<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 MAY 31, 1998
Commission File Number 1-10804
EXEL LIMITED
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Cayman Islands 98-0058718
- ------------------------------- ----------------------
(State or other jurisdiction of (I.R.S. Employer
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
June 30, 1998 was 84,315,873 excluding 27,993,436 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
May 31, 1998 (unaudited) and
November 30, 1997 3
Consolidated Statements of Income
Three Months Ended May 31, 1998
and 1997 (unaudited) and Six Months
Ended May 31, 1998 and 1997 (unaudited) 5
Consolidated Statements of Cash Flows
Six Months Ended May 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 11
PART II. OTHER INFORMATION
--------------------------
Item 4. Submission of Matters to a Vote of Shareholders 27
Item 6. Exhibits and Reports on Form 8-K 27
Signatures 28
<PAGE>
3
EXEL LIMITED
CONSOLIDATED BALANCE SHEETS
(U.S. dollars in thousands, except share amounts)
<TABLE>
<CAPTION>
May 31, November 30,
1998 1997
---- ----
(Unaudited)
ASSETS
Investments:
<S> <C> <C>
Fixed maturities, at market value
(amortized cost : 1998 - $3,263,200;
1997 - $3,144,642)..................................................... $ 3,308,490 $ 3,196,872
Equity securities, at market value
(cost: 1998 - $806,521; 1997 - $729,888) .............................. 996,885 837,827
Short-term investments, at market
value (amortized cost: 1998 - $125,970;
1997 - $220,138) ...................................................... 126,394 219,969
----------- -----------
Total Investments...................................................... $ 4,431,769 $ 4,254,668
Cash and cash equivalents ............................................. 645,310 394,599
Investment in affiliates
(cost: 1998 - $337,259; 1997 - $336,680)............................... 541,297 517,396
Other investments ..................................................... 29,970 27,244
Accrued investment income.............................................. 46,391 48,576
Deferred acquisition costs............................................. 38,725 22,272
Prepaid reinsurance premiums........................................... 108,967 108,916
Premiums receivable.................................................... 328,082 254,238
Reinsurance balances receivable........................................ 197,947 156,025
Intangible Assets ..................................................... 260,843 267,695
Other assets........................................................... 48,260 36,833
----------- -----------
Total Assets........................................................... $ 6,677,561 $ 6,088,462
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities and Minority Interest:
Unpaid losses and loss expenses........................................ $ 2,452,289 $ 2,342,254
Unearned premium....................................................... 605,904 566,911
Premium received in advance ........................................... 35,399 40,706
Loans payable.......................................................... 126,000 141,000
Accounts payable and accrued liabilities............................... 24,317 40,923
Reinsurance premiums payable........................................... 55,637 69,305
Payable for investments purchased...................................... 543,894 382,345
Minority interest ..................................................... 27,292 25,888
----------- -----------
Total Liabilities and Minority Interest................................ $ 3,870,732 $ 3,609,332
----------- -----------
</TABLE>
<PAGE>
4
<TABLE>
<CAPTION>
May 31, November 30,
1998 1997
____ ____
(Unaudited)
<S> <C> <C>
Contingencies
Shareholders' Equity:
Ordinary shares (par value $0.01):
authorized, 999,990,000 shares;
issued and outstanding, 84,521,893 shares
(excluding 27,787,436 shares held in treasury)
at May 31, 1998 and 84,407,638 shares
(excluding 27,594,800 shares held in
treasury) at November 30, 1997.................. 845 844
Contributed surplus............................. 300,014 290,085
Net unrealized appreciation of investments...... 265,525 188,444
Deferred compensation........................... (14,901) (11,362)
Retained earnings............................... 2,255,346 2,011,119
---------- ----------
Total shareholders' equity...................... $2,806,829 $2,479,130
---------- ----------
Total liabilities and Shareholders' equity...... $6,677,561 $6,088,462
========== ==========
</TABLE>
See accompanying notes to Consolidated Financial Statements.
<PAGE>
5
EXEL LIMITED
CONSOLIDATED STATEMENTS OF INCOME
(U.S. dollars and number of shares in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Six Months
Ended Ended
May 31, May 31,
1998 1997 1998 1997
---- ---- ---- ----
(Unaudited)
<S> <C> <C> <C> <C>
Revenues:
Net premiums earned........................................ $137,787 $129,817 $277,669 $249,654
Net investment income...................................... 60,452 54,160 117,980 105,717
Net realized gains on sale of
investments................................................ 74,541 126,313 137,492 158,926
Equity in net earnings of affiliates....................... 19,728 15,739 34,935 28,894
Income from other investments.............................. 4,145 - 4,145 -
-------- -------- -------- --------
Total revenues................................. $296,653 $326,029 $572,221 $543,191
-------- -------- -------- --------
Expenses:
Losses and loss expenses................................... 83,471 91,317 165,243 176,277
Acquisition costs.......................................... 18,705 10,792 34,644 20,699
Administration expenses.................................... 17,444 12,078 32,984 23,662
Interest expense........................................... 1,862 - 3,650 -
Amortization of intangible assets.......................... 3,339 - 6,677 -
-------- -------- -------- --------
Total expenses................................. $124,821 $114,187 $243,198 $220,638
-------- -------- -------- --------
Income before income tax expenses and minority interest.... 171,832 211,842 329,023 322,553
Minority Interest.......................................... 323 - 1,404 -
Income tax expense......................................... 947 262 1,647 2,855
-------- -------- -------- --------
Net income..................................... $170,562 $211,580 $325,972 $319,698
-------- -------- -------- --------
Weighted average number of
ordinary shares and
ordinary share equivalents outstanding - Basic........... 84,640 84,883 84,603 85,849
- Diluted......... 86,326 85,779 86,193 86,806
Net income per ordinary
