<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED FEBRUARY 28, 1998
Commission File Number 1-10804
EXEL LIMITED
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Cayman Islands 98-0058718
----------------------------- --------------------
(State of 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
April 13, 1998 was 84,660,852 excluding 27,594,800 shares held in treasury.
<PAGE>
2
EXEL LIMITED
INDEX TO FORM 10-Q/A
Part I. FINANCIAL INFORMATION
------------------------------
Page No.
--------
Item 1. Financial Statements:
Consolidated Balance Sheets
February 28, 1998 (unaudited) and
November 30, 1997 3
Consolidated Statements of Income
Three Months Ended February 28, 1998
and February 29, 1997 (unaudited) 5
Consolidated Statement of Cash Flows
Three Months Ended February 28, 1998
and February 28, 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 1. Legal Proceedings 24
Item 6. Exhibits and Reports on Form 8-K 24
Signatures 25
<PAGE>
3
EXEL LIMITED
CONSOLIDATED BALANCE SHEETS
(U.S. dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
February 28, November 30,
1998 1997
---- ----
(Unaudited)
<S> <C> <C>
ASSETS
Investments:
Fixed maturities, at market
value (amortized cost : 1998 - $3,182,324;
1997 - $3,144,642)............................ $3,230,126 $3,196,872
Equity securities, at market
value (cost: 1998 - $772,590;
1997 - $729,888).............................. 940,278 837,827
Short-term investments, at market
value (amortized cost: 1998 - $226,219);
1997 - $220,138).............................. 225,904 219,969
---------- ----------
Total Investments............................. 4,396,308 4,254,668
Cash and cash equivalents....................... 407,535 394,599
Investments in affiliates
(cost: 1998 - $346,667; 1997 - $336,680)........ 540,625 517,396
Other investments............................... 31,445 27,244
Accrued investment income....................... 40,891 48,576
Deferred acquisition costs...................... 40,966 22,272
Prepaid reinsurance premiums.................... 117,246 108,916
Premiums receivable............................. 332,886 254,238
Reinsurance balances receivable................. 176,619 156,025
Intangible assets............................... 265,731 267,695
Other assets.................................... 39,402 36,833
---------- ----------
Total Assets.................................. $6,389,654 $6,088,462
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Unpaid losses and loss expenses............... $2,409,255 $2,342,254
Unearned premiums............................. 652,489 566,911
Premiums received in advance.................. 36,497 40,706
Accounts payable and accrued liabilities...... 24,221 40,923
Reinsurance premiums payable.................. 66,196 69,305
Loans payable................................. 101,000 141,000
Payable for investments purchased............. 410,971 382,345
Minority interest............................. 26,969 25,888
---------- ----------
Total Liabilities............................. $3,727,598 $3,609,332
---------- ----------
</TABLE>
<PAGE>
4
<TABLE>
<CAPTION>
February 28, November 30,
1998 1997
---- ----
(Unaudited)
<S> <C> <C>
Contingencies and Commitments
Shareholders' Equity:
Ordinary shares (par value $0.01:
authorized, 999,990,000 shares;
issued and outstanding, 84,650,419 shares
(excluding 27,594,800 shares held in
treasury) at February 28, 1998 and
84,407,638 shares (excluding 27,594,800
shares held in treasury) at November 30, 1997 846 844
Contributed surplus........................... 298,653 290,085
Net unrealized appreciation on investments.... 244,949 188,444
Deferred compensation......................... (15,092) (11,362)
Retained earnings............................. 2,132,700 2,011,119
---------- ----------
Total shareholders' equity........... $2,662,056 $2,479,130
---------- ----------
Total liabilities and
shareholders' equity................. $6,389,654 $6,088,462
========== ==========
</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 28,
1998 1997
---- -----
(Unaudited)
<S> <C> <C>
Revenues:
Net premiums earned................................. $139,882 $119,837
Net investment income............................... 57,528 51,557
Net realized gains on sale of investments........... 62,951 32,613
Equity in net earnings of affiliates................ 15,207 13,155
-------- --------
Total revenues................................ 275,568 217,162
-------- --------
Expenses:
Losses and loss expenses............................ 81,772 84,960
Acquisition costs................................... 15,939 9,907
Administration expenses............................. 15,540 11,584
Interest expense.................................... 1,788 -
