<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
/x/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended OCTOBER 31, 1996
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
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)
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Title of each class
Class A Ordinary Shares, Par Value $0.20 per Share
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 ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to the
Form 10-K. ___
The aggregate market value of the shares of all classes of voting stock of the
registrant held by non-affiliates of the registrant on January 22, 1997 was
approximately $1,781.7 million computed upon the basis of the closing sales
price of the Ordinary Shares on that date. For purposes of this computation,
shares held by directors and officers of the registrant have been excluded. Such
exclusion is not intended, nor shall it be deemed, to be an admission that such
persons are affiliates of the registrant.
As of January 22, 1997 there were outstanding 34,793,246 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.
Documents Incorporated by Reference
Portions of the Registrant's annual report to security holders for the fiscal
year ended October 31, 1996 (the "1996 Annual Report") are incorporated by
reference in Parts II and IV of this Form 10-K.
The registrant's definitive proxy statement filed with the Securities and
Exchange Commission pursuant to Regulation 14A relating to the annual meeting of
shareholders scheduled to be held on March 6, 1997, is incorporated by reference
in Part III of this Form 10-K.
Portions of the Registrant's Registration Statement on Form S-1 (File No.
33-63298) are incorporated by reference in Part I of this Form 10-K.
<PAGE> 2
INDEX
<TABLE>
<CAPTION>
PART I PAGE
<S> <C> <C>
Item 1 Business...................................................... 1
Item 2 Properties.................................................... 11
Item 3 Legal Proceedings............................................. 11
Item 4 Submission of Matters to a Vote of Security Holders........... 12
PART II
Item 5 Market for the Registrant's Common Equity and Related
Stockholder Matters .......................................... 12
Item 6 Selected Financial Data....................................... 14
Item 7 Management's Discussion and Analysis of Results of Operations
and Financial Condition....................................... 14
Item 8 Financial Statements and Supplementary Data................... 14
Item 9 Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.......................................... 14
PART III
Item 10 Directors and Executive Officers of the Registrant............ 14
Item 11 Executive Compensation........................................ 14
Item 12 Security Ownership of Certain Beneficial Owners and
Management.................................................... 15
Item 13 Certain Relationships and Related Transactions................ 15
PART IV
Item 14 Exhibits, Financial Statement Schedules and
Reports on Form 8-K........................................... 15
</TABLE>
<PAGE> 3
PART I
ITEM 1 - BUSINESS
INTRODUCTION
Mid Ocean Limited ("the Company") is a holding company incorporated in the
Cayman Islands. Its principal offices are located in Bermuda. The Company,
through its wholly owned subsidiary, Mid Ocean Reinsurance Company Ltd, a
Bermuda company ("Mid Ocean"), is a leading reinsurer, providing property
catastrophe, property risk excess of loss, property pro rata, marine, energy,
aviation, satellite and other reinsurance to insurers and reinsurers on a
worldwide basis. In addition, through its acquisition of 51% of the operating
entities of The Brockbank Group plc, (the "Brockbank group" or "Brockbank" ),
the Company also operates two leading Lloyd's of London ("Lloyd's") managing
agencies and two dedicated corporate names which provides capital to two Lloyd's
underwriting syndicates which are managed by Brockbank.
Organized in August 1992, Mid Ocean was the first company formed specifically to
capitalize on the opportunity created by the then existing supply/demand
imbalance for worldwide property catastrophe reinsurance. Beginning in 1987, a
series of catastrophic events resulted in large losses for existing reinsurers,
significant increases in premium rates and a reduction in property catastrophe
reinsurance coverage available to primary insurance companies in the United
States and other significant markets. Mid Ocean initially focused its efforts
primarily on providing property catastrophe reinsurance to the world's leading
insurers, many of whom are now reinsureds of Mid Ocean. In order to take
advantage of favorable market opportunities and diversify its spread of
business, Mid Ocean has written other primarily short tail lines that are not
necessarily catastrophe-related. Mid Ocean assumes risks which are diversified
by ceding company and geography. The majority of these risks have aggregate
limits and varying attachment points.
In August 1995, Mid Ocean opened a branch office in London which commenced
writing marine, energy, aviation and satellite excess of loss reinsurance
November 1, 1995.
In December 1995, Mid Ocean entered into a series of transactions in which it
acquired 51% of the Brockbank group. As a result the Company acquired a leading
Lloyd's managing agent and funded two dedicated Lloyd's syndicates managed by
Brockbank. In 1996, these two syndicates had an aggregate premium limit (i.e.
underwriting capacity) of (pound)100 million (approximately $155 million) which
increased to (pound)142 million (approximately $230 million) effective January
1, 1997. The Brockbank group also manages syndicates comprised of participating
capital providers known as "Names", which had an aggregate premium limit of
approximately (pound)465 million (approximately $720 million) in 1996 which
increased to (pound)515 million (approximately $840 million) effective January
1, 1997. Mid Ocean has, from time to time, provided quota share reinsurance to
the syndicates managed by Brockbank. The Company has undertaken to make an
offer, by September 1, 1997, to acquire all the outstanding share capital of The
Brockbank Group plc for either cash or ordinary shares of the Company, based
upon a valuation by an independent banking firm pursuant to a specified
procedure. The assets and liabilities and results of operations of the Brockbank
group have been consolidated in the reported financial statements of the Company
since its acquisition of Brockbank and as such, only three quarters of Brockbank
operations for calendar year 1996 are included in the Company's results of
operations for the Company's fiscal 1996. The Company's fiscal year ends on
October 31 of any year while Brockbank and the Lloyd's syndicates' fiscal years
end on December 31 of any year.
In August 1996, the Company established Mid Ocean Reinsurance Consulting GmbH, a
wholly owned subsidiary located in Munich, Germany, which is Mid Ocean's
Continental European contact office. In September 1996, the Company opened a
branch office in Singapore. The Singapore office writes general reinsurance,
treaty and facultative business.
The Company will continue to seek, on a selected basis, additional business
opportunities with the goal of enhancing shareholder value.
<PAGE> 4
2
Mid Ocean is a registered Bermuda reinsurance company and is subject to
regulation and supervision in Bermuda, the United Kingdom and Singapore. The
Brockbank group, including its managing agencies and dedicated corporate
vehicles and underlying syndicates, is subject to United Kingdom and Lloyd's
regulations and supervision. Neither the Company nor Mid Ocean is registered or
licensed as an insurance company in any jurisdiction in the United States.
For the years ended October 31, 1996, 1995 and 1994, the Company reported gross
premiums written of $566.3 million, $445.8 million and $358.6 million
respectively. The following table sets forth the Mid Ocean and the Brockbank
group's gross premiums written by subsidiary and within, by lines of business:
<TABLE>
<CAPTION>
FISCAL 1996 FISCAL 1995 FISCAL 1994
------------------------------------------------------------------------------------------------
Gross Gross Gross
Premiums Percent Premiums Percent Premiums Percent
Written of Total Written of Total Written of Total
(in thousands) (in thousands) (in thousands)
------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
MID OCEAN
Type of Business
Property Reinsurance:
Property Catastrophe (1) $170,376 30.1% $204,316 45.8% $214,023 59.7%
Property Risk Excess of Loss 36,577 6.4% 33,264 7.5% 27,522 7.7%
Property Pro Rata 94,488 16.7% 95,699 21.5% 52,150 14.5%
-------- ----- -------- ----- -------- -----
301,441 53.2% 333,279 74.8% 293,695 81.9%
-------- ----- -------- ----- -------- -----
Other Reinsurance:
Marine & Energy 59,238 10.4% 65,633 14.7% 39,371 11.0%
Aviation & Satellite 42,927 7.6% 33,025 7.4% 12,155 3.4%
Other 15,117 2.7% 13,882 3.1% 13,399 3.7%
-------- ----- -------- ----- -------- -----
117,282 20.7% 112,540 25.2% 64,925 18.1%
-------- ----- -------- ----- -------- -----
Total - Mid Ocean $418,723 73.9% $445,819 100% $358,620 100%
-------- ----- -------- ----- -------- -----
THE BROCKBANK GROUP (2)
Insurance and Reinsurance:
Property 24,087 4.3% -- -- -- --
Marine & Energy 33,779 6.0% -- -- -- --
Aviation & Satellite 16,774 2.9% -- -- -- --
Motor 54,515 9.6% -- -- -- --
Other 18,409 3.3% -- -- -- --
-------- ----- -------- ----- -------- -----
Total - Brockbank $147,564 26.1% -- -- -- --
-------- ----- -------- ----- -------- -----
TOTAL $566,287 100% $445,819 100% $358,620 100%
======== ===== ======== ===== ======== =====
</TABLE>
(1)Includes four proportional retrocessions in fiscal year 1996 on property
reinsurance which may include some non-catastrophe property reinsurance.
(2)Includes only gross premiums written by the Brockbank group for the period
January 1, 1996, to September 30, 1996, the first three quarters of its
fiscal year and the period for which such gross premiums written are
reflected in the Company's financial results for fiscal 1996, by the two
dedicated corporate vehicles.
<PAGE> 5
3
MID OCEAN
PROPERTY REINSURANCE
Mid Ocean's property reinsurance account consists of catastrophe reinsurance,
risk excess of loss and proportional reinsurance of a variety of different
property related insurance coverages. Mid Ocean's property reinsurance contracts
are generally "all risk" in nature. Mid Ocean, therefore, is exposed to losses
from sources as diverse as windstorms, earthquakes, freezes, riots, floods,
industrial explosions, fires or any number of other potential disasters. In
accordance with market practice, Mid Ocean's property reinsurance policies
generally exclude certain risks such as war, nuclear contamination or radiation.
Mid Ocean's predominant exposure under such coverages is to property damage.
However, other risks, including business interruption, death and injury under
workers compensation policies and other non-property losses may also be covered
under the property reinsurance contract when arising from a covered peril.
Property Catastrophe Reinsurance
Property catastrophe reinsurance provides coverage on an excess of loss basis
when aggregate losses and loss adjustment expenses from a single occurrence of a
covered peril exceed the attachment point specified in the policy. Some of Mid
Ocean's property catastrophe contracts limit coverage to one occurrence in a
policy year, but most contracts generally provide for one reinstatement.
The table below allocates Mid Ocean's property catastrophe gross premiums
written by geographic area for the years ended October 31, 1996, 1995 and 1994.
The table also sets forth gross premiums written with respect to retrocessions
of property reinsurance, primarily property catastrophe, which cannot be
allocated geographically.
MID OCEAN
<TABLE>
<CAPTION>
FISCAL 1996 FISCAL 1995 FISCAL 1994
---------------------------------------------------------------------------------
Gross Gross Gross
Premiums Percent Premiums Percent Premiums Percent
Written of Total Written of Total Written of Total
(in thousands) (in thousands) (in thousands)
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Geographic Area
Property Catastrophe Reinsurance
United States $ 78,983 52.0% $ 87,008 49.2% $ 92,092 52.2%
United Kingdom 19,402 12.8% 25,474 14.4% 28,730 16.3%
Japan 13,240 8.7% 18,778 10.6% 18,297 10.4%
Worldwide 6,767 4.4% 8,540 4.8% 7,369 4.2%
Continental Europe 11,034 7.3% 11,634 6.6% 2,959 1.7%
Australasia 13,057 8.6% 14,441 8.2% 14,528 8.2%
Caribbean 5,400 3.5% 6,179 3.5% 5,820 3.3%
Other 4,044 2.7% 4,822 2.7% 6,638 3.7%
-------- ----- -------- ----- -------- -----
Total $151,927 100% $176,876 100% $176,433 100%
-------- ----- -------- ----- -------- -----
Retrocessions $ 18,449 $ 27,440 $ 37,590
-------- -------- --------
Total $170,376 $204,316 $214,023
======== ======== ========
</TABLE>
Property Risk Excess of Loss
Mid Ocean also writes risk excess of loss property reinsurance. Property risk
excess coverage represented $36.6 million, $33.3 million and $27.5 million of
gross premiums written for the years ended October 31, 1996, 1995 and 1994
respectively. Risk excess of loss reinsurance responds to a loss of the
reinsured on a single "risk" of the type reinsured rather than to aggregate
losses for all covered risks as does catastrophe reinsurance. The risk excess of
loss policy protects the reinsured from losses in excess of its retention level
on a single risk. A "risk" in this context might mean the insurance coverage on
one
<PAGE> 6
4
building or a group of buildings or the insurance coverage under a single
policy, which the reinsured treats as a single risk. Risk excess contracts are
generally "all risk" in nature, similar to property catastrophe reinsurance.
Property risk excess contracts have traditionally provided for unlimited
reinstatement, sometimes with payment of an additional premium. Most of the risk
excess treaties Mid Ocean participates in have limited reinstatements and
contain a per event limit on Mid Ocean's liability, which limits Mid Ocean's per
event exposure on its risk excess business in the event of a catastrophe of the
type to which property catastrophe reinsurance responds.
Property Pro Rata
Mid Ocean's property pro rata account includes proportional reinsurance of
direct written property insurance, representing $94.5 million, $95.7 million and
$52.2 million of gross premiums written for the years ended October 31, 1996,
1995 and 1994 respectively. Mid Ocean considers this business to be related to
its catastrophe and other property exposures and intends to continue to write
such business on a worldwide basis when and in areas where it believes that
rates are attractive.
In proportional reinsurance, Mid Ocean assumes a specified proportion of the
risk on the specified coverage and receives an equal proportion of the premium.
The ceding insurer receives a commission, based upon the premiums ceded to the
reinsurer and the ceding insurer may also be entitled to receive a profit
commission based on the ratio of losses, loss adjustment expense and the
reinsurer's expenses to premiums ceded. A proportional reinsurer is dependent
upon the ceding insurer's underwriting, pricing and claims administration to
yield an underwriting profit. In some instances, Mid Ocean may be entitled to
the benefit of other reinsurance, known as common account reinsurance, purchased
by the ceding company on an account reinsured by Mid Ocean on a proportional
basis.
OTHER REINSURANCE
Mid Ocean's other reinsurance account is made up primarily of the reinsurance of
marine & energy and aviation & satellite insurance coverage. Mid Ocean also
reinsures other insurance risks including motor, nuclear, accident, fidelity and
professional indemnity insurance risks. For the years ended October 31, 1996,
1995 and 1994, Mid Ocean had gross premiums written of approximately $117.3
million, $112.5 million and $64.9 million respectively pertaining to other
reinsurance, which accounted for approximately 20.7%, 25.2%, and 18.1%
respectively of gross premiums written. Mid Ocean writes other excess of loss
and proportional reinsurance in areas where it believes the pricing and risk
profile are attractive. Mid Ocean has, to date, limited the types of risk it
reinsures to those based primarily on physical damages, although certain risks,
such as marine, aviation, accident, fidelity and professional indemnity include
casualty or other non-physical risks.
Mid Ocean's non-property account consists, in part, of specific portions of the
business underwritten by selected Lloyd's syndicates, insurance and reinsurance
companies. The underlying insurance may be written on an excess of loss basis.
Marine & Energy
Mid Ocean's marine & energy account is written on both a proportional and excess
of loss basis. The proportional business is based on specific areas of account
that are clearly defined with the exception of the reinsurance of Brockbank
Syndicate 861 which is written on a "whole account" basis. For the years ended
October 31, 1996, 1995 and 1994, gross premiums written were $59.2 million,
$65.6 million and $39.4 million respectively.
Aviation & Satellite
Mid Ocean's aviation portfolio comprises both direct insurance and reinsurance,
on both a proportional and excess of loss basis. The exposures derived through
proportional relationships on defined segments of account following market
leaders in the field, with the exception of the reinsurance of Brockbank
Syndicate 861, which is written on a "whole account" basis. Due to the highly
technical nature of the satellite business, the exposures retained by Mid Ocean
under this portfolio are acquired mostly through proportional reinsurances of
specialist underwriters. For the years ended October 31, 1996, 1995 and
<PAGE> 7
5
1994, gross premiums written were $42.9 million, $33.0 million and $12.2 million
respectively.
Other
Other reinsurance, which includes nuclear, accident, fidelity and professional
indemnity, represents $15.1 million of gross premiums written in fiscal 1996,
$13.9 million in fiscal 1995 and $13.4 million in fiscal 1994.
THE BROCKBANK GROUP
The Brockbank group includes two leading Lloyd's managing agencies, which manage
syndicates having an aggregate premium limit of approximately $840 million in
1997. The Brockbank group also owns two dedicated Lloyd's syndicates having an
aggregate premium limit of approximately $230 million in 1997 (which is included
in the aggregate premium limit of approximately $840 million for all Brockbank
managed syndicates), one of which exclusively writes motor business in the
United Kingdom. The Brockbank group's earnings are principally derived from the
insurance results of the Brockbank syndicates as well as agency fees on the
syndicates.
The syndicates managed by Brockbank (including the dedicated syndicates)
generally write insurance and reinsurance covering property, marine and energy,
aviation and satellite and motor risks, as well as professional indemnity
(including directors' and officers' liability and errors and omissions coverage)
and personal lines.
OUTWARD RETROCESSIONS - REINSURANCE PROTECTIONS PURCHASED
For the years ended October 31, 1996, 1995 and 1994, Mid Ocean participated in
limited retrocessions. Initially the majority of such retrocessions originated
from common account reinsurance on assumed business. However in 1996 Mid Ocean
purchased specific reinsurance protection covers covering certain aspects of its
book of business. Brockbank, as a part of its business strategy, has
historically purchased a significant amount of reinsurance for its syndicates
which resulted in $21.9 million being reflected in the Companies financial
results in respect of the two dedicated corporate syndicates for fiscal 1996
(covering the period January 1, 1996 to September 30, 1996). Common account
reinsurance is reinsurance purchased by the ceding company on its behalf and on
behalf of its quota share reinsurers.
MARKETING
Mid Ocean utilizes non-US brokers to market substantially all of its business on
a worldwide basis. The broker is an integral part of Mid Ocean's strategy to
become a leading reinsurer. Mid Ocean has established strong relationships with
brokers by providing their respective clients property catastrophe and other
reinsurance that is supported by a sufficient level of capital and surplus.
Mid Ocean markets its business through approximately 65 non-US brokers.
Consequently the Company is able to market cost-effectively and limit the amount
of employees required to market its products. The Company believes that by
maintaining close relationships with brokers, it obtains access to a broad range
of potential insureds and reinsureds. Business submissions to Mid Ocean are
underwritten in Mid Ocean's offices in Bermuda, London or Singapore.
Brockbank markets business through approximately 113 brokers excluding personal
lines, which are written through a significant number of brokers. The Brockbank
business is underwritten in the United Kingdom. Brockbank writes a significant
amount of business through Carpenter Bowring Limited, which is one of the
largest Lloyd's brokers. Carpenter Bowring Limited is an affiliate of Marsh &
McLennan Risk Capital Holdings, Ltd., one of the Company's principal
shareholders.
The following table sets forth the percentage of the Company's business placed
in the years ended October 31, 1996, 1995 and 1994 through each broker placing
more than 5% of the Company's gross premiums written:
<PAGE> 8
6
<TABLE>
<CAPTION>
Name Year Ended Year Ended Year Ended
October 31, 1996 October 31, 1995 October 31, 1994
---------------- ---------------- ----------------
<S> <C> <C> <C>
Carpenter Bowring Limited 14.6% 24.6% 20.9%
Marsh & McLennan Global Broking (Bermuda) Ltd 10.9% 16.3% 16.6%
Willis Corroon Group 8.6% 6.7% 7.8%
Sedgwick Reinsurance Services Limited 5.4% 5.9% 9.4%
Alexander Howden Group 5.2% 6.5% 9.4%
Greig Fester 4.7% 6.6% 6.6%
</TABLE>
Carpenter Bowring Limited and Marsh & McLennan Global Broking (Bermuda) Ltd are
affiliates of Marsh & McLennan Risk Capital Holdings, Ltd., one of the Company's
principal shareholders.
UNDERWRITING
The Company employs a disciplined, analytical approach to underwriting designed
to specify an adequate premium for a given exposure that is intended to be
commensurate with the amount of capital it anticipates placing at risk. For its
property catastrophe reinsurance business, Mid Ocean has developed underwriting
guidelines under which it generally limits the amount of exposure it will
directly underwrite for any one reinsured and the amount of the aggregate
exposure to catastrophe losses in any geographic zone. Mid Ocean believes it has
defined zones such that a single occurrence, such as an earthquake or hurricane,
generally should not affect more than one zone. The definition of Mid Ocean's
zones are subject to periodic review and change. Mid Ocean also generally seeks
an attachment point for its property catastrophe reinsurance anticipated to be
high enough to produce a low frequency of loss. Mid Ocean limits its aggregate
exposure in the retrocessional and pro rata business because it is sometimes
difficult to allocate risks associated with such business to specific geographic
areas.
As part of its underwriting process, Mid Ocean typically assesses a variety of
factors, including: the reputation of the proposed cedent and the likelihood of
establishing a long-term relationship with the cedent; the geographic area in
which the cedent does business and its market share; a detailed assessment of
catastrophe and risk exposures; historical loss data for the cedent and, where
available, for the industry as a whole in the relevant regions, in order to
compare the cedent's historical catastrophe loss experience to industry
averages; and the perceived financial strength of the cedent.
RESERVES
Mid Ocean expects that most claims under its property catastrophe and property
risk excess treaties will generally become known and ascertainable within
approximately 18 to 24 months from the date of the occurrence giving rise to a
claim. Brockbank expects that claims under a significant majority of its
policies will generally become known and ascertainable within 36 months of the
date of the occurrence giving rise to a claim.
Under United States generally accepted accounting principles, the Company is not
permitted to establish loss reserves with respect to its property catastrophe
business until the occurrence of an event which may give rise to a claim. Once
such an event occurs, the Company establishes reserves based upon estimates of
total losses incurred by the insured or reinsured as a result of the event and
the Company's estimate of the portion of such loss it has insured or reinsured.
