<PAGE>
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, 1996
Commission File Number 1-10804
EXEL LIMITED
-----------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Cayman Islands 98-0058718
- --------------------------------- ----------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
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.
YES X NO
-------- --------
The number of registrant's Ordinary Shares ($0.01 par value) outstanding as of
September 23, 1996 was 87,215,464 excluding 24,100,600 shares held in treasury.
<PAGE>
2
EXEL LIMITED
INDEX TO FORM 10-Q
Part I. FINANCIAL INFORMATION
-----------------------------
<TABLE>
<CAPTION>
Page No.
-------
<S> <C>
Item 1. Financial Statements:
Consolidated Balance Sheets
August 31, 1996 (unaudited) and
November 30, 1995 3
Consolidated Statements of Income
Three Months Ended August 31, 1996
and 1995 (unaudited) and Nine Months
Ended August 31, 1996 and 1995 (unaudited) 5
Consolidated Statements of Cash Flows
Nine Months Ended August 31, 1996
and 1995 (unaudited) 6
Notes to Unaudited Consolidated
Financial Statements 8
Item 2. Management's Discussion and Analysis
of Results of Operations and
Financial Condition 11
Part II. OTHER INFORMATION
--------------------------
Item 6. Exhibits and Reports on Form 8-K 26
Signatures 29
</TABLE>
<PAGE>
3
EXEL LIMITED
(U.S. dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
August 31, November 30,
1996 1995
----------- ------------
<S> <C> <C>
(Unaudited)
ASSETS
Investments:
Fixed maturities, at market value
(amortized cost : 1996 - $2,638,211;
1995 - $2,343,143)....................... 2,557,920 $2,434,470
Equity securities, at market value
(cost: 1996 - $580,848; 1995 - $652,847). 716,082 838,132
Short-term investments, at market
value (amortized cost: 1996 - $43,921;
1995 - $82,696).......................... 44,639 82,693
---------- ----------
Total Investments 3,318,641 3,355,295
Cash and cash equivalents................... 288,490 673,433
Investment in affiliate
(cost: 1996 - $263,237; 1995 - $261,617)... 378,818 351,669
Accrued investment income................... 53,911 53,149
Deferred acquisition costs.................. 33,081 40,954
Prepaid reinsurance premiums................ 57,164 2,438
Premiums receivable......................... 344,765 234,028
Reinsurance balances receivable............. 43,442 1,002
Other assets................................ 31,181 12,938
---------- ----------
Total Assets.............................. $4,549,493 $4,724,906
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Unpaid losses and loss expenses........... $1,985,580 $1,920,500
Unearned premium.......................... 667,433 539,296
Premium received in advance............... 26,032 4,880
Accounts payable and accrued
liabilities.............................. 54,021 17,806
Payable for investments purchased......... 6,721 236,291
---------- ----------
Total Liabilities......................... $2,739,787 $2,718,773
---------- ----------
</TABLE>
<PAGE>
4
<TABLE>
<CAPTION>
August 31, November 30,
1996 1995
---------- ------------
<S> <C> <C>
(Unaudited)
Contingencies
Shareholders' Equity:
Ordinary shares (par value $0.01:
authorized, 999,990,000 shares;
issued and outstanding, 87,431,264
shares (excluding 23,884,800 shares
held in treasury) at August 31, 1996
and 94,550,790 shares (excluding
16,000,000 shares held in treasury)
at November 30, 1995..................... 874 473
Contributed surplus....................... 282,605 295,209
Net unrealized appreciation of
investments.............................. 55,398 283,289
Deferred compensation..................... (7,358) (1,657)
Retained earnings......................... 1,478,187 1,428,819
---------- ----------
Total shareholders' equity........ $1,809,706 $2,006,133
---------- ----------
Total liabilities and
shareholders' equity.............. $4,549,493 $4,724,906
========== ==========
</TABLE>
See accompanying notes to Consolidated Financial Statements.
<PAGE>
5
EXEL LIMITED
CONSOLIDATED STATEMENTS OF INCOME
(U.S. dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended Ended
August 31, August 31,
1996 1995 1996 1995
-------- -------- -------- --------
(Unaudited)
<S> <C> <C> <C> <C>
Revenues:
Net premiums earned................... $124,537 $139,219 $386,747 $405,110
Net investment income................. 50,310 39,085 148,332 146,052
Net realized (losses) gains on sale
of investments....................... (4,603) 26,162 147,658 34,178
Equity in net earnings of affiliate... 13,081 18,449 43,476 39,047
-------- -------- -------- --------
Total revenues..................... 183,325 222,915 726,213 624,387
-------- -------- -------- --------
Expenses:
Losses and loss expenses.............. 97,905 109,170 305,667 317,811
Acquisition costs..................... 9,053 13,327 26,637 39,921
Administration expenses............... 11,429 7,099 31,164 21,094
-------- -------- -------- --------
Total expenses..................... 118,387 129,596 363,468 378,826
-------- -------- -------- --------
Income before income tax expense........ 64,938 93,319 362,745 245,561
Income tax expense...................... 393 416 2,125 1,245
-------- -------- -------- --------
Net income.............................. $ 64,545 $ 92,903 $360,620 $244,316
======== ======== ======== ========
Weighted average number of
ordinary shares and
ordinary share equivalents
outstanding............................ 89,842 102,050 92,935 105,736
Net income per ordinary
share and ordinary share
equivalent............................. $ 0.72 $ 0.91 $ 3.88 $ 2.31
Dividends declared per share............ $ 0.25 $ 0.17 $ 0.70 $ 0.50
</TABLE>
See accompanying notes to Consolidated Financial Statements.
