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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(Mark One)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
|X| SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
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 1-11794
E. W. BLANCH HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 41-1741779
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
500 NORTH AKARD, SUITE 4500, DALLAS, TEXAS 75201
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (214) 756-7000
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Name of Each Exchange
Title of Each Class on Which Registered
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Common Stock, par value $.01 per share New York Stock Exchange
Preferred Share Purchase Rights New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark whether the registrant (1) has filed all reports
required 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 _______
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendments to this Form 10-K. | |
As of March 6, 2000, 13,331,213 shares of Common Stock were outstanding
and the aggregate market value of the Common Stock held by non-affiliates of the
Registrant on that date was approximately $666,144,050.
DOCUMENTS INCORPORATED BY REFERENCE.
1. Portions of Registrant's 1999 Annual Report to Shareholders are
incorporated into Parts I, II and IV.
2. Portions of Registrant's Proxy Statement dated March 24, 2000 are
incorporated into Part III.
3. Registrant's Form 8-K dated March 22, 2000.
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PART I
Item 1.
BUSINESS
GENERAL
a) Development of Business
E. W. Blanch Holdings, Inc. (the "Company") was incorporated in the
State of Delaware on March 1, 1993 as a holding company for the capital stock of
E. W. Blanch Co., Inc. The Company, through predecessor organizations, was
originally founded in 1957. Unless otherwise indicated, reference to the
"Company" hereinafter includes all operating subsidiaries.
The Company's principal business is that of integrated risk management
and distribution services, including reinsurance intermediation and technical,
analytical and financial consulting services.
ACQUISITIONS
In the third quarter of 1999, the Company acquired JD Warren, Inc., a
Pittsburgh, Pennsylvania based services company specializing in the
identification and recovery of outstanding third-party deductibles for the
insurance industry. Also in the third quarter of 1999, the Company purchased the
thirty percent of its international joint venture, Swire Blanch Insurance
(Holdings) Ltd., it did not previously own. Swire Blanch Insurance (Holdings)
Ltd. is now a wholly owned subsidiary of the Company and has been renamed E.W.
Blanch Holdings Ltd.
In the fourth quarter of 1999, the Company acquired Crawley Warren
Group Ltd., a leading Lloyd's broker and provider of special risk management
services around the world. Also in the fourth quarter of 1999, the Company
acquired Michael V. Mahoney Insurance Brokers Pty Ltd., an Australian general
retail broker. The Company accounted for all of the above acquisitions under the
purchase method of accounting.
The following are the pro forma results for the Company had the companies
described above been acquired at the beginning of the periods indicated
(unaudited - in thousands, except per share amounts):
Twelve Months Ended
December 31,
1999 1998
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Revenues $275,573 $248,402
Net Income $37,756 $33,738
Earnings per Share - Diluted $2.74 $2.57
DISPOSITIONS
In the second quarter of 1999, the Company sold two non-strategic
subsidiaries of E.W. Blanch Holdings Ltd.
STRATEGIC INVESTMENTS
In the first quarter of 1999, the Company made an equity investment in
Russell Miller Advisors Asia, LLC ("RMAA"). RMAA is an insurance specialty
investment banking firm that makes equity investments in Asian insurance and
financial services industries. The Company accounts for RMAA under the equity
method as an unconsolidated subsidiary.
In the fourth quarter of 1999, the Company made an equity investment in
Ward North America Holding, Inc. ("Ward"). Ward is a provider of integrated
outsource claims solutions in the United States and Canada. The Company accounts
for Ward as a long-term investment.
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b) Financial Information About Operating Segments
Financial information about the Company's operating segments is
incorporated by reference to the section entitled "Management's Discussion and
Analysis" on pages 24 through 30, and Note 16 of the Notes to the Consolidated
Financial Statements on page 45, of the Company's 1999 Annual Report to
Shareholders.
c) Narrative Description of Business
DOMESTIC OPERATIONS
Revenues generated by domestic operations are derived from risk
management and distribution services provided to insurance and reinsurance
companies. These services are sold both on bundled and component bases. Major
components provided include reinsurance intermediation and technical and
analytical consulting services. These services are generally recurring and due
to its expertise and the value-added nature of its services, the Company has
been able to generate relatively high operating margins. Also, domestic
operations include the operations of the holding company.
The Company provides intermediary services to a diverse group of
insurance, reinsurance and related businesses located throughout the United
States. During 1999, no domestic client accounted for more than 10% of
consolidated revenues earned by the Company.
REINSURANCE INTERMEDIATION
As a reinsurance intermediary, the Company structures and arranges
reinsurance between insurers seeking to cede insurance risks and reinsurers
willing to assume such risks. In 1999, no single reinsurer used by domestic
operations accounted for more than 10% of consolidated revenues earned by the
Company.
The Company earns revenues from the structuring, placement and
servicing of reinsurance, primarily on a treaty basis. The Company is a
significant intermediary in the property catastrophe and casualty reinsurance
markets. Catastrophe reinsurance indemnifies a ceding company against a
catastrophic loss resulting from a single event such as a hurricane, earthquake
or tornado. Casualty reinsurance indemnifies a ceding company for a specified
loss caused by injuries to third parties including resulting legal liability.
The Company's activities in the casualty reinsurance arena relate primarily to
professional liability, workers' compensation and specialized casualty exposures
underwritten by excess and surplus lines insurance carriers.
