Exhibit 99.1
Audited Financial Statements
CAT Limited
December 31, 1997 and 1996
[LOGO OF ERNST & YOUNG LETTERHEAD]
REPORT OF INDEPENDENT AUDITORS
TO THE SHAREHOLDERS OF CAT LIMITED
We have audited the accompanying balance sheets of CAT Limited as of December
31, 1997 and 1996 and the related statements of income, shareholders' equity and
cash flows for the years then ended. These financial statements are the
responsibility of the company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the company at December 31,
1997 and 1996 and the results of its operations and its cash flows for the years
then ended in conformity with accounting principles generally accepted in the
United States.
/s/ Ernst & Young
Hamilton, Bermuda
January 20, 1998
CAT LIMITED
(Incorporated in Bermuda)
BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
(expressed in thousands of United States dollars except share and per share
amounts)
1997 1996
---- ----
ASSETS
Fixed maturity securities at fair value (amortized cost $398,442
and $365,045 at December 31, 1997 and 1996,
respectively) (Note 3) $399,540 $363,865
Investment in insurance linked securities (Note 3) 19,406 -
Short term investments (Note 3) 33,831 17,437
Equity securities at fair value (Note 3) 28,009 10,165
-------- --------
Total investments 480,786 391,467
Cash and cash equivalents 35,133 73,393
Investment in Enterprise (Note 7) 72,597 -
Premiums receivable 17,133 21,114
Prepaid reinsurance premium (Note 5) 1,571 -
Accrued interest 6,337 4,200
Other assets (Note 7) 1,777 4,612
Deferred policy acquisition costs 2,354 2,446
Net fixed assets 443 186
-------- --------
Total Assets $618,131 $497,418
======== ========
LIABILITIES
Contract liabilities and accruals:
Reserve for losses, loss expenses and experience
refunds (Note 4) $ 36,862 $ 42,121
Unearned premium 24,411 25,420
Reinsurance balances payable (Note 5) 1,469 -
Accrued expenses (Note 6) 8,776 6,853
Liability for call options 6,173 -
-------- --------
Total Liabilities 77,691 74,394
-------- --------
Commitments and Contingencies (Note 8)
SHAREHOLDERS' EQUITY
(Notes 6, 9, 10 and 12)
Voting common stock, $1.00 par value 4,620,000 shares
authorized; 2,694,497 shares issued and outstanding 2,695 2,695
Additional paid in capital 251,995 251,995
Net unrealized gains (losses) on investments 18,728 (1,015)
Retained earnings 267,022 169,349
-------- --------
Total Shareholders' Equity 540,440 423,024
-------- --------
Total Liabilities and Shareholders' Equity $618,131 $497,418
======== ========
See notes to financial statements
CAT LIMITED
STATEMENTS OF INCOME
DECEMBER 31, 1997 AND 1996
(expressed in thousands of United States dollars except per share data)
1997 1996
-------- --------
Premiums written (Note 6) $147,152 $136,186
Premiums ceded (Note 5) (11,270) (357)
-------- --------
Net premiums written 135,882 135,829
Decrease (increase) in unearned premiums 2,579 5,309
-------- --------
Premiums earned 138,461 141,138
Net investment income (Note 3) 23,207 25,056
Realized (losses) gains on sales of
investments (Note 3) (242) 157
-------- --------
Total revenue 161,426 166,351
Losses, loss expenses and experience refunds
(Notes 4 and 6) 25,627 56,731
Policy acquisition costs 13,873 13,641
Administration 10,983 7,508
Consulting and technology services
(Note 8) 5,193 3,599
-------- --------
Total expenses 55,676 81,479
-------- --------
Net income $105,750 $ 84,872
======== ========
See notes to financial statements
CAT LIMITED
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997 AND 1996
(expressed in thousands of United States dollars)
1997 1996
---- ----
Cash Flows from Operating Activities:
Net income $105,750 $ 84,872
Adjustments to reconcile net income to cash
provided by operating activities:
Realized losses (gains) on sales of
investments 242 (157)
Amortization of premium on debt securities 834 1,002
Depreciation 122 229
Premiums receivable 3,981 8,921
Other assets 790 (3,451)
Prepaid reinsurance premium (1,571) -
Unearned premium (1,009) (5,309)
Reserve for losses, loss expenses and
experience refunds (5,259) 8,490
Reinsurance balances payable 1,469 (31)
