-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, MDwPaEALhCksZnAwgGCBhysdi+OMzalnBsu5NDrPYEn/iGOrm8NyzXmPBUoJuG9I 9Q6l7MWuuWl9Mgs/4u82ZA== 0000950131-98-005549.txt : 19981016 0000950131-98-005549.hdr.sgml : 19981016 ACCESSION NUMBER: 0000950131-98-005549 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19980831 FILED AS OF DATE: 19981015 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: EXEL LTD CENTRAL INDEX KEY: 0000875159 STANDARD INDUSTRIAL CLASSIFICATION: SURETY INSURANCE [6351] IRS NUMBER: 980058718 FISCAL YEAR END: 1130 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-10804 FILM NUMBER: 98725906 BUSINESS ADDRESS: STREET 1: CUMBERLAND HOUSE STREET 2: 1 VICTORIA ST CITY: HAMILTON HM11 BERMUD STATE: D2 BUSINESS PHONE: 4412928515 MAIL ADDRESS: STREET 1: CAHILL GORDON & REINDEL(IMMANUEL KOHN) STREET 2: 80 PINE STREET CITY: NEW YORKI STATE: NY ZIP: 10005 10-Q 1 FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED AUGUST 31, 1998 Commission File Number 1-10804 EXEL LIMITED - ------------------------------------------------------------------------------ (Exact name of registrant as specified in its charter)
_____Cayman Islands______ ______98-0191089____ (State or other jurisdiction of incorporation or (I.R.S. Employer Identification Number) organization)
Cumberland House, 1 Victoria Street, Hamilton, Bermuda HM 11 - ------------------------------------------------------------ (Address of principal executive offices and zip code) Registrant's telephone number, including area code (441) 292-8515 -------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
[X] YES [ ] NO - ---------------------------------------- ---------------------------------------------
The number of registrant's Ordinary Shares ($0.01 par value) outstanding as of September 30, 1998 was 110,015,535 excluding 308,200 shares held in treasury. 2 EXEL LIMITED INDEX TO FORM 10-Q PART I. FINANCIAL INFORMATION -----------------------------
Page No. Item 1. Financial Statements: Consolidated Balance Sheets August 31, 1998 (unaudited) and November 30, 1997 3 Consolidated Statements of Income Three Months Ended August 31, 1998 and 1997 (unaudited) and Nine Months Ended August 31, 1998 and 1997 (unaudited) 5 Consolidated Statements of Cash Flows Nine Months Ended August 31, 1998 and 1997 (unaudited) 6 Notes to Unaudited Consolidated Financial Statements 8 Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition 9 PART II. OTHER INFORMATION -------------------------- Item 1. Legal Proceedings 21 Item 4. Submission of Matters to a Vote of Shareholders 21 Item 6. Exhibits and Reports on Form 8-K 21 Signatures 22
3 EXEL LIMITED CONSOLIDATED BALANCE SHEETS (U.S. dollars in thousands)
August 31, 1998 November 30, 1997 (Unaudited) ASSETS Investments: Fixed maturities, at market value (amortized cost: 1998 - $4,713,217; 1997 - $3,144,642) $4,660,383 $3,196,872 Equity securities, at market value (cost: 1998 - $1,097,686; 1997 - $729,888) 1,112,022 837,827 Short-term investments, at market value (amortized cost: 1998 - $321,410; 1997 - $220,138) 320,570 219,969 ---------- ---------- Total Investments $6,092,975 $4,254,668 Cash and cash equivalents 550,084 394,599 Investment in affiliates (cost: 1998 - $149,106; 1997 - $336,680) 163,395 517,396 Other investments 47,310 27,244 Accrued investment income 62,823 48,576 Deferred acquisition costs 109,853 22,272 Prepaid reinsurance premiums 148,379 108,916 Premiums receivable 835,174 254,238 Reinsurance balances receivable 283,909 156,025 Intangible Assets 1,527,873 267,695 Other assets 123,705 36,833 ---------- ---------- Total Assets $9,945,480 $6,088,462 ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities and Minority Interest: Unpaid losses and loss expenses $3,044,304 $2,342,254 Unearned premiums 1,120,119 566,911 Premium received in advance 47,117 40,706 Loans payable 371,324 141,000 Accounts payable and accrued liabilities 116,704 40,923 Reinsurance premiums payable 106,033 69,305 Payable for investments purchased 612,415 382,345 Minority interest 27,156 25,888 ---------- ---------- Total Liabilities and Minority Interest $5,445,172 $3,609,332 ---------- ----------
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August 31, 1998 November 30, 1997 (Unaudited) Contingencies Shareholders' Equity: Ordinary shares (par value $0.01): authorized, 999,990,000 shares; issued and outstanding, 110,009,400 shares at August 31, 1998 and 84,407,638 shares (excluding 27,594,800 shares held in treasury) at November 30, 1997 1,100 844 Contributed surplus 2,271,444 290,085 Net unrealized (depreciation) appreciation of investments (15,432) 188,444 Deferred compensation (15,225) (11,362) Retained earnings 2,258,421 2,011,119 ---------- ---------- Total shareholders' equity $4,500,308 $2,479,130 ---------- ---------- Total liabilities and shareholders' equity $9,945,480 $6,088,462 ========== ==========
See accompanying notes to Consolidated Financial Statements. 5 EXEL LIMITED CONSOLIDATED STATEMENTS OF INCOME (U.S. dollars in thousands, except per share amounts)
Three Months Ended Nine Months Ended August 31 August 31 1998 1997 1998 1997 (Unaudited) Revenues: Net premiums earned $155,514 $138,034 $433,183 $387,688 Net investment income 70,983 56,109 188,963 161,826 Net realized gains (losses) on sale of investments (2,837) 116,400 134,655 275,326 Equity in net earnings of affiliates 14,604 16,219 49,539 45,113 Fee and other income 2,132 - 6,277 - -------- -------- -------- -------- Total revenues $240,396 $326,762 $812,617 $869,953 -------- -------- -------- -------- Expenses: Losses and loss expenses 91,182 85,022 256,425 261,299 Acquisition costs 18,289 13,508 52,933 34,207 Administration expenses 35,680 13,706 68,664 36,998 Interest expense 2,495 4,414 6,145 4,784 Amortization of intangible assets 6,129 2,674 12,806 2,674 -------- -------- -------- -------- Total expenses $153,775 $119,324 $396,973 $339,962 -------- -------- -------- -------- Income before income tax expenses and minority interest 86,621 207,438 415,644 529,991 Minority Interest (273) - 1,131 - Income tax expense 1,064 878 2,711 3,733 -------- -------- -------- -------- Net income $ 85,830 $206,560 $411,802 $526,258 ======== ======== ======== ======== Weighted average number of ordinary shares and ordinary share equivalents outstanding - Basic 91,337 84,378 86,868 85,356 - Diluted 94,191 85,583 88,491 86,436 Net income per ordinary share and ordinary share equivalent - Basic $0.94 $2.45 $4.74 $6.17 - Diluted $0.91 $2.41 $4.65 $6.09 Dividends declared per share $0.40 $0.32 $1.20 $0.94
