<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 FEBRUARY 28, 1997
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
March 24, 1997 was 85,594,021 excluding 26,145,700 shares held in treasury.
<PAGE>
2
EXEL LIMITED
INDEX TO FORM 10-Q
Part I. FINANCIAL INFORMATION
-----------------------------
Page No.
--------
Item 1. Financial Statements:
Consolidated Balance Sheets
February 28, 1997 (unaudited) and
November 30, 1996 3
Consolidated Statements of Income
Three Months Ended February 28, 1997
and February 29, 1996 (unaudited) 5
Consolidated Statements of Cash Flows
Three Months Ended February 28, 1997
and February 29,1996 (unaudited) 6
Notes to Unaudited Consolidated
Financial Statements 8
Item 2. Management's Discussion and Analysis
of Results of Operations and
Financial Condition 10
Part II. OTHER INFORMATION
--------------------------
Item 6. Exhibits and Reports on Form 8-K 21
Signatures 24
<PAGE>
3
EXEL LIMITED
CONSOLIDATED BALANCE SHEETS
(U.S. dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
February 28, November 30,
1997 1996
---- ----
(Unaudited)
ASSETS
<S> <C> <C>
Investments:
Fixed maturities, at market....................
value (amortized cost : 1997 - $2,575,469;
1996 - $2,812,415)............................. $2,580,216 $2,844,877
Equity securities, at market
value (cost: 1997 - $616,239;
1996 - $595,149)............................... 840,179 812,050
Short-term investments, at market
value (amortized cost: 1997 - $180,932;
1996 - $115,791)............................... 181,010 115,999
---------- ----------
Total Investments.............................. 3,601,405 3,772,926
Cash and cash equivalents........................ 436,623 252,734
Investment in affiliates
(cost: 1997 - $280,748; 1996 - $280,748)......... 419,229 414,891
Investment in partnerships....................... 25,573 23,803
Accrued investment income........................ 40,305 55,729
Deferred acquisition costs....................... 26,215 30,383
Prepaid reinsurance premiums..................... 73,105 63,467
Premiums receivable.............................. 307,489 345,082
Reinsurance balances receivable.................. 62,448 46,444
Other assets..................................... 25,329 26,079
Receivable for investments sold.................. 7,608 --
---------- ----------
Total Assets................................... $5,025,329 $5,031,538
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Unpaid losses and loss expenses................ $2,147,689 $2,099,096
Unearned premium............................... 646,305 679,535
Premium received in advance.................... 36,081 24,256
Accounts payable and accrued liabilities....... 35,225 39,171
Reinsurance premiums payable................... 35,236 31,347
Payable for investments purchased.............. -- 42,095
---------- ----------
Total Liabilities.............................. $2,900,536 $2,915,500
========== ==========
</TABLE>
<PAGE>
4
<TABLE>
<CAPTION>
February 28, November 30,
1997 1996
------------ ------------
(Unaudited)
<S> <C> <C>
Contingencies and commitments
Shareholders' Equity:
Ordinary shares (par value $0.01:
authorized, 999,990,000 shares;
issued and outstanding, 86,297,421 shares
(excluding 25,442,300 shares held in
treasury) at February 28, 1997 and
87,170,644 shares (excluding 24,205,100
shares held in treasury) at November 30, 1996 863 872
Contributed surplus.......................... 291,160 282,980
Net unrealized appreciation on investments 230,569 256,430
Deferred compensation........................ (13,721) (4,169)
Retained earnings............................ 1,615,922 1,579,925
---------- ----------
Total shareholders' equity.......... $2,124,793 $2,116,038
---------- ----------
Total liabilities and
shareholders' equity................ $5,025,329 $5,031,538
========== ==========
</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 Ended
February 28, February 29,
1997 1996
------------ ------------
(Unaudited)
Revenues:
<S> <C> <C>
Net premiums earned....................... $119,837 $130,258
Net investment income..................... 51,557 47,773
Net realized gains on sale of investments. 32,613 136,059
Equity in net earnings of affiliates...... 13,155 16,113
-------- --------
Total revenues...................... 217,162 330,203
-------- --------
Expenses:
Losses and loss expenses.................. 84,960 104,206
Acquisition costs......................... 9,907 8,572
Administration expenses................... 11,584 9,099
-------- --------
Total expenses...................... 106,451 121,877
-------- --------
Income before income tax expense............ 110,711 208,326
Income tax expense.......................... 2,593 1,237
-------- --------
Net income.................................. $108,118 $207,089
======== ========
Weighted average number of
ordinary shares and
ordinary share equivalents
outstanding............................... 87,835 95,604
Net income per ordinary
share and ordinary share equivalent....... $ 1.23 $ 2.17
Dividends declared per share................ $ 0.32 $ 0.20
</TABLE>
See accompanying notes to Consolidated Financial Statements.
