<PAGE> 1
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended APRIL 30, 1996
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-22118
MID OCEAN LIMITED
(Exact name of registrant as specified in its charter)
Cayman Islands Not Applicable
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
Richmond House, 12 Par-la-Ville Road, Hamilton HM 08, Bermuda
(Address of principal executive offices)
Telephone Number: (441) 292-1358
(Registrant's telephone number, including area code)
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
--- ---
As of June 14, 1996 there were outstanding 32,245,076 Class A Ordinary
Shares and 2,052,000 Class C Ordinary Shares, each of $0.20 par value,
of the registrant.
================================================================================
<PAGE> 2
MID OCEAN LIMITED
INDEX
PART I - FINANCIAL INFORMATION
- --------------------------------------------------------------------------------
Financial Statements: Page
Consolidated Balance Sheets 3
at April 30, 1996 (unaudited) and October 31, 1995
Consolidated Statements of Operations 4
for the six months ended April 30, 1996 and 1995 (unaudited)
Consolidated Statements of Cash Flows 5
for the six months ended April 30, 1996 and 1995 (unaudited)
Notes to Consolidated Financial Statements (unaudited) 6
Management Discussion and Analysis of Financial 7
Condition and Results of Operations
PART II - OTHER INFORMATION
- --------------------------------------------------------------------------------
Item 4 Submission of Matters to a Vote of Security Holders 16
Item 6 Exhibits and Reports on Form 8-K 16
Exhibit 11 Computation of Earnings per Share 17
Signatures 18
<PAGE> 3
PART I. FINANCIAL INFORMATION
MID OCEAN LIMITED
CONSOLIDATED BALANCE SHEETS
(THOUSANDS OF UNITED STATES DOLLARS)
<TABLE>
<CAPTION>
APRIL 30, 1996 OCTOBER 31, 1995
ASSETS (UNAUDITED) (AUDITED)
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Investments available for sale:
Fixed maturities at fair value $ 1,265,131 $1,141,069
(Amortized cost $1,288,310; 1995: $1,127,785)
Short-term investments at fair value 17,124 30,712
(Amortized cost $17,103; 1995: $30,714)
----------- ----------
Total investments available for sale 1,282,255 1,171,781
Unquoted investments; at cost 6,611 3,453
Cash and cash equivalents 135,033 215,048
Accrued investment income 22,295 21,272
Reinsurance premiums receivable 349,413 202,762
Funds withheld by cedents 5,906 4,531
Outstanding losses recoverable from reinsurers 7,555 7,061
Prepaid reinsurance premiums 18,612 5,476
Profit commissions receivable 52,784 0
Deferred acquisition costs 49,847 22,774
Goodwill 31,100 0
Other assets 10,071 1,350
----------- ----------
Total assets $ 1,971,482 $1,655,508
=========== ==========
LIABILITIES
- --------------------------------------------------------------------------------------------------------------
Reserve for losses and loss expenses $ 373,630 $ 336,051
Reserve for unearned premiums 384,958 206,335
Investments pending settlement 66,590 135,966
Reinsurance balances payable 20,546 0
Other liabilities 55,807 8,362
----------- ----------
Total liabilities 901,531 686,714
Minority interest 50,506 0
----------- ----------
Total liabilities and minority interest $ 952,037 $ 686,714
----------- ----------
SHAREHOLDERS' EQUITY
- --------------------------------------------------------------------------------------------------------------
Ordinary Shares (par value $0.20; authorized 200,000,000 shares;
issued and outstanding, 34,515,076; 1995: 34,555,192) $ 6,903 $ 6,911
Additional paid-in capital 631,028 632,926
Net unrealized (depreciation) appreciation on investments (21,758) 13,789
Foreign currency translation adjustments (221) 0
Deferred compensation (2,296) 0
Retained earnings 405,789 315,168
----------- ----------
Total shareholders' equity $ 1,019,445 $ 968,794
----------- ----------
Total liabilities and shareholders' equity $ 1,971,482 $1,655,508
=========== ==========
- --------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements
3
<PAGE> 4
MID OCEAN LIMITED
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(THOUSANDS OF UNITED STATES DOLLARS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
QUARTER ENDED SIX MONTHS ENDED
REVENUES APRIL 30, 1996 APRIL 30, 1995 APRIL 30, 1996 APRIL 30, 1995
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Gross premiums written $ 108,283 $ 55,632 $ 404,177 $ 357,112
Change in unearned premiums 2,825 44,922 (188,447) (163,330)
------------ ----------- ------------ ------------
Premiums earned 111,108 100,554 215,730 193,782
Premiums ceded 17,532 500 24,527 6,779
Change in prepaid premiums (8,698) 1,185 (13,176) (2,177)
------------ ----------- ------------ ------------
Premiums ceded 8,834 1,685 11,351 4,602
Net premiums earned 102,274 98,869 204,379 189,180
Net investment income 19,911 18,747 38,957 36,047
