<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, 1997
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 10, 1997 there were outstanding 34,755,655 Class A Ordinary Shares,
1,190,292 Class B Ordinary Shares and 1,860,000 Class C Ordinary Shares, each of
$0.20 par value, of the registrant.
<PAGE> 2
MID OCEAN LIMITED
INDEX
PART I - FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Financial Statements: Page
<S> <C>
Consolidated Balance Sheets 3
at April 30, 1997 (unaudited) and October 31, 1996
Consolidated Statements of Operations 4
for the quarter and six months ended April 30, 1997
and 1996 (unaudited)
Consolidated Statements of Cash Flows 5
for the six months ended April 30, 1997 and 1996 (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
</TABLE>
<PAGE> 3
PART I. FINANCIAL INFORMATION
MID OCEAN LIMITED
CONSOLIDATED BALANCE SHEETS
(THOUSANDS OF UNITED STATES DOLLARS)
<TABLE>
<CAPTION>
APRIL 30, 1997 OCTOBER 31, 1996
ASSETS (UNAUDITED) (AUDITED)
-------------- ----------------
<S> <C> <C>
Investments available for sale:
Fixed maturities at fair value $ 1,422,185 $ 1,360,210
(Amortized cost $1,432,372; 1996: $1,353,056)
Equity securities at fair value 6,207 0
Short-term fixed maturities at fair value 58,257 26,435
----------- -----------
(Amortized cost $57,899; 1996: $26,226)
Total investments available for sale 1,486,649 1,386,645
Unquoted investments; at cost 11,127 7,914
Cash and cash equivalents 127,729 163,968
Accrued investment income 21,142 24,106
Reinsurance premiums receivable 402,515 276,360
Funds withheld by cedents 6,847 8,696
Outstanding losses recoverable from reinsurers 8,929 5,466
Prepaid reinsurance premiums 23,783 15,846
Profit commissions receivable 52,751 50,338
Deferred acquisition costs 65,028 42,647
Goodwill 23,519 24,416
Other assets 30,920 16,297
----------- -----------
Total assets $ 2,260,939 $ 2,022,699
=========== ===========
LIABILITIES
Reserve for losses and loss expenses $ 476,366 $ 427,717
Reserve for unearned premiums 440,748 303,340
Investments pending settlement 1,616 43,374
Reinsurance balances payable 13,223 5,870
Other liabilities 67,540 72,525
----------- -----------
Total liabilities 999,493 852,826
Minority interest 53,703 52,674
----------- -----------
Total liabilities and minority interest $ 1,053,196 $ 905,500
----------- -----------
SHAREHOLDERS' EQUITY
Ordinary Shares (par value $0.20; authorized 200,000,000 shares;
issued and outstanding, 37,805,497, 1996: 34,401,576) $ 7,561 $ 6,880
Additional paid-in capital 673,777 625,048
Net unrealized (depreciation) appreciation on investments (10,425) 6,920
Foreign currency translation adjustments 734 99
Deferred compensation (2,284) (2,058)
Retained earnings 538,380 480,310
----------- -----------
Total shareholders' equity $ 1,207,743 $ 1,117,199
----------- -----------
Total liabilities and shareholders' equity $ 2,260,939 $ 2,022,699
=========== ===========
</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, 1997 APRIL 30, 1996 APRIL 30, 1997 APRIL 30, 1996
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Gross premiums written $ 137,858 $ 108,283 $ 397,694 $ 404,177
Change in unearned premiums 5,723 2,825 (133,154) (188,447)
------------ ------------ ------------ ------------
Premiums earned 143,581 111,108 264,540 215,730
Premiums ceded 21,806 17,532 31,503 24,527
Change in prepaid premiums (8,997) (8,698) (5,812) (13,176)
------------ ------------ ------------ ------------
Premiums ceded 12,809 8,834 25,691 11,351
Net premiums earned 130,772 102,274 238,849 204,379
Net investment income 25,335 19,911 49,175 38,957
Net (losses) gains on investments (3,387) (1,986) (729) 7,196
Exchange (loss) gain (899) 285 (7,785) (1,095)
Managing agency income 3,157 4,952 6,406 4,952
Other income 2,454 1,033 3,494 1,033
------------ ------------ ------------ ------------
Total Revenues $ 157,432 $ 126,469 $ 289,410 $ 255,422
============ ============ ============ ============
EXPENSES
Losses and loss expenses incurred $ 63,678 $ 45,944 $ 120,908 $ 99,642
Reinsurance recoveries (6,667) (811) (12,460) (1,305)
