<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, 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 September 12, 1997 there were outstanding 35,738,444 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 1
at July 31, 1997 (unaudited) and October 31, 1996
Consolidated Statements of Operations 2
for the quarter and nine months ended July 31, 1997 and 1996
(unaudited)
Consolidated Statements of Cash Flows 3
for the nine months ended July 31, 1997 and 1996 (unaudited)
Notes to Consolidated Financial Statements (unaudited) 4
Management Discussion and Analysis of Financial 5
Condition and Results of Operations
PART II - OTHER INFORMATION
Item 6 Exhibits and Reports on Form 8-K 14
Exhibit 11 Computation of Earnings per Share 16
Signatures 15
</TABLE>
<PAGE> 3
PART I. FINANCIAL INFORMATION
MID OCEAN LIMITED
CONSOLIDATED BALANCE SHEETS
(THOUSANDS OF UNITED STATES DOLLARS)
<TABLE>
<CAPTION>
JULY 31, 1997 OCTOBER 31, 1996
ASSETS (UNAUDITED) (AUDITED)
<S> <C> <C>
Investments available for sale:
Fixed maturities at fair value $ 1,480,589 $ 1,360,210
(Amortized cost 1,452,793; 1996: 1,353,056)
Equity securities at fair value 22,878 0
Short-term fixed maturities at fair value
(Amortized cost $27,241 ; 1996: $26,226) 27,695 26,435
----------- -----------
Total investments available for sale 1,531,162 1,386,645
Unquoted investments; at cost 10,597 7,914
Cash and cash equivalents 185,093 163,968
Accrued investment income 22,025 24,106
Reinsurance premiums receivable 399,050 276,360
Funds withheld by cedents 5,846 8,696
Outstanding losses recoverable from reinsurers 9,004 5,466
Prepaid reinsurance premiums 15,721 15,846
Profit commissions receivable 30,390 50,338
Deferred acquisition costs 63,297 42,647
Goodwill 23,069 24,416
Other assets 39,944 16,297
----------- -----------
Total assets $ 2,335,198 $ 2,022,699
=========== ===========
LIABILITIES
Reserve for losses and loss expenses $ 498,460 $ 427,717
Reserve for unearned premiums 409,454 303,340
Investments pending settlement 3,925 43,374
Reinsurance balances payable 17,791 5,870
Other liabilities 67,559 72,525
----------- -----------
Total liabilities 997,189 852,826
Minority interest 54,088 52,674
----------- -----------
Total liabilities and minority interest $ 1,051,277 $ 905,500
----------- -----------
SHAREHOLDERS' EQUITY
Ordinary Shares (par value $0.20; authorized 200,000,000 shares;
issued and outstanding, 37,805,947; 1996: 34,401,576) $ 7,569 $ 6,880
Additional paid-in capital 674,898 625,048
Net unrealized appreciation on investments 27,072 6,920
Foreign currency translation adjustments 999 99
Deferred compensation (2,124) (2,058)
Retained earnings 575,507 480,310
----------- -----------
Total shareholders' equity $ 1,283,921 $ 1,117,199
----------- -----------
Total liabilities and shareholders' equity $ 2,335,198 $ 2,022,699
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements
1
<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, 1997 JULY 31, 1996 JULY 31, 1997 JULY 31, 1996
<S> <C> <C> <C> <C>
Gross premiums written $ 114,097 $ 116,370 $ 511,790 $ 520,547
Change in unearned premiums 29,074 6,332 (104,080) (182,115)
------------ ------------ ------------ ------------
Premiums earned 143,171 122,702 407,710 338,432
Premiums ceded 12,132 8,914 43,635 33,441
Change in prepaid premiums 2,992 (314) (2,820) (13,490)
------------ ------------ ------------ ------------
Premiums ceded 15,124 8,600 40,815 19,951
Net premiums earned 128,047 114,102 366,895 318,481
Net investment income 27,024 21,052 76,200 60,009
Net gains (losses) on investments 5,124 (8,396) 4,395 (1,200)
Exchange (loss) gain (628) 1,404 (8,414) 309
Managing agency income 7,020 4,719 13,426 9,671
Other income 2,690 1,178 (6,185) 2,210
------------ ------------ ------------ ------------
Total Revenues $ 169,277 $ 134,059 $ 458,687 $ 389,480
============ ============ ============ ============
EXPENSES