Net (losses) gains on investments (1,986) 5,891 7,196 (16,924)
Exchange gain (loss) 285 2,286 (1,095) 1,163
Managing agency income 4,952 0 4,952 0
Other income 1,033 0 1,033 0
------------ ----------- ------------ ------------
Total Revenues $ 126,469 $ 125,793 $ 255,422 $ 209,466
============ =========== ============ ============
EXPENSES
- -------------------------------------------------------------------------------------------------------------------------
Losses and loss expenses incurred $ 45,944 $ 50,321 $ 99,642 $ 101,429
Reinsurance recoveries (811) 1,722 (1,305) 1,253
------------ ----------- ------------ ------------
Net losses and loss expenses incurred 45,133 52,043 98,337 102,682
Acquisition expenses 17,706 14,517 32,385 26,422
Managing agency expenses 2,080 0 2,080 0
Operational expenses 8,886 3,501 12,141 6,413
Organizational expenses 0 153 0 306
------------ ----------- ------------ ------------
Total Expenses $ 73,805 $ 70,214 $ 144,943 $ 135,823
============ =========== ============ ============
Net income before tax
and minority interest $ 52,664 $ 55,579 $ 110,479 $ 73,643
Income tax (1,671) 0 (1,671) 0
Minority interest (21) 0 (21) 0
------------ ----------- ------------ ------------
Net income $ 50,972 $ 55,579 $ 108,787 $ 73,643
============ =========== ============ ============
PER SHARE DATA
- -------------------------------------------------------------------------------------------------------------------------
Net income per ordinary share $ 1.38 $ 1.46 $ 2.95 $ 1.94
Dividend per ordinary share $ 0.275 $ 0.25 $ 0.275 $ 0.25
Weighted average number of
ordinary shares outstanding 36,989,076 37,990,692 36,926,000 37,960,230
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements
4
<PAGE> 5
MID OCEAN LIMITED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(THOUSANDS OF UNITED STATES DOLLARS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
APRIL 30, 1996 APRIL 30, 1995
CASH FLOWS FROM OPERATING ACTIVITIES (UNAUDITED) (UNAUDITED)
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
Net Income $ 108,787 $ 73,643
Adjustment to reconcile net income to cash provided
by operating activities:
Amortization of premiums on investments 5,031 201
Amortization of goodwill 701 0
Amortization of organizational expenses 0 153
Provision for depreciation 328 259
Share grants 839 0
Net (gains) losses on investments (7,196) 16,924
Minority interest 21 0
Accrued investment income (400) 8,887
Reinsurance premiums receivable (146,651) (158,413)
Deferred acquisition expenses (27,073) (18,937)
Outstanding losses recoverable from reinsurers (494) 3,357
Prepaid reinsurance premiums (13,136) (2,134)
Profit commissions receivable (3,228) 0
Reserve for losses and loss expenses 37,579 63,703
Reserve for unearned premiums 178,623 161,518
Reinsurance balances payable 20,546 0
Other liabilities 5,780 (1,345)
Foreign currency translation adjustment (434) 0
Funds withheld by cedents (1,375) (1,208)
Other assets (3,323) 704
----------- -----------
Net cash provided by operating activities $ 154,925 $ 147,312
=========== ===========
CASH FLOWS FROM INVESTING ACTIVITIES
- -----------------------------------------------------------------------------------------------
Proceeds from sale and maturity of investments $ 1,744,697 $ 1,367,790
Purchase of investments available for sale (1,897,964) (1,406,035)
Deferred gains on forward contracts 651 0
Purchase of unquoted investments (3,158) (1,498)
Net investment in Brockbank Group (58,857) 0
----------- -----------
Net cash applied to investing activities ($ 214,631) ($ 39,743)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
- -----------------------------------------------------------------------------------------------
Options exercised $ 630 $ 0
Repurchase of shares (2,772) 0
Dividends paid (18,167) (9,080)
----------- -----------
Net cash applied to financing activities ($ 20,309) ($ 9,080)
----------- -----------
Net (decrease) increase in cash and cash equivalents $ (80,015) $ 98,489
Balance at beginning of period $ 215,048 $ 184,569
----------- -----------
Cash and cash equivalents at end of period $ 135,033 $ 283,058
=========== ===========
- -----------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements
5
<PAGE> 6
MID OCEAN LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE A: BASIS OF PRESENTATION
The accompanying consolidated financial statements have not been audited except
for the balance sheet at October 31, 1995. In the opinion of the Company's
management, the financial statements reflect all adjustments necessary to
present fairly the results of operations for the quarters and six month periods
ended April 30, 1996 and 1995, the financial position at April 30, 1996 and the
cash flows for the six month periods ended April 30, 1996 and 1995. The results
of operations for the six months ended April 30, 1996 are not necessarily
indicative of future financial results.