<PAGE>
6
EXEL LIMITED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(U.S. dollars in thousands)
<TABLE>
<CAPTION>
Three Months Ended
February 28, February 29,
1997 1996
------------ ------------
(Unaudited)
<S> <C> <C>
Cash flows from operating activities
Net income................................. $ 108,118 $ 207,089
Adjustments to reconcile net income
to net cash provided by operating
activities:
Net realized gains on sale of
investments.............................. (32,613) (136,059)
Amortization of premium on fixed
maturities............................... 325 1,131
Amortization of deferred compensation...... 797 314
Equity in earnings of affiliate net of
dividends received....................... (6,013) (13,705)
Unpaid losses and loss expenses............ 48,593 77,819
Unearned premiums.......................... (33,230) 70,972
Premiums received in advance............... 11,825 (3,042)
Deferred acquisition costs................. 4,168 6,941
Prepaid reinsurance premiums............... (9,638) (37,517)
Premiums receivable........................ 37,593 (70,379)
Reinsurance balances receivable............ (16,004) (14,133)
Reinsurance premiums payable............... 3,889 15,958
Accrued investment income.................. 15,424 7,572
Accounts payable and accrued liabilities... (3,946) (3,847)
---------- ----------
Total adjustments........................ 21,170 (97,975)
---------- ----------
Net cash provided by operating
activities............................... 129,288 109,114
---------- ----------
Cash flows provided by (used in)
investing activities:
Proceeds from sale of fixed maturities
and short-term investments............... 4,030,688 2,108,284
Proceeds from redemption of fixed
maturities and short-term
investments.............................. 25,100 40,500
</TABLE>
<PAGE>
7
<TABLE>
<CAPTION>
Three Months Ended
February 28, February 29,
1997 1996
------------ ------------
(Unaudited)
<S> <C> <C>
Proceeds from sale of equity securities... 90,977 319,973
Purchases of fixed maturities and
short-term investments.................. (3,936,390) (2,506,587)
Purchases of equity securities............ (77,074) (100,549)
Deferred (losses) gains on forward hedge
contracts............................... (3,381) 2,203
Investment in limited partnerships........ (1,770) -
Other assets.............................. 750 (784)
----------- -----------
Net cash provided by (used in) investing
activities.............................. 128,900 (136,960)
----------- -----------
Cash flow (used in) provided by
financing activities:
Dividends paid............................ (27,612) (18,856)
Issuance of shares........................ 362 126
Proceeds from exercise of options......... 1,427 1,625
Repurchase of treasury shares............. (48,476) (22,155)
----------- -----------
Net cash used in financing activities....... (74,299) (39,260)
----------- -----------
Increase (decrease) in cash and cash
equivalents............................... 183,889 (67,106)
----------- -----------
Cash and cash equivalents - beginning
of period................................. 252,734 673,433
----------- -----------
Cash and cash equivalents - end
of period................................... $ 436,623 $ 606,327
=========== ===========
</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 (together with its subsidiaries, 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, 1996 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, 1996,
and footnotes thereto, included in the Company's Annual Report on Form 10-K
(No. 1-10804).