share and ordinary share equivalent - Basic.............. $2.02 $2.49 $3.85 $3.72
- Diluted............ $1.98 $2.47 $3.78 $3.68
Dividends declared per share............................... $0.40 $0.32 $0.80 $0.64
</TABLE>
See accompanying notes to Consolidated Financial Statements
<PAGE>
6
EXEL LIMITED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(U.S. dollars in thousands)
<TABLE>
<CAPTION>
Six Months Ended
May 31,
1998 1997
---- ----
(Unaudited)
<S> <C> <C>
Cash flows from operating activities
Net income for the period before minority interest............................. $ 327,376 $ 319,698
Adjustments to reconcile net income
to net cash provided by operating activities:
Net realized gains on sale of investments...................................... (137,492) (158,926)
Amortization of premium on fixed maturities.................................... (2,832) 318
Amortization of deferred compensation.......................................... 2,161 1,596
Amortization of intangible assets.............................................. 6,677 -
Equity in earnings of affiliates net of
dividends received and consolidation adjustments.............................. (18,657) (15,082)
Unpaid losses and loss expenses................................................ 110,035 101,348
Unearned premiums.............................................................. 38,993 (101,161)
Premiums received in advance................................................... (5,307) 30,511
Deferred acquisition costs..................................................... (16,453) 6,242
Prepaid reinsurance premiums................................................... (51) (7,174)
Premiums receivable............................................................ (73,844) 52,592
Reinsurance balances receivable................................................ (41,922) (32,979)
Reinsurance premiums payable................................................... (13,668) 1,535
Accrued investment income...................................................... 2,185 8,316
Accounts payable and accrued liabilities....................................... (16,606) (6,635)
---------- ----------
Total adjustments................................................. (166,781) (119,499)
---------- ----------
Net cash provided by operating activities......................... 160,595 200,199
---------- ----------
Cash flows provided by (used in)
investing activities:
Proceeds from sale of fixed maturities
and short-term investments..................................................... 5,346,346 5,725,579
Proceeds from redemption of fixed
maturities and short-term investments.......................................... 328,106 80,360
</TABLE>
<PAGE>
7
<TABLE>
<CAPTION>
Six Months Ended
May 31,
1998 1997
---- ----
(Unaudited)
<S> <C> <C>
Proceeds from sale of equity securities....................................... 444,257 573,524
Purchases of fixed maturities and short-term investments...................... (5,493,557) (5,648,824)
Purchases of equity securities................................................ (425,159) (459,654)
Deferred losses on forward hedge
contracts................................................................... (2,506) (1,249)
Investment in affiliates...................................................... (425) (1,119)
Other investments............................................................. (2,726) (2,632)
Other assets.................................................................. (11,703) (9,124)
---------- ----------
Net cash provided by investing
activities.................................................................. 182,633 256,861
---------- ----------
Cash flow provided by (used in) financing activities:
Dividends paid.............................................................. (67,740) (54,594)
Issuance of shares.......................................................... 490 355
Proceeds from exercise of options........................................... 4,081 3,965
Repurchase of treasury shares............................................... (14,348) (139,231)
Proceeds from loans......................................................... 140,000 60,000
Repayment of loans.......................................................... (155,000) -
---------- ----------
Net cash used in financing activities......................................... (92,517) (129,505)
---------- ----------
Increase in cash and cash equivalents......................................... 250,711 327,555
---------- ----------
Cash and cash equivalents - beginning
of period................................................................... $ 394,599 $ 252,734
---------- ----------
Cash and cash equivalents - end
of period................................................................... $ 645,310 $ 580,289
========== ==========
Taxes paid.................................................................... $ 3,667 $ 1,799
========== ==========
</TABLE>
See accompanying notes to Consolidated Financial Statements
<PAGE>
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 year
per share amounts have been amended to reflect this.
<PAGE>
9
2. INVESTMENT IN AFFILIATE
Summarized condensed financial information of Mid Ocean Limited, an
approximately 24.7% owned affiliate, which is accounted for by the equity
method, is as follows (U.S. dollars in thousands):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
April 30 April 30,
Income Statement Data 1998 1997 1998 1997
---- ---- ---- ----
(unaudited)
<S> <C> <C> <C> <C>
Net premiums earned $122,823 $130,772 $245,804 $238,849
Net investment income 28,010 25,335 54,393 49,175
Net realized (losses) gains
on sale of investments 11,627 (3,387) 25,907 (729)
Net income $ 79,649 $ 62,916 $143,370 $114,918
======== ======== ======== ========
Company's share of net income $ 19,692 $ 16,606 $ 35,450 $ 29,302
======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
April 30, October 31,
Balance Sheet Data 1998 1997
---- ----
(Unaudited)
<S> <C> <C>
Cash, investments and accrued
interest $1,833,990 $1,703,393
Other assets 743,118 567,212
---------- ----------
Total assets $2,577,108 $2,270,605
========== ==========
Reserves for losses and loss expenses $ 527,883 $ 479,160
Reserves for unearned premiums 429,360 307,166
Other liabilities and minority interest 168,073 111,318
Shareholders' equity 1,451,792 1,372,961
---------- ----------
Total liabilities and
shareholders' equity $2,577,108 $2,270,605
========== ==========
Company's share of
shareholders' equity $ 358,927 $ 340,783
========== ==========
</TABLE>
During the six months ended April 30, 1998 and 1997 the Company received
dividends from its affiliate of $16.0 million and $14.5 million, respectively.