Losses and loss expenses incurred $ 63,700 $ 61,390 $ 184,609 $ 161,032
Reinsurance recoveries (4,273) (4,651) (16,734) (5,956)
------------ ------------ ------------ ------------
Net losses and loss expenses incurred 59,427 56,739 167,875 155,076
Acquisition expenses 24,685 19,343 63,198 51,729
Managing agency expenses 1,195 1,488 2,865 3,568
Operational expenses 13,608 9,138 36,194 21,277
------------ ------------ ------------ ------------
Total Expenses $ 98,915 $ 86,708 $ 270,132 $ 231,650
============ ============ ============ ============
Net income before tax
and minority interest $ 70,362 $ 47,351 $ 188,555 $ 157,830
Income tax (3,230) (624) (6,452) (2,295)
Minority interest (1,620) (510) (1,673) (531)
------------ ------------ ------------ ------------
Net income $ 65,512 $ 46,217 $ 180,430 $ 155,004
============ ============ ============ ============
PER SHARE DATA
Net income per ordinary share $ 1.72 $ 1.26 $ 4.81 $ 4.21
Dividend per ordinary share $ 0.75 $ 0.4125 $ 2.25 $ 0.9375
Weighted average number of
ordinary shares outstanding 38,149,720 36,686,797 37,734,772 36,845,573
</TABLE>
See accompanying notes to consolidated financial statements
2
<PAGE> 5
MID OCEAN LIMITED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(THOUSANDS OF UNITED STATES DOLLARS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
JULY 31, 1997 JULY 31, 1996
CASH FLOWS FROM OPERATING ACTIVITIES (UNAUDITED) (UNAUDITED)
<S> <C> <C>
Net Income $ 184,430 $ 155,004
Adjustment to reconcile net income to cash provided
by operating activities:
Amortization of premiums on investments 2,094 7,267
Amortization of goodwill 1,362 1,075
Provision for depreciation 421 539
Share grants 629 958
Net (gains) losses on investments (4,395) 1,200
Minority interest (17) 531
Accrued investment income 2,091 (2,927)
Reinsurance premiums receivable (104,662) (126,012)
Deferred acquisition expenses (19,388) (29,606)
Outstanding losses recoverable from reinsurers (1,161) (4,365)
Prepaid reinsurance premiums 9,626 (9,018)
Profit commissions receivable 22,770 (8,190)
Reserve for losses and loss expenses 61,420 67,871
Reserve for unearned premiums 90,329 171,121
Reinsurance balances payable 11,712 12,196
Other liabilities (20,952) 6,834
Funds withheld by cedents 2,944 (1,878)
Other assets (22,692) (4,457)
----------- -----------
Net cash provided by operating activities $ 216,561 $ 238,143
=========== ===========
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale and maturity of fixed maturities 3,406,500 2,543,546
Purchase of fixed maturities (3,547,203) (2,753,734)
Proceeds from sale of equity securities 1,896 0
Purchases of equity securities (24,232) 0
Gains (losses) on forward contracts 2,502 (1,146)
Settlement of futures contracts (789) 0
Proceeds from sale of unquoted investments 965 0
Purchase of unquoted investments (3,264) (4,461)
Net investment in Brockbank Group 0 (58,857)
----------- -----------
Net cash applied to investing activities (163,625) ($ 274,652)
=========== ===========
CASH FLOWS FROM FINANCING ACTIVITIES
Options exercised 62,327 630
Repurchase of shares (12,484) (13,444)
Dividends paid (85,234) (32,315)
----------- -----------
Net cash applied to financing activities ($ 35,391) ($ 45,129)
=========== ===========
FOREIGN CURRENCY TRANSLATION ADJUSTMENT 3,580 (23)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS $ 21,125 ($ 81,661)
BALANCE AT BEGINNING OF PERIOD $ 163,968 $ 215,048
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 185,093 $ 133,387
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements
3
<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 quarters and nine month periods
ended July 31, 1997 and 1996, the financial position at July 31, 1997 and the
cash flows for the nine month periods ended July 31, 1997 and 1996. The results
of operations for the nine months ended July 31, 1997 are not necessarily
indicative of future financial results.