All share amounts have been adjusted for one-for-one stock dividend paid
to shareholders of record on July 26, 1996.
<PAGE>
9
NOTE B - INVESTMENT IN AFFILIATE
Summarized condensed financial information of Mid Ocean Limited, a 26% (1996 -
28%) owned affiliate, which is accounted for by the equity method, is as follows
(U.S. dollars in thousands):
<TABLE>
<CAPTION>
Quarter ended January 31,
Income Statement Data 1997 1996
------------- ------------
(Unaudited)
<S> <C> <C>
Net premiums earned $ 108,077 $ 102,106
Net investment income 23,840 19,046
Net realized gains on sale of
investments 2,658 9,181
Net income $ 52,003 $ 57,814
========== ==========
Company's share of net income $ 13,296 $ 16,113
========== ==========
January 31, October 31,
Balance Sheet Data 1997 1996
----------- -----------
(Unaudited)
Cash, investments and accrued interest $1,619,178 $1,539,259
Other assets 637,774 483,440
---------- ----------
Total assets $2,256,952 $2,022,699
========== ==========
Reserves for losses and loss expenses $ 438,982 $ 422,252
Reserves for unearned premiums 436,525 287,494
Other liabilities 195,636 195,754
Shareholders' equity 1,185,809 1,117,199
---------- ----------
Total liabilities and shareholders' equity $2,256,952 $2,022,699
========== ==========
Company's share of shareholders' equity $ 303,188 $ 314,256
========== ==========
</TABLE>
The Company received dividends from its affiliate of $7.3 million and $2.4 for
the quarters ended January 31, 1997 and 1996, respectively.
<PAGE>
10
EXEL LIMITED
------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
---------------------------------------
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
---------------------------------------------
Results of Operations for the Three Months Ended February 28,1997
-----------------------------------------------------------------
Compared to the Three Months Ended February 29, 1996
----------------------------------------------------
Table I presents an analysis of the Company's underwriting revenues for the
periods indicated:
Table I
-------
<TABLE>
<CAPTION>
Three Months Ended
February 28, February 29,
1997 1996 % Change
---- ---- --------
(unaudited)
<S> <C> <C> <C>
Gross premiums written $104,350 219,130 (52.4)%
Net premiums written 76,969 163,713 (53.0)
Net premiums earned 119,837 130,258 (8.0)
</TABLE>
The decrease in gross premiums written in the first quarter of 1997 was
impacted by the cancellation of two specialty reinsurance assumed ("SRA")
contracts written in the first quarter of 1996, resulting in the return of $56.0
million in premium. Of this amount $46.8 million was unearned. In addition, in
the first quarter of 1996, another SRA contract was written retroactively from
June 1, 1995 resulting in a premium of $22.5 million over three years. Further
discussion is provided on these matters following Table II.
Gross premiums written are also affected by the level of multi-year
policies written or as in the above case, cancelled in any given year. If gross
premiums were adjusted for this multi-year effect, adjusted premiums would be
$135.1 million and $177.9 million for 1997 and 1996, respectively. If, in
addition, the above mentioned SRA items were also excluded, gross premiums
written would be $141.2 million and $150.7 million, respectively.
A discussion of the decline in net premiums written and net premiums earned
can be found following Table III.