See accompanying notes to Consolidated Financial Statements. 6 EXEL LIMITED CONSOLIDATED STATEMENTS OF CASH FLOWS (U.S. dollars in thousands)
Nine Months Ended August 31, 1998 1997 ----------- ----------- (Unaudited) Cash flows from operating activities Net income for the period before minority interest $ 412,933 $ 526,258 Adjustments to reconcile net income to net cash provided by operating activities: Net realized gains on sale of investments (134,655) (275,326) Amortization of premium on fixed maturities (4,820) (830) Amortization of deferred compensation 3,382 2,392 Amortization of intangible assets 12,806 2,674 Equity in earnings of affiliates net of dividends received and consolidation adjustments (24,143) (24,691) Unpaid losses and loss expenses 101,640 137,689 Unearned premiums 92,461 (122,275) Premiums received in advance 6,411 24,651 Deferred acquisition costs (15,720) 8,072 Prepaid reinsurance premiums (4,021) (14,672) Premiums receivable (124,283) 118,925 Reinsurance balances receivable (39,865) (46,910) Reinsurance premiums payable (14,497) 9,802 Accrued investment income 7,567 12,003 Accounts payable and accrued liabilities (931) (9,264) ----------- ----------- Total adjustments (138,668) (177,760) ----------- ----------- Net cash provided by operating activities 274,265 348,498 ----------- ----------- Cash flows provided by (used in) investing activities: Proceeds from sale of fixed maturities and short-term investments 8,744,147 7,961,487 Proceeds from redemption of fixed maturities and short-term investments 412,625 79,220 Proceeds from sale of equity securities 647,073 967,410 Purchases of fixed maturities and short-term investments (9,082,789) (7,543,708) Purchases of equity securities (705,063) (836,513) Deferred losses on forward hedge contracts (3,656) 2,067 Investment in affiliates (27,221) (18,397) Purchase of GCR Holdings Limited - (656,282) Cash received in purchase of Mid Ocean Limited 137,483 - Other investments (4,105) 622 Other assets (30,904) (3,337) ----------- ----------- Net cash provided by (used in) investing activities 87,590 (47,431) ----------- -----------
7
Nine Months Ended August 31, 1998 1997 -------------- -------------- (Unaudited) Cash flow used in financing activities: Dividends paid (101,469) (81,587) Issuance of shares 501 355 Proceeds from exercise of options 5,906 5,793 Repurchase of treasury shares (331,308) (139,231) Proceeds from loans 570,000 460,000 Repayment of loans (350,000) (300,000) --------- --------- Net cash used in financing activities (206,370) (54,670) --------- --------- Increase in cash and cash equivalents 155,485 246,397 Cash and cash equivalents - beginning of period $ 394,599 $ 252,734 --------- --------- Cash and cash equivalents - end of period $ 550,084 $ 499,131 --------- ========= Taxes paid $ 4,127 $ 2,589 ========= =========
See accompanying notes to Consolidated Financial Statements 8 EXEL LIMITED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements of EXEL Limited (together with its subsidiaries, the "Company") have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. In the opinion of management, these unaudited financial statements reflect all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of financial position and results of operations as of the end of and for the periods presented. The results of operations for any interim period are not necessarily indicative of the results for a full year. The November 30, 1997 consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by generally accepted accounting principles. For further information, refer to the consolidated financial statements for the fiscal year ended November 30, 1997, and footnotes thereto, included in the Company's Annual Report on Form 10-K (No. 1-10804) for the year ended November 30, 1997, as filed February 25, 1998, and amended by its Form 10-K/A filed on June 26, 1998. All per share amounts are based on the weighted average number of shares calculated in accordance with SFAS No. 128. This statement replaces APB Opinion No. 15 for computing earnings per share by replacing primary earnings per share with basic earnings per share and by altering the calculation of diluted earnings per share which replaces fully diluted earnings per share. Prior period per share amounts have been restated to reflect this. 2. BUSINESS COMBINATION At a class meeting held on August 3, 1998, the shareholders of the Company approved a Scheme of Arrangement (the "EXEL Arrangement") pursuant to section 85 of the Companies Law (1995 Revision) of the Cayman Islands under which EXEL became a wholly-owned subsidiary of EXEL Merger Company, which has since been renamed "EXEL Limited" ("New EXEL"), an exempted limited liability company incorporated under the laws of the Cayman Islands. At separate class meetings held on the same date, the shareholders of Mid Ocean Limited ("Mid Ocean") approved a similar Scheme of Arrangement (the "Mid Ocean Arrangement" and, together with the EXEL Arrangement, the "Arrangements") pursuant to section 85 of the Companies Law (1995 Revision) of the Cayman Islands under which Mid Ocean became a wholly-owned subsidiary of New EXEL. Under the terms of the EXEL Arrangement and, subject to the cash election rights described below, each outstanding share of the Company was allotted and issued one share in New EXEL. Under the terms of the Mid Ocean Arrangement and, subject to the cash election rights described below, each outstanding share of the Mid Ocean was allotted and issued 1.0215 shares in New EXEL. Under the Arrangements, shareholders of EXEL and Mid Ocean had the opportunity to elect to receive cash in lieu of shares in New EXEL up to a maximum of $300 million in the aggregate. As this election was oversubscribed, $204 million was made available to shareholders of EXEL and $96 million was allotted to shareholders of Mid Ocean. The Arrangements have been accounted for as a purchase under U.S. generally accepted accounting principles and, as such, the consolidated financial statements include the financial statements of Mid Ocean effective August 1, 1998, which has been deemed the closing date of the transactions for accounting purposes. The purchase price amounted to $2.2 billion of which $0.9 billion represented the fair value of Mid Ocean's net assets not already owned by the Company with the balance of $1.3 billion representing goodwill which is being amortized over 40 years. 