Other liabilities 1,923 1,874
-------- --------
Net cash provided by operating activities 107,272 96,440
-------- --------
Cash Flows from Investing Activities:
Proceeds from sales and paydowns
on fixed maturity securities 677,191 329,732
Purchases of fixed maturity securities (711,481) (443,589)
Net sales (purchases) of short-term investments (16,551) (7,439)
Purchase of equity securities (15,004) (10,000)
Purchase of investment in Enterprise (60,000) -
Purchase of insurance linked securities (19,308) -
-------- --------
(145,153) (131,296)
Fixed asset purchases (379) (8)
-------- --------
Net cash used in investing activities: (145,532) (131,304)
-------- --------
Cash flows from Financing Activities:
Proceeds from borrowings 100,000 -
Repayment of borrowings (100,000) -
Decrease in due to shareholder (Note 6) - (31,869)
-------- --------
Net cash used in financing activities - (31,869)
-------- --------
Net decrease in cash and cash equivalents (38,260) (66,733)
Cash and cash equivalents, beginning of year 73,393 (140,126)
-------- --------
Cash and cash equivalents, end of year $35,133 ($73,393)
======== ========
See notes to financial statements
CAT LIMITED
STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997 AND 1996
(expressed in thousands of United States dollars except share amounts)
Unrealized
Additional Gains Total
Common Paid In (Losses) on Retained Shareholders'
Stock Capital Investments Earnings Equity
------ ---------- ----------- -------- -------------
Balance, December 31, 1995 $2,695 $251,995 $ 1,429 $ 84,477 $340,596
Net income - - - 84,872 84,872
Change in unrealized gains
(losses) on investments - - (2,444) - (2,444)
------ ---------- ----------- -------- -------------
Balance, December 31, 1996 2,695 251,995 (1,015) 169,349 423,024
Net income - - - 105,750 105,750
Change in unrealized gains
(losses) on investments - - 19,743 - 19,743
Dividends issued (Note 7) - - - (8,077) (8,077)
------ ---------- ----------- -------- -------------
Balance, December 31, 1997 $2,695 $251,995 $18,728 $267,022 $540,440
====== ========== =========== ======== =============
See notes to financial statements
CAT LIMITED
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
(amounts in tables expressed in thousands of United States dollars except share
and per share amounts)
1. Operations
CAT Limited (the "Company") specializes in writing property catastrophe
reinsurance around the world. Approximately two-thirds of this business is
accepted from the United States with the remainder distributed throughout
the rest of the world, principally Canada, Australia and Europe.
The Company was incorporated in Bermuda on May 21, 1993 as Centre Cat
Limited.
The Company is planning an initial public offering of its Common Shares and
in that regard in December 1997 submitted a draft registration statement to
the U.S. Securities and Exchange Commission.
2. Significant accounting policies
The financial statements of the Company have been prepared on the basis of
accounting principles generally accepted in the United States ("U.S.
GAAP"). Significant accounting policies are summarized as follows:
(a) Investments
Investments, which include fixed maturity securities, short-term
investments, equity securities, interest rate swaps and insurance
linked securities, are carried at fair value. Insurance linked
securities are contracts that contain insurance risk and include fixed
maturity instruments ("catastrophe bonds"), and options and swaps.
Realized gains or losses on the sale or maturity of investments are
determined by specific identification and are included in earnings.
Fixed maturity securities, short-term investments, equity securities
and catastrophe bonds are considered available for sale. The fair
value is determined from published market prices or independent
valuations. The amortized cost of fixed maturity securities and
catastrophe bonds includes the amortization and accretion of premiums
and discounts and factors prepayment rates when applicable. Unrealized
gains or losses are recognized as a separate component of
shareholders' equity.