Reinsurance brokerage rates, which vary by line of business, are
generally standard throughout the industry. Brokerage rates are typically based
upon a percentage of the reinsurance premium placed. In recent years, price
competition among reinsurance intermediaries has increased and there have been
instances of fee-based compensation arrangements between certain large insurers
and intermediaries such as the Company. As a result, the compensation received
by the Company relative to premium volume has in certain instances decreased in
recent years. The introduction of fee-based compensation arrangements may have
the effect of reducing the variability of the reinsurance intermediary's
compensation due to changes in external market factors such as changes in the
price of reinsurance.
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The Company's reinsurance intermediary business is highly competitive.
The Company competes with a number of reinsurance intermediaries, direct writers
of reinsurance and other financial institutions, some of which have greater
financial and other resources than the Company. The Company competes on the
basis of the quality and extent of services offered and the ability to provide
solutions that meet the needs of ceding companies, including price and capacity
requirements. In certain situations, the Company competes for reinsurance with
financial institutions which offer alternative products which attempt to
securitize or finance insurance exposures. Among the Company's competitors are
Aon Risk Services, Guy Carpenter and Co., Inc., General Re and Munich Re. There
is also competition within the reinsurance market for experienced and productive
reinsurance professionals that are essential in delivering the Company's
services. The inability of the Company to recruit and retain such reinsurance
professionals could have a material adverse effect upon its business.
Fiduciary funds and amounts of reinsurance premiums payable by the
ceding company to the reinsurer and loss payments payable by the reinsurer to
the ceding company pursuant to a reinsurance agreement, which amounts represent
receivables of the intermediary, are known as "fiduciary assets." Consistent
with industry practice, interest on the fiduciary funds accrues to the
reinsurance intermediary. Fiduciary funds are maintained in segregated accounts
for the benefit of ceding companies or reinsurers, are not commingled with other
assets of a reinsurance intermediary and are not subject to the claims of the
intermediary's creditors. At December 31, 1999, the Company had domestic
fiduciary assets and liabilities of $548.2 million. Fiduciary assets at December
31, 1999 included $80.5 million of fiduciary funds. In recent years, although
the volume of fiduciary funds processed through the Company's domestic fiduciary
accounts have increased due to business growth, the period of time for which the
funds are held has declined due to advances in technology, including electronic
transfers of funds and data. As this trend continues, the amount of investment
income earned by the Company on these funds may diminish.
The Company's reinsurance intermediary business is subject to some
government regulation. In 1990, the National Association of Insurance
Commissioners developed the Reinsurance Intermediary Model Act (the "Model Act")
which has been adopted by most states. The Company currently is licensed or is
in the process of becoming licensed in all states where it is required to be
licensed as a reinsurance intermediary. Government regulation of the Company's
business has not been a significant commercial barrier.
TECHNICAL AND ANALYTICAL CONSULTING SERVICES
The Company provides technical and analytical consulting services
primarily to insurance and reinsurance companies, government entities and
underwriting facilities. Such services are generally provided as part of the
Company's core reinsurance intermediation function, but are also marketed on a
component basis. Services include product development, facility administration,
strategic reinsurance program reviews, actuarial services, catastrophe exposure
management and analysis, and run-off management. The Company's Catalyst(R) risk
modeling software is a proprietary technology which provides a competitive
advantage in these consulting services.
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The Company also provides financial consulting services, tailored
reinsurance products and capital markets products designed to assist its clients
in capital preservation and risk management.
The Company competes with a number of competitors in its risk
management consulting and administration services business, including primary
insurance brokers, reinsurance intermediaries, management consultants,
accounting firms and financial services firms. Some of these competitors may
have, or be affiliated with, entities that have greater financial and other
resources than the Company. The Company competes with these entities on the
basis of the quality, price, innovation, and range of products and services.
FOREIGN OPERATIONS
The Company's foreign operations include E.W. Blanch Ltd., an
international risk management and distribution services firm headquartered in
London, England. E.W. Blanch Ltd. includes the operations previously carried out
by Swire Blanch Insurance (Holdings) Ltd. and the operations of Crawley Warren
Group Ltd. acquired in November 1999. These operations include a registered
Lloyd's of London insurance and reinsurance broker now trading as Blanch Crawley
Warren Ltd. and international intermediary operations. Through E.W. Blanch
Consulting Ltd., it also provides financial consulting services through the sale
of its benefits administration products, principally to companies in the
technology sector. International intermediary services include retail insurance
operations located in Hong Kong. Approximately 78% of E.W. Blanch Ltd.'s
revenues are generated in the United Kingdom with the remainder primarily from
the Pacific Rim. The Company's foreign operations have relatively lower profit
margins than its domestic operations. This is due to a number of factors
including competitive market conditions for Lloyd's brokers, the small, start-up
nature of many of the international offices, the competitiveness of the
insurance brokerage business, and the amortization of goodwill associated with
the purchase of E.W. Blanch Ltd. The Company seeks to grow its international
profitability through the integration of systems, services and expertise in
order to increase revenue production and processing efficiencies.
The Company's foreign operations provide services to a diverse client
base, including original insureds and insurance companies located throughout the
world. During 1999, no foreign client accounted for more than 10% of
consolidated revenues earned by the Company.
REINSURANCE INTERMEDIATION
In 1999, no single insurer or reinsurer used by foreign operations
accounted for more than 10% of consolidated revenues earned by the Company. The
Company's foreign operations brokerage rates are similar to those for domestic
operations. Like the Company's domestic operations, the Company's international
intermediary business is highly competitive. The Company competes with a number
of reinsurance intermediaries, direct writers of reinsurance and other financial
institutions, some of which have greater financial and other resources than the
Company. The Company competes on the basis of the quality and extent of services
offered and the ability to provide solutions that meet the needs of ceding
companies, including price and capacity requirements. In certain situations, the
Company competes for reinsurance with financial institutions which offer
alternative products which attempt to securitize or finance insurance exposures.