NOTE B: INVESTMENT IN SUBSIDIARY
The results of the Brockbank Group's second quarter and nine month periods of
operations ended June 30, 1997 and six months of operations ended June 30, 1996
have been included in the Company's earnings for the periods ended July 31, 1997
and 1996 respectively.
On August 18, 1997, subsequent to the quarter end, the company completed the
acquisition of the remaining 49% interest in the Brockbank Group by purchasing
the outstanding shares and options of The Brockbank Group plc for a cost
estimated at $145 million. Approximately $80 million of the cost is expected to
be in the form of cash and loan notes and the remainder through the issuance of
approximately 940,000 Class A Ordinary shares which will be subject to certain
transfer restrictions and 34,000 options to purchase Class A Ordinary shares.
4
<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, 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
Third Quarter ended July 31, 1997 compared with the Third Quarter ended July 31,
1996
Net income for the quarter was $ 65.5 million compared with $46.2 million for
the quarter ended July 31, 1996, an increase of 41.7%.
Net operating income, excluding net gains or losses on investments, for the
quarter ended July 31, 1997 was $60.4 million compared with $54.6 million for
the quarter ended July 31, 1996, an increase of 10.6%.
Revenues
The following table depicts the Company's revenues for the periods shown below:
<TABLE>
<CAPTION>
QUARTER ENDED JULY 31
--------------------- PERCENT
1997 1996 CHANGE
---- ---- ------
<S> <C> <C> <C>
Dollars in thousands
Gross premiums written $ 114,097 $ 116,370 (2.0)%
Premiums ceded 12,132 8,914 36.1%
--------- --------- -----
Net premiums written $ 101,965 $ 107,456 (5.1%)
========= ========= =====
Net premiums earned 128,047 114,102 12.2%
Net investment income 27,024 21,052 28.4%
Net gains/(losses) on investments 5,124 (8,396) --
Exchange (loss)/gain (628) 1,404 --
Managing agency income 7,020 4,719 48.8%
Other income 2,690 1,178 128.4%
--------- --------- -----
Total revenues $ 169,277 $ 134,059 26.3%
========= ========= =====
</TABLE>
5
<PAGE> 8
Gross premiums written for the quarter ended July 31, 1997 were $114.1 million
compared with $116.4 million for the quarter ended July 31, 1996, a decrease of
$2.3 million or 2.0%.
The decline results from a decrease in gross premiums written by Mid Ocean's
Bermuda operations of $10.1 million, which continued to experience pricing
pressure on rates.
The decline results from a decrease in gross premiums written by Mid Ocean's
Bermuda operations of $10.1 million, which continued to experience pricing
pressure on rates.
Offsetting this decrease is an increase in gross premiums written of $7.8
million by the two Lloyds corporate syndicates managed by Brockbank which have
written more business as a result of increasing capacity by approximately 40% in
1997 compared to 1996.
Premiums ceded for the quarter ended July 31, 1997 were $12.1 million compared
with $8.9 million for the quarter ended July 31, 1996. The increase of $3.2
million is attributable both to Brockbank, which normally purchases a relatively
higher proportion of reinsurance protection, and an increase in reinsurance
purchased by Mid Ocean on a portion of its book of business.
As a result of the above, net premiums written for the quarter ended July 31,
1997 were $102.0 million compared to $107.5 million for the quarter ended July
31, 1996, a decrease of $5.5 million or 5.1%.
