Exhibit 99.1
Report of Independent Accountants
---------------------------------
June 4, 1998
To The Board of Directors and Shareholders of Tarquin Plc
We have audited the accompanying consolidated balance sheets of Tarquin plc and
subsidiaries as of December 31, 1997 and 1996, and the related consolidated
statements of income, of changes in stockholders' equity and of cash flows for
each of the three years in the period ended December 31, 1997. 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 generally accepted auditing standards
of the United States of America. 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Tarquin plc and its
subsidiaries at December 31, 1997 and 1996, and the results of their operations,
their changes in stockholders' equity and their cash flows for each of the three
years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles of the United States of America.
/s/ Price Waterhouse
- --------------------
Price Waterhouse
TARQUIN PLC
Consolidated Statements of Income
Year Ended December 31,
1997 1996 1995
-------------------------------
$'000 $'000 $'000
Revenues
Premiums 223,193 189,534 123,140
Net investment income 19,835 9,900 6,138
Net realized investment gains/(losses) 5 (283) -
Other income 13,393 18,065 12,820
- ------------------------------------------------------------------------------------------
Total revenues 256,426 217,216 142,098
- ------------------------------------------------------------------------------------------
Expenses
Claims, losses and loss adjustment expenses 113,811 63,971 41,705
Policy acquisition expenses 48,934 51,108 33,550
Other operating costs 18,209 23,149 20,926
- ------------------------------------------------------------------------------------------
Total losses and expenses 180,954 138,228 96,181
- ------------------------------------------------------------------------------------------
Income before income taxes 75,472 78,988 45,917
Income taxes:
Current (6,895) (5,321) (3,787)
Deferred (19,000) (23,602) (14,637)
- ------------------------------------------------------------------------------------------
Total tax expense (25,895) (28,923) (18,424)
- ------------------------------------------------------------------------------------------
Net income 49,577 50,065 27,493
- ------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial
statements.
Page 3
TARQUIN PLC
Consolidated Balance Sheets
Year Ended December 31,
1997 1996
--------------------
$'000 $'000
Assets:
Cash & Invested Assets:
Fixed maturities - available for sale, at fair value 192,017 77,609
Equity securities - available for sale, at fair value 9,534 12,588
Cash and cash equivalents 127,292 129,371
- ---------------------------------------------------------------------------------------
Total cash & invested assets 328,843 219,568
- ---------------------------------------------------------------------------------------
Accrued investment income 3,037 1,865
Deferred policy acquisition costs 18,619 18,933
Amounts due from intermediaries 117,427 104,255
Reinsurance receivables:
Outstanding claims, losses and loss adjustment expenses 144,363 129,900
Unearned premiums 26,651 26,241
Reinsurance to close from syndicate 488 6,363 -
- ---------------------------------------------------------------------------------------
Total reinsurance receivables 177,377 156,141
- ---------------------------------------------------------------------------------------
Intangible assets 46,634 39,856
Accrued profit commission 18,940 29,358
Fixed assets 1,093 1,553
Other assets 21,611 5,546
- ---------------------------------------------------------------------------------------
Total assets 733,581 577,075
- ---------------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial
statements.
Page 4
TARQUIN PLC
Consolidated Balance Sheets
Year Ended December 31,
1997 1996
--------------------
$'000 $'000
Liabilities:
Insurance liabilities and accruals:
Outstanding claims, losses and loss adjustment expenses 305,419 207,968
Unearned premiums 87,526 95,075
- ---------------------------------------------------------------------------------------
Total insurance liabilities and accruals 392,945 303,043
- ---------------------------------------------------------------------------------------
Expenses payable 20,210 16,555
Taxes payable 7,729 6,934
Long-term debt 45,931 49,005
Deferred income taxes 66,122 47,060
- ---------------------------------------------------------------------------------------
Total liabilities 532,937 422,597
- ---------------------------------------------------------------------------------------
Contingencies - Note 17
Shareholders' equity
Common stock 7,588 7,588
Paid in capital 68,139 68,139
Retained earnings 127,135 77,558
Unrealised losses on investments (2,003) (484)
Currency translation adjustment (215) 1,677
- ---------------------------------------------------------------------------------------
Total shareholders' equity 200,644 154,478
- ---------------------------------------------------------------------------------------
Total liabilities and shareholders' equity 733,581 577,075
- ---------------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial
statements
Page 5
TARQUIN PLC
Consolidated Cash Flow
Year Ended December 31,
1997 1996 1995
---------------------------------------------
Cash Flows from Operating Activities $'000 $'000 $'000
Net income 49,577 50,065 27,493
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortisation 2,409 2,218 2,009
Deferred income taxes 19,000 23,602 14,637
Realised investment (gains)/losses (5) 283 -
Change in:
Amounts due from intermediaries (13,172) (14,820) (89,436)
Deferred policy acquisition costs 314 1,496 (20,429)
Reinsurance receivables (14,463) (102,192) (27,706)
Unearned premiums (7,549) 2,573 92,503
Outstanding claims, losses and loss adjustment
expenses 97,451 144,078 63,890
Other (7,021) (10,245) (6,476)
- ------------------------------------------------------------------------------------------------------------------
Cash provided by operating activities 126,541 97,058 56,485
- ------------------------------------------------------------------------------------------------------------------
Cash Flows from Investing activities:
Investments:
Purchase of fixed maturities (263,383) (102,815) -
Proceeds from sale of fixed maturities 145,901 25,032 -
Purchase of equity securities - (13,172) -
Proceeds from sale of equity securities 2,010 - -
Fixed asset additions (13) (353) -
Purchase of syndicate capacity (8,723) (658) -
Payment for purchase of Charman Group, net of cash acquired - - (31,364)
- ------------------------------------------------------------------------------------------------------------------
Cash used in investment activities (124,208) (91,966) (31,364)
- ------------------------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities
(Repayment)/acquisition of long-term debt (3,074) (1,537) 50,542
Proceeds from issue of shares - - 48,022
- ------------------------------------------------------------------------------------------------------------------
Cash (used in) provided by financing activities (3,074) (1,537) 98,564
- ------------------------------------------------------------------------------------------------------------------
Effect of exchange rate change on cash (1,338) 2,131 -
Net (decrease) increase in cash (2,079) 5,686 123,685
- ------------------------------------------------------------------------------------------------------------------
Cash at beginning of year 129,371 123,685 -
- ------------------------------------------------------------------------------------------------------------------
Cash at end of year 127,292 129,371 123,685
==================================================================================================================
Supplemental Disclosure of Cash Information
Interest paid 957 5,520 5,070
Income tax paid 7,222 6,360 398
The accompanying notes are an integral part of the consolidated financial
statements.