<PAGE>
10
3. ACCOUNTING STANDARDS
The Financial Accounting Standards Board ("FASB") issued SFAS No. 132,
"Employers' Disclosures about Pensions and Other Postretirement Benefits",
effective for fiscal years beginning after December 15, 1997. This Statement
revises employers' disclosures about pension and other postretirement benefit
plans. It does not change the measurement or recognition of those plans. This
standard is expected to have a minimal impact on the Company's financial
statements and disclosures.
FASB also issued SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities", effective for all fiscal quarters of fiscal years beginning
after June 15, 1999. This Statement establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts (collectively referred to as derivatives), and for
hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial position and measure
those instruments at fair value. If certain conditions are met, a derivative
may be specifically designated as a hedge. The accounting for changes in fair
value of a derivative (that is, gains and losses) depends on the intended use of
the derivative and the resulting designation. The Company has not determined
the impact of the adoption of this new accounting standard on its financial
statements and disclosures.
4. SUBSEQUENT EVENT
On July 2, 1998, a Class Meeting of Shareholders of the Company was called
in accordance with an order of the Grand Court of the Cayman Islands dated June
29, 1998, to be held at the Princess Hotel, Hamilton, Bermuda, at 9:00 a.m.,
local time, on August 3, 1998. At such meeting, the Company's shareholders will
be asked to consider and vote upon a resolution to approve the proposed Scheme
of Arrangement pursuant to Section 85 of the Companies Law (1995 Revision) of
the Cayman Islands between the Company and its shareholders under which the
Company will become a wholly owned subsidiary of Exel Merger Company Ltd., an
exempted limited liability company incorporated under the laws of the Cayman
Islands which will change its name to "EXEL Limited".
The preceding description is qualified in its entirety by reference to the
description of such matters contained in the definitive Joint Proxy Statement
of the Company and Mid Ocean Limited ("Mid Ocean") dated July 2, 1998.
<PAGE>
11
EXEL LIMITED
------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
---------------------------------------
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
---------------------------------------------
Results of Operations for the Three Months Ended May 31, 1998
-------------------------------------------------------------
Compared to the Three Months Ended May 31, 1997
-----------------------------------------------
Table I presents an analysis of the Company's underwriting revenues for the
periods indicated (U.S. dollars in thousands):
<TABLE>
<CAPTION>
Table I
- -------
For The Three Months Ended
May 31,
1998 1997 % Change
---- ---- --------
(unaudited)
<S> <C> <C> <C>
Gross premiums written $116,866 $81,266 43.8%
Net premiums written 99,206 64,350 54.2%
Net premiums earned 137,786 129,817 6.1%
</TABLE>
In addition to annual policies, gross premiums written are affected by the
level of multi-year policies written or cancelled in any given period. Although
gross premiums increased year over year, gross premiums written adjusted for
multi-year premiums and a specialty reinsurance assumed ("SRA") contract
rewritten in 1997 as illustrated in Table III, would have decreased by 8.1%.
This decline was the result of a decrease in premiums written, on an adjusted
basis, as shown in Table II, in the general and professional liability lines.
All other product lines have either experienced modest growth or have remained
relatively unchanged.
<PAGE>
12
Table II presents the split of gross premiums written by X.L. Insurance
Company, Ltd. ("X.L."), X.L. Europe Insurance ("X.L.E.") and X.L. Global
Reinsurance Company, Ltd. ("XLGRe") adjusted for the effects of multi-year
premiums (U.S. dollars in thousands):
<TABLE>
<CAPTION>
Table II
- --------
For the Three months Ended May 31,
1998 1997
(unaudited)
X.L. X.L.E. XLGRe Total X.L. X.L.E. XLGRe Total
<S> <C> <C> <C> <C> <C> <C> <C> <C>
General Liability $24,645 $15,887 - $40,532 $41,072 $9,638 - $50,710
Directors and Officers
Liability 2,512 1,054 - 3,566 3,024 919 - 3,943
Professional Liability 2,115 1,818 - 3,933 8,290 2,263 - 10,553
Employment Practices
Liability 1,628 142 - 1,770 480 - - 480
Property 6,566 1,102 - 7,668 5,712 797 - 6,509
X.L. Risk Solutions 3,844 - - 3,844 3,316 - - 3,316
Reinsurance Assumed 2,156 2,003 33,172 37,331 3,500 1,103 30,764 35,367
Other (MGA) 2,241 3,076 - 5,317 - - - -
_______ _______ _______ ________ _______ _______ ________ ________
Annualized premiums 45,707 25,082 33,172 103,961 65,394 14,720 30,764 110,878
Multi-year premiums 6,171 7,656 (922) 12,905 (2,052) (1,443) (26,117) (29,612)
_______ _______ _______ ________ _______ _______ ________ ________
Gross Premiums Written $51,878 $32,738 $32,250 $116,866 $63,342 $13,277 $ 4,647 $ 81,266
======= ======= ======= ======== ======= ======= ======== ========
</TABLE>
Historically, the second quarter is the smallest of the four quarters for
premiums written.
The increase in other premiums written is the result of the Company's
investment in two managing general agencies ("MGAs"), Venton Holdings Limited
("Venton") and Sovereign Risk Insurance Limited. Product lines offered by these
MGAs include professional indemnity, directors and officers liability, fiduciary
liability and political risk insurance. No premiums were generated by these
facilities during the comparative 1997 quarter. The Venton business is heavily
reinsured, primarily through Lloyds of London.
Competitive pressures continue to affect general liability business
written. The availability of insurance and reinsurance capacity with less
stringent terms and low pricing has reduced the number of new business
opportunities that the Company views as attractive. While business retention has
been a satisfactory 82.1%, the Company's response has been to remain on programs
but to increase the average attachment point of coverage. Average attachments
have increased from $107.3 million during the second quarter of 1997 to $130.2
million during the second quarter of 1998.
