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Incorporated 1991
Head OfficeInsurance Building • 112 Pitts Bay RoadP. O. Box HM 1007 • Hamilton HM DX • BermudaTelephone: 441-295-5566 • Fax: 441-292-8831Internet: www.bfm.bm
Subsidiary CompaniesBF&M General Insurance Company LimitedBF&M Life Insurance Company LimitedBF&M Management LimitedBF&M Properties LimitedMarchmont Insurance Company LimitedNorth Atlantic Asset Management LimitedHamilton Reinsurance Company LimitedScarborough Property Holdings Limited(60% ownership)Barr’s Bay Properties Limited(60% ownership)All subsidiaries should be contactedthrough our Head Office address. BF&M LIMITED ANNUAL REPORT 2003
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CONTENTS
2 Financial and Statistical Summary
3 Directors
4 Corporate Information
5 Group Executive
6 Chairman’s Report
8 Management Report
19 Hurricane Fabian - Special Report
26 Responsibility for Financial Reporting
26 Actuary’s Report to the Shareholders
27 Auditor’s Report to the Shareholders
28 Consolidated Balance Sheet
29 Consolidated Statement of Earnings
30 Consolidated Statement of Retained Earnings
31 Consolidated Statement of Cash Flows
32 Notes to Consolidated Financial Statements
47 Directors and Officers of Principal Operating Subsidiaries
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FINANCIAL ANDSTATISTICAL SUMMARY
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DIRECTORS
1 Lt. Col. Michael L. Darling, O.B.E., E.D., J.P. - Chairman, Chairman, William Bluck & Company, Ltd.
1 Gavin R. Arton - Deputy Chairman, Senior Vice President, XL Capital Ltd
3 Dale Butler J.P., M.P., Director, Training, Learning & Communications, MEF Enterprises Ltd.
3 Jeannette Cannonier, O.B.E., J.P.
2 Peter N. Cooper, Managing Director, A.S. Cooper & Sons, Ltd.
2 Nancy L. Gosling, B.Com., C.G.A. President & Chief Executive Officer, Gosling Brothers Limited
2 W. D. Hilton, Jr., President & Chief Executive Officer, Trust Services Inc.
1 Stephen W. Kempe, President, Admiral Management Services Limited
2 R. Blake Marshall, B.B.A., M.Sc., C.A., President, Par Management & Consulting Services Ltd.
1 Fernance B. Perry, J.P., Owner & President, Mayfair Limited
1 Richard D. Spurling, Partner, Appleby, Spurling & Kempe, Barristers & Attorneys
Glenn M. Titterton, A.C.I.I., Chartered Insurer, President & Chief Executive Officer, BF&M Limited
3 David A. J. G. White, President & Managing Director, Knick Knack Co. Ltd.
1 Finance Committee2 Audit & Compliance Committee3 Nominating Committee
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GROUP EXECUTIVE
1 Glenn M. Titterton, A.C.I.I., Chartered Insurer, President & Chief Executive Officer
2 R. John Wight, C.A., Executive Vice President, Chief Financial Officer and Secretary
3 Senator Carol A. M. Bassett, F.L.M.I./M., A.C.S., Senior Vice President, BF&M Life Insurance Company Limited
4 David Mc Leod, A.C.I.I., Chartered Insurer, Senior Vice President, BF&M General Insurance Company Limited
5 Gina A. Bradshaw, F.L.M.I., Vice President, Technical Services, BF&M Life Insurance Company Limited
6 Vincent Chaves, B.COMM, C.A., Vice President, BF&M Life Insurance Company Limited
7 Peter M. Lamb, CFP, CHFC, CLU, RGBC, LTCP, Vice President, Sales & Customer Relations, BF&M Life Insurance Company Limited
8 Glen P. Gibbons, B.A., A.C.I.I., Chartered Insurer, Vice President, Customer Relations & Sales, BF&M General Insurance Company Limited
9 Ross J. Hillen, A.C.I.I., Vice President, Technical Services, BF&M General Insurance Company Limited
10 Nick Faries, MCSE, BSc., Dip. Eng., Vice President, E-Business & Technology Solutions
11 Debby L. Graham, P.H.R., Vice President, Human Resources
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Financial Rating
A.M. Best Co., the world’s oldest and most authoritative
rating agency confirmed a financial strength rating of
“A- (Excellent)” to BF&M Limited and to each of our two
principal operating subsidiaries, BF&M Life and BF&M
General and added a “positive outlook”. In the aftermath of
Hurricane Fabian, A.M. Best briefly placed the local insurers
on the watch list because they lacked information. It is a
credit to the strength of BF&M that as soon as the required
information was supplied our rating was immediately
reaffirmed.
The Business
Hurricane Fabian dominated the year 2003. Consequently
it was not a good year for BF&M General. Ironically, this
was compounded by further bad news as the cost of
motor claims and particularly repairs to motor vehicles,
increased dramatically in the third and fourth quarters of
the year, further increasing the net loss experienced on
this account. The cost of Fabian and the increased net loss
on the motor account combined to make 2003 an
unhappy year for BF&M General despite substantial
success in other areas of the company. This is discussed
further in the Management Report.
While BF&M General was having a somewhat
unsatisfactory year, BF&M Life was enjoying the best year
in its history and we were benefiting from strong
performances by BF&M Properties, Marchmont Insurance
(formerly Fortress) and other subsidiaries, as well as from
our investments.
These factors and others that affected our Company in
2003, are dealt with in more detail in the Management
Report. I must point out however that Hurricane Fabian
cost your company approximately $3.7 million which
includes our retained losses after reinsurance, the loss of
substantial profit commission that we have enjoyed from
our reinsurance programmes for many years and various
other costs that we associate directly with Fabian.
I am happy to present the Annual Report of the Company
for the year ended 31st December 2003.
It is often the case that when one line of business or one
company does well, another encounters difficulties. This is
in the nature of the business and points to the underlying
justification for diversification. The year 2003 was
dominated by Hurricane Fabian and yet your Company still
managed to produce excellent results.
Results
We are very pleased to announce that Net Earnings for the
year ended 31st December 2003 were $8.9 million. While
this represents a decrease of $ 900,000 or 9% when
compared with 2002, it is considered to be a very strong
result given the net cost of about $3.7 million for Hurricane
Fabian mentioned below. It is interesting to note that the
Company would have achieved record Earnings in 2003
had it not been for Fabian.
Total Assets stood at $276.7 million at 31st December 2003.
Retained Earnings are now growing steadily with the result
that Shareholders’ Equity increased by 12.6 % to $66.3
million. BF&M is financially strong and continuing to grow
despite the difficult business climate that preceded 2003.
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Your company maintains a very conservative reinsurance
programme that stops our loss from such an event at a
predetermined level. Our loss was therefore entirely as
anticipated. Nevertheless, this was a very serious Category
3 hurricane that our well-trained management and staff
took in their stride. On behalf of the shareholders and
board, I congratulate them on the superb job they did
under the most extraordinary circumstances, which were
compounded by the construction work underway in our
basement and next-door.
Net Earnings, as one would expect, are less than in the
preceding year but I am pleased to note that this is only
marginally so, despite a serious Category 3 hurricane, the
worst in perhaps 70 or more years. Overall the Company
continued to achieve very good results.
Developments to our properties continue and the basic
construction of the new five floor “PXRE House” by our
60% subsidiary Barr’s Bay Properties Limited was
completed, on schedule and within budget, in November.
The renovation and refurbishing of the Insurance Building
to provide more suitable accommodation for our staff, is
progressing well. I take the opportunity on your behalf to
thank our staff for their tolerance and understanding during
this period of construction. The accompanying
Management Report addresses the business in much
greater detail.
Shares and Dividends
Our common shares opened 2003 at $10.25 and closed
the year at $12.00 on trading volume of 286,263 shares.
Subsequently and at the time of writing this report, the
market price is varying between $15.50 and $16.00.
Shareholder Dividends for the year totaled $3,212,114.
Directors, Management & Staff
Vincent Chaves, B.Comm., C.A. was transferred to BF&M
Life as Assistant Vice President with responsibility for
Pension Administration in July 2003. Subsequent to year
end, effective from 20th January 2004, he was promoted
to Vice President, BF&M Life Insurance Co. Ltd. and joined
the group executive. The Board congratulates Mr. Chaves
on this promotion and has expectations for his future
development.
Our Heritage
In November we proudly celebrated our businesses and
our heritage. The property and marine business, which now
operates as BF&M General Insurance Co. Ltd., dates back
100 years. We are of course grateful to all our customers,
but on this occasion we especially recognise families and
businesses that have placed their confidence in us from
those very early days. We salute our management and staff
through the years for the excellence of the service they
have provided.
Conclusion
I said at the beginning that 2003 was a year of mixed
fortunes. It is a great credit to management and staff that
they not only successfully dealt with normal business but
also coped with offices under construction and a serious
Category 3 Hurricane, which stretched the organisation as
no event has previously. On behalf of the directors and
shareholders, I thank Management and our excellent team
for also achieving a very acceptable financial result.
Subsequent to year-end we bought Osprey Investments
and merged this into our new subsidiary North Atlantic
Asset Management Ltd. and we reached agreement with
Canada Life to acquire their group business and to act for
them in Bermuda in respect of their pension and individual
life business. There is real momentum at BF&M and your
Board and I believe that your Company is well positioned
for future growth.
Lt. Col. Michael L. Darling, O.B.E., E.D., J.P.Chairman, 22nd April, 2004
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BACKGROUND
It is not always easy to identify a single development that
dominated a year but, in Bermuda in 2003, most people
would point unquestioningly to Hurricane Fabian. For this
reason Fabian will be mentioned frequently throughout
this report and we have included a Special Section on
Fabian which we refer you to for greater detail.
BF&M’s performance must be assessed against a
complex picture. Globally there were so many dramatic
developments for which the ultimate outcome is far from
certain. In the United States and most industrialised
countries, the business climate showed some
improvement over preceding years. At the time of writing
it is still early to state with any real confidence that a
traditional recovery is fully underway although the
consumer and businesses appear buoyant.
The incidence of terrorist attacks and the “war” against
terrorism expanded around the world and lead to the
invasion of Iraq. The initial wide-spread climate of
uncertainty and fear gave way to a continuing
questioning of motives and justification. Corporate
scandals spread from North America to Europe and
questions about board and senior executive
accountability remain to be resolved. This does not
inspire public confidence in big business. It is difficult to
identify or quantify the indirect effects on Bermuda.
The Progressive Labour Party won the 2003 election. As
they began a second term in office a change in
leadership resulted in a Government that appeared to be
more open and communicative. The discussion will now
inevitably turn to independence and we would urge that
sufficient time be allocated to ensure that Bermudians
have the opportunity to fully debate the issues involved
before the community is asked to make a decision,
presumably by way of a clearly worded referendum.
Bermuda continued to benefit from the strength of our
foreign exchange earnings from international business.
Unfortunately there was no improvement in the outlook
for Tourism and related sectors such as hospitality,
restaurants, retail and transportation. The announcement
that HSBC would seek to acquire the Bank of Bermuda
introduced another level of uncertainty into the Bermuda
business sector as leaders grappled with what the effects
would be and what it meant for other businesses.
There is great strength in our international business
sector, especially insurance and reinsurance. However, it
can be argued with merit that Bermuda is too dependent
on this single leg of our economy. Our visitor industry has
a long way to go before it can be seen as a strong and
revitalised partner. It is likely that the creation of an
independent tourism authority to manage this industry
would result in the strong leadership and clear long term
vision that are currently sadly lacking. The prospect
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continues for small incremental unaligned changes that
may or may not have marginal impact on the industry. It
is ironic that the decline of tourism has not caused
sufficient hardship and political upheaval to drive the
radical changes that are needed. Despite this, we believe
that, on balance, the outlook for Bermuda remains
sound.