9 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Results of Operations for the Three Months Ended August 31, 1998 ---------------------------------------------------------------- Compared to the Three Months Ended August 31, 1997 -------------------------------------------------- The following table presents an analysis of the Company's revenues for the periods indicated (U.S. dollars in thousands):
For the Three Months Ended August 31, (unaudited) 1998 1997 % Change -------------- ------------- ------------- Net earned premiums $155,514 $138,034 12.7% Net investment income 70,983 56,109 26.5% Realized (losses) gains (2,837) 116,400 N/M Equity in net earnings of affiliates 14,604 16,219 (11.2%) Fee and other income 2,132 - N/M
The quarter ended 1998 includes Mid Ocean Limited's ("Mid Ocean") equitized earnings through July 31, and thereafter accounts for Mid Ocean's results on a consolidated basis. In addition, the comparative quarter for 1997 only includes two and a half months of the company formerly known as Global Capital Reinsurance Company Limited (which was amalgamated in June 1997 with X.L. Reinsurance Company, Ltd. to form X.L. Global Reinsurance Company, Ltd.). 10 The following table reflects the business segmentation of the underwriting revenues for the periods indicated (U.S. dollars in thousands):
For the Three Months Ended August 31, Gross Net Net Premiums Written Premiums Written Premiums Earned 1998 1997 1998 1997 1998 1997 (unaudited) Insurance Operations General liability $ 55,589 $ 68,965 $ 45,131 $ 52,261 $ 47,098 $ 58,031 Other liability 96,729 37,950 94,146 33,466 25,531 23,185 Property 17,506 12,055 10,714 8,816 4,958 5,717 Specialty 5,432 - 4,889 - 1,145 - Reinsurance Operations Property Catastrophe 13,138 170 6,150 (440) 29,907 18,332 Other Property 554 1,852 (132) 1,851 5,421 4,948 Marine & Energy 4,647 1,291 3,879 1,291 8,846 5,998 Aviation & Satellite 4,684 10,768 4,684 10,768 7,933 9,325 Specialty liability & other 33,957 1,409 33,957 1,410 23,858 12,498 Lloyds' Syndicates 11,573 - 5,106 - 817 - -------- -------- -------- -------- -------- -------- 243,809 134,460 208,524 109,423 155,514 138,034 Multi-year premiums (12,905) 44,157 (10,564) 45,423 - 2,168 -------- -------- -------- -------- -------- -------- Annualized premiums $230,904 $178,617 $197,960 $154,846 $155,514 $140,202 -------- -------- -------- -------- -------- --------
In general liability, the Company continues to experience high levels of competition, particularly on a price basis, although business retention has remained in excess of 80%. The Company's response has been to move to higher attachment levels which results in lower premiums as the Company moves further away from the risk. As at August 31, 1998, the average limits for general liability was $83.4 million in excess of a $126.2 million attachment point as compared to an average limit of $83.2 million in excess of a $93.5 million attachment point for the comparable date in 1997. Other liability, which primarily includes professional product lines, increased significantly primarily as a result of several tailored multi-year programs written in the quarter. These transactions tend to be complicated in nature and often take a significant period of time to structure, thus premiums written in any given quarter may not be representative of future quarters and/or may be irregular in nature. Specialty liability premiums includes primarily political risk insurance underwritten by an affiliated company, Sovereign Risk Insurance Limited, which did not exist for the comparable quarter in 1997. The reinsurance operations were impacted by the acquisition of Mid Ocean and GCR Holdings Limited ("GCR") and their wholly owned reinsurance subsidiaries in the third fiscal quarter of 1998 and 1997, respectively, thus making quarterly comparisons not particularly relevant. Property catastrophe premiums reflect business written primarily by X.L. Global Re prior to its amalgamation with Mid Ocean, while specialty liability reinsurance related primarily to tailored programs written by X.L. Insurance Company, Ltd. Premiums written by the Lloyd's syndicates relate solely to the Company's interest in Venton Insurance Limited ("Venton"). The Company's interest in the Brockbank Group plc ("Brockbank"), which manages several Lloyd's syndicates and was acquired as part of the Mid Ocean transaction, is not reflected in these results. Brockbank reports on a calendar quarter basis, two months in arrears of the Company's reporting calendar. The sale of Venton is expected to be completed in the fourth quarter of 1998. Accordingly, future earnings from the Lloyd's segment will be totally attributable to Brockbank. 11
For the Three Months Ended August 31, (unaudited) 1998 1997 % Change ---------- ---------- ----------- Net investment income $70,983 $ 56,109 26.5% Realized (losses) gains (2,837) 116,400 N/M
The growth in net investment income reflects the increase in the Company's investable assets over the previous year, due primarily to the acquisition of Mid Ocean during the third quarter of 1998 and the Company's positive operational cash flow. The change in realized gains in the third quarter of 1998 primarily reflects the general decline of the stock market in August. Of the loss, $28 million was realized from the mark to market of the Company's synthetic equity index portfolio partially offset by $25 million in net gains realized from equity and fixed income securities. This portfolio is discussed further under "Financial Condition and Liquidity--Non Hedging Financial Instruments".
