Back to GetFilings.com
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED: JUNE 30, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ..................... TO ........................
COMMISSION FILE NUMBER: 0-27662
-------
IPC HOLDINGS, LTD.
(Exact name of registrant as specified in its charter)
BERMUDA NOT APPLICABLE
------- --------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
AMERICAN INTERNATIONAL BUILDING, 29 RICHMOND ROAD, PEMBROKE, HM 08, BERMUDA
---------------------------------------------------------------------------
(Address of principal executive offices)
(441) 298-5100
--------------
(Registrant's telephone number,
including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes ..X.. No .....
The number of outstanding common shares par value U.S. $0.01 per share of IPC
Holdings, Ltd., as of August 12, 2002, was 48,172,776.
EXHIBIT INDEX LOCATED ON PAGE 16
================================================================================
PART I. FINANCIAL INFORMATION
On June 14, 2002 our shareholders appointed KPMG as the Company's independent
auditors. KPMG have subsequently reviewed our financial statements for the
quarterly period ended March 31, 2002. There were no material changes to the
statements for that period as a result of that review. Changes were made to the
Transactions with Non-independent Parties disclosure, as filed in our Form
10-Q/A on August 13, 2002.
ITEM 1. FINANCIAL STATEMENTS
IPC HOLDINGS, LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Expressed in thousands of United States dollars, except for per share amounts)
- --------------------------------------------------------------------------------
As of As of
June 30, 2002 December 31, 2001
------------- -----------------
(unaudited)
ASSETS:
Fixed maturity investments:
Available for sale, at fair market value (amortized
cost 2002: $1,037,600; 2001: $740,734) $ 1,061,611 $ 758,224
Equity investments, available for sale at fair market value
(cost 2002: $219,396; 2001: $163,828) 193,905 158,870
Cash and cash equivalents 29,206 315,207
Accrued investment income 19,937 18,841
Reinsurance premiums receivable (Related party 2002:
$17,796; 2001: $3,644) 125,110 42,356
Deferred premiums ceded 2,972 1,228
Loss reserves recoverable (Related party 2002: $56; 2001:
$68) 563 681
Deferred acquisition costs 13,641 2,833
Prepaid expenses and other assets 6,436 3,476
----------- -----------
TOTAL ASSETS $ 1,453,381 $ 1,301,716
=========== ===========
LIABILITIES:
Reserve for losses and loss adjustment expenses $ 129,848 $ 162,207
Unearned premiums 125,384 24,440
Reinsurance premiums payable (Related party 2002: $440;
2001: $197) 3,504 1,732
Deferred commissions 452 218
Accounts payable and accrued liabilities (Related party
2002: $3,972; 2001: $1,212) 10,284 7,325
----------- -----------
269,472 195,922
----------- -----------
SHAREHOLDERS' EQUITY:
Share capital (Common shares outstanding, par value U.S.
$0.01: 2002: 48,172,776; 2001: 48,172,776 shares) 482 482
Additional paid-in capital 846,186 846,101
Retained earnings 338,721 246,568
----------- -----------
Accumulated other comprehensive (loss) income (1,480) 12,643
1,183,909 1,105,794
----------- -----------
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,453,381 $ 1,301,716
=========== ===========
The accompanying notes are an integral part of these
consolidated financial statements
2
IPC HOLDINGS, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Expressed in thousands of United States dollars, except for per share amounts)
Quarter ended June 30, Six months ended June 30,
---------------------- -------------------------
2002 2001 2002 2001
---- ---- ---- ----
(unaudited) (unaudited) (unaudited) (unaudited)
REVENUES:
Gross premiums written $ 60,110 $ 26,965 $ 207,158 $ 92,587
Premiums ceded (2,029) (2,487) (5,069) (3,404)
---------- ---------- ---------- ----------
Net premiums written 58,081 24,478 202,089 89,183
Change in unearned premium reserve, net (1,603) 367 (99,200) (39,851)
---------- ---------- ---------- ----------
Net premiums earned 56,478 24,845 102,889 49,332
Net investment income 13,075 7,574 24,957 15,635
Realized (losses) gains, net on investments (6,658) 587 (7,425) 4,451
Other income 854 0 2,261 0
---------- ---------- ---------- ----------
63,749 33,006 122,682 69,418
---------- ---------- ---------- ----------
EXPENSES:
Losses and loss adjustment expenses, net 7,765 7,212 15,372 14,179
Acquisition costs, net 6,421 2,706 11,465 5,753
General and administrative expenses 3,555 2,225 6,412 4,349
Exchange (gain) loss, net (2,638) 28 (2,720) 397
---------- ---------- ---------- ----------
15,103 12,171 30,529 24,678
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
NET INCOME $ 48,646 $ 20,835 $ 92,153 $ 44,740
========== ========== ========== ==========
Basic net income per common share $ 1.01 $ 0.83 $ 1.91 $ 1.79
