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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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