------------ ------------ ------------ ------------
Net losses and loss expenses incurred 57,011 45,133 108,448 98,337
Acquisition expenses 21,829 17,706 38,513 32,385
Managing agency expenses 1,683 2,080 1,670 2,080
Operational expenses 13,156 8,886 22,585 12,141
------------ ------------ ------------ ------------
Total Expenses $ 93,679 $ 73,805 $ 171,216 $ 144,943
============ ============ ============ ============
Net income before tax
and minority interest $ 63,753 $ 52,664 $ 118,194 $ 110,479
Income tax (1,216) (1,671) (3,222) (1,671)
Minority interest 379 (21) (54) (21)
------------ ------------ ------------ ------------
Net income $ 62,916 $ 50,972 $ 114,918 $ 108,787
============ ============ ============ ============
PER SHARE DATA
Net income per ordinary share $ 1.65 $ 1.38 $ 3.09 $ 2.95
============ ============ ============ ============
Dividend per ordinary share $ 0.75 $ 0.275 $ 1.50 $ 0.525
============ ============ ============ ============
Weighted average number of
ordinary shares outstanding 38,146,128 36,989,076 37,222,247 36,926,000
============ ============ ============ ============
</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, 1997 APRIL 30, 1996
CASH FLOWS FROM OPERATING ACTIVITIES (UNAUDITED) (UNAUDITED)
-------------- --------------
<S> <C> <C>
Net Income $ 114,918 $ 108,787
Adjustments to reconcile net income to cash provided
by operating activities:
Amortization of premiums on investments 2,336 5,031
Amortization of goodwill 909 701
Provision for depreciation 412 328
Share grants 367 839
Net (gains) losses on investments 729 (7,196)
Minority interest 54 21
Change in:
Accrued investment income 2,966 (400)
Reinsurance premiums receivable (110,237) (146,651)
Deferred acquisition costs (21,519) (27,073)
Outstanding losses recoverable from reinsurers (1,151) (494)
Prepaid reinsurance premiums 1,436 (13,136)
Profit commissions receivable -- (3,228)
Funds withheld by cedents 1,943 (1,375)
Other assets (14,268) (3,323)
Reserve for losses and loss expenses 44,930 37,579
Reserve for unearned premiums 123,815 178,623
Reinsurance balances payable 7,225 20,546
Other liabilities (20,154) 5,780
----------- -----------
Net cash provided by operating activities $ 134,711 $ 155,359
=========== ===========
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale and maturity of fixed maturities $ 2,406,482 $ 1,744,697
Purchase of fixed maturities (2,562,346) (1,897,964)
Proceeds from sale of equity securities 737 --
Purchase of equity securities (6,924) --
Purchase of unquoted investments (3,213) (3,158)
Deferred gains on forward contracts 249 651
Net investment in Brockbank Group -- (58,857)
----------- -----------
Net cash applied to investing activities ($ 165,015) ($ 214,631)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Options exercised $ 61,301 $ 630
Repurchase of shares (12,484) (2,772)
Dividends paid (56,849) (18,167)
----------- -----------
Net cash applied to financing activities ($ 8,032) ($ 20,309)
----------- -----------
FOREIGN CURRENCY TRANSLATION ADJUSTMENTS 2,097 (434)
NET DECREASE IN CASH AND CASH EQUIVALENTS (36,239) ($ 80,015)
BALANCE AT BEGINNING OF PERIOD $ 163,968 $ 215,048
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 127,729 $ 135,033
=========== ===========
</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, 1996. In the opinion of the Company's
management, the financial statements reflect all adjustments necessary to
present fairly the results of operations for the quarter and six month periods
ended April 30, 1997 and 1996, the financial position at April 30, 1997 and the
cash flows for the six month periods ended April 30, 1997 and 1996. The results
of operations for the quarter and six months ended April 30, 1997 are not
necessarily indicative of future financial results.
NOTE B: INVESTMENT IN SUBSIDIARY
The results of the Brockbank Group's quarter and six month periods ended
March 31, 1997 and 1996 have been included in the Company's earnings for the
periods ended April 30, 1997 and 1996 respectively.