Diluted net income per common share $ 1.01 $ 0.79 $ 1.91 $ 1.70
Weighted average number of common shares - basic 48,172,776 25,063,072 48,172,776 25,061,854
Weighted average number of common shares - diluted 48,272,420 26,330,576 48,269,061 26,300,139
The accompanying notes are an integral part of these
consolidated financial statements
3
IPC HOLDINGS, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Expressed in thousands of United States dollars)
- --------------------------------------------------------------------------------
Quarter ended June 30, Six months ended June 30,
---------------------- -------------------------
2002 2001 2002 2001
---- ---- ---- ----
(unaudited) (unaudited) (unaudited) (unaudited)
NET INCOME $ 48,646 $ 20,835 $ 92,153 $ 44,740
OTHER COMPREHENSIVE (LOSS) INCOME:
Holding (losses) gains, net on
investments during period (7,023) 853 (21,548) 2,084
Reclassification adjustment for losses
(gains) included in net income 6,658 (587) 7,425 (4,451)
-------- -------- -------- --------
(365) 266 (14,123) (2,367)
-------- -------- -------- --------
COMPREHENSIVE INCOME $ 48,281 $ 21,101 $ 78,030 $ 42,373
======== ======== ======== ========
The accompanying notes are an integral part of these
consolidated financial statements
4
IPC HOLDINGS, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Expressed in thousands of United States dollars)
- --------------------------------------------------------------------------------
Six months ended June 30,
-------------------------
2002 2001
---- ----
(unaudited) (unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 92,153 $ 44,740
Adjustments to reconcile net income to cash provided
by operating activities:
Amortization of investment premium, net 3,599 (8)
Realized losses (gains), net on investments 7,425 (4,451)
Changes in, net:
Reinsurance premiums receivable (82,754) (34,373)
Deferred premiums ceded (1,744) (1,551)
Loss reserves recoverable 118 233
Accrued investment income (1,096) 3,715
Deferred acquisition costs (10,808) (4,352)
Prepaid expenses and other assets (2,960) (823)
Reserve for losses and loss adjustment expenses (32,359) (1,637)
Unearned premiums 100,944 41,403
Reinsurance premiums payable 1,772 2,036
Deferred commissions 234 277
Accounts payable and accrued liabilities 2,959 796
--------- ---------
77,483 46,005
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of fixed maturity investments (626,232) (290,379)
Proceeds from sale of fixed maturity investments 318,023 275,411
Proceeds from maturities of fixed maturity investments 9,000 11,000
Purchases of equity investments (64,793) (39,283)
Proceeds from sale of equity investments 518 1,011
--------- ---------
(363,484) (42,240)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Additional share capital 0 377
--------- ---------
0 377
--------- ---------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (286,001) 4,142
CASH AND CASH EQUIVALENTS, beginning of period 315,207 9,409
--------- ---------
CASH AND CASH EQUIVALENTS, end of period $ 29,206 $ 13,551
========= =========
The accompanying notes are an integral part of these
consolidated financial statements
5
IPC HOLDINGS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in thousands of United States dollars, except for per share amounts)
(unaudited)
- --------------------------------------------------------------------------------
1. GENERAL:
The consolidated interim financial statements presented herein have been
prepared on the basis of accounting principles generally accepted in the
United States of America and include the accounts of IPC Holdings, Ltd. (the
"Company"), and its wholly owned subsidiaries, IPCRe Limited ("IPCRe") and
IPCRe Underwriting Services Limited ("IPCUSL" and, together with the Company
and IPCRe, "IPC") and IPCRe Europe Limited, which is a wholly-owned
subsidiary of IPCRe. In the opinion of management, these financial
statements reflect all adjustments (consisting of normal recurring accruals)
necessary for a fair presentation of the results of operations for the six
month periods ended June 30, 2002 and 2001, respectively, the balance sheet
as of June 30, 2002 and the cash flows for the six month periods ended June
30, 2002 and 2001, respectively. These interim consolidated financial
statements should be read in conjunction with the audited consolidated
financial statements for the year ended December 31, 2001. The results of
operations for any interim period are not necessarily indicative of results
for the full year.
2. DIVIDENDS:
No dividends have been declared or paid in 2002 to date.
6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
CRITICAL ACCOUNTING POLICIES
The following is a summary of the accounting policies for the three main
components of our balance sheet and statement of income: premiums, losses
(claims) including reserves and investments/investment income.