Amortization of intangible assets................... 3,338 -
-------- --------
Total expenses................................ 118,377 106,451
-------- --------
Income before minority interest and
income tax expense.................................. 157,191 110,711
Minority interest..................................... 1,081 -
Income tax expense.................................... 700 2,593
-------- --------
Net income............................................ $155,410 $108,118
======== ========
Weighted average number of
ordinary shares and ordinary share
equivalents outstanding - Basic..................... 84,544 86,858
- Diluted................... 86,004 87,820
Net income per ordinary
share and ordinary share equivalent - Basic......... $ 1.84 $ 1.24
- Diluted....... $ 1.81 $ 1.23
Dividends declared per share.......................... $ 0.40 $ 0.32
</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 28,
1998 1997
---- ----
(Unaudited)
<S> <C> <C>
Cash flows from operating activities
Net income for the period before minority
interest $ 156,491 $ 108,118
Adjustments to reconcile net income
to net cash provided by operating activities:
Net realized gains on sale of investments.............. (62,951) (32,613)
Amortization of (discount) premium
on fixed maturities................................... (1,424) 325
Amortization of deferred compensation.................. 1,017 797
Amortization of intangible assets...................... 3,338 -
Equity in earnings of affiliate net of
dividends received.................................... (8,179) (6,013)
Unpaid losses and loss expenses......................... 67,001 48,593
Unearned premiums....................................... 85,578 (33,230)
Premiums received in advance............................ (4,209) 11,825
Deferred acquisition costs.............................. (18,694) 4,168
Prepaid reinsurance premiums............................ (8,330) (9,638)
Premiums receivable..................................... (78,648) 37,593
Reinsurance balances receivable......................... (20,594) (16,004)
Reinsurance premiums payable............................ (3,109) 3,889
Accrued investment income............................... 7,685 15,424
Accounts payable and accrued liabilities................ (16,702) (3,946)
---------- ----------
Total Adjustments..................................... (58,221) 21,170
---------- ----------
Net cash provided by operating activities............... 98,270 129,288
---------- ----------
Cash flows (used in) provided by
investing activities:
Proceeds from sale of fixed maturities
and short-term investments............................ 2,707,219 4,030,688
Proceeds from redemption of fixed
maturities and short-term investments................. 230,061 25,100
</TABLE>
<PAGE>
7
<TABLE>
<CAPTION>
Three Months Ended
February 28, February 28,
1998 1997
------------ ------------
(Unaudited)
<S> <C> <C>
Proceeds from sale of equity securities................ 233,607 90,977
Purchases of fixed maturities and
short-term investments............................... (2,938,126) (3,936,390)
Purchases of equity securities......................... (226,701) (77,074)
Deferred losses on forward hedge contracts............. (727) (3,381)
Investments in affiliates.............................. (12,517) --
Other investments...................................... (4,201) (1,770)
Other assets........................................... (3,943) 750
------------ ------------
Net cash (used in) provided by investing activities.... (15,328) 128,900
------------ ------------
Cash flow (used in) provided by financing activities:
Dividends paid......................................... (33,829) (27,612)
Issuance of shares..................................... 479 362
Proceeds from exercise of options...................... 3,344 1,427
Repurchase of treasury shares.......................... -- (48,476)
Proceeds from loans.................................... 60,000 --
Repayment of loans..................................... (100,000) --
------------ ------------
Net cash used in financing activities..................... (70,006) (74,299)
------------ ------------
Increase in cash and cash equivalents..................... 12,936 183,889
------------ ------------
Cash and cash equivalents - beginning of period........... 394,599 252,734
------------ ------------
Cash and cash equivalents - end of period................. $ 407,535 $ 436,623
============ ============
</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 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, 1997 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 such fiscal year.