<PAGE>
11
Table II presents the split of gross premiums written by X.L. Insurance
Company, Ltd. (X.L.) and X.L. Europe Insurance (X.L.E.)and X.L. Reinsurance
Company, Ltd. (XLRe) adjusted for the effects of multi-year premiums:
<TABLE>
<CAPTION>
Table II
- --------
Three Months Ended
February 28, 1997 February 29, 1996
X.L. X.L.E. XLRe Total X.L. X.L.E. XLRe Total
--------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
General
liability $ 73,911 $16,763 - $ 90,674 $ 83,301 $20,645 $ - $103,946
Directors
and officers
liability 3,958 391 - 4,349 4,513 454 - 4,967
Professional
liability 3,797 1,195 - 4,992 3,804 992 - 4,796
Employment
practices
liability 4,249 - - 4,249 - - - -
Property 4,332 981 - 5,313 3,787 - - 3,787
X.L. Risk
Solutions 3,260 - - 3,260 - - - -
Specialty
reinsurance
assumed 5,468 4,695 12,058 22,221 10,150 9,723 40,562 60,435
--------------------------------------------------------------------------------
Annualized
premiums 98,975 24,025 12,058 135,058 105,555 31,814 40,562 177,931
Multi-year
premiums 17,254 (940) (47,022) (30,708) (28,400) 77 69,522 41,199
--------------------------------------------------------------------------------
$116,229 $23,085 $(34,964) $104,350 $ 77,155 $31,891 $110,084 $213,120
================================================================================
</TABLE>
The decline in gross written premiums on an annual basis is largely due to
anomalies in the SRA line and the continuing competitive pressures felt by the
general liability product line. Directors and officers and professional
liability remain relatively flat, while employment practices liability continues
to grow. The other growth areas include the property and X.L. Risk Solutions
product lines.
<PAGE>
12
As disclosed in previous filings, some SRA policies can have significant
premiums due to the nature of the risks and the multi-year coverage. These
policies can be 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 quarter, two
reinsureds with XLRe cancelled and entered into new contracts, resulting in the
return of $56.0 million in premium of which $9.2 million had been earned. The
net expense of the $9.2 million was offset by the release of the same amount
accrued in experience reserves. Because of the apparent 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 net of
experience contributions has been recorded, resulting in premium of $3.1
million. The intent of the other existing property reinsureds will be assessed
at the first anniversary of their contracts and will be accounted for in
accordance with their intent at that time.
During the first quarter of 1996 X.L. wrote an SRA policy retroactively
from June 1, 1995 resulting in an adjusted premium of 15.3 million and a future
year premium of $7.3 million. The latter amount will not be recognized in annual
premium until the third quarter of 1997.
SRA premiums assumed by X.L.E. relate mostly to reinsurance protection to a
Bermuda insurer which provides certificates of responsibility to ship owners for
compliance with the U.S. Oil Pollution Act of 1990. Premiums from this program
have decreased by approximately $6.0 million, largely due to a recent
restructuring of the facility to an excess of loss basis from a quota share
basis.
X.L. Risk Solutions was introduced late in the second quarter of 1996.
X.L. Risk Solutions is a coordinated initiative with CIGNA Risk Solutions,
between the Company and CIGNA Property and Casualty ("CIGNA"). It provides
combined limits of capacity for two or more of the Company's stand alone product
lines over three or more years. In addition, the Company has commenced providing
combined capacity coverage with CIGNA which is reflected in the property line,
together with the continuing growth of the Company's traditional property cover.
Employment practices liability was also introduced late in the second
quarter of 1996, with the first premium written during the third quarter of said
fiscal year.
<PAGE>
13
General liability insurance results continue to reflect the impact of
competitive pressures from the U.S. domestic market and Lloyds of London.
Despite these pressures, this division managed to maintain 84.5% of its
business. Excluding insureds acquired by existing insureds, this ratio increased
to 87.0%. The retention ratio for the same period in 1996 was 88.3%. The decline
was largely caused by X.L.E. having a retention ratio of 75.6%. Average
attachments on premiums written increased from $108.4 million to $129.8 million
and limits increased from $84.4 million to $88.0 million for the quarters ended
February 29, 1996 and February 28, 1997, respectively.