Premiums are recorded at the beginning of each policy, based upon
information received from ceding companies and their brokers. For excess
of loss contracts, the amount of premium is usually contractually
documented at inception, and no management judgement is necessary in
accounting for this. Premiums are earned on a pro rata basis over the
policy period. For proportional treaties, the amount of premium is
normally estimated at inception by the ceding company. We account for such
premium using the initial estimates, and then adjust them once a
sufficient period for actual premium reporting has elapsed, normally
around three years. For the six months ended June 30, 2002 the net amount
of premium written resulting from estimate accruals was approximately 4%
of total premiums written. We also accrue for reinstatement premiums on
loss reserves. Such accruals are based upon actual contractual terms, and
the only element of management judgement involved is with respect to the
amount of loss reserves, as described below. The amount accrued at June
30, 2002 for reinstatement premiums on Reported But Not Enough losses
("RBNE") and Incurred But Not Reported ("IBNR") loss reserves was $2.6
million, the majority of which related to claims from the World Trade
Center tragedy.
Under accounting principles generally accepted in the United States Of
America , we are not permitted to establish loss reserves with respect to
property catastrophe reinsurance until the occurrence of an event which
may give rise to a claim. As a result, only loss reserves applicable to
losses incurred up to the reporting date may be set aside, with no
allowance for the provision of a contingency reserve to account for
expected future losses. Claims arising from future catastrophic events can
be expected to require the establishment of substantial reserves from time
to time.
Setting appropriate reserves for catastrophes is an inherently uncertain
process. Loss reserves represent our estimates, at a given point in time,
of ultimate settlement and administration costs of losses incurred
(including IBNR losses). We regularly review and update these estimates,
using the most current information available to us. Consequently, the
ultimate liability for a catastrophic loss is likely to differ from the
original estimate. Whenever we determine that any existing loss reserves
are inadequate, we are required to increase the loss reserves with a
corresponding reduction, which could be material, in our operating results
in the period in which the deficiency is identified. The establishment of
new reserves, or the adjustment of reserves for reported claims, could
result in significant upward or downward changes to our financial
condition or results of operations in any particular period.
The reserve for losses and loss adjustment expenses is based upon reports,
individual case estimates received from ceding companies, and management's
estimates. Management's estimates are used mostly to estimate IBNR or RBNE
loss amounts. For certain catastrophic events there is considerable
uncertainty underlying the assumptions and associated estimated reserves
for losses and loss adjustment expenses. Reserves are reviewed regularly
and, as experience develops and additional information becomes known, the
reserves are adjusted as necessary. Such adjustments, if necessary, are
reflected in results of operations in the period in which they become
known. In addition, we have an independent firm of actuaries review our
reserves semi-annually. At June 30, 2002 management's estimates for
IBNR/RBNE represented approximately 24.3% of total loss reserves. The
largest component of the estimate related to additional reserves for
claims from the attack on the World Trade Center.
In accordance with our investment guidelines, our investments consist of
certain equity securities and high-grade marketable fixed income
securities. Investments are carried at market value as determined by the
most recently traded price of each security at the balance sheet date. In
accordance with SFAS 115, unrealized gains and losses are included as a
separate component of shareholders' investment. Realized gains and losses
on sales of investments are determined on a first-in, first-out basis. In
addition, unrealized depreciation in the value of individual securities
considered by management to be other than temporary is charged to income
in the period it is determined. Our determination of whether or not the
decline in the value of securities is temporary is based upon the extent
of decline, the length of time such decline has existed, and other
quantitative and qualitative issues. Investment income is recorded when
earned and includes the amortization of premiums and discounts on
investments.
RESULTS OF OPERATIONS, QUARTERS ENDED JUNE 30, 2002 AND 2001
The following is a discussion of the results of operations and financial
position of IPC Holdings, Ltd. References to "we", "our" or "IPC" mean IPC
Holdings together with its wholly-owned subsidiaries, IPCRe and IPCUSL.
This discussion should be read in conjunction with our Consolidated
Financial Statements and related notes for the six months ended June 30,
2002.
In the quarters ended June 30, 2002 and 2001, we wrote premiums of $60.1
million and $27.0 million, respectively, an increase of 122.9%. Written
premiums in the quarter were higher primarily because we used our
increased capacity
7
resulting from the additional capital that we raised in December 2001 to
write additional business for our existing clients, as well as new
business. Premiums were also higher because of increases in premium rates,
which were generally in the range of 10% to 15% for loss-free contracts,
and greater increases for loss-impacted contracts. The additional premium
from existing clients resulting from additional business written and rate
increases amounted to approximately $20.1 million. Premiums from new
business amounted to $13.5 million. These increases were partly offset by
business which was not renewed because of unsatisfactory terms and
conditions, which totaled approximately $2.2 million. Reinstatement
premiums were $0.6 million lower in the second quarter of 2002 when
compared to the corresponding quarter in 2001. We retroceded premiums of
$2.0 million in the second quarter of 2002, compared to $2.5 million ceded
in the second quarter of 2001. Net premiums earned in the three months
ended June 30, 2002 were $56.5 million, compared to $24.8 million in the
same period in 2001, an increase of 127.3%. Earned premiums were higher
due to the increase in written premiums.