Such reserves will be adjusted as the Company receives notices of claims and
proofs of loss from insureds and reinsureds and as estimates of severity of
damages and the Company's share of the total loss are revised.
The Company establishes reserves for incurred but not reported losses ("IBNR").
In determining the IBNR portion of loss and loss expenses for the year, the
Company classifies the business written into segments that could reasonably be
expected to have similar loss characteristics. Reporting patterns and initial
expected loss ratios are developed based upon available industry data, actual
experience, knowledge of the business written by the Company and general market
trends in the reinsurance industry. The Company employs its own actuaries who,
together with the Company's independent consulting actuaries, develop the IBNR
loss reserves.
Generally, reserves are established without regard to whether the claim may
subsequently be contested
<PAGE> 9
7
by the Company. The Company's policy is to establish reserves for reported
losses based upon reports received from insureds and reinsureds supplemented by
the Company's case reserve estimates.
Loss reserves represent estimates of what the insurer or reinsurer ultimately
expects to pay on claims at a given time, based on facts and circumstances then
known, and it is possible that the ultimate liability may exceed or be less than
such estimates. During the loss settlement period, it often becomes necessary to
refine and adjust the estimates of liability on a claim either upward or
downward. Even after such adjustments, ultimate liability may exceed or be less
than the revised estimates. The estimation of reserves for new reinsurers, such
as Mid Ocean, is inherently less reliable than the reserve estimations of a
reinsurer with a stable volume of business and an established loss history.
The Company incurred losses and loss expenses for the years ended October 31,
1996, 1995 and 1994 of $211.9 million, $198.7 million and $197.1 million net of
reinsurance recoveries of $4.6 million, $1.4 and $9.0 million respectively. The
Company established a specific aviation IBNR reserve of $7.5 million during the
year ended October 31, 1996. The only significant catastrophe provisions
established during fiscal 1995 were a $5.0 million provision in respect of the
Great Hanshin, Kobe earthquake on January 17, 1995 and a $21.5 million provision
in respect of Hurricanes Luis and Marilyn. Included in fiscal 1994 were
estimated loss and loss expenses of $95.0 million in respect of the Northridge,
California earthquake on January 17, 1994, ("Northridge").
At fiscal year end 1996, net loss reserves amounted to $422.3 million compared
to $329.0 million and $215.0 million at fiscal year end 1995 and 1994
respectively. Net reserves for IBNR losses were $318.0 million, $258.0 million
and $162.5 million respectively. The Company's net reserves in respect of the
Northridge earthquake were $20.1 million at October 31, 1996 compared with $35.5
million at October 31, 1995 and $62.0 million at October 31, 1994. Northridge
IBNR reserves were $9.1 million at October 31, 1996 compared with $18.2 million
at October 31, 1995 and $31.0 million at October 31, 1994. The Company paid
losses during fiscal 1996 of $118.6 million which included $11.3 million in
respect of Northridge. In fiscal 1995 the Company paid losses of $84.7 million
which included $26.5 million in respect of Northridge and $8.5 million in
respect of a single risk excess loss. In fiscal 1994, the Company paid losses of
$53.4 million which, included $33.0 million for Northridge.
CLAIMS ADMINISTRATION
Claims management includes the review of initial loss reports, creation of
claims files, administration of the claims data base and generation of
appropriate response to claims reports. In addition, the Company may make use of
outside consultants for claims work.
INVESTMENTS
Mid Ocean has developed specific investment guidelines for the management of its
investment portfolio. Although these guidelines stress diversification of risks,
conservation of principal and liquidity, investments are subject to market-wide
risks and fluctuations, as well as to risks inherent in particular securities.
The primary objective of the portfolio, as set forth in the guidelines, is to
preserve the capital assets of Mid Ocean while achieving a total return
commensurate with market conditions. These guidelines, which are subject to
change at the discretion of the Company's Board of Directors, are discussed
below. Mid Ocean's letter of credit facility also contains certain restrictions
on the type of investments included in the portion of the portfolio pledged to
secure such facility. At fiscal year end 1996, approximately 54% of the
investment portfolio was managed internally. In addition, Mid Ocean has entered
into investment management agreements (the "Investment Management Agreements")
with the following companies: Loomis Sayles and Company Inc, Miller Anderson and
Sherrerd LLP, Mercury Asset Management and Lincoln Capital Management Company
(collectively, the "Investment Managers").
Under the Investment Management Agreements, the Investment Managers manage a
portion of Mid Ocean's portfolio of investment securities subject to Mid Ocean's
investment guidelines. Mid Ocean is obligated to pay the Investment Managers
fees based on the value of the assets under management. The performance of, and
the fees paid to, the Investment Managers under the Investment Management
Agreements are reviewed periodically by management and the Board of Directors of
Mid Ocean.
Quality of Debt Securities in Investment Portfolio
<PAGE> 10
8
Investments in debt securities are restricted to debt issues which are rated
"Baa/BBB-" ("A1/P1", in the case of short term debt) or better by Moody's
Investor Services Inc. or Standard & Poor's Corporation. Mid Ocean has not
invested in equities, although it may do so in the future.
Foreign Currency Exposures
Mid Ocean's primary reinsurance risk exposures and premiums receivable are
denominated in US Dollars, British Pounds and Japanese Yen. The investment
portfolio may, from time to time, be partially invested in non-US Dollar
component currencies of its expected liability profile, thereby reducing, to
some extent, the currency exposure on the underlying reinsurance risks.
Diversification and Liquidity
No more than 5% of Mid Ocean's investment portfolio will generally be invested
in the securities of any single issuer with the exception of securities issued
or ultimately guaranteed by sovereign governments or agencies, including
supranational agencies.
Mid Ocean has classified its investment portfolio as available for sale and
consequently the portfolio is carried at fair value in accordance with the
Financial Accounting Standards Board Statement of Financial Accounting
Standard ("SFAS") 115.
The following table summarizes the composition of the investments and cash of
Mid Ocean at October 31, of each year shown:
<TABLE>
<CAPTION>
MID OCEAN
---------
1996 1995 1994
----------------------------------------------------------------------------------
Fair Value Percent Fair Value Percent Fair Value Percent
(in thousands) (in thousands) (in thousands)
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
US Treasury and agency $ 651,892 42.0% $ 526,750 38.0% $ 118,356 11.7%
(excluding mortgage-based securities)
Corporate bonds 227,983 14.7% 139,971 10.1% 114,288 11.3%
Non-US sovereign government bonds 249,462 16.1% 229,201 16.5% 548,051 54.4%
Mortgage and asset-backed securities 257,308 16.6% 275,859 19.9% 43,510 4.3%
---------- ----- ---------- ----- ---------- -----
Total fixed maturities
and short-term investments $1,386,645 89.4% $1,171,781 84.5% $ 824,205 81.7%
Cash and cash equivalents 163,968 10.6% 215,048 15.5% 184,569 18.3%
---------- ----- ---------- ----- ---------- -----
Total investments and cash $1,550,613 100.0% $1,386,829 100.0% $1,008,774 100.0%
========== ===== ========== ===== ========== =====
</TABLE>
At October 31, 1996, 1995 and 1994, the weighted average duration of the
portfolio was 3.7, 3.7 and 4.4 years respectively. The annualized effective
yield calculated on the average of the beginning and ending values of
investments, net of pending trades, and cash and cash equivalents was 6.2%, 6.4%
and 5.7% for fiscal years 1996, 1995 and 1994 respectively.
REGULATION
Bermuda
The Insurance Act of 1978 of Bermuda, amendments thereto and related regulations
(the "Act"), regulates the business of Mid Ocean. The Act imposes on Bermuda
insurance companies solvency and liquidity standards and auditing and reporting
requirements and grants to the Minister of Finance powers to supervise,
investigate and intervene in the affairs of insurance companies.
United States
The insurance laws of each state of the United States and of many foreign
countries regulate the sale of insurance within their jurisdiction by alien
insurers, such as Mid Ocean. Mid Ocean believes it is not in violation of the
insurance laws of any state in the US or any foreign country. From time to time,
various proposals for federal legislation within the United States have been
circulated which could require Mid
<PAGE> 11
9
Ocean to, among other things, register as a surplus lines insurer. Mid Ocean
does not believe such legislation would have a material impact on the ability of
Mid Ocean to conduct its business.
United Kingdom
London Branch Office
The United Kingdom Department of Trade and Industry ("DTI") regulates
reinsurance entities that are "effecting and carrying on" insurance business in
the United Kingdom. Mid Ocean, through its London branch, "effects and carries
on" business in the United Kingdom and is therefore regulated by the DTI.
Lloyd's
The Company and its relevant UK subsidiaries are subject to the regulatory
jurisdiction of the Council of Lloyd's (the "Council") as a result of the
acquisition by the Company of a majority interest in the Brockbank group and the
establishment in the Brockbank group of two corporate capital vehicles, Dornoch
Limited and County Down Limited (the "CCVs"), UK corporate Names of Lloyd's
formed in connection with the Brockbank group acquisition. Unlike other
financial markets in the UK, Lloyd's is not subject to direct UK government
regulation through The Financial Services Act of 1986 but, instead, is self
regulating by virtue of The Lloyd's Act of 1982 through by-laws, regulations
and codes of conduct written by the Council, which governs the market. Under the
Council, there are two boards, the Market Board and the Regulatory Board, The
former is led by working members of the Council and is responsible for strategy
and the provision of services such as premium and claims handling, accounting
and policy signing. The Regulatory Board is responsible for the regulation of
the market, compliance and the protection of policyholders. Under the
regulations, the approval of Council has to be obtained before any person can be
a "major shareholder" or "controller" of a corporate Name or a managing agency.
The Company has been approved as both a "major shareholder" and a "controller"
of its corporate Names (the CCVs) and managing agencies.
A person would be viewed by Lloyd's as a "major shareholder" of the CCVs if such
person owns 15% or more of the Company's outstanding capital stock and as a
"controller" if it owns 30% or more of the Company's outstanding capital stock.
Therefore, any person that becomes the owner of 15% or more of the Company's
stock may be required to deliver a declaration and undertaking to Lloyd's, in
the form prescribed by Lloyd's, unless Lloyd's exempts such person from this
requirement.
As a "controller", the Company is required to give certain undertakings,
directed principally towards ensuring that there is no direct interference in
the conduct of the business of the relevant managing agency, but there are no
provisions in The Lloyd's Act of 1982, the bye-laws or the regulations which
provide for any liabilities of the CCVs or the Brockbank group as a whole to be
met by the Company. In addition, a managing agency is required to comply with
various capital and solvency requirements, and to submit to regular monitoring
and compliance procedures. The CCVs, as corporate members of Lloyd's, are each
required to commit a specified amount approximately equal to 50% of their
underwriting capacity on the syndicates to support its underwriting on those
syndicates.
The Lloyd's Act of 1982 generally restricts certain direct or indirect equity
cross-ownership between a Lloyd's broker and a Lloyd's managing agent.
Singapore
The Monetary Authority of Singapore ("MAS") regulates reinsurance entities
operating in Singapore and, as such, Mid Ocean's Singapore branch is regulated
by the MAS.
Germany
The Company has established, for marketing purposes, a representative office in
Munich, Germany. However, all underwriting operations continue to be conducted
in Bermuda, Singapore and the United Kingdom.
TAX MATTERS
<PAGE> 12
10
The Company is a Cayman Islands company and has never paid United States
corporate income taxes on the basis that it is not engaged in a trade or
business in the United States.
Each US Shareholder of the Company who owns shares (directly or through foreign
entities) on the last day of the Company's fiscal year may have to include in
such shareholder's gross income for US tax purposes a proportionate share of the
Company's "related person insurance income" ("RPII") if the RPII of Mid Ocean,
determined on a gross basis, is 20% or more of Mid Ocean's gross insurance
income in such fiscal year and 20% or more of the total voting power or value of
Mid Ocean's common stock is held by insureds or reinsureds or persons related
thereto. RPII is income attributable to insurance policies where the direct or
indirect insureds are US shareholders or are related to US shareholders. RPII is
included in a US shareholder's gross income for US tax purposes regardless of
whether such shareholder is a policyholder.
While there can be no assurance, the Company does not believe 20% or more of the
gross insurance income of Mid Ocean for fiscal 1996 constituted RPII and does
not anticipate that 20% or more of Mid Ocean's gross insurance income in future
taxable years will constitute RPII. For a more detailed discussion of RPII and
other tax matters pertaining to an investment in the Company's Ordinary Shares,
reference is hereby made to the section entitled "Certain Tax Considerations" in
the Company's Registration Statement on Form S-1 (File No. 33-63298), which
section is incorporated by reference herein.
Cayman Islands
Under current Cayman Islands law, the Company is not required to pay any taxes
in the Cayman Islands on either income or capital gains. The Company has
received an undertaking that in the event of any such taxes being imposed the
Company will be exempted from Cayman Islands income or capital gains tax until
the year 2013.
Bermuda
Under current Bermuda law, neither the Company nor Mid Ocean is required to pay
any taxes in Bermuda on either income or capital gains. The Company and Mid
Ocean have received an undertaking from the Minister of Finance in Bermuda that
in the event of any such taxes being imposed, the Company and Mid Ocean will be
exempted from income or capital gains taxation until the year 2016.
United Kingdom
Lloyd's Names are required to pay US income tax on US connected income ("US
income") written by Lloyd's syndicates on which they participate. Lloyd's has a
closing agreement with the IRS whereby the amount of tax due on this business is
calculated by Lloyd's and remitted directly to the IRS. These amounts are then
charged to the personal accounts of the Names in proportion to their
participation in the relevant syndicates. The CCVs are subject to this
arrangement but, as UK domiciled companies, will receive UK corporation tax
credits for any US income tax incurred up to the value of the equivalent UK
corporation income tax charge to the US income.
The Brockbank group is subject to UK corporation tax and value added tax. The
Company's London branch has been advised that it is deemed to be doing insurance
business in the UK and therefore is subject to taxation in the UK on business
written in the UK.
With effect from October 1, 1994, the UK imposed an insurance premium tax on
that portion of policies related to certain UK risks. The Brockbank group,
including its syndicates, are registered to collect and pay this tax on behalf
of UK domiciled policyholders.
Singapore
Profits of the Singapore branch will be subject to Singapore corporation taxes.
Germany
The German subsidiary is subject to taxation in Germany. However under its
current role as a consulting operation it is not expected to generate any
taxable revenue
<PAGE> 13
11
EMPLOYEES
At October 31, 1996 Mid Ocean employed a total of 58 persons and Brockbank
(including only its direct operations) employed a total of 200 persons. None of
these employees is represented by a labor union. Mid Ocean and Brockbank believe
that relations with their employees are excellent.
COMPETITION
The Lloyd's market and the reinsurance industry is highly competitive. The
Brockbank group competes with other Lloyd's market managing agencies, Lloyd's
syndicates, London market companies and other insurers and reinsurers while Mid
Ocean competes with US and other insurers and reinsurers, some of which have
greater financial, marketing and management resources. Competition in the types
of business that Brockbank and Mid Ocean underwrite is based on many factors,
including the perceived financial strength of the underwriting syndicate or the
reinsurer, pricing and other terms and conditions, services provided, ratings
assigned by independent rating organizations (including A.M. Best Company Inc),
speed of claims payment and reputation and experience in the line of reinsurance
to be written.
Lloyd's of London is a long established insurance marketplace, where many varied
forms of insurance and reinsurance are sold by syndicates, which are annual
joint ventures of Names. Participation as a Name on a syndicate carries with it
unlimited liability for the Name's share of any insurance losses incurred by the
syndicate (each Name participating severally). In 1994, the rules surrounding
participation were changed to allow limited liability "corporate names" to enter
the Lloyd's marketplace as capital providers.
Several of the underwriting years of the late 1980s and early 1990s proved to be
particularly unprofitable for many of the syndicates operating at Lloyd's. This
proved to be financially disastrous for some of the Names on the affected
syndicates due to the unlimited liability of their participation. During the
last three years, Lloyd's governing body has been seeking to implement a
reconstruction and renewal plan to allow the market to continue. In August 1996
this plan was formally approved by the required parties and a new company,
Equitas, was authorized to reinsure the liabilities of the 1992 and prior years
of account of all syndicates at Lloyd's. Funding came from a variety of sources
including the premiums on the liabilities assumed by Equitas as well as a series
of levies charged to entities that had historically provided services to the
Lloyd's insurance market (including managing agencies and insurance brokers).
Mid Ocean has received a rating of A+ (Superior) from A. M. Best Company Inc
and an AA (Excellent) claims paying rating from Standard & Poors
Corporation. A.M. Best Company Inc. and Standard & Poors Corporation ratings
are based upon factors relevant to policy holders, agents and intermediaries
and are not directed toward the protection of investors. Such ratings are
not recommendations to buy, sell or hold securities.
ITEM 2 - PROPERTIES
Mid Ocean leases office space in Richmond House, Hamilton, Bermuda, at which the
Company's principal offices are located. Mid Ocean also leases office space in
the London Underwriting Centre, London, England, at which its London branch
office is located. In addition, Mid Ocean leases office space at 6 Raffles Quay,
John Hancock Tower, Singapore at which its Singapore branch is located. Office
space is also leased at Bavariaring 44, Munich, Germany where Mid Ocean
Reinsurance Consulting GmbH is located. The Brockbank group leases office space
at Fitzwilliam House and Rood Lane, London where its principal offices are
located. Other Brockbank operations lease space in Cardiff and Swansea, Wales
and Haywards Heath, England.
ITEM 3 - LEGAL PROCEEDINGS
The Company is subject to litigation and arbitration in the ordinary course of
its business.
While any proceeding contains an element of uncertainty, management presently
believes the outcome thereof will not have a material adverse effect on the
Company.
<PAGE> 14
12
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of stockholders during the fourth quarter of
the fiscal year covered by this report.
EXECUTIVE OFFICERS OF THE COMPANY
The table sets forth the names, ages and titles of the persons who are the
executive officers of the Company and Mid Ocean:
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Robert J Newhouse Jr 71 Chairman
Michael A Butt 54 President & Chief Executive Officer
Charles F Hays 50 Senior Vice President & Chief Financial & Administrative Officer
Henry C V Keeling 41 Executive Vice President & Chief Underwriting Officer
of Mid Ocean
John M Wadson 47 Vice President, Treasurer & Secretary
</TABLE>
Robert J Newhouse Jr serves as Chairman of the Board of the Company and Mid
Ocean. He served as Vice Chairman of Marsh & McLennan Companies Inc., as a
member of the Office of the Chairman of Marsh & McLennan Companies Inc. and as a
member of the Executive Committee of Marsh & McLennan Companies Inc. until 1990.
Mr Newhouse was elected a director of Marsh & McLennan Companies Inc. in 1971,
Executive Vice President in 1974 and President in 1976. He was elected Vice
Chairman of Marsh & McLennan Companies Inc. in 1988. Mr Newhouse also serves as
a director of Trident Corp.
Michael A Butt has served as President and Chief Executive Officer of the
Company and Mid Ocean since May 1993 and has been a director of Mid Ocean since
November 1992 and of the Company since June 1993. Mr Butt has served as a
director of the Instituto Nazionale di Assicurazioni ("INA"), Rome since
November 1993, and the Bank of N. T. Butterfield & Son, Limited since October
1996. From 1992 to April 1993, Mr Butt served as director of Phoenix Securities
Limited, a private investment banking firm based in London. From 1987 to 1992 he
was a director of BAT Industries and Chairman and Chief Executive Officer of
Eagle Star Holdings Plc and Eagle Star Insurance Company. From 1982 to 1986, Mr
Butt was Chairman of Sedgwick Limited and Vice Chairman of Sedgwick Group Plc.
Charles F Hays serves as Senior Vice President and Chief Financial and Chief
Administrative Officer of the Company and Executive Vice President & Chief
Financial & Administrative Officer of Mid Ocean. He also serves as a director of
Harris & Harris Group. Mr Hays served as Managing Director and Chief Financial
Officer of Marsh & McLennan Incorporated from 1984 to 1993.
Henry C V Keeling serves as Executive Vice President and Chief Underwriting
Officer of Mid Ocean. Mr Keeling served as a director of Taylor Clayton
(Underwriting Agencies) Ltd and deputy underwriter for Syndicate No 51 at
Lloyd's from 1984 through 1992.
John M Wadson serves as Vice President, Treasurer and Secretary of the Company
and Mid Ocean. Mr Wadson served as Vice President, Financial Controller and a
director of Burland Conyers & Marirea Ltd (a construction company) from 1986 to
1992. From 1982 to 1986 Mr Wadson was Vice President of Operations for Inlake
Insurance Limited, a subsidiary of TRW Inc.
PART II
ITEM 5 - MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's Class A Ordinary Shares, $0.20 par value, have been included for
trading on The New York Stock Exchange, Inc since May 30, 1996, under the symbol
"MOC" and, before that, on The Nasdaq National Market since August 4, 1993,
under the symbol "MOCNF".
The following table sets forth the high and low closing sales prices per share
of the Company's Class A
<PAGE> 15
13
Ordinary Shares for each fiscal quarter period from November 1, 1994 to October
31, 1996.
<TABLE>
<CAPTION>
High Low
---- ---
<S> <C> <C>
1995
First Quarter $28.000 $22.250
Second Quarter 29.000 25.250
Third Quarter 34.250 27.750
Fourth Quarter 36.625 31.000
1996
First Quarter 41.625 35.563
Second Quarter 42.000 35.625
Third Quarter 42.625 35.500
Fourth Quarter 48.125 39.625
</TABLE>
As of December 31, 1996, there were approximately 6,400 holders of Class A
Ordinary Shares.