The local insurance market in Bermuda continued to be
highly competitive. Unlike many small markets, Bermuda
has matured to the point where, over time, strong local
companies have developed that actively compete
amongst themselves and with the foreign companies
licensed to operate here. This is serious competition
employing leading edge technology and well-trained staff
to meet the changing needs of the Bermuda customer.
The consumer benefits from this competition but there is
the tendency to drive some lines of business to the point
where they are unprofitable e.g. motor insurance.
The hard reinsurance market for property, casualty, motor
and marine continued and reinsurers made a concerted
effort to drive rates up in Bermuda for the average
insurance customer. We resisted these efforts with every
means at our disposal but, with Fabian playing such a
major role, the outcome was, in our view, less than
satisfactory. Meanwhile health reinsurance costs were
being driven up by the rapid rise in health care costs,
increased usage and developments in both procedures
and drugs, as well as an aging population. The leading
reinsurer, important to many of the primary companies
including BF&M, withdrew its support for the Bermuda
market in response to these continuing developments.
Primary rate increases in Bermuda, although always
difficult for our customers, were generally manageable
and considerably less than experienced in many other
jurisdictions.
REPORT
Hurricane Fabian had the effect of reducing Net Earnings
by about $3.7 million. This charge includes our claims
retentions, the loss of profit commission on our
reinsurance treaties and other costs identified as resulting
from this severe Category 3 hurricane. For more detail on
Fabian see the Special Report which is included in this
Annual Report.
Real progress wasevidenced in thestrong growth inGross PremiumsWritten, whichincreased by 16% toover $94.6 million. In these circumstances we are very pleased to report that
2003 was otherwise a successful year for BF&M Limited
and its operating subsidiaries. Net Earnings for the year
ended 31st December 2003 were $8.9 million. Despite
the approximate $3.7 million cost of Hurricane Fabian
mentioned above, Net Earnings only decreased $900,000
or 9 % from the previous year. We consider this a very
satisfactory result in the circumstances and note that, but
for Fabian, the year would have produced record earnings.
It was a year of mixed fortunes, as is often the case in this
industry. BF&M Life and BF&M Properties produced strong
profits but net earnings for BF&M General reduced
substantially as a result of the $3.7 million cost of Fabian
and a motor account that went from bad to worse. Both of
these developments are addressed elsewhere in this
report. It was a better year for investments and our
investment income grew by 48%.
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Real progress was evidenced in the strong growth in
Gross Premiums Written, which increased by 16% to over
$94.6 million. Reinsurance costs increased by 15%. Net
Premiums Earned increased by 17% and Total Income
increased by a very satisfying 16%.
While Operating Expenses were held to a very modest
1% increase, consistent with our objective, overall
Expenses increased by 20% because of a 29% increase
in Claims and Claim Expenses, substantially because of
Fabian.
Operating Expenseswere held to a verymodest 1%increase.At 31st December 2003 Total Assets stood at $277
million. Part of this substantial increase at that particular
point in time, resulted from outstanding Fabian claims due
to be paid by our excellent panel of reinsurers. Retained
Earnings are growing steadily with the result that
Shareholders’ Equity increased by 13% to $66.3 million.
Our financial strength was endorsed during the year when
A.M. Best re-confirmed our rating of “A- (Excellent)” and
added a “positive outlook”.
BF&M LIFE INSURANCE COMPANY LIMITED
BF&M Life experienced a very successful year. Gross
Premiums Earned increased by 17% and Investment
Income increased 52% so that Total Income increased by
18%. On the expense side Policy Benefits increased by
23% and Operating Expenses increased by 1%,
producing an increase of 19% in Total Expenses. The
result was that Net Earnings increased by 6%.
Personal Insurance
We successfully launched our new Education Savings Plan
(ESP) during the year. The first recipients of our new plan
were the “Name the Mascot” contest winners who were
presented their prizes by Mayor Lawson Mapp at the City
Hall. It is our intention to aggressively market this coverage
throughout 2004 to parents, grandparents and guardians
who wish to set aside funds for the future educational
needs of their youngsters.
Our 2002 Networking Agreement with Sun Life Assurance
Company of Canada continues to have a positive impact
on our sales as BF&M Producers successfully market Sun
Life plans and Sun Life Producers introduce BF&M benefits
to their clients on an ongoing basis.
Our individual life, health and pension plan sales increased
by 27% and retention levels continue to remain at a high
level.
An exciting sales contest launched mid year involving all
our staff produced an incredible 570 leads. Premium
income on new business directly related to these leads
totaled $268,000 of annualised premium. We will
continue to encourage a “total sales culture” throughout
our group of companies.
Business Insurance
Segregated pension assets continue to grow significantly
with assets under administration increasing by 28%. The
marked increase reflects new business as well as
improvement in Investment returns for the various mutual
funds available to our pension policyholders. The
continued interest in BF&M Life’s pension product is
encouraging and should bode well for the future.
Additional growth is expected during 2004 as the required
contribution percentage increases from 8% to 10% of
salary effective 1st January 2004. We continue to
encourage all employers to remit their funds on a timely
basis to ensure their plans remain in compliance with
The National Pension Scheme (Occupational Pensions)
Act, 1998.
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As a leading provider of group health benefits we were
delighted to be invited by the Government to participate in
the newly formed Joint Fees Committee. The mandate of
this Committee is to look at the Health industry and its
guidelines and to assist with the further development of
Current Procedure Terminology (CPT) coding in all aspects
of the health industry. The Committee successfully
developed guidelines for reimbursing visiting surgeons who
perform surgeries that cannot be done by local surgeons.
We experienced tremendous growth of our group health
portfolio with sales for the year increasing by 80%. In
addition to strong sales numbers our retention levels for all
lines of group products remains at satisfactory levels.
It was a betteryear for investmentsand our investmentincome grewby 48%.We were pleased to launch our new Group Web Enquiry
System, which allows our group policyholders around-the-
clock access to their plan information at the member and
group level. This service has been well received by our
customers and further establishes us as the technological
leaders in the local industry.
We continue to invest in the state-of-the-art technology that
will result in the ability to receive claims electronically and
communicate with pharmacies to ensure that they have
access to the most current information and the quick
transfer of accurate data.
BF&M GENERAL INSURANCE COMPANY LIMITED
Gross Premiums Written increased by a very satisfactory
14% while Investment Income increased by 41%,
producing an increase of 13% in Total Income. However,
Total Expenses increased by 23% as a result of Hurricane
Fabian and disastrous Motor results. Net Earnings reduced
by 63% which is no doubt to be expected in a year when
Bermuda was hit by a Category 3 hurricane recognized as
being the worst to hit Bermuda in 70 to 100 years. BF&M
General is Bermuda’s leading property and marine insurer
and, as would be expected, felt the full brunt of Fabian.
Personal Insurance
This segment of our portfolio comprises primarily Home,
Motor and Marine Insurance. Premium income in all these
classes grew and we achieved our planned growth by the
year-end.
Within the Home account, as a service to all our Personal
Insurance Customers, we have been actively promoting our
Free Sums Insured Assessment Survey as a means of
keeping cover up to date. New business acquisition was at
a level that met our expectations. Retention rates were also
high and non-windstorm claims were modest. Overall non-
Fabian claims numbers were in line with our forecast for
2003 and in keeping with historical trends over the last 10
years.
The Marine (Small Craft) account had a good year in terms
of premium growth arising out of a more focused
underwriting approach and the appointment of a dedicated
resource to this important class of insurance. The numbers
of Marine claims reduced marginally this year but the total
cost unfortunately increased.
The Private Car and Motorcycle accounts were highlighted
in our 2002 Annual Report because we had suffered
another substantial loss on this business. A full review was
carried out in the second quarter 2003, which
unfortunately highlighted continuously rising repair costs
and the need to continue to increase premiums and
deductibles if we were to have any hope of bringing this
account to a break even point. Plans for a sustainable, if
modest, profit lie in the future. A series of strategies were
initiated by mid-year, which we had hoped would correct
the ongoing loss position of this business.
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It is disappointing to note that these actions have still not
produced the desired result. Private Car claims were
numerically in line with previous years. However, Own
Damage claims costs rose by 25% and in the fourth
quarter alone we had five simple single vehicle accidents
that collectively cost $140,000. Third Party claims in the
Private car account were, in term of numbers, on a par
with previous years. Claim costs however rose due to the
need to increase reserves on some older claims. There
was one large new Third Party injury loss at the end of
the year for which we have had to carry a substantial
reserve.
Within the Motorcycle account the number of reported
cycle claims was slightly lower than in 2002 but once
again the cost of claims increased significantly. The cost of
Own Damage claims increased by 14% compared to
2002 and we had two serious Third Party injury claims,
which have necessitated the establishment of substantial
initial reserves. Comment was made last year on the
problem of cycle theft. In 2003 the numbers of reported
theft claims was down by 7.5% but further analysis shows
that this was due to the first quarter of the year being
significantly lower than in previous years with the
remainder of the year being consistent with the pattern of
2002. The problem has certainly not been overcome and
is still producing 45% of all cycle claims and 65% of all
Own Damage claims for Motorcycles.
Damage claims increased by 14%.The situation continues to worsen and motor insurance
produces unacceptable losses every year. BF&M lost $1.6
million on Motor insurance in 2003. Motor insurance in its
present form is unsustainable at current rates and
deductibles. The rapid and substantial increases in the
cost of repairs is driving up the cost of motor insurance,
which has traditionally been too cheap in Bermuda when
compared with other jurisdictions. The matter will be
made even worse if or when Government permits larger
and more expensive cars, making it even more difficult to
obtain a broader variety of parts and repairs at a
reasonable cost. Our garages face pressures that are
driving up their costs, including the cost of labour and
parts and currency exchange rates. However, unless the
rise in motor repair costs can be controlled, the rapid rise
will continue and insurance premiums must follow. The
customer must take a closer interest in these repair costs
and assist in finding ways to reduce them.
Looking forward to 2004 we have a number of initiatives
in place which will, we believe, assist us considerably
toward our goal of returning the motor account to at least
a break-even point. Unfortunately these include further
rating increases, particularly on those cases which have
produced claims, minimum premiums, higher deductibles
and a closer focus on the cost of repairs.
Business Insurance
In overall terms our Business Insurance Team had a good
year achieving their income goals and maintaining a high
retention rate, which is testament to the high quality of
service they deliver to our many Business customers.
We continue to be successful in the acquisition of
Contract Works insurance to the local construction
industry. Another initiative on Workmen’s Compensation
has also produced added revenue ahead of expectations.
Consequential Loss Insurance for business clients is a
growing class of insurance and the Business Unit has
been active in promoting this cover with some degree of
success.
With the exception of Fabian there were no significant
Commercial Property losses in 2003. Commercial Casualty
losses were modest.
Commercial vehicle claims rose 5% over the previous
year but claim costs rose 9.6% in the same period. We
had three significant Commercial Vehicle Third party injury
claims, which are reserved at $250,000 and together with
an increase on a prior year claim, accounts for the gross
claims being above our forecast.
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RISK MANAGEMENT SERVICES
This Division includes BF&M Management Limited, BF&M
Brokers (a division of BF&M Management Limited) and
Marchmont Insurance Company Limited (formerly Fortress
Insurance Company Limited). BF&M Management Limited is
a leading independent captive management company,
providing quality management, consulting and broking
services to a diverse range of international clients.
Marchmont Insurance Company Limited is a rent-a-captive
facility offering a wide variety of traditional and non-
traditional programs.