Net investment income was $13.1 million in the quarter ended June 30,
2002, compared to $7.6 million for the quarter ended June 30, 2001. The
overall yield of the fixed income portfolio was less for the quarter ended
June 30, 2002, than for the corresponding quarter in 2001. In addition,
the amount of equity investments in the portfolio represented a greater
proportion of the total portfolio in the second quarter of 2002, than they
did for the corresponding period of 2001. These negative factors were more
than offset by the increase in the average balance of invested assets in
the second quarter of 2002, which was 99.1% higher than the second quarter
of 2001.
There was a net realized loss from investments in the quarter ended June
30, 2002 of $(6.7) million, compared to a net realized gain of $0.6
million in the second quarter of 2001. Generally, net realized gains and
losses fluctuate from period to period, depending on the individual
securities sold, as recommended by IPCRe's investment advisor. In
addition, in June 2002, we wrote down the cost basis of equity investments
in certain S & P 500 stocks, where the decline in value was considered
other than temporary. In accordance with FAS 115, such a write-down is
recognized as a realized loss in the income statement, even though there
were no sales of the securities. The amount of the write-down was $(7.1)
million.
In the three months ended June 30, 2002, we incurred losses of $7.8
million, compared to $7.2 million in the second quarter of 2001. Losses
included approximately $6.0 million for various 2002 events, including
Cats.# 58-65, which were various hail storms & tornados which struck s
parts of the United States, and minor development from some 2001 events.
The largest of the 2002 losses was $2.0 million arising from Cat.#61. Our
loss and loss expense ratio (the ratio of losses and loss adjustment
expenses to premiums earned) was 13.7% in the second quarter of 2002,
compared to 29.0% in the second quarter of 2001.
Acquisition costs incurred, which consist primarily of commissions and
brokerage fees paid to intermediaries for the production of business, were
$6.4 million for the quarter ended June 30, 2002, compared to $2.7 million
in the corresponding period of 2001, an increase of 137.3%. Acquisition
costs have increased primarily because of the increase in earned premiums.
General and administrative expenses were $3.5 million in the quarter ended
June 30, 2002, compared to the $2.2 million incurred in the second quarter
of 2001. This increase is due primarily to an increase in administrative
fees which are based on earned premiums, as well as some minor increases
in certain operating expenses, including salaries and benefits and bank
charges. IPC's expense ratio (the ratio of acquisition costs plus general
and administrative expenses to premiums earned) was 17.7% for the quarter
ended June 30, 2002 compared to 19.9% for the quarter ended June 30, 2001.
The following table summarizes the loss and loss expense ratio, expense
ratio and combined ratio (sum of loss and loss expense ratio, plus expense
ratio) for the quarters ended June 30, 2002 and 2001, respectively:
Quarter ended June 30,
----------------------
2002 2001
---- ----
Loss & loss expense ratio 13.7% 29.0%
Expense ratio 17.7% 19.9%
Combined ratio 31.4% 48.9%
Our net income for the quarter ended June 30, 2002 was $48.6 million,
compared to $20.8 million for the second quarter of 2001, an increase of
133.5%. Excluding the effects of net realized gains and losses from
investments, our net operating income for the quarter ended June 30, 2002
was $55.3 million, compared to $20.2 million for the second quarter of
2001, an increase of 173.1%. This increase is primarily the result of the
significant increase in premiums, and the reduction in loss ratio, as
discussed above.
RESULTS OF OPERATIONS, SIX MONTHS ENDED JUNE 30, 2002 AND 2001
In the six months ended June 30, 2002 and 2001, we wrote premiums of
$207.2 million and $92.6 million, respectively, an increase of 123.7%.
Written premiums in the six months were higher due to the utilization of
our increased capacity resulting from the additional capital raised in
December 2001. We wrote an additional $72.3 million for our existing
clients, and $51.7 million for new clients. The increase also includes the
impact of increases in premium rates, which
8
were generally in the range of 10% to 20% for loss-free contracts, and
greater increases for loss-impacted contracts. These increases were partly
offset by business which was not renewed because of unsatisfactory terms
and conditions, and by decreases in foreign currency exchange rates. These
reductions totaled approximately $10.4 million. We ceded premiums of $5.1
million to IPCRe's proportional reinsurance facilities in the first six
months of 2002, compared to $3.4 million ceded in the first six months of
2001. Net premiums earned in the six months ended June 30, 2002 were
$102.9 million, compared to $49.3 million in the same period in 2001, an
increase of 108.6%. Earned premiums were higher due to the significant
increase in written premiums.