DIVIDENDS
The following table sets forth for the fiscal quarters of the two most recent
fiscal years all dividends declared during such period:
<TABLE>
<CAPTION>
Dividends
per share
<S> <C>
1995 First Quarter --
Second Quarter $0.25
Third Quarter $0.25
Fourth Quarter $0.25
1996 First Quarter $0.25
Second Quarter $0.275
Third Quarter $0.4125
Fourth Quarter $0.4125
</TABLE>
The Company did not pay any dividends in the first quarter of fiscal 1995. The
Company declared its first dividend of $0.25 per Ordinary Share on March 3, 1995
and declared subsequent dividends of $0.25 per Ordinary Share on June 2, 1995,
September 12, 1995 and December 7, 1995. The Company subsequently declared a
dividend per Ordinary Share of $0.275 on February 29, 1996, $0.4125 on June 18,
1996, $0.4125 on September 12, 1996 and $0.75 on December 5, 1996. Future
payment of dividends will be at the discretion of the Board of Directors and
will be dependent upon the profits and financial requirements of the Company and
other factors, including legal restrictions on the payment of dividends and such
other factors as the Board of Directors deems relevant.
The Company is a holding company whose principal source of income is dividends
from Mid Ocean. The payment of dividends by Mid Ocean is subject to restriction
under Bermuda insurance and corporate law and regulations. At October 31, 1996,
there were no effective statutory restrictions on the payment of dividends from
retained earnings by Mid Ocean or the Company as the minimum statutory capital
and surplus is satisfied by share capital and additional paid in capital.
Neither the Cayman Islands, where the Company is incorporated, nor Bermuda,
where its executive offices are located, presently imposes any income or
withholding taxes upon dividends by the Company to non-resident shareholders, or
presently imposes any exchange control that would affect dividends or other
payments to non-resident holders of Ordinary Shares.
<PAGE> 16
14
RESTRICTIONS ON VOTING AND TRANSFER
The Articles of Association of the Company contain various provisions affecting
the transferability of Ordinary Shares. Under the Articles of Association, the
Board of Directors may decline to register any transfer of Ordinary Shares if
the Board of Directors determines that such transfer would result in a United
States Person having Controlled Shares that constitute more than 9.9% of the
voting power of the Ordinary Shares. The Articles of Association also provide
that the Board of Directors may decline to register the transfer of Ordinary
Shares that have not been sold pursuant to an effective registration statement
under the Securities Act or pursuant to Rule 144 thereunder. A transferee will
be permitted to dispose of any Ordinary Shares purchased which violate the
restrictions and as to the transfer of which registration is refused. The
transferor of such Ordinary Shares will be deemed to own such Ordinary Shares
for dividend, voting and reporting purposes until a transfer of such Ordinary
Shares has been registered on the stock transfer records of the Company. If and
so long as, the Controlled Shares (as defined below) of any United States Person
(as defined below) constitute 10% or more of the voting power of the issued
Ordinary Shares, the voting rights with respect to the Controlled Shares owned
by such person shall be limited, pursuant to a formula specified in the Articles
of Association, in the aggregate, to less than 10%. "Controlled Shares" shall
include among other things, all Ordinary Shares which such person is deemed to
beneficially own directly, indirectly or constructively (within the meaning of
Section 13(d) of the Securities Internal Review Code of 1986, as amended, (the
"Code"). "United States Person" means a United States person as defined in
Section 7701 (a) (3) of the Code.
ITEM 6 - SELECTED FINANCIAL DATA
This item is incorporated by reference to the Selected Financial Data table
contained in the 1996 Annual Report.
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
This item is incorporated by reference to Management's Discussion and Analysis
of Results of Operations and Financial Condition in the 1996 Annual Report.
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
This item is incorporated by reference to the financial statements in the 1996
Annual Report.
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There have been no changes in nor any disagreements with accountants on
accounting and financial disclosure within the three years ending October 31,
1996.
PART III
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
This item is omitted because a definitive proxy statement which involved the
election of directors will be filed with the Securities and Exchange Commission
not later than 120 days after the close of the fiscal year pursuant to
Regulation 14A.
ITEM 11 - EXECUTIVE COMPENSATION
This item is omitted because a definitive proxy statement which involved the
election of directors will be filed with the Securities and Exchange Commission
not later than 120 days after the close of the fiscal year pursuant to
Regulation 14A.
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
This item is omitted because a definitive proxy statement which involved the
election of directors will be filed with the Securities and Exchange Commission
not later than 120 days after the close of the fiscal year pursuant to
Regulation 14A.
<PAGE> 17
15
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
This item is omitted because a definitive proxy statement which involved the
election of directors will be filed with the Securities and Exchange Commission
not later than 120 days after the close of the fiscal year pursuant to
Regulation 14A.
PART IV
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(A) FINANCIAL STATEMENTS AND EXHIBITS
1. Consolidated Financial Statements
The following Consolidated Financial Statements of Mid Ocean Limited and
Report of Independent Auditors are incorporated by reference to pages 18
through 37 of the registrant's 1996 Annual Report to Shareholders:
Independent Auditors' Report
Consolidated Balance Sheets - October 31, 1996 and 1995
Consolidated Statements of Operations - Years ended October 31, 1996,
1995 & 1994
Consolidated Statements of Shareholders' Equity - Years ended October
31, 1996, 1995 & 1994
Consolidated Statements of Cash Flows - Years ended October 31, 1996,
1995 & 1994
Notes to Consolidated Financial Statements
2. Financial Statement Schedules
Schedule I Consolidated Summary of Investments
III Supplementary Insurance Information
IV Reinsurance
Other Schedules have been omitted as they are not applicable to the
Company.
3. Exhibits
3.1 - Memorandum of Association of the Company (incorporated by reference
from the Company's Registration Statement on Form S-1 (File No.
33-63298) (the "Registration Statement")).
3.2 - Articles of Association of the Company (incorporated by reference
from the Registration Statement).
4.1 - Rights Agreement, dated September 12, 1996, between Mid Ocean
Limited and the Bank of New York, as Rights Agent (incorporated by
reference from the Company's Report on Form 8-K filed September 12,
1996).
10.01 - 1993 Long-Term Incentive and Share Award Plan (incorporated by
reference from the Registration Statement).
10.02 - Letter of Credit Facility and Security Agreement (incorporated by
reference from the Registration Statement).
10.03 - Investment Management Agreement, dated as of November 1, 1993 between
Brinson Partners Inc and Mid Ocean (incorporated by reference to the
Company's Form 10-K for the year ended October 31, 1993)
10.04 - Investment Management Agreement, dated as of November 1, 1993 between
Warburg Asset
<PAGE> 18
16
Management and Mid Ocean (incorporated by reference to the Company's
Form 10-K for the year ended October 31, 1993).
10.05 - Employment Agreement (amended and restated as of August 19,1996)
between Michael A. Butt and Mid Ocean Reinsurance Company Ltd. and Mid
Ocean Limited.
10.06 - Service Agreement (amended and restated as of August 19, 1996)
between Robert J. Newhouse Jr. and Mid Ocean Reinsurance
Company Ltd. and Mid Ocean Limited.
10.07 - Employment Agreement (amended and restated as of August 19, 1996)
between Henry C. V. Keeling and Mid Ocean Reinsurance Company Ltd.
10.08 - Employment Agreement (amended and restated as of August 19, 1996)
between Charles F. Hays and Mid Ocean Reinsurance Company Ltd. and Mid
Ocean Limited.
11.1 - Statement of Computation of Earnings Per Share for the fiscal years
ended October 31, 1996, 1995 and 1994.
13.1 - Pages 9 - 37 of the Mid Ocean Limited Annual Report to Shareholders.
21.1 - List of subsidiaries of the Registrant.
23.1 - Consent of KPMG Peat Marwick.
24.1 - Powers of Attorney
27.1 - Financial Data Schedule
(B) REPORTS ON FORM 8-K
A report on Form 8-K was filed by the Company on September 12, 1996, reporting
the adoption by the Company of a shareholder rights plan, the description and
terms of which were included in such report.
<PAGE> 19
17
AUDITOR'S REPORT ON FINANCIAL STATEMENT
SCHEDULES INCLUDED IN FORM 10-K
The Board of Directors and Shareholders
Mid Ocean Limited
Under date of November 25, 1996, we reported on the consolidated balance sheets
of Mid Ocean Limited and subsidiaries as of October 31, 1996 and 1995, and the
related consolidated statements of operation, shareholders' equity and cash
flows for each of the years in the three year period ended October 31, 1996, as
contained in the 1996 annual report to shareholders. These consolidated
financial statements and our report thereon are incorporated by reference in the
annual report on Form 10-K for the year 1996. In connection with our audit of
the aforementioned consolidated financial statements, we also have audited the
related consolidated financial statement schedules as listed in Part IV on page
15. These financial statement schedules are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statement schedules based on our audit.
In our opinion, such financial statement schedules, when considered in relation
to the basic financial statements taken as whole, present fairly, in all
material respects, the information set forth therein.
KPMG PEAT MARWICK
Hamilton, Bermuda
November 25, 1996
<PAGE> 20
18
SUPPLEMENTAL SCHEDULE I
CONSOLIDATED SUMMARY OF INVESTMENTS
OCTOBER 31, 1996
(US DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
COST OR AMOUNT AT WHICH
AMORTIZED FAIR SHOWN IN THE
COST(1) VALUE BALANCE SHEET
------- ----- -------------
<S> <C> <C> <C>
TYPE OF INVESTMENT
Fixed Maturities:
US government and government agencies
and authorities $629,924 $634,301 $634,301
Non-US sovereign governments 240,524 241,443 241,443
Corporate Bonds 226,738 227,158 227,158
Mortgage and asset-backed Securities 255,870 257,308 257,308
-------- -------- --------
Total fixed maturities $1,353,056 $1,360,210 $1,360,210
Short-term investments 26,226 26,435 26,435
---------- ---------- ----------
Total Investments $1,379,282 $1,386,645 $1,386,645
========== ========== ==========
</TABLE>
(1) Investments in fixed maturities and short-term investments are shown at
amortized cost.
<PAGE> 21
19
SCHEDULE III
MID OCEAN LIMITED
SUPPLEMENTARY INSURANCE INFORMATION
OCTOBER 31, 1996, 1995 AND 1994
(US DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Losses,
Deferred Claims and Net Losses and
Acquisition Claim Unearned Premium Investment Settlement
Year Ended Costs Expenses Premiums Revenue Income Expenses
- ---------- ----- -------- -------- ------- ------ --------
<S> <C> <C> <C> <C> <C> <C>
October 31, 1996
Property and Liability Insurance $42,647 $427,717 $303,340 $436,097 $83,261 $211,888
October 31, 1995
Property and Liability Insurance $22,774 $336,051 $206,335 $379,390 $73,835 $198,650
October 31, 1994
Property and Liability Insurance $18,296 $224,818 $155,063 $301,017 $51,457 $197,072
</TABLE>
<TABLE>
<CAPTION>
Amortization
of Deferred Other
Acquisition Operating Premiums
Year Ended Costs Expenses Written
- ---------- ----- -------- -------
<S> <C> <C> <C>
October 31, 1996
Property and Liability Insurance $70,125 $34,402 $525,672
October 31, 1995
Property and Liability Insurance $53,352 $17,328 $434,977
October 31, 1994
Property and Liability Insurance $37,028 $13,057 $346,455
</TABLE>
<PAGE> 22
20
SCHEDULE IV
MID OCEAN LIMITED
REINSURANCE
OCTOBER 31, 1996, 1995 AND 1994
(US DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
PERCENTAGE
CEDED TO ASSUMED OF AMOUNT
GROSS OTHER FROM OTHER NET ASSUMED
YEAR ENDED AMOUNT COMPANIES COMPANIES AMOUNT TO NET
- ---------- ------ --------- --------- ------ ------
<S> <C> <C> <C> <C> <C>
October 31, 1996
Property and Liability Insurance $36,329 $29,924 $429,692 $436,097 98.5%
October 31, 1995
Property and Liability Insurance $ - $10,210 $389,600 $379,390 102.7%
October 31, 1994
Property and Liability Insurance $ - $11,640 $312,657 $301,017 103.9%
</TABLE>
<PAGE> 23
21
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to the registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized.
MID OCEAN LIMITED
By: /s/ Michael A Butt
-----------------------------
Michael A Butt
President and Chief Executive Officer
January 29, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons in the capacities and on the
dates indicated.
<TABLE>
<CAPTION>
Signatures Title Date
---------- ----- ----
<S> <C> <C>
*
- ---------------------------------------
Robert J Newhouse Jr Chairman of the Board January 29, 1997
/s/ Michael A Butt
- ---------------------------------------
Michael A Butt President & Chief Executive Officer January 29,1997
(Principal Executive Officer)
/s/ Charles F Hays
- ---------------------------------------
Charles F Hays Senior Vice President & Chief Financial January 29, 1997
and Administrative Officer (Principal
Financial Officer)
/s/ John M Wadson
- ---------------------------------------
John M Wadson Vice President, Treasurer & Secretary January 29, 1997
(Principal Accounting Officer)
*
- ---------------------------------------
Frank J Borelli Director January 29, 1997
*
- ---------------------------------------
Sir Brian Corby Director January 29, 1997
*
- ---------------------------------------
Geoffrey Elliott Director January 29, 1997
*
- ---------------------------------------
Michael P Esposito Jr Director January 29, 1997
</TABLE>
<PAGE> 24
22
<TABLE>
<CAPTION>
<S> <C> <C>
*
- ---------------------------------------
Robert R Glauber Director January 29, 1997
*
- ---------------------------------------
Henry U Harder Director January 29, 1997
*
- ---------------------------------------
Paul Jeanbart Director January 29, 1997
*
- ---------------------------------------
Roberto Mendoza Director January 29, 1997
*
- ---------------------------------------
Brian O'Hara Director January 29, 1997
*
- ---------------------------------------
John Pasquesi Director January 29, 1997
*
- ---------------------------------------
Henry H Peters Director January 29, 1997
*
- --------------------------------------- Director January 29, 1997
Jeffrey S Tabak
*
- --------------------------------------- Director January 29, 1997
Frank J Tasco
</TABLE>
*By:
/s/ Michael A Butt
---------------------
Michael A Butt
Attorney in Fact
<PAGE> 25
26
INDEX TO EXHIBITS
3.1 - Memorandum of Association of the Company (incorporated by
reference from the Company's Registration Statement on Form S-1
(File No. 33-63298) (the "Registration Statement")).
3.2 - Articles of Association of the Company (incorporated by
reference from the Registration Statement).
4.1 - Rights Agreement, dated September 12, 1996, between Mid Ocean
Limited and the Bank of New York, as Rights Agent (incorporated by
reference from the Company's Report on Form 8-K filed September
12, 1996).
10.01 - 1993 Long-Term Incentive and Share Award Plan (incorporated by
reference from the Registration Statement).
10.02 - Letter of Credit Facility and Security Agreement (incorporated
by reference from the Registration Statement).
10.03 - Investment Management Agreement, dated as of November 1, 1993
between Brinson Partners Inc and Mid Ocean (incorporated by
reference to the Company's Form 10-K for the year ended October
31, 1993)
10.04 - Investment Management Agreement, dated as of November 1, 1993
between Warburg Asset Management and Mid Ocean (incorporated by
reference to the Company's Form 10-K for the year ended October
31, 1993).
10.05 - Employment Agreement (amended and restated as of August 19,
1996) between Michael A. Butt and Mid Ocean Reinsurance Company
Ltd. and Mid Ocean Limited.
10.06 - Service Agreement (amended and restated as of August 19, 1996)
between Robert J. Newhouse Jr. and Mid Ocean Reinsurance Company
Ltd. and Mid Ocean Limited.
10.07 - Employment Agreement (amended and restated as of August 19,
1996) between Henry C. V. Keeling and Mid Ocean Reinsurance
Company Ltd.
10.08 - Employment Agreement (amended and restated as of August 19,
1996) between Charles F. Hays and Mid Ocean Reinsurance Company
Ltd. and Mid Ocean Limited.
11.1 - Statement of Computation of Earnings Per Share for the fiscal
years ended October 31, 1996, 1995 and 1994.
13.1 - Pages 9 - 37 of the Mid Ocean Limited Annual Report to
Shareholders.
21.1 - List of subsidiaries of the Registrant.
23.1 - Consent of KPMG Peat Marwick.
24.1 - Powers of Attorney
27.1 - Financial Data Schedule
<PAGE> 1
Exhibit 10.05
EMPLOYMENT AGREEMENT
(amended and restated as of August 19, 1996)
AGREEMENT, made and entered into as of the 19th day of August,
1996 by and between Mid Ocean Reinsurance Company Ltd., a Bermuda corporation
(the "COMPANY"), Mid Ocean Limited, a Cayman Islands Corporation (the "PARENT")
and Michael A. Butt (the "EXECUTIVE").
WHEREAS, on May 1, 1993, the Company and the Executive entered
into an employment agreement (the "MAY 1 AGREEMENT") pursuant to which the
Company agreed to employ the Executive, and the Executive agreed to serve, as
Vice Chairman, subject to the terms and conditions of the May 1 Agreement; and
WHEREAS, on May 21, 1993, the Company, Parent and Executive
agreed to amend the May 1 Agreement (as amended, the "MAY 21 AGREEMENT") to
provide, among other things, that the Parent would employ, and Executive would
serve, as President and Chief Executive Officer of Parent, subject to the terms
and conditions of the May 21 Agreement; and
WHEREAS, the Company and the Parent desire to amend and
restate the May 21 Agreement as set forth herein; and
WHEREAS, the Executive wishes to continue such employment with
the Company and Parent under the terms and conditions of this Agreement;
<PAGE> 2
-2-
NOW, THEREFORE, in consideration of the premises and mutual
covenants contained herein and for other good and valuable consideration, the
Company, the Parent and the Executive (the "PARTIES") agree as follows:
1. EMPLOYMENT.
The Company and Parent hereby employ the Executive, and the
Executive hereby accepts employment with the Company and Parent, for the term of
this Agreement as set forth in Section 2, below, in the position and with duties
and responsibilities set forth in Section 3, below, and upon such other terms
and conditions as are hereinafter stated.
2. TERM OF EMPLOYMENT.
<PAGE> 3
-3-
The term of employment under this Agreement shall commence on
August 19, 1996 (the "DATE OF THE AGREEMENT") and shall continue through the
close of business on the third anniversary of the Date of the Agreement, subject
to earlier termination as provided in Section 9, below. Thereafter such term
shall automatically be renewed for successive one-year periods unless the
Company and Parent give notice in writing to the Executive or the Executive
gives notice in writing to the Company and Parent at least six months prior to
the then scheduled expiration date that the term is not to so renew.
3. POSITIONS, DUTIES AND RESPONSIBILITIES.
<PAGE> 4
-4-
(a) GENERAL. The Executive shall be employed as President and
Chief Executive Officer of the Company and Parent, with such duties and
responsibilities, including but not limited to general management
responsibilities over the business and operations of the Company and the Parent,
as may be assigned to him by the Chairman of the Board of Directors of the
Company (the "BOARD") or the Chairman of the Board of Directors of the Parent
(the "PARENT BOARD"), as the case may be. In carrying out his duties and
responsibilities, the Executive shall report to the Chairman of the Board or to
the Chairman of the Parent Board, as the case may be. During the term of this
Agreement, the Executive shall devote his full business time to the business and
affairs of the Company and Parent, including any corporation, partnership or
other venture in which the Company or Parent owns, directly or indirectly, 50
percent or more of the stock or, in the case of any entity or venture other than
a corporation, 50 percent or more of the equity interest (an "AFFILIATE"), and
shall use his best efforts, skills and abilities to promote the Company's and
Parent's interests.
(b) MEMBERSHIPS. It is the intention of the Parties that the
Executive shall be nominated and elected and shall thereafter serve as a member
of the Board, as member of the Parent Board and as a member of the Executive
Committee of the Board and as a member of the Executive Committee of the Parent
Board.
(c) PERFORMANCE OF SERVICES. The Executive's services under
this Agreement shall be performed outside the United States and generally in
Bermuda unless the Executive and the Board and the Parent Board mutually agree
in writing to the performance of such services in
<PAGE> 5
-5-
another location outside the United States.
(d) PERMITTED ACTIVITIES. Anything herein to the contrary
notwithstanding, nothing shall preclude the Executive from (i) serving on the
boards of directors of a reasonable number of other corporations or the boards
of a reasonable number of trade associations and/or charitable organizations,
(ii) engaging in charitable activities and community affairs and (iii) managing
his personal investments and affairs, provided such activities do not materially
interfere with the proper performance of his duties and responsibilities as the
Company's Vice Chairman and the Parent's President and Chief Executive Officer.
4. BASE SALARY.
<PAGE> 6
-6-
The Executive shall be paid a Base Salary by the Company at an
annual rate of US $460,000, payable in accordance with the Company's regular pay
practices. Such Base Salary shall be subject to annual review and may be
increased at the discretion of the Executive Committee of the Parent Board (the
"EXECUTIVE COMMITTEE").
5. BONUSES.
In addition to the Base Salary provided for in Section 4,
above, the Executive may be awarded such annual bonuses as may be determined by
the Executive Committee pursuant to the Annual Short Term Bonus Plan approved by
the Executive Committee, with a minimum guaranteed bonus of US $75,000. Any
annual bonus shall be paid in cash in a lump sum promptly following
determination thereof. The Executive shall also be eligible to participate in
the Long Term Incentive Plan to be adopted by the Company.