<PAGE>
6
EXEL LIMITED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(U.S. dollars in thousands)
<TABLE>
<CAPTION>
Nine Months Ended
August 31,
1996 1995
---- ----
<S> <C> <C>
(Unaudited)
Cash flows from operating activities
Net income.................................... $ 360,620 $ 244,316
Adjustments to reconcile net income
to net cash provided by operating activities:
Net realized gains on sale of investments..... (147,658) (34,178)
Unrealized loss on foreign exchange........... - 8,025
Amortization of premium on fixed maturities... 5,571 4,026
Amortization of deferred compensation......... 1,097 777
Equity in earnings of affiliate net of
dividends received and consolidation
adjustments................................. (33,702) (34,083)
Unpaid losses and loss expenses............... 65,080 156,181
Unearned premiums............................. 128,137 91,446
Premiums received in advance.................. 21,152 (2,191)
Deferred acquisition costs.................... 7,873 (1,958)
Prepaid reinsurance premiums.................. (54,726) -
Premiums receivable........................... (110,737) (67,035)
Reinsurance balances receivable............... (42,440) -
Accrued investment income..................... (762) 22,024
Accounts payable and accrued liabilities...... 36,215 1,924
---------- ----------
Total adjustments........................... (124,900) 144,958
---------- ----------
Net cash provided by operating activities..... 235,720 389,274
---------- ----------
Cash flows provided by (used in)
investing activities:
Proceeds from sale of fixed maturities
and short-term investments.................... 3,541,887 4,414,038
Proceeds from redemption of fixed
maturities and short-term investments......... 98,000 81,000
</TABLE>
<PAGE>
7
<TABLE>
<CAPTION>
Nine Months Ended
August 31,
1996 1995
---- ----
(Unaudited)
<S> <C> <C>
Proceeds from sale of equity securities........ 468,860 158,195
Purchases of fixed maturities and
short-term investments...................... (4,089,078) (4,386,834)
Purchases of equity securities................. (291,446) (334,689)
Deferred gains on forward hedge
contracts................................... 1,230 34,464
Investment in affiliate........................ (1,620) -
Proceeds from sale of shares in affiliate...... - 15,312
Other assets................................... (18,243) (1,321)
----------- -----------
Net cash used in investing
activities................................... (290,410) (19,835)
----------- -----------
Cash flow (used in) provided by financing
activities:
Dividends paid................................. (64,333) (52,305)
Issuance of shares............................. 126 126
Proceeds from exercise of options.............. 5,216 2,213
Repurchase of treasury shares.................. (271,262) (257,063)
----------- -----------
Net cash used in financing activities............. (330,253) (307,029)
----------- -----------
(Decrease)increase in cash and cash
equivalents.................................... (384,943) 62,410
----------- -----------
Cash and cash equivalents - beginning
of period...................................... $ 673,433 $ 456,176
----------- -----------
Cash and cash equivalents - end
of period...................................... $ 288,490 $ 518,586
=========== ===========
Taxes paid..................................... $ 1,571 $ 1,056
=========== ===========
</TABLE>
See accompanying notes to Consolidated Financial Statements.
<PAGE>
8
EXEL LIMITED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of EXEL
Limited (the "Company") have been prepared in accordance with 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 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,
1995 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, 1995, and footnotes thereto,
included in the Company's Annual Report on Form 10-K (No. 1-10804).
All share amounts have been adjusted for the July 1996 one-for-one stock
dividend paid on the company's ordinary shares.