The Company has similar types of competitive issues internationally and
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domestically. The Company's primary foreign competitors are other Lloyd's
brokers, in addition to the Company's domestic competitors or affiliates of
those companies. The Company also competes for experienced professionals to
deliver the Company's services internationally and could be adversely affected
if the Company is unable to recruit and retain such employees.
The Company's foreign operations also have fiduciary assets, similar to
its domestic operations, and earns investment income on the funds it holds for
insurance and reinsurance companies. At December 31, 1999, the Company had
foreign fiduciary assets and liabilities of $421.6 million. Fiduciary assets at
December 31, 1999 included $94.1 million of fiduciary funds.
The Company's foreign intermediary business is subject to varying
amounts of government regulation in each of the countries where it has
operations. The Company currently is licensed or is in the process of becoming
licensed in all countries where it is required to be licensed as an insurance or
reinsurance intermediary. Government regulation of the Company's business has
not been a significant commercial barrier.
FINANCIAL PENSION AND CONSULTANCY SERVICES
Through E.W. Blanch Holdings Ltd., the Company provides independent
advice on various aspects of the financial services industry, including the
design, administration and financial control of employee benefits packages,
personal financial planning and pension fund administration. These services are
provided, outside of the United States, to individuals, professional
intermediaries, owner-managed businesses and corporations of all sizes. The
Company plans to continue to develop these services.
The Company competes with other financial service and insurance
companies in providing these services. Some of these competitors may have, or be
affiliated with, entities that have greater financial and other resources than
the Company. The Company competes with these entities on the basis of the
quality, price, innovation, and range of products and services.
EMPLOYEES
As of December 31, 1999, the Company had 1,291 employees. The table
below reflects the number of Company employees by geographic segment at December
31 of the respective year:
1999 1998
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Domestic operations 756 665
Foreign operations 535 499
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Total 1,291 1,164
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The increase in the number of employees in the Company's domestic operations is
primarily due to increased business levels and the acquisition of JD Warren,
Inc. The Company believes its relationship with its employees is excellent. The
Company is not a party to any collective bargaining agreement.
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CAUTION REGARDING FORWARD-LOOKING STATEMENTS
In connection with the "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995, the Company expresses caution that the
following important risk factors, among others, could cause the Company's actual
results to differ materially from those projected in forward-looking statements,
both written and verbal, about the Company made by or on behalf of the Company.
COMPETITION
The reinsurance intermediary business, the Company's primary source of
revenue, is highly competitive. The Company competes with a number of
reinsurance intermediaries in the broker reinsurance market. The consolidation
of reinsurance intermediary competitors through mergers and acquisitions has
continued in 1999, with the result that certain of the Company's principal
competitors have increased substantially in size and potential resources, which
may make them more formidable competitors. Results of the Company's operations
may also be affected by competition for reinsurance business between broker
reinsurers and direct reinsurance writers. Broker reinsurers compete with direct
writers based primarily upon the price of reinsurance, reinsurance capacity,
contract terms and conditions, quality and extent of services offered, financial
strength, reputation and experience. The Company competes with other reinsurance
intermediaries and direct writers on the basis of the quality and extent of
services offered to ceding companies and the ability to provide solutions that
meet the needs of ceding companies, including price and capacity requirements.
Finally, in certain situations, the Company finds itself in competition for
reinsurance business with other financial institutions which offer alternative
products which attempt to securitize or finance insurance exposures using
various capital market products.
The Company also faces substantial competition in its efforts to
generate revenues by offering unbundled risk management consulting, financial
consulting and administration services to its clients and prospects.
In addition, the Company competes with other entities with respect to
the employment of personnel, including reinsurance brokers. The Company's
competitors include entities which have, or are affiliated with entities that
have, greater financial and other resources than the Company.
DEPENDENCE ON KEY PERSONNEL
The Company's business depends, and will continue to depend, on the
services of its executive officers, senior reinsurance brokers, senior
consultants and other key employees. Such persons may from time to time leave
the Company due to, among other things, retirement, health, personal and
professional reasons. The Company has entered into employment agreements with
most of its executive officers and senior reinsurance brokers. The employment
agreements contain provisions under which the employees have agreed not to
compete with the Company for specified periods of time following termination of
employment and not to solicit other employees to join in a departure from the
Company. The Company intends to continue to seek enforcement of employment
agreements though this may not prevent the departure of key personnel. There can
be no assurance that the Company will be able to retain its existing personnel
or to find and attract additional qualified employees.
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MARKET CONDITIONS IN THE INSURANCE AND REINSURANCE INDUSTRIES
The Company's business is affected by market conditions in the
insurance and reinsurance industries, which historically have been subject to
significant volatility in demand, supply and price.
Insurance companies generally purchase reinsurance in order to, among
other things, manage their exposures on insured risks, maintain acceptable
financial ratios and protect their underwriting results from catastrophic
events. The propensity of insurers to purchase, as well as the propensity of
reinsurers to supply reinsurance, is affected by a variety of factors, including
the level of surplus capacity in the insurance and reinsurance markets,
prevailing premium rates for insurance and reinsurance, underwriting experience,
regulatory considerations, changes in the investment environment and general
economic conditions and business trends.