Table III presents certain underwriting information with respect to the
business written by the Company for the periods indicated:
Table III
- ---------
<TABLE>
<CAPTION>
Gross Net Net
Premiums Written Premiums written Premiums earned
---------------- ----------------- ----------------
Three Months Ended
Feb. 28, Feb. 29, Feb. 28, Feb.29, Feb. 28, Feb. 29,
1997 1996 1997 1996 1997 1996
---- ---- ---- ---- ---- ----
(Unaudited)
<S> <C> <C> <C> <C> <C> <C>
General liability $ 94,739 $104,341 $ 71,420 $ 50,168 $ 75,425 $ 82,167
Directors and officers
liability 5,284 4,967 5,284 4,967 5,504 6,275
Professional liability 6,844 5,555 6,844 5,555 12,507 13,371
Employment practices
liability 4,249 - 2,603 - 821 -
Property 9,480 5,810 8,206 4,566 5,321 4,897
Risk solutions 8,555 - 7,413 - 1,671 -
Reinsurance assumed (24,801) 98,457 (24,801) 98,457 18,588 23,548
----------------------------------------------------------------------------------
104,350 219,130 76,969 163,713 119,837 130,258
Multi year premiums 30,708 (41,199) 21,993 (41,199) - -
Annual adjustment for
reinsurance assumed
contracts 6,180 (27,250) 6,180 (27,250) 7,729 (5,972)
Reinsurance general
liability quota
share of unearned
premium - - - 35,544 - -
----------------------------------------------------------------------------------
$141,238 $150,681 $105,142 $130,808 $127,566 $124,286
==================================================================================
</TABLE>
<PAGE>
14
Net premiums written were affected by the SRA anomalies and multi-year
adjustments. In addition, the 1996 quarter reflects the cession of part of the
general liability unearned premium reserve of $35.5 million on the commencement
of the quota share treaty, December 1, 1995. With effect from December 1, 1996
general liability premiums written under the managed alternate rating
methodology are also included which resulted in $7.0 million in premiums ceded.
In addition, the employment practices liability, X.L. Risk Solutions and
property business lines are all subject to reinsurance.
Net earned premiums were also impacted by the SRA volatility. As disclosed
above, if these SRA premiums had been excluded, net earned premiums would have
been $127.6 million and $124.3 million for 1997 and 1996, respectively.
Table IV presents an analysis of the Company's revenues from its portfolio
of investments and its investment in affiliates:
Table IV
--------
<TABLE>
<CAPTION>
Three Months Ended
February 28, February 29,
1997 1996 % Change
---- ---- --------
(unaudited)
<S> <C> <C> <C>
Net investment income $51,557 $ 47,773 7.9%
Net realized gains 32,613 136,059 N/M
Equity in net earnings
of affiliates 13,155 16,113 (18.3)
</TABLE>
Net investment income has increased due to the higher performance of the
U.S. bond market over the same quarter last year.
The significant gains realized in 1996 were the result of the liquidation
of two fixed maturity portfolios and one equity portfolio due to similarities in
strategies between managers. During the first quarter of 1997, the fixed
maturity portfolio was extensively restructured, realizing losses of $5.2
million. The equity managers took $37.8 million in gains of which $8.9 million
were gains realized by a synthetic equity portfolio. A further discussion of
these derivatives is included under "Financial Condition and Liquidity below" .
The decrease in equity earnings in affiliates is attributable to Mid Ocean
Limited ("MOCL") having a 10% decline in its net income. In addition the
Company's ownership MOCL interest in decreased from approximately 27.9% to 25.6%
compared to the prior quarter, following the exercise of options by MOCL's
founding shareholders.