For the Three Months Ended August 31, (unaudited) 1998 1997 % Change ---------- ---------- ----------- Equity in net earnings of affiliates $14,604 $16,219 (11.2%) Fee and other income 2,132 -- N/M
Equity earnings in affiliates is represented largely by Mid Ocean. The third quarter of 1998 is the last reported quarter that the Company will be showing equitized earnings for Mid Ocean. Subsequent earnings will be wholly consolidated. Mid Ocean had higher comparative net earnings in the third quarter of 1997. Fee and other income reflects the Company's increased efforts to create innovative underwriting solutions with the Company being partially compensated for the deal origination and design. The following table represents an analysis of the Company's loss and loss expense ratio, its underwriting expense ratio and combined ratio.
Three Months Ended August 31, (unaudited) 1998 1997 Loss and loss expense ratio 58.6% 61.6% Underwriting expense ratio 23.5% 19.7% Combined ratio 82.1% 81.3%
The decrease in the loss ratio primarily reflects the diversification of the Company's business over the past year to include a lower proportion of liability business which tends to be long-tail in nature. Loss ratios for this longer tail business can be higher but usually pay out claims over several years. The Company experienced lower losses in shorter tail lines resulting in an overall lower loss ratio. The decrease in the proportion of longer tail business will cause overall Company loss ratios to decrease in periods of low catastrophic activity. It should also be noted that the converse may also occur. The underwriting expense ratio excludes any interest charges associated with the Company's debt, the amortization of goodwill and one time charges incurred during the quarter associated with the realignment of the Company's reinsurance operations which are discussed further below. 12 The increase in the expense ratio is consistent with the Company's mix of business moving towards more reinsurance. This business typically has higher costs associated with the acquisition of the business as compared to insurance.
Three Months Ended August 31, (unaudited) 1998 1997 Net income $ 85,830 $206,560 Net income per share and share equivalent (diluted) $ 0.91 $ 2.41 Net income excluding realized investment (losses) gains, the amortization of intangible assets and one time alignment charges $112,256 $ 92,834 Net income per share on an adjusted basis $ 1.19 $ 1.08
The decrease in net income is primarily due to the Company realizing investment losses of $2.8 million compared to gains of $116.4 million for the quarters ended August 31, 1998 and 1997, respectively, as well as amortization of intangible assets which amounted to $6.1 million in the 1998 quarter as compared to $2.7 million in the 1997 quarter. In addition, the Company incurred one time charges of $17.5 million during the quarter associated with the realignment of the Company's reinsurance operations. This included the conversion of the Company's reinsurance systems to that of Mid Ocean, the write off of leasehold improvements due to the closure of the Company's reinsurance offices and the severance of some of the Company's employees. The Company and Mid Ocean had a one month difference in fiscal years and to bring the two in line, net income for the third quarter includes one month of the consolidated results of Mid Ocean excluding any contribution from Brockbank. In addition, a full quarter of equitized earnings of Mid Ocean was included. Although an additional month's results were included in the quarter, there was no impact on per share earnings due to the dilutive effect of the additional Company shares issued when Mid Ocean was acquired. 13 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Results of Operations for the Nine Months Ended August 31, 1998 --------------------------------------------------------------- Compared to the Nine Months Ended August 31, 1997 ------------------------------------------------- The following table presents an analysis of the Company's revenues for the periods indicated (U.S. dollars in thousands):
For the Nine Months Ended August 31, (unaudited) 1998 1997 % Change -------- -------- -------- Net earned premiums $433,183 $387,688 11.2% Net investment income 188,963 161,826 16.8% Realized (losses) gains 134,655 275,326 N/M Equity in net earnings of affiliates 49,539 45,113 9.8% Fee and other income 6,277 - N/M
The nine months ended 1998 includes Mid Ocean's equitized earnings through July 31 and thereafter accounts for Mid Ocean's results on a consolidated basis (excluding Brockbank). In addition, the comparative period for 1997 only includes two and a half months of the company formerly known as Global Capital Reinsurance Company Limited (which was amalgamated in June 1997 with X.L. Reinsurance Company, Ltd. to form X.L. Global Reinsurance Company, Ltd.). 14 The following table reflects the business segmentation of the underwriting revenues for the periods indicated (U.S. Dollars in thousands):
For the Nine Months Ended August 31 Gross Net Net Premiums Written Premiums Written Premiums Earned 1998 1997 1998 1997 1998 1997 (unaudited) Insurance Operations General liability $161,756 $204,962 $127,901 $151,086 $142,215 $204,658 Other liability 126,105 84,042 120,648 76,263 69,251 65,685 Property 29,217 31,133 20,799 24,064 18,182 16,060 Specialty 20,990 - 18,838 - 2,373 - Reinsurance Operations Property Catastrophe 83,069 (77,948) 72,324 (78,558) 86,504 18,406 Other Property 34,850 17,106 28,108 17,106 13,078 9,520 Marine & Energy 17,641 15,683 16,912 15,683 12,345 14,805 Aviation & Satellite 41,449 24,499 41,449 24,499 28,839 23,462 Specialty liability & other 70,943 20,599 70,943 20,599 59,334 35,092 Lloyds' Syndicates 24,983 - 7,212 - 1,062 - -------- -------- -------- -------- -------- -------- 611,003 320,076 525,134 250,742 433,183 387,688 Multi-year premiums (30,695) 112,854 (29,521) 131,068 - 7,361 -------- -------- -------- -------- -------- -------- Annualized premiums $580,308 $432,930 $495,613 $381,810 $433,183 $395,049 ======== ======== ======== ======== ======== ========
