83.1 million, at December 31, 1997 from $29.0 million at December 31, 1996. This increase was primarily attributable to the following:
(ii) a reclassification of Ordinary Shares subject to redemption of $14.5 million since these shares are no longer redeemable after consummation of the Initial Public Offering; and
Total assets increased to $649.6 million at December 31, 1998 from $406.3 million at December 31, 1997 and $235.1 million at December 31, 1996, principally as a result of increased business activity and a significant increase in client insurance balances outstanding. The Company had no outstanding debt at December 31, 1996, 1997 and 1998.
During 1998, the AICPA Accounting Standards Executive Committee issued Statement of Position (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 to be recorded in the statement of income for the quarter ended March 31, 1999 will be approximately $495.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities". This statement is effective for all quarters of fiscal years beginning after June
15, 1999. Given the limited number of transactions currently entered into by the Company that are covered by the Statement, the Company does not anticipate any significant changes to its current financial reporting.
In 1998, the Company adopted SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information". SFAS 131 establishes standards for reporting information about operating segments and related disclosures about products and services, geographic areas and major customers. This disclosure is located within Note 15 to the Company's consolidated financial statements.
The Company continues to assess its external relationships with third parties. The Company is in the process of communicating with its significant vendors and large customers to determine the extent to which the Company is vulnerable to those third parties' failure to remediate their own Year 2000 issues. Where deemed necessary by the Company, this process involves onsite review of the third party's procedures and plans for Year 2000 compliance. However, 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 be timely converted, or that a failure to convert by another company would not have a material adverse effect on the
Based on the review of the state of readiness of the Company and its risks, the Company currently anticipates minimal business disruption will occur as a result of Year 2000 issues. Nonetheless, the Year 2000 issue represents a risk that cannot be assessed with precision nor controlled with certainty. Possible consequences of disruptions that could occur given non-compliance include, but are not limited to, loss of communication links with subsidiaries and insurance carriers, loss of electric power, inability to process transactions or inability to engage in similar normal business activities. Furthermore, failure of significant third parties with which the Company conducts business, including insurance carriers, to meet Year 2000 compliance could have a materially detrimental effect on the Company. To date, the Company has not established a contingency plan for possible Year 2000 issues. Where needed, the Company will establish contingency plans based on actual testing experience with its systems and assessment of outside risks.
The Company does not believe its operations have been materially affected by inflation. The potential adverse impacts of inflation include: (a) a decline in the market value of the Company's fixed maturity investment portfolio; (b) an increase in the ultimate cost of settling claims which remain unresolved for a significant period of time; and (c) an increase in the Company's operating expenses. However, the Company generally holds its fixed maturity investments to maturity and currently believes that an acceptable amount is included in the yield to compensate the Company for the risk of inflation. Any increase in the cost of settling claims will be offset by increases in investment income earned and, generally, an increase in operating expenses resulting from inflation should be matched by similar increases in investment income earned on the Company's general surplus funds.
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998 (EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS)
Stirling Cooke Brown Holdings Limited (the "Company") was incorporated in Bermuda on December 12, 1995. The Company is a holding company which, through its subsidiaries, provides risk management services and products. The Company provides its range of services to independent insurance carriers and reinsurance companies as well as directly to the insureds. The Company arranges reinsurance for its products as well as for those offered by independent U.S.-based insurance carriers active in the workers compensation, occupational accident and health and casualty insurance markets. In January 1996, the Company acquired all the outstanding common shares of Realm Investments Ltd. in exchange for 1,999,980 of its newly issued ordinary shares. The Company also acquired, in September 1996, its own United States domiciled insurance company Realm National Insurance Company ("Realm National") which, together with the Company's Bermuda based reinsurance company, writes insurance and reinsurance business. The Company specializes in the North American occupational accident and workers' compensation alternative risk transfer markets.
The accompanying consolidated financial statements are prepared in accordance with United States generally accepted accounting principles which require management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The following are the significant accounting policies adopted by the Company:
Premiums written and assumed are recorded on the accruals 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 terms of the reinsurance contract with the unearned portion being deferred in the consolidated balance sheets as deferred reinsurance premiums ceded.