<PAGE>
15
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>
Three Months Ended
February 28, February 29,
1997 1996
---- ----
(unaudited)
<S> <C> <C>
Loss and loss expense ratio 70.9% 80.0%
Underwriting expense ratio 17.9% 13.6%
Combined ratio 88.8% 93.6%
</TABLE>
The decrease in the loss and loss expense ratio is the result of several
factors. There was a net release of short-tail reserves of $3.8 million and a
pull down effect caused by the release of SRA experience reserves, returned as
premium in the amount of $9.2 million, as previously mentioned. After adjusting
for these items the loss ratio would have been 75.9%. The decrease in the
adjusted ratio reflects the reserving methodology on the SRA business, which is
established on a contract by contract basis. A significant component of this
business has been short tail, and due to the level of attachments involved, no
incurred but not reported reserves ("IBNR") has been accrued on several
contracts.
The return of the SRA premiums also affected the expense ratio. In
addition, during the fourth quarter of 1996 X.L. acquired the assets of the
American Excess Insurance Association ("AEIA"). X.L. is subject to a fee based
upon the level of the AEIA book that binds with X.L. This fee will be expensed
over five years. After adjusting for the aforementioned items, the expense ratio
would have been 15.4%.
Net income was $108.1 million or $1.23 per share and $207.1 million per
share or $2.17 per share for the quarters ended February 28, 1997 and February
29, 1996, respectively, representing a decrease of 43.3% per share. The decrease
in per share amounts is primarily due to realized investment gains of $32.6
million compared to $136.1 million for the respective quarters.
<PAGE>
16
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, X.L. must maintain certain
minimum levels of share capital, solvency and liquidity pursuant to Bermuda
statutes and regulations. At February 28, 1997, X.L. could have paid dividends
in the amount of approximately $1.2 billion. Neither the Company nor any of its
subsidiaries other than X.L. and XLRe 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 February 28, 1997 was $2.1 billion, of which
$1.6 billion was retained earnings.
At February 28, 1997, total investments and cash net of unsettled
investment trades were $4.0 billion, unchanged from November 30, 1996. The
Company's fixed income investments (including short-term investments and cash
equivalents) at February 28, 1997 represented approximately 79% of invested
assets and were managed by several outside investment management firms with
different strategies. Substantially all fixed income securities are of
investment grade, and approximately 66% 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 $444.2 million at February 28,
1997, compared to $210.6 million at November 30, 1996.
In fiscal 1996 and in fiscal 1997 through February 28, the total amount of
losses paid by the Company was $302.6 million and $51.4 million, respectively.
<PAGE>
17
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 0.5 to 1 (calculated on an annual
basis) for the three months ended February 28, 1997 and for the year ended
November 30, 1996.
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. No assurance can be given
that actual claims made and payments related thereto will not be in excess of
the amounts reserved.
The Company commenced its initial share buy back program in September 1993
as authorized by the Board of Directors and obtained approval for subsequent
programs as each program was completed. As at February 28, 1997 the Company had
repurchased 25.4 million shares in total. During the quarter then ended, the
Company had purchased 1.2 million shares at a cost of $48.5 million leaving 1.6
million shares out of the 5 million shares authorized by the Board of Directors
on June 28, 1996. On January 24, 1997 the Board of Directors authorized the
repurchase of a further 3 million shares.
Derivative Financial Instruments
- --------------------------------
Foreign Currency Risk Management
--------------------------------
As part of its current investment strategy, the Company invests in non-U.S.
Dollar denominated fixed maturities and equities. The Company hedges the
majority of the foreign currency exposure 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. When an investment
is sold, the related foreign exchange sale contract is closed by entering into
an offsetting purchase. At February 28, 1997 the Company had, as hedges, foreign
exchange contracts for the sale of $262.7 million and the purchase of $30.8
million of foreign exchange at fixed rates, primarily Australian Dollars (15% of
net contract value), German Marks (15%), Japanese Yen (13%), Canadian Dollars
(12%) and Swedish Kroners (12%). No other currency was greater than 10%. The
market value of non-U.S. Dollar fixed maturities held by the Company as at
February 28, 1997 was $225.00 million. The balance of the hedges are being
utilized to cover currency exposure on accrued interest.