Net premiums earned during the quarter ended July 31, 1997 were $128.0 million
compared with $114.1 million during the quarter ended July 31, 1996, an increase
of $13.9 million or 12.2%. Brockbank contributed approximately $28.3 million to
the increase which was offset by a decrease of $14.4 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 $13.5 million
to net premiums earned during the 1996 third quarter which reflected earnings of
those premiums written by the syndicates in their first six months of
operations. Net earned premiums increased substantially in the third quarter
1997 to $41.8 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 $27.0 million in the quarter ended July 31, 1997
compared with $21.0 million in the second quarter of 1996. The increase results
from a larger investment base and increased investment yields; 6.56% during the
quarter ended July 31, 1997 compared with 6.11% during the same quarter in 1996.
Net gains on investments were $5.1 million during the quarter ended July 31,
1997 compared with losses of $8.4 million during the quarter ended July 31,
1996. The gains are primarily attributable to the sale of securities in periods
of increasing market values.
Managing agency income was $7.0 million during the quarter ended July 31, 1997
compared with $4.7 million during the quarter ended July 31, 1996, an increase
of $2.3 million. The increase is attributable to a revision of the estimated
profit commission relating to the 1995 underwriting year. 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 syndicates, excluding
the two dedicated corporate syndicates which are included in Mid Ocean's
operating results, as noted above.
6
<PAGE> 9
Other income of $2.7 million is fee income resulting from Brockbank's direct
marketing motor business and is $1.5 million higher than the $1.2 million
recorded in the third quarter 1996 relating to an increase in gross premiums
written.
As a result of the above, total revenues for the quarter ended July 31, 1997
were $169.3 million compared with $134.0 million, an increase of $35.3 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
1997 1996 CHANGE
<S> <C> <C> <C>
Dollars in thousands
Net losses and loss expenses incurred $59,427 $56,739 4.7%
------- ------- ----
Acquisition expenses 24,685 19,343 27.6%
Operational expenses 13,608 9,138 48.9%
------- ------- ----
Total underwriting expenses 38,293 28,481 34.4%
Managing agency expenses 1,195 1,488 (19.7%)
------- ------- ----
Total expenses $98,915 $86,708 14.1%
======= ======= ====
Net loss and loss expense ratio 46.4% 49.7%
------- -------
Acquisition expense ratio 19.3% 17.0%
Operational expense ratio 10.6% 8.0%
------- -------
Underwriting expense ratio 29.9% 25.0%
Combined ratio 76.3% 74.7%
======= =======
</TABLE>
The Company incurred net losses and loss expenses during the quarter ended July
31, 1997, of $59.4 million or 46.4% of net premiums earned compared with $56.7
million or 49.7% of net premiums earned during the same quarter 1996, an
increase of $2.7 million or 4.7%. There were no significant catastrophic losses
reported during the quarters ended July 31, 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. The lower losses on Mid Ocean's book of business is due to an
absence of significant loss events together with a release of prior years' loss
reserves. 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 as noted above.
7
<PAGE> 10
Underwriting expenses are comprised of acquisition expenses and operational
expenses. Underwriting expenses for the quarter ended July 31, 1997 were
$38.3 million or 29.9% of net premiums earned compared with $28.5 million or
25.0% of net premiums earned during the quarter ended July 31, 1996. This
represents an increase of $9.8 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 increased to 19.3% in the
third quarter 1997 from 17.0% in the third quarter 1996. This increase in the
acquisition expense ratio is attributable to relatively higher profit
commission expense provisions in 1997. The operational expense ratio increased
to 10.6% in the third quarter 1997 compared with 8.0% 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 third quarter 1996 comparison.
Managing agency expenses reflect the cost of operating the Brockbank managing
agency and have decreased slightly over the third 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 July 31, 1997
were $98.9 million compared with $86.7 million during the quarter ended July 31,
1996, an increase of $12.2 million or 14.1%.
Net income before income tax and minority interest for the quarter ended April
30, 1997 was $70.4 million compared with $47.4 million for the quarter ended
July 31, 1996, an increase of $23.0 million or 48.6%.