The Company participates in interest rate swap agreements to modify
the interest rate characteristics of its investment portfolio and
hedge designated debt securities. The interest rate differential, to
be paid or received as interest rates change, is accrued and
recognized as an adjustment to interest income associated with the
corresponding designated securities. The related amount payable to or
receivable from counterparties is included in accrued interest.
Changes in the fair market value of these swap agreements are included
in a separate component of shareholders' equity. Gains and losses on
terminations of interest-rate swap agreements are deferred and
recognized as an adjustment to the amortized cost of the specified
debt securities. In the event of the early maturity or sale of a
designated investment security, the portion of the unrealized gain or
loss on the swap allocated to the disposed debt security is realized.
CAT LIMITED
NOTES TO THE FINANCIAL STATEMENTS, Cont'd.
DECEMBER 31, 1997 AND 1996
(amounts in tables expressed in thousands of United States dollars except share
and per share amounts)
2. Significant accounting policies, cont'd.
Insurance linked options and swaps include contracts that are valued
based on certain meteorological or seismological conditions at defined
locations, and contracts that contain insurance risk. Income or loss
on these contracts is included in earnings and is derived from the net
amounts received or paid, gains and losses on terminations (of swap
agreements) and the difference between the fair value and the cost (of
swap agreements). The fair value of all contracts is based on an
option valuation model due to the lack of a ready market. Changes in
fair value are recognized in earnings.
(b) Cash and Cash Equivalents
Cash and cash equivalents are defined as cash and certain highly
liquid investments with a maturity date of three months or less from
the date of purchase.
(c) Premiums
Premiums written include all one-year contracts plus the annualized
value of multiple-year contracts. Reinsurance premiums are recognized,
net of any applicable retrocessional coverage, as revenue evenly over
the terms of the particular contracts.
(d) Policy Acquisition Costs
Policy acquisition costs such as brokerage and certain other
underwriting expenses vary with and are directly related to the
production of business. Such costs are deferred to the extent
recoverable from future earned premium and anticipated investment
income, and amortized evenly over the terms of the particular
contracts.
(e) Losses, Loss Expenses and Experience Refunds
The reserve for losses, loss expenses and experience refunds
represents estimates of the ultimate cost of all losses and experience
refunds incurred but not paid through December 31 of each year.
The loss estimates include reserves based on reports from ceding
companies and additional case reserves as determined by management.
Inherent in the estimates of ultimate losses are expected trends in
claim severity and other factors that could vary as claims are
settled. Accordingly, ultimate losses could differ from the amounts
recorded in the financial statements. As adjustments become necessary,
such adjustments are reflected in current operations.
The reserve for experience refunds represents estimates of the total
liability incurred under profit commission provisions of various
contracts. These estimates are continually reviewed and, as
adjustments become necessary, such adjustments are reflected in
current operations. Since the reserve is based on estimates, the
ultimate settlement of experience refunds may vary from the amount
provided.
The Company recognizes an asset or liability to the extent that there
is an obligation to receive or pay cash or other consideration due to
experience under the contracts.
CAT LIMITED
NOTES TO THE FINANCIAL STATEMENTS, Cont'd.
DECEMBER 31, 1997 AND 1996
(amounts in tables expressed in thousands of United States dollars except share
and per share amounts)
2. Significant accounting policies, cont'd.
(f) Depreciation
Depreciation is provided on property and equipment over the expected
useful lives of the assets on a straight-line basis.
(g) Foreign Currencies
Foreign currency monetary assets and liabilities are translated into
U.S. Dollars at rates prevailing on balance sheet dates. Revenue and
expenses are translated at the rates prevailing on the date of the
transactions. Gains or losses arising from foreign currency
transactions are credited or charged to income. The Company's
functional currency is the U.S. dollar.
(h) Stock Options and Equity Award Agreements
The Company continues to follow Accounting Principles Board Opinion
No. 25 ("APB 25") and related interpretations in accounting for its
stock options and equity award agreements payable in stock, and
disclosures have been made in accordance with Financial Accounting
Standard Statement No. 123 ("FAS 123") to the extent applicable.