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, a Cayman
Islands corporation ("Mid Ocean") and a 25% (1997 - 25%) 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 1998 1997
----------- -----------
(Unaudited)
<S> <C> <C>
Net premiums earned $ 122,981 $ 108,077
Net investment income 26,383 23,840
Net realized gains on sale of investments 14,280 2,658
Net income $ 63,721 $ 52,003
=========== ===========
Company's share of net income $ 15,758 $ 13,296
=========== ===========
January 31, October 31,
Balance Sheet Data 1998 1997
----------- -----------
(Unaudited)
Cash, investments and accrued interest $ 1,739,436 $ 1,703,393
Other assets 710,649 567,212
----------- -----------
Total assets $ 2,450,085 $ 2,270,605
=========== ===========
Reserves for losses and loss expenses $ 494,484 $ 479,160
Reserves for unearned premiums 433,060 307,166
Other liabilities 112,009 111,318
Shareholders' equity 1,410,532 1,372,961
----------- -----------
Total liabilities and shareholders' equity $ 2,450,085 $ 2,270,605
=========== ===========
Company's share of shareholders' equity $ 348,820 $ 340,783
=========== ===========
</TABLE>
The Company received dividends from its affiliate of $8.0 million and $7.3
million for the quarters ended January 31, 1998 and 1997, respectively.
<PAGE>
10
3. Subsequent Events
The Company entered into an Agreement and Schemes of Arrangements, dated as
of March 16, 1998, pursuant to which each of the Company and Mid Ocean will
become subsidiaries of a newly formed Cayman Islands corporation (which will
change its name to "EXEL Limited") pursuant to a Scheme of Arrangements between
the Company and its shareholders and a Scheme of Arrangements between Mid Ocean
and its shareholders other than the Company.
On March 13, 1998, the Board of Directors of the Company authorized the
repurchase of an additional $500 million of its shares.
The preceding description of subsequent events is qualified in its entirety
by reference to the description of such matters contained in the Company's
current report on Form 8-K dated March 16, 1998, including the exhibits thereto.
<PAGE>
11
EXEL LIMITED
------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
---------------------------------------
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
---------------------------------------------
Results of Operations for the Three Months Ended February 28, 1998
------------------------------------------------------------------
Compared to the Three Months Ended February 28, 1997
----------------------------------------------------
Table I presents an analysis of the Company's underwriting revenues for the
periods indicated (U.S. dollars in thousands):
Table I
-------
<TABLE>
<CAPTION>
Three Months Ended
February 28, February 28,
1998 1997 % Change
---- ---- --------
(unaudited)
<S> <C> <C> <C>
Gross premiums written $250,328 104,350 139.9%
Net premiums written 217,404 76,969 182.5
Net premiums earned 139,882 119,837 16.7
</TABLE>
The increase in gross premiums written in the first quarter of 1998
resulted primarily from the renewal and development of new reinsurance
business written during the period. Further discussion is provided on these
matters following Table II. There was no effect from specialty reinsurance
assumed ("SRA") contracts written during the quarter as all of these were
renewed on an annual basis in 1997. Gross written premium in the first quarter
of 1997 was impacted by the cancellation of two SRA contracts being re-written.
This resulted in the return of $56.0 million in premium in 1997, of which $46.8
million was unearned.
Gross premiums written are also affected by the level of multi-year
policies written or cancelled in any given year. If gross premiums written were
adjusted for the multi-year effect, adjusted premiums would be $271.6 million
and $135.1 million for 1998 and 1997, respectively. If, in addition, the above
mentioned SRA items were also excluded, gross premiums written would have been
$144.3 million in 1997.
A discussion of the increase in net premiums written and net premiums
earned can be found following Table III.