<PAGE>
9
NOTE B - INVESTMENT IN AFFILIATE
Summarized condensed financial information of Mid Ocean Limited (MOCL), a 28%
owned affiliate, which is accounted for by the equity method, is as follows
(U.S. dollars in thousands):
<TABLE>
<CAPTION>
Three months Ended Nine Months Ended
July 31, July 31,
Income Statement Data 1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
(unaudited)
Net premiums earned $114,102 $ 90,796 $318,481 $ 279,976
Net investment income 21,052 18,716 60,009 54,763
Net realized (losses) gains
on sale of investments (8,396) 15,308 (1,200) (1,616)
Net income $ 46,217 $ 66,140 $155,004 $ 139,783
======== ========== ======== ==========
Company's share of net income $ 13,081 $ 18,449 $ 43,476 $ 39,047
======== ========== ======== ==========
July 31, October 31,
Balance Sheet Data 1996 1995
----------- -----------
(Unaudited)
Cash, investments and accrued
interest $1,436,551 $1,275,588
Other assets 487,029 231,417
---------- ----------
Total assets $1,923,580 $1,507,005
========== ==========
Reserves for losses and
loss expenses $ 392,496 $ 328,990
Reserves for unearned premiums 362,962 200,859
Other liabilities and minority
interest 117,640 8,362
Shareholders' equity 1,050,482 968,794
---------- ----------
Total liabilities
and shareholders' equity $1,923,580 $1,507,005
========== ==========
Company's share of
shareholders' equity $ 296,372 $ 273,867
========== ==========
</TABLE>
The Company received dividends from its affiliate of $4.0 million, and $2.4
million during the quarters ended August 31,1996 and 1995 and $9.0 million and
$5.0 million for each of the nine month periods then ended.
<PAGE>
10
NOTE C - SUBSEQUENT EVENTS
Subsequent to the quarter end X.L. Insurance Company Limited (X.L.) made
two acquisitions; American Excess Insurance Association (AEIA), where the
Company acquired its assets, (principally their underwriting files) and Railroad
Association Insurance, Ltd. (RAIL) which was purchased outright. Neither
acquisition will materially affect cashflows, although the fee associated with
the former will increase the expense ratio over approximately the next two
years. The size of the increase will be dependent on the level of policies
renewing with X.L.
<PAGE>
11
EXEL LIMITED
------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
---------------------------------------
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
---------------------------------------------
Results of Operations for the Three Months Ended August 31, 1996
----------------------------------------------------------------
Compared to the Three Months Ended August 31, 1995
--------------------------------------------------
The following table presents a summary analysis of the Company's
underwriting revenues for the periods indicated:
<TABLE>
<CAPTION>
Three Months Ended
August 31,
1996 1995 % Change
---- ---- --------
Table I (unaudited)
-------
<S> <C> <C> <C>
Gross premiums written $189,488 $248,613 (23.8%)
Net premiums written 152,635 247,075 (38.2%)
Net premiums earned 124,537 139,219 (10.5%)
</TABLE>
The decrease in gross premiums written is reflective of the maturity of the
multi year book over that of last year, resulting in an adjusted annual premium
of $172.6 million and $174.3 million for the third quarter of 1996 and 1995,
respectively, a decrease of 0.1%. In addition, two specialty reinsurance assumed
contracts (SRA) canceled on their first year anniversary of a three year
contract resulting in a return premium of $10.8 million. Further discussion is
provided on this matter following Table II.
Net premiums written were similarly affected by these items in addition to
the general liability quota share reinsurance policy which came into effect on
December 1, 1995. The policy covers general liability risks written on a
guaranteed cost form, with certain exclusions. X.L. cedes 20% of these risks
with a total limit of up to $100 million and 25% with a total limit in excess of
$100 million. The resulting adjustment of $15.4 million as noted in Table III
reflects a decrease of 6.9%. Net earned premiums adjusted for this treaty would
have increased 0.5%.
<PAGE>
12
Table II presented below, reflects the split of gross premiums written by
X.L. Insurance Company, Ltd. (X.L.), X.L. Europe Insurance (X.L.E.) and X.L.
Reinsurance Company, Ltd. (XLRe) by line of business and after multi-year
adjustments.
<TABLE>
<CAPTION>
Three Months Ended August 31,
1996 1995
Table II X.L. X.L.E. XLRe Total X.L. X.L.E. Total
- -------- -------- ------- ------- -------- -------- ------- --------
(Unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
General liability $102,425 $10,879 $ - $113,304 $104,545 $13,000 $117,545
Directors and officers liability 6,128 219 - 6,347 7,212 329 7,541
Professional liability 20,874 1,766 - 22,640 13,790 1,426 15,216
Employment practices liability 1,534 - - 1,534 - - -
Property 12,854 718 - 13,572 7,035 1,218 8,253
Risk solutions 2,472 - - 2,472 - - -
Speciality reinsurance assumed 3,115 2,157 7,435 12,707 24,220 1,549 25,769
-------- ------- ------- -------- -------- ------- --------
Annualized premiums 149,402 15,739 7,435 172,576 156,802 17,522 174,324
Multi-year premiums 2,774 3,630 10,508 16,912 71,024 3,265 74,289
-------- ------- ------- -------- -------- ------- --------
Gross premiums written $152,176 $19,369 $17,943 $189,488 $227,826 $20,787 $248,613
======== ======= ======= ======== ======== ======= ========
</TABLE>
As has been disclosed in previous filings, SRA policyholders are few in
number but with policies that generate significant premiums due to the nature of
the risks and the multi-year coverage. These policies are loss sensitive,
providing large penalty premiums in the event of losses and the return of
significant levels of premiums where little or no losses are incurred by the end
of the policy term. During the third quarter, two reinsureds canceled and
entered into new contracts, which were property in nature, resulting in the
return of loss experience funds accrued to date of $10.8 million and unearned
premium for years two and three of these contracts of $48.5 million. Because of
the intent of these respective reinsureds to cancel and rewrite their contracts
after one year where it is loss free, only the first year of the go forward
contract has been recorded as premium. The intent of other existing property
reinsureds will be assessed at the first year anniversary of their contracts and
will be accounted for in accordance with their intent at that time. The impact
of this transaction on gross written and net earned premium is further
exemplified in Table III.