Income taxes were $3.2 million for the quarter ended July 31, 1997 and compared
with $0.6 million for the third 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.
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, 1997 compared with nine months ended July 31, 1996
For the nine months period ended July 31, 1997 net income was $180.4 million
compared with $155.0 million for the nine months ended July 31, 1996, an
increase of 16.4%.
8
<PAGE> 11
Net operating income, excluding net gains or losses on investments, for the nine
months ended July 30, 1997 was $176.0 million compared with $156.2 million for
the nine months ended July 31, 1996, an increase of 12.7%.
Revenues
The following table depicts the Company's revenues for the periods shown below:
<TABLE>
<CAPTION>
NINE MONTHS ENDED JULY 31,
-------------------------- PERCENT
1997 1996 CHANGE
---- ---- ------
<S> <C> <C> <C>
Dollars in thousands
Gross premiums written $ 511,790 $ 520,547 (1.7%)
Premiums ceded 43,635 33,441 30.5%
--------- --------- -----
Net premiums written $ 468,155 $ 487,106 (3.9%)
========= ========= =====
Net premiums earned 366,895 318,481 15.2%
Net investment income 76,200 60,009 27.0%
Net gains/(losses) on investments 4,395 (1,200) --
Exchange (loss)/gain (8,414) 309 --
Managing agency income 13,426 9,671 38.8%
Other income 6,185 2,210 179.9%
--------- --------- -----
Total revenues $ 458,687 $ 389,480 17.8%
========= ========= =====
</TABLE>
For the nine month period ended July 31, 1997, gross premiums written were
$511.8 million compared with $520.5 million during the first nine months of
1996, a decrease of $8.7 million or 1.7%. This decrease is the net result of an
increase in gross premiums underwritten through the two corporate syndicates
managed by Brockbank of $71.3 million offset by a decrease of $80.0 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 three quarters of underwriting results in the nine months ended
July 31, 1997 compared with two quarters of underwriting results in the nine
months ended July 31, 1996. The decrease in gross premiums written by Mid Ocean
results primarily from a $53.6 million decline in the pro rata book of
business, an $11.1 million decline in the excess of loss book of business and
lesser declines on other books of business. These declines are primarily
attributable to reduced cessions on the part of some clients, the non renewal of
certain accounts and in the case of the pro rata book of business, a number of
negative adjustments resulting from changes in premium estimates in previous
underwriting years.
Premiums ceded during the nine months ended July 31, 1997 were $43.6 million
compared with $33.4
9
<PAGE> 12
million for the nine months ended July 31, 1996, an increase
of $10.2 million. This increase is largely attributable to reinsurance purchased
by the corporate syndicates relating to the increase in their premium written.
As a result, net premiums written for the nine months ended July 31, 1997 were
$468.2 million compared to $487.1 million for the nine months ended July 31,
1996, a decrease of $8.9 million.
Net premiums earned during the nine months ended July 31, 1997 were $366.9
million compared with $318.5 million during the same period in 1996, an increase
of $48.4 million or 15.2%. The corporate syndicates contributed $89.4 million to
this increase. Offsetting this increase was a decrease of $41.0 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 nine months ended July 31, 1997.
Net investment income was $76.2 million during the nine months ended July 31,
1997 compared to $60.0 million during the same period in 1996, an increase of
$16.2 million or 27.0%. The increase results from a larger investment base and
increased investment yields when compared with the previous year.
Net gains on investments were $4.4 million during the nine months ended July 31,
1997 compared with a loss of $1.2 million for the nine months ended July 31,
1996. The 1997 gain is attributable to gains realized on the sale of securities
during the third quarter of 1997.
Exchange losses were $8.4 million during the nine months ended July 31, 1997
compared with gains of $0.3 million in the same period 1996. 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 is attributable to both earned profit commissions and fee
income in respect of the Brockbank managing agency activities. Managing agency
income was $13.4 million during the nine months ended July 31, 1997, compared
with $9.7 million in the nine months ended July 31, 1996. Three quarters of
managing agency income are included in the nine months ended July 31 1997
compared with only two quarters in 1996.