2003 was an encouraging year for the Division. Total fee
revenues for rent-a-captive underwriting, broking and
consulting increased by more than 150% from 2002. This
increase related to the addition of two new rent-a-captive
programs, pre-incorporation consulting fees and broking
revenue. Captive management services continued to show
a slight decline throughout the year and fee income
decreased by 5%. Overall, fee revenues increased by
12.5% in 2003. Direct operating expenses decreased by
1.4% and the overall increase in net income before indirect
expenses was 63%.
The addition of a significant new client in the latter part of
2003, recent expansion in the operations of existing captive
management clients and significant interest in Marchmont
Insurance Company Limited should lead to continuing
growth in total fee revenues throughout 2004.
ASSET MANAGEMENT
Subsequent to year-end we acquired the Osprey Investment
Division of Anchor Investment Management and moved this
into a newly incorporated subsidiary North Atlantic Asset
Management Limited. The company’s primary objective is to
advise on and manage pension assets.
INVESTMENTS
We continue to maintain a very well diversified portfolio
consisting of first mortgages on Bermuda property,
Bermuda equities, foreign denominated equities and
foreign denominated fixed income securities. Of these
various types of securities, US dollar Government and
Corporate bonds make up the majority. The reason for
this is these securities provide the best vehicle for
matching cash inflows of interest and maturing
investments to expected cash outflows or payouts of
future claims. While bond markets globally didn’t
perform as well in 2003 as 2002, BF&M’s own
portfolio performed better because in 2002 one of
BF&M’s subsidiaries had a principal write down on a
fixed income security.
A sizeable portion of BF&M’s overall portfolio is allocated
to local mortgages. We remain bullish on the local
mortgage market as local rates provide a premium over
overseas rates for seemingly comparable risks.
Finally, the allocation of assets available for investment
apportioned to local and overseas equities is modest as
compared to fixed income securities. Those equities
invested in are surplus to the company’s operating needs
and thus we are able to absorb the increased volatility on
these securities through higher long-term returns.
Performance in both the overseas and local equities was
very strong in 2003.
PROPERTIES
2003 has been a very busy year for our property
companies. November saw the completion by Barr’s Bay
Properties Limited, a joint venture of BF&M Properties
Limited and PXRE Group Ltd, of the five floor office
building project. This project commenced in November
2002 and was completed on budget and almost six
weeks ahead of schedule in November 2003. The work
of the general contractor, sub contractors, project
managers and everyone involved in this project is to be
commended. While every building project of this
magnitude has its challenges, the whole team worked
hard, often during evenings and weekends, to ensure the
successful completion of the building. BF&M staff moved
into the building in late December to occupy the
Waterfront and second levels, and PXRE moved in this
month (April) to occupy the top three floors. Magnificent
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water views, prime location, and attractive design and fit
out make PXRE House the newest and one of the most
attractive office buildings in Hamilton.
Also during the year plans were drawn up and approved
for the renovation of the Insurance Building. This building,
which houses the majority of BF&M staff, is forty-two years
old. While it has served staff very well over the years, it is
in need of changes to provide for modern space and
work standards. Part of this work entails the replacement
of old air ducts and other equipment related to the air
conditioning system. Staff were very patient and
understanding during the period early in 2004 when the
building had no air conditioning and we thank them for
this. As part of the Insurance Building renovation project,
BF&M has constructed a link block between the Insurance
Building and PXRE House that will provide for additional
space for staff for our growing businesses. We anticipate
the completion of the Insurance Building renovation
project by the end of 2004.
E-BUSINESS AND TECHNOLOGY SOLUTIONS
Unquestionably the leader in electronic business
capabilities in the local insurance market, BF&M has
continued to build on its lead in efficient, customer
focused systems throughout the year. 2003 has seen the
introduction of several new ground breaking solutions for
our business and personal customers, including Marine
renewals online, the ability for Health, Life and ADD group
customers to view and better manage their portfolio,
home insurance “part payments” online, and the ability for
all types of BF&M external agents to instantly, and in real
time, quote & buy policies on our customers’ behalf. As
part of the “E-surance” suite of products, a new set of
functionality was added to the web site which will give
our customers complete control over how we
communicate with them per policy or line of business,
whether email or post, further highlighting BF&M’s
commitment to providing our valued customers
“Insurance your way”.
In addition to the more visible “E-surance” initiatives, we
continue to seek operating efficiencies through “B2B”
(Business to Business) electronic processes. In 2003 an
entirely new flexible web based process for handling bulk
claims from business partners was developed, and has
been implemented with local pharmacies, improving
claims reporting speed, turnaround time, and reducing
manual intervention.
Technology solutions continue to lead the drive for
operating efficiencies at BF&M, providing customised,
workflow driven, intelligent, intuitive systems aimed at
enhancing customer relationships, and giving all staff
members access to the information they need, when they
need it. In 2003, a new state of the art “Voice Over IP”
phone systems was implemented just prior to Hurricane
Fabian, allowing for a very timely doubling and then later
tripling of phone capacity just as it was needed. Internal
systems were enhanced with a completely rewritten
Shareholders system using our new application
development toolset, and phase 1 of the document
management project was implemented, resulting in new
standardized customer correspondence, options to email
all output, and the ability to electronically and
automatically archive and retrieve all output for improved
customer service.
...which will giveour customerscomplete controlover how wecommunicate withthem.Considering the aftermath of Hurricane Fabian, it was
gratifying to note that BF&M’s commitment to a company
wide Business Recovery Plan was justified. The plan takes
into account multiple scenarios that the company may
need to recover from, including loss of our facilities during
an island wide event such as a hurricane. In these
situations, BF&M must continue to function effectively,
15
delivering much needed assistance to all of our valuable
customers. The Business Recovery Plan provides for
backup computer systems both on and off island, backup
phone systems, and separate facilities to house staff
members. During a full test in May 2003, the entire
company took part in the scenario developed by the
Business Recovery Team that simulated a complete loss
of the Insurance Building during a hurricane. All of the
business units at BF&M used this opportunity to think
about the actions that they would take if the scenario
were real, and an actual category 3 hurricane was bearing
down on us, culminating in a “full live test” of all recovery
systems and procedures in the worst of possible
circumstances. All of the technical systems required at the
business recovery site worked as expected, including
phones, local computer systems and backup computer
systems at IBM in Toronto, and, while thankfully not
required for Fabian, proving that all of the planning and
preparation will provide seamless service for our
customers when they need us most.
www.SharkOil.bmreceived 1.8 millionhits and 100,000individual visitsleading up toHurricane Fabian.Hurricane preparedness was a pertinent topic in 2003,
and BF&M were proud to assist and sponsor an effort by
four forward thinking staff members, which was in line
with our corporate priorities. Their goal was to create the
most functional and Bermuda relevant hurricane resource
available online. The result of their efforts was
www.SharkOil.bm, a site which received 1.8 million hits
and 100,000 individual visits leading up to hurricane
Fabian, providing a fantastic resource for safety, education
and tracking, both for those in Bermuda and overseas.
Denis Robert, Chuck Morgan, Andrew White and Kevin
DeSilva all received the President’s Award in 2003 for
their innovative and voluntary work on www.SharkOil.bm,
demonstrating the truth that BF&M cares through their
community focused effort and commitment to quality.
HUMAN RESOURCES
The strength of our Training & Development initiatives
became apparent in 2003 when our staff were called
upon to provide a continuously high standard of post
Fabian service. The team spirit, collaboration, and focus on
the clients’ needs was exceptional and we commend
everyone involved.
Leadership and Management Team
Vincent Chaves B.Comm., C.A. was transferred to BF&M
Life as Assistant Vice President with responsibility for
Pension Administration in July 2003. Subsequent to year
end, effective from 20th January 2004, he was promoted
to Vice President, BF&M Life Insurance Co. Ltd. and joined
the group executive.
Professional Development
We congratulate the following staff who were successful in
examinations in 2003:
Bermuda Insurance Diploma
- Michaela BradshawHealth Insurance Association of America
– Peter Lamb and Fiona Davies
Chartered Property Casualty Underwriter
– Michael Jones and John Wight,Certified Management Accountant Association of Canada
– Carol Faries
Life Office Management Association
– Zina Tucker, Jewell Eve, Ronisa deFontes, Vince Chaves and Cheryl Smack
Associate in Risk Management
– David EllisonAssociate in Reinsurance
– Alyson Nicol
16
Leadership Development
BF&M continues to support the development of its senior
team. In 2003 Glen Gibbons, Vice President, Customer
Relations & Sales – BF&M General, attended the INSEAD
Advanced Management Program (AMP) in Fountainbleau,
France. AMP is INSEAD’s flagship global executive
programme. It has won international recognition since it
was first run, and offers an unrivalled forum for learning,
reflection and exchange for senior managers from a wide
variety of cultural and corporate backgrounds.
To continue with our commitment to excellence and our
endorsement to management development, the
management group attended the Living Leadership 2003,
“The Power of Executing Greatness”. This one day
programme hosted some of the world’s most inspiring
leaders including Rudy Giuliani and best seller author,
Stephen R. Covey.
Training and Development
In 2002, the International Computers Drivers License
(ICDL) program was first offered at BF&M for all employees.
In 2003, 23 people successfully completed the seven
module course and received their ICDL certificate. To date,
one third of the staff have achieved their designation with
several more in the last stages of completion. To reconfirm
our commitment to the programme, BF&M runs in-house
programmes to accommodate the work schedules of
employees. Throughout the year, various in-house “Lunch &
Learns” were also offered which covered both personal and
business topics.
Long Service
We place great value on those members who have
committed themselves to our team for lengthy periods. We
celebrate their success.
Thirty Years
Ross Spurling, Senior Customer Relations Service
Representative/Marine Specialist
Twenty Five Years
Cindy Ottley, Accounts Administrator
Gayle Stowe, Support Service Representative
Janice Woods, Team Leader, Group Sales and Services
Five Years
Michael Jones, Senior Analyst Programmer
Cheryl Smack, Foreign Claims Examiner
Business Education Partnership
Our relationship with the Bermuda College continues to
be important to us as we try to encourage and help
young Bermudians further their education. This year, our
2 first year awards were given to Anson Aguiar and
Zikomo Simmons and our 2 second awards were given
to Tache King and Shanelle Lee.
In addition, we employed approximately ten students and
two interns throughout the year. Programmes like these
create opportunities for employees of the future.
Alumni
Our Pensioners are an important part of the BF&M family.
This year, many of them joined us not only for our
annual Christmas luncheon, but also as BF&M celebrated
its businesses and their100 year heritage. Hurricane
Fabian reunited us with a couple of our Pensioners in a
different way, as Robert Jack and Roderic Pearman
returned to assist our claims department. They helped us
tremendously as they worked side by side with our team,
giving their expertise and support.
Our core value,“BF&M Cares”.COMMUNITY INVOLVEMENT
We consistently attempt to achieve recognition as a Good
Corporate Citizen and this quest is supported by our core
value, “BF&M Cares” . We are active in supporting a very
17
broad range of charities and projects throughout the
community. It would be inappropriate to list them all here
but in some cases our staff are very involved and we like
to recognise this direct involvement in the community
whenever we can.
Fighting Breast Cancer
BF&M is committed to supporting the Bermuda TB
Cancer and Health Association in many ways. For the
past six years we have sponsored Breast Cancer
Awareness Month, including the very popular “Fun Walk”.
With over 500 walkers and over $68,000 in pledges, the
event was a major success. Our staff are of course active
participants in addition to manning the registration tables
and supplying water along the route. We also made a
$40,000 donation towards their new purpose built
headquarters on Point Finger Road.