<PAGE>
13
SRA premiums assumed by X.L.E. relate solely to reinsurance protection to a
Bermuda insurer who provides certificates of financial responsibility to ship
owners for compliance with the U.S. Oil Pollution Act of 1990. Growth in this
area, merely reflects a change in buying pattern over 1995.
Risk solutions, one of the Company's new product lines, bound one such
policy during the third quarter. Risk solutions is an initiative with CIGNA
Property & Casualty (CIGNA) providing combined limits of capacity for two or
more of X.L.'s stand alone product lines over three or more years. In addition,
X.L. has commenced providing combined property capacity coverage with CIGNA.
X.L. bound two of these contracts during the quarter which are reflected in the
property line, together with continuing growth of X.L.'s traditional property
cover.
General liability continues to feel the impact of competitive pressures
from the U.S. domestic insurance market in both terms and pricing. Despite these
pressures, this division managed to retain 91% of its business renewing in the
quarter and write increased limits averaging $85.6 million compared to $77.8
million for the same quarter in 1995 over average attachments of $62.6 million
and $61.4 million, respectively. The increases in limits and new business
however did not provide sufficient premium to cover the business lost.
Directors and Officers liability was similarly impacted by U.S. domestic
competition, although professional liability was able to write a significant
level of new business over last year. Employment practices liability (EPL) is a
new product that was announced in the second quarter. Capacity of $100 million
is offered of which the Company retains 50% after reinsurance. These premiums
should not be considered indicative of future periods.
<PAGE>
14
Table III presents certain underwriting information with respect to the
business written by the Company for the periods indicated:
<TABLE>
<CAPTION>
Gross Net Net
-------------------- -------------------- --------------------
Table III Premiums Written Premiums Written Premiums Earned
- --------- -------------------- -------------------- --------------------
Three Months Ended August 31
1996 1995 1996 1995 1996 1995
-------- -------- -------- -------- -------- --------
(Unaudited)
<S> <C> <C> <C> <C> <C> <C>
General liability $134,051 $128,565 $108,944 $128,565 $ 86,768 $106,021
Directors and officers liability 7,180 7,541 7,180 7,541 5,754 6,789
Professional liability 24,100 11,794 24,100 11,794 14,483 13,737
Employment practices liability 1,534 - 931 - 121 -
Property 21,420 4,253 16,039 2,715 5,321 3,193
Risk solutions 16,058 - 10,296 - 61 -
Speciality reinsurance assumed (14,855) 96,460 (14,855) 96,460 12,029 9,479
-------- -------- -------- -------- -------- --------
189,488 248,613 152,635 247,075 124,537 139,219
Adjustment for multi-year premium (16,912) (14,855) (16,912) (74,289) - -
Reinsurance ceded - - 25,106 - 15,419 -
-------- -------- -------- -------- -------- --------
Adjusted premiums $172,576 $174,324 $160,829 $172,786 $139,956 $139,219
======== ======== ======== ======== ======== ========
</TABLE>
<PAGE>
15
Table IV presents an analysis of the Company's revenues from its portfolio
of investments and its investment in affiliate:
<TABLE>
<CAPTION>
Table IV Three Months Ended
- -------- August 31,
1996 1995 % Change
---- ---- --------
(unaudited)
<S> <C> <C> <C>
Net investment income $50,310 $39,085 28.7%
Net realized (losses) gains (4,603) 26,162 N/M
Equity in net earnings
of affiliate 13,081 18,449 (29.1%)
</TABLE>
Net investment income for the third quarter in 1995 included unrealized
currency losses of $12.2 million compared to $Nil for the comparative quarter in
1996, resulting in an adjusted decline of 1.9%. Investable assets on average,
were approximately the same in terms of amount and split between fixed income
and equity securities. Bond yields were increasing in the 1996 quarter and
sliding in the 1995 quarter creating similar results. Realized losses and gains
in the respective quarters are reflective of these changing yields.
Equity in net earnings of affiliate decreased principally due to the
Company's equity share of realized losses of $2.4 million versus realized gains
of $4.3 million in the comparative quarter in 1995.