6. SHARE PURCHASE OPTION.
Concurrently with the execution of the May 21 Agreement, the
Company and the Executive entered into a Share Purchase Option, granting to the
Executive the right to purchase Outstanding Stock (as defined in Exhibit A
thereto) as described therein. The Parties agreed that the Option shall be
amended to read as set forth in the form attached hereto as Exhibit A thereto
(the "OPTION"). The Option shall be 100% exercisable upon a "CHANGE IN CONTROL"
(as defined in Exhibit A hereto).
<PAGE> 7
-7-
7. EMPLOYEE BENEFIT PROGRAMS.
During the term of the Executive's employment under this
Agreement, the Executive shall be entitled to participate in all employee
benefit programs of the Company and Parent as are in effect from time to time
and in which senior executives of the Company and Parent are eligible to
participate, including medical, hospitalization, life, travel and accident
insurance, disability protection and retirement benefits.
8. BUSINESS EXPENSE REIMBURSEMENT AND FRINGE BENEFITS.
(a) EXPENSE REIMBURSEMENT. During the term of the Executive's
employment under this Agreement, the Executive shall be entitled to receive
reimbursement by the Company and Parent for all reasonable out-of-pocket travel
expenses, entertainment expenses and other expenses incurred by him in
performing his duties under this Agreement, provided that the Executive submits
reasonable documentation with respect to such expenses. This shall include,
without limitation, reimbursements of any such costs for air fare (which the
Executive shall be entitled to on a first-class basis), hotel accommodations and
meals.
(b) FRINGE BENEFITS. During the term of the Executive's
employment under this Agreement, the Executive shall be entitled to participate
in any of the Company's and Parent's executive fringe benefits in accordance
with the terms and conditions of such arrangements as are in effect from time to
time for the Company's and Parent's senior executives. In all events, the
Executive shall be entitled during the period he is employed to the
<PAGE> 8
-8-
following:
(i) a living allowance of up to US $10,000 per month (to be
prorated for partial months) while his services are performed in
Bermuda,
(ii) use of an automobile in Bermuda,
(iii) reimbursement of the cost (including initiation fees and
annual dues) of membership in three clubs in Bermuda,
(iv) reimbursement by the Company for the reasonable cost of
financial and tax planning, such reimbursement not to exceed US $10,000
per year; and
(v) air fare for up to four round-trip first-class
non-business trips per year by the Executive or members of his family
between London and Bermuda (the benefit under this Section 8(b)(iv)
being in addition to any reimbursement of air fare described in Section
8(a)), above.
9. TERMINATION OF EMPLOYMENT.
(a) TERMINATION DUE TO DEATH. In the event the Executive dies
during the term of employment, the Executive's spouse, if she survives him,
shall be entitled to receive the Executive's Base Salary as provided in Section
4, above, at the rate in effect immediately prior to termination, through the
end of the month in which the Executive dies. In the event that the
<PAGE> 9
-9-
Executive's spouse does not survive him, the estate or other legal
representative of the Executive shall be entitled to receive the Base Salary as
provided in Section 4, above, at the rate in effect at the time of his death,
through the end of the month in which the Executive dies. In addition to the
above, the estate or other legal representative of the Executive shall be
entitled to:
(i) any annual bonus awarded but not yet paid under Section 5,
above,
(ii) a pro rata bonus for the year of death, if the Executive
Committee so determines,
(iii) the rights under the Option and any other options held
by the Executive to purchase equity securities of the Company or Parent
as provided in Section 6, above, or otherwise, determined in accordance
with the terms thereof, and
(iv) any other rights and benefits available under employee
compensation or benefit programs of the Company and Parent, or their
equivalent, as provided in Section 7, above, and under business expense
reimbursement and fringe benefit programs as described in Section 8,
above, determined in accordance with the applicable terms and
provisions of such programs.
(b) TERMINATION DUE TO DISABILITY. In the event the
Executive's employment with the Company or Parent is terminated due to his
disability, as determined under the Company's or Parent's long-term disability
plan, the Executive shall be entitled to:
<PAGE> 10
-10-
(i) the Base Salary as provided in Section 4, above, through
the end of the month in which the Executive's employment terminates due
to disability,
(ii) any annual bonus awarded but not yet paid under Section
5, above,
(iii) the rights under the Option and any other options held
by the Executive to purchase equity securities of the Company or Parent
as provided in Section 6, above, or otherwise, determined in accordance
with the terms thereof, and
(iv) any other rights and benefits available under employee
benefit programs of the Company and Parent, or their equivalent, as
provided in Section 7, above, including, without limitation, the terms
of any Long-Term Disability Plan, and under the business expense
reimbursement and fringe benefits programs as described in Section 8,
above, determined in accordance with the applicable terms and
provisions of such programs.
(c) TERMINATION FOR CAUSE.
(i) The employment of the Executive under this Agreement may
be terminated by the Parent or the Company for Cause. For this purpose,
"CAUSE" shall mean:
(A) conviction of the Executive of a felony involving
moral turpitude, or
(B) the Executive, in carrying out his duties for the
Company or Parent under this Agreement, has been guilty of (1)
gross neglect or (II) gross
<PAGE> 11
-11-
misconduct.
(ii) In the event of a termination for Cause under Section
9(c)(i), above, the Executive shall be entitled only to:
(A) Base Salary as provided in Section 4, above, at
the rate in effect at the time of his termination of
employment for Cause, through the date on which termination
for Cause occurs,
(B) the rights, if any, under the Option or any other
option to purchase equity securities of the Company and Parent
as provided in Section 6, above, or otherwise determined in
accordance with the terms thereof, and
(C) any other rights and benefits, if any, available
under employee benefit programs of the Company and Parent, or
their equivalent, as provided in Section 7, above, and under
the business expense reimbursement and fringe benefits
programs as described in Section 8, above, determined in
accordance with the applicable terms and provisions of such
programs.
(d) TERMINATION WITHOUT CAUSE.
(i) Anything in this Agreement to the contrary
notwithstanding, the Executive's employment may be terminated without
Cause as provided in this Section 9(d). A termination due to
disability, as described in Section 9(b), above, or a
<PAGE> 12
-12-
termination for Cause, as described in Section 9(c), above, shall not
be deemed a termination without Cause under this Section 9(d).
(ii) In the event the Executive's employment is terminated
without Cause (x) prior to a Change in Control or (y) following the
first anniversary of a Change in Control, the Executive shall be
entitled to:
(A) Base Salary as provided in Section 4, above, at
the rate in effect in accordance with Section 4, above,
immediately prior to such termination, payable in equal
monthly installments for a period of 12 months following the
date of such termination,
(B) any annual bonus awarded but not yet paid under
Section 5, above,
(C) the rights under the Option as provided in
Section 6, above, in accordance with the terms thereof,
(D) continued coverage under the employee benefit
programs of the Company and Parent, or their equivalent, as
provided in Section 7, above, in which the Executive was
participating at the time of his termination of employment for
the period of salary continuation; provided, however, that any
such continued coverage shall be offset by comparable coverage
provided to the Executive in connection with subsequent
full-time employment and, to the extent
<PAGE> 13
-13-
the Company or Parent is unable to continue such coverage, the
Company or Parent shall provide the Executive with
economically equivalent benefits determined on an after-tax
basis, and
(E) any other rights and benefits available under
employee benefit programs of the Company and Parent, or their
equivalent, as provided in Section 7, above, and under the
business expense reimbursement and fringe benefits programs as
described in Section 8, above, determined in accordance with
the applicable terms and provisions of such programs.
(iii) In the event the Executive's employment is terminated by
the Company or Parent without Cause within the 12 month period
following a Change in Control (the "POST-CHANGE PERIOD") or the
Executive terminates his employment for "GOOD REASON" (as defined in
Exhibit B hereto) during the Post-Change Period, the Executive shall be
entitled to:
(A) Base Salary as provided in Section 4, above, at
the rate in effect in accordance with Section 4, above,
immediately prior to such termination, payable in equal
monthly installments for a period of 36 months following the
date of such termination,
(B) an amount equal to three times the largest annual
bonus awarded to the Executive in the three year period prior
to the year in which a Change in
<PAGE> 14
-14-
Control occurs, paid in equal monthly installments for the
period of Base Salary continuation,
(C) an amount equal to the annual bonus that would
have been awarded to Executive in respect of the year in which
the Change in Control occurs, multiplied by a fraction, the
numerator of which is the number of months or fraction thereof
in which the Executive was employed by the Company or Parent
in such year, and the denominator of which is 12,
(D) the rights under the Option, and any other
options held by the Executive to purchase equity securities of
the Company or Parent as provided in Section 6, above, or
otherwise, determined in accordance with the terms thereof,
(E) continued coverage under the employee benefit
programs on the Company and Parent, or their equivalent, as
provided in Section 7, above, in which the Executive was
participating at the time of his termination of employment for
the period of Base Salary continuation; provided, however,
that any such continued coverage shall be offset by comparable
coverage provided to the Executive in connection with
subsequent full-time employment and, to the extent the Company
and Parent is unable to continue such coverage, the Company
and Parent shall provide the Executive with economically
equivalent benefits determined on an after-tax basis and,
<PAGE> 15
-15-
(F) any other rights and benefits available under
employee benefit programs of the Company and Parent, or their
equivalent, as provided in Section 7, above, and under the
business expense reimbursement and fringe benefits programs as
described in Section 8, above, determined in accordance with
the applicable terms and provisions of such programs.
(G) full and immediate vesting under the Company's
pension plans as of the date of termination, to the extent
permitted by applicable law.
(iv) If, at any time during the term of the Executive's
employment hereunder, the Executive fails to be elected (or re-elected,
as appropriate) to the Board or the Parent Board, or is otherwise
removed from the Board or the Parent Board, or fails to be appointed
(or re-appointed, as appropriate) to the Executive Committee of the
Board or the Parent Board involuntarily, the Executive shall have the
right to terminate his employment and such termination, if prior to a
Change in Control, shall be deemed a termination by the Company and
Parent without Cause under Section 9(d)(ii), above, or, if following a
Change in Control, shall be deemed a termination without Cause under
Section 9(d)(iii), above, provided the Executive, in either case, shall
have given the Company and Parent written notice of his decision and
shall not within 10 business days thereafter have been reinstated to
the relevant positions.
(e) VOLUNTARY TERMINATION BY THE EXECUTIVE. The Executive may
<PAGE> 16
-16-
voluntarily terminate his employment prior to the expiration of the term of this
Agreement. Such termination shall constitute a voluntary termination and, except
as provided in Section 9(d)(iii), above, in such event the Executive shall be
limited to the same rights and benefits as applicable to a termination by the
Company or Parent for Cause as provided in Section 9(c), above. A voluntary
termination under this Section 9(e) shaH not be deemed a breach of this
Agreement. A termination of the Executive's employment due to disability as
described in Section 9(b), above, a termination by the Executive which the
Executive is entitled to treat as a termination by the Company or Parent
pursuant to Section 9(d), above, or a termination by the Executive under Section
9(d)(iii), above, shall not be deemed a voluntary termination within the meaning
of this Section 9(e).
10. NO MITIGATION; NO OFFSET.
<PAGE> 17
-17-
In the event of any termination of employment under Section 9,
above, the Executive shall be under no obligation to seek other employment, and
there shall be no offset against amounts due the Executive under this Agreement
on account of any remuneration attributable to any subsequent employment that he
may obtain.
11. NONCOMPETITION AND NONSOLICITATION.
(a) NONCOMPETITION. During the term of his employment and for
a period of 24 months thereafter, the Executive shall not, directly or
indirectly, whether as an employee, consultant, partner, principal, agent,
distributor, representative or stockholder (except as a less than one percent
stockholder of a publicly traded company or a less than five percent stockholder
of a privately held company), engage in any activities in Bermuda if such
activities are competitive with the businesses that (i) are then being conducted
by the Company or Parent and (ii) during the period of the Executive's
employment were either being conducted by the Company or Parent or actively
being developed by the Company or Parent. For purposes of this Section 11, the
Company or Parent shall be deemed to include any entity that was an Affiliate of
the Company or Parent during the period of the Executive's employment as well as
the time in question.
(b) NONSOLICITATION. During the term of the Executive's
employment under this Agreement, and for a period of 24 months following
termination of employment, the Executive shall not (i) encourage any other
employee of the Company or Parent to leave the
<PAGE> 18
-18-
employ of the Company or Parent except as may be in the interests of the Company
or Parent during the course of carrying out his duties under Section 3 above or
(ii) seek to obtain or solicit business from any person, firm or company which
is (so long as the Executive is employed by the Company or Parent) or at the
time of the termination of the Executive's employment was a customer of or in
the habit of dealing with the Company or Parent.
12. CONFIDENTIAL INFORMATION.
<PAGE> 19
-19-
The Executive covenants that he shall not, without the prior
written consent of the Board or Parent Board or a person authorized by the Board
or Parent Board, disclose to any person, other than an employee of the Company
or Parent or other person to whom disclosure is necessary to the performance by
the Executive of his duties in the employ of the Company or Parent, any
confidential proprietary information about the Company or Parent or their
business, unless and until such information has become known to the public
generally (other than as a result of unauthorized disclosure by the Executive)
or unless he is required to disclose such information by a court or by a
governmental body with apparent authority to require such disclosure. The
foregoing covenant by the Executive shall be without limitation as to time and
geographic application.
13. WITHHOLDING.
Anything in this Agreement to the contrary notwithstanding,
all payments required to be made by the Company or Parent hereunder to the
Executive shall be subject to withholding of such amounts relating to taxes as
the Company or Parent may reasonably determine either should withhold pursuant
to any applicable law or regulation. In lieu of withholding such amounts, in
whole or in part, the Company or Parent may, in its sole discretion, accept
other provision for payment of taxes as required by law, provided it is
satisfied that all requirements of law affecting its responsibilities to
withhold such taxes have been satisfied.
14. PARENT SERVICES.
<PAGE> 20
-20-
(a) LIABILITY. The Parent, hereby agrees to be jointly and
severally liable together with the Company, for the payment to the Executive of
his Base Salary, bonus, business expense reimbursement and termination of
employment provisions of this Agreement.
<PAGE> 21
-21-
(b) RESPONSIBILITY. All of the other terms and provisions of
this Agreement relating to the Executive's employment by the Company shall
likewise apply mutatis mutandis to the Executive's employment by the Parent
including, without limitation, Sections 1, 2, 7, 8, 9, 10, 11, 12, 13 and 18, it
being understood that if the Executive terminates his employment, he shall be
required to do so with respect to both the Company and the Parent and that a
termination of the employment of the Executive by both the Company or the Parent
shall be deemed a termination by both.
15. ENTIRE AGREEMENT.
This Agreement, together with the Exhibits, contains the
entire agreement between the Parties concerning the subject matter hereof and
supersedes all prior agreements, understandings, discussions, negotiations and
undertakings, whether written or oral, between the Company, Parent and the
Executive with respect thereto.
16. ASSIGNABILITY; BINDING NATURE.
<PAGE> 22
-22-
This Agreement shall be binding upon and inure to the benefit
of the Parties and their respective successors, heirs and assigns. No rights or
obligations of the Executive under this Agreement may be assigned or transferred
by the Executive other than his right to compensation and benefits hereunder,
which may be transferred by will or operation of law subject to the limitations
of this Agreement. No rights or obligations of the Company or Parent under this
Agreement may be assigned or transferred by the Company or Parent except that
such rights or obligations may be assigned or transferred pursuant to a merger
or consolidation in which the Company or Parent is not the continuing entity, or
the sale or liquidation of all or substantially all of the assets of the Company
or Parent, provided that the assignee or transferee is the successor to all or
substantially all of the assets of the Company or Parent and such assignee or
transferee assumes the liabilities, obligations and duties of the Company or
Parent, as contained in this Agreement, either contractually or as a matter of
law.
17. INDEMNIFICATION.
The Executive shall be provided indemnification by each of
Parent and the Company to maximum extent permitted under the laws of their
respective jurisdictions of incorporation and their respective charter
documents. In addition, he shall be covered by a directors' and officers'
liability policy with coverage for him to the extent of US $50,000,000.
18. SETTLEMENT OF DISPUTES.
<PAGE> 23
-23-
Any dispute between the Parties arising from or relating to
the terms of this Agreement or the Executive's employment with the Company or
Parent shall be resolved by arbitration held in New York City in accordance with
the rules of the American Arbitration Association. All costs associated with any
arbitration, including all legal expenses, for both Parties shall be borne by
the Company and Parent.
19. AMENDMENT OR WAIVER.
No provision in this Agreement may be amended unless such
amendment is agreed to in writing, signed by the Executive and by a duly
authorized officer of the Company and Parent. No waiver by any Party of any
breach by the other Party of any condition or provision of this Agreement to be
performed by such other Party shall be deemed a waiver of a similar or
dissimilar condition or provision at the same or any prior or subsequent time.
Any waiver must be in writing and signed by the Executive or a duly authorized
officer of the Company and Parent, as the case may be.
20. NOTICES.
Any notice required or permitted to be given under this
Agreement shall be in writing and shall be deemed to have been given when
delivered personally or sent by courier, or by certified or registered mail,
postage prepaid, return receipt requested, duly addressed to the Party concerned
at the address indicated below or to such changed address as such Party may
subsequently by similar process give notice of:
<PAGE> 24
-24-
If to the Company: Mid Ocean Reinsurance Company Ltd.
Richmond House
12 Par-la-Ville Road
Hamilton HM EX Bermuda
If to the Parent: Mid Ocean Limited
Richmond House
12 Par-la-Ville Road
Hamilton HM EX, Bermuda
If to the Executive: Michael A. Butt
"Chan Mar"
41 Tucker's Town Road
Bermuda
21. SEVERABILITY.
In the event that any provision or portion of this Agreement
shall be determined to be invalid or unenforceable for any reason, in whole in
part, the remaining provisions of this Agreement shall be unaffected thereby and
shall remain in full force and effect to the fullest extent permitted by law.
22. SURVIVORSHIP.
The respective rights and obligations of the Parties shall
survive any termination of this Agreement to the extent necessary to the
intended preservation of such rights and obligations.
<PAGE> 25
-25-
23. REFERENCE.
In the event of the Executive's death or a judicial
determination of his incompetence, reference in this Agreement to the Executive
shall be deemed, where appropriate, to refer to his estate or other legal
representative.
24. GOVERNING LAW.
This Agreement shall be governed by and construed and
interpreted in accordance with the laws of the State of New York without
reference to the principles of conflict of laws.
25. HEADINGS.
The heading of the sections contained in this Agreement are
for convenience only and shall not be deemed to control or affect the meaning or
construction of any provision of this Agreement.
26. COUNTERPARTS.
This Agreement may be executed in one or more counterparts.
<PAGE> 26
-26-
IN WITNESS WHEREOF, the undersigned have executed this
Agreement as of the date first written above.
MID OCEAN REINSURANCE COMPANY LTD.
By: /s/ R. J. Newhouse Jr.
------------------------------------
MID OCEAN LIMITED
By: /s/ Michael A. Butt
------------------------------------
------------------------------------
Michael A. Butt
<PAGE> 27
EXHIBIT A
CHANGE IN CONTROL
A "Change in Control" shall be deemed to have occurred if:
(i) on or after the date hereof, any person (which, for all purposes
hereof, shall include, without limitation, an individual, sole
proprietorship, partnership, unincorporated association, unincorporated
syndicate, unincorporated organization, trust, body corporate and a
trustee, executor, administrator or other legal representative), or any
group (within the meaning of Section 13(d)(3) of the United States
Securities Exchange Act of 1934, as amended), becomes the beneficial
owner, directly or indirectly, of securities of the Parent
representing, or acquires the right to control or direct, or to acquire
through the conversion or exchange of securities or the exercise of
warrants or other rights to acquire securities ("Beneficial Owner'),
20% or more of the combined voting power of the Parent's then
outstanding securities ("Significant Owner') (excluding any person who
or group which, together with all affiliates and associates of such
person or group, would on the date of this Agreement but for this
clause be a Significant Owner as long as such person or group does not
subsequently become the Beneficial Owner of any additional securities
of the Parent in any manner other than a change in the aggregate number
of the outstanding securities of the
A-1
<PAGE> 28
Parent, and other than pursuant to any purchase or acquisition
permitted by the first full paragraph of the second page of that
Standstill Agreement dated June 2, 1995 between Parent and EXEL
Limited) and, for the purposes hereof, "voting power" means the right
to vote for the election of directors; or
(ii) at any time subsequent to the execution of this contract there shall be
elected or appointed to the Parent Board any director or directors
whose appointment or election by the Parent's shareholders was not
approved by a vote of at least a majority of the directors then still
in office who were either directors at the date hereof or whose
election or appointment or nomination for election was previously so
approved.
The determination to be made pursuant to clause (i) above shall be made on the
basis that (x) all securities beneficially owned by the person or group or over
which control or direction is exercised by the person or group which are
convertible or exchangeable into securities carrying voting rights have been
converted or exchanged and all options, warrants, exchange rights or other
rights which may be exercised to acquire securities beneficially owned by the
person or group or over which control or direction is exercised by the person or
group have been exercised, and (y) no such convertible or exchangeable
securities have been converted or exchanged by any other person and no such
options, warrants, exchange rights or other rights have been exercised by any
other person.