Running and Walking for Fun
Our 5km Fitness Run and Fun Walk has become an
annual summer fixture in St. Georges. Many of our staff
participate and we meet a great cross-section of
interesting people. BF&M sponsors this project as our
ongoing commitment to Tuesday Evenings in St. Georges
(formerly Heritage Nights, for which we were the major
sponsor for many years). It is a pleasure to work with the
Mid Atlantic Athletic Club in organising this enjoyable
event.
Festival of Lights
November and early December 2003 saw many of
Bermuda’s residents decorating their homes in time for
the Eighth Annual Festival of Lights co-sponsored by
BF&M and BELCO Holdings. Not even Fabian could deter
the many families and businesses from participating in
this annual event, which is focused on community spirit
and charity. There is no doubt that this project helped
Bermuda end the year on a bright note. This year BF&M
and BELCO donated another $10,250 to various charities,
designated by the thirteen winners. Total charitable
donations from this colorful event have now passed the
$73,500 mark. It was pleasing to see many new entries
amongst the winners alongside repeat winners and to see
so many charities benefit. We thank all participants and
our judges for making this another successful year for the
Festival of Lights.
We celebrated ourbusinesses and aheritage that datesback 100 years.BF&M Calendar
BF&M’s Calendar is an annual project that we undertake
with enthusiasm. The calendar is welcomed into
businesses and homes each year and we are gratified that
it continues to be enormously popular. Our objective is to
produce a “Bermudian” calendar with a difference. The
2003 Calendar was entitled “Twelve Artists, Twelve
Perspectives – one subject, Bermuda” and made for a rich
diversity of artistic expression.
Our Friend “Happy”
Happy continues to be a feature at all of our major
gatherings and is a huge success with youngsters and
adults alike. Our advertising campaign, which is focused on
our customers, continues to be well received.
We say “we are financially strong, we care, we are
professionals and we have a heritage of having served
Bermuda for 100 years - leave the risk to us”.
OUR HERITAGE
In November we celebrated our businesses and our
heritage. The origins of our property and marine business,
now under BF&M General Insurance Co., Ltd., dates back
100 years. We are proud of this heritage and of the men
and women who have made our businesses successful
over a great many years. We are particularly grateful to all
BF&M that, combined with the enthusiasm and
commitment of our team, we believe will lead to further
growth and success.
A.M.Bestreconfirmed our“A-Excellent”rating and added a“positive outlook”.We are committed to our customers and to Bermuda. In a
rapidly changing business environment we intend to be
“winners”. I thank and congratulate our entire team, who
should take considerable pride in our success in 2003,
particularly in the midst of Hurricane Fabian and the
disruption of our own building works.
Glenn M. Titterton, A.C.I.I., Chartered Insurer,President & Chief Executive Officer22nd April 2004
18
our customers and to some families and businesses who
have supported us for a century. We value relationships
both long and short.
CONCLUSION
We have been successful by remaining clearly focused on
our core business.
2003 was a successful year despite the devastating
effects of Hurricane Fabian, a severe Category 3 hurricane,
amply demonstrating the strength of our Group. We are
financially strong and secure and that strength was
recognised during the year by A.M. Best who reconfirmed
our “A- Excellent” rating and added a “positive outlook”.
We are financiallystrong and secure.We are the market leader and innovator. We continue to
expand our real-time on-line facilities at www.bfm.bm
and we believe that our substantial lead in e-business
positions us well as more sophisticated customers
demand easier access to insurance services and to their
insurance information. We continue to be proud to be an
“Investor in People” and amongst the many training and
educational programmes that we offer, we salute the
many staff who have now completed the International
Computer Drivers Licence. The Group Life and Long- term
disability business acquired from Sun Life in 2002 has
been successfully integrated and our networking
agreement with Sun Life has brought real benefit to both
parties but particularly to our customers. The development
of PXRE House by our 60% owned subsidiary, Barr’s Bay
Properties Limited, is complete and the complete
renovation of the Insurance Building is underway.
Subsequent to year-end we reached agreement with
Canada Life to acquire their group business in Bermuda
and to act for them in other lines. We also formed North
Atlantic Asset Management Limited and acquired Osprey
Investments. There is considerable momentum at
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A SPECIAL REPORT
Hurricane FabianAugust 27th - September 8th, 2003
20
THE PROGRESS OF THE STORM
Fabian was spawned in the eastern Atlantic on August 27th.
At 5 pm BDS the National Hurricane Center, Miami Florida
designated a surface low pressure located near 14.6N
31.5W asTropical Depression No 10. The storm grew
quickly being upgraded to a category 4 (Saffir Simpson
Scale winds between 114-135 kt or 131-155 mph)
hurricane on September 1st.
http://www.sharkoil.bm/documents/atlantic_storm_info/saffir_simpson
Initial projections forecast Fabian to move to the north
passing between the U.S. East Coast and Bermuda.
However, further forecasts showed the projected track
creeping closer to Bermuda. On Thursday September 4th a
Hurricane Watch was issued at 6 am closely followed by a
Hurricane Warning at 11.30 am. Fabian was forecast to
make a direct hit on Friday the 5th. Winds reached Small
Craft Warning
status by early
evening on
the 4th.
September 5th -
At 9.33 am
tropical storm
strength winds
(34 kt or 39 mph
and greater)
were recorded by
the Bermuda
Weather Service.
By 2.11 pm hurricane strength winds of 63 knots
(72.5 mph) were recorded at the airport. Within minutes
the winds reached 75 knots (86 mph) with gusts to 86
knots (99 mph). Strong winds, rain, blowing sea spray and
heavy surf reduced visibility and pounded the island
into the evening.
The highest winds recorded were 102 kts (117 mph) with
gusts of 110 kts (126.5 mph), before the mast at Bermuda
Harbour Radio’s Fort George site, from which the recordings
were being taken, was knocked down at 4.35 pm.
In all probability winds reached higher
speeds, with readings from other sites and
estimates putting the strength at approximately
105 kts (121 mph) with gusts of 115 kts (132 mph). The
strongest winds lasted between 3-4 hours. The eye of Fabian
passed just west of Bermuda.
The Storm Surge on the 5th was recorded at the airport as
being between 6-8 feet.
As Fabian moved away from Bermuda on the 6th, conditions
eased with winds reducing to just small craft
advisory strength and skies
were mostly sunny.
On the 7th sunny
skies prevailed as the
winds continued to
lighten.
Fabian became
extratropical on
September 8th
approximately 585 miles
east of Cape Race,
Newfoundland.
UNDERSTANDING WHAT SAFFIR-SIMPSONCATEGORY 3 & 4 MEANShttp://www.sharkoil.bm/documents/atlantic_storm_info/saffir_simpson
Category 3 hurricane- winds 111-130 mph (178-209 km/hr; 96-113 kts)
Some structural damage to small residences and utility
buildings. Large trees blown down. Terrain may be flooded
inland. Previous example - Hurricane which struck Bermuda
October 22, 1926.
Category 4 hurricane - winds 131-155 mph (210-249 km/hr; 114-135 kts)
More extensive curtain wall failures with some complete roof
structure failure on small residences. Major erosion of beach
areas. Terrain may be flooded well inland. Previous example
- Hurricane Hugo, North Carolina, 1989.
(note – definitions adapted for local circumstances)
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BF&M’S APPROACH ANDEXPERIENCE
BF&M has a written Hurricane Plan (supported by a full
Business Recovery Plan) which is updated every year to
take account of changing conditions. Many members of
staff are allocated specific roles in the event of a hurricane
but all staff are expected to assist as required. Each year
training takes place to ensure that all those allocated a role
are prepared. In addition in May 2003, the BF&M General
team tested the plan simulating a Category 3 hurricane,
which included the loss of the main insurance building,
including computer systems and telephones. Valuable
lessons were learned and the results were put into place
prior to the higher risk part of the hurricane season.
Fabian hit on Friday, September 5th and by 7am on
Saturday, September 6th several members of staff were in
attendance ready to open the doors for business. It quickly
became apparent that this was a major event and many
members of staff were co-opted into the claims
department.
BF&M General sent a total of 40 surveyors into the field
and used an extra 24 internal claims assistants. We had
2,350 claims reported from September 5th to September
30th and 198 more from that date to year-end. Our aim
was to see every claim within 36 hours of notification and
with a few exceptions
we achieved that aim. Regular meetings
(initially daily) of Senior Staff took place to
monitor our response and draw in extra resources when
required. We tried to take a leading role in managing costs
and as an example were successful in preventing any
gouging of prices for roof slates.
How did the plan hold up? Inevitably there were a few
problems. Any plan would have been under pressure with
the size of this event but the plan worked and lessons
learned will be incorporated into Hurricane Plan 2004
(and thereafter).
We took the view that the best service we could give our
customers was to inspect every claim and to settle when
repairs were completed following the submission of fair
and reasonable estimates. Clearly emergency repairs were
authorised immediately.
We could have settled many claims on Day One of our
visit on the basis of what we considered to be the correct
figure but this would not have been fair to our customers.
Many repairs proved to be more complex as work
progressed and an early settlement would have penalised
our Insured unfairly.
We decided to use in house staff wherever possible. We
used Woodbourne Associates to advise on complex or
large building claims and we are indebted to them for
their professionalism and efficiency. Independent Loss
0
Adjusters were employed on three large
commercial claims. Our plan was to keep
in direct contact with our Insured rather than dealing at
arm’s length through an independent adjuster. We are
proud of our personal contact with all our Insured and did
our best to maintain this in difficult conditions.
Marine claims presented and continue to present particular
difficulties. Even before the hurricane we were aware of the
shortage of boat repair facilities on the island. With the large
number of claims from Fabian this problem has been
exacerbated. As a result cost estimates have increased
dramatically both in terms of time and labour rates. The
repairers have also been reluctant to agree to any
reductions in cost as they have any number of clients who
will willingly pay these raised prices. This is a conundrum
which is still exercising our mind for the future.
THE COST IN NUMBERS
Year end estimates of the claims that will be paid by the
local insurance industry, i.e. risks insured in Bermuda,
amount to about $125 million, about half of which will be
bourne by BF&M as Bermuda’s largest insurer. A number of
large claims were insured overseas, including the Bermuda
Government, and while a figure of about another $100
million in total has been mentioned, this is unsupported.
The Minister of Finance is reported in the Royal Gazette on
March 18th as indicating that the Government’s insurance
loss, included in the figure above, was about $30 million
and that further uninsured losses would be
about another $16 million. The total
insured loss to Bermuda would therefore
appear to be about $225 million to which would have to
be added other economic loss. At year end that is the
nearest we could come to estimating the total cost of
Fabian to Bermuda.
At 31st December 2003, BF&M total claim numbers by
line of business were:-
ClaimsHome 1,654
Business 286
Marine 216
Motor 363
Total 2,519
At December 31st we had completely settled 1,387 or
55% of all claims and interim payments had been made
on many more. Our Insured were faced with great
difficulties in finding a builder to undertake their repairs
and periodically there were severe shortages of materials.
On behalf of our customers, we note that the process is far
too slow, but we acknowledge that this is a small
community with limited capacity.
BF&M had one loss for a major hotel property that was
considerably larger than all others and it distorts our
average claim numbers. The average Business claim was
$116,433 but excluding the hotel property claim
0
the average reduces to $43,000. Again,
setting aside the claim for the hotel
property, our largest individual property claim was
$2,000,000.
Home claims averaged $12,938, Marine (Small Craft)
claims averaged $23,600 and Motor claims averaged
$1,790.