<PAGE>
16
Table V sets forth the Company's combined ratios and the components thereof
for the periods indicated using U.S. generally accepted accounting principles:
<TABLE>
<CAPTION>
Table V Three Months Ended
------- August 31,
1996 1995
---- ----
(unaudited)
<S> <C> <C>
Loss and loss expense ratio 78.6% 78.4%
Underwriting expense ratio 16.4% 14.7%
Combined ratio 95.0% 93.1%
</TABLE>
The increase in the underwriting expense ratio was impacted by lower net
earned premium, as discussed previously, and increased expenses. The expenses
reflect the expanding operations of the Company in addition to some non-
recurring expenses associated with the Company's Tenth Anniversary, legal and
consulting expenses related to the acquisitions of the renewal rights of
American Excess Insurance Association's (AEIA) insurance book of business and a
share of Pareto Partners. These expenses are however offset by commissions
earned on business ceded under the General Liability Quota Share Treaty. After
adjusting net earned premiums and expense for the aforementioned items, the
underwriting ratio for the third quarter of 1996 would have been 14.9%
Net income was $64.5 million or $0.72 per share and $92.9 million or $0.91
per share for the quarters ended August 31, 1996 and August 31, 1995,
respectively, representing a decrease of 20.9% per share. The decrease in per
share amounts is largely attributable to the realization of investment losses of
$4.6 million versus gains of $26.2 million for the respective quarters.
<PAGE>
17
Results of Operations for the Nine Months Ended August 31, 1996
---------------------------------------------------------------
Compared to the Nine Months Ended August 31, 1995
-------------------------------------------------
The following table presents a summary analysis of the Company's
underwriting revenues for the periods indicated:
<TABLE>
<CAPTION>
Table I Nine Months Ended
- ------- August 31,
1996 1995 % Change
---- ---- --------
(unaudited)
<S> <C> <C> <C>
Gross premiums written $568,787 $498,737 14.0%
Net premiums written 460,158 496,557 (7.3%)
Net premiums earned 386,747 405,110 (4.5%)
</TABLE>
The increase in gross premiums written in 1996 was predominantly due to the
growth in SRA premiums, written primarily by XLRe as reflected in Table II.
These premiums are generally multi-year premiums, reflecting net future year
premiums of $41.4 million of the total $112.8 million recognized in the period.
Gross premiums written adjusted for this multi-year effect was $456.0 million
compared to adjusted premiums for the 1995 period of $436.5 million, an increase
of 4.5%.
Net premiums written were similarly affected by the multi-year premiums in
addition to the general liability quota share reinsurance policy which came into
effect on December 1, 1995. The policy covers general liability risks written on
a guaranteed cost form, with certain exclusions. X.L. cedes 20% of these risks
with a total limit of up to $100 million and 25% with a total limit in excess of
$100 million. Of the $92.5 million of the premiums ceded under this program,
$35.5 million related to the cession of the Company's unearned premiums as at
December 1, 1995 to provide reinsurance protection on its in force policies from
this date. The resulting adjustment as noted in Table III reflects an increase
of 1.3%. Net earned premiums adjusted for this treaty increased by 7.5%.
<PAGE>
18
The following table presents the split of gross premiums written by X.L.,
X.L.E and XLRe by line of business, for the periods indicated, adjusted for the
effects of multi-year premiums:
<TABLE>
<CAPTION>
Table II Nine Months Ended August 31,
- --------
1996 1995
---- ----
X.L. X.L.E. XLRe Total X.L. X.L.E. Total
-------- ------- ------ -------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
(Unaudited)
General liability $238,667 $44,059 - $282,726 $271,593 $53,853 $325,446
Directors and officers -
liability 16,009 1,742 - 17,751 17,259 2,148 19,407
Professional liability 32,032 5,175 - 37,207 26,429 5,305 31,734
Employment practices
liability 1,534 - - 1,534 - - -
Property 19,862 680 - 20,542 12,553 1,365 13,918
Risk solutions 4,372 - - 4,372 - - -
Specialty reinsurance
assumed 13,265 14,603 63,975 91,843 30,595 15,426 46,021
-------- ------- ------ -------- -------- ------- --------
Annualized premiums 325,741 66,259 63,975 455,975 358,429 78,097 436,526
Multi-year premiums (13,265) 13,410 110,966 112,812 57,436 4,775 62,211
-------- ------- -------- -------- -------- ------- --------
Gross premiums written $314,177 $79,669 $174,941 $568,787 $415,865 $82,872 $498,737
======== ======= ======== ======== ======== ======= ========
</TABLE>
XLRe is the primary writer of SRA. The SRA premiums written by X.L.
represent the culmination of specific negotiations which commenced prior to the
incorporation of XLRe. SRA policyholders are few in number with substantial
multi-year premiums. These policies characteristically allow for the return of
significant levels of premiums in the event no losses are incurred. This was the
case in the third quarter for two reinsureds which resulted in the return of
$10.8 million. Premiums assumed in the first nine months are not indicative of
future periods.