Net investment income was $25.0 million in the six months ended June 30,
2002, compared to $15.6 million for the six months ended June 30, 2001, an
increase of 59.6%. This increase is a result of the 102.1% increase in the
average amount of invested assets, offset by the effect of the reduction
in the average yield generated by the portfolio.
There was a net realized loss from investments in the six months ended
June 30, 2002 of $(7.4) million, compared to a net gain of $4.5 million in
the first six months of 2001. Net realized gains and losses fluctuate from
period to period, depending on the individual securities sold, as
recommended by IPCRe's investment advisor. In addition, in March and June
of this year, we wrote down the cost basis of equity investments in
certain S & P 500 stocks, where the decline in value was considered other
than temporary. In accordance with FAS 115, such a write-down is
recognized as a realized loss in the income statement, even though there
were no sales of the securities. The amount of the write-down was $(8.4)
million, for the six months ended June 30, 2002.
In the six months ended June 30, 2002, we incurred losses of $15.4
million, compared to $14.2 million in the first six months of 2001.
Incurred losses in the first six months included reserves on various minor
catastrophic events which took place during the six months, including
North American hail storms and tornadoes, and some minor development of
losses from 2001. In the first six months of 2001, incurred losses were
primarily the reserves on certain events which took place during the six
months, including North American winter storms, storms in Northeast
Australia, Tropical Storm Allison and the hail storms which struck St.
Louis and other parts of the mid-West. Our loss and loss expense ratio was
14.9% in the first six months of 2002, compared to 28.7% in the first six
months of 2001.
Acquisition costs incurred, which consist primarily of commissions and
brokerage fees paid to intermediaries for the production of business, were
$11.5 million for the six months ended June 30, 2002, compared to $5.8
million in the same period of 2001, an increase of 99.3%. This increase is
due to the increase in earned premiums. General and administrative
expenses were $6.4 million in the six months ended June 30, 2002, compared
to the $4.3 million incurred in the corresponding period in 2001. This
increase is due primarily to the increase in administrative fees which are
based on earned premiums, and some minor increases in certain operating
expenses, including salaries and benefits. IPC's expense ratio was 17.4%
for the six months ended June 30, 2002 compared to 20.5% for the
corresponding period in 2001.
The following table summarizes the loss and loss expense ratio, expense
ratio and combined ratio for the six months ended June 30, 2002 and 2001,
respectively:
Six months ended June 30,
-------------------------
2002 2001
---- ----
Loss & loss expense ratio 14.9% 28.7%
Expense ratio 17.4% 20.5%
Combined ratio 32.3% 49.2%
Our net income for the six months ended June 30, 2002 was $92.2 million,
compared to $44.7 million for the corresponding period in 2001, an
increase of 106.0%. Excluding the effects of net realized gains and losses
arising from investments, net operating income for the first six months of
2002 was $99.6 million, compared to $40.3 million for the first six months
of 2001, an increase of 147.1%. This increase is primarily the result of
higher premiums and lower loss ratio, as discussed above.
LIQUIDITY AND CAPITAL RESOURCES
IPC Holdings is a holding company that conducts no reinsurance operations
of its own. Its cash flows are limited to distributions from IPCRe and
IPCUSL by way of loans or dividends. The dividends that IPCRe may pay are
limited under Bermuda legislation and IPCRe's revolving credit facility.
The Bermuda Insurance Act of 1978, and subsequent amendments thereto,
require IPCRe to maintain a minimum solvency margin and a minimum
liquidity ratio. The maximum dividend payable by IPCRe in accordance with
Bermuda regulations as of January 1, 2002 was approximately $276 million.
The maximum amount IPCRe could have paid in the second quarter under the
terms of the credit facility was $15.5 million.
IPCRe's sources of funds consist of premiums written, investment income,
paid losses recovered from retrocedants and proceeds from sales and
redemptions of investments. Cash is used primarily to pay losses and loss
adjustment expenses, premiums retroceded, brokerage commissions, excise
taxes, general and administrative expenses and dividends. The
9
potential for a large catastrophe means that unpredictable and substantial
payments may need to be made within relatively short periods of time, and
therefore our cash flows fluctuate significantly from period to period.
Net cash flows from operating activities in the six months ended June 30,
2002 were $77.5 million compared to $46.0 million in the corresponding
period in 2001. The increase is primarily the result of the significant
increase in premium volume, offset in part by an increase in claims paid
during the period, which were $49.1 million in the six months ended June
30, 2002, compared to $14.1 million in the second quarter of 2001. A
significant proportion of the claims paid in 2002 relate to Cat. #48 (the
attack on the World Trade Center). We expect to continue to pay
significant amounts in respect of that event during the next six to nine
months.