A-2
<PAGE> 29
EXHIBIT B
GOOD REASON
For purposes of this Agreement, 'Good Reason' shall mean any
of the following (without Executive's express prior written consent):
(i) (A) The assignment to Executive of duties materially
inconsistent with Executive's position (including duties,
responsibilities, status, titles or offices as set forth in
Section 2 hereof); or (B) any elimination or reduction of
Executive's duties or responsibilities except in connection
with the termination of Executive's employment for Cause,
disability or as a result of Executive's death or by Executive
other than for Good Reason;
(ii) The (A) reduction in Executive's Base Salary from the level in
effect immediately prior to, or (B) payment of an annual bonus
in an amount less than the most recent annual bonus paid prior
to the Change in Control;
(iii) The failure by the Company or Parent to obtain the specific
assumption of this Agreement by any successor or assign of
Parent or the Company or any person acquiring substantially
all of the Company's or Parent's assets;
(iv) Any material breach by the Company or Parent of any provision
of this Agreement or any agreements entered into pursuant
thereto;
(v) Requiring Executive to be based at any office or location
other than those described in Section 2(a) hereof, except for
travel reasonably required in the performance of the
Executive's responsibilities; or
(vi) During the twelve month period following a Change in Control,
(A) the failure to continue in effect any compensation plan in
which Executive participates at the time of the Change in
Control unless an equitable arrangement (embodied in an
ongoing substitute or alternative plan providing Executive
with substantially similar benefits) has been made with
respect to such plan in connection with the Change in Control,
or the failure to continue Executive's participation therein
on substantially the same basis, both in terms of the amount
of benefits provided and the level of his participation
relative to other participants, as existed at the time of the
Change in Control; or (B) the failure to continue to provide
Executive with benefits at least as favorable in the aggregate
as those enjoyed by him under any of
B-1
<PAGE> 30
the Company's or Parent's pension, life insurance, medical,
health and accident, disability, deferred compensation or
savings plans in which he was participating at the time of the
Change of Control, the taking of any action which would
directly or indirectly materially reduce any of such benefits
or deprive Executive of any fringe benefit enjoyed by him at
the time of the Change of Control, or the failure to provide
him with the number of paid vacation days to which he was
entitled on the basis of the Company's practice with respect
to him as in effect at the time of the Change of Control.
B-2
<PAGE> 1
Exhibit 10.06
SERVICE AGREEMENT
(amended and restated as of August 19, 1996)
AGREEMENT, made and entered into this 19th day of August, 1996
by and between Mid Ocean Reinsurance Company Ltd., a Bermuda corporation (the
"COMPANY"), Mid Ocean Limited, a Cayman Islands corporation (the "PARENT") and
Robert J. Newhouse, Jr. (the "EXECUTIVE").
WHEREAS, on November 1, 1992, the Company and Executive
entered into a Service Agreement (the "1992 AGREEMENT") pursuant to which the
Company agreed to have the Executive serve, and the Executive agreed to serve,
as Chairman of its Board of Directors (the "BOARD") and a member of its
Executive Committee, subject to the terms and condition of the 1992 Agreement;
and
WHEREAS, on June 23, 1993, the Company, Parent and Executive
agreed to amend the 1992 Agreement (as amended, the "PRIOR AGREEMENT") to
provide, among other things, that Executive would serve as Chairman of the
Parent's Board of Directors (the "PARENT BOARD"), subject to the terms and
conditions of the Prior Agreement;
WHEREAS, the Company, Parent and Executive desire to amend and
restate the Prior Agreement as set forth herein;
WHEREAS, the Executive wishes to continue to serve as Chairman
of the Board and the Parent Board and a member of the Executive Committees of
the Board and the Parent Board under the terms and conditions of this Agreement;
<PAGE> 2
NOW, THEREFORE, in consideration of the premises and mutual
covenants contained herein and for other good and valuable consideration, the
Company, the Executive and the Parent (the "PARTIES") agree as follows:
1. TERM OF SERVICE.
The term of service under this Agreement shall commence on
August 19, 1996 (the "DATE OF THE AGREEMENT") and shall continue through the
close of business on the third anniversary of the Date of the Agreement, subject
to earlier termination as provided in Section 8, below. Thereafter such term
shall automatically be renewed for successive one-year periods unless the
Company and Parent give notice in writing to the Executive or the Executive
gives notice in writing to the Company and Parent at least six months prior to
the then scheduled expiration date that the term is not to so renew.
2. POSITIONS, DUTIES AND RESPONSIBILITIES.
(a) GENERAL. It is the intention of the Parties that the
Executive shall serve throughout his term of service hereunder as Chairman of
the Board and a member of the Executive Committee of the Board with the duties,
responsibilities and authorities normally associated with those positions. It is
understood that the Executive will not become a resident of Bermuda. The amount
of time the Executive will spend in Bermuda and Europe shall be in the
discretion of the Executive, except for the amount of time necessary for him to
attend meetings of the Board and of committees of the Board of which he is a
member. The Executive's services under this Agreement shall be performed outside
the United States.
-2-
<PAGE> 3
(b) ADDITIONAL DUTIES. In addition to the positions, duties
and responsibilities of the Executive with respect to his positions at the
Company as set forth in the preceding paragraph (a), the Executive shall also
serve throughout his term of service hereunder as Chairman of the Parent Board
and a member of the Executive Committee of the Parent Board, with the duties,
responsibilities and authorities normally associated with those positions. It is
understood that the Executive will not become a resident of the Cayman Islands.
(c) PERMITTED ACTIVITIES. Anything herein to the contrary
notwithstanding, nothing shall preclude the Executive from (i) serving on the
boards of directors of a reasonable number of other corporations or the boards
of a reasonable number of trade associations and/or charitable organizations,
(ii) engaging in charitable, community and other business affairs and (iii)
managing his personal investments and affairs, provided such activities do not
materially interfere with the proper performance of his duties and
responsibilities as the Company's Chairman of the Board and the Parent's
Chairman of the Board.
3. BASE FEE.
The Executive shall be paid a Base Fee by the Company at an
annual rate of US $325,000, payable in accordance with the Company's regular pay
practices. Such Base Fee shall be subject to review for increase at the
discretion of the Executive Committee of the Parent Board.
4. ANNUAL BONUS.
In addition to the Base Fee provided for in Section 3, above,
the Executive may be
-3-
<PAGE> 4
awarded such annual bonuses as may be determined by the Executive Committee of
the Parent Board, based on whatever incentive programs have been adopted by the
Company or Parent for senior executives of the Company or Parent, as well as the
performance of the Executive and the performance of the Company or Parent. Any
bonus shall be paid in cash in a lump sum promptly following determination
thereof.
5. SHARE PURCHASE OPTION.
Concurrently with the execution of the 1992 Agreement, the
Company and the Executive entered into a Share Purchase Option in the form
attached thereto as Exhibit A (the "OPTION"), granting to the Executive the
right to purchase those shares of Outstanding Stock (as defined in such Exhibit
A) as described herein.
6. EMPLOYEE BENEFIT PROGRAMS.
During the term of the Executive's service under this
Agreement, the Executive shall be entitled to participate in all employee
benefit programs of the Company or Parent as are in effect from time to time and
in which senior executives of the Company or Parent are eligible to participate
except that he shall not be entitled to participate in any pension plan. To the
extent the Executive is not eligible to participate in any such program (other
than the pension plan) he shall be provided with the after-tax economic
equivalent of the benefits provided under the program in which he is unable to
participate. In addition, if necessary, the Executive shall be provided interim
coverage until such time as the Company or Parent has adopted a program of
employee benefit coverages. Coverage may, in the discretion of the Company or
Parent, be provided through purchase of separate insurance contracts, through
self-insurance or, to the
-4-
<PAGE> 5
extent the Executive is permitted to continue to maintain on a contributory
basis the benefits he presently receives from Marsh & McLennan Companies, Inc.,
by reimbursing the Executive for the cost thereof on a basis that keeps the
Executive whole after taxes.
7. BUSINESS EXPENSE REIMBURSEMENT AND FRINGE BENEFITS.
(a) EXPENSE REIMBURSEMENT. During the term of the Executive's
service under this Agreement, the Executive shall be entitled to receive
reimbursement by the Company or Parent for all reasonable out-of-pocket travel
expenses, entertainment expenses and other expenses incurred by him in
performing services under this Agreement, provided that the Executive submits
reasonable documentation with respect to such expenses. This shall include,
without limitation, reimbursements of any such costs for air fare (which the
Executive shall be entitled to on a first-class basis), hotel accommodations and
meals.
(b) FRINGE BENEFITS. During the term of the Executive's
service under this Agreement, the Executive shall be entitled to participate in
any of the Company's or Parent's executive fringe benefits in accordance with
the terms and conditions of such arrangements as are in effect from time to time
for the Company's or Parent's senior executives. In all events, the Executive
shall be entitled during the term of his service to the following:
(i) reimbursement of the cost (including initiation fees
and annual dues) of membership in one club in
Bermuda,
(ii) air fare for up to 12 round-trip first-class
non-business trips per year by the Executive or
members of his family between New York, New York,
-5-
<PAGE> 6
Newark, New Jersey or Nantucket, Massachusetts and
Bermuda and for up to four round-trip first-class
non-business trips by the Executive or his wife
between New York, Newark, Nantucket, or Bermuda and
London, England (the benefit under this Section
7(b)(ii) being in addition to any reimbursement of
airfare described in Section 7 (a)), above, and
(iii) reimbursement by the Company for the reasonable cost of
financial and tax planning, such reimbursement not to exceed US $10,000 per
year.
8. TERMINATION OF SERVICE.
(a) TERMINATION DUE TO DEATH. In the event the Executive dies
during the term of his service under this Agreement, the Executive's spouse, if
she survives him, shall be entitled to receive the Executive Base Fee as
provided in Section 3, above, at the rate in effect immediately prior to
termination, through the end of the month in which the Executive dies and
thereafter shall be entitled to receive payments at the rate US $162,500 per
year or, if greater, one half the Base Fee at the rate in effect at the time of
his death) for a period of three years from the date of his death. In the event
the Executive's spouse dies during such three-year period, such payments shall
thereafter be made to the beneficiary designated by the Executive or, in the
absence of such designation, to the estate or other legal representative of the
Executive. In the event that the Executive's spouse does not survive him, the
estate or other legal representative of the Executive shall be entitled to
receive the Base Fee as provided in Section 3, above, at the rate in effect at
the time of his death, through the end of month in which the Executive dies. In
addition to the above, the estate or other legal representative of the Executive
shall be entitled to:
-6-
<PAGE> 7
(i) any annual bonus awarded but not yet paid under Section 4,
above,
(ii) a pro rata bonus for the year of death, if the Executive
Committee of the Board so determines,
(iii) the rights under the Option as provided in Section 5,
above, in accordance with the terms thereof except to the
extent the Option has been transferred, and
(iv) any other rights and benefits available to him under employee
benefit programs of the Company and Parent, or their equivalent, as
provided in Section 6, above, and under business expense reimbursement
and fringe benefit programs as described in Section 7, above,
determined in accordance with the applicable terms and provisions of
such programs.
(b) TERMINATION DUE TO DISABILITY. In the event the
Executive's service with the Company or Parent is terminated due to his
disability, as determined under the Company's or Parent's long-term disability
plan, the Executive shall be entitled to:
(i) the Base Fee as provided in Section 3, above, through the
end of the month in which the Executive's service terminates due to
disability,
(ii) any annual bonus awarded but not yet paid under Section
4, above,
(iii) the rights under the Option as provided in Section 5,
above, in
-7-
<PAGE> 8
accordance with the terms thereof except to the extent the Option has
been transferred, and
(iv) any other rights and benefits available to him under
employee benefit programs of the Company and Parent, or their
equivalent, as provided in Section 6, above, including, without
limitation, the terms of any Long Term Disability Plan, and under the
business expense reimbursement and fringe benefit programs as described
in Section 7, above, determined in accordance with the applicable terms
and provisions of such programs.
(c) TERMINATION FOR CAUSE.
(i) The service of the Executive under this Agreement may be
terminated by the Parent or the Company for Cause. For this purpose, "CAUSE"
shall mean:
(A) conviction of the Executive of a felony involving
moral turpitude, or
(B) the Executive, in carrying out his duties for the
Company or Parent under this Agreement, has been guilty of (I) gross
neglect or (II) gross misconduct; provided, however, that any act, or
failure to act, by the Executive shall not constitute Cause for
purposes of this Section 8(c)(i)(B) if such act, or failure to act, was
committed, or omitted, by the Executive in good faith and in a manner
he reasonably believed to be in the best interests of the Company or
Parent.
-8-
<PAGE> 9
(ii) In the event of a termination for Cause under Section
8(c)(i), above, the Executive shall be entitled only to:
(A) the Base Fee as provided in Section 3, above, at the rate
in effect at the time of his termination of service for Cause, through
the date on which termination for Cause occurs,
(B) the rights, if any, under the Option as provided in
Section 5, above, determined in accordance with the terms thereof
except to the extent the Option has been transferred, and
(C) other rights and benefits, if any, available to him under
employee benefit programs of the Company and Parent, or their
equivalent, as provided in Section 6, above, and under business expense
reimbursement and fringe benefit programs as described in Section 7,
above, determined in accordance with the applicable terms and
provisions of such programs.
(d) TERMINATION WITHOUT CAUSE.
(i) Anything in this Agreement to the contrary
notwithstanding, the Executive's service may be terminated without Cause as
provided in this Section 8(d). A termination due to disability, as described in
Section 8(b), above, or a termination for Cause, as described in Section 8(c),
above, shall not be deemed a termination without Cause under this Section 8(d).
-9-
<PAGE> 10
(ii) In the event the Executive's service is terminated
without Cause (x) prior to a "CHANGE IN CONTROL" of Parent (as defined in
Exhibit A hereto) or (y) following the first anniversary of a Change in Control,
the Executive shall be entitled to:
(A) the Base Fee as provided in Section 3,
above, at the rate in effect in accordance with Section 3,
above, immediately prior to such termination, payable in equal
monthly installments for a period of 24 months following the
date of such termination,
(B) any annual bonus awarded but not yet
paid under Section 4, above,
(C) the rights under the Option as provided
in Section 5, above, in accordance with the terms thereof
except to the extent the Option has been transferred,
(D) continued coverage under the employee
benefit programs of the Company and Parent, or their
equivalent, as provided in Section 6, above, in which the
Executive was participating at the time of his termination of
service for the period of Base Fee continuation; provided,
however, that any such continued coverage shall be offset by
comparable coverage provided to the Executive in connection
with subsequent employment or other service and, to the extent
the Company or
-10-
<PAGE> 11
Parent is unable to continue such coverage, the Company shall
provide the Executive with economically equivalent benefits
determined on an after-tax basis, and
(E) other rights and benefits available to
him under employee benefit programs of the Company and Parent,
or their equivalent, as provided in Section 6, above, and
under business expense reimbursement and fringe benefit
programs as described in Section 7, above, determined in
accordance with the applicable terms and provisions of such
programs.
(iii) In the event the Executive's service is terminated by
the Company or Parent without Cause within the 12 month period following a
Change of Control (the "POST-CHANGE PERIOD") or the Executive terminates his
employment for "GOOD REASON" (as defined in Exhibit B hereto) during the
Post-Change Period, the Executive shall be entitled to:
(A) the Base Fee as provided in Section 3, above, at the rate
in effect in accordance with Section 3, above, immediately prior to
such termination, payable in equal monthly installments for a period of
24 months following the date of such termination,
(B) an amount equal to two times the largest annual bonus
awarded to the Executive in the three year period prior to the year in
which a Change in Control occurs, paid in equal monthly installments
for the period of Base Fee continuation,
-11-
<PAGE> 12
(C) an amount equal to the annual bonus that would have been
awarded to Executive in respect of the year in which the Change in
Control occurs, multiplied by a fraction, the numerator of which is the
number of months or fraction thereof in which the Executive was
employed by the Company and Parent in such year, and the denominator of
which is 12,
(D) the rights under the Option as provided in Section 5,
above, in accordance with the terms thereof except to the extent the
Option has been transferred,
(E) continued coverage under the employee benefit programs of
the Company and Parent, or their equivalent, as provided in Section 6,
above, in which the Executive was participating at the time of his
termination of service for the period of Base Fee continuation;
provided, however, that any such continued coverage shall be offset by
comparable coverage provided to the Executive in connection with
subsequent employment or other service and, to the extent the Company
or Parent is unable to continue such coverage, the Company or Parent
shall provide the Executive with economically equivalent benefits
determined on an after-tax basis, and
(F) other rights and benefits available to him under employee
benefit programs of the Company or Parent, or their equivalent, as
provided in Section 6, above, and under business expense reimbursement
and fringe benefit programs as described in Section 7, above,
determined in accordance with the applicable terms
-12-
<PAGE> 13
and provisions of such programs.
(iv) If, at any time during the term of the Executive's
service hereunder, the Executive fails to be elected (or re-elected, as
appropriate) as Chairman of the Board and the Parent Board, or is otherwise
removed from the Board and the Parent Board involuntarily, or fails to be
appointed (or reappointed, as appropriate) to the Executive Committee of the
Board and the Parent Board, the Executive shall have the right to terminate his
service, and, if prior to a Change in Control, such termination shall be deemed
a termination by the Company and Parent without Cause under Section 8(d)(ii),
above, or, if following a Change in Control, such termination shall be deemed a
termination without Cause under Section 8(d)(iii), above, provided the
Executive, in either case, shall have given the Company and Parent written
notice of his decision and shall not within 10 business days thereafter have
been reinstated to the relevant positions.
(e) VOLUNTARY TERMINATION BY THE EXECUTIVE. The Executive may
voluntarily terminate his service prior to the expiration of the term of his
service under this Agreement. Such termination shall constitute a voluntary
termination and, except as provided in Section 8(d)(iii), in such event the
Executive shall be limited to the same rights and benefits as applicable to a
termination by the Company for Cause as provided in Section 8(c), above. A
voluntary termination under this Section 8(f) shall not be deemed a breach of
this Agreement. A termination of the Executive's service due to disability as
described in Section 8(b), above, a termination by the Executive which the
Executive is entitled to treat as a termination by the Company pursuant to
Section 8(d) or 8(e), above, or a termination by the Executive under
-13-
<PAGE> 14
Section 8(d)(iii), above, shall not be deemed a voluntary termination within the
meaning of this Section 8(f).
9. NO MITIGATION; NO OFFSET.
In the event of any termination of service under Section 8,
above, the Executive shall be under no obligation to seek other employment, and
there shall be no offset against amounts due the Executive under this Agreement
on account of any remuneration attributable to any subsequent employment that he
may obtain.
10. NONCOMPETITION AND NONSOLICITATION.
(a) NONCOMPETITION. During the term of his service and, except
in the case of a termination of the term of his service pursuant to Section 8(d)
or (e), above, for a period of 12 months thereafter, the Executive shall not,
directly or indirectly, whether as an employee, consultant, partner, principal,
agent, distributor, representative or stockholder (except as a less than one
percent stockholder of a publicly traded company or a less than five percent
stockholder of a privately held company), engage in any activities within the
United States or Bermuda if such activities involve insurance or reinsurance of
United States based entities or exposures that are competitive with the
businesses that (i) are then being conducted by the Company or Parent and (ii)
during the period of the Executive's service were either being conducted by the
Company or Parent or actively being developed by the Company or Parent. The
Executive's service as a director of any company in the insurance, reinsurance
or related businesses shall not be deemed engaging in any activity that is
competitive within the meaning of the preceding sentence. For purposes of this
Section 10, the Company or Parent shall be deemed to include any entity that
-14-
<PAGE> 15
was affiliated with the Company or Parent during the period of the Executive's
service as well as the time in question (meaning any entity 50% of the equity in
which is owned by the Company or Parent during the period of the Executive's
service as well as the time in question).
(b) NONSOLICITATION. During the term of the Executive's
service under this Agreement, and for a period of 12 months following
termination of service, the Executive shall not encourage any employee of the
Company or Parent to leave the employ of the Company or Parent except as may be
in the interests of the Company or Parent during the course of carrying out his
duties under Section 2, above.
11. CONFIDENTIAL INFORMATION.
The Executive covenants that he shall not, without the prior
written consent of the Board or Parent Board or a person authorized by the Board
or Parent Board, disclose to any person, other than an employee of the Company
or Parent or other person to whom disclosure is necessary to the performance by
the Executive of his duties in the service of the Company or Parent, any
confidential proprietary information about the Company or Parent or their
business, unless and until such information has become known to the public
generally (other than as a result of unauthorized disclosure by the Executive)
or unless he is required to disclose such information by a court or by a
governmental body with apparent authority to require such disclosure. The
foregoing covenant by the Executive shall be without limitation as to time and
geographic application.
12. WITHHOLDING.
-15-
<PAGE> 16
Anything in this Agreement to the contrary notwithstanding,
all payments required to be made by the Company or Parent hereunder to the
Executive shall be subject to withholding of such amounts relating to taxes as
either the Company or Parent may reasonably determine it should withhold
pursuant to any applicable law or regulation. In lieu of withholding such
amounts, in whole or in part, either the Company or Parent may, in its sole
discretion, accept other provision for payment of taxes as required by law,
provided it is satisfied that all requirements of law affecting its
responsibilities to withhold such taxes have been satisfied.
13. PARENT SERVICES.
(a) LIABILITY. The Parent, hereby agrees to be jointly and
severally liable together with the Company, for the payment to the Executive of
his Base Fee, bonus, business expense reimbursement and termination of
employment provisions of this Agreement.
(b) RESPONSIBILITY. All of the other terms and provisions of
this Agreement relating to the Executive's employment by the Company shall
likewise apply mutatis mutandis to the Executive's employment by the Parent
including, without limitation, Sections 1, 6, 7, 8, 9, 10, 11, 12, 17 and 18,
being understood that if the Executive terminates his service under the Service
Agreement he shall be required to do so with respect to both the Company and the
Parent and that a termination of the Executive's services by the Company or the
Parent shall be deemed a termination by both.
14. ENTIRE AGREEMENT.
This Agreement, together with the Exhibits, contains the
entire agreement
-16-
<PAGE> 17
between the Parties concerning the subject matter hereof and supersedes all
prior agreements, understandings, discussions, negotiations and undertakings,
whether written or oral, between the Company, Parent and the Executive with
respect thereto.