<PAGE>
18
Foreign Currency Risk Management (Continued)
--------------------------------
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 February 28, 1997, unrealized deferred gains
amounted to $1.2 million, and were offset by corresponding decreases in the
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 February 28, 1997, realized deferred
losses amounted to $0.1 million.
The Company uses foreign exchange contracts to manage the foreign exchange
risk of fluctuating foreign currencies on the value of its non-U.S. Dollar
equity investments. 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. At February 28, 1997, the Company had such forward contracts
outstanding of $358.2 million, with unrealized gains of $12.6 million. Gains of
$1.6 million were realized during the three month period then ended. Based on
the outstanding contracts' value, a 5% appreciation or devaluation of the U.S.
Dollar as compared to the level of other currencies under contract at February
28, 1997 would have resulted in approximately $22.0 million or $2.5 million in
unrealized gains, respectively.
The Company also manages exchange risk for a particular non-U.S. Dollar
fixed maturity portfolio in a manner similar to that of its non-U.S. Dollar
equity portfolio. The Company had outstanding forward contracts for sale of
$208.6 million and for purchase of $41.4 million of foreign currencies at fixed
rates. A 5% appreciation or devaluation of the U.S. Dollar as compared to the
other currencies under contract at February 28, 1997 would have resulted
approximately in unrealized gains of $7.6 million and unrealized losses of $9.2
million. The market value of the non-U.S. Dollar fixed maturities held was
$154.0 million.
<PAGE>
19
Foreign Currency Risk Management (Continued)
--------------------------------
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 February 28, 1997, the Company had $4.2 million of such contracts
outstanding, and had recognized a minimal amount in realized and unrealized
losses for the three month period. Based on this value, a 5% appreciation or
devaluation of the U.S. Dollar as compared to the level of other currencies
under contract at February 28, 1997 would have had no material effect on income.
Speculative Financial Instruments
---------------------------------
In accordance with its current investment guidelines, the Company may
invest up to 30% of its investment portfolio in equity securities. During 1996
these guidelines were amended so that this exposure could be obtained by direct
holdings of publicly traded equities and by investing in a synthetic portfolio.
In this synthetic equity portfolio, S&P 500 Index futures are held with an
exposure approximately equal in amount to the market value of underlying assets
held in this fund. As at February 28, 1997, the portfolio held $259.8 million in
exposure to S&P 500 Index futures together with fixed maturities, short-term
investments and cash amounting to $260.7 million. Based on this value, a 5%
increase or decrease in the price of these futures would have resulted in
positions of $272.7 million and $246.8 million respectively. The value of the
futures is updated daily with the change recorded in income as a realized gain
or loss. For the quarter ended February 28, 1997, net realized gains from index
futures totalled $8.9 million.
With the introduction of the new fixed maturity managers during February
1997, certain managers may utilize derivative instruments to add value to the
investments they manage where they believe market deficiencies exist. Once such
manager had bond futures outstanding of $111.0 million with underlying
investments having a market value of $784.1 million at February 28, 1997. (All
managers are restricted from leveraging their derivative positions). A 5%
appreciation or devaluation of these bond futures at this time would have
resulted approximately in unrealized gains of $5.6 million and unrealized losses
of $5.5 million.
<PAGE>
20
Speculative Financial Instruments (Continued)
---------------------------------
Another investment manager utilizes both stock and bond futures in the
global market to take advantage of market deficiencies between countries and
types of securities. All futures are collateralized by U.S. Treasury securities.
The total stock and bond futures' exposure at February 28, 1997 for this manager
was $27.6 million with underlying investments having a value of $51.9 million. A
5% appreciation or devaluation of these futures would have resulted
approximately in unrealized gains of $1.4 million and unrealized losses of $1.4
million.
Current Outlook
- ---------------
The Company believes competitive pressures will continue throughout fiscal
1997 and constrain growth in the Company's traditional product lines. However,
the Company believes specific opportunities will exist in 1997 for growth in the
Company's property, X.L. Risk Solutions and employment practices liability
product lines, XLRe's specialty reinsurance lines, further developments in non-
U.S. business and selected types of political risk insurance.