Other income of $6.2 million for the nine months ended July 31, 1997 compares
with $2.2 million for the same period 1996. However only two quarter of
Brockbank results are included in that period compared with three quarters in
the first nine 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 nine months ended July 31, 1997
were $458.7 million compared with $389.5 million for the nine months ended July
31, 1996, an increase of $69.2 million or 17.8%.
Expenses
The following table sets forth the Company's expenses, combined ratio and
components thereof for the periods indicated:
10
<PAGE> 13
<TABLE>
<CAPTION>
NINE MONTHS ENDED JULY 31,
-------------------------- PERCENT
1997 1996 CHANGE
---- ---- ------
<S> <C> <C> <C>
Dollars in thousands
Net losses and loss expenses incurred $167,875 $155,076 8.3%
-------- -------- ----
Acquisition expenses 63,198 51,729 22.2%
Operational expenses 36,194 21,277 70.1%
-------- -------- ----
Total underwriting expenses 99,392 73,006 36.1%
Managing agency expenses 2,865 3,568 (19.7%)
-------- -------- ----
Total expenses $270,132 $231,650 16.6%
======== ======== ====
Net loss and loss expense ratio 45.8% 48.7%
-------- --------
Acquisition expense ratio 17.2% 16.2%
Operational expense ratio 9.9% 6.7%
-------- --------
Underwriting expense ratio 27.1% 22.9%
Combined ratio 72.9% 71.6%
======== ========
</TABLE>
The Company incurred net losses and loss expenses during the nine months ended
July 31, 1997 of $167.9 million or 45.8% of net premiums earned compared with
$155.1 million or 48.7% of net premiums earned during the nine months ended July
31, 1996, an increase of $12.8 million or 8.3%. There were no significant
catastrophic losses reported during the nine months ended July 31, 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 nine months ended July 31, 1997 were
$99.4 million or 27.1% of net premiums earned compared with $73.0 million or
22.9% of net premiums earned for the nine months ended July 31, 1996. This
represents an increase of $26.4 million of which $11.5 million is attributable
to increased acquisition costs and $14.9 million is attributable to increased
operational expenses.
The acquisition expense ratio was 17.2% for the nine months ended July 31, 1997
compared with 16.2% for the nine months ended July 31, 1996. The increase is
attributable to higher brokerage expenses on the corporate syndicates which are
becoming a larger part of the whole together with accrued profit commissions due
to the reduction in reserves for prior underwriting years.
11
<PAGE> 14
The operational expense ratio increased to 9.9% for the nine months ended July
31, 1997 compared with 6.7% for the nine months ended July 31, 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 nine months ended
July 31, 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 nine months ended
July 31, 1997 was $188.6 million compared with $157.8 million for the nine
months ended July 31, 1996, an increase of $30.8 million or 19.5%.
Income taxes were $6.5 million for the nine months ended July 31, 1997 compared
with $2.3 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 July 31, 1997, shareholders' equity was $1,283.9 million, of which $575.5
million was retained earnings. At July 31, 1997, Mid Ocean held $185.1 million
of cash and cash equivalents compared with $164.0 million at October 31, 1996.
The increase is attributable to the timing of the investment of the Company's
cash and cash equivalents.
Net cash flow provided by operating activities for the nine months ended July
31, 1997 was $216.6 million compared with $238.1 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
12
<PAGE> 15
structured to provide a high level of liquidity to meet its obligations. At
July 31, 1997, the Company's investment portfolio, measured at fair value,
including accrued investment income and trades pending settlement and cash and
cash equivalents, was $1,745.0 million compared with $1,539.3 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 $22.9
million of equity securities. At July 31, 1997 approximately $13.6 million of
fixed income securities were hedged by the purchase of interest rate futures of
the same value. At July 31, 1997, 76.9% 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 July 31, 1997, Mid Ocean had provided letters of credit
amounting to approximately $191.3 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 $120.7 million in lieu of
capital.