In general liability, the Company continues to experience high levels of competition, particularly on a price basis, although business retention has remained in excess of 80%. The Company's response has been to move to higher attachment levels which results in lower premiums as the Company moves further away from the risk. As at August 31, 1998, the average limits for general liability was $83.4 million in excess of $126.2 million attachment point as compared to an average limit of $83.2 million in excess of a $93.5 million attachment point for the comparable date in 1997. Other liability, which primarily includes professional product lines, increased significantly primarily as a result of several tailored multi-year programs written in 1998. These transactions tend to be complicated in nature and often take a significant period of time to structure, thus premiums written in any given quarter may not be representative of future periods and/or may be irregular in nature. Specialty liability premiums includes primary political risk insurance underwritten by an affiliated company, Sovereign Risk Insurance Limited, which did not exist for the comparable period in 1997. The reinsurance operations were impacted by the acquisition of Mid Ocean and GCR and their wholly owned reinsurance subsidiaries in the third fiscal quarter of 1998 and 1997, respectively, thus making comparison not particularly relevant. Property catastrophe premiums reflect business written primarily by X.L. Global Re prior to its amalgamation with Mid Ocean, while specialty liability reinsurance related primarily to tailored programs written by X.L. Insurance Company, Ltd. Gross premiums written and net premiums earned for this line were negative in 1997 as a result of several multi-year loss sensitive policies with significant premiums which were reversed when it became apparent that the intent of reinsureds was to cancel and rewrite these contracts after one year when they are loss free. Premiums written by the Lloyd's syndicates relate solely to the Company's interest in Venton. The Company's interest in Brockbank, which manages several Lloyd's syndicates and was acquired as part of the Mid Ocean transaction, is not reflected in these results. Brockbank reports on a calendar quarter basis, two months in arrears of the Company's reporting calendar. The sale of Venton is expected to be completed in the fourth quarter of 1998. Accordingly, future earnings from the Lloyd's segment will be totally attributable to Brockbank. 15
For the Nine Months Ended August 31, (unaudited) 1998 1997 % Change ------------ ------------ ------------ Net investment income $188,963 $161,826 16.8% Realized (losses) gains 134,655 275,326 N/M
The growth in net investment income reflects the increase in the Company's investable assets over the previous year, due primarily to the acquisition of Mid Ocean during the third quarter of 1998 and the Company's positive operational cash flow. The investment portfolio was significantly restructured during the nine month period ended August 31, 1997 resulting in the realization of investment gains. The nine month period ended August 31, 1998 saw the investment markets reach record highs and then decline during July and August. The consequence of these changes saw the Company's investment managers capture gains in the earlier part of the period offset to a limited degree by some losses realized in the latter part of the period.
For the Nine Months Ended August 31, (unaudited) 1998 1997 % Change ------------ ------------ ------------ Equity in net earnings of affiliates $49,539 $45,113 9.8% Fee and other income 6,277 - N/M
Equity earnings in affiliates is represented largely by Mid Ocean. The third quarter of 1998 is the last reported quarter that the Company will be showing equitized earnings for Mid Ocean. Subsequent earnings will be wholly consolidated. Fee and other income reflects the Company's increased efforts to create innovative underwriting solutions with the Company being partially compensated for the deal origination and design. Also included in this item are some income distributions from the Company's other investments in limited partnerships. 16 The following table represents an analysis of the Company's loss and loss expense ratio, its underwriting expense ratio and combined ratio.
Nine Months Ended August 31, (unaudited) 1998 1997 Loss and loss expense ratio 59.2% 67.4% Underwriting expense ratio 24.0% 18.4% Combined ratio 83.2% 85.8%
The decrease in the loss ratio primarily reflects the diversification of the Company's business over the past year to include a lower proportion of liability business which tends to be long-tail in nature. Loss ratios for this longer tail business can be higher but usually pay out claims over several years. The Company experienced lower losses in shorter tail lines resulting in an overall lower loss ratio. The decrease in the proportion of longer tail business will cause overall Company loss ratios to decrease in periods of low catastrophic activity. It should also be noted that the converse may also occur. The underwriting expense ratio excludes any interest charges associated with the Company's debt, the amortization of goodwill and one time charges incurred during the period associated with the realignment of the Company's reinsurance operations which are discussed below. The increase in the expense ratio is consistent with the Company's mix of business moving towards more reinsurance. This business typically has higher costs associated with the acquisition of the business as compared to insurance.