Page 6
TARQUIN PLC
Consolidated Statement of Changes in Stockholders' Equity
At Year Ended December 31,
1997 1996 1995
---------------------------------------------
$'000 $'000 $'000
Common Stock:
Balance at beginning of year 7,588 7,588 7,588
Movement in year - - -
- ----------------------------------------------------------------------------------------------------
Balance at end of year 7,588 7,588 7,588
- ----------------------------------------------------------------------------------------------------
Paid in capital:
Balance at beginning of year 68,139 68,139 68,139
Movement in year - - -
- ----------------------------------------------------------------------------------------------------
Balance at end of year 68,139 68,139 68,139
- ----------------------------------------------------------------------------------------------------
Unrealised losses on investments, net of tax
Balance at beginning of year (484) - -
Movement in year (1,519) (484) -
- ----------------------------------------------------------------------------------------------------
Balance at end of year (2,003) (484) -
- ----------------------------------------------------------------------------------------------------
Retained earnings:
Balance at beginning of year 77,558 27,493 -
Net income 49,577 50,065 27,493
- ----------------------------------------------------------------------------------------------------
Balance at end of year 127,135 77,558 27,493
- ----------------------------------------------------------------------------------------------------
Currency translation adjustment:
Balance at beginning of year 1,677 (433) -
Movement in year (1,892) 2,110 (433)
- ----------------------------------------------------------------------------------------------------
Balance at end of year (215) 1,677 (433)
- ----------------------------------------------------------------------------------------------------
Total shareholders' equity 200,644 154,478 102,787
- ----------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial
statements.
Page 7
TARQUIN PLC
Notes to the Consolidated Financial Statements
1. Summary of significant accounting policies
(a) Basis of presentation, principles of consolidation and nature of operations
These accounts have been prepared under generally accepted accounting
principles of the United States of America ("U.S. GAAP"), using the Group's
functional currency which is U.S. dollars.
The Company is a worldwide speciality lines insurer and reinsurer. The
principal activity of Tarquin plc is that of a corporate underwriting
member of Lloyd's of London ("Lloyds"), being the sole member of Syndicate
2488, and of a Lloyd's managing agent for syndicates 2488 and 488.
Syndicate 2488 commenced underwriting for the 1995 year of account with a
capacity of $264 million which was increased to $313.5 million for the 1996
year of account and to $330 million for the 1997 year of account.
The consolidated financial statements include the accounts of Tarquin plc,
a holding company, its wholly owned subsidiaries, Tarquin Underwriters
Limited, a corporate member of Lloyd's, and its dedicated corporate
syndicate, 2488. The consolidated financial statements also include the
accounts of Charman Underwriting Agencies Limited, a Lloyd's managing
agent, and its holding company, Charman Group Limited. Tarquin plc and its
subsidiaries are collectively referred to as "Tarquin" or "the Company".
All significant inter-company transactions and balances have been
eliminated. The 1995 income statement includes the results of the Company's
operations since the purchase of Charman Group Limited by Tarquin plc,
which occurred on November 30, 1994. Accordingly, the results of operations
in the 1995 income statement are for 13 months, however the 1994 results
are immaterial to the results of that period.
The preparation of financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent asset and liabilities at the date
of the financial statements and the reported amounts of revenues and claims
and expenses during the reporting period. Actual results could differ from
those estimates.
Accounting Policies
(b) Underwriting results
Underwriting results are recognised on an annual accounting basis, which
requires estimates for underwriting years which have not yet closed under
the Lloyd's three year accounting convention.
(c) Premiums and unearned premiums reserves
Premiums are accounted for in the period in which the risk commences.
Unearned premiums relating to risks in future periods of account are
calculated on a pro-rata basis over the period of the risk.
(d) Outstanding claims, losses and loss adjustment expenses
Claims and claim adjustment expense reserves represent estimated provision
for both reported and unreported claims incurred and related expenses. The
reserves are adjusted regularly based on experience.
Page 8
TARQUIN PLC
Notes to the Consolidated Financial Statements
1. Summary of significant accounting policies (continued)
In determining claims and claim adjustment expense reserves, the Company
carries out a continuous review of its overall position, its reserving
techniques and its reinsurance. These reserves represent the estimated
ultimate cost of all incurred claims and claim adjustment expenses. Since
the reserves are based on estimates, the ultimate liability may be more or
less than such reserves. The effects of changes in such estimated reserves
are included in the results of operations in the period in which the
estimates are changed. Such changes may be material to the results of
operations and could occur in a future period.
(e) Amounts due from intermediaries
Amounts due from intermediaries are amounts of premium which, it is
estimated, are due to the syndicate from policyholders. These amounts of
premium are estimated based on underwriting signings and brokers estimates,
and are presented gross of brokerage and commissions. These premium
estimates are adjusted periodically to reflect current experience.
(f) Accrued profit commission
The company earns fees and profit commissions from managing Syndicate 488.
Under the Lloyd's three year accounting convention, profit commission is
only due and payable upon the closure of an underwriting account. Estimated
amounts of profit commission, based on underwriting results, are therefore
accrued in the year to which they relate. Accrued profit commissions are
adjusted to reflect current experience, and are included within other
income in the revenue account and other assets in the balance sheet.
(g) Reinsurance receivables
Amounts receivable from reinsurers are estimated and recorded in a manner
consistent with the claim liability associated with the reinsured business.
The Company evaluates and monitors the financial condition of its
reinsurers to minimize its exposure to significant losses from reinsurer
insolvencies.