THE NET COST TO BF&M
We maintain a conservatively structured reinsurance
programme that is placed with a panel of reinsurers of the
highest security. Our brokers and reinsurers have been
very supportive, have met every obligation and continue
so to do. We are grateful to them for their efficient
support. It is unfortunate that as a result of Fabian we will
lose profit commission on our reinsurance treaties for
several years. We also incurred other costs associated
directly with Fabian. Our net losses after reinsurance, the
loss of our profit commission and these other direct costs,
total some $3.7 million and this represents the total cost
of Fabian to BF&M. Our reinsurance programme is
designed to protect us against even worse storms and
also against multiple storms. We have a high level of
comfort in this structure. Hurricane Fabian tested our
reinsurance programme and, as expected, it was effective
in limiting our loss exposures under these conditions,
which gives us further confidence in this structure.
THE COST IN LIVES
In addition to the hundreds of millions of dollars of
damage to property, the economy and the environment,
Fabian cost the lives of four persons in Bermuda. These
lives were lost while attempting to cross the very exposed
Causeway. In addition three fishermen were drowned off
Newfoundland and there was a rip current drowning near
Cape Hatteras.
THE FUTURE (lessons learned)
Inevitably lessons are learned from an event as huge as
Fabian both from an underwriting and policy cover
perspective. Perhaps the most significant lessons arose out
of the damage to South Shore properties and the
widespread marine losses.
The wave action and inundation from the sea along the
South Shore affected the coastline and the properties
close to the seashore causing extensive damage. We have
not seen such extensive damage before and your
Company is reviewing its approach to insuring high-risk
properties. We are following the advice laid out by Smith
Warner International who was employed by the Bermuda
Government to assess coastal damage resulting from
Fabian. We will follow their recommendations closely;
particularly with regard to setbacks and proper structural
designs to withstand wave forces. Properties that are
viewed as being prone to inevitable
damage will, of necessity, be declined
cover. Similarly, low-lying areas like the
Airport were inundated, once again
causing several motor cars to be written off. We urge
Government to decline long-term parking at the airport
when weather forecasting authorities predict Bermuda is
vulnerable to an approaching hurricane.
We are cognizant that Fabian approached from the south
and Bermuda was exposed to the strongest quadrant, the
right quadrant of the storm. It may appear to be conjecture
to consider what may have happened if the hurricane had
come from a different direction but we need to realise that
the north side of Bermuda faired far better than the south
side. Our conclusion is that low-lying properties in areas
other than the south side will also need to be reviewed.
There was also fairly widespread damage to fences and
pergolas compared with our experience of hurricanes since
Emily of 1987. We have decided that any exclusion of this
type of property in the open would not be reasonable to
our policyholders, as Fabian was a category 3 and this is
one of the reasons why insurance is purchased.
The aggregate loss in the marine account was
proportionately far more extensive than the property
account. Perhaps this was to be expected, however, there
are several underwriting changes we subsequently
introduced. The key changes implemented are that rates
and deductibles have been increased, and we are
moving to annual mooring inspections
along with stipulated moorings criteria.
Although there is a long-standing mariner tradition in
Bermuda we have realised for some time that not all
‘boatmen’ are of equal ability. Accordingly, we have
introduced new terms for novice boatmen.
CONCLUSION
There are so many differing views, but it would appear
safe to say that Fabian represented a 70 to 100 year
event. Unfortunately this does not mean that we will not
have a repeat for at least 70 years and both Bermuda
and BF&M must maintain a state of readiness. We
extend our sincere condolences to the families and
friends of the four individuals who were lost in Bermuda.
We care greatly about those whose property received
severe damage. There is perhaps no better
demonstration of the benefits of having adequate and up
to date insurance with a reputable insurer. Our service
will never be perfect but we can certainly strive to make
it so. We are immensely proud of our team and the
service they rendered in this time of need. We accept
the huge volume of compliments as some evidence that
we did well. As we write this report, we are beginning to
plan the 2004
testing of both
our Business
Recovery Plan
and our
Hurricane Plan.
We areimmenselyproud of ourteam and theservice theyrendered in thistime of need.
Hurricane Fabian Satellite Images courtesy ofNOAA/National Climatic Data Centre.
0
26
RESPONSIBILITY FOR FINANCIAL REPORTING
The accompanying financial statements of BF&M Limited were prepared by management in accordance with accounting principles generallyaccepted in Bermuda and Canada, and include some amounts based upon management’s best estimates and judgements.
The shareholders’ auditors, PricewaterhouseCoopers, conduct an independent audit of the financial statements of the company and reportto the shareholders regarding the fairness of financial reporting. The shareholders’ auditors use the work of the appointed actuary in respectof policy liabilities included in the financial statements on which the appointed actuary has rendered an opinion.
The appointed actuary of BF&M Life, Mr. Sylvain Goulet, FCIA, is responsible for rendering an opinion to the shareholders on theappropriateness of the value of the policy liabilities included in the financial statements. The appointed actuary uses the work of theshareholders’ auditors in verifying the data files used for valuation purposes.
Glenn M. Titterton A.C.I.I.President and Chief Executive Officer
R. John Wight C.A.Executive Vice President, Chief Financial Officer and Secretary
22nd April, 2004
I have valued the policy liabilities in BF&M Life Insurance Company Limited’s balance sheet as at 31st December, 2003, and their changesin its statement of earnings for the year then ended in accordance with accepted actuarial practice.
In my opinion, the valuation is appropriate, and the financial statements fairly present its results.
Sylvain Goulet, F.S.A., F.C.I.A., M.A.A.A.Fellow, Canadian Institute of Actuaries1st April, 2004
APPOINTED ACTUARY’S REPORT TO THE SHAREHOLDERS
27
We have audited the consolidated balance sheet of BF&M Limited as at 31st December, 2003 and the consolidated statements of earnings,retained earnings and cash flows for the year 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 audit.
We conducted our audit in accordance with auditing standards generally accepted in Bermuda and Canada. Those standards require thatwe plan and perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatement. An auditincludes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includesassessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financialstatement presentation.
In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of the Company as at31st December, 2003 and the results of its operations and its cash flows for the year then ended in accordance with accounting principlesgenerally accepted in Bermuda and Canada.
Chartered Accountants1st April, 2004
AUDITOR’S REPORT TO THE SHAREHOLDERS
28
2003 2002$ $
ASSETS
Cash and short-term deposits 23,858,603 13,360,691Investments (notes 3 and 7) 122,292,770 112,878,776Segregated accounts with a guaranteed return (note 9) 44,960,716 40,025,950Accounts receivable and other (notes 8 and 10) 19,462,918 15,153,776Reinsurers’ share of:
Claims provisions 20,734,294 1,476,291Claims payable 11,183,297 –Unearned premiums 7,801,074 7,304,699
Property, plant and equipment and development costs (note 4) 26,373,591 19,720,321
276,667,263 209,920,504
LIABILITIES
Provision for claims and future policy benefits (note 5) 92,563,317 66,696,202Provision for participating policy benefits 949,515 1,643,228Claims payable 23,247,340 1,369,738Unearned premiums and deferred commission income 18,337,246 15,922,624Segregated accounts with a guaranteed return (note 9) 44,960,716 40,025,950Accounts payable (note 8) 13,239,024 10,661,718Deferred net realised gains on bonds and equities 2,558,315 1,448,110Deferred revenue (note 6) 827,783 1,002,033Loan payable (note 7) 6,965,450 5,358,656Non-controlling interest 6,713,634 6,914,548
210,362,340 151,042,807
SHAREHOLDERS’ EQUITY
Share capital (note 11(a)) 6,704,794 6,669,636Share premium 26,578,176 26,286,582Unrealised appreciation on investments 2,390,700 1,008,728Retained earnings 30,631,253 24,912,751
66,304,923 58,877,697
276,667,263 209,920,504
CONSOLIDATED BALANCE SHEETAs at 31st De c e m b e r, 2003
Lt. Col. Michael L. Darling, O.B.E., E.D., J.P.Chairman
Glenn M. Titterton, A.C.I.I., Chartered Insurer,President & Chief Executive Officer
The accompanying notes are an integral part of these consolidated financial statements.
29
CONSOLIDATED STATEMENT OF EARNINGSFor the year ended 31st De c e m b e r, 2003
2003 2002$ $
INCOME
Gross premiums written 94,697,842 81,972,423Reinsurance ceded (27,061,918) (23,562,832)
Net premiums written 67,635,924 58,409,591Net change in unearned premiums (895,172) (1,265,622)
Net premiums earned 66,740,752 57,143,969
Investment income (note 3(e)) 8,703,847 5,877,994Commissions and other income 9,152,037 9,807,556
84,596,636 72,829,519
EXPENSES
Claims, benefits and claim expenses 56,289,801 43,438,060Commissions paid 1,798,263 1,661,183Operating 15,031,243 14,985,197Amortisation 1,624,292 1,655,494Interest on loan 323,334 575,572Non-controlling interest 599,087 682,893
75,666,020 62,998,399
NET EARNINGS FOR THE YEAR 8,930,616 9,831,120
EARNINGS PER SHARE FOR THE YEAR
- Basic (note 11(c)) $1.34 $1.69- Fully diluted (note 11(c)) $1.33 $1.68
The accompanying notes are an integral part of these consolidated financial statements.
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CONSOLIDATED STATEMENT OF RETAINED EARNINGSFor the year ended 31st De c e m b e r, 2003
2003 2002$ $
RETAINED EARNINGS - BEGINNING OF YEAR 24,912,751 21,421,648Net earnings for the year 8,930,616 9,831,120
33,843,367 31,252,768
Cash dividends - preference – (1,123,201)- common (3,212,114) (2,438,919)
Stock dividend - common – (2,777,897)
RETAINED EARNINGS - END OF YEAR 30,631,253 24,912,751
The accompanying notes are an integral part of these consolidated financial statements.
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CONSOLIDATED STATEMENT OF CASH FLOWSFor the year ended 31st De c e m b e r, 2003
2003 2002$ $
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings for the year 8,930,616 9,831,120Add (deduct) items not affecting cash:
Amortisation 1,624,292 1,655,494Compensation expense on issue of common shares 95,587 43,692(Gain) loss on sale of investments (6,888) 480,986Amortisation of deferred gains - bonds (252,200) (97,479)
- equities (692,334) (367,836)Provision for permanent impairment – 1,765,590Amortisation of premium on investments 148,731 14,266Non-controlling interest 599,087 682,893
Changes in assets and liabilities:Accounts receivable and other (3,405,985) 1,009,975Reinsurers’ share of:
Claims provisions (19,258,003) 2,280,873Claims payable (11,183,297) –Unearned premiums (496,375) (1,248,818)
Provision for claims and future policy benefits 25,867,115 (673,122)Provision for participating policy benefits (693,713) (558,018)Claims payable 21,877,602 784,323Unearned premiums and deferred commission income 2,414,622 2,555,802Accounts payable 2,577,306 1,299,272Deferred revenue (174,250) (174,250)
Net cash provided by operating activities 27,971,913 19,284,763
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of investments (83,003,252) (88,798,104)Proceeds from sales of investments 76,836,992 76,373,039Development property costs (6,764,004) (800,543)Acquisition of property, plant and equipment and development costs (1,352,815) (449,626)Acquisition of customer list (869,565) (1,074,527)
Net cash used in investing activities (15,152,644) (14,749,761)
CASH FLOWS FROM FINANCING ACTIVITIES
Cash dividends paid (3,212,114) (3,562,120)Repayment of loan (5,358,656) (6,240,989)Loan received 6,965,450 –Cash dividends paid to non-controlling interest (800,000) (800,000)Proceeds on issue of common shares 83,963 116,108
Net cash used in financing activities (2,321,357) (10,487,001)
INCREASE (DECREASE) IN CASH AND SHORT-TERM DEPOSITS 10,497,912 (5,951,999)
CASH AND SHORT-TERM DEPOSITS - BEGINNING OF YEAR 13,360,691 19,312,690
CASH AND SHORT-TERM DEPOSITS - END OF YEAR 23,858,603 13,360,691
The accompanying notes are an integral part of these consolidated financial statements.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTSFor the year ended 31st De c e m b e r, 2003
1. NATURE OF THE COMPANY AND ITS BUSINESSBF&M Limited (the “Company”) was incorporated in Bermuda on 5th August, 1991 as an investment holding company, and has thefollowing subsidiaries:
% OwnedBF&M General Insurance Company Limited (“BF&M General”) 100% BF&M Life Insurance Company Limited (“BF&M Life”) 100% BF&M Management Limited (“BF&M Management”) 100% BF&M Management (Barbados) Limited (“BF&M Barbados”) 100% BF&M Properties Limited (“BF&M Properties”) 100% Marchmont Insurance Company Limited (“Marchmont”) 100%
(formerly Fortress Insurance Company Limited)The Hamilton Reinsurance Company Limited (“Hamilton”) 100% Scarborough Property Holdings Limited (“Scarborough”) 60% Barr’s Bay Properties Limited (“Barr’s”) 60%
The Company is involved in property, casualty, motor, marine, life, health, long-term disability insurance, annuities, the management ofpension plans, and also in the management of captive insurance companies.