15. ASSIGNABILITY; BINDING NATURE.
This Agreement shall be binding upon and inure to the benefit
of the Parties and their respective successors, heirs and assigns. No rights or
obligations of the Executive under this Agreement may be assigned or transferred
by the Executive other than his rights to compensation and benefits hereunder,
which may be transferred by will or operation of law subject to the limitations
of this Agreement. The Parties recognize that the Executive also may transfer
his rights under the Option as therein provided. No rights or obligations of the
Company or Parent under this Agreement may be assigned or transferred by the
Company or Parent except that such rights or obligations may be assigned or
transferred pursuant to a merger or consolidation in which the Company or Parent
is not the continuing entity, or the sale or liquidation of all or substantially
all of the assets of the Company or Parent, provided that the assignee or
transferee is the successor to all or substantially all of the assets of the
Company or Parent and such assignee or transferee assumes the liabilities,
obligations and duties of the Company or Parent, as contained in this Agreement,
either contractually or as a matter of law.
16. INDEMNIFICATION.
The Executive shall be provided indemnification by each of
Parent and the Company to maximum extent permitted under the laws of their
respective jurisdictions of incorporation and their respective charter
documents. In addition, he shall be covered by a
-17-
<PAGE> 18
directors' and officers' liability policy with coverage for him to the extent of
US $50,000,000.
17. EXCISE TAX ADJUSTMENT PAYMENTS.
(a) PAYMENTS. In the event that it is determined that any
payment or distribution by the Company or Parent to or for the benefit of
Executive, whether paid or payable or distributed or distributable pursuant to
the terms of this Agreement or otherwise, other than any payment pursuant to
this Section 17(a), (a "PAYMENT"), would be subject to the excise tax imposed by
Section 4999 of the Internal Revenue Code of 1986, as amended (the "CODE") or
any interest or penalties with respect to such excise tax (such excise tax,
together with any such interest and penalties, are hereinafter collectively
referred to as the "EXCISE TAX"), then Executive shall be entitled to receive
from the Company or Parent, within 15 days following the determination described
in Section 17(b), below, an additional payment ("EXCISE TAX ADJUSTMENT PAYMENT")
in an amount such that after payment by Executive of all applicable Federal,
state and local taxes (computed at the maximum marginal rates and including any
interest or penalties imposed with respect to such taxes), including any Excise
Tax, imposed upon the Excise Tax Adjustment Payment, Executive retains an amount
of the Excise Tax Adjustment Payment equal to the Excise Tax imposed upon the
Payments.
(b) DETERMINATIONS. All determinations required to be made
under this Section 17, including whether an Excise Tax Adjustment Payment is
required and the amount of such Excise Tax Adjustment Payment, shall be made by
KPMG Peat Marwick LLP, or such other national accounting firm as the Company or
Parent may designate prior to a Change of Control, which shall provide detailed
supporting calculations to the Company and the Executive
-18-
<PAGE> 19
within 15 business days of the date of termination of Executive's employment.
Except as hereinafter provided, any determination by KPMG Peat Marwick LLP, or
such other national accounting firm as the Company or Parent may designate prior
to a Change of Control, shall be binding upon the Company, Parent and the
Executive. As a result of the uncertainty in the application of Section 4999 of
the Code at the time of the initial determination hereunder, it is possible that
(x) certain Excise Tax Adjustment Payments will not have been made by the
Company or Parent which should have been made (an "UNDERPAYMENT"), or (y)
certain Excise Tax Adjustment Payments will have been made which should not have
been made (an "OVERPAYMENT"), consistent with the calculations required to be
made hereunder. In the event of an Underpayment, such Underpayment shall be
promptly paid by the Company or Parent to or for the benefit of the Executive.
In the event that the Executive discovers that an Overpayment shall have
occurred, the amount thereof shall be promptly repaid to the Company or Parent.
18. SETTLEMENT OF DISPUTES.
Any dispute between the Parties arising from or relating to
the terms of this Agreement or the Executive's service with the Company or
Parent shall be resolved by arbitration held in New York City in accordance with
the rules of the American Arbitration Association. All costs associated with any
arbitration, including all legal expenses, for both Parties shall be borne by
the Company and Parent.
19. AMENDMENT OR WAIVER.
No provision in this Agreement may be amended unless such
amendment is agreed to in writing, signed by the Executive and by a duly
authorized officer of the Company
-19-
<PAGE> 20
and Parent. No waiver by any Party of any breach by an other Party of any
condition or provision of this Agreement to be performed by such other Party
shall be deemed a waiver of a similar or dissimilar condition or provision at
the same or any prior or subsequent time. Any waiver must be in writing and
signed by the Executive or duly authorized officer of the Company and Parent, as
the case may be.
20. NOTICES.
Any notice required or permitted to be given under this
Agreement shall be in writing and shall be deemed to have been given when
delivered personally or sent by courier, or by certified or registered mail,
postage prepaid, return receipt requested, duly addressed to the Party concerned
at the address indicated below or to such changed address as such Party may
subsequently by similar process give notice of:
If to the Company: Mid Ocean Reinsurance Company Ltd.
Richmond House
12 Par-la-Ville Road
2 Church Street
Hamilton HM EX
Bermuda
If to the Parent: Mid Ocean Limited
Richmond House
12 Par-la-Ville Road
Hamilton HM EX
Bermuda
If to the Executive: Robert J. Newhouse, Jr.
15 Chestnut Place
Short Hills, New Jersey 07078
-20-
<PAGE> 21
21. SEVERABILITY.
In the event that any provision or portion of this Agreement
shall be determined to be invalid or unenforceable for any reason, in whole or
in part, the remaining provisions of this Agreement shall be unaffected thereby
and shall remain in full force and effect to the fullest extent permitted by
law.
22. SURVIVORSHIP.
The respective rights and obligations of the Parties shall
survive any termination of this Agreement to the extent necessary to the
intended preservation of such rights and obligations.
23. REFERENCES.
-21-
<PAGE> 22
In the event of the Executive's death or a judicial
determination of his incompetence, reference in this Agreement to the Executive
shall be deemed, where appropriate, to refer to his estate or other legal
representative.
24. GOVERNING LAW.
This Agreement shall be governed by and construed and
interpreted in accordance with the laws of the State of New York without
reference to the principles of conflict of law.
25. HEADINGS.
The headings of the sections contained in this Agreement are
for convenience only and shall not be deemed to control or affect the meaning or
construction of any provision of this Agreement.
26. COUNTERPARTS.
This Agreement may be executed in one or more counterparts.
-22-
<PAGE> 23
IN WITNESS WHEREOF, the undersigned have executed this
Agreement as of the date first written above.
Mid Ocean Reinsurance Company Ltd.
By: /s/ Michael A. Butt
-------------------------------
MID OCEAN LIMITED
By: /s/ Robert J. Newhouse, Jr.
--------------------------------
--------------------------------
Robert J. Newhouse, Jr.
-23-
<PAGE> 24
EXHIBIT A
CHANGE IN CONTROL
A "Change in Control" shall be deemed to have occurred if:
(i) on or after the date hereof, any person (which, for all purposes
hereof, shall include, without limitation, an individual, sole
proprietorship, partnership, unincorporated association, unincorporated
syndicate, unincorporated organization, trust, body corporate and a
trustee, executor, administrator or other legal representative), or any
group (within the meaning of Section 13(d)(3) of the United States
Securities Exchange Act of 1934, as amended), becomes the beneficial
owner, directly or indirectly, of securities of the Parent
representing, or acquires the right to control or direct, or to acquire
through the conversion or exchange of securities or the exercise of
warrants or other rights to acquire securities ("Beneficial Owner"),
20% or more of the combined voting power of the Parent's then
outstanding securities ("Significant Owner") (excluding any person who
or group which, together with all affiliates and associates of such
person or group, would on the date of this Agreement but for this
clause be a Significant Owner as long as such person or group does not
subsequently become the Beneficial Owner of any additional securities
of the Parent in any manner other than a change in the aggregate number
of the outstanding securities of the Parent, and other than pursuant to
any purchase or acquisition permitted by the first full paragraph of
the second page of that Standstill Agreement dated June 2, 1995 between
Parent and EXEL Limited) and, for the purposes
-24-
<PAGE> 25
hereof, "voting power" means the right to vote for the election of
directors; or
(ii) at any time subsequent to the execution of this contract there shall be
elected or appointed to the Parent Board any director or directors
whose appointment or election by the Parent's shareholders was not
approved by a vote of at least a majority of the directors then still
in office who were either directors at the date hereof or whose
election or appointment or nomination for election was previously so
approved.
The determination to be made pursuant to clause (i) above shall be made on the
basis that (x) all securities beneficially owned by the person or group or over
which control or direction is exercised by the person or group which are
convertible or exchangeable into securities carrying voting rights have been
converted or exchanged and all options, warrants, exchange rights or other
rights which may be exercised to acquire securities beneficially owned by the
person or group or over which control or direction is exercised by the person or
group have been exercised, and (y) no such convertible or exchangeable
securities have been converted or exchanged by any other person and no such
options, warrants, exchange rights or other rights have been exercised by any
other person.
-25-
<PAGE> 26
EXHIBIT B
GOOD REASON
For purposes of this Agreement, "Good Reason" shall mean any
of the following (without Executive's express prior written consent):
(i) (A) The assignment to Executive of duties materially
inconsistent with Executive's position (including
duties, responsibilities, status, titles or offices
as set forth in Section 2 hereof); (B) any
elimination or reduction of Executive's duties or
responsibilities; or (C) any removal of Executive
from or any failure to elect or reelect Executive to
the positions of Chairman of the Company's and
Parent's Boards of Directors, except in connection
with the termination of Executive's employment for
Cause, disability or as a result of Executive's death
or by Executive other than for Good Reason;
(ii) The (A) reduction in Executive's Base Fee from the
level in effect immediately prior to, or (B) payment
of an annual bonus in an amount less than the most
recent annual bonus paid prior to the Change in
Control;
(iii) The failure by the Company or Parent to obtain the
specific assumption of this Agreement by any
successor or assign of Parent or the Company or any
person acquiring substantially all of the Company's
or Parent's assets;
(iv) Any material breach by the Company or Parent of any
provision of this Agreement or any agreements entered
into pursuant thereto;
(v) Requiring Executive to be based at any office or
location other than those described in Section 2(a)
hereof, except for travel reasonably required in the
performance of the Executive's responsibilities; or
(vi) During the twelve month period following a Change in
Control, (A) the
-26-
<PAGE> 27
failure to continue in effect any compensation plan
in which Executive participates at the time of the
Change in Control unless an equitable arrangement
(embodied in an ongoing substitute or alternative
plan providing Executive with substantially similar
benefits) has been made with respect to such plan in
connection with the Change in Control, or the failure
to continue Executive's participation therein on
substantially the same basis, both in terms of the
amount of benefits provided and the level of his
participation relative to other participants, as
existed at the time of the Change in Control; or (B)
the failure to continue to provide Executive with
benefits at least as favorable in the aggregate as
those enjoyed by him under any of the Company's or
Parent's pension, life insurance, medical, health and
accident, disability, deferred compensation or
savings plans in which he was participating at the
time of the Change of Control, the taking of any
action which would directly or indirectly materially
reduce any of such benefits or deprive Executive of
any fringe benefit enjoyed by him at the time of the
Change of Control, or the failure to provide him with
the number of paid vacation days to which he was
entitled on the basis of the Company's practice with
respect to him as in effect at the time of the Change
of Control.
-27-
<PAGE> 1
Exhibit 10.07
EMPLOYMENT AGREEMENT
(amended and restated as of August 19, 1996)
AGREEMENT, made and entered into this 19th day of August, 1996 by
and between Mid Ocean Reinsurance Company Ltd., a Bermuda corporation (the
"COMPANY"), and Henry C. V.
Keeling (the "EXECUTIVE").
WHEREAS, on November 1, 1995, the Company and the Executive
entered into an employment agreement (the "PRIOR AGREEMENT") pursuant to which
the Company agreed to employ the Executive, and the Executive agreed to serve,
as resident Senior Vice President and Chief Underwriting Officer, subject to the
terms and conditions of such Prior Agreement; and
WHEREAS, the Company desires to amend and restate the Prior
Agreement as set forth herein; and
WHEREAS, the Executive wishes to continue such employment under
the terms and conditions of this Agreement;
NOW, THEREFORE, in consideration of the premises and mutual
covenants contained herein and for other good and valuable consideration, the
Company and the Executive (the "PARTIES") agree as follows:
1. EMPLOYMENT.
<PAGE> 2
-2-
The Company hereby employs the Executive, and the Executive
hereby accepts employment with the Company, for the term of this Agreement as
set forth in Section 2, below, in the position with duties and responsibilities
set forth in Section 3, below, and upon such other terms and conditions as are
hereinafter stated.
2. TERM OF EMPLOYMENT.
The term of employment under this Agreement shall commence on
August 19, 1996 (the "DATE OF THE AGREEMENT") and shall continue through the
close of business on the third anniversary of the Date of the Agreement, subject
to earlier termination as provided in Section 9, below. Thereafter such term
shall automatically be renewed for successive one-year periods unless the
Company gives notice in writing to the Executive or the Executive gives notice
in writing to the Company at least 60 days prior to the then scheduled
expiration date that the term is not to so renew.
3. POSITIONS, DUTIES AND RESPONSIBILITIES.
(a) GENERAL. The Executive shall be employed as Resident Chief
Underwriting Officer and Executive Vice President for the Company, with such
duties and responsibilities, including but not limited to underwriting, as may
be assigned to him by the President and Chief Executive Officer or his
successor. In carrying out his duties and responsibilities, the Executive shall
report to the President and Chief Executive Officer. During the term of this
Agreement, the Executive shall devote his full business time to the business and
<PAGE> 3
-3-
affairs of the Company, including any corporation, partnership or other venture
in which the Company owns, directly or indirectly, 50 percent or more of the
stock or, in the case of any entity or venture other than a corporation, 50
percent or more of the equity interest (an "AFFILIATE"), and shall use his best
efforts, skills and abilities to promote the Company's interests.
(b) PERFORMANCE OF SERVICES. The Executive shall be stationed in
Bermuda and his services under this Agreement shall be generally performed in
Bermuda unless the Executive and the Company's Board of Directors (the "BOARD")
mutually agree in writing to the performance of such duties in another location
outside the United States.
(c) PERMITTED ACTIVITIES. Anything herein to the contrary
notwithstanding, nothing shall preclude the Executive from (i) serving on the
boards of directors of a reasonable number of other corporations or the boards
of a reasonable number of trade associations and/or charitable organizations,
(ii) engaging in charitable activities and community affairs and (iii) managing
his personal investments and affairs, provided such activities do not materially
interfere with the proper performance of his duties and responsibilities as
resident chief Underwriting Officer for the Company.
4. BASE SALARY.
The Executive shall be paid a Base Salary by the Company at an
annual rate of US $325,000, payable in accordance with the Company's regular pay
practices. Such Base Salary shall be subject to annual review and may be
increased at the discretion of the Executive
<PAGE> 4
-4-
Committee of the Board.
5. ANNUAL BONUS.
In addition to the Base Salary provided for in Section 4, above,
the Executive may be awarded such annual bonuses as may be determined by the
Executive Committee of the Board, based on whatever incentive programs have been
adopted by the Company for senior executives of the Company, and Parent (as
defined below) as well as the performance of the Executive and the performance
of the Company. Any bonus shall be paid in cash in a lump sum promptly following
determination thereof. In any event, each annual bonus shall be at least
$50,000.
6. STOCK OPTION.
The Executive will be awarded Stock Options ("OPTIONS") under the
1993 Long-Term Incentive and Share Award Plan (the "PLAN") of the Company's
parent, Mid Ocean Limited, a Cayman Islands corporation (the "PARENT")
periodically as appropriate on the terins set forth in the Plan.
7. EMPLOYEE BENEFIT PROGRAMS.
During the term of the Executive's employment under this
Agreement, the Executive shall be entitled to participate in all employee
benefit programs of the Company and Parent as are in effect from time to time
and in which senior executives of the Company and Parent are eligible to
participate.
<PAGE> 5
-5-
8. BUSINESS EXPENSE REIMBURSEMENT AND FRINGE BENEFITS.
(a) EXPENSE REIMBURSEMENT. During the term of the Executive's
employment under this Agreement, the Executive shall be entitled to receive
reimbursement by the Company or Parent for all reasonable out-of-pocket travel
expenses, entertainment expenses and other expenses incurred by him in
performing services under this Agreement, provided that the Executive submits
reasonable documentation with respect to such expenses. This shall include,
without limitation, reimbursement of any such costs for air fare (which the
Executive shall be entitled to on a first-class basis), hotel accommodations and
meals.
(b) FRINGE BENEFITS. During the term of the Executive's
employment under this Agreement, the Executive shall be entitled to participate
in any of the Company's and Parent's executive fringe benefits in accordance
with the terms and conditions of such arrangements as are in effect from time to
time for the Company's and Parent's senior executives. In all events, the
Executive shall be entitled during the period he is employed to the following:
(i) a living allowance of up to US $8,000 per month (to be
prorated for partial months) while the services are generally performed
in Bermuda,
(ii) use of an automobile in Bermuda,
(iii) reimbursement of the cost (including initiation fees and
annual dues) of
<PAGE> 6
-6-
membership in two clubs in Bermuda,
(iv) reimbursement by the Company for the reasonable cost of
financial and tax planning, such reimbursement not to exceed US $10,000
per year; and
(v) air fare for up to three round-trip first-class non-business
trips per year between London and Bermuda by the Executive and such
members of his family as may accompany him (the benefit under this
Section 8(b)(iv) being in addition to any reimbursement of air fare
described in Section 8(a)).
9. TERMINATION OF EMPLOYMENT.
(a) TERMINATION DUE TO DEATH.
In the event the Executive dies during the term of employment,
the Executive's spouse or, if she does not survive him, the estate or other
legal representative of the Executive shall be entitled to receive the
Executive's Base Salary as provided in Section 4, above, at the rate in effect
immediately prior to termination, through the end of the month in which the
Executive dies. In addition to the above, the estate or other legal
representative of the Executive shall be entitled to:
(i) any annual bonus awarded but not yet paid under Section 5,
above,
(ii) a pro rata bonus for the year of death, if the Executive
Committee of the
<PAGE> 7
-7-
Board so determines,
(iii) the rights under any options as provided in Section 6,
above, in accordance with the terms thereof, and
(iv) any other rights and benefits available under employee
compensation or benefit programs of the Company, or their equivalent, as
provided in Section 7, above, and under business expense reimbursement
and fringe benefit programs as described in Section 8, above, determined
in accordance with the applicable terms and provisions of such programs.
(b) TERMINATION DUE TO DISABILITY.
In the event the Executive's employment with the Company is
terminated due to his disability, as determined under the Company's long-term
disability plan, the Executive shall be entitled to:
(i) the Base Salary as provided in Section 4, above, through the
end of the month in which the Executive's employment terminates due to
disability,
(ii) any annual bonus awarded but not yet paid under Section 5,
above,
(iii) the rights under the Options as provided in Section 6,
above, in accordance with the terms thereof,
<PAGE> 8
-8-
(iv) any other rights and benefits available under employee
benefit programs of the Company, or their equivalent, as provided in
Section 7, above, including, without limitation, the terms of any
long-term disability plan, and under the business expense reimbursement
and fringe benefit programs as described in Section 8, above, determined
in accordance with the applicable terms and provisions of such programs.
(c) TERMINATION FOR CAUSE.
(i) The employment of the Executive under this Agreement may be
terminated by the Company for Cause. For this purpose, "CAUSE" shall
mean:
(A) conviction of the Executive of a felony involving
moral turpitude, or
(B) the Executive, in carrying out his duties for the
Company under this Agreement, has been guilty of (I) gross
neglect or (11) gross misconduct.
(ii) In the event of a termination for Cause under Section
9(c)(i), above, the Executive shall be entitled only to:
(A) Base Salary as provided in Section 4, above, at the
rate in effect at the time of his termination of employment for
Cause, through the date on which termination for Cause occurs,
<PAGE> 9
-9-
(B) the rights, if any, under the Options as provided in
Section 6, above, determined in accordance with the terms
thereof, and (C) any other rights and benefits, if any, available
under employee benefit programs of the Company, or their
equivalent, as provided in Section 7, above, and under the
business expense reimbursement and fringe benefit programs as
described in Section 8, above, determined in accordance with the
applicable terms and provisions of such programs.
(d) TERMINATION WITHOUT CAUSE.
(i) Anything in this Agreement to the contrary notwithstanding,
the Executive's employment may be terminated without Cause as provided
in this Section 9(d). A termination due to disability, as described in
Section 9(b), above, or a termination for Cause, as described in Section
9(c), above, shall not be deemed a termination without Cause under this
Section 9(d).
(ii) In the event the Executive's employment is terminated
without Cause (x) prior to a "CHANGE IN CONTROL" of Parent (as defined
in Exhibit A hereto) or (y) following the first anniversary of a Change
of Control, the Executive shall be entitled to:
(A) Base Salary as provided in Section 4, above, at the
rate in effect in accordance with Section 4, above, immediately
prior to such termination, payable in equal monthly installments
for a period of 12 months following the date of such
<PAGE> 10
-10-
termination,
(B) any annual bonus awarded but not yet paid under
Section 5, above,
(C) the rights under any Options as provided in Section 6,
above, in accordance with the terms thereof,
(D) continued coverage under the employee benefit programs
of the Company and Parent, or their equivalent, as provided in
Section 7, above, in which the Executive was participating at the
time of his termination of employment for the period of salary
continuation or, if longer, for the period provided in such
programs; provided, however, that any such continued coverage
shall be offset by comparable coverage provided to the Executive
in connection with subsequent full-time employment and, to the
extent the Company or Parent is unable to continue such coverage,
the Company or Parent shall provide the Executive with
economically equivalent benefits determined on an after-tax
basis, and
(E) any other rights and benefits available under employee
benefit programs of the Company or Parent, or their equivalent,
as provided in Section 7, above, and under the business expense
reimbursement and fringe benefit programs as described in Section
8, above, determined in accordance with the applicable terms and
provisions of such programs.