(h) Deferred policy acquisition costs
Commissions and premium taxes, which vary with and are primarily related to
the production of new business, are deferred and amortised pro rata over
the contract periods in which the related premiums are earned. Deferred
acquisition costs are reviewed to determine if they are recoverable from
future income, and if not, are charged to expense. All other acquisition
expenses are charged to operations as incurred.
(I) Investments
Fixed maturities and equity securities
Fixed maturities include bonds, notes and redeemable preferred stocks.
Equity securities consist solely of common stock. Fixed maturities and
equity securities are classified as "available for sale" and are reported
at fair value, with unrealised investment gains and losses, net of income
taxes, charged or credited directly to stockholders' equity. Fixed
maturities and equity securities are valued based upon quoted market
prices. Investment income is presented net of investment expenses.
Page 9
TARQUIN PLC
Notes to the Consolidated Financial Statements
1. Summary of significant accounting policies (continued)
Cash and cash equivalents
Cash and cash equivalents include cash on hand and highly liquid debt
instruments purchased with an original maturity of three months or less.
In the normal course of business, the Company enters into transactions
involving various types of financial instruments, including debt
investments such as fixed maturities and equity securities. These
instruments involve credit risk and also may be subject to risk of loss due
to interest rate fluctuation. The Company evaluates and monitors each
financial instrument individually and, when appropriate, obtains collateral
or other security to minimise losses.
(j) Realised investment gains and losses
Realised investment gains and losses are included as a component of pre-tax
revenues based upon specific identification of the investments sold on the
trade date. Other than temporary declines in the market value of
investments are included in realised investment losses.
(k) Goodwill and other intangible assets
Goodwill is amortised on a straight-line basis over a 25 year period.
The Company has purchased participation rights on Syndicate 488 in the
Lloyd's capacity auctions of 1996 and 1997 and in a special offer to Names
in 1997 to participate in all future underwriting years. The costs of
capacity purchases have been capitalised and are written off over three
years on a straight line basis against future underwriting income
commencing in the first underwriting year of participation.
The carrying amount of intangible assets is reviewed regularly for
indications of other than temporary impairment in value. Impairments would
be recognised in operating results if a permanent diminution in value has
deemed to have occurred.
(l) Income taxes
Tarquin is a UK tax registered group which is liable for UK income tax on
its operating profits. In addition, syndicate 2488 is liable for U.S.
Federal income tax on its underwriting profits which are deemed to have
arisen in the U.S., which may be offset against UK taxes when calculating
total tax liabilities. Deferred income taxes are generally recognised when
assets and liabilities have different values for financial statement and
tax reporting purposes. These differences result primarily from tax exempt
interest income and disallowable interest expense.
(m) Foreign exchange
Amounts expressed in foreign currencies are translated into U.S. dollars.
Assets and liabilities denominated in sterling are translated into U.S.
dollars generally using current rates of exchange and the related
translation adjustments are recorded as a separate component of
shareholders equity net of any related taxes. Income statement amounts
expressed in sterling are translated using average exchange rates. Exchange
gains and losses resulting from foreign currency transactions are recorded
in other income. The consolidated statement of income contains an aggregate
transaction gain/(loss) of $170,736, $4,256,199 and ($870,565) in 1997,
1996 and 1995, respectively.
Page 10
TARQUIN PLC
Notes to the Consolidated Financial Statements
1. Summary of significant accounting policies (continued)
(n) Fixed assets
Leasehold improvements, equipment and motor vehicles are stated at cost,
less accumulated depreciation and amortisation. Depreciation is provided
using the straight-line or accelerated method over the estimated useful
lives of the related assets which generally range from 2 to 5 years.
Amortisation of leasehold improvements is provided using the straight-line
method over the term of the lease.
2. Significant transactions
During 1996 Lloyd's successfully initiated it's Reconstruction and Renewal
Plan ("R&R"), establishing a dedicated run-off company, Equitas
Reinsurance Limited to assume the liabilities of the 1992 and prior
underwriting years of all syndicates. As part of R&R, Managing Agents were
required by Lloyd's to pay a one time contribution to Lloyd's. The
contribution payable by the Company was based on the early release of
profit commission from the 1995 underwriting year and amounted to
$7,652,129. This was recognised as an expense in 1996.
3. Cash and investments
1997 1996 1995
-----------------------------------------
$'000 $'000 $'000
Income from Investment Operations
Investment income:
Short-term interest 7,710 6,555 6,138
Fixed maturities 10,912 2,635 -
Equity securities 1,511 793 -
----------------------------------------------------------------------------------
Total investment income 20,133 9,983 6,138
----------------------------------------------------------------------------------
Investment expenses (298) (83) -
----------------------------------------------------------------------------------
Net investment income 19,835 9,900 6,138
----------------------------------------------------------------------------------
1997 1996 1995
-----------------------------------------
$'000 $'000 $'000
Realised investment gains (losses):
Fixed maturities
Gains 314 24 -
Losses (313) (307) -
----------------------------------------------------------------------------------
Net gains/(losses) 1 (283) -
----------------------------------------------------------------------------------
Equity securities
Gains 4 - -
Losses - - -
----------------------------------------------------------------------------------
Net gains 4 - -
----------------------------------------------------------------------------------
Realised investment gains/(losses) 5 (283) -
----------------------------------------------------------------------------------
Page 11
TARQUIN PLC
Notes to the Consolidated Financial Statements
3. Cash and investments (continued)
1997 1996 1995
--------------------------------------
$'000 $'000 $'000
Unrealised Investment Gains /(Losses), Net of Tax
Fixed maturities:
Gains 317 218 -
Losses (1,283) (117) -
---------------------------------------------------------------------------------------------
Net (losses)/gains (966) 101 -
---------------------------------------------------------------------------------------------
Equity securities:
Gains 265 30 -
Losses (451) (615) -
Foreign exchange (367) - -
---------------------------------------------------------------------------------------------
Net losses (553) (585) -
---------------------------------------------------------------------------------------------
Total unrealised investment losses (1,519) (484) -
---------------------------------------------------------------------------------------------
Page 12
TARQUIN PLC
Notes to the Consolidated Financial Statements
3. Cash and investments (continued)
Fixed maturities
The amortised cost, estimated fair values (based principally upon quoted
market prices) and gross unrealised gains and losses of fixed maturities
at December 31, were as follows:
1997
--------------------------------------------------
Estimated Gross Gross
Amortised Fair Unrealised Unrealised
Category: Cost Value Gains Losses
--------------------------------------------------
$'000 $'000 $'000 $'000
UK governments 52,712 52,042 0 (670)
Foreign governments 10,390 10,349 13 (54)
Corporate and other 45,847 45,469 128 (506)
U.S. Treasury and agencies 84,034 84,157 176 (53)
--------------------------------------------------------------------------------
Total fixed maturities 192,983 192,017 317 (1,283)
--------------------------------------------------------------------------------
1996
--------------------------------------------------
Estimated Gross Gross
Amortised Fair Unrealised Unrealised
Category: Cost Value Gains Losses
--------------------------------------------------
$'000 $'000 $'000 $'000
UK governments 9,845 9,855 23 (13)
Foreign Governments -- -- -- --
Corporate and other 32,421 32,546 146 (21)
U.S. Treasury and agencies 35,242 35,208 49 (83)
--------------------------------------------------------------------------------
Total fixed maturities 77,508 77,609 218 (117)
--------------------------------------------------------------------------------
The amortised cost and estimated fair value of fixed maturities at
December 31, by contractual years-to-maturity follow. Actual maturities
will differ from contractual maturities because borrowers may have the
right to prepay obligations.