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, 1997 and the
consolidated financial statements for the year ended October 31, 1996 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, 1997 compared with the Second Quarter ended April
30, 1996
Net income for the quarter was $62.9 million compared with $51.0 million for the
quarter ended April 30, 1996, an increase of 23.4%.
Net operating income, excluding net gains or losses on investments, for the
quarter ended April 30, 1997 was $66.3 million compared with $53.0 million for
the quarter ended April 30, 1996, an increase of 25.2%.
Revenues
The following table depicts the Company's revenues for the periods shown below:
<TABLE>
<CAPTION>
QUARTER ENDED APRIL 30,
----------------------- PERCENT
1997 1996 CHANGE
---- ---- ------
<S> <C> <C> <C>
Dollars in thousands
Gross premiums written $ 137,858 $ 108,283 27.3%
Premiums ceded 21,806 17,532 24.4%
--------- --------- ----
Net premiums written $ 116,052 $ 90,751 27.9%
========= ========= ====
Net premiums earned 130,772 102,274 27.9%
Net investment income 25,335 19,911 27.2%
Net (losses)/gains on investments (3,387) (1,986) --
Exchange (loss)/gain (899) 285 --
Managing agency income 3,157 4,952 (36.3)%
Other income 2,454 1,033 --
--------- --------- ----
Total revenues $ 157,432 $ 126,469 24.5%
========= ========= ====
</TABLE>
7
<PAGE> 8
Gross premiums written for the quarter ended April 30, 1997 were $137.9 million
compared with $108.3 million for the quarter ended April 30, 1996, an increase
of $29.6 million or 27.3%.
The increase results from a $34.3 million increase in gross premiums
underwritten through the two Lloyd's corporate syndicates managed by Brockbank
which have written more business as a result of an increase in capacity of
approximately 40% in 1997 compared to 1996. Off-setting this increase was a
net $4.7 million decrease in the Mid Ocean book which continued to experience
pricing pressure on rates.
Premiums ceded for the quarter ended April 30, 1997 were $21.8 million compared
with $17.5 million for the quarter ended April 30, 1996. The increase of
$4.3 million is attributable to Brockbank which normally purchases a relatively
higher proportion of reinsurance protection.
As a result of the above, net premiums written for the quarter ended April 30,
1997 were $116.1 million compared to $90.8 million for the quarter ended April
30, 1996, an increase of $25.3 million or 27.9%.
Net premiums earned during the quarter ended April 30, 1997 were $130.8 million
compared with $102.3 million during the quarter ended April 30, 1996, an
increase of $28.5 million or 27.9%. Brockbank contributed approximately $35.6
million to the increase which was offset by a decrease of $7.1 on the Mid Ocean
book. The majority of premiums written by the corporate syndicates are earned in
periods of 12 months or more, hence there was a low contribution of only $4.3
million to net premiums earned during the 1996 second quarter which
reflected earnings of those premiums written by the syndicates in their first
quarter of operation. Net earned premiums increased substantially in the second
quarter 1997 to $39.9 million as the majority of premiums written from the
inception of the corporate syndicates was still being earned. The decrease in
net premiums earned on the Mid Ocean book reflects the decrease in net premiums
written.
Net investment income was $25.3 million in the quarter ended April 30, 1997
compared with $19.9 million in the second quarter of 1996. The increase results
from a larger investment base and increased investment yields; 6.34% during the
quarter ended April 30, 1997 compared with 5.95% during the same quarter in
1996.
Net losses on investments were $3.4 million during the quarter ended April 30,
1997 compared with losses of $2.0 million during the quarter ended April 30,
1996. The losses are primarily attributable to the sale of securities in
periods of declining market values.
Managing agency income was $3.2 million during the quarter ended April 30, 1997
compared with $5.0 million during the second quarter 1996, a decrease of $1.8
million. The decrease is attributable to a decreasing contribution from profit
commissions relating to the 1994 and 1995 underwriting years as these years
become fully earned while profit commission from the 1996 and 1997 underwriting
years will not be recognized until such time as it can be determined that
profits will accrue from those underwriting years. Managing agency income
reflects income earned by the Brockbank managing agency in respect of its
management of three Lloyd's underwriting
8
<PAGE> 9
syndicates, excluding the two dedicated corporate syndicates which are included
in Mid Ocean's operating results, as noted above.