To the extent that these factors influence the need for, availability
of and price of insurance and reinsurance, they may also affect the amount of
reinsurance brokerage, normally a function of the ceded premium, received by the
Company. For example, when reinsurance premium rates rise, brokerage associated
with a particular amount of coverage placed may increase. The Company's ability
to earn increased brokerage in this instance may, however, be limited if
insurers purchase less reinsurance which has been an increasing trend among the
Company's clients, or if the supply of certain reinsurance coverage is
curtailed. Conversely, declining prices for reinsurance would generally reduce
the brokerage associated with a particular placement. A reduction in brokerage
may, however, be limited if insurers purchase more reinsurance at the lower
premium rates or if more or larger placements of coverages are achieved due to
increases in the supply of reinsurance. The Company's reinsurance brokerage
revenues can also be negatively influenced by clients who choose to increase
their retentions of risk, thereby purchasing less reinsurance, and by
acquisitions of the Company's clients where the acquirer does not purchase
reinsurance, purchases less reinsurance or purchases reinsurance elsewhere.
Price competition among reinsurance intermediaries has increased in
recent years, and there have been instances of fee-based compensation
arrangements between certain large insurers and reinsurance intermediaries such
as the Company. As a result, the compensation received by the Company relative
to premium volume has in certain instances decreased in recent years and there
can be no assurance that these arrangements will not become more prevalent in
the future.
In addition, the development of state or federal underwriting
facilities, pools, or other alternate coverage mechanisms for catastrophic risks
such as earthquakes or hurricanes may, in the future, lead to a reduction in the
amount of such risks insured by primary insurers, and may consequently reduce
such insurers' needs for reinsurance of the type traditionally brokered by the
Company.
The insurance brokerage industry in general is experiencing a period of
low growth due to competitive pricing of underlying insurance and reinsurance
premiums, and competitive pressures on brokerage and commission rates. Although
the Company seeks to achieve growth in this market through its business
strategies, there can be no assurance that these strategies will be successful
to achieve consistent internal growth in a difficult market environment. Should
internal growth slow, or even decline, the Company will be less likely to meet
revenue targets which could affect net income, profit margins, and the market
price of the Company's common stock.
The Company has experienced and may continue to experience greater
fluctuations in revenues due to the impact of market conditions on commissions
resulting in some renewable contracts not being renewed, renewed on
substantially different terms or influenced by other circumstances. See UNICOVER
LITIGATION AND WORKERS' COMPENSATION REINSURANCE ISSUES below.
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INTERNAL REORGANIZATION
In response to the changing market, the Company has reviewed its
operations and organization resulting in a plan to realign internal operations
to better take advantage of the market and respond to changing customer needs.
There can be no assurance that the reorganization will be successfully
completed, or that it will positively affect revenues.
FUTURE ACQUISITIONS
One of the Company's strategic solutions to market conditions and to
growth has been to acquire international and domestic operations of similar and
related businesses. The ability of the Company to continue to successfully
acquire such businesses will depend on numerous factors that the Company may not
be able to control such as finding suitable candidates, successfully and quickly
integrating the businesses into its domestic and/or international operations,
profitably funding the acquisition, maintaining sufficient management resources
for evaluating and negotiating acquisitions, minimizing the distractions from
the business during acquisitions and integrations, and successfully achieving
anticipated benefits from the acquisitions.
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SPECIFIC ENGAGEMENTS AND NEW OPPORTUNITIES
The Company has been engaged and is pursuing a variety of specific
engagements and opportunities, in addition to its traditional reinsurance
intermediary and wholesale brokerage lines of business. In its efforts to expand
its revenues, the Company is exploring a variety of potential initiatives and
opportunities that are related to the Company's traditional core business, but
that will require the Company in some instances to operate in areas where the
Company does not have historical experience.
These specific engagements and opportunities give rise to certain risks
and uncertainties. For example, alternative distribution opportunities are
subject to significant negotiations among the Company, the primary insurance
company transferring the insurance risks at issue, the alternative insurance
companies assuming those risks, and the reinsurance marketplace providing the
capacity to support the risk transfer. These alternative distribution
transactions also generally require approval of terms and rates by relevant
state insurance departments. As a result, there can be no assurance these
transactions will be consummated, and the timing of the transactions is
difficult to predict, which can reduce or delay the revenues the Company expects
to receive.
These specific engagements also can result in increased fluctuations in
the Company's earnings. While the revenues in the Company's core reinsurance and
insurance intermediary lines of business also are subject to fluctuation, as
described above, the revenues from these core lines of business generally tend
to recur each year, as the reinsurance or insurance contracts are renewed by the
Company's customers. For certain of these specific engagements and new
opportunities, however, the potential revenues may not recur each year.
Additionally, the timing of the engagements can affect quarterly results, adding
to fluctuations in quarterly earnings which can impact the market price of the
Company's common stock.
Also, as the Company expands into new (though related) lines of
business, there likely will be increased unpredictability as to whether the
Company will be successful in those new endeavors. These new opportunities
generally involve technological capabilities and personnel skill sets that the
Company must acquire externally and/or build internally. The availability and
revenue potential for some of these opportunities are unknown or uncertain and
the ability of the Company to recognize gains from any strategic investments in
these opportunities cannot be assured. For these reasons, it is possible the
Company may invest substantial resources into these potential specific
engagements and opportunities, without achieving the revenues it anticipates in
return.