1997
----------------------
Estimated
Amortised Fair
Maturity Cost Value
----------------------
$'000 $'000
One year or less 75,536 75,616
Over one year through five years 77,840 76,967
Over five years through ten years 1,389 1,391
Due after ten years 38,218 38,043
--------------------------------------------------------------------------------
Total fixed maturities 192,983 192,017
--------------------------------------------------------------------------------
Page 13
TARQUIN PLC
Notes to the Consolidated Financial Statements
3. Cash and investments (continued)
Equity Securities
The cost, estimated fair values (based principally upon quoted market
prices) and gross unrealised gains and losses of equity securities at
December 31, were as follows:
1997
--------------------------------------------------------
Estimated Gross Gross
Fair Unrealised Unrealised
Cost Value Gains Losses
--------------------------------------------------------
$'000 $'000 $'000 $'000
Common stocks 10,087 9,534 75 (628)
-------------------------------------------------------------------------------------
Total equity securities 10,087 9,534 75 (628)
-------------------------------------------------------------------------------------
1996
--------------------------------------------------------
Estimated Gross Gross
Fair Unrealised Unrealised
Cost Value Gains Losses
--------------------------------------------------------
$'000 $'000 $'000 $'000
Common stocks 13,173 12,588 30 (615)
-------------------------------------------------------------------------------------
Total equity securities 13,173 12,588 30 (615)
-------------------------------------------------------------------------------------
The Company held no derivative financial instruments in its investment
portfolio during the three year period ended December 31, 1997.
As of December 31, 1997, the Company had no concentration of investments
in a single investee exceeding 10% of shareholders' equity, except for UK
and U.S. government issues.
4. Fair value disclosures of financial instruments
SFAS No 107, "Disclosures about Fair Value of Financial Instruments",
requires disclosure of fair value information about certain financial
instruments (insurance contracts and taxes are excluded) for which it is
practicable to estimate such values, whether or not these instruments are
included in the balance sheet. The fair values presented for certain
financial instruments are estimated which, in many cases, may differ
significantly from the amounts which could be realised upon immediate
liquidation. In cases where market prices are not available, estimates of
fair value are based on discounted cash flow analyses which utilise
current interest rates for similar financial instruments which have
comparable terms and credit quality.
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments:
Cash and Cash Equivalents
For these short-term investments, the carrying amount approximates fair
value.
Fixed maturities
Fair values are based on quoted market prices.
Page 14
TARQUIN PLC
Notes to the Consolidated Financial Statements
4. Fair value disclosures of financial instruments (continued)
Equity Securities
Fair values are based on quoted market prices.
Long Term Debt
Fair values are estimated by discounting future contractual cash flows
using the current rates at which the Company could borrow.
The estimated fair values of the financial instruments as of December 31,
were as follows:
1997 1996
----------------------------------------------------
Carrying Carrying
value Fair value value Fair value
----------------------------------------------------
$'000 $'000 $'000 $'000
Financial Assets:
Cash and cash equivalents 127,292 127,292 129,371 129,371
Fixed maturities 192,017 192,017 77,609 77,609
Equity securities 9,534 9,534 12,588 12,588
-----------------------------------------------------------------------------------
328,843 328,843 219,568 219,568
-----------------------------------------------------------------------------------
Financial liabilities:
Long term debt 45,931 49,666 49,005 54,795
-----------------------------------------------------------------------------------
5. Restricted assets
Within the Company's holdings of cash and investments are two funds which
are subject to restrictions as to their use. These restrictions are placed
upon the Company by Lloyds. The funds which are held by Syndicate 2488 may
only be used within that syndicate's terms of trade. In addition, Tarquin
Underwriters Limited is required to maintain funds in order to support its
underwriting activities via Syndicate 2488. The amounts of these funds are
as follows:
1997 1996
----------------------------
$'000 $'000
Syndicate 2488
Fixed maturities 137,925 50,459
Cash and cash equivalents 87,286 67,830
Tarquin Underwriters Limited
Fixed maturities 54,092 27,130
Equity securities 9,534 12,588
Cash and cash equivalents 28,791 53,365
-----------------------------------------------------------------------------------
Total restricted assets 317,628 211,372
-----------------------------------------------------------------------------------
Page 15
TARQUIN PLC
Notes to the Consolidated Financial Statements
5. Restricted assets (continued)
Within Syndicate 2488's holdings of cash and cash equivalents, there are
deposits in respect of the following:
1997 1996
-------------------
$'000 $'000
Joint Asset Trust Fund 1,307 1,609
Additional Securities Limited 4,914 4,403
Kentucky Trust Fund 155 152
-----------------------------------------------------------------------------
6,376 6,164
-----------------------------------------------------------------------------
Deposits made to the Joint Asset Trust Fund are calculated by reference to
the Syndicates' gross liabilities in respect of U.S. situs surplus lines
and reinsurance business (i.e. risks geographically located in the U.S.).