<PAGE>
13
The drop in professional liability premiums written reflects the loss of
several significant accounts during the quarter, due to less stringent terms and
pricing offered by competitors.
The declines in premium levels are also reflective of the Company's
philosophy of attempting to maintain underwriting profitability even at the
expense of premium volume, rather than write policies at rates and terms that
the Company believes are inappropriate.
Table III presents certain underwriting information with respect to the
business written by the Company for the periods indicated (U.S. dollars in
thousands):
Table III
- ---------
<TABLE>
<CAPTION>
For the three months ended May 31
(unaudited)
<S> <C> <C> <C> <C> <C> <C>
Gross Net Net
Premiums Written Premiums Written Premiums Earned
1998 1997 1998 1997 1998 1997
-----------------------------------------------------------
General Liability $ 51,749 $ 41,258 $42,302 $ 27,405 $ 44,515 $ 71,202
Directors and Officers Liability 4,511 3,564 4,511 3,564 4,804 5,449
Professional Liability 4,810 12,252 4,810 12,252 11,049 12,935
Employment Practices Liability 1,770 480 1,188 316 2,129 1,180
Property 6,163 9,598 4,840 7,042 5,427 5,022
X.L. Risk Solutions 1,839 4,864 1,259 4,521 4,490 2,433
Other (MGA) 9,615 - 6,046 - 913 -
Reinsurance Assumed 36,409 9,250 34,250 9,250 64,460 31,596
-----------------------------------------------------------
Premiums as reported $116,866 $ 81,266 $99,206 $ 64,350 $137,787 $129,817
Multi-year premiums (12,905) 29,612 (10,564) 35,508 -
Adjustment for SRA contracts
rewritten - 2,197 - 2,197 - 1,762
General liability excess of loss
reinsurance ceded - - - - 5,625 -
-----------------------------------------------------------
Adjusted Premiums $103,961 $113,075 $88,642 $102,055 $143,412 $131,579
===========================================================
</TABLE>
<PAGE>
14
Net premiums written in the second quarter of 1997 were affected by the SRA
contracts that were rewritten and multi-year adjustments for both periods as
mentioned previously and illustrated in Table III. Other factors affecting net
premiums written include the growth in employment practices liability and Venton
business which are reinsured.
The increase in net earned premiums is primarily due to the increase in
reinsurance assumed during the first quarter of 1998. This related principally
to the business assumed from the acquisition of GCR Holdings Limited and its
subsidiary, Global Capital Reinsurance Company Ltd. in June of 1997. In
addition, the Company entered into a general liability reinsurance excess of
loss contract during the fourth quarter of 1997; hence there was an effect on
the 1998 results, with no effect on the comparative period of the previous year.
Table IV presents an analysis of the Company's revenues from its portfolio
of investments and its investments in affiliates (U.S. dollars in thousands):
<TABLE>
<CAPTION>
Table IV
- --------
Three Months Ended
May 31,
1998 1997 % Change
---- ---- --------
(Unaudited)
<S> <C> <C> <C>
Net investment income $60,452 $ 54,160 11.2%
Net realized gains 74,541 126,313 N/M
Equity in net earnings of affiliates 19,728 15,739 25.3%
Income from other investments 4,145 - N/M
</TABLE>
Net investment income has increased principally due to a larger asset base
over the same quarter last year.
Investment gains realized during the second quarter of 1997 resulted mostly
from the restructuring of the Company's equity portfolio. During the second
quarter of 1998, equity managers captured gains of $37.7 million. In addition,
$23.4 million in derivative gains were recognized, of which $16.2 million
related to two currency overlays programs on the Company's fixed income and
equity portfolios, and $6.1 million relates to the Company's synthetic
portfolio. A further discussion of derivative activity is provided under
"Financial Condition and Liquidity".
Equity in net earnings of affiliates increased due to Mid Ocean Limited
reporting a 26.6% increase in net income in its second quarter of 1998 compared
to the same period in 1997. The Company's relative share however, was lower due
to its reduced ownership declining from 25.6% to 24.7%.
Income from other investments represents a distribution from one of the
Company's investments in limited partnerships.
<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>
Table V
- -------
Three Months Ended
May 31,
1998 1997
---- ----
(unaudited)
<S> <C> <C>
Loss and loss expense ratio 60.6% 70.4%
Underwriting expense ratio 26.2% 17.6%
Combined ratio 86.8% 88.0%
</TABLE>
The decrease in the combined ratio and loss ratio reflects a change in the
Company's mix of business to include more reinsurance business assumed as
illustrated in Table III which portrays the changes in net earned premium
quarter over quarter. Initial loss ratios tend to be lower, and the acquisition
cost component of the expense ratio tends to be higher, than the Company's other
lines of business. A significant component of XLGRe's business is property
business. Under United States generally accepted accounting principles it is
general practice not to set up catastrophe reserves. Consequently, the absence
or presence of loss events on this business will instill volatility to the loss
ratio.
The increase in administration expenses as shown in the Consolidated
Statement of Income reflects the acquisition of GCR Holdings Ltd. in June of
1997, and the consequent increase in the size of the Company.
Net income was $170.6 million or $1.98 per share and $211.6 million or
$2.47 per share for the quarters ended May 31, 1998 and 1997, respectively,
representing a decrease of 20.2% per share. (Net income per share is presented
on a diluted basis). The decrease in per share amounts is primarily due to
realized investment gains of $74.5 million in the second quarter of 1998
as compared to $126.3 million for the like period of the previous year.