SRA premiums assumed by X.L.E. relate solely to reinsurance protection
provided to a Bermuda insurer who provides certificates of financial
responsibility to ship owners for compliance with the U.S. Oil Pollution Act of
1990. The decline in premiums over the comparative period in 1995 reflects the
development of the market where capacity was previously unavailable. It is
expected only a limited amount of additional premium will be assumed on this
program during the fourth quarter.
<PAGE>
19
The Company's new product lines, Risk Solutions and Employment Practices
Liability were introduced in the second and third quarters, respectively. The
former is an initiative with CIGNA providing combined limits of capacity for two
or more of X.L.'s stand alone product lines over three or more years. The
Company has bound two policies during the nine month period. In addition, X.L.
has commenced providing combined property capacity coverage with CIGNA. X.L.
bound two of these contracts during the quarter which are reflected in the
property line, together with continuing growth of X.L.'s traditional property
cover.
Of the Company's more traditional product lines, Professional liability was
the only other line experiencing growth from new business. General liability and
Directors and Officers liability continue to feel the impact of competitive
pressures from the U.S. domestic insurance market in both terms and pricing.
Business retention for General liability for the nine months was 88.3%, although
part of the lost business was the result of some of the insureds being merged or
acquired by others, resulting in an adjusted retention of 90.4%. Average limits
increased to $83.8 million from $78.1 million and average attachments increased
to $83.7 million from $72.2 million for the nine month periods ending August 31,
1996 and 1995, respectively. The additional premium that would be generated
under normal market conditions from increased limits were offset by higher
attachments. Retention for Directors and Officers liability for the same period
was 85.4%. Average limits were increased to $19.1 million from $18.6 million and
average attachments to $56.8 million from $49.2 million for the respective nine
month periods. Aside from the impact of the change in layering on pricing, the
main reason for the decline of these two lines is that new premium has been
insufficient to offset the business lost.
<PAGE>
20
Table III presents certain underwriting information with respect to the
business written by the Company for the periods indicated :
<TABLE>
<CAPTION>
Gross Net Net
----- --- ---
Table III Premiums Written Premiums Written Premiums Earned
- --------- ---------------- ---------------- ---------------
Nine Months Ended August 31
1996 1995 1996 1995 1996 1995
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
(Unaudited)
General liability $320,890 $323,389 $228,354 $323,389 $249,973 $317,755
Directors and officers
liability 19,424 19,407 19,424 19,407 18,286 21,048
Professional liability 39,427 28,962 39,427 28,962 41,672 40,493
Employment practices
liability 1,534 - 931 - 121 -
Property 32,515 10,268 24,362 8,088 15,302 8,693
Risk solutions 21,758 - 14,421 - 178 -
Speciality reinsurance
assumed 133,239 116,711 133,239 116,711 61,215 17,121
-------- -------- -------- -------- -------- --------
568,787 498,737 460,158 496,557 386,747 405,110
Adjustment for multi-
year premium (112,812) (62,211) (112,812) (62,211) - -
Reinsurance ceded - - 92,535 - 48,834 -
-------- -------- -------- -------- -------- --------
Adjusted premiums $455,975 $436,526 $439,881 $434,346 $435,581 $405,110
======== ======== ======== ======== ======== ========
</TABLE>
<PAGE>
21
The following table presents an analysis of the Company's revenues from its
portfolio of investments and its investment in affiliate:
<TABLE>
<CAPTION>
Table IV Nine Months Ended
-------- August 31,
1996 1995 % Change
---- ---- --------
(unaudited)
<S> <C> <C> <C>
Net investment income $148,332 $146,052 1.6%
Net realized gains 147,658 34,178 N/M
Equity in net earnings
of affiliate 43,476 39,047 11.3%
</TABLE>
Net investment income for the first nine months in 1995 included unrealized
currency losses of $8.0 million compared to $Nil for the comparative period in
1996, resulting in an adjusted decline of 3.7%. The decrease in investment
income was caused by several factors. Fixed income assets at amortized cost were
on average, approximately the same in terms of amount at $2.9 billion for the
comparable nine month period but the average equity securities held, at cost,
were higher for the 1996 period at $616.8 million compared to $552.0 million for
the equivalent period in 1995. This is reflective of the higher equity position
taken in August of 1995. Bond yields were increasing in the 1996 period and
sliding in the 1995 period creating the noted decline. In addition, the Company
has liquidated two fixed maturity portfolios and one equity portfolio due to
similarities in strategies between managers, creating an influx of cash and the
realization of significant gains. From the realized proceeds, $250 million was
used to capitalize XLRe.
<PAGE>
22
Equity in net earnings of affiliate increased principally due to MOCL's
improved income from operations.
The following table sets forth the Company's combined ratios and the
components thereof for the periods indicated using U.S. generally accepted
accounting principles:
<TABLE>
<CAPTION>
Table V Nine Months Ended
------- August 31,
1996 1995
---- ----
(unaudited)
<S> <C> <C>
Loss and loss expense ratio 79.0% 78.4%
Underwriting expense ratio 15.0% 15.1%
Combined ratio 94.0% 93.5%
</TABLE>
The increase in the loss and loss expense ratio reflects an increase in the
rate at which incurred but not reported reserves are established on the
Company's casualty lines of business, which commenced during the fourth quarter
of 1995.