No compensation expense was recognized at the time equity awards were
issued (except for an accrual for cash paid or given up to purchase
the awards), since there was no intrinsic value inherent in the awards
at the time. No compensation expense has been recorded for
appreciation of the awards to become exercisable or settled (a change
of control, liquidation, or in certain cases, an initial public
offering of Company Shares) have not been satisfied.
(i) Use of Estimates
The preparation of the financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect certain amounts reported in the
financial statements and accompanying notes. Actual results could
differ from those estimates. Management believes that any such
differences will not be significant.
(j) Pending Accounting Standard
The Financial Accounting Standard Board has recently issued Statement
of Financial Accounting Standard No. 130 ("FAS 130"), Reporting
Comprehensive Income. FAS 130 is effective for periods beginning after
December 15, 1997. The Company is currently considering the effects of
this statement on the Company's financial statement presentation and
disclosures.
CAT LIMITED
NOTES TO THE FINANCIAL STATEMENTS, Cont'd.
DECEMBER 31, 1997 AND 1996
(amounts in tables expressed in thousands of United States dollars except share
and per share amounts)
3. Investments
-----------
Total fixed maturities and certain equity securities are managed by Miller,
Anderson & Sherrerd, LLC ("MAS") and Zurich Investment Management, Inc.
(formerly Centre Investment Services, Inc.) ("CIS"), pursuant to investment
management agreements. MAS and CIS are affiliates of certain shareholders.
The following is a summary of investments available for sale as at December
31:
Cost or Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- ---------
1997
----
U.S. Treasury securities and
obligations of U.S.
government agencies $ 143,322 $ 520 $ 123 $ 143,719
Mortgage backed securities 113,267 1,240 285 114,222
Asset backed securities 117,202 396 165 117,433
Corporate obligations 58,479 833 1,315 57,997
--------- ---------- ---------- ---------
Total fixed maturities and
short-term investments 432,270 2,989 1,888 433,371
Catastrophe bonds 20,148 121 - 20,269
Equity securities 25,003 3,006 - 28,009
--------- ---------- ---------- ---------
Total investments available for
sale $ 477,421 $ 6,116 $ 1,888 $ 481,649
========= ========== ========== =========
Insurance linked securities include the catastrophe bonds of $20,269,000
together with heating index options with a fair value of $(863,000).
CAT LIMITED
NOTES TO THE FINANCIAL STATEMENTS, Cont'd.
DECEMBER 31, 1997 AND 1996
(amounts in tables expressed in thousands of United States dollars except share
and per share amounts)
3. Investments available for sale, cont'd.
---------------------------------------
Cost or Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- ---------
1996
----
U.S. Treasury securities and
obligations of U.S.
government agencies $ 106,756 $ 85 $ 399 $ 106,442
Mortgage backed securities 136,777 375 1,668 135,484
Asset backed securities 101,973 504 239 102,238
Corporate obligations 36,976 224 62 37,138
--------- ---------- ---------- ---------
Total fixed maturities and
short-term investments 382,482 1,188 2,368 381,302
Equity securities 10,000 165 - 10,165
--------- ---------- ---------- ---------
Total investments available
for sale $ 392,482 $ 1,353 $ 2,368 $ 391,467
========= ========== ========== =========
The amortized cost and estimated fair value of debt securities at December
31, 1997, by contractual maturity, are shown below. Expected maturities may
differ from contractual maturities in cases where the issuers of the
securities have the right to prepay obligations without prepayment
penalties.
Cost or Estimated
Amortized Fair
Cost Value
--------- ---------
Due in one year or less $ 49,989 $ 50,020
Due after one year through five years 122,386 122,591
Due after five years through ten years 19,134 18,664
Due after ten years 10,292 10,441
Mortgage and asset backed securities 230,469 231,655
--------- ---------
Total fixed maturities and
short-term investments 432,270 433,371
Catastrophe bonds due in one year or less 14,148 14,215
Catastrophe bonds due after five years
through ten years 6,000 6,054
--------- ---------
$ 452,418 $ 453,640
========= =========
CAT LIMITED
NOTES TO THE FINANCIAL STATEMENTS, Cont'd.