<PAGE>
16
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED MAY 31, 1998
-----------------------------------------------------------
COMPARED TO THE SIX MONTHS ENDED MAY 31, 1997
---------------------------------------------
Table I presents an analysis of the Company's underwriting revenues for the
periods indicated (U.S. dollars in thousands):
<TABLE>
<CAPTION>
Table I
- -------
Six Months Ended
May 31,
1998 1997 % Change
(unaudited)
<S> <C> <C> <C>
Gross premiums written $367,194 $185,616 97.8%
Net premiums written 316,610 141,319 124.0%
Net premiums earned 277,669 249,654 11.2%
</TABLE>
In addition to annual policies, gross premiums are also affected by the
level of multi-year policies written or cancelled in any given period. Gross
premiums written adjusted for the multi-year premiums and the SRA contracts
rewritten in the first six months of 1997, as illustrated in Table III,
increased by 47.7%. This was primarily the result of reinsurance business
acquired from the former Global Capital Reinsurance Company Ltd. ("GCR") in June
of 1997, accordingly no comparative financial information is included for the
1997 period. Further discussion is provided on these changes following Table II.
<PAGE>
17
Table II presents the split of gross premiums written by X.L, X.L.E and
XLGRe for the periods for the periods indicated, adjusted for the effects of
multi-year premiums (U.S. dollars in thousands):
<TABLE>
<CAPTION>
Table II
- --------
For the Six months Ended May 31,
1998 1997
(unaudited)
X.L. X.L.E. XLGRe Total X.L. X.L.E. XLGRe Total
<S> <C> <C> <C> <C> <C> <C> <C> <C>
General Liability $ 84,407 $34,518 $ - $118,925 $114,983 $ 26,401 $ - $141,384
Directors and Officers -
Liability 6,687 1,473 - 8,160 6,982 1,310 - 8,292
Professional Liability 4,551 3,372 - 7,923 12,087 3,458 - 15,545
Employment Practices
Liability 5,985 142 - 6,127 4,729 - - 4,729
Property 13,272 2,360 - 15,632 10,044 1,778 - 11,822
Risk Solutions 7,632 887 - 8,519 6,576 - - 6,576
Reinsurance Assumed 2,645 2,839 186,432 191,916 8,968 5,798 42,822 57,588
Other (MGA) 4,946 13,410 - 18,356 - - - -
-------- ------- -------- -------- -------- ------- -------- --------
Annualized premiums 130,125 59,001 186,432 375,558 164,369 38,745 42,822 245,936
Multi-year premiums (9,659) 2,217 (922) (8,364) 15,202 (2,383) (73,139) (60,320)
-------- ------- -------- -------- -------- ------- -------- --------
Gross Premiums Written $120,466 $61,218 $185,510 $367,194 $179,571 $36,362 $(30,317) $185,616
======== ======= ======== ======== ======== ======= ======== ========
</TABLE>
The increase in gross premiums written on an annual basis is due largely to
the increase in reinsurance premiums assumed by XLGRe. The nature of the
reinsurance assumed has diversified from specialty contracts to include more
traditional forms of reinsurance, including property, property catastrophe,
marine and aviation. As previously mentioned, the increased volume and diversity
of XLGRe reinsurance assumed is a direct result of the Company's acquisition of
GCR Holdings Limited. In the first six months of 1998, that portion of the
reinsurance business attributable to the GCR book of business amounted to $41.6
million of gross written premiums. Unlike primary insurance, the full
reinsurance premium is often estimated at the inception of the contract based
upon information provided by clients. Any subsequent premium adjustments are
recognized in the period in which they are determined. A significant component
of this business is written on January 1 and therefore it is inappropriate to
use the first six months premiums as an indication for business to be assumed in
subsequent quarters.
Also included in reinsurance premiums assumed are $16.1 million of premiums
written by XLGRe's majority-owned subsidiary Latin American Reinsurance Company,
Ltd. ("LAR"). LAR was formed in the fourth quarter of 1997 and provides
predominantly property reinsurance to the Latin American market. LAR commenced
writing business in the first fiscal quarter of 1998.
Reinsurance assumed by X.L.E. in 1997 mostly relates to one marine oil
pollution program. The decline in premiums in the first six months of 1998
reflects changes in X.L.E.'s participation from a quota share to an excess of
loss basis. The comparable 1997 period reflects the run off of the initial
program.
X.L. Risk Solutions is a coordinated effort with CIGNA Property and
Casualty ("CIGNA") to provide 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.
provides combined property capacity coverage with CIGNA in certain circumstances
which is reflected in the property line. It should be noted that, while this
combined capacity provided modest growth to
<PAGE>
18
annual gross premiums written in the first six months, the cession of CIGNA's
share of limits can reduce net premiums written and earned.
During 1997, the Company invested in two managing general agencies
("MGA's"), Venton Holdings Limited and Sovereign Risk Insurance Limited. These
have started contributing to premiums written in the first six months of 1998.
Product lines offered by these MGA's include professional indemnity, directors
and officers liability, fiduciary liability and political risk insurance.
Property insurance premiums written increased in the first six months of
1998 compared to the comparable quarter in 1997 due to X.L.'s decision to begin
writing property insurance on a quota share basis as well as an excess of loss
basis.
Employment practices liability represents the final area of growth in
the first six months.
General liability insurance results continue to reflect competitive
pressures sustained, directly or indirectly, by the availability of insurance
and reinsurance capacity with less stringent terms and pricing. As a
consequence, while business retention for this product line at 83.3% has been
good, relative to market conditions, new business opportunities that the Company
views as attractive have been limited. The Company's response has been to remain
on programs but to increase the average attachment point of coverage. Average
attachments for the six months ended May 31, 1998 and 1997 were $146.2 million
and $119.8 million, respectively.
Professional liability reflects the loss of several significant accounts
due to less stringent terms and lower pricing offered by competitors.