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. Global
Reinsurance Company, Ltd. ("XLGRe") adjusted for the effects of multi-year
premiums (U.S. dollars in thousands):
<PAGE>
12
Table II
- --------
<TABLE>
<CAPTION>
Gross Premiums Written
Three Months Ended
February 28, 1998 February 28, 1997
X.L X.L.E. XLGRe Total X.L. X.L.E. XLGRe Total
----------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
General
liability $59,762 $18,631 -- $78,393 $73,911 $16,763 -- $90,674
Directors
and officers
liability 4,175 419 -- 4,594 3,958 391 -- 4,349
Professional
liability 2,436 1,554 -- 3,990 3,797 1,195 -- 4,992
Employment
practices
liability 4,357 -- -- 4,357 4,249 -- -- 4,249
Property 6,706 1,258 -- 7,964 4,332 981 -- 5,313
X.L. Risk
Solutions 3,788 887 -- 4,675 3,260 -- -- 3,260
Reinsurance
assumed 489 836 153,260 154,585 5,468 4,695 12,058 22,221
Managing
General
Agencies 2,705 10,334 -- 13,039 -- -- -- --
----------------------------------------------------------------------------------------------
Annualized
premiums 84,418 33,919 153,260 271,597 98,975 24,025 12,058 135,058
Multi-year
premiums (15,830) (5,439) -- (21,269) 17,254 (940) (47,022) (30,708)
----------------------------------------------------------------------------------------------
$68,588 $28,480 $153,260 $250,328 $116,229 $23,085 $(34,964) $104,350
==============================================================================================
</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. The increased volume and diversity of XLGRe's reinsurance
assumed is a direct result of the Company's acquisition of GCR Holdings Limited
and its reinsurance subsidiary, Global Capital Reinsurance Company Ltd. ("GCR")
in June of 1997. As most of GCR's business is written in the first half of the
year, there was no impact in the results of the first quarter of 1997. In the
comparable 1998 quarter, that portion of the reinsurance business attributable
to the GCR book 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. It is the nature of this type of business to record
estimated premiums based upon information provided by clients. Any subsequent
premium adjustments are recognized in the period in which they are determined.
Accordingly it is inappropriate to use the first quarter's premiums as an
indication for business to be assumed in subsequent quarters.
<PAGE>
13
Also included in reinsurance premiums assumed are $13.3 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 related mostly to a Bermuda insurer
which provides certificates of financial responsibility to ship owners in order
for them to comply with the U.S. Oil Pollution Act of 1990. The decline in
premiums in the first quarter of 1998 reflects changes in X.L.E.'s participation
from a quota share to an excess of loss basis. The 1997 quarter 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 annual gross premiums written in the
quarter, the cession of CIGNA's share of limited can reduce net premiums written
and earned.
During 1997, the Company invested in two managing general agencies
("MGAs"), Venton Holdings Limited and Sovereign Risk Insurance Limited. These
have started contributing to premiums written in the first quarter of 1998.
Product lines offered by these MGAs include professional indemnity, directors
and officers liability, fiduciary liability and political risk insurance.
Property insurance premiums written increased modestly in the first quarter
of 1998 compared to the same 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.
<PAGE>
14
Partially offsetting the growth in other lines has been the decline in
gross premiums written in the general liability and professional liability
product lines. Such declines stem from severe competitive pressures from the
U.S. domestic market, Lloyds of London, European carriers and other Bermuda-
based suppliers of these coverages in both terms and pricing. This increased
competition has led to a decline in policy retention for general liability from
84.5% to 83.7% for the first quarters of 1997 and 1998, respectively.
Average attachments were $151.1 million and $129.8 million and average
limits were $88.6 million and $88.0 million for the quarters ending February 28,
1998 and 1997, respectively, reflecting the Company's strategy to increase
attachments where possible when confronted with significant price reductions
unaccompanied by commensurate reductions in exposure. Accordingly, the decrease
in premiums has been a factor associated with increased attachments and lost
business which has not been replaced by new business.