Other income of $2.5 million is fee income resulting from Brockbank's direct
marketing motor business and is $1.5 million higher than the $1.0 million
recorded in the second quarter 1996.
As a result of the above, total revenues for the quarter ended April 30, 1997
were $157.4 million compared with $126.4 million, an increase of $31.0 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
1997 1996 CHANGE
----- ----
Dollars in thousands
<S> <C> <C> <C>
Net losses and loss expenses incurred $57,011 $45,133 26.3%
------- ------- ----
Acquisition expenses 21,829 17,706 23.3%
Operational expenses 13,156 8,886 48.1%
------- ------- ----
Total underwriting expenses 34,985 26,592 31.6%
Managing agency expenses 1,683 2,080 (19.1)%
------- ------- ----
Total expenses $93,679 $73,805 26.9%
======= ======= ====
Net loss and loss expense ratio 43.6% 44.1%
------- ------
Acquisition expense ratio 16.7% 17.3%
Operational expense ratio 10.0% 8.7%
------- ------
Underwriting expense ratio 26.7% 26.0%
Combined ratio 70.3% 70.1%
======= ======
</TABLE>
The Company incurred net losses and loss expenses during the quarter ended April
30, 1997, of $57.0 million or 43.6% of net premiums earned compared with $45.1
million or 44.1% of net premiums earned during the same quarter 1996,
an increase of $11.9 million or 26.3%. There were no significant catastrophic
losses reported during the quarters ended April 30, 1997 or 1996. The increase
in the value of net losses and loss expenses incurred is attributable to
higher loss provisions on the corporate syndicates offset by relatively lower
losses on Mid Ocean's book, and higher releases from prior years' loss reserves.
9
<PAGE> 10
The decrease in the loss ratio is attributable to the ongoing actuarial review
which has resulted in the reduction of reserves previously established for
prior underwriting years as noted above.
Underwriting expenses are comprised of acquisition expenses and operational
expenses. Underwriting expenses for the quarter ended April 30, 1997 were $35.0
million or 26.7% of net premiums earned compared with $26.6 million or 26.0% of
net premiums earned during the quarter ended April 30, 1996. This represents an
increase of $8.4 million which in dollar terms, is equally attributable to both
acquisition costs and operational expenses. Expressed as a ratio of net earned
premiums acquisition costs have decreased to 16.7% in the second quarter 1997
from 17.3% in the second quarter 1996. This decrease in the acquisition expense
ratio is attributable to relatively higher profit commission expense provisions
in 1996. The operational expense ratio increased to 10.0% in the second quarter
1997 compared with 8.7% in the same quarter 1996. The increase in operational
expenses results from the increasing size of the dedicated Lloyd's corporate
capital syndicates managed by Brockbank as a portion of the whole and, to a
lesser extent, increases in the size of the Mid Ocean Bermuda operation,
increases in Mid Ocean's London Branch and inclusion of Mid Ocean's Singapore
Branch and Mid Ocean's German consulting operation both of which have no second
quarter 1996 comparison.
Managing agency expenses reflect the cost of operating the Brockbank managing
agency and have decreased slightly over the second quarter 1996. A large 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 a result of the above, total expenses for the quarter ended April 30, 1997
were $93.7 million compared with $73.8 million during the quarter ended April
30, 1996, an increase of $19.9 million or 26.9%.
Net income before income tax and minority interest for the quarter ended April
30, 1997 was $63.8 million compared with $52.7 million for the quarter ended
April 30, 1996, an increase of $11.1 million or 21.1%.
Income taxes were $1.2 million for the quarter ended April 30, 1997 and compared
with $1.7 million for the second quarter 1996. Income tax represents the
Company's provision of an estimate of tax liability in respect of the Company's
operations outside of Bermuda.
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, 1997 compared with six months ended April 30, 1996
For the six months period ended April 30, 1997 net income was $114.9 million
compared with $108.8 million for the six months ended april 30, 1996, an
increase of 5.6%.
Net operating income, excluding net gains or losses on investments, for the six
months ended April 30, 1997 was $115.6 million compared with $101.6 million for
the six months ended April 30, 1996, a increase of 13.8%.
