<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 JULY 31, 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 September 12, 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
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION
- ------------------------------------------------------------------------------------
<S> <C> <C>
Financial Statements: Page
Consolidated Balance Sheets 3
at July 31, 1996 (unaudited) and October 31, 1995
Consolidated Statements of Operations 4
for the quarter and nine months ended July 31, 1996 and
1995 (unaudited)
Consolidated Statements of Cash Flows 5
for the nine months ended July 31, 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 6 Exhibits and Reports on Form 8-K 16
Exhibit 11 Computation of Earnings per Share 17
Signatures 18
</TABLE>
<PAGE> 3
PART I. FINANCIAL INFORMATION
MID OCEAN LIMITED
CONSOLIDATED BALANCE SHEETS
(THOUSANDS OF UNITED STATES DOLLARS)
<TABLE>
<CAPTION>
JULY 31, 1996 OCTOBER 31, 1995
ASSETS (UNAUDITED) (AUDITED)
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
Investments available for sale:
Fixed maturities at fair value $ 1,316,962 $ 1,141,069
(Amortized cost $1,331,659; 1995: $1,127,785)
Short-term investments at fair value 2,936 30,712
----------- -----------
(Amortized cost $2,925; 1995: $30,714)
Total investments available for sale 1,319,898 1,171,781
Unquoted investments; at cost 7,914 3,453
Cash and cash equivalents 133,387 215,048
Accrued investment income 24,822 21,272
Reinsurance premiums receivable 328,774 202,762
Funds withheld by cedents 6,409 4,531
Outstanding losses recoverable from reinsurers 11,426 7,061
Prepaid reinsurance premiums 14,494 5,476
Profit commissions receivable 57,746 0
Deferred acquisition costs 52,380 22,774
Goodwill 30,726 0
Other assets 10,994 1,350
----------- -----------
Total assets $ 1,998,970 $ 1,655,508
=========== ===========
LIABILITIES
- -------------------------------------------------------------------------------------------------------
Reserve for losses and loss expenses $ 403,922 $ 336,051
Reserve for unearned premiums 377,456 206,335
Investments pending settlement 49,470 135,966
Reinsurance balances payable 12,196 0
Other liabilities 53,962 8,362
----------- -----------
Total liabilities 897,006 686,714
Minority interest 51,482 0
----------- -----------
Total liabilities and minority interest $ 948,488 $ 686,714
----------- -----------
SHAREHOLDERS' EQUITY
- -------------------------------------------------------------------------------------------------------
Ordinary Shares (par value $0.20; authorized 200,000,000 shares;
issued and outstanding, 34,297,076; 1995:34,555,192) $ 6,859 $ 6,911
Additional paid-in capital 623,299 632,926
Net unrealized (depreciation) appreciation on investments (15,346) 13,789
Foreign currency translation adjustments (12) 0
Deferred compensation (2,177) 0
Retained earnings 437,859 315,168
----------- -----------
Total shareholders' equity $ 1,050,482 $ 968,794
----------- -----------
Total liabilities and shareholders' equity $ 1,998,970 $ 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 NINE MONTHS ENDED
REVENUES JULY 31, 1996 JULY 31, 1995 JULY 31, 1996 JULY 31, 1995
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Gross premiums written $116,370 $ 67,848 $ 520,547 $ 424,960
Change in unearned premiums 6,332 25,674 (182,115) (137,656)
-------- -------- -------- ---------
Premiums earned 122,702 93,522 338,432 287,304
Premiums ceded 8,914 1,504 33,441 8,283
Change in prepaid premiums (314) 1,222 (13,490) (955)
-------- -------- -------- ---------
Premiums ceded 8,600 2,726 19,951 7,328
Net premiums earned 114,102 90,796 318,481 279,976
Net investment income 21,052 18,716 60,009 54,763
Net (losses) gains on investments (8,396) 15,308 (1,200) (1,616)
Exchange gain (loss) 1,404 (1,362) 309 (199)
Managing agency income 4,719 0 9,671 0
Other income 1,178 0 2,210 0
-------- -------- -------- ---------
Total Revenues $134,059 $123,458 $ 389,480 $ 332,924
======== ======== ======== ========
EXPENSES
- ----------------------------------------------------------------------------------------------------------------------
Losses and loss expenses incurred $ 61,390 $39,951 $ 161,032 $ 141,380
Reinsurance recoveries (4,651) (144) (5,956) 1,109
-------- -------- -------- ---------
Net losses and loss expenses incurred 56,739 39,807 155,076 142,489