The underwriting expense ratio remained relatively flat in the first nine
months of 1996 compared to the same period of 1995. The effect of commissions
earned on the new quota share reinsurance program was offset by some non-
recurring expenses associated with the Company's Tenth Anniversary and legal and
consulting expenses related to the acquisition of the renewal rights of American
Excess Insurance Association's (AEIA) insurance book of business and a share of
Pareto Partners.
Net income was $360.6 million or $3.88 per share and $244.3 million or
$2.31 per share for the nine months ended August 31, 1996 and 1995,
respectively, representing an increase of 68.0% per share. The increase in per
share amounts is largely attributable to realized investment gains of $147.7
million compared to $34.2 million and a decrease in the weighted average shares
outstanding from 105.7 million to 92.9 million.
<PAGE>
23
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
is limited to accumulated net realized profits, the Company's principal
subsidiary, X.L., must maintain certain minimum levels of statutory capital and
surplus, solvency and liquidity pursuant to Bermuda statutes and regulations. At
August 31, 1996, X.L. could have paid dividends in the amount of approximately
$1.1 billion. Neither the Company nor any of its subsidiaries other than X.L.
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, 1996 was $1.8 billion, of which $1.5 billion was retained earnings.
At August 31, 1996, total investments and cash net of the payable for
investments purchased were $3.6 billion compared to $3.8 billion at November 30,
1995.
The Company purchased a further 7.9 million of its outstanding shares
during the nine months ended August 31, 1996, at a cost of $271.3 million,
increasing its treasury holding to 23.9 million shares. The Company has 3.1
million shares remaining in its authorized share repurchase program.
The Company's fixed income investments (including short-term investments
and cash and cash equivalents net of the payable for investments purchased) at
August 31, 1996 represented approximately 80% of invested assets and were
managed by several outside investment management firms with different
strategies. All fixed income securities are of investment grade and include U.S.
and non-U.S. sovereign government obligations and corporate and other
securities. Of the Company's fixed income portfolio, 72% is rated Aa or AA or
better by a nationally recognized rating agency or an investment manager. Cash
and cash equivalents net of the payable for investments purchased was $281.8
million at August 31, 1996, compared to $437.1 million at November 30, 1995.
<PAGE>
24
In connection with the Company's investment in MOCL, the Company has
confirmed to MOCL that, subject to certain conditions, it will not, prior to May
1998, without the consent of the Directors of MOCL, increase its ownership of
MOCL shares if, as a result, it would own more than 30% of MOCL's outstanding
voting shares or more than 25% of MOCL's shares on a fully diluted basis. In
connection with the previously announced authorization by the Directors of MOCL
for the repurchase of up to $75 million of MOCL shares, the Company has
confirmed its intention to decrease proportionately the number of shares of MOCL
owned by it so as to maintain its percentage ownership of MOCL at a level no
greater than at present.
In fiscal 1994, 1995 and in fiscal 1996 through August 31, the total amount
of losses paid by the Company was $138.7 million, $188.5 million and $282.5
million, respectively.
Insurance practices and regulatory guidelines suggest that property and
casualty insurance companies maintain a ratio of net premiums written to
statutory capital and surplus of not greater than 3 to 1, with a lower ratio
considered to be more prudent for a company that insures the types of exposures
written by X.L. X.L. maintained a ratio of less than 0.9 to 1 for the year ended
November 30, 1995 and 0.5 to 1 (calculated on an annualized basis) for the nine
months ended August 31, 1996. The decrease is reflective of a decrease in gross
premiums written on X.L.'s traditional lines coupled with the premiums ceded
under the general liability quota share treaty which was effective December 1,
1995.
X.L. 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. X.L. calculates such reserves by using
actuarial and other reserving techniques to project the estimated ultimate net
liability for losses and loss expenses. No assurance can be given that actual
claims made and payments related thereto will not be in excess of the amounts
reserved.
<PAGE>
25
Inflation can have an effect on the Company in that inflationary factors
can increase damage awards and potentially result in more claims exceeding
applicable minimum attachment points. The Company's underwriting philosophy is
to adjust premiums in response to inflation, although this may not always be
possible due to competitive pressures. Inflationary factors are considered in
determining the premium level on multi-year policies at the time the contracts
are written. In addition, the Company from time to time evaluates whether
minimum attachment points should be raised to take into account inflationary
factors; as of this date, no revisions to minimum attachment points have been
implemented.
Subsequent Events
- -----------------
Subsequent to the quarter end X.L. made two acquisitions; AEIA, where the
Company acquired its assets, (principally their underwriting files) and Railroad
Association Insurance, Ltd. (RAIL). Neither acquisition will materially affect
cashflows, although the fee associated with the former will increase the expense
ratio over approximately the next two years. The size of the increase will be
dependent on the level of policies renewing with X.L.