Revenues
The following table depicts the Company's revenues for the periods shown below:
<TABLE>
<CAPTION>
SIX MONTHS ENDED APRIL 30,
-------------------------- PERCENT
1997 1996 CHANGE
---- ---- ------
<S> <C> <C> <C>
Dollars in thousands
Gross premiums written $ 397,694 $ 404,177 (1.6)%
Premiums ceded 31,503 24,527 28.4%
--------- --------- ----
Net premiums written $ 366,191 $ 379,650 (3.5)%
========= ========= ====
Net premiums earned 238,849 204,379 16.9%
Net investment income 49,175 38,957 26.2%
Net gains/(losses) on investments (729) 7,196 --
Exchange loss on investments (7,785) (1,095) --
Managing agency income 6,406 4,952 --
Other income 3,494 1,033 --
--------- --------- ----
Total revenues $ 289,410 $ 255,422 13.3%
========= ========= ====
</TABLE>
For the six month period ended April 30, 1997, gross premiums written were
$397.7 million compared with $404.2 million during the first six months of 1996,
a decrease of 1.6%. This decrease is the net result an increase in gross
premiums underwritten through the two corporate syndicates managed by Brockbank
of $63.43 million offset by a decrease of $69.8 million on business underwritten
by Mid Ocean. The increase in gross premiums written for the corporate
syndicates results from increased capacity for the 1997 underwriting year of
approximately 40% over the 1996 underwriting year and the inclusion of two
quarters of underwriting results in the six months ended April 30, 1997 compared
with one quarter of underwriting results in the six months ended April 30, 1996.
The decrease in gross premiums written from Bermuda is primarily attributable to
the first quarter 1997 which experienced a $41.0 million decline in the pro rata
book of business, a $7.3 million decline in the excess of loss book of business
together with reduced cessions on the part of some clients and the non renewal
of certain accounts and a number of negative adjustments resulting from changes
in premium estimates in previous underwriting years.
11
<PAGE> 12
Premiums ceded during the six months ended April 30, 1997 were $31.5 million
compared with $24.5 million for the six months ended April 30, 1996, an increase
of $7.0 million. This increase is largely attributable to reinsurance purchased
by the corporate syndicates. As a result, net premiums written for the six
months ended April 30, 1997 were $366.2 million compared to $379.7 million for
the six months ended April 30, 1996, a decrease of $13.5 million.
Net premiums earned during the six months ended April 30, 1997 were $238.8
million compared with $204.4 million during the same period in 1996, an increase
of $34.4 million or 16.9%. The corporate syndicates contributed $61.2 million to
this increase. Offsetting this increase was a decrease of $26.8 million
attributable to the Mid Ocean book of business. These changes reflect the
growing written premium base for the corporate syndicates. The decrease in net
premiums earned on the Mid Ocean book reflect the reduction in net premiums
written during the six months ended April 30, 1997.
Net investment income was $49.2 million during the six months ended April 30,
1997 compared to $39.0 million during the same period in 1996, an increase of
$10.2 million or 26.2%. The increase results from a larger investment base and
increased investment yields when compared with the previous year.
Net losses on investments were $0.7 million during the six months ended April
30, 1997 compared with a gain of $7.2 million for the six months ended April 30,
1996. The 1996 gain is attributable to gains realized on the sale of securities
during the first quarter of 1996.
Exchange losses were $7.8 million during the six months ended April 30, 1997
compared with losses of $1.1 million in the same period 1996, a deterioration of
$6.7 million. Most of the 1997 exchange losses are attributable to the first
quarter where the value of Sterling denominated premium receivables decreased as
a result of a sharp decline in the Sterling exchange rate.
Managing agency income of $6.4 million is attributable to both earned profit
commissions and fee income in respect of the Brockbank managing agency
activities which is included in these accounts for both quarters of 1997
compared with only the second quarter in 1996.
Other income of $3.5 million for the six months ended April 30, 1997 compares
with $1.0 million for the same period 1996. However only one quarter of
Brockbank results are included in that period compared with two quarters in the
first six months of 1997. Other income is fee income which results from
Brockbank's direct marketing motor business.
As a result of the above, total revenues for the six months ended April 30, 1997
were $289.4 million compared with $255.4 million for the six months ended April
30, 1996, an increase of $34.0 million or 13.3%.