Acquisition expenses 19,343 12,122 51,729 38,544
Managing agency expenses 1,488 0 3,568 0
Operational expenses 9,138 5,235 21,277 11,648
Organizational expenses 0 154 0 460
-------- -------- -------- ---------
Total Expenses $ 86,708 $ 57,318 $ 231,650 $ 193,141
======= ======= ======== ========
Net income before tax
and minority interest $ 47,351 $ 66,140 $ 157,830 $ 139,783
Income tax (624) 0 (2,295) 0
Minority interest (510) 0 (531) 0
-------- -------- -------- ---------
Net income $ 46,217 $ 66,140 $ 155,004 $ 139,783
======= ======= ======== ========
PER SHARE DATA
- ----------------------------------------------------------------------------------------------------------------------
Net income per ordinary share $1.26 $1.76 $4.21 $3.70
Dividend per ordinary share $0.4125 $0.25 $0.9375 $0.50
Weighted average number of
ordinary shares outstanding 36,686,797 37,499,073 36,845,573 37,802,517
- ----------------------------------------------------------------------------------------------------------------------
</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>
NINE MONTHS ENDED
JULY 31, 1996 JULY 31, 1995
CASH FLOWS FROM OPERATING ACTIVITIES (UNAUDITED) (UNAUDITED)
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net Income $155,004 $ 139,783
Adjustment to reconcile net income to cash provided
by operating activities:
Amortization of premiums on investments 7,267 1,212
Amortization of goodwill 1,075 0
Amortization of organizational expenses 0 460
Provision for depreciation 539 404
Share grants 958 0
Net losses on investments 1,200 1,616
Minority interest 531 0
Accrued investment income (2,927) 1,115
Reinsurance premiums receivable (126,012) (137,224)
Deferred acquisition expenses (29,606) (16,331)
Outstanding losses recoverable from reinsurers (4,365) 3,906
Prepaid reinsurance premiums (9,018) (869)
Profit commissions receivable (8,190) 0
Reserve for losses and loss expenses 67,871 81,464
Reserve for unearned premiums 171,121 134,343
Reinsurance balances payable 12,196 (217)
Other liabilities 6,834 0
Foreign currency translation adjustment (23) 0
Funds withheld by cedents (1,878) (1,108)
Other assets (4,457) 502
-------- ----------
Net cash provided by operating activities $238,120 $209,056
======= =======
CASH FLOWS FROM INVESTING ACTIVITIES
- -----------------------------------------------------------------------------------------------------------------
Proceeds from sale and maturity of investments 2,543,546 2,641,238
Purchase of investments available for sale (2,753,734) (2,650,749)
Deferred gains on forward contracts (1,146) (50)
Purchase of unquoted investments (4,461) (1,498)
Net investment in Brockbank Group (58,857) 0
--------- -----------
Net cash applied to investing activities ($274,652) ($11,059)
======== =======
CASH FLOWS FROM FINANCING ACTIVITIES
- -----------------------------------------------------------------------------------------------------------------
Options exercised 630 0
Repurchase of shares (13,444) (48,929)
Dividends paid (32,315) (17,784)
------- -------
Net cash applied to financing activities ($45,129) ($66,713)
======= =======
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS ($81,661) $131,284
BALANCE AT BEGINNING OF PERIOD $215,048 $184,569
------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $133,387 $315,853
======= =======
- -----------------------------------------------------------------------------------------------------------------
</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 nine month periods
ended July 31, 1996 and 1995, the financial position at July 31, 1996 and the
cash flows for the nine month periods ended July 31, 1996 and 1995. The results
of operations for the nine months ended July 31, 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 is amortizing on a straight
line basis over 15 years.
The results of the Brockbank Group's second quarter and six month period of
operations ended June 30, 1996 have been included in the Company's earnings for
the quarter and year to date ended July 31, 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 nine months ended July 31, 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
Third Quarter ended July 31, 1996 compared with the Third Quarter ended July 31,
1995
Net income for the quarter was $46.2 million compared with $66.1 million for the
quarter ended July 31, 1995, a decrease of 30.1%.