NOTE B: INVESTMENT IN SUBSIDIARY
On December 29, 1995, the shareholders of The Brockbank Group plc agreed to
combine the business of its subsidiaries, principally a Lloyd's managing agency,
with a subsidiary of Mid Ocean which in turn has invested $78 million in two new
Lloyd's dedicated corporate syndicates. Such combination resulted in the
formation of the Brockbank Group. As a result of this combination, which has
been accounted for under the purchase method, Mid Ocean owns 51% of the
Brockbank Group. Goodwill resulting from this transaction is currently estimated
at approximately $31 million which the Company intends to amortize on a straight
line basis over 15 years.
The results of the Brockbank Group's first quarter of operations for the three
month period ended March 31, 1996 have been included in the Company's earnings
for the quarter ended April 30, 1996.
6
<PAGE> 7
MID OCEAN LIMITED
MANAGEMENT DISCUSSION & ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
The following is a discussion of the Company's results of operations and
financial condition. This discussion and analysis should be read in conjunction
with the attached unaudited consolidated financial statements and notes thereto
of the Company for the quarter and six months ended April 30, 1996 and the
consolidated financial statements for the year ended October 31, 1995 and the
notes thereto included in the Company's Annual Report on Form 10-K. The results
of operations for any fiscal period are not necessarily indicative of future
financial results. Unless otherwise indicated, reference to the Company includes
Mid Ocean Reinsurance Company Ltd, its wholly owned subsidiary ("Mid Ocean") and
Mid Ocean's 51% ownership of the Brockbank Group ("Brockbank").
RESULTS OF OPERATIONS
Second Quarter ended April 30, 1996 compared with the Second Quarter ended April
30, 1995
Net income for the quarter was $51.0 million compared with $55.6 million for the
quarter ended April 30, 1995, a decrease of 8.3%.
Net operating income, excluding net gains or losses on investments, for the
quarter ended April 30, 1996 was $53.0 million compared with $49.7 million for
the quarter ended April 30, 1995, an increase of 6.6%.
Revenues
The following table depicts the Company's revenues for the periods shown below:
<TABLE>
<CAPTION>
QUARTER ENDED APRIL 30,
----------------------- PERCENT
1996 1995 CHANGE
---- ---- ------
<S> <C> <C> <C>
Dollars in thousands
Gross premiums written $ 108,283 $ 55,632 94.6%
Premiums ceded 17,532 500 --
--------- -------- ----
Net premiums written $ 90,751 $ 55,132 64.6%
========= ======== ====
Net premiums earned 102,274 98,869 3.4%
Net investment income 19,911 18,747 6.2%
Net (losses)/gains on investments (1,986) 5,891 --
Exchange gain on investments 285 2,286 (87.5%)
Managing agency income 4,952 0 --
Other income 1,033 0 --
--------- -------- ----
Total revenues $ 126,469 $125,793 0.5%
========= ======== ====
</TABLE>
7
<PAGE> 8
Gross premiums written for the quarter ended April 30, 1996 were $108.3 million
compared with $55.6 million for the quarter ended April 30, 1995, an increase of
$52.7 million or 94.6%. This increase is largely attributable to the Company's
investment in the Brockbank Group which, through two Lloyd's corporate
syndicates, contributed $61.1 million of gross premiums written during the
quarter. Off-setting this increase was a net downward revision of gross premiums
written of $3.5 million relating to the 1994 proportional book of account,
resulting from a regular review of the development of the Company's proportional
business. In addition, approximately $5.9 million relating to the Company's crop
book was reported during the first quarter of 1996, which was previously
recorded in the second quarter 1995. The Company's Japanese book of business
which was renewed during the second quarter, was approximately 9% lower in Yen
terms, 25% lower in Dollar terms or a reduction of $6.0 million, resulting from
a deterioration in the value of the Yen, when compared with the second quarter
1995. The Company did not renew certain Japanese accounts as the rates did not
meet the Company's required levels. However, the Company was able to strengthen
other important relationships in that market and increased its participation in
those programs. The decline in the Japanese book was offset by the development
of new business and increases in the Company's existing non-catastrophe book.
As a result, gross premiums written during the quarter ended April 30, 1996,
after allowing for the impact of Brockbank and the events noted above, was
slightly higher than the second quarter of 1995.
Premiums ceded for the quarter ended April 30, 1996 were $17.5 million compared
with $0.5 million for the quarter ended April 30, 1995, an increase of $17.0
million of which $16.0 million is attributable to Brockbank which normally
purchases a significant amount of reinsurance protection. Approximately $1.5
million of premiums ceded during the second quarter of 1996 results from Mid
Ocean's own operations. In addition to the normal common account reinsurance
protection associated with certain of the Company's proportional contracts, the
Company also purchased reinsurance protection on certain aspects of its book of
business at a cost of approximately $3.0 million. Off-setting these costs were
reductions in previously recorded premiums ceded relating to prior year's
proportional business of approximately $1.5 million.