Outlook
-------
The Company believes competitive pressures will continue throughout fiscal
1996 and constrain growth in the Company's traditional product lines. However,
the Company believes specific opportunities will exist through the further
growth of the Company's property product line, the release of the new employment
practices liability product, XLRe and Risk Solutions. The Company may also
experience some growth through the renewal of the AEIA book over the next year,
although there is no guarantee that the Company will secure all of this business
or any significant portion thereof. The acquisition of RAIL however will result
in an increase in gross premiums written, but will not be material to the
Company's total book of business.
<PAGE>
26
EXEL LIMITED
PART II - OTHER INFORMATION
---------------------------
ITEM 6. - EXHIBITS AND REPORTS ON FORM 8-K
- ------------------------------------------
(a) Exhibit 11. Statement regarding Computation of Per Share Earnings.
(b) There were no reports on Form 8-K filed during the three months ended
August 31, 1996.
<PAGE>
Exhibit 11
27
EXEL LIMITED
COMPUTATION OF EARNINGS PER ORDINARY SHARE AND
ORDINARY SHARE EQUIVALENT
(U.S. dollars in thousands except
per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
August 31, August 31,
1996 1995 1996 1995
(Unaudited) (Unaudited)
(U.S. Dollars in thousands except per
share amounts)
<S> <C> <C> <C> <C>
(A) Earnings per ordinary
share and ordinary share
equivalent -- primary:
Weighted average shares
outstanding................ 89,026 101,174 91,890 105,042
Average stock options
outstanding (net of
repurchased shares
under the treasury
stock method)............. 816 876 1,045 694
------- -------- -------- --------
Weighted average ordinary
shares and ordinary
share equivalents
outstanding............... 89,842 102,050 92,935 105,736
------- -------- -------- --------
Net income:
Actual net income......... $64,545 $ 92,903 $360,620 $244,316
Assumed earnings on
excess option proceeds.... - - - -
------- -------- -------- --------
Adjusted net income......... $64,545 $ 92,903 $360,620 $244,316
------- -------- -------- --------
Earnings per ordinary
share and ordinary
share equivalent.......... $ 0.72 $ 0.91 $ 3.88 $ 2.31
======= ======== ======== ========
</TABLE>
<PAGE>
28
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
August 31, August 31,
1996 1995 1996 1995
(Unaudited) (Unaudited)
(U.S. Dollars in thousands except per share
amounts)
<S> <C> <C> <C> <C>
(B) Earnings per ordinary
share and ordinary share
equivalent -- assuming full
dilution:
Weighted average shares
outstanding................ 89,026 101,174 91,890 105,042
Average stock options
outstanding (net of
repurchased shares
under the treasury
stock method).............. 816 948 1,045 972
------- -------- -------- --------
Weighted average ordinary
shares and ordinary
share equivalents
outstanding................ 89,842 102,122 92,935 106,014
------- -------- -------- --------
Net income:
Actual net income.......... $64,545 $ 92,903 $360,620 $244,316
Assumed earnings on
excess option proceeds... - - - -
------- -------- -------- --------
Adjusted net income.......... $64,545 $ 92,903 $360,620 $244,316
======= ======== ======== ========
Earnings per ordinary
share and ordinary
share equivalent........... $ 0.72 $ 0.91 $ 3.88 $ 2.30
======= ======== ======== ========
</TABLE>
<PAGE>
29
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)
September 23, 1996 /s/ Brian M. O'Hara
_______________________
Brian M. O'Hara
President and
Chief Executive Officer
September 23, 1996 /s/ Brian G. Walford
______________________
Brian G. Walford
Executive Vice President and
Chief Financial Officer
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<LEGEND> 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.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> NOV-30-1996
<PERIOD-START> DEC-01-1995
<PERIOD-END> AUG-31-1996
<DEBT-HELD-FOR-SALE> 2,602,559
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 716,082
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 3,318,641
<CASH> 288,490
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 33,081
<TOTAL-ASSETS> 4,549,493
<POLICY-LOSSES> 1,985,580
<UNEARNED-PREMIUMS> 667,433
<POLICY-OTHER> 26,032
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 0
<COMMON> 874
0
0
<OTHER-SE> 1,808,832
<TOTAL-LIABILITY-AND-EQUITY> 4,549,493
386,747
<INVESTMENT-INCOME> 148,332
<INVESTMENT-GAINS> 147,658
<OTHER-INCOME> 43,476
<BENEFITS> 305,667
<UNDERWRITING-AMORTIZATION> 26,637
<UNDERWRITING-OTHER> 31,164
<INCOME-PRETAX> 362,745
<INCOME-TAX> 2,125
<INCOME-CONTINUING> 360,620
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 360,620
<EPS-PRIMARY> 3.88
<EPS-DILUTED> 3.88
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