Net operating income, excluding net gains or losses on investments, for the
quarter ended July 31, 1996 was $54.6 million compared with $50.8 million for
the quarter ended July 31, 1995, an increase of 7.4%.
Revenues
The following table depicts the Company's revenues for the periods shown below:
<TABLE>
<CAPTION>
QUARTER ENDED JULY 31,
------------------------------- PERCENT
1996 1995 CHANGE
---- ---- ------
<S> <C> <C> <C>
Dollars in thousands
Gross premiums written $116,370 $67,848 71.5%
Premiums ceded 8,914 1,504 -
---------- --------- -----
Net premiums written $107,456 $66,344 62.0%
======== ======= =====
Net premiums earned 114,102 90,796 25.7%
Net investment income 21,052 18,716 12.5%
Net (losses)/gains on investments (8,396) 15,308 -
Exchange gain (loss) 1,404 (1,362) -
Managing agency income 4,719 0 -
Other income 1,178 0 -
---------- --------- -----
Total revenues $134,059 $123,458 8.6%
======== ======== ======
</TABLE>
7
<PAGE> 8
Gross premiums written for the quarter ended July 31, 1996 were $116.4 million
compared with $67.8 million for the quarter ended July 31, 1995, an increase of
$48.6 million or 71.5%. This increase is largely attributable to the Company's
investment in the Brockbank Group which, through two Lloyd's corporate
syndicates, contributed $45.5 million of gross premiums written during the
quarter.
Premiums ceded for the quarter ended July 31, 1996 were $8.9 million compared
with $1.5 million for the quarter ended July 31, 1995, an increase of $7.4
million. For the quarter ended July 31, 1996, $2.9 million is attributable to
Brockbank which normally purchases reinsurance protection. Approximately $6.0
million of premiums ceded during the third quarter of 1996 results from Mid
Ocean's 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 $4.0 million.
As a result of the above, net premiums written for the quarter ended July 31,
1996 were $107.5 million compared to $66.3 million for the quarter ended July
31, 1995, an increase of $41.2 million or 62.0%.
Net premiums earned during the quarter ended July 31, 1996 were $114.1 million
compared with $90.8 million during the quarter ended July 31, 1995, an increase
of $23.3 million or 25.7%. Approximately $100.6 million of net premiums earned
is attributable to the Mid Ocean book of business and is comparable to the $90.8
million of net premiums earned during the third quarter of 1995. Approximately
$13.5 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.
Net investment income was $21.0 million in the quarter ended July 31, 1996
compared with $18.7 million in the third quarter of 1995. The increase results
from a larger investment base off-set by lower investment yields; 6.1% during
the quarter ended July 31, 1996 compared with 6.4% during the same quarter in
1995.
Net losses on investments were $8.4 million during the quarter ended July 31,
1996 compared with gains of $15.3 million during the quarter ended July 31,
1995. The loss reported during the third quarter of 1996 is primarily
attributable to the sale of securities in a period of declining market values
where interest rates increased approximately 20 basis points in the Company's
portfolio, whereas the gain in the same quarter of 1995 is attributable to
increasing market values resulting from a decrease in interest rates of
approximately 50 basis points.
Managing agency income reflects revenue 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 agency 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 was first reflected during the quarter ended April 30, 1996, there
is no prior year comparative.
8
<PAGE> 9
Other income of $1.2 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, were first
reflected in Mid Ocean's results for the quarter ended April 30, 1996. As a
result of the above, total revenues for the quarter ended July 31, 1996 were
$134.1 million compared with $123.5 million for the third quarter of 1995, an
increase of $10.5 million.