Net cash outflows from investing activities in the six months ended June
30, 2002 were $(363.5) million. Cash and cash equivalents decreased by
$(286.0) million in the six months ended June 30, 2002, resulting in a
balance of $29.2 million at June 30, 2002. The decrease is due to the fact
that at December 31, 2001, a significant proportion of the proceeds of our
capital raising in December had been invested in commercial paper, time
deposits and other short term instruments with maturities of less than
ninety days, which we classify as cash equivalents. During the first
quarter of 2002, our investment managers reinvested these funds in longer
dated fixed income securities and equities. At June 30, 2002, 34.5% of
IPC's fixed maturity portfolio (based on market value) was held in cash,
United States Government/Agency issues and in securities rated AAA, and
43.9% was held in securities rated AA. The average modified duration of
IPC's fixed maturity portfolio was 2.4 years. We believe that IPCRe's $150
million revolving credit facility which expires in June 2003, and the
relatively short duration and high quality of IPC's investment portfolio,
will provide sufficient liquidity to meet IPC's cash demands.
IPCRe is not a licensed insurer in the United States and therefore, under
the terms of most of its contracts with U.S.-based companies, must provide
security to reinsureds to cover unpaid liabilities in a form acceptable to
state insurance commissioners. Typically, this type of security takes the
form of a letter of credit issued by an acceptable bank, the establishment
of a trust, or a cash advance. Currently IPCRe obtains letters of credit
through one commercial bank pursuant to a $100.0 million facility. In
turn, IPCRe provides the bank security by giving the bank a lien over
certain of IPCRe's investments in an amount not to exceed the aggregate
letters of credit outstanding to a maximum of $118.0 million. At June 30,
2002, there were outstanding letters of credit of $89.2 million. If we
were unable to obtain the necessary credit, IPCRe could be limited in its
ability to write business for our clients in the United States.
Our investment portfolio does not currently include options, warrants,
swaps, collars or similar derivative instruments. Our investment policy
guidelines provide that financial futures and options and foreign exchange
contracts may not be used in a speculative manner, but may be used,
subject to certain numerical limits, only as part of a defensive strategy
to protect the market value of the portfolio. Also, our portfolio does not
contain any investments in real estate or mortgage loans. Neither the
Company nor any of its subsidiaries has any other forms of off-balance
sheet arrangements, or cash obligations or commitments.
Neither the Company, IPCRe nor IPCUSL have any material commitments for
capital expenditures.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The investment portfolio of IPCRe is exposed to market risk. Market risk
is the risk of loss of fair value resulting from adverse fluctuations in
interest rates, foreign currency exchange rates and equity prices.
Measuring potential losses in fair values has become the focus of risk
management efforts by many companies. Such measurements are performed
through the application of various statistical techniques. One such
technique is Value at Risk ("VaR"). VaR is a summary statistical measure
that uses historical interest and foreign currency exchange rates and
equity prices and estimates of the volatility and correlation of each of
these rates and prices to calculate the maximum loss that could occur
within a given statistical confidence level and time horizon.
We believe that statistical models alone do not provide a reliable method
of monitoring and controlling market risk. While VaR models are relatively
sophisticated, the quantitative market risk information is limited by the
assumptions and parameters established in creating the related models.
Therefore, such models are tools and do not substitute for the experience
or judgement of senior management.
Our investment managers performed a VaR analysis to estimate the maximum
potential loss of fair value for each segment of market risk for our
investment portfolio, as of June 30, 2002, March 31, 2002 and December 31,
2001. The analysis calculated the VaR with respect to the net fair value
of our financial instrument assets, which includes cash and cash
equivalents, certain equity and high grade fixed maturity securities, as
of June 30, 2002 using historical simulation methodology. As of June 30,
2002 the VaR of IPCRe's investment portfolio was approximately $16.3
million, which represents a 95th percentile value change over a one-month
time horizon. This result was obtained through historical simulation using
approximately 750 days (3 years) of historical interest rate, foreign
exchange rate and equity market data.
10
The following table presents the VaR of each component of market risk of
IPCRe's investment portfolio as of June 30, 2002, March 31, 2002, and
December 31, 2001, respectively, and the average for the six months ended
June 30, 2002, calculated using the beginning, ending and quarterly points
(expressed in thousands of U.S. dollars):
MARKET RISK At At At Average for six
June 30, March 31, December 31, months ended
2002 2002 2001 June 30, 2002
---- ---- ---- -------------
Currency $ 1,283 $ 1,351 $ 1,101 $ 1,245
Interest Rate 9,554 11,404 7,296 9,418
Equity 17,029 18,625 13,222 16,292
-------- -------- -------- --------
Sum of Risk 27,866 31,380 21,619 26,955
Diversification Benefit (11,576) (12,666) (8,305) (10,849)
-------- -------- -------- --------
TOTAL NET RISK $ 16,290 $ 18,714 $ 13,314 $ 16,106
-------- -------- -------- --------
The primary reasons for the increase in VaR from $13.3 million at December
31, 2001 to $16.3 million at June 30, 2002 are the additional investment
in equities, which took place at the beginning of January, 2002, growth in
our bond holdings and a slight increase in the duration of the fixed
maturity portfolio.