The Company undertakes no lobligation to update publicly changes in its
beliefs expressed herein.
<PAGE>
21
EXEL LIMITED
PART II - OTHER INFORMATION
---------------------------
ITEM 6. - EXHIBITS AND REPORTS ON FORM 8-K
- ------------------------------------------
Exhibit 11. Statement regarding Computation of Per Share Earnings.
No reports on Form 8-K were filed during the three month period ended
February 28, 1997.
<PAGE>
Exhibit 11
22
EXEL LIMITED
COMPUTATION OF EARNINGS PER ORDINARY SHARE AND
ORDINARY SHARE EQUIVALENT
<TABLE>
<CAPTION>
Three Months Ended
February 28, February 29,
1997 1996
------------ ------------
(unaudited)
(U.S. dollars in thousands except
per share amounts)
<S> <C> <C>
(A) Earnings per ordinary
share and ordinary share
equivalent -- primary:
Weighted average shares
outstanding.............. 86,858 94,476
Average stock options
outstanding (net of
repurchased shares
under the treasury
stock method)............ 977 1,128
------- -------
Weighted average ordinary
shares and ordinary
share equivalents
outstanding.............. 87,835 95,604
======= =======
Net income:
Actual net income........ $108,118 $207,089
Assumed earnings
on excess option
proceeds............... - -
------- -------
Adjusted net income........ $108,118 $207,089
======== ========
Earnings per ordinary
share and ordinary
share equivalent......... $1.23 $2.17
======== ========
</TABLE>
<PAGE>
23
<TABLE>
<CAPTION>
Three Months Ended
February 28, February 29
1997 1996
---- ----
(unaudited)
(U.S. dollars in thousands except
per share amounts)
<S> <C> <C>
(B) Earnings per ordinary
share and ordinary share
equivalent -- assuming
full dilution:
Weighted average shares
outstanding............... 86,858 94,476
Average stock options
outstanding (net of
repurchased shares
under the treasury
stock method)............. 1,173 1,226
-------- --------
Weighted average ordinary
shares and ordinary
share equivalents
outstanding............... 88,031 95,702
======== ========
Net income:
Actual net income......... $108,118 $207,089
Assumed earnings
on excess option
proceeds................ - -
-------- --------
Adjusted net income......... $108,118 $207,089
======== ========
Earnings per ordinary
share and ordinary
share equivalent.......... $ 1.23 $ 2.16
======== ========
</TABLE>
<PAGE>
24
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)
April 11, 1997 /s/ Brian M. O'Hara
----------------------------
Brian M. O'Hara
President and
Chief Executive Officer
April 11, 1997 /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> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> NOV-30-1997
<PERIOD-START> DEC-01-1996
<PERIOD-END> FEB-28-1997
<DEBT-HELD-FOR-SALE> 2,761,226
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 840,179
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 3,601,405
<CASH> 436,623
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 26,215
<TOTAL-ASSETS> 5,025,329
<POLICY-LOSSES> 2,147,689
<UNEARNED-PREMIUMS> 646,305
<POLICY-OTHER> 36,081
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 0
<COMMON> 863
0
0
<OTHER-SE> 2,123,930
<TOTAL-LIABILITY-AND-EQUITY> 5,025,329
119,837
<INVESTMENT-INCOME> 51,557
<INVESTMENT-GAINS> 32,613
<OTHER-INCOME> 13,155
<BENEFITS> 84,960
<UNDERWRITING-AMORTIZATION> 9,907
<UNDERWRITING-OTHER> 11,584
<INCOME-PRETAX> 110,711
<INCOME-TAX> 2,593
<INCOME-CONTINUING> 108,118
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 108,118
<EPS-PRIMARY> 1.23
<EPS-DILUTED> 1.23
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