<PAGE>
19
Table III presents certain underwriting information with respect to the
business written by the Company for the periods indicated (U.S. dollars in
thousands):
Table III
- ---------
<TABLE>
<CAPTION>
Six Months Ended May 31
(Unaudited)
Gross Net Net
Premiums Written Premiums Written Premiums Earned
1998 1997 1998 1997 1998 1997
<S> <C> <C> <C> <C> <C> <C>
General liability $106,167 $135,997 $82,770 $98,825 $95,117 $146,627
Directors and officers liability 10,851 8,848 10,851 8,848 9,638 10,953
Professional liability 8,022 19,096 8,022 19,096 22,264 25,442
Employment practices liability 6,668 4,729 4,326 2,919 4,079 2,001
Property 11,711 19,078 8,831 15,248 10,716 10,343
X.L. Risk solutions 3,835 13,419 3,303 11,934 7,739 4,104
Other (MGA) 28,968 - 16,055 - 1,474 -
Reinsurance assumed 190,972 (15,551) 182,452 (15,551) 126,642 50,184
---------------------------------------------------------------------------
Premiums as reported 367,194 185,616 316,610 141,319 277,669 249,654
Multi year premiums 8,364 60,320 8,243 77,268 - -
Adjustment for SRA contracts
Rewritten - 8,377 - 8,377 - 9,491
General liability excess of loss
Reinsurance ceded - - - - 11,250 -
---------------------------------------------------------------------------
Adjusted Premiums $375,558 $254,313 $324,853 $226,964 $288,919 $259,145
===========================================================================
</TABLE>
Net premiums written in the first six months of 1997 were affected by the
SRA contracts that were rewritten and multi-year adjustments as mentioned
previously and illustrated in Table III. Other factors affecting net premiums
written include the growth in employment practices liability and Venton
business, which are reinsured.
The increase in net earned premiums is primarily due to the increase in
reinsurance assumed during the first six months of 1998. This related
principally to the business assumed from the acquisition of GCR Holdings Limited
and its subsidiary, Global Capital Reinsurance Company Ltd. in June of 1997. In
addition, the Company entered into a general liability reinsurance excess of
loss contract during the fourth quarter of 1997; hence there was an effect on
the 1998 results, with no effect on the comparative period of the previous year.
<PAGE>
20
Table IV presents an analysis of The Company's revenues from its portfolio
of investments and its investment in affiliates (U.S. dollars in thousands):
<TABLE>
<CAPTION>
Table IV
- --------
Six Months Ended
May 31,
1998 1997 % Change
---- ---- --------
(unaudited)
<S> <C> <C> <C>
Net investment income $117,980 $105,717 11.6%
Net realized gains 137,492 158,926 N/M
Equity in net earnings of affiliate 34,935 28,894 20.9%
Income from other investments 4,145 - N/M
</TABLE>
Net investment income has increased principally due to a larger asset base
over the same period last year.
The stock market reached historic highs during the six months ended May 31,
1998. Equity managers, taking advantage of market conditions, realized $70.6
million in gains. In addition, $44.1 million in derivative gains were recognized
in the period of which $10.2 million related to the Company's foreign currency
overlay programs on its fixed income and equity portfolios, and $22.9 million
relates to the Company's synthetic portfolio. A further discussion of derivative
activity is provided under "Financial Condition and Liquidity". During the
second quarter of 1997, the equity portfolio was restructured. Total gains
realized by the equity managers during the six month period ended May 31, 1997
was $170 million of which $26.3 million were gains realized by a synthetic
equity portfolio.
Equity in net earnings of affiliates increased due to Mid Ocean Limited
reporting a 24.8% increase in net income in its first six months of 1998
compared to the same period in 1997. The Company's relative share however was
lower due to its reduced ownership declining from 25.6% to 24.7%
Income from other investments represents a distribution from one of the
Company's investments in limited partnerships.
<PAGE>
21
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
- --------
Six Months Ended
May 31,
1998 1997
---- ----
(unaudited)
<S> <C> <C>
Loss and loss expense ratio 59.5% 70.6%
Underwriting expense ratio 24.4% 17.8%
Combined ratio 83.9% 88.4%
</TABLE>
The decrease in the combined ratio and loss ratio reflects a change in the
Company's mix of business to include more reinsurance business assumed as
illustrated in Table III which portrays the changes in net earned premium
quarter over quarter. A significant component of XLGRe's business is property
business. Under United States generally accepted accounting principles, it is
general practice not to set up catastrophe reserves. Consequently, the absence
or presence of loss events on this business will instill volatility to the loss
ratio.
The increase in administration expenses as shown in the Consolidated
Statement of Income reflects the acquisition of GCR Holdings Ltd. in June of
1997, and the consequent increase in the size of the Company.
Net income was $326.0 million or $3.78 per share and $319.7 million or
$3.68 per share for the six months ended May 31, 1998 and 1997, respectively,
representing an increase of 2.7% per share. (Net income per share is presented
on a diluted basis). Capital gains were $137.5 million and $158.9 million for
the first six months of 1998 and 1997, respectively.
<PAGE>
22
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
subsidiary, X.L., must maintain certain minimum levels of statutory capital and
surplus, solvency and liquidity pursuant to Bermuda statutes and regulations. At
May 31, 1998, X.L. could have paid dividends in the amount of approximately $1.8
billion. Neither the Company nor any of its material subsidiaries other than
X.L. and XLGRe 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 May 31, 1998 was $2.8 billion, of which $2.3 billion was
retained earnings.
At May 31, 1998, total investments and cash net of the unsettled
investments trades were $4.5 billion, compared to $4.3 billion at November 30,
1997. The Company's fixed income investments (including short-term investments
and cash equivalents) at May 31, 1998 represented approximately 78% of invested
assets and were managed by several outside investment management firms with
different strategies. Approximately 90% of fixed income securities are of
investment grade, and approximately 64.4% 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 $101.4 million at May 31, 1998,
compared to $12.3 million at November 30, 1997.