The fund is a requirement for the Syndicate to write this type of business
in the U.S.
The Syndicate is required to lodge a deposit with Additional Securities
Limited in order to comply with the statutory requirements of various
countries in which it does business.
Kentucky is the only state in the U.S. where all Lloyd's syndicates are
licensed to write insurance business. With effect from January 1, 1996,
all underwriting members of Lloyd's conducting licensed Kentucky business
are required to maintain a joint asset trust fund in Kentucky to meet
certain capital and surplus requirements. Each syndicate year of account
has also been required to establish trust funds in respect of the
liabilities for the Kentucky licensed business written by its Names. These
liabilities based trust funds are adjusted quarterly according to a
liabilities calculation agreed to with the Kentucky Insurance Department.
6. Fixed assets
Fixed assets are summarised as follows:
1997 1996
-------------------
$'000 $'000
Furniture, equipment and other 2,509 2,501
Less accumulated depreciation (1,416) (948)
-----------------------------------------------------------------------
Fixed assets 1,093 1,553
-----------------------------------------------------------------------
Page 16
TARQUIN PLC
Notes to the Consolidated Financial Statements
7. Intangible assets
During 1995, Tarquin plc purchased Charman Group for cash and shares of
$59,984,000, which resulted in goodwill of $42,602,000.
The Company has purchased participation rights on Syndicate 488 in the
Lloyd's capacity auctions of 1996 and 1997. Additionally, the Company made
a cash offer to the Names participating on the 1997 year of Syndicates 488
and 2488. The offer was formally announced on May 30, 1997 and closed on
July 31, 1997. Names were offered 16.5 cents for every $1.65 of capacity
and a total capacity of $70,361,948 was acquired.
1997 1996
-----------------------
$'000 $'000
Goodwill (including accumulated amortisation of
$5,106,000 and $3,404,000) 37,495 39,198
Cost of acquiring capacity (including accumulated
amortisation of $219,000 at December 31, 1997) 9,139 658
------------------------------------------------------------------------------------
46,634 39,856
------------------------------------------------------------------------------------
Goodwill:
1997 1996
-----------------------
$'000 $'000
Balance at beginning of the year 39,197 40,900
Amortisation (1,702) (1,702)
------------------------------------------------------------------------------------
37,495 39,198
------------------------------------------------------------------------------------
Cost of Acquiring Capacity:
1997 1996
-----------------------
$'000 $'000
Balance at beginning of the year 658 --
Additions in year 8,723 658
Amortisation (219) --
Movements on exchange (23) --
------------------------------------------------------------------------------------
9,139 658
------------------------------------------------------------------------------------
Page 17
TARQUIN PLC
Notes to the Consolidated Financial Statements
8. Reinsurance
In the normal course of business, the Company seeks to reduce the loss
that may arise from catastrophes or other events that cause unfavourable
underwriting results by reinsuring certain levels of risk in various areas
of exposure with other Lloyd's Syndicates, insurance companies or
reinsurers. Reinsurance transactions are accounted for in accordance with
the provisions of SFAS No. 113.
Amounts recoverable from reinsurers are estimated in a manner consistent
with the claim liability associated with the reinsured policy. Reinsurance
contracts do not relieve the Company from its obligations to
policyholders. Failure of reinsurers to honour their obligations could
result in losses to the Company; consequently, allowances are established
for amounts deemed uncollectible. The Company determines the appropriate
amount of reinsurance based on market conditions (including the
availability and pricing of reinsurance). The company also believes that
the terms of its reinsurance contracts are consistent with industry
practice in that they contain standard terms with respect to lines of
business covered, limit and retention, arbitration and occurrence. Based
on its review of its reinsurers' financial statements and reputations in
the reinsurance marketplace, the Company believes that its reinsurers are
financially sound.
The Company is subject to credit concentration risk with respect to
reinsurance ceded. The Company's three largest reinsurers accounted for
approximately 69.7% and 63.7% of reinsurance receivables on outstanding
claims, losses and loss adjustment expenses at December 31, 1997 and 1996,
respectively. See Note 17 for a discussion of litigation in which the
company is involved with respect to its reinsurance programs.