Expenses
The following table sets forth the Company's expenses, combined ratio and
components thereof for the periods indicated:
<TABLE>
<CAPTION>
QUARTER ENDED JULY 31, PERCENT
1996 1995 CHANGE
----- ---- ------
<S> <C> <C> <C>
Net losses and loss expenses incurred $56,739 $39,807 42.5%
Acquisition expenses 19,343 12,122 59.6%
Operational expenses 9,138 5,235 74.6%
Organizational expenses 0 154 --
------- ------- ------
Total underwriting expenses 28,481 17,511 62.6%
Managing agency expenses 1,488 0 N/A
------- ------- ------
Total expenses $86,708 $57,318 51.3%
======= ======== ======
Net loss and loss expense ratio 49.7% 43.8%
------- --------
Acquisition expense ratio 17.0% 13.4%
Operational and organizational
expense ratio 8.0% 5.9%
------- -------
Underwriting expense ratio 25.0% 19.3%
------- -------
Combined ratio 74.6% 63.1%
======= =======
</TABLE>
The Company incurred net losses and loss expenses during the quarter ended July
31, 1996, of $56.7 million or 49.7% of net premiums earned compared with $39.8
million or 43.8% of net premiums earned during the quarter ended July 31, 1995,
an increase of $16.9 million or 42.5%. Net losses incurred by the two corporate
syndicates, which did not exist in the third quarter of 1995, were $12.0 million
for the quarter ended July 31, 1996. Net losses incurred for the Company
excluding the corporate syndicates were $44.7 million for the quarter ended July
31, 1996, which is an increase over the prior year's period of $4.9 million.
This is due to a higher earned premium base in 1996 together with a $2.5 million
provision net of reinsurance recoveries which the Company has included for the
TWA 800 loss on July 17, 1996. In addition, there was a $5.0 million reserve
decrease for the Great Hanshin, Kobe earthquake during the quarter ended
July 31, 1995.
9
<PAGE> 10
Underwriting expenses are comprised of acquisition expenses and operational
expenses (which includes organizational expenses). Underwriting expenses for the
quarter ended July 31, 1996 were $28.5 million or 25.0% of net premiums earned
compared with $17.5 million or 19.3% of net premiums earned during the quarter
ended July 31, 1995. This represents an increase of $11.0 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 17.0% for the quarter ended July 31, 1996 compared with 13.4% for the third
quarter of 1995. The increase is attributable to higher commissions on certain
of the Company's proportional contracts together with the inclusion of the
corporate syndicates' results where higher commission rates are paid to ceding
companies.
As a result of the above, total expenses for the quarter ended July 31, 1996
were $86.7 million compared with $57.3 million during the quarter ended July 31,
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 was 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 July
31, 1996 was $47.4 million compared with $66.1 million for the quarter ended
July 31, 1995, a decrease of $18.7 million or 28.4%. Income tax of $0.6 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 third quarter of 1995, nor had the Brockbank transaction taken
place at that time. Accordingly, there were no comparable income taxes during
the quarter ended July 31, 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.
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.
Nine months ended July 31, 1996 compared with nine months ended July 31, 1995
For the nine months period ended July 31, 1996, net income was $155.0 million
compared with $139.8 million for the nine months ended July 31, 1995, an
increase of 10.9%.
Net operating income, excluding net gains or losses on investments, for the
nine months ended July 31, 1996 was $156.2 million compared with $141.4 million
for the nine months ended July 31, 1995, an increase of 10.5%.
Revenues
The following table depicts the Company's revenues for the periods shown below:
10
<PAGE> 11
<TABLE>
<CAPTION>
NINE MONTHS ENDED JULY 31, PERCENT
1996 1995 CHANGE
---- ---- ------
<S> <C> <C> <C>
Dollars in thousands
Gross premiums written $520,547 $424,960 22.5%
Premiums ceded 33,441 8,283 -
-------- -------- -----
Net premiums written $487,106 $416,677 16.9%
-------- -------- -----
Net premiums earned $318,481 $279,976 13.8%
Net investment income 60,009 54,763 9.6%
Net (losses) on investments (1,200) (1,616) (25.7%)
Exchange gain/(loss) 309 (199) -
Managing agency income 9,671 0 -
Other income 2,210 0 -
-------- -------- ------
Total revenues $389,480 $332,924 17.0%
======== ======== ======
</TABLE>
For the nine month period ended July 31, 1996, gross premiums written were
$520.5 million compared with $425.0 million during the first nine months of
1995, an increase of 22.5%. This growth is largely attributable to the Company's
investment in the Brockbank Group which, through its syndicates, represented
$106.6 million of gross premiums written during the first nine months of 1996.
Offsetting these increases was a reduction in the size of a reinsurance contract
provided to a syndicate managed by 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.