Losses and related loss adjustment expenses are charged to income as they are incurred and are net of losses recovered and recoverable of $6,775, $16,866 and $44,312 for the years ended December 31, 1996, 1997 and 1998 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's investments in affiliated companies which are not majority owned or controlled are accounted for using the equity method if the Company is able to exert significant influence upon such companies. Other investments in affiliates are carried at cost. Investments in affiliates of $1,350 and $1,982 for the years ended December 31, 1997 and 1998, respectively, are recorded in other assets. The Company's equity share in the net income of affiliates, for the years ended December 31, 1996, 1997 and 1998 of $282, $1,266 and $2,631 respectively, is included in other income. Dividends received from affiliated companies of $0, $593 and $2,145 during 1996, 1997 and 1998, respectively, are recorded as a reduction in the carrying value of the investment.
Goodwill in the amount of $8,613 and $8,775 at December 31, 1997, and 1998, respectively, represents the excess of purchase price over fair value of net assets acquired. Goodwill is amortized on a straight-line basis over the expected periods to be benefited, generally 5 to 20 years. Accumulated amortization at December 31, 1997 and 1998 is $1,130 and $1,870, respectively. The Company assesses the recoverability of this intangible asset by determining whether the amortization of the goodwill balance over its remaining life can be recovered through undiscounted future operating cash flows of the acquired operation. The amount of goodwill impairment, if any, is measured based on projected discounted future operating cash flows using a discount rate reflecting the Company's average cost of funds. The assessment of the recoverability of goodwill will be impacted if estimated future operating cash flows are not achieved.
Earnings per share have been calculated in accordance with Statement of Financial Accounting Standards No. 128. Net income per share is calculated by dividing income available to ordinary shareholders by the weighted average number of ordinary shares outstanding. The ordinary shares which were subject to redemption are included in the computation of the weighted average number of outstanding ordinary shares since they have identical rights. Shares held in treasury are not considered outstanding for purposes of the computation. Net income 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. The dilutive effect of options are reflected in the computation by application of the treasury stock method.
In accordance with SEC Staff Accounting Bulletin 98, ordinary shares which were issued in connection with the conversion of 25 class "A" non-voting shares are considered outstanding for all periods presented for purposes of both basic and diluted presentations.
Under the asset and liability method used by the Company, deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the consolidated financial statements carrying amounts of existing assets and liabilities and their respective tax bases. A valuation allowance is provided for a portion or all of the deferred tax assets when it is more likely than not that such portion or all such deferred assets will not be realized.
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 of $559, $311 and $223 are included in other income for the years ended December 31, 1996, 1997 and 1998, respectively.
The Company is party to certain derivative financial instruments, being 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. Forward foreign exchange contracts are recorded at their fair value. The fair values of open contracts at the balance sheet dates 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).
During 1998, the AICPA Accounting Standards Executive Committee issued Statement of Position (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 to be recorded in the statement of income for the quarter ended March 31, 1999 will be approximately $495.
One of the Company's subsidiaries is registered with the Society of Lloyd's as a registered Lloyd's Broker. As required by Lloyd's Brokers Byelaw (No. 5 of 1988), the subsidiary has entered into a trust deed under which all insurance broking account assets are subject to a floating lien held in trust for the Society of Lloyd's for the benefit of the insurance creditors. Insurance and reinsurance balances payable covered by the floating lien at December 31, 1997 and 1998, amounted to $95,279 and $139,216, respectively, including relevant creditors of other subsidiaries. The purpose of the trust deed is to provide security to the Lloyds Broker's insurance creditors in the event of the Brokers insolvency by creating a charge over the Broker's insurance transaction assets. The lien becomes enforceable only in the event the Lloyds Broker becomes insolvent or breaches Lloyds solvency rules or regulations. The assets which were subject to this floating lien at December 31, 1997 and 1998 were:
In its various capacities as an insurance intermediary, the Company acts as a conduit for insurance and reinsurance premiums from insureds and other intermediaries, and after deducting its risk management fee and, where appropriate, surplus lines taxes and stamping fees, remits the premium to the respective insurance company or underwriter. Additionally, the Company acts as a conduit for loss payments. Pending the remittance of such funds to the insurance company or underwriter in accordance with the applicable insurance contract, the Company holds collected funds in its own segregated bank accounts and is entitled to any accrued interest on such funds. The obligation to remit these funds is recorded as insurance and
reinsurance balances payable on the Company's balance sheet. The period for which the Company holds such funds is dependent upon the date the insured remits the payment of the premium to the Company and the date the Company is required to forward such payment to the insurer.