The Company has made no significant capital expenditures during the nine months
ended July 31, 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 July 31, 1997 and October 31, 1996, the investment in Trident was
$6.3 million valued at cost.
On August 18, 1997, subsequent to the quarter end, the company completed the
acquisition of the remaining 49% interest in the Brockbank Group by purchasing
the outstanding shares and options of The Brockbank Group plc for a cost
estimated at $145 million. Approximately $80 million of the cost is expected to
be in the form of cash and loan notes and the remainder through the issuance of
approximately 940,000 Class A Ordinary shares which will be subject to certain
transfer restrictions and 34,000 options to purchase Class A Ordinary shares.
The Company is in the process of completing negotiations to put in place bank
liquidity facilities aggregating to $200 million and expects the facilities to
be in place during the fourth quarter 1997. Proceeds from the facilities will
be available for general corporate purposes.
13
<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 nine months ended July 31, 1997.
14
<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
CHARLES F HAYS
Senior Vice President,
Chief Financial and Administrative Officer
(Principal Financial Officer
and Duly Authorized Officer)
John M Wadson
JOHN M WADSON
Vice President, Treasurer and Secretary
(Principal Accounting Officer
and Duly Authorized Officer)
September 15, 1997
- ------------------------------
Date
15
<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, 1997 JULY 31, 1996 JULY 31, 1997 JULY 31, 1996
<S> <C> <C> <C> <C>
Net Income $ 65,512 $ 46,217 $ 180,430 $ 105,004
=========== =========== =========== ===========
Weighted average ordinary
shares outstanding 37,823,982 34,302,783 37,214,550 34,491,918
Common share equivalents
associated with options 325,738 2,384,014 320,222 2,353,655
----------- ----------- ----------- -----------
Ordinary shares and ordinary share
equivalents outstanding 38,149,720 36,686,797 37,734,772 36,845,573
=========== =========== =========== ===========
Earnings per ordinary share
and ordinary share equivalent $ 1.72 $ 1.26 $ 4.81 $ 4.21
=========== =========== =========== ===========
</TABLE>
16
<TABLE> <S> <C>
<ARTICLE> 7
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-START> NOV-01-1997
<PERIOD-END> JUL-31-1997
<DEBT-HELD-FOR-SALE> 1,480,589<F1>
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 22,878
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 1,541,759
<CASH> 185,093
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 63,297
<TOTAL-ASSETS> 2,335,198
<POLICY-LOSSES> 498,460<F2>
<UNEARNED-PREMIUMS> 409,454<F3>
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 0
0
0
<COMMON> 682,467<F4>
<OTHER-SE> 601,454<F5>
<TOTAL-LIABILITY-AND-EQUITY> 2,335,198<F6>
366,895
<INVESTMENT-INCOME> 76,200
<INVESTMENT-GAINS> 4,395
<OTHER-INCOME> 11,197
<BENEFITS> 167,875
<UNDERWRITING-AMORTIZATION> 63,198
<UNDERWRITING-OTHER> 39,059
<INCOME-PRETAX> 188,555
<INCOME-TAX> 6,452
<INCOME-CONTINUING> 180,430
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 180,430
<EPS-PRIMARY> 4.81
<EPS-DILUTED> 4.81
<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 (9,004) WHICH IS INCLUDED IN TOTAL ASSETS.
<F3>UNEARNED-PREMIUMS EXCLUDE THE REDUCTION FOR PREPAID REINSURANCE PREMIUM
($15,721) WHICH IS INCLUDED IN TOTAL ASSETS.
<4>COMMON INCLUDES ORDINARY SHARES OF $7,569 AND ADDITIONAL PAID IN CAPITAL
$674,898.
<5>OTHER-SE INCLUDES RETAINED EARNINGS, NET UNREALIZED APPRECIATION ON
INVESTMENTS, FOREIGN CURRENCY TRANSLATION ADJUSTMENTS AND DEFERRED
COMPENSATION.
<6>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>