DECEMBER 31, 1997 AND 1996
(amounts in tables expressed in thousands of United States dollars
except share and per share amounts)
3. Investments available for sale, cont'd.
Net investment income is comprised of the following:
Years ended
December 31,
-------------------
1997 1996
-------------------
Fixed maturities and short-term investments $23,459 $19,658
Equity securities -- --
Cash and cash equivalents 3,887 6,112
Catastrophe bonds 339 --
Other (2,529) 210
------- -------
25,156 25,980
Investment expenses (748) (724)
Foreign exchange (1,201) (200)
------- -------
Net investment income $23,207 $25,056
======= =======
The analysis of realized gains (losses) and the change in unrealized gains
(losses) on investments is as follows:
Years ended
December 31,
-------------------
1997 1996
-------------------
Gross realized gains $ 1,266 $ 988
Gross realized losses (1,508) (831)
------- -------
Net realized (losses) gains on sale of
investments (242) 157
Unrealized gains (losses) 19,743 (2,444)
------- -------
Total realized and unrealized gains (losses)
on investments $19,501 $(2,287)
======= =======
The carrying values of other financial instruments approximate their fair
value due to the short term nature of the balances.
CAT LIMITED
NOTES TO THE FINANCIAL STATEMENTS, Cont'd.
DECEMBER 31, 1997 AND 1996
(amounts in tables expressed in thousands of United States dollars
except share and per share amounts)
3. Investments available for sale, cont'd.
During the year, the Company entered into one interest rate swap with a
maturity date of April 25, 2007. The agreement entitles the Company to
receive from the counterparty on a quarterly basis 3 month LIBOR and pay a
fixed rate of 7.253% on a semi-annual basis. The notional amount of the
swap is $10,000,000. This notional amount does not represent an amount
exchanged by the parties and is not a measure of the Company's exposure
through the use of derivatives. The Company is exposed to credit related
losses in the event of non-performance by the counterparty to the swap
agreement, however, the Company does not expect the counterparty to fail.
At December 31, 1997, the swap had a fair market value of $(699,000) and
this was recorded with unrealized gains on investments as a separate
component of shareholder's equity. The Company had a net interest expense
of $92,000 on this swap for the year.
4. Losses, loss expenses and experience refunds
The activity in the reserve for losses, loss expenses and experience
refunds is summarized below.
1997 1996
-------- -------
Balance, beginning of year $ 42,121 $33,631
Adjust for experience refunds (16,432) (8,281)
-------- -------
Loss reserve balance, beginning of year 25,689 25,350
-------- -------
Losses incurred related to:
Current year 22,541 44,079
Prior years (4,526) 3,921
-------- -------
Total losses incurred 18,015 48,000
-------- -------
Losses paid related to
Current year 6,089 25,179
Prior years 15,334 22,482
-------- -------
Total losses paid 21,423 47,661
-------- -------
Loss reserve balance, end of year 22,281 25,689
Adjust for experience refunds 14,581 16,432
-------- -------
Balance, end of year $ 36,862 $42,121
======== =======
CAT LIMITED
NOTES TO THE FINANCIAL STATEMENTS, Cont'd.
DECEMBER 31, 1997 AND 1996
(amounts in tables expressed in thousands of United States dollars except share
and per share amounts)
4. Losses, loss expenses and experience refunds, cont'd.
Losses incurred in 1996 relating to prior years are due primarily to the
January 17, 1994 Northridge, California earthquake and floods in Europe.
The reduction of losses in respect or prior years, in the year ended
December 31, 1997, reflects favourable development of certain events
causing ultimate losses to fall below the cedants' retentions.
Corresponding reinstatement premiums receivable have been accrued for the
effect of prior year losses.