Traditional directors and officers and employment practices liability has
remained relatively flat even with continued competitive pressure.
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>
Gross Net Net
Premiums Written Premiums Written Premiums earned
------------------- ------------------- -----------------
Three Months Ended
Feb. 28, Feb. 28, Feb. 28, Feb. 28, Feb. 28, Feb. 28,
1998 1997 1998 1997 1998 1997
---- ---- ---- ---- ---- ----
(Unaudited)
<S> <C> <C> <C> <C> <C> <C>
General liability $ 54,418 $ 94,739 $ 40,468 $ 71,420 $ 50,602 $ 75,425
Directors and officers
liability 6,340 5,284 6,340 5,284 4,834 5,504
Professional liability 3,212 6,844 3,212 6,844 11,215 12,507
Employment practices
liability 4,898 4,249 3,138 2,603 1,950 821
Property 5,548 9,480 3,990 8,206 5,289 5,321
Risk solutions 1,996 8,555 2,044 7,413 3,249 1,671
Reinsurance assumed 154,563 (24,801) 148,203 (24,801) 62,182 18,588
Managing General Agencies 19,353 - 10,009 - 561 -
--------------------------------------------------------------
250,328 104,350 217,404 76,969 139,882 119,837
Multi year premiums 21,269 (9,922) 19,049 1,130 - -
Annual adjustment for
reinsurance assumed - 49,870 - 49,870 - 9,240
contracts --------------------------------------------------------------
Adjusted premiums $ 271,597 $144,298 $236,453 $127,969 $139,882 $129,077
==============================================================
</TABLE>
<PAGE>
15
The increase in adjusted net premiums written reflects the increase in
reinsurance premiums assumed. The decrease in net premiums earned on the general
liability product line is partly due to an effect of an excess of loss
reinsurance policy entered into during the last fiscal quarter of 1997. This
reduced net premiums earned on this line by $5.6 million for the first quarter
of 1998. The changes in net premiums written and earned for the remaining lines
of business were noted previously in the discussion of gross premiums written.
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 IV
--------
Three Months Ended
February 28, February 28,
1998 1997 %Change
---- ---- -------
(unaudited)
Net investment income $57,528 $51,557 11.6%
Net realized gains 62,951 32,613 93.0
Equity in net earnings
of affiliates 15,207 13,155 15.6
Net investment income has increased principally due to a larger asset base
over the same quarter last year. In addition the yield on the portfolio was
marginally higher in the first quarter of 1998 when compared to 1997.
The increase in net realized gains resulted from equity managers capturing
gains as the stock markets continued to reach record highs during the quarter.
In addition, gains of $16.8 million were realized by a synthetic equity
portfolio. A further discussion of derivative activity is discussed under
"Financial Condition and Liquidity" below.
The increase in equity earnings in affiliates is largely attributable to
Mid Ocean recording a 22.5% increase in its net income.
<PAGE>
16
Table V sets forth the Company's combined ratios and the components thereof
for the periods indicated using U.S. generally accepted accounting principles.
<TABLE>
<CAPTION>
Table V
-------
Three Months Ended
February 28, February 28,
1998 1997
---- ----
(unaudited)
<S> <C> <C>
Loss and loss expense ratio 58.5% 70.9%
Underwriting expense ratio 22.5% 17.9%
Combined ratio 81.0% 88.8%
</TABLE>
The decrease in the loss and loss expense ratio is largely a result of the
increase in reinsurance business assumed, of which a significant component is
short-term property-catastrophe reinsurance. While this business is currently
depressing the loss ratio, any losses incurred relative to the same could have a
material adverse affect on the Company's operating results and financial
condition due to the absence of reserves in respect thereof.