As a result of the above, net premiums written for the quarter ended April 30,
1996 were $90.8 million compared to $55.1 million for the quarter ended April
30, 1995, an increase of $35.7 million or 64.6%.
Net premiums earned during the quarter ended April 30, 1996 were $102.3 million
compared with $98.9 million during the quarter ended April 30, 1995, an increase
of $3.4 million or 3.4%. Approximately $98.0 million of net premiums earned is
attributable to the Mid Ocean book of business and is comparable to the $98.9
million of net premiums earned during the second quarter of 1995. Approximately
$4.3 million is attributable to the Brockbank Group. The majority of premiums
resulting from Brockbank are earned in excess of 12 months; hence the low
contribution to net premiums earned during the quarter.
8
<PAGE> 9
Net investment income was $19.9 million in the quarter ended April 30, 1996
compared with $18.7 million in the second quarter of 1995. The increase results
from a larger investment base off-set by lower investment yields; 5.95% during
the quarter ended April 30, 1996 compared with 6.85% during the same quarter in
1995.
Net losses on investments were $2.0 million during the quarter ended April 30,
1996 compared with gains of $5.9 million during the quarter ended April 30,
1995. The loss reported during the second quarter of 1996 is primarily
attributable to the sale of securities in a period of declining market values.
Managing agency income reflects income earned by the Brockbank managing agency
in respect of its management of five Lloyd's underwriting syndicates, two of
which are dedicated corporate syndicates which are included in Mid Ocean's
operating results, as noted above, although income with respect to these two
syndicates has been eliminated on consolidation. Also included are earned profit
commissions which relate to the 1994 and 1995 underwriting years. As this income
is first reflected during the quarter ended April 30, 1996, there is no prior
year comparative.
Other income of $1.0 million is fee income resulting from Brockbank's direct
marketing motor business. There is no prior period comparative amount, as
results arising from the Brockbank acquisition on December 29, 1995, which is
Brockbank's first quarter ending March 31, 1996, are reflected in Mid Ocean's
results for the first time during the quarter ended April 30, 1996. As a result
of the above, total revenues for the quarter ended April 30, 1996 were $126.5
million compared with $125.8 million, an increase of $0.7 million.
Expenses
The following table sets forth the Company's expenses, combined ratio and
components thereof for the periods indicated:
<TABLE>
<CAPTION>
QUARTER ENDED APRIL 30, PERCENT
1996 1995 CHANGE
---- ----
<S> <C> <C> <C>
Net losses and loss expenses incurred $45,133 $52,043 (13.3)%
------- ------- ------
Acquisition expenses 17,706 14,517 22.0%
Operational expenses 8,886 3,501 153.8%
Organizational expenses 0 153 N/A
------- ------- ------
Total underwriting expenses 26,592 18,171 46.3%
Managing agency expenses 2,080 0 N/A
------- ------- ------
Total expenses $73,805 $70,214 5.1%
======= ======= ======
Net loss and loss expense ratio 44.1% 52.6%
------- -------
Acquisition expense ratio 17.3% 14.7%
Operational expense ratio 8.7% 3.7%
------- -------
Underwriting expense ratio 26.0% 18.4%
Combined ratio 70.1% 71.0%
======= =======
</TABLE>
9
<PAGE> 10
The Company incurred net losses and loss expenses during the quarter ended April
30, 1996, of $45.1 million or 44.1% of net premiums earned compared with $52.0
million or 52.6% of net premiums earned during the quarter ended April 30, 1995,
a decrease of $6.9 million or 13.3%. There were no significant catastrophic
losses reported during the quarters ended April 30, 1996 or 1995. The decrease
in net losses and loss expenses incurred is attributable to the on-going
actuarial review process which has resulted in the reduction of reserves
previously established for prior underwriting years.
Underwriting expenses are comprised of acquisition expenses and operational
expenses (which includes organizational expenses). Underwriting expenses for the
quarter ended April 30, 1996 were $26.6 million or 26.0% of net premiums earned
compared with $18.2 million or 18.4% of net premiums earned during the quarter
ended April 30, 1995. This represents an increase of $8.4 million which is
primarily attributable to increased costs resulting from the dedicated Lloyd's
corporate capital syndicates included in the Brockbank Group and, to a lesser
extent, Mid Ocean's London branch. The increase in the underwriting expense
ratio results primarily from increased expenses when compared to the relatively
low net earned premiums from the Brockbank Group. The acquisition expense ratio
was 17.3% for the quarter ended April 30, 1996 compared with 14.7% for the
second quarter of 1995. Approximately 2 percentage points are attributable to
profit commissions accrued in respect of Mid Ocean's proportional book of
business which reflected an increased profitability resulting from a decrease in
prior years reserves for losses and loss expenses. Included in operational
expenses is approximately $0.8 million of long term incentive compensation which
was awarded and vested during the quarter. Approximately $2.3 million of this
incentive compensation is deferred in the balance sheet and will be expensed
over the next five years as the awards vest.