In fiscal 1997 and in fiscal 1998 through May 31, the total amount of
losses paid by the Company was $267.2 million and $105.1 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 0.5 to 1 (calculated on an annualized
basis) for the six months ended May 31, 1997 and 0.4 to 1 for the year ended
November 30, 1997.
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 5.846%. The balance of the loans outstanding under the
bank facilities at May 31, 1998 is comprised of two amounts: $80 million which
was extended for an additional two months at its due date on June 12, 1998 and
$35 million which was repaid on June 15, 1998.
The Company entered into an Agreement and Scheme of Arrangement dated as of
March 16, 1998, as amended and restated on April 28, 1998, and further amended
on June 26, 1998 (the "Agreement"), pursuant to which each of the Company and
<PAGE>
23
Mid Ocean will become subsidiaries of a newly formed Cayman Islands corporation
(which will change its name to "EXEL Limited") ("NEW EXEL") pursuant to a Scheme
of Arrangement between the Company and its shareholders (the "EXEL Arrangement")
and a Scheme of Arrangement between Mid Ocean and its shareholders other than
EXEL (the "Mid Ocean Arrangement", and together with the EXEL Arrangement, the
"Arrangements"). Under the terms of the EXEL Arrangement, shareholders of EXEL
will be allotted and issued one share of NEW EXEL for each share of EXEL that
they own on the effective date, subject to the cash election rights described
below. Under the terms of the Mid Ocean Arrangement, shareholders of Mid Ocean
other than EXEL will be allotted and issued 1.0215 shares of NEW EXEL for each
share of Mid Ocean that they own on the effective date, subject to the cash
election rights described below.
Under the Arrangements, shareholders of EXEL and Mid Ocean will have an
opportunity to elect to receive cash in lieu of shares in NEW EXEL, up to a
maximum of $300 million in the aggregate. If more than that amount is elected,
$204 million of the cash will be made available to shareholders of EXEL and $96
million will be made available to shareholders of Mid Ocean, on a pro rata basis
within each group of shareholders. If the cash pool available to either group of
shareholders is not exhausted by cash elections within such group, the excess
cash shall be made available for the other group of shareholders. The Company
expects New EXEL to utilize the existing credit facilities of the Company to
fund any cash elections made under the Arrangements up to $300 million.
On March 13, 1998 the Board of Directors of the Company authorized the
repurchase of $500 million of its shares, which will be reduced by the amount of
any cash elections made under the Arrangements. The Company has purchased
approximately 193,000 shares during the quarter ending May 31, 1998 at a cost of
$14.3 million.
On February 27, 1998 the Company obtained a $500 million letter of credit
facility from a syndicate of banks, led by Mellon, 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 May 31, 1998 in the amounts of $203.3 million and 11.2
million.
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 methods 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 May
31, 1998, the Company had, as hedges, foreign
<PAGE>
24
contracts for the sale of $62.4 million and the purchase of $35.0 million of
foreign currencies at fixed rates, primarily Japanese Yen (38% of net contract
value), German Marks (28%) Finnish Markka (27%), Danish Kroner (4%) and
Netherlands Guilders (2%). The market value of non-U.S. dollar fixed maturities
held by the Company as at May 31, 1998 was $26.9 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 May 31, 1998, unrealized deferred gains amounted to
$1.1 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 May 31, 1998, realized deferred gains
amounted to $7.8 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 May 31, 1998, the Company had forward contracts outstanding
of $341.8 million with unrealized gains of $20.5 million. Gains of $10.2 million
were realized during the six month period. Based on the value of forward
contracts outstanding, a 10% appreciation or devaluation of the U.S. dollar as
compared to the level of other currencies under contract at May 31, 1998 would
have resulted in approximately $50.1 million in unrealized gains and $15.2
million in unrealized 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 May 31, 1998, the Company had $0.8 million of such contracts
outstanding, and had recognized a total of $0.6 million in realized and
unrealized losses for the six-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 May 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 May 31, 1998, the portfolio held
$202.5 million in exposure to S&P 500 Index futures together with fixed
maturities, short-term investments and cash amounting to $203.2 million. Based
on this value, by definition a 10% increase or decrease in the price of these
futures would have resulted in exposure of $222.8 million and $182.3 million
respectively. The value of the futures is updated daily with the change recorded
in income as a realized gain or loss. For the six months ended May 31, 1998, net
realized gains from index future totaled $22.8 million as a result of the 15.1%
increase in the S&P Index during the six month period.
Derivative investments are also utilized to add value to the portfolio
where market inefficiencies are believed to exist. At May 31, 1998, bond and
stock index futures outstanding were $236.3 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
<PAGE>
25
these derivative instruments at this time would have resulted in unrealized
gains and losses of $23.6 million, respectively.
Accounting Standards
The Financial Accounting Standards Board ("FASB") issued SFAS No. 132,
"Employers' Disclosures about Pensions and Other Post-retirement Benefits",
effective for fiscal years beginning after December 15, 1997. This Statement
revises employers' disclosures about pension and other post-retirement benefit
plans. It does not change the measurement or recognition of those plans. This
standard is expected to have a minimal impact on the Company's financial
statements and disclosures.
FASB also issued SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities", effective for all fiscal quarters of fiscal years beginning
after June 15, 1999. This Statement establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts, (collectively referred to as derivatives) and for
hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial position and measure
those instruments at fair value. If certain conditions are met, a derivative may
be specifically designed as a hedge. The accounting for changes in fair value of
a derivative (that is, gains and losses) depends on the intended use of the
derivative and the resulting designation. The Company has not determined the
impact of the adoption of this new accounting standard on its financial
statements and disclosures.