Net income was $155.4 million or $1.81 per share and $108.1 million or
$1.23 per share for the quarters ended February 28, 1998 and 1997, respectively,
representing an increase of 47.2% per share. The increase in per share amounts
is primarily due to the increase in reinsurance business assumed and realized
investment gains of $63.0 million compared to $32.6 million for the respective
quarters.
The underwritten expense ratio has increased in the first quarter of 1998
over the comparable quarter in 1997, principally due to the higher acquisition
costs related to the reinsurance business assumed by XLGRe. Acquisition costs
expressed as percentage of earned premium were 11.4% and 8.3% for the quarters
ended February 28, 1998 and 1997, respectively. Administration expenses also
increased in 1998 as the Company's operations expanded to increase its range of
capabilities. The expense ratio excludes interest expense and the amortization
of intangible assets.
<PAGE>
17
Financial Condition and Liquidity
- ---------------------------------
As a holding company, the Company's assets consist primarily of its
investments in the stock of its subsidiaries and the Company's future cash flows
depend on the availability of dividends or other statutorily permissible
payments from its subsidiaries. In order to pay dividends, the amount of which
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, 1998, X.L. could have paid dividends
in the amount of approximately $1.8 billion. Neither the Company nor any of its
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 February 28, 1998 was $2.7 billion, of
which $2.1 billion was retained earnings.
At February 28, 1998, total investments and cash, net of the payable for
investments purchased, were $4.4 billion, compared to $4.3 billion at November
30, 1997. The increase is due to the reinvestment of investment income and
realized gains and the strengthening of the bond and equity markets; however, as
the Company's business matures over the next three to five years, it is possible
that claims payments may increase due to the increased exposure to events which
occurred in prior years but have not yet been reported or paid. It is also
possible that excess funds available for investment may be reduced as compared
to prior years due to such increased claims payments. The Company's fixed income
investments (including short-term investments and cash equivalents) at February
28, 1998 represented approximately 79% of invested assets and were managed by
several outside investment managers with different strategies. Approximately 89%
of the fixed income securities are of investment grade, with 64% rated Aa or AA
or better by a nationally recognized rating agency.
In fiscal 1997 and in fiscal 1998 through February 28, the total amount of
losses paid by the Company was, $267.2 million and $34.5 million, respectively.
Insurance practices and regulatory guidelines suggest that property and
casualty insurance companies maintain a ratio of net premiums written to
statutory capital and surplus of not greater than 3 to 1, with a lower ratio
considered to be more prudent for a company that insures the types of exposures
written by X.L. which maintained a ratio of 0.4 to 1 (calculated on an annual
basis) for the three months ended February 28, 1998 and for the year ended
November 30, 1997. XLGRe had a ratio of 0.7 to 1 for the three months ended
February 28, 1998 and for the year ended November 30, 1997.
<PAGE>
18
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
judgment concerning sound financial practice and do 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.
Inflation can have an effect on the Company in that inflationary factors
can increase damage awards and potentially result in more claims exceeding
applicable minimum attachment points. The Company's underwriting philosophy is
to adjust premiums in response to inflation, although this may not always be
possible due to competitive pressure. Inflationary factors are considered in
determining the premium level on multi-year policies at the time contracts are
written. In addition, the Company from time to time evaluates whether minimum
attachment points should be raised to take into account inflationary factors.
Corporate
---------
The Company commenced its initial stock repurchase program in September
1993 as authorized by the Board of Directors and obtained approval for
subsequent programs as each program was completed. During the three months ended
February 28, 1998, no shares were repurchased. There are approximately 2.4
million shares remaining on the open program. On March 13, 1998, the Board of
Directors of the Company authorized the repurchase of an additional $500 million
of its shares.
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. These
facilities are provided by a syndicate of banks led by Mellon Bank to facilitate
strategic acquisitions and to supplement operational cash flow. The weighted
average interest rate on the funds borrowed during the period was 6.156%. The
balance of the Mellon loans outstanding as at February 28, 1998 comprises two
amounts: $10 million due March 3, 1998 and $80 million due June 12, 1998.