After adjusting for the Brockbank Group, profit commissions and long term
incentive compensation noted above, the underwriting expense ratios for Mid
Ocean's own operation are comparable with the second quarter of 1995.
As a result of the above, total expenses for the quarter ended April 30, 1996
were $73.8 million compared with $70.2 million during the quarter ended April
30, 1995.
Managing agency expenses reflect the cost of operating the Brockbank managing
agency. A portion of these costs are allocated to and recovered from the
syndicates (shown in revenues as managing agency income) under management based
on the underwriting capacity of each syndicate. As this expense is first
reflected during the quarter ended April 30, 1996, there is no prior year
comparative.
Net income before income tax and minority interest for the quarter ended April
30, 1996 was $52.7 million compared with $55.6 million for the quarter ended
April 30, 1995, a decrease of $2.9 million or 5.2%. Income tax of $1.7 million
represents the Company's estimate of tax liability in respect of the Company's
Branch and Brockbank Group in the United Kingdom. The Company's Branch did not
exist during the second quarter of 1995, nor had the Brockbank transaction taken
place at that time. Accordingly, there were no comparable income taxes during
the quarter ended April 30, 1995.
10
<PAGE> 11
Minority interest represents that portion of the Brockbank Group included in the
Company's results of operations, as described above, which belongs to the
minority shareholders of Brockbank.
The Company expects that the effects of inflation are unlikely to be a
significant factor in the results of operations given the short term nature of
both reinsurance premiums receivable and expected loss payments from reserves
for losses and loss expenses.
Six months ended April 30, 1996 compared with six months ended April 30, 1995
For the six months period ended April 30, 1996 net income was $108.8 million
compared with $73.6 million for the six months ended April 30, 1995, an increase
of 47.7%.
Net operating income, excluding net gains or losses on investments, for the six
months ended April 30, 1996 was $101.6 million compared with $90.6 million for
the six months ended April 30, 1995, an increase of 12.2%.
Revenues
The following table depicts the Company's revenues for the periods shown below:
<TABLE>
<CAPTION>
SIX MONTHS ENDED APRIL 30, PERCENT
1996 1995 CHANGE
---- ---- ------
<S> <C> <C> <C>
Dollars in thousands
Gross premiums written $ 404,177 $ 357,112 13.2%
Premiums ceded 24,527 6,779 261.8%
--------- --------- -------
Net premiums written $ 379,650 $ 350,333 8.4%
========= ========= =======
Net premiums earned 204,379 189,180 8.0%
Net investment income 38,957 36,047 8.1%
Net gains/(losses) on investments 7,196 (16,924) --
Exchange (loss)/gain on investments (1,095) 1,163 (194.5)%
Managing agency income 4,952 0 --
Other income 1,033 0 --
--------- --------- -------
Total revenues $ 255,422 $ 209,466 21.9%
========= ========= =====
</TABLE>
For the six month period ended April 30, 1996, gross premiums written were
$404.2 million compared with $357.1 million during the first six months of 1995,
an increase of 13.2%. This growth is largely attributable to the Company's
investment in the Brockbank Group which, through its syndicates, represented
$61.1 million of gross premiums written during the first six months of 1996. As
previously noted, the Company was also able to increase existing and develop new
business in the Company's non-catastrophe book. Additionally, the Company's
London branch has increased gross premiums written by approximately $17.2
million. Offsetting these increases was a reduction in the size of a reinsurance
contract provided to a syndicate managed by
11
<PAGE> 12
Brockbank which was written in the first quarter of fiscal 1995 with an
estimated gross written premium of approximately $38.0 million. This was renewed
in January 1996 at an estimated gross written premium of $24.5 million, a
decrease of $13.5 million. The reduced renewal of this contract is attributable
to Mid Ocean providing additional capacity to Brockbank by way of the Company's
investment in two new Lloyd's dedicated corporate vehicles, thereby reducing
Brockbank's need for such reinsurance. The Company experienced a reduction in
the property catastrophe excess of loss portfolio during the first quarter 1996.
In addition, there were reductions in the underlying insurance policies, which
comprise elements of the Company's proportional portfolio, during the first
quarter 1996. As noted above, the Company's Japanese book of business declined
by approximately $6.0 million during the second quarter 1996 compared with the
second quarter 1995.
Premiums ceded during the six months ended April 30, 1996 were $24.5 million
compared with $6.8 million for the six months ended April 30, 1995, an increase
of $17.7 million. This increase is largely attributable to reinsurance purchased
by Brockbank during the second quarter, as previously noted. As a result, net
premiums written for the six months ended April 30, 1996 were $379.7 million
compared to $350.3 million for the six months ended April 30, 1995, an increase
of $29.3 million or 8.4%.