The Company has exposure to loss from ice storms in Canada which occurred
subsequent to year end. The current estimate of the gross loss before
retrocessional recoveries or reinstatement premium is approximately
$12,000,000. The current range of estimated loss does not impact the
Company's financial position significantly.
5. Ceded reinsurance
During 1997, the Company utilized reinsurance to reduce its exposure to
large losses. The Company currently has in place contracts that provide for
recovery of certain claims and claims expenses from reinsurers in excess of
various retentions. If reinsurers are unable to meet their obligations
under the agreements, the Company would remain liable to the extent that
any reinsurance company fails to meet its obligations. To date, there have
been no losses reported to indicate that the Company's reinsurance coverage
will be reached, and there are no amounts recoverable for claims and claim
expenses from reinsurers.
6. Transactions with affiliated parties
The Company reinsures several companies whose ultimate parents, the Zurich
Insurance Group ("Zurich") and the Chubb Insurance Group, are also the
ultimate parents of two of the Company's shareholders. In 1997 and 1996
written premiums from this business totaled $5,321,709 and $9,119,000
respectively.
Prior to the Company obtaining a rating from A.M. Best and where a rating
was instrumental to the transaction, the Company assumed business as a
retrocession of a rated reinsurer, Centre Solutions (Bermuda) Limited
("Centre Solutions"), (formerly Centre Reinsurance Limited), whose ultimate
parent is Zurich. In 1997 and 1996, transactions of this nature took place
involving ceding commissions to Centre Solutions of $1,055,000 and
$1,270,000 respectively.
In 1995, the Company gave a guarantee to Centre Solutions for part of their
direct investment in CHA Insurance Company Limited ("CHA"). An amount of
$750,000 is included in accrued expenses as due to Centre Solutions
representing the amount of loss the Company expects to incur under the
guarantee.
In 1995, the Company agreed to repurchase 234,954 Common Shares from Centre
Solutions for $135.64 per share. This agreement with Centre Solutions was
approved by the Board of Directors at a meeting on December 5, 1995 and the
settlement occurred in January 1996. As a result of the repurchase the
Company ceased to be controlled by Centre Solutions.
CAT LIMITED
NOTES TO THE FINANCIAL STATEMENTS, Cont'd.
DECEMBER 31, 1997 AND 1996
(amounts in tables expressed in thousands of United States dollars except share
and per share amounts)
7. Acquisition of Enterprise
On January 17, 1997 the Company made a $60,000,000 investment in Enterprise
Reinsurance Holdings Corporation ("Enterprise"), which is owned by the
Company, its shareholders and other third parties. The Company is obligated
to guarantee 50% of certain indebtedness of Enterprise (the "Enterprise
Guarantee"), such indebtedness being limited to an aggregate principal
amount of $100,000,000 for period of not more than five years. Currently
there is no such indebtedness outstanding. The Company may unilaterally
terminate the guarantee upon the occurrence of certain corporate events,
including an initial public offering of its Common Shares, and has notified
Enterprise that the Enterprise Guarantee will terminate upon consummation
of the Offering. Immediately following this investment, the Company
dividend to its stockholders $1,904,000 of its holdings of Enterprise's
stock and issued a dividend to its shareholders consisting of options (the
"Call Options") to purchase most of the remaining stock of Enterprise held
by the Company.
The value of the Call Options of $6,173,000 was estimated using a binomial
option pricing model.
Included in other assets at December 31, 1996 is $2,080,000 of promissory
notes, payable on demand, and with interest accruing at 6% to 8%, which had
been advanced for the startup costs of Enterprise. In addition, the Company
guaranteed Enterprise's lease agreement for office space. In January 1997,
the promissory notes were repaid in full and the lease guarantee was
released.