A deferred tax liability of $39 and $168 at December 31, 1997 and 1998, respectively, has been provided against unrealized gains on marketable securities held as "available for sale" which has been presented net as accumulated other comprehensive income within shareholders' equity.
d) At December 31, 1997 and 1998, debt securities having an amortized cost of $2,925 and $2,878 respectively, were on deposit with government authorities as required by law.
e) At December 31, 1997 and 1998, there were no individual investments, other than investments in U.S. Government securities, which exceeded 10% of shareholders' equity.
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, 1997 and 1998. 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.
Reinsurance contracts do not relieve the Company from its obligations to policyholders. Failure of reinsurers to honor their obligations could result in losses to the Company; consequently, allowances are established for amounts deemed uncollectible. The Company evaluates the financial condition of its reinsurers and monitors concentrations of credit risk arising from similar geographic regions, activities, or economic characteristics of the reinsurers to minimize its exposure to significant losses from reinsurer insolvencies. At December 31, 1998, the Company is in dispute with certain of its reinsurers in respect of amounts due under retrocessional coverages. Management believes that approximately $2.5 million (1997 - $0) of paid and outstanding losses recoverable from reinsurers is uncollectible and has established a provision for doubtful recoveries accordingly. This provision of $2.5 million against reinsurance recoveries of $13.4 million represents management's best estimate at this time of a shortfall in recoveries. This provision is included in the balance sheet as a component of paid and outstanding losses recoverable from reinsurers. The provision is necessarily an estimate and amounts not collectible from reinsurers may ultimately be significantly greater or lesser than the provision established. It is reasonably possible that management will revise this estimate significantly in the near term. Any subsequent differences arising will be recorded in the period in which they occur.
The Company recognizes reinsurance recoveries when the associated loss is booked.
Realm National Insurance Company ("Realm National"), a subsidiary of the Company, has written property and workers compensation business since its acquisition. Realm National's workers' compensation business is subject to quota share reinsurance whereby it retains 25% of the first $1,000. Realm National's retention under the quota share treaty is further protected by common account excess coverage in excess of $3. Realm National purchases excess loss coverage on an occurrence basis up to $200,000.
Outstanding losses and loss expenses relate to the insurance activities of CIRCL and Realm National.
As discussed in Note 1 to the consolidated financial statements, during 1996, the Company issued 1,999,980 shares in exchange for 100% of the share capital of Realm Investments Ltd. The fair value assigned to the shares issued was $12,819. The excess of the fair value of the shares issued over par value was recorded in additional paid in capital. This represents a non-cash financing and investing activity for the purpose of the statements of cash flows. The Company also issued 2,000,000 ordinary shares and 25 Class "A" non-voting shares to a private investor group. Contemporaneously, the private investor group also acquired additional ordinary shares from existing shareholders on a pro-rata basis, such that the private investor group's total ownership represented 32.5% of the total number of issued ordinary share capital at that time.
The 2,000,000 ordinary shares and related 25 Class "A" shares issued to the private investor group 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.
Treasury stock is recorded at cost as a deduction from shareholders' equity. During 1996 the Company repurchased 202,784 of its ordinary shares from one of its founding shareholders at a price negotiated between the Company and the shareholder. The shares were held as treasury stock at December 31, 1996.
In June 1997, the Company reissued 16,000 ordinary shares of its treasury stock for a total subscription price of $86.
On June 30, 1997, the shareholders exercised these options and purchased 600,000 ordinary shares in the Company at an exercise price of $2.71.
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. All of these options were outstanding at December 31, 1997 and 1998.
The 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:
There were no options granted during 1996 or 1998. The fair value of options granted during 1997 was $6.59 per share.