INTERNATIONAL OPERATIONS
The Company is significantly increasing its reinsurance intermediary
and wholesale brokerage activities outside of its traditional territory in the
United States. The Company has offices in Adelaide, Asuncion, Brisbane,
Copenhagen, Hong Kong, LaBuan, London, Melbourne, Mexico City, New Castle, Rio
de Janeiro, Santiago, Singapore and Sydney. The Company has representative
offices in Beijing, Buenos Aires, Hanoi, Ho Chi Minh City and Shanghai. With
these international operations come increased risks, including the potential
that the Company will not successfully integrate its international operations
with its domestic and other international operations, currency exchange risks,
unstable local insurance markets, unstable local economies, legal and regulatory
constraints and liabilities in jurisdictions where the Company does not have
significant experience, and political risks, especially in third-world
countries.
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FOREIGN CURRENCY
The Company's primary functional currency is the U.S. dollar. The
functional currency of the Company's foreign operations is the currency of the
primary economic environment in which the subsidiary operates. Therefore,
fluctuations in foreign currency rates can have an impact on the Company's
results of operations. However, the Company believes its exposure to market risk
in certain geographic areas that have experienced or are likely to experience an
economic downturn, such as the Pacific Rim and Latin America, is minimal.
Additional information is contained in the Company's 1999 Annual Report to
Shareholders under the caption Market Risk on pages 28 through 29.
UNICOVER LITIGATION AND WORKERS' COMPENSATION REINSURANCE ISSUES
The workers' compensation reinsurance industry was impacted in 1999 by
certain events principally surrounding an entity called Unicover Managers, Inc.
("Unicover"). Unicover served as a managing general underwriter for various
insurance companies that provided reinsurance coverage to the workers'
compensation primary insurance industry. It has been alleged that Unicover, on
behalf of companies it represented, assumed reinsurance exposures at prices and
volume levels that were imprudent for those companies and their
retrocessionaires, and that correspondingly were advantageous to the customers
who procured reinsurance coverage through Unicover. Various clients of the
Company, employing the Company's reinsurance intermediary services, procured
workers' compensation reinsurance coverage through Unicover in late 1998 and
early 1999.
One client that the Company assisted in procuring reinsurance through
Unicover was the "AIG" group of insurance companies. A lawsuit was commenced in
1999 relating to that reinsurance program. The Company is the third-party
defendant and cross-claimant in that litigation, which is described in more
detail in Item 3. Legal Proceedings. The Company also assisted various other
clients in procuring workers' compensation reinsurance coverage with Reliance
Insurance Company ("Reliance"), managed by Unicover. In 1999, Reliance engaged
in negotiations with those clients of the Company, to settle Reliance's
reinsurance obligations to those clients of the Company. In January 2000,
Reliance announced that those settlement negotiations had been successfully
concluded. Also in January 2000, Reliance and the Company reached an agreement
in principle concerning the Company's brokerage revenue associated with these
settled reinsurance placements. As a result of this agreement, the Company will
not experience any material adverse impact with respect to revenues the Company
has previously recognized for these placements.
The Company also assisted another client company, EBI Indemnity Company
("EBI"), in procuring workers' compensation reinsurance coverage through
Unicover. The Company has
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been advised that the reinsurance companies represented by Unicover settled
their obligations to EBI in January 2000. To date, the Company has not reached
an agreement with EBI or those reinsurers concerning the Company's brokerage
revenues associated with the reinsurance program, although discussions are
ongoing. In 1999 the Company recognized revenue for this program in accordance
with its standard revenue recognition practices, through the third quarter of
1999. Some, but not all, of that recognized revenue has been received by the
Company. If the Company is not successful in negotiating a satisfactory
resolution of its right to brokerage for the EBI reinsurance program, it intends
to pursue its legal remedies to enforce its rights.
The Company also assisted a client, Superior National Insurance Group
("SNIG"), in procuring workers' compensation reinsurance coverage. This coverage
was procured through a competitor of Unicover, Web Management LLC ("WEB"), which
represented a reinsurer named United States Life Insurance Co. of the City of
New York ("U.S. Life"). The Company is advised that U.S. Life in late 1999
commenced an arbitration proceeding against SNIG. The Company is advised that
U.S. Life alleges, possibly among other things, that this reinsurance program
should be rescinded, for alleged nondisclosure of material information. The
Company is not a party to this arbitration proceeding. However, it is possible
that in the event U.S. Life is successful in that proceeding, the Company may be
required to return reinsurance brokerage previously received and recognized. If
the Company were required to return all of its previously recognized and
received brokerage for this program, the amount would have a material adverse
impact on the Company's financial position and results of operations. However,
based on currently available information, the Company does not believe that this
is likely to occur.
The Company has not made any material accruals for any loss contingency
relating to the revenues recognized to date on the Unicover litigation and
workers' compensation reinsurance issues discussed above, because in the
Company's opinion, no such loss contingencies are likely to occur. However, the
Company is of the opinion that there is a reasonable possibility (i.e., more
than remote but less than likely) of a loss contingency with respect to certain
of those issues, and estimates a possible range of loss for these reasonably
possible loss contingencies of zero to $7.1 million. The Company intends to
continue to vigorously pursue and defend its rights to brokerage on these
matters, including its rights to brokerage in addition to what it has recognized
to date.
GOVERNMENT REGULATION
Certain countries and states in which the Company operates require the
licensing of certain components of the Company's operations. Reinsurance
intermediary licensing statutes generally require, among other things, a written
contract between the ceding company and the reinsurance intermediary which is
terminable at will by the ceding company.