8. Commitments and contingencies
On October 13, 1993, the Company entered into a services agreement
("Services Agreement") with Hamilton Services Limited ("Hamilton"), whereby
the Company is required to pay a regular monthly fee to Hamilton for
licensed software products and related service and support functions. Such
monthly fee equaled $345,000. In addition, under the Services Agreement,
the Company is obligated to pay an additional monthly expansion fee based
on budgeted operational costs of Hamilton in proportion to the business
related to or arising out of services provided pursuant to the Services
Agreement, as determined each fiscal quarter. The aggregate amount of such
fee payable in any 12-month period may not exceed $7,000,000. For the years
ended December 31, 1997 and 1996, the total fees paid to Hamilton were
$5,340,000 and $4,140,000.
CAT LIMITED
NOTES TO THE FINANCIAL STATEMENTS, Cont'd.
DECEMBER 31, 1997 AND 1996
(amounts in tables expressed in thousands of United States dollars except share
and per share amounts)
8. Commitments and contingencies, cont'd.
The Services Agreement also requires the Company to pay Hamilton contingent
fees to reimburse Hamilton for certain amounts represented by equity award
units under an equity award plan adopted in 1993 payable by Hamilton to its
employees, which amounts are dependent, typically, upon the adjusted book
value of the Company's Common Shares. The contingent amounts are payable to
Hamilton upon the occurrence of, among other things, an initial public
offering of Company's Common Shares and subject to the continued employment
of the employees with Hamilton. The Company is obligated to reimburse
Hamilton in cash, or in certain instances, for specified units, in Common
Shares. The reimbursement amount is determined by reference to the excess
of the adjusted net book value of the Company's Common Shares on the date
of the specified event over a base price ($200.57 for 3,281 units, $157 for
11,159 units, $126.40 for 137,246 units, $102.52 for 9,560 units $99.02 for
2,104 units and $100.00 for 141,853 units). No amounts have been recorded
by the Company, as of December 31, 1997, except for the cash paid to
purchase 12,223 units, because a combination of conditions were required to
be met, but were not considered probable as at that date. As of December
31, 1997 and 1996 respectively, and have a term of one year.
To secure certain reinsurance contracts, irrevocable letters of credit of
$6,319,900 and $9,820,000 were outstanding at December 31, 1997 and 1996
respectively. These letters of credit were secured by treasury notes with a
market value of $6,513,500 and $12,283,000 at December 31, 1997 and 1996
respectively, and have a term of one year.
On February 20, 1997 the Company closed on a new five year, unsecured
$100,000,000 revolving credit facility. The transaction canceled the
previous $50,000,000 secured credit facility which was replaced by a
$30,000,000 letter of credit agreement, transferring the same collateral to
the new facility, as described above.
9. Stock options and equity award agreements
(a) Stock Options
Option agreements with a current director and a shareholder who had
been a director vest in accordance with the dates in the following
table, or at an earlier date upon the occurrence of certain corporate
and other events.
CAT LIMITED
NOTES TO THE FINANCIAL STATEMENTS, Cont'd.
DECEMBER 31, 1997 AND 1996
(amounts in tables expressed in thousands of United States dollars except share
and per share amounts)
9. Stock options and equity award agreements, cont'd.
Exercise Number of Shares Exercise
Date Under Option Price
-------- ---------------- --------
October 13, 1994 4,239 $100.00
October 13, 1995 4,239 100.00
October 13, 1996 4,239 100.00
October 13, 1997 4,239 100.00
January 1, 1998 2,000 157.00
October 13, 1998 4,239 157.00
October 13, 1999 4,239 157.00
October 13, 2000 4,239 157.00
October 13, 2001 4,239 157.00
------
35,912
======
No options had been exercised as of December 31, 1997. During 1995,
option agreements dated October 13, 1993 with shareholders relating to
254,348 shares were relinquished.
The Company has adopted the disclosure-only alternative under FAS 123.
The effects of applying the fair value accounting provisions of FAS
123 to the Company's stock options results in net income that is not
materially different from the amount reported.
(b) Equity award agreements
Under the Company's Equity Award Plan adopted in 1994, equity award
units ("units") have been issued by the Company to certain employees.
The total units granted as of December 31, 1997 amounted to 110,293.