IPCRe's premiums receivable and liabilities for losses from reinsurance
contracts it has written, are also exposed to the risk of changes in value
resulting from adverse fluctuations in foreign currency exchange rates. To
an extent, the impact on loss reserves of a movement in an exchange rate,
will be partly offset by the impact on assets (receivables and
cash/investments) denominated in the same currency, or vice versa. As of
June 30, 2002 an estimated 36% (approximately $45 million) of reinsurance
premiums receivable, and an estimated $20 million of loss reserves, were
denominated in non-U.S. currencies. In addition, we held U.S.$3.3 million
of Australian dollar cash deposits which are to be used to settle
hailstorm claims from 1999. Accordingly, we do not believe that the impact
of exchange rate movements in respect of receivables or loss reserves on
our overall VaR as of June 30, 2002 to be material.
TRANSACTIONS WITH NON-INDEPENDENT PARTIES
The following is a summary of amounts in respect of significant related
party transactions during the six month periods ended June 30, 2002 and
June 30, 2001, respectively, (expressed in thousands of U.S. dollars):
June 30, 2002 June 30, 2001
------------- -------------
Administrative services fees (included in Operating expenses) $ 2,655 $ 1,279
Investment fees netted against investment income:
Investment management services fees $ 1,092 $ 616
Investment custodian services fees $ 249 $ 159
Underwriting services fee income (included in Other income) $ 2,261 $ 0
Premiums written $28,737 $12,116
Premiums ceded $ 581 $ 340
Underwriting service fees are a percentage of the premiums written on
behalf of one client, a company in which AIG has a 23.4% ownership
interest. Fees are accrued and taken into income based on the premiums
written each quarter.
In addition, IPCRe assumes premiums through brokers related to
shareholders of the Company. Generally, such premiums represent less than
5% of total premiums assumed. Brokerage fees incurred on such premiums are
generally 10% of the premium.
For a discussion of certain of our contractual relationships with
non-independent parties, please see "Certain Relationships and Related
Transactions" in our definitive Proxy Statement on Schedule 14A, filed
with the Securities and Exchange Commission on April 26, 2002 and
incorporated by reference into our Form 10-K for the year ended December
31, 2001.
All transactions with related parties are conducted at arm's length, with
normal terms and conditions applicable. To our knowledge, neither the
Company nor any of its subsidiaries have entered into any other
significant transactions with non-independent parties.
NOTE ON FORWARD-LOOKING STATEMENTS
This report contains certain forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933, as amended, and Section 21E
of the Securities Exchange Act of 1934, as amended. Forward-looking
statements are
11
statements other than historical information or statements of current
condition, including but not limited to expectations regarding renewals
and our ability to increase written premium volume and improve profit
margins, market conditions, the impact of current market conditions and
trends on future periods, the impact of our business strategy on our
results, trends in pricing and claims and the insurance and reinsurance
market response to catastrophic events. Some forward-looking statements
may be identified by our use of terms such as "believes," "anticipates,"
"intends," or "expects" and relate to our plans and objectives for future
operations. In light of the risks and uncertainties inherent in all
forward-looking statements, the inclusion of such statements in this
document should not be considered as a representation by us or any other
person that our objectives or plans will be achieved. We do not intend,
and are under no obligation, to update any forward-looking statement
contained in this report. The largest single factor in our results has
been and will continue to be the severity or frequency of catastrophic
events, which is inherently unpredictable. Numerous factors could cause
our actual results to differ materially from those in the forward-looking
statements, including, but not limited to, the following: (i) the
occurrence of natural or man-made catastrophic events with a frequency or
severity exceeding our estimates; (ii) any lowering or loss of one of the
financial ratings of our wholly owned subsidiary, IPCRe Limited; (iii) a
decrease in the level of demand for property catastrophe reinsurance, or
increased competition owing to increased capacity of property catastrophe
reinsurers; (iv) the effect of competition on market trends and pricing;
(v) the adequacy of our loss reserves; (vi) loss of our non-admitted
status in United States jurisdictions or the passage of federal or state
legislation subjecting us to supervision or regulation in the United
States; (vii) the impact of the September 11 terrorist attacks and their
aftermath on our reinsureds, on the insurance and reinsurance industry and
on the future coverage for terrorist acts and on the economy in general,
and potential governmental intervention in the insurance and reinsurance
industry in the aftermath of the September 11 terrorist attacks; (viii)
challenges by insurance regulators in the United States to our claim of
exemption from insurance regulation under current laws; (ix) a contention
by the United States Internal Revenue Service that we are engaged in the
conduct of a trade or business within the U.S.; (x) loss of services of
any one of our executive officers; or (xi) changes in exchange rates and
greater than expected currency exposure.