The Company’s principal business is insurance. It determines and charges a premium to policyholders which, taken as a pool with all otherpolicyholders, is expected to cover underwriting costs and claims which may take a number of years to settle. The business risks of insurancereside in determining the premium, settlement of claims, estimation of claims costs and management of investment funds.
To further mitigate underwriting risk, the Company purchases reinsurance to share part of the risks originally accepted by the Company inwriting premiums. This reinsurance, however, does not relieve the Company of its primary obligation to policyholders. If any reinsurers areunable to meet their obligations under the related agreements, the Company remains liable to its policyholders for the unrecoverableamounts.
2. SIGNIFICANT ACCOUNTING POLICIESThese consolidated financial statements have been prepared in accordance with accounting principles generally accepted in Bermuda andCanada. The preparation of financial statements in accordance with generally accepted accounting principles requires management to makeestimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as atthe date of the financial statements. Estimates also affect the reported amounts of income and expenses for the reporting period in thestatement of earnings. Actual results could differ from those estimates.
Outlined below are the significant accounting policies of the Company:
(A) PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the financial statements of BF&M Limited and its subsidiaries.
(B) CASH AND SHORT TERM DEPOSITS
The Company considers all time deposits within an ordinary maturity of ninety days or less as equivalent to cash.
(C) INVESTMENTS
Bonds for BF&M Life are carried at amortised cost, using the scientific yield method of amortisation, and bonds for BF&M General are carriedat market value. Mortgage loans are carried at unpaid principal balances. Amortisation of premium and discount arising on the purchase ofbonds is included in investment income. Realised gains and losses arising on the sale of bonds attributable to BF&M Life are deferred andamortised on the scientific yield method over the remaining term of the bonds sold.
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Equities of BF&M Life are carried on a moving average market basis whereby the carrying value is adjusted towards market value at 15%per annum and all other equities are valued at quoted market values. Realised gains and losses on equities attributable to BF&M Life aredeferred and amortised at 15% per annum. All other realised gains and losses are included in earnings and all other unrealised gains andlosses on equities have been included as a separate component of shareholders’ equity.
A provision is established for a permanent impairment on any investment.
(D) REINSURANCE
Reinsurance on the balance sheet and the statement of earnings is recorded on a gross basis as it pertains to reinsurance recoveries,unearned premiums and premiums ceded to indicate the extent of credit risk related to reinsurance and on a net basis as it pertains toclaims, benefits and claims expenses in the statement of earnings to indicate the results of its retention of losses.
In accordance with industry standards, reinsurance balances recoverable in the balance sheet relating to life insurance and the related policybenefits are recorded on a net basis.
(E) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is carried at cost less accumulated amortisation. Amortisation is recorded on a straight-line basis over theirestimated useful lives at the following rates:
Buildings 2%Furniture, equipment and leasehold improvements 10% - 20%Computer hardware and software 33%Investment property 2%
The Company has incurred costs on a development property. Amortisation will commence upon occupation by its tenants in 2004.
(F) DEVELOPMENT COSTS
These costs relate to the development of the Company’s electronic commerce system and customer relationship management system.Costs incurred up to the date of technical feasibility are deferred and amortised on a straight-line basis over three years.
(G) POLICY LOANS
Policy loans are carried at their unpaid balance and are fully secured by the policy values on which the loans are made.
(H) INTANGIBLES
The Company purchased the rights to a customer list. This cost is amortised over 10 years, the expected life of the business assumed.
(I) PREMIUMS WRITTEN, CEDED AND EARNED
Premiums written and ceded are recorded on an accrual basis. Premiums are earned on a pro-rata basis over the lives of the underlyingpolicies.
Premiums receivable are recorded at amounts due less any required provision for doubtful accounts.
(J) UNEARNED PREMIUMS AND DEFERRED COMMISSION INCOME
Unearned premiums are those portions of premiums written that relate to periods of risk subsequent to the year end.
The reinsurers’ share of unearned premium, net of any provision for doubtful accounts, is recognised as an asset at the same time andusing principles consistent with the Company’s method for determining the unearned premium liability.
Commission income is recognised over the term of the related policies.
34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)For the year ended 31st De c e m b e r, 2003
(K) PROVISION FOR CLAIMS AND FUTURE POLICY BENEFITS
i) Provision is made for the estimated costs of claims notified but not settled at the balance sheet date, using the best information availableat that time. A provision is included for losses and loss adjustment expenses incurred but not reported on the basis of past experience. Themethod of making such estimates and for establishing the resulting provisions is continually reviewed and updated and any adjustmentsresulting therefrom are reflected in earnings in the period in which they are determined.
ii) The policy actuarial liability reserves represent the amounts equal to the carrying value of the assets that, in the opinion of the AppointedActuary and taking into account the other pertinent items on the balance sheet, will be sufficient to provide for the estimated futureobligations on policies in force.
The policy actuarial liability reserves are determined using generally accepted actuarial practices according to standards established by theCanadian Institute of Actuaries (“CIA”). In accordance with these standards, the policy actuarial liability reserves have been determinedusing the Canadian Asset Liability Method (“CALM”) and the Standards of Practice for the Valuation of Policy Liabilities of Life Insurers(“LSOP”).
The policy actuarial liability reserves under CALM are calculated by projecting assets and liability cash flows under a variety of interest ratescenarios using best-estimate assumptions, together with margins for adverse deviations with respect to other contingencies pertinentto the valuation. The policy actuarial liability reserves make sufficient provision for the expected experience scenario and for adversedeviations in experience.
iii) Expected reinsurance recoveries on claims and future policy benefits, net of any required provision for doubtful amounts, are estimatedusing principles consistent with the Company’s method for establishing the related liability.
(L) POLICYHOLDER DIVIDENDS
Policyholder dividends are charged to the operations of the participating line of business on an annual basis. Dividends vary depending onthe type and duration of the policy and the age of the insured at the date of issue.
(M) FOREIGN CURRENCY TRANSLATION
Transactions originating in foreign currencies are translated at the approximate rates of exchange prevailing at the date of the transactions.Monetary balances in foreign currencies are translated at the rates of exchange prevailing at the balance sheet date. Resulting gains or lossesare reflected in earnings. Non-monetary balances are translated at historical exchange rates.
(N) RENTAL INCOME
Rental income is recorded on an accrual basis and is included in commissions and other income.
(O) EMPLOYEE FUTURE BENEFITS
The Company’s projected pension benefit obligation is discounted using a market interest rate based on high quality debt instruments. Forthe purpose of calculating the expected return on plan assets, those assets are valued at a market related value. Annual changes in netassets or obligations arising from plan amendments and transitional amounts are amortised over the expected average remaining servicelife of the employees covered by the plan. Actuarial gains and losses that are in excess of 10% of the greater of the benefit obligation andthe market-related value of plan assets are amortised over the average remaining service period of active employees.
In addition to pension benefits, the Company provides post retirement benefits for health care. These costs are recognised on an accrualbasis during the years when service is provided to the Company. Annual changes in the post retirement benefits for health care obligationsarising from plan amendments are amortised on a straight-line basis over the expected average remaining service life to full eligibility ageof employees covered by the plan.
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(P) SHARE BASED COMPENSATION PLANS
The Company has an Equity Incentive Plan which is described in note 11(b). A compensation expense is recognised for this plan whenshare grants are issued to employees equal to the fair value of the shares on the grant date and is amortised over their three year vestingperiod.
This plan also includes share options which are issued with an exercise price set at the fair market value of the Company’s shares at thedate of issuance, however, there is no compensation expense recognised. Consideration paid by employees on the exercise of share optionsis credited to share capital and share premium.
(Q) SEGREGATED ACCOUNTS
Segregated accounts are lines of business in which the Company issues a contract where the benefit amount is directly linked to the marketvalue of the investments held in the particular segregated accounts or a guaranteed return held in the particular segregated accounts. Theunderlying assets are registered in the name of the Company and the segregated account contract holder has no direct access to the specificassets. The contractual arrangements are such that the segregated account policyholder bears the risks and rewards of the account’sinvestment performance, except for segregated accounts with a guaranteed return where the risks for these accounts are borne by theCompany. Accordingly, the segregated accounts with a guaranteed return are included on the Company’s balance sheet and the othersegregated accounts are excluded from the Company’s balance sheet.
Segregated account assets are carried at fair value as disclosed in note 9. Fair values are determined using quoted market values. Segregatedaccount assets may not be applied against liabilities that arise from any other business of the Company. The investment results of thesegregated accounts are reflected directly in segregated account liabilities, except for segregated accounts with a guaranteed return wherethe excess of the return on the assets over the guaranteed return is reflected in investment income in the Consolidated Statement ofEarnings. For the segregated accounts where the benefit amount is directly linked to the market value of the investments, the Companyderives only fee income.
Assets and liabilities for rent-a-captive segregated accounts relate to certain funding contracts, which are arranged by the Company inaccordance with a Private Act and comprise the cumulative excess of premiums received and interest allocated to the “accounts” over therepayment of premiums, losses and loss expenses. Assets for these accounts are segregated and invested in accordance with the terms ofthe underlying policy agreements and are available only to settle the corresponding segregated account liabilities.
3. INVESTMENTSInvestments comprise:
2003 2002$ $
Bonds (market value - $65,683,070; 2002 - $69,345,267) 62,417,755 63,141,231Equities (cost - $8,166,062; 2002 - $7,622,815) 10,569,970 8,345,077Mortgages 49,305,045 41,392,468
122,292,770 112,878,776
(A) MORTGAGES
Mortgages comprise first mortgages on real property situated in Bermuda and are registered under The Mortgage Registration Act 1976 andThe Trustee Act 1975.