The effect of reinsurance on premiums written was as follows:
1997 1996 1995
------------------------------------
$'000 $'000 $'000
Direct 274,782 239,470 236,549
Assumed 16,080 9,998 8,057
Ceded (74,956) (68,535) (45,929)
- ---------------------------------------------------------------------------------------------
Net premiums 215,906 180,933 198,677
- ---------------------------------------------------------------------------------------------
The effect of reinsurance on property and casualty premiums earned was as
follows:
1997 1996 1995
------------------------------------
$'000 $'000 $'000
Direct 283,117 239,639 147,093
Assumed 14,517 9,302 5,010
Ceded (74,441) (59,407) (28,963)
- ---------------------------------------------------------------------------------------------
Net premiums 223,193 189,534 123,140
- ---------------------------------------------------------------------------------------------
Page 18
TARQUIN PLC
Notes to the Consolidated Financial Statements
8. Reinsurance (continued)
The effect of reinsurance on outstanding claims, losses and loss
adjustment expenses was as follows:
1997 1996 1995
--------------------------------------
$'000 $'000 $'000
Direct 302,587 205,223 62,479
Assumed 2,832 2,745 1,410
Ceded (144,363) (129,900) (26,705)
- ----------------------------------------------------------------------------------------------------------------
Net outstanding claims, losses and loss adjustment expenses 161,056 78,068 37,184
- ----------------------------------------------------------------------------------------------------------------
9. Deferred Policy Acquisition Expenses
The following reflects the amount of policy acquisition expenses deferred
and amortized for the years ended December 31:
1997 1996 1995
----------------------------------
$'000 $'000 $'000
Balance at the beginning of the year 18,933 20,429 -
Acquisition expenses deferred 48,815 48,880 53,979
Amortized to expense during the year (48,934) (51,108) (33,550)
Movement on foreign exchange (195) 732 -
- --------------------------------------------------------------------------------------------------------
Balance at end of the year 18,619 18,933 20,429
- --------------------------------------------------------------------------------------------------------
Page 19
TARQUIN PLC
Notes to the Consolidated Financial Statements
10. Reconciliation of net liability for claims and adjustment expenses
The Company regularly updates its reserve estimates as new information
becomes available and further events occur which may impact the resolution
of unsettled claims. As the Company has not previously prepared accounts
on an annual basis, nor estimated their liability for claims and
adjustment expenses on an annual basis, these accounts reflect no prior
year development. The table below provides a reconciliation of the
beginning and ending reserves for unpaid losses and loss adjustment
expenses (LAE) for the years ended December 31, as follows:
1997 1996
------------------------------------------------------------------------------------------------------------------
$'000 $'000
Gross liability, beginning of year 207,968 63,890
Reinsurance recoverable beginning of year (129,900) (26,706)
------------------------------------------------------------------------------------------------------------------
Net liability, beginning of year 78,068 37,184
------------------------------------------------------------------------------------------------------------------
Plus:
Provisions for claims and adjustment expenses occurring in the current year 113,811 63,971
Increase/(decrease) in estimated claims and adjustment expenses arising from prior years'
insured events - -
Movement on foreign exchange (1,133) 1,113
------------------------------------------------------------------------------------------------------------------
112,678 65,084
------------------------------------------------------------------------------------------------------------------
Less:
Payment for claims arising in:
Current year 3,965 4,475
Prior year 25,725 19,725
------------------------------------------------------------------------------------------------------------------
29,690 24,200
------------------------------------------------------------------------------------------------------------------
Net liability, end of year 161,056 78,068
Reinsurance recoverable end of year 144,363 129,900
------------------------------------------------------------------------------------------------------------------
Gross liability, end of year 305,419 207,968
------------------------------------------------------------------------------------------------------------------
TARQUIN PLC
Notes to the Consolidated Financial Statements
11. Taxes
A summary of the income tax expense in the consolidated income statement
is shown below:
1997 1996 1995
-----------------------------------
$ '000 $ '000 $ '000
Current expense:
UK 6,895 5,321 3,787
US - - -
--------------------------------------------------------------------------
Total current expense 6,895 5,321 3,787
--------------------------------------------------------------------------
Deferred expense:
UK 1,131 2,059 2,761
US 17,869 21,543 11,876
--------------------------------------------------------------------------
Total deferred expense 19,000 23,602 14,637
--------------------------------------------------------------------------
Total tax expense 25,895 28,923 18,424
--------------------------------------------------------------------------
UK corporation tax is payable at the rate of 33% on group trading profits
earned in calendar years 1995 and 1996. The corporation tax rate was
reduced to 31% for profits earned after April 1, 1997, therefore the
trading profits of 1997 are subject to two different rates of taxation,
depending on when they were realised. Tax on the underwriting profits of
Tarquin Underwriters Limited is not payable until one year after the
closure of the underwriting year to which it relates. An underwriting
account will normally close after three years.
Tarquin Underwriters Limited is liable for U.S. Federal Income tax (USFIT)
on underwriting profits determined to have arisen from U.S. underwriting.
Under the existing UK double taxation rules, this USFIT can be offset
against the UK tax payable when the underwriting year closes. Included in
the figure of other assets as at December 31, 1997 is USFIT paid of
$2,004,135, $2,104,051 and $2,334,544 in respect of the 1997, 1996 and
1995 underwriting years, respectively.
No UK tax computations for the Company have been agreed to by the Revenue
since the inception of the Company.
Tax on the profit commission receipts of Charman Underwriting Agencies
Limited is not payable until one year after receipt which is after the
closure of the underwriting year to which it relates.
The income taxes attributable to the consolidated results of operations
are different from the amounts determined by multiplying income before
income taxes by the statutory income tax rate. The sources of the
difference were as follows:
1997 1996 1995
-----------------------------------
$ '000 $ '000 $ '000
Income tax expense at statutory rates 23,774 26,066 15,152
Tax exempt interest income (2,652) (122) (104)
Disallowable interest expense on Aeneas debt 2,902 2,902 2,902
Goodwill amortisation 562 562 562
Tax credits and other, net 1,309 (485) (88)
-----------------------------------------------------------------------------------
Income tax at effective rate 25,895 28,923 18,424
-----------------------------------------------------------------------------------
Page 21
TARQUIN PLC
Notes to the Consolidated Financial Statements
11. Taxes (continued)
The deferred income tax liability represents the tax effects of temporary
differences. Its components were as follows at December 31,
1997 1996
-----------------------
$'000 $'000
Underwriting profits of Tarquin Underwriters Limited 51,285 33,419
Profit commissions of Charman Underwriting Agencies Limited 14,035 13,374
Investment income 570 -
Other, net 232 267
------------------------------------------------------------------------------------------
Deferred income tax liability, gross 66,122 47,060
------------------------------------------------------------------------------------------
There were no gross deferred income tax assets at December 31, 1997 or
1996.
12. Leases
Rental expenses for operating leases, principally with respect to
buildings, amounted to $203,871, $176,934, and $176,934 in 1997, 1996 and
1995 respectively. As of December 31, 1997, future minimum rental payments
under non-cancellable operating leases were approximately $2,393,325,
payable as follows: 1998 - $478,665; 1999 - $478,665; 2000 - $478,665;
2001 - $478,665; 2002 - $478,665; and $0 million thereafter.