12
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
NONE
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
NONE
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
NONE
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On June 14, 2002 the Annual General Meeting of
Shareholders of the Company was held. At the meeting,
shareholders were asked to vote upon resolutions set forth
below. The following tabulation indicates the number of
shares present in person or by proxy at such meeting and
the number of such shares for or against, or withheld, or
abstaining, with respect to each resolution after giving
effect to the voting limitations contained in the
Company's Bye-Laws:
i). amending the Company's Bye-Laws to permit and require
the Board of Directors fill casual vacancies of the
Company's independent Auditor until the following Annual
General Meeting -
FOR AGAINST WITHHELD
--- ------- --------
37,369,573 125,681 41,826
ii). authorizing the Board to appoint a seventh director
to hold office until the Company's next Annual General
Meeting -
FOR AGAINST WITHHELD
--- ------- --------
37,340,429 152,412 44,239
iii). electing the following persons as directors of the
Company to serve until the 2003 Annual General Meeting -
FOR AGAINST WITHHELD
--- ------- --------
Joseph C.H. Johnson 37,393,540 - 143,540
Anthony M. Pilling 37,509,156 - 27,924
Dr. the Honourable Clarence James 37,509,000 - 28,080
Frank Mutch 37,510,540 - 26,540
James P. Bryce 37,511,156 - 25,924
Jackie Clegg 37,510,366 - 26,714
iv). appointing KPMG as auditors of the Company for its
fiscal year ending December 31, 2002 -
FOR AGAINST WITHHELD
--- ------- --------
37,392,740 119,551 24,789
All resolutions were passed by show of hands. No other
business of substance was transacted.
ITEM 5. OTHER INFORMATION
NONE
13
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Unless otherwise indicated, exhibits are incorporated by
reference to the corresponding numbered exhibits to the
Company's Registration Statement on Form S-1 (Registration
No. 333-00088).
EXHIBIT
NUMBER DESCRIPTION
------ -----------
3.1 Memorandum of Association of the Company
3.2 + Amended and Restated Bye-laws of the Company
3.3 Form of Memorandum of Increase of Share Capital
11.1 * Reconciliation of basic and diluted net income per common share ("EPS").
+ Incorporated by reference to Exhibit 4.2 to our Registration
Statement on Form S-3 (No. 333-73828).
* Filed herewith
(b) Reports on Form 8-K
(i) The Company filed a Form 8-K current report (date of
earliest event reported: April 17, 2002) advising that
the Board of Directors were proposing to IPC's
shareholders that KPMG be appointed in place of Arthur
Andersen as the Company's independent auditors, at its
Annual General Meeting on June 14, 2002.
(ii) The Company filed a Form 8-K/A current report (date of
earliest event reported: June 14, 2002) confirming that
there had been no disagreements between IPC and Arthur
Andersen on any matter of accounting principle or
practice, or financial statements disclosure, or any
reportable events, during IPC's two most recent fiscal
years ended December 31, 2001 and during the interim
period between December 31, 2001 and June 14, 2002. The
filing also confirmed that IPC's shareholders had
resolved to appoint KPMG as IPC's independent auditors
to serve until the next Annual General meeting of the
shareholders.
14
IPC HOLDINGS, LTD.
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THE
REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED THEREUNTO DULY AUTHORIZED.
IPC HOLDINGS, LTD.
(REGISTRANT)
DATE AUGUST 14, 2002 /s/ James P. Bryce
--------------- -------------------------------------------------
JAMES P. BRYCE
PRESIDENT AND CHIEF EXECUTIVE OFFICER
DATE AUGUST 14, 2002 /s/ John R. Weale
--------------- -------------------------------------------------
JOHN R. WEALE
SENIOR VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
15
EXHIBIT INDEX
Unless otherwise indicated, exhibits are incorporated by reference to the
corresponding numbered exhibits to the Company's Registration Statement on Form
S-1 (Registration No. 333-00088).
EXHIBIT
NUMBER DESCRIPTION
------ -----------
3.1 Memorandum of Association of the Company
3.2 + Amended and Restated Bye-laws of the Company
3.3 Form of Memorandum of Increase of Share Capital
11.1 * Reconciliation of basic and diluted net income per common share ("EPS")
+ Incorporated by reference to Exhibit 4.2 to our Registration
Statement on Form S-3 (No. 333-73828).
* Filed herewith
16