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
1997 1996 CHANGE
----- ----
Dollars in thousands
<S> <C> <C> <C>
Net losses and loss expenses incurred $108,448 $ 98,337 10.3%
-------- -------- ----
Acquisition expenses 38,513 32,385 18.9%
Operational expenses 22,585 12,141 86.0%
-------- -------- ----
Total underwriting expenses 61,098 44,526 37.2%
Managing agency expenses 1,670 2,080 (19.7)%
-------- -------- ----
Total expenses $171,216 $144,943 18.1%
======== ======== ====
Net loss and loss expense ratio 45.4% 48.1%
-------- --------
Acquisition expense ratio 16.1% 15.9%
Operational expense ratio 9.5% 5.9%
-------- --------
Underwriting expense ratio 25.6% 21.8%
Combined ratio 71.0% 69.9%
======== ========
</TABLE>
The Company incurred net losses and loss expenses during the six months ended
April 30, 1997 of $108.4 million or 45.4% of net premiums earned compared with
$98.3 million or 48.1% of net premiums earned during the six months ended April
30, 1996, an increase of $10.1 million or 10.3%. There were no significant
catastrophic losses reported during the six months ended April 30, 1997 or 1996.
The decrease in the 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. Underwriting expenses for the six months ended April 30, 1997 were
$61.1 million or 25.6% of net premiums earned compared with $44.5 million or
21.8% of net premiums earned for the six months ended April 30, 1996. This
represents an increase of $16.6 million of which $6.1 million is attributable to
increased acquisition costs and $10.5 million is attributable to increased
operational expenses.
13
<PAGE> 14
The acquisition expense ratio was 16.1% for the six months ended April 30, 1997
compared with 15.9% for the six months ended April 30, 1996. The increase is
largely attributable to higher brokerage expenses on the corporate syndicates
which are becoming a larger part of the whole.
The operational expense ratio increased to 9.5% for the six months ended April
30, 1997 compared with 5.9% for the six months ended April 30, 1996. The
increase is attributable to higher operational costs on the corporate syndicates
which are becoming a larger part of the whole as well as increases in the size
of the Bermuda operation and inclusion of the Singapore branch and German
consulting operation.
Managing agency expenses reflects costs attributable to operating the Brockbank
managing agency and have decreased slightly compared with the six months ended
April 30, 1996. A large portion of these costs are allocated to and recovered
from the syndicates under management based on the underwriting capacity of each
syndicate.
Net income before income tax and minority interest for the six months ended
April 30, 1997 was $118.2 million compared with $110.5 million for the six
months ended April 30, 1996, an increase of $7.7 million or 7.0%.
Income taxes were $3.2 million for the six months ended April 30, 1997 compared
with $1.7 million for the same period in 1996. Income tax represents the
Company's estimate of tax liability in respect of the Company's operations
outside of Bermuda.
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, 1997, shareholders' equity was $1,207.7 million, of which $538.4
million was retained earnings. At April 30, 1997, Mid Ocean held $127.7 million
of cash and cash equivalents compared with $164.0 million at October 31, 1996.
The decrease is attributable to an increased level of investment of the
Company's cash and cash equivalents. In addition, the Company repurchased $2.3
million of its stock during the second quarter of 1997. The $75 million
authorized by the Board of Directors for repurchase of shares in March 1995 is
almost totally utilized. The Company currently has no debt.
14
<PAGE> 15
Net cash flow provided by operating activities for the six months ended April
30, 1997 was $134.7 million compared with $155.4 million during the same period
of 1996. This results primarily from receipt of premium income net of paid
losses, acquisition costs and other related expenses. Mid Ocean expects cash
inflows 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 April 30, 1997, the Company's investment portfolio, measured
at fair value, including accrued investment income and trades pending settlement
and cash and cash equivalents, was $1,633.9 million compared with $1,531.3
million at October 31, 1996. The Mid Ocean investment portfolio is presently
made up of bonds, mortgage and asset-backed securities, short-term investments
and $6.2 million of equity securities. At April 30, 1997, 80.7% 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 Company presently has no investments in real estate or mortgage
loans. All fixed maturity, short-term and equity 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 approximately
$307 million. These facilities are secured by a lien on a portion of Mid Ocean's
investment portfolio. At April 30, 1997, Mid Ocean had provided letters of
credit amounting to approximately $198 million compared with approximately $165
million at October 31, 1996. 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 approximately $107 million in lieu of
capital.
On December 29, 1995, Mid Ocean completed a transaction to acquire an effective
51% ownership of the Brockbank Group. The Company 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 the Company.