<PAGE> 11
-11-
(iii) In the event the Executive's employment is terminated by
the Company without Cause within the 12 month period following a Change
in Control (the "POST-CHANGE PERIOD"), or the Executive terminates his
employment with the Company for "GOOD REASON" (as defined in Exhibit B
hereto) during the Post-Change Period, the Executive shall be entitled
to:
(A) Base Salary as provided in Section 4, above, at the
rate in effect in accordance with Section 4, above, immediately
prior to such termination, payable in equal monthly installments
for a period of 24 months following the date of such termination,
(B) an amount equal to two times the largest annual bonus
awarded to the Executive in the three year period prior to the
year in which a Change of Control occurs, paid in equal monthly
installments for the period of Base Salary continuation,
(C) an amount equal to the annual bonus that would have
been awarded to Executive in respect of the year in which the
Change in Control occurs, multiplied by a fraction, the numerator
of which is the number of months or fraction thereof in which the
Executive was employed by the Company in such year, and the
denominator of which is 12.
<PAGE> 12
-12-
(D) the rights under any Options as provided in Section 6,
above, in accordance with the terms thereof,
(E) continued coverage under the employee benefit programs
of the Company or Parent, or their equivalent, as provided in
Section 7, above, in which the Executive was participating at the
time of his termination of employment for the period of Base
Salary continuation or, if longer, for the period provided in
such programs; provided, however, that any such continued
coverage shall be offset by comparable coverage provided to the
Executive in connection with subsequent full-time employment and,
to the extent the Company or Parent is unable to continue such
coverage, the Company or Parent shall provide the Executive with
economically equivalent benefits determined on an after-tax
basis, and
(F) any other rights and benefits available under employee
benefit programs of the Company or Parent, or their equivalent,
as provided in Section 7, above, and under the business expense
reimbursement and fringe benefit programs as described in Section
8, above, determined in accordance with the applicable terms and
provisions of such programs.
(iv) If, at any time during the term of the Executive's
employment hereunder, the Executive fails to be appointed (or
re-appointed, as appropriate) as resident Chief
<PAGE> 13
-13-
Underwriting Officer for the Company, the Executive shall have the right
to terminate his employment and such termination, if prior to a Change
in Control, shall be deemed a termination by the Company without Cause
under Section 9(d)(ii), above, or, if following a Change in Control,
shall be deemed a termination by the Company without Cause under Section
9(d)(ii), above, provided the Executive shall have given the Company
written notice of his decision and shall not within 10 business days
thereafter have been reinstated to the relevant position.
(e) VOLUNTARY TERMINATION BY THE EXECUTIVE.
The Executive may voluntarily terminate his employment prior to
the expiration of the term of this Agreement. Such termination shall constitute
a voluntary termination and, except as provided in Section 9(d)(iii), above, in
such event the Executive shall be limited to the same rights and benefits as
applicable to a termination by the Company or Parent for Cause as provided in
Section 9(c), above. A voluntary termination under this Section 9(e) shall not
be deemed a breach of this Agreement. A termination of the Executive's
employment due to disability as described in Section 9(b), above, termination by
the Executive which the Executive is entitled to treat as a termination by the
Company or Parent pursuant to Section 9(d), above, or a termination by Executive
under Section 9(d)(iii), above, shall not be deemed a voluntary termination
within the meaning of this Section 9(c).
10. NO MITIGATION; NO OFFSET.
<PAGE> 14
-14-
In the event of any termination of employment under Section 9
above, the Executive shall be under no obligation to seek other employment, and
there shall be no offset against amounts due the Executive under this Agreement
on account of any remuneration attributable to any subsequent employment that he
may obtain.
11. NON-COMPETITION AND NON-SOLICITATION.
(a) NON-COMPETITION. During the term of his employment and for a
period of 12 months thereafter, the Executive shall not engage in any activities
in Bermuda if such activities involve business that is competitive with that
being conducted by the Company or Parent. For purposes of this Section 11, the
Company or Parent shall be deemed to include any entity that was an Affiliate of
the Company or Parent during the period of the Executive's employment as well as
the time in question.
<PAGE> 15
-15-
(b) NON-SOLICITATION. During the term of the Executive's
employment under this Agreement, and for a period of 12 months following
termination of employment, the Executive shall not encourage any other employee
of the Company or Parent to leave the employ of the Company or Parent.
12. CONFIDENTIAL INFORMATION.
The Executive covenants that he shall not, without the prior
written consent of the Board or a person authorized by the Board, disclose to
any person, other than an employee of the Company or Parent or other person to
whom disclosure is necessary to the performance by the Executive of his duties
in the employ of the Company or Parent, any confidential proprietary information
about the Company Parent or an Affiliate or their respective businesses, unless
and until such information has become known to the public generally (other than
as a result of unauthorized disclosure by the Executive) or unless he is
required to disclose such information by a court or by a governmental body with
apparent authority to require such disclosure. The foregoing covenant by the
Executive shall be without limitation as to time and geographic application.
13. WITHHOLDING.
Anything in this Agreement to the contrary notwithstanding, all
payments required to be made by the Company or Parent hereunder to the Executive
shall be subject to withholding of such amounts relating to taxes as the Company
or Parent may reasonably determine it should
<PAGE> 16
-16-
withhold pursuant to any applicable law or regulation. In lieu of withholding
such amounts, in whole or in part, the Company or Parent may, in its sole
discretion, accept any other provision for payment of taxes as required by law,
provided it is satisfied that all requirements of law affecting its
responsibilities to withhold such taxes have been satisfied.
14. ENTIRE AGREEMENT.
This Agreement, together with the Exhibits, contains the entire
agreement between the Parties concerning the subject matter hereof and
supersedes all prior agreements, understandings, discussions, negotiations and
undertakings, whether written or oral, between the Company and the Executive
with respect thereto.
15. ASSIGNABILITY; BINDING NATURE.
<PAGE> 17
-17-
This Agreement shall be binding upon and inure to the benefit of
the Parties and their respective successors, heirs and assigns. No rights or
obligations of the Executive under this Agreement may be assigned or transferred
by the Executive other than his rights to compensation and benefits hereunder,
which may be transferred by will or operation of law subject to the limitations
of this Agreement. No rights or obligations of the Company under this Agreement
may be assigned or transferred by the Company except that such rights or
obligations may be assigned or transferred pursuant to a merger or consolidation
in which the Company is not the continuing entity, or the sale or liquidation of
all or substantially all of the assets of the Company, provided that the
assignee or transferee is the successor to all or substantially all of the
assets of the Company and such assignee or transferee assumes the liabilities,
obligations and duties of the Company, as contained in this Agreement, either
contractually or as a matter of law.
16. INDEMNIFICATION.
The Executive shall be provided indemnification by the Company to
the maximum extent permitted under the laws of Bermuda and the Memorandum of
Association and By-Laws of the Company. In addition, he shall be covered by a
directors' and officers' liability policy with coverage for him to the extent of
US $50,000,000.
17. SETTLEMENT OF DISPUTES.
<PAGE> 18
-18-
Any dispute between the Parties arising from or relating to the
terms of this Agreement or the Executive's employment with the Company shall be
resolved by arbitration held in New York City in accordance with the rules of
the American Arbitration Association. All costs associated with any arbitration,
including all legal expenses, for both Parties shall be borne by the Company.
18. AMENDMENT OR WAIVER.
No provision in this Agreement may be amended unless such
amendment is agreed to in writing, signed by the Executive and by a duly
authorized officer of the Company. No waiver by either Party of any breach by
the other Party of any condition or provision of this Agreement to be performed
by such other Party shall be deemed a waiver of a similar or dissimilar
condition or provision at the same or any prior or subsequent time. Any waiver
must be in writing and signed by the Executive or a duly authorized officer of
the Company, as the case may be.
19. NOTICES.
Any notices required or permitted to be given under this
Agreement shall be in writing and shall be deemed to have been given when
delivered personally or sent by courier, or by certified or registered mail,
postage prepaid, return receipt requested, duly addressed to the Party concerned
at the address indicated below or to such changed address as such Party may
subsequently by similar process give notice of:
<PAGE> 19
-19-
If to the Company: Mid Ocean Reinsurance Company, Ltd.
Richmond House,
12 Par-la-Ville Road
Hamilton, HM EX
Bermuda
If to the Parent: Mid Ocean Limited
Richmond House,
12 Par-la-Ville Road
Hamilton, HM EX
Bermuda
If to the Executive: Henry C.V. Keeling
Bredon House
3 Nantucket Lane
Smiths Parish FL 05
Bermuda
20. SEVERABILITY.
In the event that any provision or portion of this Agreement
shall be determined to be invalid or unenforceable for any reason, in whole or
in part, the remaining provisions of this Agreement shall be unaffected thereby
and shall remain in full force and effect to the fullest extent permitted by
law.
21. SURVIVORSHIP.
<PAGE> 20
-20-
The respective rights and obligations of the Parties shall
survive any termination of this Agreement to the extent necessary to the
intended preservation of such rights and obligations.
22. REFERENCES.
In the event of the Executive's death or a judicial determination
of his incompetence, reference in this Agreement to the Executive shall be
deemed, where appropriate, to refer to his estate or other legal representative.
23. GOVERNING LAW.
This Agreement shall be governed by and construed and interpreted
in accordance with the laws of the State of New York without reference to the
principles of conflict of laws.
24. HEADINGS.
The headings of the sections contained in this Agreement are for
convenience only and shall not be deemed to control of affect the meaning or
construction of any provision of this Agreement.
25. COUNTERPARTS.
This Agreement may be executed in one or more counterparts.
<PAGE> 21
-21-
IN WITNESS WHEREOF, the undersigned have executed this Agreement
as of the date first written above.
MID OCEAN REINSURANCE COMPANY LTD.
By: /s/ Michael A. Butt
---------------------------------
MID OCEAN LIMITED
By: /s/ Henry C. V. Keeling
---------------------------------
---------------------------------
Henry C. V. Keeling
<PAGE> 22
EXHIBIT A
CHANGE IN CONTROL
A "Change in Control" shall be deemed to have occurred if:
(i) on or after the date hereof, any person (which, for all purposes hereof,
shall include, without limitation, an individual, sole proprietorship,
partnership, unincorporated association, unincorporated syndicate,
unincorporated organization, trust, body corporate and a trustee,
executor, administrator or other legal representative), or any group
(within the meaning of Section 13(d)(3) of the United States Securities
Exchange Act of 1934, as amended), becomes the beneficial owner,
directly or indirectly, of securities of the Parent representing, or
acquires the right to control or direct, or to acquire through the
conversion or exchange of securities or the exercise of warrants or
other rights to acquire securities ("Beneficial Owner"), 20% or more of
the combined voting power of the Parent's then outstanding securities
("Significant Owner") (excluding any person who or group which, together
with all affiliates and associates of such person or group, would on the
date of this Agreement but for this clause be a Significant Owner as
long as such person or group does not subsequently become the Beneficial
Owner of any additional securities of the Parent in any manner other
than a change in the aggregate number of the outstanding securities of
the Parent, and other than pursuant to any purchase or acquisition
permitted by the first Full paragraph of the second page of that
Standstill Agreement dated June 2, 1995 between Parent and EXEL Limited)
and, for the purposes hereof "voting power" means the right to vote for
the
A-1
<PAGE> 23
election of directors; or
(ii) at any time subsequent to the execution of this contract there shall be
elected or appointed to the Parent's Board of Directors (the "Parent
Board") any director or directors whose appointment or election by the
Parent's shareholders was not approved by a vote of at least a majority
of the directors then still in office who were either directors at the
date hereof or whose election or appointment or nomination for election
was previously so approved.
The determination to be made pursuant to clause (i) above shall be made on the
basis that (x) all securities beneficially owned by the person or group or over
which control or direction is exercised by the person or group which are
convertible or exchangeable into securities carrying voting rights have been
converted or exchanged and all options, warrants, exchange rights or other
rights which may be exercised to acquire securities beneficially owned by the
person or group or over which control or direction is exercised by the person or
group have been exercised, and (y) no such convertible or exchangeable
securities have been converted or exchanged by any other person and no such
options, warrants, exchange rights or other rights have been exercised by any
other person.
A-2
<PAGE> 24
EXHIBIT B
GOOD REASON
For purposes of this Agreement, "Good Reason" shall mean any of
the following (without Executive's express prior written consent):
(i) (A) The assignment to Executive of duties materially inconsistent
with Executive's position (including duties, responsibilities,
status, titles or offices as set forth in Section 2 hereof); or
(B) any elimination or reduction of Executive's duties or
responsibilities except in connection with the termination of
Executive's employment for Cause, disability or as a result of
Executive's death or by Executive other than for Good Reason;
(ii) The (A) reduction in Executive's Base Salary from the level in
effect immediately prior to, or (B) payment of an annual bonus in
an amount less than the most recent annual bonus paid prior to
the Change in Control;
(iii) The failure by the Company or Parent to obtain the specific
assumption of this Agreement by any successor or assign of Parent
or the Company or any person acquiring substantially all of the
Company's or Parent's assets;
(iv) Any material breach by the Company or Parent of any provision of
this Agreement or any agreements entered into pursuant thereto;
(v) Requiring Executive to be based at any office or location other
than those described in Section 2(a) hereof, except for travel
reasonably required in the performance of the Executive's
responsibilities; or
(vi) During the twelve month period following a Change in Control, (A)
the failure to continue in effect any compensation plan in which
Executive participates at the time of the Change in Control
unless an equitable arrangement (embodied in an ongoing
substitute or alternative plan providing Executive with
substantially similar benefits) has been made with respect to
such plan in connection with the Change in Control, or the
failure to continue Executive's participation therein on
substantially the same basis, both in terms of the amount of
benefits provided and the level of his participation relative to
other participants, as existed at the time of the Change in
Control; or (B) the failure to continue to provide Executive with
benefits at least as favorable in the aggregate as those enjoyed
by
A-3
<PAGE> 25
him under any of the Company's or Parent's pension, life
insurance, medical, health and accident, disability, deferred
compensation or savings plans in which he was participating at
the time of the Change of Control, the taking of any action which
would directly or indirectly materially reduce any of such
benefits or deprive Executive of any fringe benefit enjoyed by
him at the time of the Change of Control, or the failure to
provide him with the number of paid vacation days to which he was
entitled on the basis of the Company's practice with respect to
him as in effect at the time of the Change of Control.
A-4
<PAGE> 1
Exhibit 10.08
EMPLOYMENT AGREEMENT
(amended and restated as of August 19, 1996)
AGREEMENT, made and entered into this 19th day of August, 1996
by and between Mid Ocean Reinsurance Company Ltd., a Bermuda corporation (the
"COMPANY"), Mid Ocean Limited, a Cayman Islands corporation (the "PARENT") and
Charles F. Hays (the "EXECUTIVE").
WHEREAS, on November 1, 1993, the company and the Executive
entered into an employment agreement (the "PRIOR AGREEMENT") pursuant to which
the Parent agreed to employ the Executive, and the Executive agreed to serve, as
Chief Financial and Administrative Officer, subject to the terms and conditions
of the Prior Agreement; and
WHEREAS, the Parent desires to amend and restate the Prior
Agreement as set forth herein and the Company desires to become a party;
WHEREAS, the Executive wishes to continue such employment with
the Parent under the terms and conditions of this Agreement;
<PAGE> 2
NOW, THEREFORE, in consideration of the premises and mutual
covenants contained herein and for other good and valuable consideration, the
Company, the Parent and the Executive (the "PARTIES") agree as follows:
1. EMPLOYMENT.
The Company and Parent hereby employ the Executive, and the
Executive hereby accepts employment with the Company, for the term of this
Agreement as set forth in Section 2, below, in the position and with duties and
responsibilities set forth in Section 3, below, and upon such other terms and
conditions as are hereinafter stated.
2. TERM OF EMPLOYMENT.
The term of employment under this Agreement shall commence on
August 19, 1996 (the "DATE OF THE AGREEMENT") and shall continue through the
close of business on the third anniversary of the Date of the Agreement, subject
to earlier termination as provided in Section 9, below. Thereafter such term
shall automatically be renewed for successive one-year periods unless the
Company and Parent give notice in writing to the Executive or the Executive
gives notice in writing to the Company and Parent at least 60 days prior to the
then scheduled expiration date that the term is not to so renew.
3. POSITIONS, DUTIES AND RESPONSIBILITIES.
(a) GENERAL. The Executive shall be employed as Chief
Financial and Administrative Officer and Senior Vice President of the Parent,
and Executive Vice President of the Company with, in each case, such duties and
responsibilities, including but not limited to
-2-
<PAGE> 3
financial and administrative duties and responsibilities, as may be assigned to
him by the President and Chief Executive Officer of the Parent or the Company,
as the case may be, (currently, Michael A. Butt) or his successor. In carrying
out his duties and responsibilities, the Executive shall report to Mr. Butt or
his successor. During the term of this Agreement, the Executive shall devote his
full business time to the business and affairs of the Company and Parent,
including any corporation, partnership or other venture in which the Company or
Parent owns, directly or indirectly, 50 percent or more of the stock or, in the
case of any entity or venture other than a corporation, 50 percent or more of
the equity interest (an "AFFILIATE"), and shall use his best efforts, skills and
abilities to promote the Company's and Parent's interests.
(b) PERFORMANCE OF SERVICES. The Executive shall be stationed
in Bermuda and his services under this Agreement shall be generally performed in
Bermuda unless the Executive and the Parent's Board of Directors (the "PARENT
BOARD") and the Company's Board of Directors (the "BOARD") mutually agree in
writing to the performance of such duties in another location outside the United
States.
-3-
<PAGE> 4
(c) PERMITTED ACTIVITIES. Anything herein to the contrary
notwithstanding, nothing shall preclude the Executive from (i) serving on the
boards of directors of a reasonable number of other corporations or the boards
of a reasonable number of trade associations and/or charitable organizations,
(ii) engaging in charitable activities and community affairs and (iii) managing
his personal investments and affairs, provided such activities do not materially
interfere with the proper performance of his duties and responsibilities as
resident Underwriter for and Chief Financial and Administrative Officer of the
Parent and Executive Vice President of the Company.
4. BASE SALARY.
The Executive shall be paid a Base Salary by the Company at an
annual rate of US $310,000, payable in accordance with the Company's regular pay
practices. Such Base Salary shall be subject to annual review and may be
increased at the discretion of the Executive Committee of the Board.
5. ANNUAL BONUS.
In addition to the Base Salary provided for in Section 4,
above, the Executive may be awarded such annual bonuses as may be determined by
the Executive Committee of the Board, based on whatever incentive programs have
been adopted by the Company for senior executives of the Company, as well as the
performance of the Executive and the performance of the Company. Any bonus shall
be paid in cash in a lump sum promptly following determination thereof.
-4-
<PAGE> 5
6. STOCK OPTION.
The Parent has granted the Executive a 10-year option under
the Parent's 1993 Long-Term Incentive and Share Award Plan (the "PLAN") to
purchase shares of the Common Stock of the Parent referred to in the Plan at the
purchase price referred to therein (the "OPTION"). The Option shall vest and
become exercisable on a cumulative basis as to 20% of the shares subject to the
Option on the first anniversary of the date of the Agreement and an additional
20% of such shares on each anniversary thereafter until it is fully exercisable
and shall be subject to the terms and conditions of the Plan. The Option and any
other options to purchase equities securities of the Parent granted to Executive
under the Plan or otherwise shall be 100% exercisable upon a "CHANGE OF CONTROL"
(as defined in Exhibit A hereto).
7. EMPLOYEE BENEFIT PROGRAM.
During the term of the Executive's employment under this
Agreement, the Executive shall be entitled to participate in all employee
benefit programs of the Company and Parent as are in effect from time to time
and in which senior executives of the Company and Parent are eligible to
participate. It is expected that such programs will include standard
arrangements for medical, hospitalization, life, travel and accident insurance,
disability protection and retirement benefits. Coverage may, in the discretion
of the Company and Parent, be provided through purchase of separate insurance
contracts or through self-insurance.
-5-
<PAGE> 6
8. BUSINESS EXPENSE REIMBURSEMENT AND FRINGE BENEFITS.
(a) EXPENSE REIMBURSEMENT. During the term of the Executive's
employment under this Agreement, the Executive shall be entitled to receive
reimbursement by the Company or Parent for all reasonable out-of-pocket travel
expenses, entertainment expenses and other expenses incurred by him in
performing services under this Agreement, provided that the Executive submits
reasonable documentation with respect to such expenses. This shall include,
without limitation, reimbursements of any such costs for air fare (which the
Executive shall be entitled to on a first-class basis), hotel accommodations and
meals.
(b) FRINGE BENEFITS. During the term of the Executive's
employment under this Agreement, the Executive shall be entitled to participate
in any of the Company's or Parent's executive fringe benefits in accordance with
the terms and conditions of such arrangements as are in effect from time to time
for the Company's or Parent's senior executives. In all events, the Executive
shall be entitled during the period he is employed to the following:
(i) a living allowance of up to US $8,000 per month (to be
prorated for partial months) while the services are generally performed
in Bermuda,
(ii) use of an automobile in Bermuda,
(iii) reimbursement of the cost (including initiation fees and
annual dues) of membership in two clubs in Bermuda,
(iv) reimbursement by the Company or Parent for the reasonable
cost of financial and tax planning, such reimbursement not to exceed US
$10,000 per year; and
-6-
<PAGE> 7
(v) air fare for up to three round-trip first-class
non-business trips per year between New York and Bermuda by the
Executive and such members of his family as may accompany him (the
benefit under this Section 8(b)(iv) being in addition to any
reimbursement of air fare described in Section 8(a)).