Income tax expense attributable to income from continuing operations was $2,281, $2,925 and $3,790 for the years ended December 31, 1996, 1997 and 1998 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:
Valuation allowances of $104 and $0 have been established against the deferred tax asset as of December 31, 1997 and 1998, respectively. There was no valuation allowance for deferred tax assets as of December 31, 1998, since it is management's belief 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
See Notes 10 and 11 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:
Deposit liabilities and related assets: Underlying assets comprise mainly cash and deposits. The fair values of these assets and related liabilities approximate their carrying value due to the short maturity of these instruments.
The estimates of fair values presented herein are subjective in nature and are not necessarily indicative of the amounts that the Company would actually realize in a current market exchange. Any differences
would not be expected to be material. Certain instruments such as prepaid expenses, other assets, goodwill and deferred expenses, deferred fee income, outstanding losses recoverable from reinsurers, and outstanding losses and loss expenses are excluded from fair value disclosure. Thus the total fair value amounts cannot be aggregated to determine the underlying economic value of the Company.
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 a notional principal amount outstanding of (Pounds)1,000 and (Pounds)Nil at December 31, 1997 and 1998, respectively, relating to contracts to buy British Pounds Sterling in the future. Net unrealized gains on the forward exchange contracts for the year ended December 31, 1997 and 1998 amounted to $83 and $Nil, respectively and have been accrued in other income and included in other assets in the consolidated balance sheets. A net realized gain (loss) of $465, $(22) and $182 is included in other income in the consolidated statements of income in respect of such contracts during the years ended December 31, 1996, 1997 and 1998, respectively.
(a) The Company has five main business segments; Brokerage, Program Business, Underwriting Management, Insurance, and Reinsurance. Brokerage companies design and arrange, for a fee or commission, insurance and reinsurance contracts which transfer risk and associated premium from one company to another. Program Business companies market and manage insurance products and programs developed by the Company on behalf of reinsurers. Underwriting Management companies underwrite and administer reinsurance business on behalf of a number of independent reinsurance companies. The insurance and reinsurance segments represent companies that retain risks and their revenues include premiums earned on insurance 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 (1996 - $282, 1997 - $1,266, 1998- $2,631). 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.
The loss of this carrier could have a material adverse effect on the Company. However, the Company believes that the availability of alternative underwriting capacity at Realm National and other independent insurance carriers would reduce the impact of such a loss.
Future minimum lease payments under non-cancelable operating leases as at December 31, 1998 are as follows:
b) Under New York law, Realm National may pay cash dividends only from earned surplus determined on a statutory basis. Further, Realm National is restricted (on the basis of the lower of 10% of statutory surplus at the end of the preceding twelve month period or 100% of the adjusted net investment income for the preceding twelve month period) as to the amount of dividends it may declare or pay in any twelve month period without the approval of the Insurance Department of the State of New York.
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, 1997 and 1998, respectively, CIRCL was required to maintain a
a) Amounts due from/to affiliates are interest free and unsecured with no fixed terms of repayment.
Goldman, Sachs & Co. or certain of their affiliates maintain certain contractual relationships with the Company and have provided investment banking services to the Company. Goldman, Sachs & Co. also provide investment management services to Realm National pursuant to a Corporate Account Agreement dated December 24, 1996 and received customary fees and expenses of approximately $20 during 1998 (1997 - $52) for such services.
(a) There currently are pending several arbitration proceedings in England between reinsurers and their ceding insurers relating to reinsurance transactions involving the personal accident excess of loss market ("LMX") for the years 1993, 1994, 1995 and 1996. Although, with one exception, neither the Company nor its subsidiaries are a party to any of these arbitrations, certain of the Company's subsidiaries acted as a reinsurance broker for ceding companies that are parties to certain of the arbitrations. The exception entails a subsidiary that is directly involved in an arbitration because it assumed the position of one of the reinsureds by way of portfolio transfer.
The Company understands that the parties to the arbitration and court proceedings and other participants in these markets currently are attempting to achieve a business solution that could involve a financial contribution by participants in the market. Although no assurances can be given as to the outcome of the pending proceedings and their effect on the Company, the Company believes, based on the information presently available to it, that any such effect should not materially adversely affect the Company's financial condition.