Insurance regulation, including the regulation of intermediaries, has
been subject to increased scrutiny by the National Association of Insurance
Commissioners (the "NAIC") and legislative and regulatory bodies. The NAIC and
state insurance regulators have been reexamining existing laws and regulations,
with an emphasis on insurance company investment and solvency issues. From time
to time members of Congress have raised the possibility of federal regulation
that could result in the federal government assuming some role in the monitoring
of the insurance industry. No assurance can be given as to future legislative or
regulatory changes or as to their effect upon the Company.
The Company's subsidiary E.W. Blanch Capital Markets, Inc. ("EWB
Capital Markets") is a broker-dealer, registered with the Securities and
Exchange Commission ("SEC") and securities regulatory commissions in certain
states. EWB Capital Markets must maintain current registration with the
applicable regulatory bodies. EWB Capital Markets is a member of the National
Association of Securities Dealers ("NASD"). The securities industry in the
United States is subject to extensive regulation under federal and state laws.
The SEC is the federal agency charged with administration of the federal
securities laws. Much of the regulation of broker-dealers, such as EWB Capital
Markets, has been delegated to self-regulatory organizations like the NASD. The
NASD conducts periodic examinations of member broker-dealers. Securities firms
are also subject to regulation by state securities commissions in the states in
which they are registered.
FIDUCIARY FUNDS
As an intermediary, the Company acts as a conduit for insurance and
reinsurance premiums and loss payments which are paid to and remitted from
fiduciary accounts. The Company could be liable if it were to mishandle such
funds in violation of its fiduciary obligations.
The Company earns investment income on the fiduciary funds it holds on
behalf of insurance and reinsurance companies. In recent years, although the
volume of funds processed through the Company's fiduciary accounts have
increased due to business growth, the period of time for which the funds are
held has declined due to advances in technology, including electronic transfers
of funds and data. As this trend continues, the amount of investment income
earned by the Company on these funds may diminish. The Company's investment
income on the fiduciary funds also is impacted by fluctuating interest rates.
Item 2.
PROPERTIES
The Company's physical properties consist primarily of leases of
commercial office space. At December 31, 1999, the Company leased 378,000 square
feet of office space, including 228,000 square feet at its three primary
locations, Dallas, London, and Minneapolis. The Company considers its properties
to be adequate for its present and reasonably foreseeable requirements.
Item 3.
LEGAL PROCEEDINGS
The Company is engaged in legal proceedings in the ordinary course of
business, none of which, either individually or in the aggregate, will, in the
opinion of management, have a material adverse effect on the consolidated
financial position of the Company or the results of its operations.
The various lawsuits to which the Company is a party are routine in
nature and incidental to the Company's business, with the following exception:
E.W. Blanch Co. ("Blanch"), a subsidiary of the Company, is a
third-party defendant in a lawsuit venued in the Supreme Court of the State of
New York, County of New York. This lawsuit was instituted on February 16, 1999,
and Blanch was added as a third-party defendant on
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March 23, 1999. Plaintiffs are AIU Insurance Company and various other insurance
companies, all of whom are part of the "AIG" group of companies. Defendants are
Unicover Managers, Inc. ("Unicover") and ReliaStar Life Insurance Company
("ReliaStar"). Blanch was joined in the lawsuit as a third-party defendant by
ReliaStar.
In this lawsuit, AIG as plaintiff alleges that ReliaStar, through its
agent Unicover, agreed to provide certain reinsurance protection to AIG,
relating to workers' compensation insurance policies issued by the plaintiff AIG
companies in California and elsewhere in the United States. Defendants assert
that the reinsurance coverages in issue never were bound, and defendant
ReliaStar further asserts that if defendant Unicover in fact did bind those
coverages, it acted beyond the authority granted by ReliaStar.
In ReliaStar's third-party complaint against Blanch, ReliaStar alleges
that Blanch, as AIG's reinsurance broker on the reinsurance placements in issue,
knew or should have known that the reinsurance coverages were not bound and knew
or should have known that Unicover did not have the authority to bind ReliaStar
to those coverages.
The relief being sought by AIG in its complaint against ReliaStar and
Unicover is that defendants be required to honor the reinsurance commitments
that AIG alleges were made, and be required to pay an unspecified amount of
money damages for alleged breach of those reinsurance commitments and (with
respect to Unicover) for negligent misrepresentation.
The relief being sought by ReliaStar in its third-party complaint
against Blanch is that, in the event ReliaStar is found to be liable to AIG,
Blanch be required to indemnify and hold ReliaStar harmless for that liability,
or in the alternative, Blanch be required to make a contribution for a portion
of that liability in an amount to be determined by the Court.
Blanch, in turn, has filed a counterclaim against ReliaStar and
Unicover. The counterclaim alleges that ReliaStar and Unicover, in fact, did
bind the reinsurance coverages in issue, and therefore, they owe Blanch the
reinsurance brokerage to which Blanch is entitled under those reinsurance
contracts. Alternatively, if it is determined that Unicover misrepresented its
authority to bind ReliaStar, Blanch should be awarded money damages resulting
from its reliance on those misrepresentations.
This lawsuit is in the pre-trial stage, with a trial expected to occur
sometime in 2000. Blanch intends to defend vigorously the claims made against it
by ReliaStar and to pursue vigorously its counterclaims against ReliaStar and
Unicover.
Management believes, based on current information, that these actions
will not have a material adverse effect upon the financial position or results
of operations of the Company.
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Item 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of the Company's security
holders during the Company's fourth quarter.
Item 4A.