Premiums ceded during the nine months ended July 31, 1996 were $33.4 million
compared with $8.3 million for the nine months ended July 31, 1995, an increase
of $25.1 million. This increase is largely attributable to reinsurance purchased
by Brockbank. As a result, net premiums written for the nine months ended
July 31, 1996 were $487.1 million compared to $416.7 million for the nine
months ended July 31, 1995, an increase of $70.4 million or 16.9%.
Net premiums earned during the nine months ended July 31, 1996 were $318.5
million compared with $280.0 million during the same period in 1995, an increase
of $38.5 million or 13.8%. 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 together with the inclusion of the results of the
corporate syndicates for the first time in 1996 which amount to $17.8 million.
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.
11
<PAGE> 12
Net investment income was $60.0 million during the nine months ended July 31,
1996 compared to $54.8 million during the same period in 1995, an increase of
$5.2 million or 9.6%. The increase results from a larger investment base offset
by lower investment yields when compared with the previous year. The investment
portfolio yielded 6.05% over the nine months to July 31, 1996 compared with
6.72% for the same period in 1995, annualized on a market value basis.
Net losses on investments were $1.2 million during the nine months ended July
31, 1996 compared with a loss of $1.6 million for the nine months ended July 31,
1995. The fiscal 1996 year to date loss is primarily attributable to losses
realized on the sale of securities during the third 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 was 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 nine months ended July 31, 1996
were $389.5 million compared with $332.9 million for the nine months ended July
31, 1995, an increase of $56.6 million or 17.0%.
Expenses
The following table sets forth the Company's expenses, combined ratio and
components thereof for the periods indicated:
<TABLE>
<CAPTION>
NINE MONTHS ENDED JULY 31, PERCENT
1996 1995 CHANGE
----- ----
<S> <C> <C> <C>
Net losses and loss expenses incurred $155,076 $142,489 8.8%
Acquisition expenses 51,729 38,544 34.2%
Operational expenses 21,277 11,648 82.7%
Organizational expenses 0 460 -
-------- -------- -----
Total underwriting expenses 73,006 50,652 44.2%
Managing agency expenses 3,568 0 -
-------- -------- -----
Total expenses $231,650 $193,141 19.9%
======== ======== =====
Net loss and loss expense ratio 48.7% 50.9%
-------- --------
Acquisition expense ratio 16.2% 13.8%
Operational expense ratio 6.7% 4.3%
-------- ---------
Underwriting expense ratio 22.9% 18.1%
-------- ---------
Combined ratio 71.6% 69.0%
======== =========
</TABLE>
12
<PAGE> 13
The Company incurred net losses and loss expenses during the nine months ended
July 31, 1996 of $155.1 million or 48.7% of net premiums earned compared with
$142.5 million or 50.9% of net premiums earned during the nine months ended July
31, 1995, an increase of $12.6 million or 8.8%.
There were no significant catastrophic losses reported during the nine months
ended July 31, 1996 or 1995. The slight decrease in loss ratio 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
nine months ended July 31, 1996 were $73.0 million or 22.9% of net premiums
earned compared with $50.7 million or 18.1% of net premiums earned for the nine
months ended July 31, 1995. This represents an increase of $22.3 million which
is primarily attributable to increased costs resulting from the Brockbank Group
and, to a lesser extent, Mid Ocean's London branch together with increases on
the Bermuda book of business related to increased net premiums earned on that
book of business. In addition, included in the first nine months of 1996
operational expenses is approximately $0.9 million of long term incentive
compensation which was awarded and subsequently vested during that period.
Approximately $2.2 million of this incentive compensation is deferred in the
balance sheet and will be expensed over the next five years as the awards vest.
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 16.2% for the nine months ended July 31, 1996
compared with 13.8% for the nine months ended July 31, 1995. The increase is
largely attributable to higher commissions on certain proportional contracts and
inclusion of the corporate syndicates' results where higher commission rates are
paid to ceding companies.
Managing agency expenses reflect 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 was 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 nine months ended
July 31, 1996 was $157.8 million compared with $139.8 million for the nine
months ended July 31, 1995, an increase of $18.0 million or 12.9%. Income tax of
$2.3 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 nine months ended July 31, 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.
13
<PAGE> 14
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 July 31, 1996, shareholders' equity was $1,050.5 million, of which $437.9
million was retained earnings. At July 31, 1996, Mid Ocean held $133.4 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. In addition, the Company repurchased $13.4
million of its stock during the nine months ended July 31 1996. Approximately
$12.6 million of the $75 million authorized by the Board of Directors for
repurchase of shares in March 1995 remains at September, 1996. The Company has
no debt.