(B) MARKET AND INTEREST RATE RISK
The Company is subject to market risk with its marketable investments. As a result, the market values of the marketable investments willfluctuate with changes in market prices. In addition to market risk, the Company is subject to interest rate risks on its investments in bondsand mortgages. Accordingly, the market value of the bonds and mortgages will fluctuate as a result of changes in market interest rates.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)For the year ended 31st De c e m b e r, 2003
(C) LIQUIDITY
A significant business risk of the insurance industry is to match the cash flows of the investment portfolio with the expected payment ofpolicy liabilities. The maturity profile of investments with specific maturities at 31st December, 2003 was as follows:
Within 1 to 3 3 to 5 5 to 10 Over 10 Book1 year years years years years value
$ $ $ $ $ $
Bonds 3,498,431 9,032,473 12,316,999 12,758,466 24,811,386 6 2 , 417,755Mortgages 2 , 374 , 14 6 5,304,655 5 , 507, 26 5 15,424,968 20,694,011 49,305,045
5 , 872 , 577 14 , 337, 128 17, 8 24 , 26 4 28,183,434 45,505,397 111,722,800
Percent of total 5% 13% 16% 25% 41% 100%
The maturity profile of investments with specific maturities at 31st December, 2002 was as follows:
Within 1 to 3 3 to 5 5 to 10 Over 10 Book1 year years years years years value
$ $ $ $ $ $
Bonds 991,516 8,188,005 11,640,444 20,343,927 21,977,339 63,141,231Mortgages 1,670,280 4,138,848 4,646,025 12,274,132 18,663,183 41,392,468
2,661,796 12,326,853 16,286,469 32,618,059 40,640,522 104,533,699
Percent of total 3% 12% 15% 31% 39% 100%
(D) CREDIT RISK
Credit risk is the risk that a borrower will fail to fully honor its obligations to the Company. The Company manages its exposure to credit riskthrough an emphasis on the quality of its investments and their diversification by issuer, industry and geographical area.
(E) INVESTMENT INCOME2003 2002
$ $
Bond interest and amortisation (net of management fees) 4,370,217 4,385,457Dividends on equities 351,437 322,483Mortgage interest 3,558,336 2,947,047Bank deposit and policyholder loan interest 423,435 495,508Other income (loss) 422 (2,272,501)
8,703,847 5,877,994
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4. PROPERTY, PLANT AND EQUIPMENT AND DEVELOPMENT COSTSProperty, plant and equipment and development costs comprise:
2003 2002
AccumulatedCost amortisation Net Net
$ $ $ $
Land and buildings 1,839,673 825,000 1,014,673 440,000Furniture, equipment and leasehold improvements 4,769,551 3,822,270 947,281 896,513Investment property 22,250,103 5,963,505 16,286,598 16,894,858Development costs 1,177,477 1,122,812 54,665 182,580Development property 8,070,374 - 8,070,374 1,306,370
38,107,178 11,733,587 26,373,591 19,720,321
The investment property, the ACE Tempest Re Building is owned by Scarborough, a 60% owned subsidiary. The development property,PXRE House, is owned by Barr’s Bay, a 60% owned subsidiary. The minority shareholder of Barr’s Bay holds an equitable mortgage assecurity for it’s loan to Barr’s Bay.
5. PROVISION FOR CLAIMS AND FUTURE POLICY BENEFITSThe table below details the provision for unpaid claims and adjustment expenses by risk categories:
2003 2002Gross Gross Gross Ceded
$ $ $ $
TYPE OF CLAIM PROVISION
Property, casualty, motor and marine 23,739,568 20,734,294 3,774,688 1,476,291Life, health and accident, annuity 72,289,827 3,466,078 65,815,718 2,894,204
Total 96,029,395 24,200,372 69,590,406 4,370,495
(A) ASSUMPTIONS
Uncertainty exists on reported claims in that all information may not be available at the reporting date, therefore, the claim cost may rise orfall at some date in the future when the information is obtained. In addition, claims may not be reported to the Company immediately,therefore, estimates are made as to the value of claims incurred but not yet reported, a value which may take some months to finallydetermine. In order to determine the liability, assumptions are developed considering the characteristics of the class of business, thehistorical pattern of payments, the amount of data available and any other pertinent factors.
(B) REINSURANCE RECOVERIES
The Company has guidelines and a review process in place to ascertain the credit worthiness of the companies to which it cedes. In 2003and 2002 the Company had no write-offs. No information has come to the Company’s attention indicating weakness or failure of any ofits current reinsurers, so no provision has been made in the accounts for doubtful collection.
(C) INTEREST RATE RISK
Interest rate risk relates to the potential for financial gain or loss arising from changes in interest rates. BF&M Life manages and controlsthis risk by maintaining an appropriate asset/liability management process for its participating and non participating lines of business. Thismatching enables BF&M Life to reduce much of the uncertainty inherent in estimating future investment rates through the management ofthe asset and corresponding liability cash flows thus reducing its exposure to future interest rate changes.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)For the year ended 31st De c e m b e r, 2003
6. DEFERRED REVENUEUnder an agreement between Scarborough and ACE, ACE reimbursed Scarborough in 1994 for the cost of the construction of the ACETempest Re building extension. In return, ACE occupies the ACE Tempest Re building extension rent-free until 30th September, 2008. Thereimbursement from ACE has therefore been accounted for by the Company as deferred rental income, which is being credited to incomeon a straight-line basis through to 30th September, 2008.
7. LOAN PAYABLEDuring the year, an affiliated company of the minority shareholder of Barr’s Bay advanced funds to that company totaling $6,808,906 tofinance the construction of a new office building. Interest on the variable rate loan is adjusted quarterly at the lower of 7% or 2% less thanthe average of the prevailing per annum First Mortgage rates of banks in Bermuda. Interest accrues on the date of each drawdown and ispayable on the last day of each calendar quarter commencing one year after completion of the new office building but only to the extentthat Barr’s Bay has cash surplus to its needs arising from income in excess of all operating expenses (including payments of interest).Accrued interest on the loan at 31st December, 2003 at 4.75% was $156,544. Repayments of loan principal will commence 30 days afterthe first calendar quarter in which the Company has cash surplus to its needs arising from income in excess of all operating expenses.Principal repayments are estimated to commence in June 2005. Notwithstanding the foregoing, such repayments will commence no laterthan 1st January, 2006, with full repayment to be made by 31st December, 2025.
Principal repayments on the loan balance of $5,358,656 for the next five years are as follows:
$
2004 –2005 244,8692006 340,2792007 356,7322008 373,981
1,315,861
During the year BF&M General repaid $5,358,656 representing the remaining balance on a bank loan received from the Bank of N.T.Butterfield & Son Ltd. in 1999.
8. POLICYHOLDER DIVIDENDS AND LOANSAccounts payable include policyholder dividends of $4,034,229 (2002 - $3,736,816) representing dividends and interest left to accumulateby the participating policyholders. Accounts receivable include policyholder loans of $3,334,495 (2002 - $3,201,887).
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9. SEGREGATED ACCOUNTThe table below details the changes in segregated funds net assets for the years ended 31st December, 2003 and 2002 and the segregatedfunds net assets as at 31st December, 2003 and 2002.
2003 2002$ $
CHANGES IN SEGREGATED FUNDS NET ASSETS
Deposits:Rent-a-captive premiums 43,608,239 1,974,510Pension contributions 30,081,586 29,598,042Annuities 192,649 181,027Life 56,506 55,571
Net realised and unrealised gains (losses) 17,907,848 (6,040,611)Other investment income 2,179,251 2,644,921
94,026,079 28,413,460DEDUCTIONS FROM SEGREGATED FUNDS
Payments to policyholders and their beneficiaries (14,803,869) (20,019,814)Rent-a-captive payments (39,258,246) (571,893)Management fees (824,137) (651,796)
(54,886,252) (21,243,503)
Net additions to segregated funds 39,139,827 7,169,957Segregated funds net assets - beginning of year 137,606,948 130,436,991
Segregated funds net assets - end of year 176,746,775 137,606,948
SEGREGATED FUNDS NET ASSETS
Assets:Mutual funds 113,278,602 92,173,422Fixed income investments 63,468,173 45,433,526
SEGREGATED FUNDS NET ASSETS - END OF YEAR 176,746,775 137,606,948
Included in segregated funds net assets balance of $176,746,775 is $44,960,716, representing policies and contracts with a guaranteedreturn. This amount is included in the Company’s assets and liabilities.
10. INTANGIBLESIncluded in accounts receivable and other is an amount of $1,740,068 (2002 - $1,031,247) representing the unamortised cost of acustomer list acquired in 2002.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)For the year ended 31st De c e m b e r, 2003
11. SHARE CAPITAL(A) SHARE CAPITAL COMPRISES:
2003 2002$ $
Authorised -
10,000,000 (2002 - 10,000,000) common shares of a par value of $1 each 10,000,000 10,000,000
Issued and fully paid -6,704,794 (2002 - 6,669,636) common shares of a par value of $1 each 6,704,794 6,669,636
In 2002 the Company converted all its issued and outstanding preference shares to common shares resulting in the issuance of anadditional 3,025,000 common shares.
On 25th April, 2002, the Company declared a 10% stock dividend resulting in the issuance of 330,702 common shares.
During the year, 16,321 (2002 - 11,416) shares were issued under the employee share purchase plan. The fair value of the shares amountto $156,463 (2002 - $115,964) which was credited to share capital and share premium. The discount of $23,783 (2002 - $17,305) wascharged to compensation expense.
The Bermuda Fire and Marine Insurance Company Limited (in liquidation) has an option to subscribe for up to 1,100,000 common sharesin the Company at a subscription price of $11.27 per share. This option can only be exercised in years 2004 to 2006 inclusive. TheCompany may negotiate the repurchase of this option for an amount that is mutually acceptable to both parties.
(B) EQUITY INCENTIVE PLAN
i) STOCK OPTIONSThe stock options granted have a ten year term and vest to the grantees over a three year period. The following table summarises the stockoptions issued under the Company’s Equity Incentive Plan which includes the retroactive effect of the 10% stock dividend in 2002:
2003 2002
Weighted Weightedaverage average
# of options exercise price # of options exercise price
Outstanding at beginning of year 147,791 6.86 102,300 6.39Granted 53,705 10.25 50,991 7.73Exercised (7,760) 6.37 (5,500) 6.25
Outstanding at end of year 193,736 7.82 147,791 6.86
Exercisable at 1st January, 2004 and 2003 141,214 7.21 95,005 6.60
The following table summarises information about stock options outstanding at year-end:
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# of optionsStock options # of options exercisable as
expiring 1st January outstanding at 1st January 2004 Exercise price
2010 34,600 34,600 6.142011 55,275 55,275 6.592012 50,156 33,437 7.732013 53,705 17,902 10.25
193,736 141,214
The fair value of stock options granted in the year ended 31st December, 2003, was $2.11 per share, using the Black-Scholes option-pricingmodel with the following assumptions:
31st December, 2003
Dividend yield 4.68%Risk free interest rate 3.96%Historical volatility 20%Expected lives 10 years
Had compensation cost been determined based on the fair value of the stock option awards at the date of grant, net income and earningsper share would have been reduced to the pro-forma amounts shown below:
31st December, 2003
Net income as reported 8,930,616Net income - pro-forma 8,826,843Earnings per share - as reported (basic) 1.34Earnings per share - pro-forma (basic) 1.32
ii) STOCK GRANTSDuring the year 11,540 (2002 – 11,611) common shares were issued to certain key employees in respect of restricted share awards.These shares are held by the Company and are restricted from sale or use by the employees for three years from the grant date. Theamount of the benefit to these key employees totalled $121,170 (2002 - $79,162) and will be amortised through earnings over a threeyear period.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)For the year ended 31st De c e m b e r, 2003
The following table summarises information about the outstanding stock grants which includes the retroactive effect of the 10% stockdividend in 2002:
RESTRICTED SHARES VESTING # of shares
1st January, 2004 11,9901st January, 2005 11,6111st January, 2006 11,540
Total 35,141
(C) EARNINGS PER SHARE
The following sets forth the computation of basic and diluted earnings per share for the years ended 31st December, 2003 and 2002:
2003 2002Average Average
weighted weightedIncome shares Per share Income shares Per share
(numerator) (denominator) amount (numerator) (denominator) amount
Net income $ 8,930,616 $ 9,831,120Less preferred shares dividends - (1,123,201)
Basic earnings per shareIncome available to common shares 8,930,616 6,684,451 $ 1.34 8,707,919 5,143,524 $ 1.69
Effect of dilutive securitiesStock options 45,015 47,933
Diluted earnings per shareIncome available to commonshareholders and assumed conversions $ 8,930,616 6,729,466 $ 1.33 $ 8,707,919 5,191,457 $ 1.68
The weighted average number of shares used in the calculations of diluted earnings per share excludes 1,100,000 (2002 - 1,100,000)options held by The Bermuda Fire and Marine Insurance Company Limited to acquire common shares in the Company, and 53,705 (2002- Nil) share options granted to employees of the Company, as these would have been anti-dilutive for the periods presented.