Generally, settlement of the units is contingent on employment with
the Company at the time of the payment event. However, the award
agreements currently provide for partial vesting in the event of
certain types of termination of employment. The settlement price
("settlement price") is determined by reference to the excess of
adjusted net book value of the Company's Common Shares on the
specified date over a base price ($200.57 for 1,500 units, $157.00 for
12,320 units, $126.40 for 59,667 units and $100.00 for 36,806 units)
or, in the case of certain specified corporate events, such as a
change of control or liquidation of the Company, the excess of the
price paid in such an event over the base price.
Upon the occurrence of among other things, an initial public offering
of Company Common Shares, provided that certain performance criteria
shall have been met, 62,441 of these units become payable in cash or,
at the option of the Compensation Committee, in Common Shares ("share
units"), and 47,852 become payable in cash ("cash units").
CAT LIMITED
NOTES TO THE FINANCIAL STATEMENTS, Cont'd.
DECEMBER 31, 1997 AND 1996
(amounts in tables expressed in thousands of United States dollars except share
and per share amounts)
9. Stock options and equity award agreements, cont'd.
Other equity award units, which have been granted as bonus payments
("bonus units"), have been accrued based on the book value of the
Company's Common Shares as at the fiscal year end in the year of
service. The bonus units outstanding under the Company's Equity Award
Plan amounted to 4,154 at December 31, 1997. these bonus units become
payable in cash upon the occurrence of certain corporate events,
including an initial public offering of Company Common Shares.
Settlement price is determined based on the book value of the
Company's Common Shares on the specified date, or in a corporate
event, the price paid for each Common Share in such event.
In addition, in 1997 and 1994, Equity Award Agreements were entered
into with some directors and a service provider, respectively. These
agreements have the same features as the bonus units. The cumulative
unit entitlements under these agreements at December 31, 1997 and 1996
amounted to 8,367 and 8,091 respectively. Amounts of $863,000 and
$813,000 had been accrued as of December 31, 1997 and 1996
respectively, representing the value of the services for which units
were issued, and was derived from the book value of the Company's
Common Shares at the time of service.
The cash, share and bonus units have features that make both their
ultimate value and realization uncertain and, since the specified
events were not considered probable at December 31, 1997, no accrual
has been made as of that date for the settlement price, except as
described above. Similarly, the appreciation of the fair value
accounting provisions of FAS 123 to the award units would not result
in an accrual. Therefore, the calculation of a FAS 123 proforma net
income effect is not applicable.
10. Shareholders' equity
Under provisions of the Bye-Laws of the Company, the voting rights of the
Common Shares vary, depending on whether the shareholder is a United States
Person, an Insurance Company Person or a Regulated Shareholder, as defined
therein.
During the year ended December 31, 1995, the Company changed its par value
from $0.10 to $1.00 in order to comply with The Insurance Amendment Act of
1995.
11. Income taxes
Bermuda presently imposes no income, withholding, or capital gains taxes.
In the event that any such taxes are enacted, the Company is exempt from
the imposition of any Bermuda tax until March 2016.
CAT LIMITED
NOTES TO THE FINANCIAL STATEMENTS, Cont'd.
DECEMBER 31, 1997 AND 1996
(amounts in tables expressed in thousands of United States dollars except share
and per share amounts)
12. Statutory information
The Bermuda Insurance Act 1978 and Related Regulations ("The Act") requires
the Company to meet a minimum solvency margin. The statutory accounting
practices used in the preparation of the statutory financial statements do
not differ materially from the accounting principles employed in the
preparation of these accounts. Statutory capital and surplus as at December
31, 1997 and 1996 was $537,650,000 ad $420,186,000 respectively, and the
amount required to be maintained by the Company was $100,000,000 for 1997
and 1996. In addition a minimum liquidity ratio must be maintained whereby
relevant assets, as defined by The Act, must exceed 75% of relevant
liabilities.
Statutory restrictions on distributions exist to ensure that the above
requirements are met. At December 31, 1997 and 1996, the amounts available
for distribution were $437,650,000 and $320,186,000 respectively.
13. Comparative figures
Certain comparative figures have been reclassified to conform to the
current period's presentation.