13. Capital structure
1997 1997
-----------------------
number $'000
Authorised equity shares
US $1 "A" ordinary shares 2,658,800 2,659
US $0.01 "A" ordinary shares 572,162 6
US $1.00 "B" ordinary shares 712,788 710
US $1.00 "C" ordinary shares 4,229,988 4,202
Authorised non-equity shares
(Pounds)1 deferred shares 50,000 83
- -----------------------------------------------------------------------------------------------
7,660
- -----------------------------------------------------------------------------------------------
Issued equity shares
US $1.00 "A" ordinary shares 2,658,800 2,659
US $1.00 "B" ordinary shares 710,000 710
US $1.00 "C" ordinary shares 4,202,200 4,202
Page 22
TARQUIN PLC
Notes to the Consolidated Financial Statements
13. Capital structure (continued)
1997 1997
-----------------------
number $ '000
Allotted non-equity shares
(Pounds)1 sterling deferred shares 50,000 83
------------------------------------------------------------------------------------------
7,654
------------------------------------------------------------------------------------------
Called up and fully paid equity shares
US $1 "A" ordinary shares 2,658,800 2,659
US $1 "B" ordinary shares 710,000 710
US $1 "C" ordinary shares 4,202,200 4,202
------------------------------------------------------------------------------------------
7,571
------------------------------------------------------------------------------------------
Called up and fully paid non equity shares (Pounds)1 sterling
deferred shares 10,570 17
------------------------------------------------------------------------------------------
Total called up and fully paid shares 7,588
------------------------------------------------------------------------------------------
The following rights are attached to the different classes of shares
comprising the capital of the company.
(Pounds)1 Sterling Deferred shares
The holders of the deferred shares shall not by virtue of their holdings
of such shares, have the rights to receive notice of any general meeting
of the company nor the right to attend, speak or vote at any such general
meeting. The deferred shares shall, on the return of assets on a winding
up, entitle the holder only to the repayment of the amounts paid upon such
shares after repayment of the capital paid up on ordinary shares plus the
payment of sterling (Pounds)10,000,000 per such ordinary share.
US $1 ordinary shares
The holders of U.S. $1 ordinary shares shall rank pari passu in respect of
voting rights, dividends and division of assets on a winding up.
The holders of "C" ordinary shares shall be entitled to appoint and remove
up to three directors of the company, the holders of "A" ordinary shares
up to two directors of the company and the holders of "B" ordinary shares
one director depending on the relevant proportions of total issued equity
which each class of shares represent.
Page 23
TARQUIN PLC
Notes to the Consolidated Financial Statements
13. Capital structure (continued)
Earn-out provision
Upon the first occurrence of an Exit Event, which is defined as the
earlier of December 31, 1999, an initial public offering or sale of the
Company, additional shares may become available which may be distributed
at the sole discretion of Charman Trustees Limited, an indirectly but
wholly owned subsidiary of Tarquin plc. The amount of additional shares to
become available is based upon the internal rate of return of the "B"
ordinary and "C" ordinary shares of the Company measured at the date of
the Exit Event, but will not exceed 7% of the ordinary shares in issue
immediately prior to the Exit Event. As these shares have not been granted
to specific employees, no compensation expense has been recorded in these
financial statements.
Dividend Distribution Restrictions
Charman Underwriting Agencies Limited is a Lloyd's managing agent. All
Lloyd's managing agencies are subject to solvency provisions which place
effective limits on the amounts of distributable profits. These limits are
designed to ensure that the agencies retain sufficient funds to manage
their businesses. Charman Underwriting Agencies Limited must maintain its
level of net current assets (on a UK GAAP basis) at each balance sheet
date so that it equals or exceeds 25% of the agency's recurring
expenditure, after deducting certain expenses. The agency must also
maintain its net assets (on a UK GAAP basis) at each balance sheet date so
that they are equal to or greater than the higher of minimum qualifying
capital (currently (Pounds)325,000) or .275% of aggregate syndicate
allocated capacity. Charman Underwriting Agencies Limited can meet the
solvency requirements from amounts of retained earnings as at December 31,
1997 which means that post-tax earnings from that date onwards will be
fully distributable subject only to changes in the solvency requirements.
14. Pension plans
The Company operates both a defined contribution scheme and a defined
benefit scheme to provide benefits for the staff of Charman Underwriting
Agencies Limited. Both schemes are fully insured.
The defined benefit scheme is a final salary scheme contracted-out of the
State Earnings Related Pensions Scheme under the provisions of the
Pensions Schemes Act 1995. It is an exempt approved scheme under Chapter 1
of part XIV of the Income and Corporation Taxes Act 1988 and is
established and governed by a trust deed and rules which have been
approved by the Occupational Pensions Board and the Pensions Schemes
Office.
Components of net pension expense for the years ended December 31 were as
follows:
1997 1996 1995
------------------------------------
$'000 $'000 $'000
Service cost - benefits earned during the year 93 88 82
Interest accrued on projected benefit obligation 161 161 157
Actual return on assets (199) (202) 12
Net amortisation and deferral 4 31 (178)
---------------------------------------------------------------------------------------------
Net pension expense 59 78 73
---------------------------------------------------------------------------------------------
Page 24
TARQUIN PLC
Notes to the Consolidated Financial Statements
14. Pension plans (continued)
The following table summarises the combined status as of 31 December of
the defined benefit pension plan.
1997 1996
-------------------
$ '000 $ '000
Actuarial present value of benefit obligations:
Vested benefit obligation 2,572 1,991
Unvested benefit obligation - -
----------------------------------------------------------------------------------------------------------
Accumulated benefit obligation 2,572 1,991
----------------------------------------------------------------------------------------------------------
Pension (liability) asset included in Consolidated Balance Sheets:
Projected benefit obligation (2,774) (2,143)
Plan assets at fair value 2,376 2,110
----------------------------------------------------------------------------------------------------------
Plan assets in excess of (less than) projected benefit obligation (398) (33)
Unamortised transition obligation (13) (16)
----------------------------------------------------------------------------------------------------------
Net pension asset (liability) 13 0
----------------------------------------------------------------------------------------------------------
Determination of the projected benefit obligation was based on a weighted
average discount rate of 7.5% in 1997 and 6.5% in 1996, and the assumed
long-term rate of return on plan assets was 9.0%. The actuarial present
value of the projected benefit obligations was determined using assumed
rates of increase in future compensation levels ranging from 5% to 6%.
Plan assets are invested in a with profits deposit administration
insurance contract.
The company also has a defined contribution pension plan for its
employees. This plan is a contracted-out money purchase scheme. The plan
expense in 1997, 1996 and 1995 was $181,000, $162,000 and $146,000,
respectively.