<PAGE>
19
On December 24, 1997, the Company received a firm commitment from a
syndicate of commercial banks led by Mellon Bank replacing its existing
unsecured letter of credit facility with a $500 million facility secured by its
investment portfolio.
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.
At February 28, 1998, there was no material change in the market risk
sensitivity of the Company's fixed income and equity securities portfolio as
compared to November 30, 1997.
<PAGE>
20
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
February 28, 1998, the Company had, as hedges, foreign contracts for the sale
of $116.9 million and the purchase of $43.3 million of foreign currencies at
fixed rates, primarily Swedish Kroner (29% of net contract value), Japanese Yen
(16%), German Marks (15%), Canadian Dollars (14%) and Finnish Markka (14%). The
market value of non-U.S. Dollar fixed maturities held by the Company as at
February 28, 1998 was $67.3 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 February 28, 1998, unrealized deferred gains
amounted to $0.9 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 February 28, 1998, realized deferred
gains amounted to $9.6 million.
The Company uses foreign exchange contracts to manage the foreign exchange
risk of fluctuating foreign currencies on the value of its remaining non-U.S.
dollar fixed maturities and its non-U.S. dollar equity investments on an overlay
basis. These contracts are not designated as specific hedges and, therefore,
realized and unrealized gains and losses recognized on them are recorded as a
component of net realized gains and losses in the period in which they occur. In
addition, where the Company's investment managers are of the opinion that
potential gains exist in a particular currency, then a forward contract will not
be entered into. At February 28, 1998, the Company had such forward contracts
outstanding of $256.0 million with unrealized gains of $1.4 million. Gains of
$2.1 million were realized during 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, 1998 would have resulted in
approximately $13.7 million in unrealized gains and $11.9 million in losses.
<PAGE>
21
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, 1998, the Company had $0.8 million of such contracts
outstanding, and had recognized a total of $0.1 million 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, 1998 would have had no material effect
on income.
Speculative 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 February 28, 1998, the portfolio held
$208.8 million in exposure to S&P 500 Index futures together with fixed
maturities, short-term investments and cash amounting to $209.0 million. Based
on this value, a 5% increase or decrease in the price of these futures would
have resulted in exposure of $219.2 million and $198.3 million, respectively.
The value of the futures is updated daily with the change recorded in income as
a realized gain or loss. For the three months ended February 28, 1998, net
realized gains from index futures totaled $16.8 million as a result of the
10.25% increase in the S&P Index during the three-month period.
Derivative investments are also utilized to add value to the portfolio
where market inefficiencies are believed to exist. At February 28, 1998, bond
and stock index futures outstanding were $275.2 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 5%
appreciation or depreciation of these derivative instruments at this time would
have resulted in unrealized gains and losses of $16.7 million, respectively.
<PAGE>
22
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 casualty product lines.
Cautionary Note Regarding Forward-Looking Statements.
This Quarterly Report on Form 10-Q/A 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 February 28, 1998 compared to the Three
Months ended February 28, 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 short-tail reinsurance business assumed; (ii) "Management's
Discussion and Analysis--Financial Condition and Liquidity" concerning the
possibility that the Company's funds available for investment may be reduced as
compared to prior years if claim payments increase as the Company's overall book
of business continues to mature; (iii) "Management's Discussion and
Analysis--Financial Risk Management", "--Foreign Currency Risk Management" and
"--Speculative Financial Instruments" concerning the potential effects of
certain events on the Company's portfolios of fixed income and equity
instruments, foreign currency exposures, derivatives positions and certain other
types of instruments (iv) "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.
<PAGE>
23
Cautionary Note Regarding Forward-Looking Statements
(Continued)
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 factors 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>
24
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 February 28, 1998, the Company was not a party to any
material litigation other than as routinely encountered in claims activity.