Net premiums earned during the six months ended April 30, 1996 were $204.4
million compared with $189.2 million during the same period in 1995, an increase
of $15.2 million or 8.0%. This increase is attributable to a general increase in
gross premiums written during 1996 and 1995 which continue to be earned during
the current year. Premiums written are earned over the underlying risk period of
each contract commencing at the inception of the contract. Generally the risk
period is one year but can be longer in certain cases.
Net investment income was $38.9 million during the six months ended April 30,
1996 compared to $36.0 million during the same period in 1995, an increase of
$2.9 million or 8.1%. The increase results from a larger investment base offset
by lower investment yields when compared with the previous year.
Net gains on investments were $7.2 million during the six months ended April 30,
1996 compared with a loss of $16.9 million for the six months ended April 30,
1995. The fiscal 1996 year to date gain is attributable to gains realized on the
sale of securities during the first quarter. The fiscal 1995 losses were largely
attributable to the first quarter 1995 where there were realized losses on the
sale of securities due to repositioning of the Company's fixed income portfolio
in a period of declining market values together with unrealized currency losses
on bonds and forward currency contracts.
As previously noted, managing agency income is attributable to both earned
profit commissions and fee income in respect of Brockbank which is included in
these accounts for the first time during the second quarter 1996. Accordingly,
there is no prior period comparative figure.
As a result of the above, total revenues for the six months ended April 30, 1996
were $255.4 million compared with $209.5 million for the six months ended April
30, 1995, an increase of $45.9 million or 21.9%.
12
<PAGE> 13
Expenses
The following table sets forth the Company's expenses, combined ratio and
components thereof for the periods indicated:
<TABLE>
<CAPTION>
SIX MONTHS ENDED APRIL 30, PERCENT
1996 1995 CHANGE
----- ----
<S> <C> <C> <C>
Net losses and loss expenses incurred $ 98,337 $102,682 (4.2%)
-------- -------- ----
Acquisition expenses 32,385 26,422 22.6%
Operational expenses 12,141 6,413 89.3%
Organizational expenses 0 306 --
-------- -------- ----
Total underwriting expenses 44,526 33,141 34.4%
Managing agency expenses 2,080 0 --
-------- -------- ----
Total expenses $144,943 $135,823 6.7%
======== ======== ====
Net loss and loss expense ratio 48.1% 54.3%
-------- --------
Acquisition expense ratio 15.9% 14.0%
Operational expense ratio 5.9% 3.5%
-------- --------
Underwriting expense ratio 21.8% 17.5%
Combined ratio 69.9% 71.8%
======== ========
</TABLE>
The Company incurred net losses and loss expenses during the six months ended
April 30,1996 of $98.3 million or 48.1% of net premiums earned compared with
$102.7 million or 54.3% of net premiums earned during the six months ended April
30, 1995, a decrease of $4.4 million or 4.2%. There were no significant
catastrophic losses reported during the six months ended April 30, 1996 or 1995.
The decrease in net losses and loss expenses incurred is attributable to the
ongoing actuarial review process which has resulted in the reduction of reserves
previously established for prior underwriting years.
Underwriting expenses are comprised of acquisition expenses and operational
expenses (which includes organizational expenses). Underwriting expenses for the
six months ended April 30, 1996 were $44.5 million or 21.8% of net premiums
earned compared with $33.1 million or 17.5% of net premiums earned for the six
months ended April 30, 1995. This represents an increase of $11.4 million which
is primarily attributable to increased costs resulting from the Brockbank Group
and, to a lesser extent, Mid Ocean's London branch. The increase in the
underwriting expense ratio results primarily from increased expenses as noted
above and the relatively low net earned premium from the Brockbank Group.
The acquisition expense ratio was 15.9% for the six months ended April 30, 1996
compared with 14.0% for the six months ended April 30, 1995. The increase is
largely attributable to higher
13
<PAGE> 14
commissions on certain proportional contracts. Included in the first six months
of 1996 operational expenses is approximately $0.8 million of long term
incentive compensation which was awarded and subsequently vested during that
period.
Managing agency expenses reflects costs attributable to operating the Brockbank
managing agency. A portion of these costs are allocated to and recovered from
the syndicates under management based on the underwriting capacity of each
syndicate. As this expense is first reflected during the quarter ended April 30,
1996, there is no prior year comparative.
Net income before income tax and minority interest for the six months ended
April 30, 1996 was $110.4 million compared with $73.6 million for the six months
ended April 30, 1995, an increase of $36.8 million or 50.0%. Income tax of $1.7
million represents the Company's estimate of tax liability in respect of the
Company's branch and Brockbank Group in the United Kingdom. The Company's branch
did not exist during the same period of 1995 nor had the Brockbank transaction
taken place at that time. Accordingly, there were no comparable income taxes
during the six months ended April 30, 1995.