Page 25
TARQUIN PLC
Notes to the Consolidated Financial Statements
15. Related party transactions
Charman Underwriting Agencies Limited is the managing agency for
Syndicates 488 and 2488. Syndicate 2488 has a single corporate member -
Tarquin Underwriters Limited - another group company. Syndicate 488 is
financed by a mix of traditional "bespoke" Names and Members Agents
Pooling Arrangements (MAPA) and corporate capital.
The following table shows the participation of directors of group
companies in the capacity of Syndicate 488.
Underwriting year
---------------------------------------------
1998 1997 1996 1995
---------------------------------------------
$'000 $'000 $'000 $'000
JR Charman - 495 495 495
RDH Brindle - 41 231 231
DG Penney - 109 109 109
DJ de M Coulthard (resigned 15 October 1996) - - 91 83
AF Jackson (retired 30 September 1996) - - 96 84
Charman Underwriting Agencies Limited charges the providers of capital on
its two managed syndicates a fixed fee (based on syndicate capacity) which
encompasses the managing agent's fee and syndicate expenses. This flat fee
covers all normal expenses which managing agents, in accordance with best
practice, are able to recover from a syndicate, including, but not limited
to, staff and property costs, computer charges, travel and Lloyd's
charges. Items not included are those which are incurred as a direct
consequence of business transactions such as commissions, a 1.1% premium
levy (on the 1997 account and onwards), claims adjusters and related legal
fees, foreign exchange variances and overseas premium taxes. No further
amount is charged to the syndicates provided that they close in the normal
manner at the end of 36 months.
For 1995, 1996 and 1997 the flat fee was 2.5% of capacity. This was
increased in 1998 to 2.75% subject to a minimum aggregate fee of
(Pounds)9,075,000 or approximately $15,000,000.
Managed syndicates are charged a profit commission which is based on the
underwriting profits of a closed underwriting account. Profit commission
for the 1995, 1996 and 1997 accounts has been and will be charged at the
rate of 15%. For the 1998 underwriting year this will be increased to
17.5%.
The amount of profit commission and management fee income from Syndicate
488 was $11,526,000, $16,251,000 and $11,585,000 in 1997, 1996 and 1995,
respectively. The amount of profit commission accrued at December 31, 1997
and 1996 was $18,940,000 and $29,358,000, respectively.
In addition, the Company has outstanding debt with Aeneas Venture
Corporation, a related party. See Note 16 for further information on this
related party debt.
Page 26
TARQUIN PLC
Notes to the Consolidated Financial Statements
16. Debt
1997 1996
-----------------------
Long term debt $'000 $'000
Aeneas Venture Corporation loan 35,172 35,172
Bank of Boston loan 10,759 13,833
--------------------------------------------------------------------------------------
45,931 49,005
--------------------------------------------------------------------------------------
With respect to the above long-term debt, the Company has incurred
interest expense of $5,428,000, $5,621,000 and $5,070,000 during 1997,
1996 and 1995, respectively. Interest payable at December 31, 1997 and
1996 was $4,572,000 and $0 respectively.
Loan - Bank of Boston
The Bank of Boston advanced $15,370,000 to the Company on November 27,
1995. Interest on the loan is payable at a rate of 1 1/2% per annum above
LIBOR rates at one, three or six monthly intervals, at the Company's
discretion. The loan is repayable in instalments of between 10% and 30%
of the amount advanced with the last instalment being repayable on the
earlier of seven days after the release to Charman Underwriting Agencies
Limited of profit commission in respect of the 1997 underwriting year of
account or June 30, 2000.
This loan agreement contains covenants which limit the Company's ability
to pay dividends and enter into certain transactions. Additionally, this
loan agreement requires that the tangible net worth of the Company (under
Lloyd's 3 year accounting rules) not be less than $46,200,000 from the
period July 1, 1997 through June 30, 1998 and $88,020,000, from July 1,
1998 onward.
Related Party Loan - Aeneas Venture Corporation
A loan of $35,172,000 was advanced to the company by Aeneas Venture
Corporation, a company whose sole shareholder is the President and
Fellows of Harvard University, on November 30, 1994. The President and
Fellows of Harvard University are also the sole shareholder of Phemus
Corporation which holds all of the US$1 "B" ordinary shares in the
Company.
Interest payable on the loan is calculated by two methods; a base rate of
13% per annum is payable annually in arrears; an additional rate of up to
12% will become payable on the "Final Repayment Date" which is the
earlier of:
1. the date of an initial public offering ("IPO");
2. the date of a sale of shares of Tarquin plc to a third party or
parties who are not connected persons with any of the existing
shareholders of the company which, when aggregated with all previous
such sales comprises more than 50% of the shares subscribed for by
the investors;
3. the seventh anniversary of the date of the original loan agreement
(which was December 22, 1994); or
4. in the absence of an IPO or sale prior to such seventh anniversary,
such later date, not exceeding 36 months from the date of the seventh
anniversary as the lender may determine.
Page 27
TARQUIN PLC
Notes to the Consolidated Financial Statements
16. Debt (continued)
The additional rate payable will be determined by a formula which is
dependent on the internal rate of return which accrues to "B" and "C" US$1
ordinary shares upon the "Final Repayment Date".
The additional interest amount has been accrued at the full 12% as an
evaluation of the internal rate of return has indicated that it is in
excess of the amount which would cause the full 12% to become payable.
However, no amount is payable until the "Final Repayment Date". Additional
interest expense of $4,220,640 has been recognised in each of the three
years ended December 31, 1997.
This loan agreement also contains covenants which limit the Company's
ability to pay dividends and enter into certain transactions.
17. Contingencies
The terms of certain reinsurance contracts for Syndicate 2488, for which
Tarquin Underwriters Limited is the sole capital provider, are being
disputed by reinsurers. Current legal advice confirms the contracts are
fully enforceable and, therefore, no provision has been made. As at
December 31, 1997, the amounts due under the contracts in question was
$10,768,870 and reinsurance receivables on unpaid losses and IBNR was
$30,578,736.
Page 28