The Company has made no significant capital expenditures during the six months
ended April 30, 1997. 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, 1997 and October 31, 1996, the investment in Trident was
$7.9 million valued at cost.
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 March 6, 1997, the
following actions were taken:
a. The stockholders adopted a resolution to amend the
1993 Long Term Incentive and Shares Award Plan to
permit discretionary (as opposed to formulaic)
grants of Ordinary Shares to be made to the members
of the Board of Directors by the following vote:
<TABLE>
<S> <C>
For 26,035,612
Against 6,669,521
Abstentions 60,010
Broker No Vote 35,530
</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, 1997 by the following vote:
<TABLE>
<S> <C>
For 32,783,495
Against 9,304
Abstentions 7,874
</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>
Frank J. Borelli Class I Director 32,786,224 14,449
Michael A. Butt Class I Director 32,786,184 14,489
Henry U. Harder Class I Director 32,783,259 17,414
Brian M. O'Hara Class I Director 32,786,224 14,449
Jeffrey S. Tabak Class I Director 32,785,524 15,149
</TABLE>
Class I Directors will serve until the 2000 Annual Meeting of
Stockholders. Class II Directors will serve until the 1998 Annual
meeting. Class III Directors will serve until the 1999 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, 1997.
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)
/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 13, 1997
Date
17
<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 SIX MONTHS ENDED
APRIL 30, 1997 APRIL 30, 1996 APRIL 30, 1997 APRIL 30, 1996
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Net Income $ 62,916 $ 50,972 $ 114,918 $ 108,787
=========== =========== =========== ===========
Weighted average ordinary
shares outstanding 37,843,218 34,619,143 36,904,783 34,587,524
Common share equivalents
associated with options 302,910 2,369,933 317,464 2,338,476
----------- ----------- ----------- -----------
Ordinary shares and ordinary share
equivalents outstanding 38,146,128 36,989,076 37,222,247 36,926,000
=========== =========== =========== ===========
Earnings per ordinary share
and ordinary share equivalent $ 1.65 $ 1.38 $ 3.09 $ 2.95
=========== =========== =========== ===========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 7
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-START> NOV-01-1996
<PERIOD-END> APR-30-1997
<DEBT-HELD-FOR-SALE> 1,422,185<F1>
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 6,207
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 1,497,776
<CASH> 127,729
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 65,028
<TOTAL-ASSETS> 2,260,939
<POLICY-LOSSES> 476,366<F2>
<UNEARNED-PREMIUMS> 440,748<F3>
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 0
0
0
<COMMON> 681,338<F4>
<OTHER-SE> 526,405<F5>
<TOTAL-LIABILITY-AND-EQUITY> 2,260,939
238,849
<INVESTMENT-INCOME> 49,175
<INVESTMENT-GAINS> (729)
<OTHER-INCOME> 2,115
<BENEFITS> 108,448
<UNDERWRITING-AMORTIZATION> 38,513
<UNDERWRITING-OTHER> 24,255
<INCOME-PRETAX> 118,194
<INCOME-TAX> 3,222
<INCOME-CONTINUING> 114,918
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 114,918
<EPS-PRIMARY> 3.09
<EPS-DILUTED> 3.09
<RESERVE-OPEN> 0<F6>
<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 ($8,929) WHICH IS INCLUDED IN TOTAL ASSETS.
<F3>UNEARNED-PREMIUMS EXCLUDE THE REDUCTION FOR PREPAID REINSURANCE PREMIUM
($23,783) WHICH IS INCLUDED IN TOTAL ASSETS.
<F4>COMMON INCLUDES ORDINARY SHARES OF $7,561 AND ADDITIONAL PAID IN CAPITAL
$673,777.
<F5>OTHER-SE INCLUDES RETAINED EARNINGS, NET UNREALIZED APPRECIATION ON
INVESTMENTS, FOREIGN CURRENCY TRANSLATION ADJUSTMENTS AND DEFERRED
COMPENSATION.
<F6>AMOUNTS FOR SECURITIES ACT INDUSTRY GUIDE 6 AND EXCHANGE ACT INDUSTRY GUIDE 4
DISCLOSURES ARE NOT PROVIDED BECAUSE THE COMPANY'S LOSS RESERVES DO NOT EXCEED
ONE-HALF OF CONSOLIDATED COMMON SHAREHOLDERS' EQUITY.
</FN>
</TABLE>