Net cash flow provided by operating activities for the nine months ended July
31, 1996 was $238.1 million compared with $209.1 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.
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 July 31, 1996, Mid Ocean's investment portfolio, measured at
fair value, including accrued investment income and trades pending settlement
and cash and cash equivalents, was $1,428.6 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 July
31, 1996, 91.3% 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 with the exception of $4.0 million, (fair value), which were
rated BA2. 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 July 31, 1996, Mid Ocean had provided letters of credit amounting
to $162.1 million 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. Included in the total noted above are letters of credit in the
equivalent amount of $76.4 million which were issued in lieu of capital to
support the two Lloyd's corporate syndicates managed by Brockbank.
14
<PAGE> 15
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 $76.4 million. 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 nine months
ended July 31, 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 July 31, 1996
and October 31, 1995, the investment in Trident was $6.9 million and $2.5
million respectively.
15
<PAGE> 16
PART II OTHER INFORMATION
MID OCEAN LIMITED
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- ------------------------------------------------------------------------------
No reports on Form 8-K were filed during the three months ended July 31, 1996.
16
<PAGE> 17
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)
CHARLES F HAYS
Executive Vice President,
Chief Financial and Administrative Officer
(Principal Financial Officer
and Duly Authorized Officer)
------------------------------------------
JOHN M WADSON
Vice President, Treasurer and Secretary
(Principal Accounting Officer
and Duly Authorized Officer)
Date: September 16, 1996
17
<PAGE> 18
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
11 COMPUTATIONS OF EARNINGS PER SHARE
27 FINANCIAL DATA SCHEDULE
<PAGE> 1
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 NINE MONTHS ENDED
JULY 31, 1996 JULY 31, 1995 JULY 31, 1996 JULY 31, 1995
<S> <C> <C> <C> <C>
Net Income $46,217 $66,140 $155,004 $139,783
======= ======= ======== ========
Weighted average ordinary
shares outstanding 34,302,783 35,459,670 34,491,918 36,028,357
Common share equivalents
associated with options 2,384,014 2,039,403 2,353,655 1,774,160
--------- --------- --------- ---------
Ordinary shares and ordinary share
equivalents outstanding 36,686,797 37,499,073 36,845,573 37,802,517
========== ========== ========== ==========
Earnings per ordinary share
and ordinary share equivalent $1.26 $1.76 $4.21 $3.70
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated balance sheets and the consolidated statements of income and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> OCT-31-1996
<PERIOD-START> NOV-01-1995
<PERIOD-END> JUL-31-1996
<DEBT-HELD-FOR-SALE> 1316962<F1>
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 0
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 1327812
<CASH> 133387
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 52380
<TOTAL-ASSETS> 1998970
<POLICY-LOSSES> 403922<F2>
<UNEARNED-PREMIUMS> 377456<F3>
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 0
0
0
<COMMON> 630158<F4>
<OTHER-SE> 420324<F5>
<TOTAL-LIABILITY-AND-EQUITY> 1998970
318481
<INVESTMENT-INCOME> 60009
<INVESTMENT-GAINS> (1200)
<OTHER-INCOME> 12190
<BENEFITS> 155076
<UNDERWRITING-AMORTIZATION> 51729
<UNDERWRITING-OTHER> 24845
<INCOME-PRETAX> 157830
<INCOME-TAX> 2295
<INCOME-CONTINUING> 155004
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 155004
<EPS-PRIMARY> 4.21
<EPS-DILUTED> 0
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
<FN>
<F1>Debt-Held-For-Sale represents fixed maturity investments available for sale.
These are carried at market value.
<F2>Policy-Losses exclude the reduction for outstanding losses recoverable from
reinsurers ($11426) which is included in total assets.
<F3>Unearned-Premiums exclude the reduction for prepaid reinsurance premium
($14,494) which is included in total assets.
<F4>Common includes ordinary shares of $6,859 and additional paid in capital of
$623,299.
<F5>Other-SE includes retained earnings, net unrealized appreciation on
investments, foreign currency translation adjustments and deferred compensation.
</FN>
</TABLE>
