BF&M Announces Half Year Report To Shareholders

We are pleased to report the unaudited management accounts for BF&M Limited for the half year to 30th June 2004.

Insurance experience in a small market can be somewhat erratic as the insurer does not have the benefit of a large book of business to smooth out results. Consequently, when all else seems to be going so right, one or two unexpected developments can undermine an otherwise successful period. Glenn Titterton, President & Chief Executive Officer explained, "we have enjoyed a great deal of success in the six months to 30th June 2004 as evidenced by the strong results referred to, however our Group performance was adversely affected by poor experience in our Health and Life business."

The fundamentals remain very strong. Strong sales and business retention resulted in a substantial improvement in income. We were very pleased that Gross Premiums Written increased by a strong 17 % to $ 55,862,134 (2003 - $47,735,363) and Net Premiums Earned increased by 18 %. Investment Income increased 13 % marking a continued improvement. Total Income, net of reinsurance costs, increased by 15 %. However, for the reasons given above, Total Expenses (including claims) increased by 27%. The result was that Net Earnings decreased by 48% to $ 3,324,673 (2003 - $6,373,265).

Total Assets stood at $256 million with Shareholders Equity at $69 million.

Chief Financial Officer, John Wight confirmed that the Company was " very pleased that during the period A M. Best, the oldest and most prestigious insurance rating agency upgraded BF&M Limited to an "A (Excellent)" financial strength rating, with a stable outlook. This rating applies to BF&M Life and BF&M General as well."

Mr. Titterton stressed that "the rapid escalation of health care costs is one of the most important issues facing the community and he felt that more extensive comment was called for." He said that "health care costs have escalated at an even faster and more substantial rate than anticipated and the frequency of use of medical services and facilities has again accelerated. The use of costly overseas facilities continues to grow despite the excellent medical facilities available locally for most medical needs.

"We marvel at the many wonders of modern medicine that help us to detect and save patients with heart disease or cancer for example, claims for both of which are rising rapidly; but we must also accept that there is a huge price to be paid for these advances. An example would be our ability today to save the lives of children born many months prematurely. We had two claims for such pre-mature births within the period and another subsequently, which is an unexpectedly high number for one insurer in such a short time frame. It may surprise many that the overall cost of each such pre-mature birth is generally between $0.5 million and $1 million." Mr. Titterton explained that "while we do have reinsurance protection to reduce the financial impact to the Company, these events still have a material adverse affect on our results. Several claims of this magnitude quickly extinguish any hope of a health insurer covering its costs and making any profit on the business. We have also been adversely impacted by an unusual number of large death claims. This unusual convergence of events has a substantial negative impact on our bottom line."

Chief Financial Officer, John Wight explained that "claims and policy benefits increased by 35 %. Health insurance is our largest line of business by premium volume and therefore a 14% increase in our group health loss ratio caused considerable concern. A comprehensive review is being undertaken which will provide us with actuarial and underwriting information needed to develop the necessary solutions. Health care costs in Bermuda and overseas continue to escalate. On top of this there is a further increase in the rate of usage of medical services in Bermuda and the trend towards costly overseas treatment continues."

Mr. Titterton added that "it is disappointing that health care costs cannot be controlled more adequately in Bermuda, although similar problems are occurring in other countries. We see a leadership void in Bermuda in this most critical area." "We have been very concerned that the escalating cost of health care has been difficult for employers and their employees to bear. These costs drive insurance premiums ever upwards. For the 2004/2005 year we attempted to hold premium increases to a minimum. We might have succeeded temporarily, however claims increased considerably faster and greater than anticipated. Unfortunately the result was that we lost a substantial amount of money providing health insurance coverage during the first six months of the year." Mr. Titterton stressed "it is imperative that Government, the Employers, Employees and the Community in general gain a greater understanding of this issue and do everything possible to curb the rapid escalation in health care costs and usage. Otherwise the result can only be further large increases in health insurance premiums as insurers attempt to keep pace with these escalating costs. This is not in the best interests of the employee or the employer and shifting the cost from employer to employee or vice versa merely avoids the real problem of the costs themselves."

Expenses continue to reflect a substantial investment in staff development and information systems as well as a portion of the direct and indirect expenses associated with the $5 million project to extensively renovate and refurbish the Insurance Building, which has not been substantially renovated for over 40 years.

On 1st April BF&M acquired the group health and disability policies of Canada Life which were successfully converted.

Our determined action to bring our Motor Account back to a more viable position after many consecutive years of losses, is beginning to show results. However, it is too early to say that we have achieved our goal and we still face the challenges of increased labour rates and repair costs associated with today's modern cars.

Our pension portfolio continued to grow at an encouraging rate. Pension assets under administration grew 22% during the period. Effective 1st May we became third party administrators for the local Canada Life pension plans and we are happy to welcome our new customers to BF&M. Mr. Wight explained that "BF&M acquired the pension business of Osprey Investments on 1st February 2004. This acquisition is consistent with our plan to grow the financial services area of our group and aligns well with the Pension Administration services offered by BF&M Life. In only a few short months we have been successful at growing this investment business in a competitive environment."

Mr. Titterton said that there had been extensive activity involving the Company's properties. "PXRE moved into the new PXRE House on 1st April and work has continued on the extensive renovations and refurbishment to the Insurance Building."

Mr. Titterton pointed to changes that will take place amongst senior management at year end. "We announced on 30th June that I would be retiring as President & Chief Executive Officer at 31st December 2004 and that I would be succeeded by R. John Wight, C.A., currently Executive Vice President & Chief Financial Officer. Senator Carol A. M. Bassett, F.L.M.I./M., A.C.S. will also retire at 31st December as Senior Vice President, BF&M Life and she will be replaced by Vincent Chaves, B.COMM, C.A. I gave notice to the Chairman in December 2001 and Carol Bassett gave notice in January 2003. We have used this valuable time to strengthen our leadership team and realign some responsibilities. We are proud to have a strong succession plan and impressive experience and depth in our Executive Team. We expect a very smooth transition at year-end."

Mr. Titterton concluded "we were delighted at our success in the first half of 2004 and disappointed that this success was undermined by unexpectedly numerous and heavy losses in health insurance.This is the nature of our business in a small market."