Minority interest represents that portion of the Brockbank Group included in the
Company's results of operations as described above which belongs to the minority
shareholders of Brockbank.
FINANCIAL CONDITION AND LIQUIDITY
As a holding company, the Company's assets consist of its investment in the
stock of Mid Ocean. The Company relies primarily on cash dividends from Mid
Ocean to the Company, which are restricted to retained earnings and could be
further limited under Bermuda insurance law. The Insurance Act of 1978 of
Bermuda, as amended by the Insurance Amendment Act of 1995 of Bermuda, requires
Mid Ocean to maintain a minimum solvency margin and minimum liquidity ratio.
Provisions of the above noted Acts are not expected to limit payment of any
required dividends from retained earnings by Mid Ocean to the Company.
At April 30, 1996, shareholders' equity was $1,019.4 million, of which $405.8
million was retained earnings. At April 30, 1996, Mid Ocean held $135.0 million
of cash and cash equivalents compared with $215.0 million at October 31, 1995.
The decrease is attributable to an increased level of investment of the
Company's cash and cash equivalents and the cash in-flow from reinsurance
premiums receivable. In addition, the Company repurchased $5.7 million of its
stock during April 1996 of which $2.8 million was settled. An additional $7.8
million was repurchased subsequent to April 30, 1996. Approximately $12.6
million of the $75 million authorized by the Board of Directors for repurchase
of shares in March 1995 remains at June 14, 1996. The Company has no debt.
Net cash flow provided by operating activities for the six months ended April
30, 1996 was $154.9 million compared with $147.3 million during the same period
of 1995. This results primarily from receipt of premium income net of paid
losses, acquisition costs and other related expenses. Mid Ocean expects cash
flows will continue to be strong, primarily as a result of net reinsurance
premium receipts and investment income. Mid Ocean is unable to predict its cash
outflows, as they will be substantially determined by loss payments and
particularly large catastrophes if they occur. As a consequence, cash flow may
fluctuate between individual fiscal quarters and fiscal years.
14
<PAGE> 15
Primarily because of the potential for large loss payments, Mid Ocean's
investment portfolio is structured to provide a high level of liquidity to meet
its obligations. At April 30, 1996, Mid Ocean's investment portfolio, measured
at fair value, including accrued investment income and trades pending settlement
and cash and cash equivalents, was $1,373.0 million compared with $1,272.1
million at October 31, 1995. The investment portfolio is presently made up of
bonds, mortgage and asset-backed securities and short-term investments. At April
30, 1996, 91.2% of the fair value of securities held was in US Government
securities or in obligations rated "AA" or better by Moody's Investor Services
Inc or Standard & Poor's Corporation. The balance was in investment grade fixed
income securities. The Company presently has no investments in real estate or
mortgage loans. All fixed maturity and short-term investments are currently
classified as securities available for sale and are carried at fair value.
Under the terms of certain reinsurance contracts, Mid Ocean is required to
provide letters of credit to reinsureds in respect of reported claims and/or
unearned premiums. Mid Ocean has letter of credit facilities of $274 million.
These facilities are secured by a lien on a portion of Mid Ocean's investment
portfolio. At April 30, 1996, Mid Ocean had provided letters of credit amounting
to $164.7 compared with $71.2 million at October 31, 1995. Letters of credit are
required by certain ceding companies to support unearned premiums and loss
reserves and in the case of the two Lloyd's corporate syndicates managed by
Brockbank, letters of credit were issued in the equivalent amount of $73.9
million in lieu of capital.
On December 29, 1995, Mid Ocean completed a transaction to acquire 51% ownership
of the Brockbank Group, in exchange for 49% of a wholly owned subsidiary
capitalized at $78 million which, in turn, had capitalized two limited liability
dedicated corporate syndicates at Lloyd's. The initial investment in the two
corporate syndicates is supported by a cash deposit of approximately $1.5
million together with a letter of credit of approximately $76.5 million. Due to
the uncertainties surrounding Lloyd's, the transaction may be unwound by Mid
Ocean if certain events, principally related to the Lloyd's Reconstruction and
Renewal Plan, occur or fail to occur before September 1, 1996, including a
material adverse change in respect of Lloyd's or Brockbank. In this event, Mid
Ocean will continue to support the two new corporate syndicates for at least the
1996 calendar year of account. In the event that the transaction proceeds and is
not unwound as noted above, Mid Ocean has undertaken to make an offer by
September 1, 1997, based on a valuation pursuant to a specified procedure by an
independent banking firm, to acquire all outstanding Brockbank shares for either
cash, loan notes or ordinary shares in Mid Ocean.