EXECUTIVE OFFICERS OF THE COMPANY (AS OF MARCH 6, 2000)
DATES
ELECTED TO
NAME AND AGE OFFICE PRESENT POSITION AND BUSINESS EXPERIENCE
- ------------ ------ ----------------------------------------
Edgar W. Blanch, Jr. (63) 3/03/93 Chairman and Chief Executive Officer
Kaj Ahlmann (49) 11/24/99 Vice Chairman
1993-1999 Chairman, President and Chief Executive Officer -
Employers Reinsurance Corporation (Reinsurer)
Chris L. Walker (42) 7/27/95 President and Chief Operating Officer
3/03/93-7/27/95 Executive Vice President
Frank S. Wilkinson, Jr. (60) 3/03/93 Executive Vice President
Susan B. Wollenberg (36) 1/24/00 Senior Vice President and Chief Financial Officer
1995-2000 Second Vice President (Finance and Business
Development) - Employers Reinsurance Corporation
(Reinsurer)
1993-1995 Assistant Vice President (Finance) - Employers
Reinsurance Corporation (Reinsurer)
Scott K. Billings (37) 1/01/00 Senior Vice President and Chief Accounting Officer
1998-1999 Vice President and Controller
1994-1998 Assistant Controller and Controller - H.D. Vest, Inc.
(Financial Services)
Daniel P. O'Keefe (47) 4/01/96 Senior Vice President, General Counsel and Corporate
Secretary
Prior to 4/01/96 Partner - Dorsey & Whitney LLP (Law Firm)
*Rodman R. Fox (36) 3/7/97 President and Chief Operating Officer - Blanch
4/1/95-3/7/97 Executive Vice President - Blanch
5/6/93-4/1/95 Senior Vice President - Blanch
* Mr. Fox resigned from his employment with the Company effective March 20,
2000.
-14-
PART II
Item 5.
MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED SHAREHOLDER MATTERS
The information required by Item 5 is incorporated herein by reference
to the section entitled "Stock Listing and Trading Information" on page 49 of
the Company's 1999 Annual Report to Shareholders.
Item 6.
SELECTED FINANCIAL DATA
The information required by Item 6 is incorporated herein by reference
to the section entitled "Six Year Financial Summary" on page 23 of the Company's
1999 Annual Report to Shareholders.
Item 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The information required by Item 7 is incorporated herein by reference
to the section entitled "Management's Discussion and Analysis" on pages 24
through 30 of the Company's 1999 Annual Report to Shareholders.
Item 7(a).
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required by Item 7(a) is incorporated herein by
reference to the section entitled "Market Risk" on pages 28 through 29 of the
Company's 1999 Annual Report to Shareholders.
Item 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by Item 8 is incorporated herein by reference
to pages 31 through 47 of the Company's 1999 Annual Report to Shareholders.
Item 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not Applicable.
-15-
PART III
Item 10.
DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The information required by Item 10 with regard to Directors is
incorporated herein by reference to the section entitled "Election of Directors"
in the Company's proxy statement for its Annual Meeting of Shareholders in 2000.
The information required by Item 10 with regard to executive officers is set
forth in Item 4A hereof. The information required by Item 10 with regard to
Section 16 reporting is incorporated by reference to the section entitled
"Section 16(a) Beneficial Ownership Reporting Compliance" of the Company's proxy
statement for its Annual Meeting of Shareholders in 2000.
Item 11.
EXECUTIVE COMPENSATION
The information required by Item 11 is incorporated herein by reference
to the section entitled "Executive Compensation" in the Company's proxy
statement for its Annual Meeting of Shareholders in 2000.
Item 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required in Item 12 is incorporated herein by reference
to the section entitled "Security Ownership of Certain Beneficial Owners" in the
Company's proxy statement for its Annual Meeting of Shareholders in 2000.
Item 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 is incorporated herein by reference
to the section entitled "Certain Relationships and Related Transactions" in the
Company's proxy statement for its Annual Meeting of Shareholders in 2000.
-16-
PART IV
Item 14.
EXHIBITS, FINANCIAL STATEMENT SCHEDULES,
AND REPORTS ON FORM 8-K
(a)(1) The following consolidated financial statements of E. W. Blanch
Holdings, Inc. included in the 1999 Annual Report to Shareholders are
incorporated by reference into this Report by Item 8 hereof:
Report of Independent Auditors
Consolidated Statements of Income for the years ended December 31,
1999, 1998 and 1997
Consolidated Balance Sheets as of December 31, 1999 and 1998
Consolidated Statements of Cash Flows for the years ended December 31,
1999, 1998 and 1997
Consolidated Statements of Shareholders' Equity for the years ended
December 31, 1999, 1998 and 1997
Notes to Consolidated Financial Statements
(a)(2) All schedules to the consolidated financial statements listed in
Article 5 of Regulation S-X are not required under the related
instructions or are inapplicable and therefore have been omitted.
(a)(3) The Exhibits required to be a part of this Report are listed in the
Index to Exhibits on pages 21 through 22 hereof.
Pursuant to Item 601 (b) (4) (iii) of Regulation S-K, copies of certain
instruments defining the rights of holders of certain long-term debt of
the Company are not filed, and in lieu thereof, the Company agrees to
furnish copies thereof to the Securities and Exchange Commission upon
request.
(b) Reports on Form 8-K
The registrant filed a current report on Form 8-K on March 22, 2000.
The report contained the Company's press release reporting preliminary
results for the first quarter ending March 31, 2000 and the resignation
of Rodman R. Fox. Mr. Fox was a member of the Board of Directors of the
Company, and was President and Chief Operating Officer of the Company's
E.W. Blanch Co. subsidiary. This Form 8-K should be read in conjunction
with the Company's financial statements included in Exhibit 13 hereof.