12. SEGMENTED INFORMATIONThe tables below present the segments of the business based on internal management reporting. The operating segments are as follows:
(A) PERSONAL INSURANCE
Insurance coverage includes fire, windstorm, burglary, public liability, automobile, autocycle, boat, special types, health and accident, life, andannuity. The Company also provides retirement income plans for individuals.
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(B) BUSINESS INSURANCE
Insurance coverage includes fire, windstorm, burglary, public liability, workman’s compensation, boat, special types, commercial vehicles,group health and accident, group life, and group annuity. The Company also offers group retirement income plans.
(C) REAL ESTATE
The Company currently owns and occupies one building and is a majority owner in a building that is leased principally to non-related parties.The Company also owns a property completed but not yet occupied that will be leased principally to non-related parties.
(D) INDUSTRY SEGMENT (000’S)
Business Personal Real estate All other Total
2003 2002 2003 2002 2003 2002 2003 2002 2003 2002$ $ $ $ $ $ $ $ $ $
Income earned from 59,868 50,378 21,264 19,090 2,190 2,215 1,275 1,147 84,597 72,830External customers
Intersegment income – – – – 749 795 100 102 849 897
Segment 581 560 273 263 762 819 8 13 1,624 1,655amortisation
Segment interest 104 391 63 184 156 – – – 323 575expense
Segment earnings 8,670 8,589 (945) 69 1,044 1,099 162 74 8,931 9,831
Segment assets 170,990 128,952 80,466 60,683 30,884 25,402 2,334 2,124 284,674 217,161
Segment property, 475 151 223 93 7,408 1,389 10 5 8,116 1,638plant and equipmentexpenditures
Figures included in the “all other” column above represent the combined operations of three operating segments of the Company. Thosesegments include a management company, a financial reinsurance company, and an investment company.
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The accounting policies of the segments are the same as those described in note 2. Intersegment income is recorded at management’sestimate of current market prices. Reconciliation of segment income to total income, segment earnings to total earnings, and segment assetsto total assets are listed below:
2003 2002$ $
INCOME
Total income for reportable segments 84,171 72,580Other income 1,275 1,147Elimination of intersegment income (849) (897)
Total company income 84,597 72,830
EARNINGS
Total earnings for reportable segments 8,769 9,758Other profit 162 73
Total company earnings 8,931 9,831
ASSETS
Total assets for reportable segments 282,340 215,037Other assets 2,334 2,124Elimination of intersegment assets (8,007) (7,241)
Total company assets 276,667 209,920
13. PENSION PLANS(A) DEFINED BENEFIT PLAN
The Company has a non-contributory defined benefit plan administered under a trust for group employees which provides for pensionbenefits based on length of service and compensation.
Pension assets consist principally of corporate bonds, equities, and mortgages. The Company bears the risk of experience loss againstassumptions used by the Company’s consulting actuary in his calculations and the credit risk associated with the pension asset portfolio.
(B) DEFINED CONTRIBUTION PLAN
The Company has a contributory defined contribution plan administered under a trust for group employees which provides for pensionbenefits based on contributions and investment income earned. Contributions of $429,564 (2002 - $449,495) equating to the service costfor the year for these employees were made to this plan.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)For the year ended 31st De c e m b e r, 2003
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The following table provides summaries of the defined benefit pension and post retirement plans’ estimated financial position at 31 December, 2003 and 2002:
Pension benefit plans Other benefit plans2003 2002 2003 2002$’000 $’000 $’000 $’000
ACCRUED BENEFIT OBLIGATION
Balance - Beginning of year 20,245 17,765 3,803 3,267Current service cost 543 485 223 187Interest cost 1,309 1,236 245 230Benefits and expenses paid (747) (706) (289) (146)Actuarial loss 811 1,465 147 265
BALANCE - END OF YEAR 22,161 20,245 4,130 3,803
PLANS ASSETS
Fair value - Beginning of year 21,118 22,436 – –Actual return on plan assets 4,069 (998) – –Employer contributions 406 386 – –Benefits and expenses paid (747) (706) – –
FAIR VALUE - END OF YEAR 24,846 21,118 – –
Funded status - plan surplus (deficit) 2,685 873 (4,130) (3,803)Unamortised net actuarial loss 2,338 4,055 413 265Unamortised transitional (asset) obligation (4,050) (4,303) 2,390 2,541
ACCRUED BENEFIT ASSET (LIABILITY) 973 625 (1,327) (997)
The significant actuarial assumptions adopted in measuring the Company’s accrued benefit obligations are as follows (weighted-averageassumptions as of 31st December, 2003 and 2002):
Pension Pension Other Otherbenefit plans benefit plans benefit plans benefit plans
2003 2002 2003 2002
% % % %Discount rate 6.25 6.50 6.25 6.50Expected long-term rate of return on plan assets 7.00 7.00 – –Rate of compensation increase 4.00 4.00 – –
For measurement purposes, the annual rate of increase in the per capita cost of covered health care benefits was assumed to be 10% foryears 2003 to 2007, 8% for years 2008 to 2012, 6% for years 2013 to 2017, and 4% thereafter.
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The company’s net benefit plan expense is as follows:
Pension benefit plans Other benefit plans2003 2002 2003 2002$’000 $’000 $’000 $’000
Current service cost 543 485 223 187Interest cost 1,309 1,236 245 230Expected return on plan assets (1,566) (1,475) – –Amortisation of transitional obligation (253) (253) 150 150Amortisation of net loss 25 – – –
Net benefit plan expense 58 (7) 618 567
14. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTSThe Company’s financial instruments comprise all assets and liabilities, except for the reinsurers’ share of provision for unearned premiums,property, plant and equipment and development costs, unearned premiums and deferred commission income, deferred revenue and thenon-controlling interest in subsidiaries.
The fair value of the Company’s investments is disclosed in note 3 and a related fair value for the provision for claims and future policybenefits is not readily determinable. The fair value of the Company’s other financial instruments approximate the carrying values in thebalance sheet except for Barr’s Bay’s loan with a minority shareholder which has an interest rate of 2% less than the average of the prevailingper annum First Mortgage rates in Bermuda. The future cash flows of the Barr’s Bay loan have been discounted using a market interest rate.The fair value of the loan, recorded in the Company’s balance sheet at $6,965,450, is $6,073,978.
15. DIRECTORS’ AND OFFICERS’ SHARE IN INTERESTS AND SERVICE CONTRACTSPursuant to Regulation 6.8 (3) of Section 11A of the Bermuda Stock Exchange Listing Regulations, the total interests of all directors andofficers of the Company in the common shares of the Company at 31 December, 2003 were 196,906 shares. No rights to subscribe forshares in the Company have been granted to or exercised by any director or officer, other than those disclosed in Note 11(b).
There are no service contracts with directors.
16. COMPARATIVE FIGURESCertain of the 2002 comparative figures have been restated to reflect the financial statement presentation adopted for the current year.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)For the year ended 31st De c e m b e r, 2003
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DIRECTORS AND OFFICERS OF PRINCIPAL OPERATING SUBSIDIARIES
BF&M GENERAL INSURANCE COMPANY LIMITED
DIRECTORS Fernance B. Perry, J.P, ChairmanPeter N. Cooper, Deputy ChairmanGavin R. ArtonLt. Col. Michael L. Darling, O.B.E., E.D., J.P.Glen P. Gibbons, A.C.I.I., Chartered InsurerNancy L. Gosling, B.Com., C.G.A.Ross J. Hillen, A.C.I.I.David McLeod, A.C.I.I., Chartered InsurerGlenn M. Titterton, A.C.I.I., Chartered InsurerR. John Wight, C.A.
MANAGEMENT Glenn M. Titterton, A.C.I.I., Chartered Insurer, President & Chief Executive OfficerR. John Wight, C.A., Executive Vice President, Chief Financial Officer & SecretaryDavid McLeod, A.C.I.I., Senior Vice PresidentGlen P. Gibbons, A.C.I.I., Chartered Insurer, Vice President, Customer Relations & SalesRoss J. Hillen, A.C.I.I., Vice President, Technical ServicesDiane Boca, Assistant Vice President, Customer Relations & Personal InsuranceIris Cundliffe, C.A., Assistant Vice President & Controller
BF&M LIFE INSURANCE COMPANY LIMITED
DIRECTORS Richard D. Spurling, ChairmanJeannette Cannonier, O.B.E., J.P., Deputy ChairmanSenator Carol A. M. Bassett, F.L.M.I./M., A.C.S.Gina A. Bradshaw, F.L.M.I.Dale Butler, J.P., M.P.Stephen W. KempePeter M. Lamb, C.F.P., C.H.F.C., C.L.U., RGBC, LTCPGlenn M. Titterton, A.C.I.I., Chartered InsurerDavid A. J. G. WhiteR. John Wight, C.A.
MANAGEMENT Glenn M. Titterton, A.C.I.I., Chartered Insurer, President & Chief Executive OfficerR. John Wight, C.A., Executive Vice President, Chief Financial Officer & SecretarySenator Carol A.M. Bassett, F.L.M.I./M., A.C.S., Senior Vice PresidentGina A. Bradshaw, F.L.M.I., Vice President, Technical ServicesVincent L. Chaves, C.A., Vice PresidentPeter M. Lamb, C.F.P., C.H.F.C., C.L.U., Vice President, Customer Relations & SalesIris Cundliffe, C.A., Assistant Vice President & ControllerFiona M. Davies, B.A., F.L.M.I., A.C.S., A.R.E., Assistant Vice President, Technical Services
ACTUARIAL Sylvain Goulet, F.S.A., F.C.I.A., M.A.A.A., (Eckler Partners Limited, Toronto), Consulting Actuary
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DIRECTORS AND OFFICERS OF PRINCIPAL OPERATING SUBSIDIARIES (CONTINUED)
BF&M MANAGEMENT LIMITED
DIRECTORS William D. Thomson, ChairmanR. Blake Marshall, B.B.A., M.Sc., C.A., Deputy ChairmanGlenn M. Titterton, A.C.I.I., Chartered Insurer R. John Wight, C.A.
OFFICERS Glenn M. Titterton, A.C.I.I., Chartered Insurer, President & Chief Executive OfficerElizabeth A. C. Durrant, Vice President & Secretary
MARCHMONT INSURANCE COMPANY LIMITED
DIRECTORS William D. Thomson, ChairmanR. Blake Marshall, B.B.A.,M.Sc., C.A., Deputy ChairmanGlenn M. Titterton, A.C.I.I., Chartered InsurerR. John Wight, C.A.Elizabeth A. C. Durrant
OFFICERS Glenn M. Titterton, A.C.I.I., Chartered Insurer, President & Chief Executive OfficerS. Andrew White, ARM, Manager & Secretary
BF&M PROPERTIES LIMITED
DIRECTORS David A. J. G. White, ChairmanFernance B. Perry, J.P., Deputy ChairmanGlenn M. Titterton, A.C.I.I., Chartered Insurer R. John Wight, C.A.
OFFICERS Glenn M. Titterton, A.C.I.I., Chartered Insurer, President & Chief Executive OfficerR. John Wight, C.A., Executive Vice President, Chief Financial Officer & Secretary
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