Nine Months Ended August 31, (unaudited) 1998 1997 Net income $411,802 $526,258 Net income per share and share equivalent (diluted) $ 4.65 $ 6.09 Net income excluding realized investment (losses) gains, the amortization of intangible assets and one time alignment charges $307,413 $253,606 Net income per share on an adjusted basis $ 3.47 $ 2.93
The decrease in net income is primarily due to the Company realizing investment gains of $134.7 million compared to $275.3 million for the nine month periods ended August 31, 1998 and 1997, respectively, as well as amortization of intangible assets which amounted to $12.8 million in the 1998 period as compared to $2.7 million in the 1997 period. In addition, the Company incurred one time charges of $17.5 million during the period associated with the realignment of the Company's reinsurance operations. This included the conversion of the Company's reinsurance systems to that of Mid Ocean, the write off of leasehold improvements due to the closure of the Company's reinsurance offices and the severance of some of the Company's employees. The Company and Mid Ocean had a one month difference in fiscal years and to bring the two in line, net income for the nine months ended August 31, 1998 includes one month of the consolidated results of Mid Ocean excluding any contribution from Brockbank. In addition, three full quarters of equitized earnings of Mid Ocean have been included. Although an additional month's results were included in the period, there was no impact on per share earnings due to the dilutive effect of the additional Company shares issued when Mid Ocean was acquired. 17 Financial Condition and Liquidity As a holding company, the Company's assets consist primarily of its investments in the stock of its subsidiaries and the Company's future cash flows depend on the availability of dividends or other statutorily permissible payments from its subsidiaries. In order to pay dividends, the amount of which are limited to accumulated net realized profits, the Company's principal subsidiaries, X.L. Insurance Company, Ltd. ("X.L.") and X.L. Mid Ocean Reinsurance Company, Ltd. ("X.L. Mid Ocean"), must maintain certain minimum levels of statutory capital and surplus, solvency and liquidity pursuant to Bermuda statutes and regulations. At August 31, 1998, X.L. and X.L. Mid Ocean could have paid dividends in the amount of approximately $3.2 billion. Neither the Company nor any of its material subsidiaries other than X.L. and X.L. Mid Ocean had any other restrictions preventing them from paying dividends. No assurance, however, can be given that the Company or its subsidiaries will not be prevented from paying dividends in the future. The Company's shareholders' equity at August 31, 1998 was $4.5 billion, of which $2.3 billion was retained earnings. At August 31, 1998, total investments and cash net of the unsettled investments trades were $6.0 billion, compared to $4.3 billion at November 30, 1997. The Company's fixed income investments (including short-term investments and cash equivalents) at August 31, 1998 represented approximately 82% of invested assets and were managed by several outside investment management firms with different strategies. Approximately 86% of fixed income securities are of investment grade, and approximately 63.1% of the portfolio is in U.S. and non-U.S. sovereign government obligations, corporate bonds and other securities rated Aa or AA or better by a nationally recognized rating agency. Cash and cash equivalents net of pending investment trades was $(62.3) million at August 31, 1998, compared to $12.3 million at November 30, 1997. In fiscal 1997 and in fiscal 1998 through August 31, the total amount of losses paid by the Company was $267.2 million and $199.3 million, respectively. The Company establishes reserves to provide for the estimated expenses of settling claims, the general expenses of administering the claims adjustment process and for losses incurred but not reported. These reserves are calculated by using actuarial and other reserving techniques to project the estimated ultimate net liability for losses and loss expenses. The Company's reserving practices and the establishment of any particular reserve reflect management's judgement concerning sound financial practice and does not represent any admission of liability with respect to any claims made against the Company's subsidiaries. No assurance can be given that actual claims made and payments related thereto will not be in excess of the amounts reserved. Corporate On June 11, 1997, the Company obtained two revolving lines of credit in the amount of $250 million each, one for 364 days and the other for 5 years. The one year facility has been extended for another year. These facilities are provided by a syndicate of banks to facilitate strategic acquisitions and to supplement operational cash flow. The weighted average interest rate on the funds borrowed during the period was 5.833%. The balance of the loans outstanding under the facilities as at August 31, 1998 was composed of predominantly three amounts: $250 million which was extended for an additional month at its due date on October 14, 1998 and two amounts of $50 million each which were extended for an additional month at their due dates on October 13, 1998. These borrowings were used to fund the cash elections made available to shareholders of EXEL and shareholders of Mid Ocean pursuant to the terms of the Arrangements, and to fund the Company's U.S. operations. On March 13, 1998 the Board of Directors of the Company authorized the repurchase of $500 million of its shares. In addition to the $300 million cash election option related to the combination with Mid Ocean, the Company repurchased 423,636 shares during the first nine months of 1998 at a cost of $31.3 million. On February 27, 1998 the Company obtained a $500 million letter of credit facility from a syndicate of banks, which is secured against the Company's investment portfolio. This facility is used to collateralize reinsureds' technical reserves with the Company. The Company has letters of credit outstanding at August 31, 1998 in the amounts of $191.0 million and (Pounds)11.2 million. 18 Year 2000 Considerations In 1997, the Company initiated a project to address Year 2000 issues with respect to the Company's computer software and information technology systems as well as its non-information technology systems. The project has two distinct areas of focus assessment of the Year 2000 compliance of the Company's software, systems and technology platforms, and the evaluation of the Year 2000 preparedness of significant third parties with whom the Company conducts business, including vendors and customers. The Company has substantially completed its assessment of Company software and systems and has adopted a plan to implement compliant components, targeted to be substantially complete by June 1999. The Company estimates that through August 31, 1998 the remediation and validation efforts are approximately 50% complete, with the costs through such date aggregating approximately $3 million. Future costs of remediation are not expected to have a material impact on the Company's financial position, results of operation or cash flows, although no assurance can be given in this regard. The Company recognizes the potential impact of Year 2000 issues from its service providers and customers. The Company is currently communicating with its significant