The Company has made no significant capital expenditures during the six months
ended April 30, 1996 other than its investment of $78 million in Brockbank. The
Company has committed to invest up to $18.7 million, principally as a special
limited partner in The Trident Partnership L.P. ("Trident"), a limited
partnership organized for investment in the insurance industry. At April 30,
1996 and October 31, 1995, the investment in Trident was $5.6 million and $2.5
million respectively. The Company expects to invest between $0.8 million and
$2.1 million in June 1996.
The Company's common stock commenced trading on the New York Stock Exchange on
May 30, 1996.
15
<PAGE> 16
PART II OTHER INFORMATION
MID OCEAN LIMITED
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's Annual Meeting of Stockholders, held February 29, 1996, the
following actions were taken:
a. The stockholders adopted a resolution to increase the number
of Class A Ordinary Shares of the Company reserves for
issuance upon exercise of options to be granted under the 1993
Long Term Incentive and Share Award Plan from 1,500,000 to
2,250,000 by the following vote:
<TABLE>
<S> <C>
For 22,449,860
Against 3,043,197
Abstentions 42,260
Broker No Vote 124,930
</TABLE>
b. The stockholders appointed KPMG Peat Marwick, Bermuda, to act
as the independent auditors of the Company for the fiscal year
ending October 31, 1996 by the following vote:
<TABLE>
<S> <C>
For 25,647,046
Against 3,485
Abstentions 9,716
</TABLE>
c. The stockholders elected the following nominees as Directors
by the following vote:
<TABLE>
<CAPTION>
Nominee Elected Class of Director For Against
------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Robert J Newhouse Jr Class III Director 25,645,432 14,815
Geoffrey Elliott Class III Director 25,640,682 19,565
Michael P Esposito Jr Class III Director 25,644,382 15,865
Roberto G Mendoza Class III Director 25,645,522 14,725
Frank J Tasco Class III Director 25,642,132 18,115
</TABLE>
Class III Directors will serve until the 1999 Annual Meeting of
Stockholders. Class I Directors will serve until the 1997 Annual
meeting. Class II Directors will serve until the 1998 Annual Meeting
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the three months ended April 30, 1996.
16
<PAGE> 17
EXHIBIT 11
MID OCEAN LIMITED
COMPUTATIONS OF EARNINGS PER SHARE
(UNAUDITED)
(Thousands of US Dollars except share and per share amounts)
<TABLE>
<CAPTION>
QUARTER ENDED SIX MONTHS ENDED
APRIL 30, 1996 APRIL 30, 1995 APRIL 30, 1996 APRIL 30, 1995
<S> <C> <C> <C> <C>
Net Income $ 50,972 $ 55,579 $ 108,787 $ 73,643
=========== =========== =========== ===========
Weighted average ordinary
shares outstanding 34,619,143 36,318,692 34,587,524 36,318,692
Common share equivalents
associated with options 2,369,933 1,672,000 2,338,476 1,641,538
----------- ----------- ----------- -----------
Ordinary shares and ordinary share
equivalents outstanding 36,989,076 37,990,692 36,926,000 37,960,230
=========== =========== =========== ===========
Earnings per ordinary share
and ordinary share equivalent $ 1.38 $ 1.46 $ 2.95 $ 1.94
=========== =========== =========== ===========
</TABLE>
17
<PAGE> 18
MID OCEAN LIMITED
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.
MID OCEAN LIMITED
-------------------------
(Registrant)
/s/ CHARLES F HAYS
-------------------------
CHARLES F HAYS
Executive Vice President,
Chief Financial and Administrative Officer
(Principal Financial Officer
and Duly Authorized Officer)
/s/ JOHN M WADSON
-------------------------
JOHN M WADSON
Vice President, Treasurer and Secretary
(Principal Accounting Officer
and Duly Authorized Officer)
June 14, 1996
- -------------------------
Date
18
<PAGE> 19
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
11 Computations of Earnings Per Share (see page 17)
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 7
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> OCT-31-1996
<PERIOD-START> NOV-01-1995
<PERIOD-END> APR-30-1996
<DEBT-HELD-FOR-SALE> 1265131
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 0
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 1288866
<CASH> 135033
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 49847
<TOTAL-ASSETS> 1971482
<POLICY-LOSSES> 373630
<UNEARNED-PREMIUMS> 384958
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 0
0
0
<COMMON> 637931
<OTHER-SE> 381514
<TOTAL-LIABILITY-AND-EQUITY> 1971482
204379
<INVESTMENT-INCOME> 38957
<INVESTMENT-GAINS> 7196
<OTHER-INCOME> 4890
<BENEFITS> 98337
<UNDERWRITING-AMORTIZATION> 32385
<UNDERWRITING-OTHER> 14221
<INCOME-PRETAX> 110479
<INCOME-TAX> 1671
<INCOME-CONTINUING> 108787
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 108787
<EPS-PRIMARY> 2.95
<EPS-DILUTED> 0
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