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 May 31, 1998 Compared to the Three Months Ended May
31, 1997" and "- Results of Operations for the Six Months Ended May 31, 1998
Compared to the Six Months Ended May 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 - Corporate" concerning the Company's
expectation that New EXEL will utilize the Company's existing credit facilities
to fund any cash elections under the Arrangements up to $300 million and the
impact of such cash elections on the Company's share repurchase program; (iii)
"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 (iv)
<PAGE>
26
Management's Discussion and Analysis-Current Outlook" concerning the current
outlook for rates and particular product lines; (v) such other statements
contained in this Quarterly Report that may be considered to be forward-looking
statements; and (vi) 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.
<PAGE>
27
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 May 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
judiciary 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, an order enjoining consummation of the Arrangements,
or, in the event the Arrangements are consummated, 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 the Annual General Meeting of Shareholders held on March 31, 1998 at the
Hyatt Regency Grand Cayman, Grand Cayman, Cayman Islands, British West Indies,
the shareholders approved the following:
1. To elect Class II Directors to hold office until 2001:
<TABLE>
<CAPTION>
Votes Votes
For* Against*
----- ---------
<S> <C> <C>
Robert V. Hatcher, Jr. 67,285,888 312,199
Brian M. O'Hara 67,300,080 298,007
John T. Thornton 67,303,868 294,224
John Weiser 67,303,773 294,314
</TABLE>
Messrs. Clements, Esposito, Rance, Gould, Heap, Loudon, Dr. Parker Senter and
Dr. Thrower continue in office.
2. To appoint Coopers & Lybrand, Bermuda as independent Auditors for the
fiscal year ending November 30, 1998;
<TABLE>
<CAPTION>
Votes* Votes*
For Against Abstaining
------ ------- ----------
<S> <C> <C>
67,557,202 15,416 25,469
</TABLE>
ITEM 6. - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
2.1 Agreement and Schemes of Arrangement, dated as of March 16, 1998, by
and among the Company, Exel Merger Company Ltd., and Mid Ocean,
incorporated by reference to Exhibit 2.1 to the Company's Current
Report on Form 8-K filed March 17, 1998.
2.2 Agreement and Schemes of Arrangement, dated as of March 16, 1998, as
amended and restated April 28, 1998, by and among the Company, Exel
Merger Company Ltd., and Mid Ocean, incorporated by reference to
Exhibit 2.1 to the Company's Current Report on Form 8-K filed
May 5, 1998.
2.3 Support Agreement, dated as of March 16, 1998, by and among the
Company, Exel Merger Company Ltd., and JP Morgan Capital Corporation,
incorporated by reference to Exhibit 2.2 to the Company's Current
Report on Form 8-K filed March 17, 1998.
(b) Reports on Form 8-K
Current Report on Form 8-K filed on March 17, 1998, under Item 5 thereof.
Current Report on Form 8-K filed on May 5, 1998, under Item 5 thereof.
<PAGE>
28
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)
/s/ Brian M. O'Hara
July 14, 1998 _______________________
Brian M. O'Hara
President and
Chief Executive Officer
/s/ Robert R. Lusardi
July 14, 1998 _______________________
Robert R. Lusardi
Executive Vice President and
\Chief Financial Officer
<PAGE>
Exhibit 11 - Statement regarding Computation Per Share Earnings.
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 Six Months Ended
May 31, May 31,
1998 1997 1998 1998
(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 -- basic:
Weighted average ordinary
shares and ordinary
share equivalents
outstanding....................... 84,640 84,883 84,603 85,849
======== ======== ======== ========
Net income:......................... $170,562 $211,580 $325,972 $319,698
======== ======== ======== ========
Earnings per ordinary
share and ordinary
share equivalent.................. $2.02 $2.49 $3.85 $3.72
======== ======== ======== ========
(B) Earnings per ordinary
share and ordinary share
equivalent - assuming
full dilution:
Weighted average shares
outstanding....................... 84,466 84,678 84,487 85,728
Average stock options
outstanding (net of
repurchased shares
under the treasury
stock method....................... 1,860 1,101 1,706 1,078
-------- -------- -------- --------
Weighted average ordinary
shares and ordinary
share equivalents
outstanding........................ 86,326 85,779 86,193 86,806
======== ======== ======== ========
Net income.......................... $170,562 $211,580 $325,972 $319,698
======== ======== ======== ========
Earnings per ordinary
share and ordinary
share equivalent................... $1.98 $2.47 $3.78 $3.68
======== ======== ======== ========
</TABLE>
<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> 6-MOS
<FISCAL-YEAR-END> NOV-30-1998
<PERIOD-START> DEC-01-1997
<PERIOD-END> MAY-31-1998
<DEBT-HELD-FOR-SALE> 3,434,884
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 996,885
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 4,431,769
<CASH> 645,310
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 38,725
<TOTAL-ASSETS> 6,677,561
<POLICY-LOSSES> 2,452,289
<UNEARNED-PREMIUMS> 605,904
<POLICY-OTHER> 35,399
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 126,000
<COMMON> 845
0
0
<OTHER-SE> 2,805,984
<TOTAL-LIABILITY-AND-EQUITY> 6,677,561
277,669
<INVESTMENT-INCOME> 117,980
<INVESTMENT-GAINS> 137,492
<OTHER-INCOME> 39,080
<BENEFITS> 165,243
<UNDERWRITING-AMORTIZATION> 34,644
<UNDERWRITING-OTHER> 43,311
<INCOME-PRETAX> 329,023
<INCOME-TAX> 1,647
<INCOME-CONTINUING> 325,972
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 325,972
<EPS-PRIMARY> 3.85
<EPS-DILUTED> 3.78
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>