service providers to assess their readiness and will address compliance risks with each new significant vendor. In addition, the Company's potential exposure to its customers' Year 2000 issues is being reviewed. Formal contingency plans will not be formulated until the Company has identified specific areas where there is a substantial risk of Year 2000 problems occurring, and no such areas are identified as of this date. Financial Risk Management This risk management discussion and the estimated amounts generated from the sensitivity analyses are forward-looking statements of market risk assuming certain adverse market conditions occur. Actual results in the future may differ materially from these projected results due to actual developments in the global financial markets. The analysis used by the Company to assess and mitigate risk should not be considered projections of future events of losses. The Company's investment portfolio consists of fixed income and equity securities, denominated in both U.S. and non-U.S. dollars. Accordingly, earnings will be affected by changes in interest rates, equity prices and foreign currency exchange rates. Foreign Currency Risk Management The Company attempts to hedge directly the foreign currency exposure of a portion of its non-U.S. dollar fixed maturity investments using forward foreign exchange contracts that generally have maturities of three months or less, and which are rolled over to provide continuing coverage for as long as the investments are held. Where an investment is sold, the related foreign exchange sale contract is closed by entering into an offsetting purchase contract. At August 31, 1998, the Company had, as hedges, foreign contracts for the sale of $20.9 million and the purchase of $10.3 million of foreign currencies at fixed rates, primarily Japanese Yen (93% of net contract value) and French Francs (7%). The market value of non-U.S. dollar fixed maturities held by the Company as at August 31, 1998 was $10.1 million. Unrealized foreign exchange gains or losses on foreign exchange contracts hedging non-U.S. Dollar fixed maturity investments are deferred and included in shareholders' equity. As at August 31, 1998, unrealized deferred gains amounted to $0.2 million, and were offset by corresponding decreases in the U.S. dollar value of the investments. Realized gains and losses on the maturity of these contracts are also deferred and included in shareholders' equity until the corresponding investment is sold. As at August 31, 1998, realized deferred gains amounted to $6.6 million. The Company uses foreign exchange contracts to manage the foreign exchange risk of fluctuating foreign currencies on the value of its remaining non-U.S. dollar fixed maturities and its non-U.S. dollar equity investments on an overlay basis. These contracts are not designated as specific hedges and, therefore, realized and unrealized gains and losses recognized on them are recorded as a component of net realized gains and losses in the period in which they occur. In addition, where the Company's investment managers are of the opinion that potential gains exist in a particular currency, then a forward contract will not be entered into. At August 31, 1998, the Company had forward contracts outstanding of $258.6 million with unrealized gains of $6.4 million. Gains of $24.5 million were realized during the nine month period. Based on the value of forward contracts outstanding, a 10% appreciation or 19 devaluation of the U.S. dollar as compared to the level of other currencies under contract at August 31, 1998 would have resulted in approximately $26.7 million in unrealized gains and $19.0 million in losses, respectively. In addition, the Company also enters into foreign exchange contracts to buy and sell foreign currencies in the course of trading its non-U.S. dollar investments. These contracts are not designated as specific hedges, and generally have maturities of two weeks or less. As such, any realized or unrealized gains or losses are recorded in income in the period in which they occur. At August 31, 1998, the Company had an immaterial amount of such contracts outstanding, and had recognized a total of $0.3 million in realized and unrealized losses for the nine-month period. Based on this value, a 10% appreciation or devaluation of the U.S. dollar as compared to the level of other currencies under contract at August 31, 1998 would have had no material effect on income. Non Hedging Financial Instruments The Company also invests in a synthetic equity portfolio of S&P Index futures with an exposure approximately equal in amount to the market value of underlying assets held in this fund. As at August 31, 1998, the portfolio held $160.0 million in exposure to S&P 500 Index futures together with fixed maturities, short-term investments and cash amounting to $158.9 million. Based on this value, by definition a 10% increase or decrease in the price of these futures would have resulted in exposure of $176.0 million and $144.0 million respectively. The value of the futures is updated daily with the change recorded in income as a realized gain or loss. For the nine months ended August 31, 1998, net realized losses from index futures totaled $1.2 million. Derivative investments are also utilized to add value to the portfolio where market inefficiencies are believed to exist. At August 31, 1998, bond and stock index futures outstanding were $101.7 million, with underlying investments having a market value of $2.1 billion (all managers are prohibited by the Company's investment guidelines from leveraging their positions). A 10% appreciation or depreciation of these derivative instruments at this time would have resulted in unrealized gains and losses of $10.2 million, respectively. Current Outlook The Company believes competition in the property casualty insurance and reinsurance industry will continue to be strong and may intensify in 1998, exerting pressure on rates in general and particularly in the Company's traditional casualty product lines. Although the Company believes some opportunities will exist in 1998 for growth in certain product lines, no assurances can be made that growth in such other product lines will be sufficient to offset the competitive pressures affecting the Company's traditional product lines. Cautionary Note Regarding Forward-Looking Statements This Quarterly Report on Form 10-Q contains statements that may be considered to be "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Such statements may include, without limitation, insofar as they may be considered to be forward-looking statements, certain statements in (i) "Management's Discussion and Analysis-Results of Operations for the Three Months Ended August 31, 1998 Compared to the Three Months Ended August 31, 1997" and "-Results of Operations for the Nine Months Ended August 31, 1998 Compared to the Nine Months Ended August 31, 1997" concerning (A) certain relationships among gross premiums written, net premiums written and net premiums earned and (B) the potential material adverse affect on the Company's operating results and financial condition stemming from the absence of reserves in respect of all or a portion of its property reinsurance business assumed; (ii) "Management's Discussion and Analysis Financial Risk Management", "- Foreign Currency Risk Management" and "- Non Hedging Financial Instruments" concerning the potential effects of certain events on the Company's