(c) Exhibits
Included in Item 14(a)(3) above.
(d) Financial Statement Schedules
Included in Item 14(a)(2) above.
-17-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, E. W. Blanch Holdings, Inc. has duly caused this annual
report on Form 10-K to be signed on its behalf by the undersigned, thereunto
duly authorized, on March 28, 2000.
E. W. BLANCH HOLDINGS, INC.
(Registrant)
By: /s/ Edgar W. Blanch, Jr.
-------------------------------------
Edgar W. Blanch, Jr., Chairman of the Board,
Chief Executive Officer and Director
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of E. W.
Blanch Holdings, Inc. and in the capacities indicated on March 28, 2000.
Signature Title
- ------------------------------- ----------------------------------------------
/s/ Edgar W. Blanch, Jr. Chairman of the Board, Chief Executive Officer
- ------------------------------- and Director
Edgar W. Blanch, Jr.
/s/ Susan B. Wollenberg Senior Vice President and Chief Financial
- ------------------------------- Officer
Susan B. Wollenberg
/s/ Scott K. Billings Senior Vice President and Chief Accounting
- ------------------------------- Officer
Scott K. Billings
Edgar W. Blanch, Jr., pursuant to powers of attorney which are being
filed with this Annual Report on Form 10-K, has signed below on March 28, 2000
as attorney-in-fact for the following directors of the Registrant:
James N. Land, Jr. William B. Madden
Steven G. Rothmeier Gerald A. Isom
Paul B. Ingrey Chris L. Walker
Frank S. Wilkinson, Jr.
Kaj Ahlmann
/s/ Edgar W. Blanch, Jr.
------------------------------------------
Edgar W. Blanch, Jr.
Attorney-in-fact
-18-
INDEX TO EXHIBITS
Exhibit
Number Description
- ------ -----------
3.1 Restated Certificate of Incorporation of the Company (5)
3.2 By-Laws of the Company (2)
4.1 Specimen Common Stock Certificate (2)
4.2 Rights Agreement, dated as of January 24, 1997, between the
Company and Norwest Bank Minnesota, N.A., as Rights Agent (3)
4.3 Rights Agreement Amendment, dated as of October 16, 1998, between
the Company and Norwest Bank Minnesota, N.A., as Rights Agent (9)
4.4 Credit Agreement, dated as of November 3, 1998, between the
Company and Nationsbank, N.A., as Agent (11)
10.1* Non-Employee Directors Stock Plan (2)
10.2* Directors' Stock Option Plan (7)
10.3* 1993 Stock Incentive Plan, as amended (11)
10.4* 1997 Stock Incentive Plan (7)
10.5* Executive Restricted Stock Incentive Plan (7)
10.6* 1999 Management Incentive Plan (1)
10.7* K2 Technologies, Inc. 1994 Stock Plan (10)
10.8* K2 Technologies, Inc. 1996 Stock Plan (10)
10.9* K2 Technologies, Inc. 1998 Key Person Stock Option Plan (10)
10.10* Employment Agreement between the Company and Edgar W. Blanch, Jr. (4)
10.11* Employment Agreement between the Company and Frank S. Wilkinson, Jr. (2)
10.12* Employment Agreement between the Company and Chris L. Walker (2)
10.13* Employment Agreement between the Company and Rodman R. Fox (11)
10.14* Specimen Severance Agreement (6)
10.15* Schedule of Executives Receiving Severance Agreements, as amended (1)
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10.16* Employment Agreement between the Company and Kaj Ahlmann (1)
10.17 Stock Purchase Agreement by and among Paragon Reinsurance Risk
Management Services, Inc., E.W. Blanch Holdings, Inc., JD Warren,
Incorporated, Ronald R. Morris, Michael P. Lopes and Paul A.
Herskovitz, dated August 25, 1999 (1)
10.18 Sale/Purchase Agreement of the entire issued share capital of
Crawley Warren Group Ltd. by and among B.J. Warren Esq. And
Others, and E.W. Blanch Ltd., dated November 1999 (1)
11 Computation of Earnings per Share (8)
13 Portions of the 1999 Annual Report to Shareholders incorporated
by reference in this Form 10-K (1)
21 Subsidiaries of the Company (1)
23 Consent of Ernst & Young LLP (1)
24 Powers of Attorney (1)
27 Financial Data Schedule for the year ended December 31, 1999 (1)
- -------------------------------------
(1) Filed with this Annual Report on Form 10-K.
(2) Incorporated by reference to the Company's Registration Statement on
Form S-1, Registration No. 33-59198.
(3) Incorporated by reference to the Company's Registration Statement on
Form 8-A, dated January 24, 1997.
(4) Filed with the Company's Quarterly Report on Form 10-Q for the fiscal
quarter ended June 30, 1997.
(5) Filed with the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1996.
(6) Filed with the Company's Quarterly Report on Form 10-Q for the fiscal
quarter ended September 30, 1997.
(7) Filed with the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1997.
(8) The information required by Exhibit 11 is incorporated by reference to
Note 8 to the Company's Consolidated Financial Statements for the year
ended December 31, 1999 included in Exhibit 13 with this Annual Report
on Form 10-K.
(9) Incorporated by reference to Amendment number one to the Company's
registration statement on Form 8-A dated November 18, 1998.
(10) Filed with the Company's Quarterly Report on Form 10-Q for the fiscal
quarter ended September 30, 1998.
(11) Filed with the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1998.
* Management contract and compensatory plan or arrangement required to be
filed pursuant to Item 601(b)(10)(iii)(A) of Regulation S-K.
-20-