ITEM 6. - EXHIBITS AND REPORTS ON FORM 8-K
Exhibit 10.1 - Short Term revolving Credit Agreement between X.L. Insurance
Company, Ltd. and X.L. Reinsurance Company, Ltd., as Borrowers, and X.L.
Insurance Company, Ltd. and EXEL Acquisition Ltd., as Guarantors, and the Banks
parties thereto from time to time, and Mellon Bank, N.A., as Agent, dated as of
June 6, 1997 incorporated by reference to Exhibit (b) (1) to the Company's
Amendment No. 2 to Schedule 14D-1 dated June 10, 1997.
Exhibit 10.2 - Revolving Credit Agreement between X.L. Insurance Company,
Ltd. and X.L. Reinsurance Company, Ltd., as Borrowers, and X.L. Insurance
Company, Ltd. and EXEL Acquisition Ltd., as Guarantors, and the Banks parties
thereto from time to time, and Mellon Bank, N.A., as Agent, dated as of June 6,
1997, incorporated by reference to Exhibit (b) (2) to the Company's Amendment
No. 2 to Schedule 14D-1 dated June 10, 1997.
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, 1998.
<PAGE>
25
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
April 13, 1998 -------------------------
Brian M. O'Hara
President and
Chief Executive Officer
/s/ Robert R. Lusardi
April 13, 1998 -------------------------
Robert R. Lusardi
Executive Vice President and
Chief Financial Officer
<PAGE>
Exhibit 11
EXEL LIMITED
COMPUTATION OF EARNINGS PER ORDINARY SHARE AND
ORDINARY SHARE EQUIVALENT
<TABLE>
<CAPTION>
Three Months Ended
February 28, February 28,
1998 1997
(unaudited)
(U.S. dollars in thousands except
per share amounts)
<S> <C> <C>
(A) Earnings per ordinary
share and ordinary share
equivalent - basic:
Weighted average ordinary
shares and ordinary
share equivalents
outstanding................. 84,543 86,858
======== ========
Net income.................. $155,410 $108,118
======== ========
Earnings per ordinary
share and ordinary
share equivalent............ $ 1.84 $ 1.24
======== ========
(B) Earnings per ordinary
share and ordinary share
equivalent - assuming
full dilution:
Weighted average shares
outstanding................. 84,486 86,824
Average stock options
outstanding (net of
repurchased shares
under the treasury
stock method)............... 1,518 996
-------- --------
Weighted average ordinary
shares and ordinary
share equivalents
outstanding................. 86,004 87,820
======== ========
Net income.................. $155,410 $108,118
======== ========
Earnings per ordinary
share and ordinary
share equivalent.............. $ 1.81 $ 1.23
======== ========
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<LEGEND>
This schedule contains summary financial information extracted from the
Consolidated Balance Sheet and Consolidated Statement of Income and is qualified
in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> NOV-30-1998
<PERIOD-START> DEC-01-1997
<PERIOD-END> FEB-28-1998
<DEBT-HELD-FOR-SALE> 3,456,030
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 940,278
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 4,396,308
<CASH> 407,535
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 40,966
<TOTAL-ASSETS> 6,389,654
<POLICY-LOSSES> 2,409,225
<UNEARNED-PREMIUMS> 652,489
<POLICY-OTHER> 36,497
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 101,000
<COMMON> 846
0
0
<OTHER-SE> 2,661,210
<TOTAL-LIABILITY-AND-EQUITY> 6,389,654
139,882
<INVESTMENT-INCOME> 57,528
<INVESTMENT-GAINS> 62,951
<OTHER-INCOME> 15,207
<BENEFITS> 81,772
<UNDERWRITING-AMORTIZATION> 15,939
<UNDERWRITING-OTHER> 20,666
<INCOME-PRETAX> 157,191
<INCOME-TAX> 700
<INCOME-CONTINUING> 155,410
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 155,410
<EPS-PRIMARY> 1.84
<EPS-DILUTED> 1.81
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