portfolios of fixed income and equity instruments, foreign currency exposure, derivatives positions and certain other types of instruments (iii) Management's Discussion and Analysis-Current Outlook" concerning the current outlook for rates and particular product lines; (iv) such other statements contained in this Quarterly Report that may be 20 considered to be forward-looking statements; and (v) variations of the foregoing statements wherever they appear in this Quarterly Report. All forward-looking statements address matters that involve risks and uncertainties. Accordingly, there are or will be important factors that could cause actual results to differ materially from those indicated in such statements. The Company believes that these include the following non-exclusive factors: (i) the impact of changing market conditions on the Company's business strategy; (ii) the effects of increased competition on pricing, coverage terms, retention of customers and ability to attract new customers; (iii) greater severity or frequency of the types of large or catastrophic losses which the Company's subsidiaries insure or reinsure; (iv) faster loss development experience than that on which the Company's underwriting, reserving and investment practices are based; (v) developments in global financial markets which could adversely affect the performance of the Company's investment portfolio; (vi) regulatory or tax developments which could adversely affect the Company's business; (vii) risks associated with the introduction of new products and services; and (viii) the impact of mergers and acquisitions. The facts set forth above should be considered in connection with any forward- looking statement contained in this Quarterly Report. The important factors that could affect such forward-looking statements are subject to change, and the Company does not intend to update any forward-looking statement or the foregoing list of important factors. By this cautionary note, the Company intends to avail of the safe harbor from liability with respect of forward-looking statements provided by Section 27A and Section 21E referred to above. 21 EXEL LIMITED PART II - OTHER INFORMATION ITEM 1 - LEGAL PROCEEDINGS The Company, through its subsidiaries, in common with the insurance and reinsurance industry in general, is subject to litigation in the normal course of its business. Although most of its policies provide for resolution of disputes by arbitration in London, X.L. has been sued several times in United States courts and is defending each suit vigorously, both on procedural grounds and the merits. As of August 31, 1998, the Company was not a party to any material litigation other than as routinely encountered in claims activity. EXEL, Mid Ocean and the directors of Mid Ocean have been named as defendants in a purported class action lawsuit (the "Shareholder Action") filed in connection with the proposed Arrangements in the Supreme Court, County of New York, State of New York. Harbor Finance Partners v. Newhouse, et al., C.A. No. 1998/601266. The Shareholder Action alleges that the defendants breached their fiduciary duties to the Mid Ocean shareholders by failing to exercise independent business judgment (due to their alleged conflict of interest) and by agreeing to sell Mid Ocean at an unfair and inadequate price. The Shareholder Action is brought on behalf of a purported class of persons consisting of Mid Ocean shareholders other than the defendants. As relief, the Shareholder Action seeks, among other things, a rescission of the Arrangements and an award of compensatory damages in an unspecified amount, as well as costs including fees for plaintiff's counsel and experts' fees and expenses. On June 18, 1998, the defendants filed a motion to dismiss the Shareholder action on the grounds that the Shareholder Action (i) failed to state a claim upon which relief may be granted under Cayman Islands law and (ii) was not brought in an appropriate forum (forum non conveniens). ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS At a Class Meeting of Shareholders held on August 31, 1998 at the Princess Hotel, Hamilton, Bermuda, the shareholders approved the following: 1. To approve the proposed Scheme of Arrangement pursuant to section 85 of the Companies Law (1995 Revision) of the Cayman Islands between EXEL and its shareholders under which EXEL will become a wholly owned subsidiary of EXEL Merger Company Ltd., an exempted limited liability company incorporated under the laws of the Cayman Islands. Votes For Votes Against ---------- ------------- 70,268,729 150,809 ========== ======= ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K Exhibits Exhibit 11 - Statement regarding Computation Per Share Earnings. Reports on Form 8-K Current Report on Form 8-K filed on July 29,1998, under Item 5 thereof. Current Report on Form 8-K filed on August 3, 1998, under Item 5 thereof. Current Report on Form 8-K filed on August 7, 1998, under Item 5 thereof. Current Report on Form 8-K filed on August 19, 1998, under Item 5 thereof. 22 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. EXEL LIMITED ---------------------------------------- (Registrant) October 15, 1998 /s/ Brian M. O'Hara ---------------------------------------- Brian M. O'Hara President and Chief Executive Officer October 15, 1998 /s/ Robert R. Lusardi ---------------------------------------- Robert R. Lusardi Executive Vice President and Chief Financial Officer EX-11 2 COMPUTATION OF EARNINGS PER COMMON SHARE Exhibit 11 COMPUTATION OF EARNINGS PER ORDINARY SHARE ------------------------------------------ AND ORDINARY SHARE EQUIVALENT -----------------------------
Three Months Ended Nine Months Ended August 31, August 31, 1998 1997 1998 1997 (Unaudited) (Unaudited) (U.S. dollars in thousands except per share amounts) (A) Earnings per ordinary share and ordinary share equivalent--basic: Weighted average ordinary shares and ordinary share equivalents outstanding 91,337 84,378 86,868 85,356 ======= ======== ======== ======== Net income $85,830 $206,560 $411,802 $526,258 ======= ======== ======== ======== Earnings per ordinary share and ordinary share equivalent $ 0.94 $ 2.45 $ 4.74 $ 6.17 ======= ======== ======== ======== (B) Earnings per ordinary share and ordinary share equivalent--assuming full dilution: Weighted average ordinary shares outstanding 92,287 84,085 86,714 85,177 Average stock options outstanding (net of repurchased shares under the treasury stock method) 1,904 1,498 1,777 1,259 ------- -------- -------- -------- Weighted average ordinary shares and ordinary share equivalents outstanding 94,191 85,583 88,491 86,436 ======= ======== ======== ======== Net income $85,830 $206,560 $411,802 $526,258 ======= ======== ======== ======== Earnings per ordinary share and ordinary share equivalent $ 0.91 $ 2.41 $ 4.65 $ 6.09 ======= ======== ======== ========
EX-27 3 FINANCIAL DATA SCHEDULE
7 This schedule contains summary financial information extracted from the Consolidated Balance Sheets and Consolidated Statements of Income and is qualified in its entirety by reference to such financial statements. 1,000 9-MOS NOV-30-1998 DEC-01-1997 AUG-31-1998 4,980,953 0 0 1,112,022 0 0 6,092,975 550,084 0 109,853 9,945,480 3,044,304 1,120,119 47,117 0 371,324 1,100 0 0 4,499,208 9,945,480 433,183 188,963 134,655 55,816 256,425 52,933 87,615 415,644 2,711 411,802 0 0 0 411,802 4.74 4.65 0 0 0 0 0 0 0
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