9. TERMINATION OF EMPLOYMENT.
(a) TERMINATION DUE TO DEATH. In the event the Executive dies
during the term of employment, the Executive's spouse or, if she does not
survive him, the estate or other legal representative of the Executive shall be
entitled to receive the Executive's Base Salary as provided in Section 4, above,
at the rate in effect immediately prior to termination, through the end of the
month in which the Executive dies. In addition to the above, the estate or other
legal representative of the Executive shall be entitled to:
(i) any annual bonus awarded but not yet paid under Section 5,
above,
(ii) a pro rata bonus for the year of death, if the Executive
Committee of the Board so determines,
(iii) the rights under the Option and all other options as
provided in Section 6, above, in accordance with the terms thereof, and
(iv) any other rights and benefits available under employee
compensation or benefit programs of the Company and Parent, or their
equivalent, as provided in Section 7, above, and under business expense
reimbursement and fringe benefit programs as described in Section 8,
above, determined in accordance with the applicable terms and
-7-
<PAGE> 8
provisions of such programs.
(b) TERMINATION DUE TO DISABILITY. In the event the
Executive's employment with the Company and Parent is terminated due to his
disability, as determined under the Company's or Parent's long-term disability
plan, the Executive shall be entitled to:
(i) the Base Salary as provided in Section 4, above, through
the end of the month in which the Executive's employment terminates due
to disability,
(ii) any annual bonus awarded but not yet paid under Section
5, above,
(iii) the rights under the Option and all other options as
provided in Section 6, above, in accordance with the terms thereof,
(iv) any other rights and benefits available under employee
benefit programs of the Company and Parent, or their equivalent, as
provided in Section 7, above, including, without limitation, the terms
of any long-term disability plan, and under the business expense
reimbursement and fringe benefit programs as described in Section 8,
above, determined in accordance with the applicable terms and
provisions such programs.
(c) TERMINATION FOR CAUSE.
(i) The employment of the Executive under this Agreement may
be terminated by the Parent or the Company for Cause. For this purpose,
"CAUSE" shall mean:
-8-
<PAGE> 9
(A) conviction of the Executive of a felony involving
moral turpitude, or
(B) the Executive, in carrying out his duties for the
Company or Parent under this Agreement, has been guilty of (I)
gross neglect or (II) gross misconduct.
(ii) In the event of a termination for Cause under Section
9(c)(i) above, the Executive shall be entitled only to:
(A) Base Salary as provided in Section 4, above, at
the rate in effect at the time of his termination of
employment for Cause, through the date on which termination
for Cause occurs,
(B) the rights, if any, under the Option and all
other options as provided in Section 6, above, or otherwise,
determined in accordance with the terms thereof, and
(C) any other rights and benefits, if any, available
under employee benefit program of the Company and Parent, or
their equivalent, as provided in Section 7, above, and under
the business expense reimbursement and fringe benefit programs
as described in Section 8, above, determined in accordance
with the applicable terms and provisions of such programs.
(d) TERMINATION WITHOUT CAUSE.
-9-
<PAGE> 10
(i) Anything in this Agreement to the contrary
notwithstanding, the Executive's employment may be terminated without
Cause as provided in this Section 9(d). A termination due to
disability, as described in Section 9(b), above, or a termination for
Cause, as described in Section 9(c), above, shall not be deemed a
termination without Cause under this Section 9(d).
(ii) In the event the Executive's employment is terminated
without Cause prior to Change in Control or following the first
anniversary of a Change in Control, the Executive shall be entitled to:
(A) Base Salary as provided in Section 4, above, at
the rate in effect in accordance with Section 4, above,
immediately prior to such termination, payable in equal
monthly installments for a period of 12 months following the
date of such termination,
(B) any annual bonus awarded but not yet paid under
Section 5, above,
(C) the rights under the option and all other options
as provided in Section 6, above, determined in accordance with
the terms thereof,
(D) continued coverage under the employee benefit
programs of the Company, or their equivalent, as provided in
Section 7, above, in which the Executive was participating at
the time of his termination of employment for the period of
salary continuation or, if longer, for the period provided in
such programs; provided, however, that any such continued
coverage shall be offset by
-10-
<PAGE> 11
comparable coverage provided to the Executive in connection
with subsequent full-time employment and, to the extent the
Company is unable to continue such coverage, the Company shall
provide the Executive with economically equivalent benefits
determined on an after-tax basis, and
(E) any other rights and benefits available under
employee benefit programs of the Company and Parent, or their
equivalent, as provided in Section 7, above, and under the
business expense reimbursement and fringe benefit programs as
described in Section 8, above, determined in accordance with
the applicable terms and provisions of such programs.
(iii) In the event the Executive's employment is terminated by
the Company or Parent without Cause within the 12-month period
following a Change in Control (the "POST-CHANGE PERIOD") or the
Executive terminates his employment for "GOOD REASON" (as defined in
Exhibit B hereto) during the Post-Change Period, the Executive shall be
entitled to:
(A) Base Salary as provided in Section 4, above, at
the rate in effect in accordance with Section 4, above,
immediately prior to such termination, payable in equal
monthly installments for a period of 24 months following the
date of such termination,
(B) an amount equal to two times the largest annual
bonus awarded to the Executive in the three-year period prior
to the year in which a Change in Control occurs, paid in equal
monthly installments for the period of Base Salary
-11-
<PAGE> 12
continuation.
(C) an amount equal to the annual bonus that would
have been awarded to Executive in respect of the year in which
the Change in Control occurs, multiplied by a fraction, the
numerator of which is the number of months or fraction thereof
in which the Executive was employed by the Company in such
year, and the denominator of which is 12.
(D) the rights under the Option, and all other
options as provided in Section 6, above, determined in
accordance with the terms thereof,
(E) continued coverage under the employee benefit
programs of the Company and Parent, or their equivalent, as
provided in Section 7, above, in which the Executive was
participating at the time of his termination of employment for
the period of Base Salary continuation or, if longer, for the
period provided in such programs; provided, however, that any
such continued coverage shall be offset by comparable coverage
provided to the Executive in connection with subsequent
full-time employment and, to the extent the Company and Parent
are unable to continue such coverage, the Company and Parent
shall provide the Executive with economically equivalent
benefits determined on an after-tax basis,
(F) any other rights and benefits available under
employee benefit programs of the Company and Parent, or their
equivalent, as provided in Section 7, above, and under the
business expense reimbursement and fringe benefit programs as
described in Section 8, above, determined in accordance with
the
-12-
<PAGE> 13
applicable terms and provisions of such programs; and
(G) full and immediate vesting under the Company's
pension plans as of the date of termination, to the extent
permitted by applicable law.
(iv) If, at any time during the term of the Executive's
employment hereunder, the Executive fails to be appointed (or
re-appointed, as appropriate) as Chief Financial and Administrative
Officer and Senior Vice President of the Parent and Executive Vice
President of the Company, the Executive shall have the right to
terminate his employment and such termination, if prior to a Change in
Control, shall be deemed a termination by the Company and Parent
without Cause under Section 9(d)(H), above, or, if following a Change
in Control, shall be deemed a termination by the Company and Parent
without Cause under Section 9(d)(iii), above, provided that the
Executive in either case shall have given the Company and Parent
written notice of his decision and shall not within 10 business days
thereafter have been reinstated to the relevant positions.
(e) VOLUNTARY TERMINATION BY THE EXECUTIVE. The Executive may
voluntarily terminate his employment prior to the expiration of the term of this
Agreement. Such termination shall constitute a voluntary termination and, except
as provided in Section 9(d)(iii), above, in such event the Executive shall be
limited to the same rights and benefits as applicable to a termination by the
Company or Parent for Cause as provided in Section 9(c), above. A voluntary
termination under this Section 9(e) shall not be deemed a breach of this
Agreement. A termination of the Executive's employment due to disability as
described in Section 9(b), above, a termination by the Executive which the
Executive is entitled to treat as a termination by the
-13-
<PAGE> 14
Company or Parent pursuant to Section 9(d), above, or a termination by the
Executive under Section 9(d)(iii), above, shall not be deemed a voluntary
termination within the meaning of this Section 9(e).
10. NO MITIGATION; NO OFFSET.
In the event of any termination of employment under Section 9,
above, the Executive shall be under no obligation to seek other employment, and
there shall be no offset against amounts due the Executive under this Agreement
on account of any remuneration attributable to any subsequent employment that he
may obtain.
11. NONCOMPETITION AND NONSOLICITATIAN.
(a) NONCOMPETITION. During the term of his employment and for
a period of 24 months thereafter, the Executive shall not engage in any
activities in Bermuda if such activities involve business that is competitive
with that being conducted by the Company or Parent. For purposes of this Section
11, the Company or Parent shall be deemed to include any entity that was an
Affiliate of the Company or Parent during the period of the Executive's
employment as well as the time in question.
(b) NONSOLICITATION. During the term of the Executive's
employment under this Agreement, and for a period of 24 months following
termination of employment, the Executive shall not encourage any other employee
of the Company or Parent to leave the employ of the Company or Parent.
-14-
<PAGE> 15
12. CONFIDENTIAL INFORMATION.
The Executive covenants that he shall not, without the prior
written consent of the Board or Parent Board or a person authorized by the Board
or Parent Board, disclose to any person, other than an employee of the Company
or Parent Board or other person to whom disclosure is necessary to the
performance by the Executive of his duties in the employ of the Company or
Parent Board, any confidential proprietary information about the Company or an
Affiliate or their respective businesses, unless and until such information has
become known to the public generally (other than as a result of unauthorized
disclosure by the Executive) or unless he is required to disclose such
information by a court or by a governmental body with apparent authority to
require such disclosure. The foregoing covenant by the Executive shall be
without limitation as to time and geographic application.
13. WITHHOLDING.
Anything in this Agreement to the contrary notwithstanding,
all payments required to be made by the Company or Parent hereunder to the
Executive shall be subject to withholding of such amounts relating to taxes as
the Company or Parent may reasonably determine it should withhold pursuant to
any applicable law or regulation. In lieu of withholding such amounts, in whole
or in part, the Company or Parent may, in its sole discretion, accept other
provision for payment of taxes as required by law, provided it is satisfied that
all requirements of law affecting its responsibilities to withhold such taxes
have been satisfied.
-15-
<PAGE> 16
14. ENTIRE AGREEMENT.
This Agreement, together with the Exhibits, contains the
entire agreement between the Parties concerning the subject matter hereof and
supersedes all prior agreements, understandings, discussions, negotiations and
undertakings, whether written or oral, between the Company, the Parent and the
Executive with respect thereto.
15. ASSIGNABILITY; BINDING NATURE.
This Agreement shall be binding upon and inure to the benefit
of the Parties and their respective successors, heirs and assigns. No rights or
obligations of the Executive under this Agreement may be assigned or transferred
by the Executive other than his rights to compensation and benefits hereunder,
which may be transferred by will or operation of law subject to the limitations
of this Agreement. No rights or obligations of the Company or Parent under this
Agreement may be assigned or transferred by the Company or Parent except that
such rights or obligations may be assigned or transferred pursuant to a merger
or consolidation in which the Company or Parent is not the continuing entity, or
the sale or liquidation of all or substantially all of the assets of the Company
or Parent, provided that the assignee or transferee is the successor to all or
substantially all of the assets of the Company or Parent and such assignee or
transferee assumes the liabilities, obligations and duties of the Company or
Parent, as contained in this Agreement, either contractually or as a matter of
law.
16. INDEMNIFICATION.
-16-
<PAGE> 17
The Executive shall be provided indemnification by each of the
Company and Parent to the maximum extent permitted under the laws of their
respective jurisdictions of incorporation and their respective charter
documents. In addition, he shall be covered by a directors' and officers'
liability policy with coverage for him to the extent of US $50,000,000.
17. EXCISE TAX ADJUSTMENT PAYMENTS
(a) PAYMENTS. In the event that it is determined that any
payment or distribution by the Company or Parent to or for the benefit of
Executive, whether paid or payable or distributed or distributable pursuant to
the terms of this Agreement or otherwise, other than any payment pursuant to
this Section 17(a), (a "PAYMENT"), would be subject to the excise tax imposed by
Section 4999 of the Internal Revenue Code of 1986, as amended (the "CODE") or
any interest or penalties with respect to such excise tax (such excise tax,
together with any such interest and penalties, are hereinafter collectively
referred to as the "EXCISE TAX"), then Executive shall be entitled to receive
from the Company or Parent, within 15 days following the determination described
in Section 17(b), below, an additional payment ("EXCISE TAX ADJUSTMENT PAYMENT")
in an amount such that after payment by Executive of all applicable Federal,
state and local taxes (computed at the maximum marginal rates and including any
interest or penalties imposed with respect to such taxes), including any Excise
Tax, imposed upon the Excise Tax Adjustment Payment, Executive retains an amount
of the Excise Tax Adjustment Payment equal to the Excise Tax imposed upon the
Payments.
-17-
<PAGE> 18
(b) DETERMINATIONS. All determinations required to be made
under this Section 17, including whether an Excise Tax Adjustment Payment is
required and the amount of such Excise Tax Adjustment Payment, shall be made by
KPMG Peat Marwick LLP, or such other national accounting firm as the Company or
Parent may designate prior to a Change of Control, which shall provide detailed
supporting calculations to the Company and the Executive within 15 business days
of the date of termination of Executive's employment. Except as hereinafter
provided, any determination by KPMG Peat Marwick LLP, or such other national
accounting firm as the Company or Parent may designate prior to a Change of
Control, shall be binding upon the Company, Parent and the Executive. As a
result of the uncertainty in the application of Section 4999 of the Code at the
time of the initial determination hereunder, it is possible that (x) certain
Excise Tax Adjustment Payments will not have been made by the Company or Parent
which should have been made (an "UNDERPAYMENT"), or (y) certain Excise Tax
Adjustment Payments will have been made which should not have been made (an
"OVERPAYMENT"), consistent with the calculations required to be made hereunder.
In the event of an Underpayment, such Underpayment shall be promptly paid by the
Company or Parent to or for the benefit of the Executive. In the event that the
Executive discovers that an Overpayment shall have occurred, the amount thereof
shall be promptly repaid to the Company or Parent.
18. SETTLEMENT OF DISPUTES.
-18-
<PAGE> 19
Any dispute between the Parties arising from or relating to
the terms of this Agreement or the Executive's employment with the Company or
Parent shall be resolved by arbitration held in New York City in accordance with
the rules of the American Arbitration Association. All costs associated with any
arbitration, including all legal expenses, for the Parties shall be borne by the
Company and Parent.
19. AMENDMENT OR WAIVER.
No provision in this Agreement may be amended unless such
amendment is agreed to in writing, signed by the Executive and by a duly
authorized officer of the Company and Parent. No waiver by any Party of any
breach by the other Party of any condition or provision of this Agreement to be
performed by such other Party shall be deemed a waiver of a similar or
dissimilar condition or provision at the same or any prior or subsequent time.
Any waiver must be in writing and signed by the Executive or a duly authorized
officer of the Company and Parent, as the case may be.
20. NOTICES.
Any notice required or permitted to be given under this
Agreement shall be in writing and shall be deemed to have been given when
delivered personally or sent by courier, or by certified or registered mail,
postage prepaid, return receipt requested, duly addressed to the Party concerned
at the address indicated below or to such changed address as such Party may
subsequently by similar process give notice of:
If to the Company: Mid Ocean Reinsurance Company Ltd.
-19-
<PAGE> 20
Richmond House
12 Par-la-Ville Road
P.O. Box HM 1066
Hamilton HM EX Bermuda
If to the Parent: Mid Ocean Limited
Richmond House
12 Par-la-Ville Road
P.O. Box HM 1066
Hamilton HM EX Bermuda
If to the Executive: Charles F. Hays
Oleander Brakes
49 St. Anne's Road
Southampton SN 02
Bermuda
Fax (441) 238-3909
21. SEVERABILITY.
In the event that any provision or portion of this Agreement
shall be determined to be invalid or unenforceable for any reason, in whole or
in part, the remaining provisions of this Agreement shall be unaffected thereby
and shall remain in full force and effect to the fullest extent permitted by
law.
22. SURVIVORSHIP.
-20-
<PAGE> 21
The respective rights and obligations of the Parties shall
survive any termination of this Agreement to the extent necessary to the
intended preservation of such rights and obligations.
23. REFERENCES.
In the event of the Executive's death or a judicial
determination of his incompetence, reference in this Agreement to the Executive
shall be deemed, where appropriate, to refer to his estate or other legal
representative.
24. GOVERNING LAW.
This Agreement shall be governed by and construed and
interpreted in accordance with the laws of the State of New York without
reference to the principles of conflict of laws.
25. HEADINGS.
The headings of the sections contained in this Agreement are
for convenience only and shall not be deemed to control or affect the meaning or
construction of any provision of this Agreement.
26. COUNTERPARTS.
This Agreement may be executed in one or more counterparts.
-21-
<PAGE> 22
IN WITNESS WHEREOF, the undersigned have executed this
Agreement as of the date first written above.
MID OCEAN LIMITED
By: /s/ Michael A. Butt
-------------------------------
MID OCEAN REINSURANCE COMPANY LTD.
By: /s/ Charles F. Hays
-------------------------------
Charles F. Hays
-22-
<PAGE> 23
EXHIBIT A
CHANGE IN CONTROL
A "Change in Control" shall be deemed to have occurred if:
(1) on or after the date hereof, any person (which, for all
purposes hereof, shall include, without limitation, an
individual, sole proprietorship, partnership, unincorporated
association, unincorporated syndicate, unincorporated
organization, trust, body corporate and a trustee, executor,
administrator or other legal representative), or any group
(within the meaning of Section 13(d)(3) of the United States
Securities Exchange Act of 1934, as amended), becomes the
beneficial owner, directly or indirectly, of securities of the
Parent representing, or acquires the right to control or
direct, or to acquire through the conversion or exchange of
securities or the exercise of warrants or other rights to
acquire securities ("Beneficial Owner"), 20% or more of the
combined voting power of the Parent's then outstanding
securities ("Significant Owner") (excluding any person who or
group which, together with all affiliates and associates of
such person or group, would on the date of this Agreement but
for this clause be a Significant Owner as long as such person
or group does not subsequently become the Beneficial Owner of
any additional securities of the Parent in any manner other
than a change in the aggregate number of the outstanding
securities of the Parent, and other than pursuant to any
purchase or acquisition permitted by the first full paragraph
of the second page of that Standstill
-23-
<PAGE> 24
Agreement dated June 2, 1995 between the Parent and EXEL
Limited) and, for the purposes hereof, "voting power" means
the right to vote for the election of directors; or
(ii) at any time subsequent to the execution of this contract there
shall be elected or appointed to the Parent Board any director
or directors whose appointment or election by the Parent's
shareholders was not approved by a vote of at least a majority
of the directors then still in office who were either
directors at the date hereof or whose election or appointment
or nomination for election was previously so approved.
The determination to be made pursuant to clause (i) above shall be made on the
basis that (x) all securities beneficially owned by the person or group or over
which control or direction is exercised by the person or group which are
convertible or exchangeable into securities carrying voting rights have been
converted or exchanged and all options, warrants, exchange rights or other
rights which may be exercised to acquire securities beneficially owned by the
person or group or over which control or direction is exercised by the person or
group have been exercised, and (y) no such convertible or exchangeable
securities have been converted or exchanged by any other person and no such
options, warrants, exchange rights or other rights have been exercised by any
other person.
-24-
<PAGE> 25
EXHIBIT B
GOOD REASON
For purposes of this Agreement, "Good Reason" shall mean any
of the following (without Executive's express prior written consent):
(i) (A) The assignment to Executive of duties materially
inconsistent with Executive's position (including
duties, responsibilities, status, titles or offices
as set forth in Section 2 hereof); or (B) any
elimination or reduction of Executive's duties or
responsibilities except in connection with the
termination of Executive's employment for Cause,
disability or as a result of Executive's death or by
Executive other than for Good Reason;
(ii) The (A) reduction in Executive's Base Salary from the
level in effect immediately prior to, or (B) payment
of an annual bonus in an amount less than the most
recent annual bonus paid prior to the Change in
Control;
(iii) The failure by the Company or Parent to obtain the
specific assumption of this Agreement by any
successor or assign of Parent or the Company or any
person acquiring substantially all of the Company's
or Parent's assets;
(iv) Any material breach by the Company or Parent of any
provision of this Agreement or any agreements entered
into pursuant thereto;
-25-
<PAGE> 26
(v) Requiring Executive to be based at any office or
location other than those described in Section 2(a)
hereof, except for travel reasonably required in the
performance of the Executive's responsibilities; or
(vi) During the twelve month period following a Change in
Control, (A) the failure to continue in effect any
compensation plan in which Executive participates at
the time of the Change in Control unless an equitable
arrangement (embodied in an ongoing substitute or
alternative plan providing Executive with
substantially similar benefits) has been made with
respect to such plan in connection with the Change in
Control, or the failure to continue Executive's
participation therein on substantially the same
basis, both in terms of the amount of benefits
provided and the level of his participation relative
to other participants, as existed at the time of the
Change in Control; or (B) the failure to continue to
provide Executive with benefits at least as favorable
in the aggregate as those enjoyed by him under any of
the Company's or Parent's pension, life insurance,
medical, health and accident, disability, deferred
compensation or savings plans in which he was
participating at the time of the Change of Control,
the taking of any action which would directly or
indirectly materially reduce any of such benefits or
deprive Executive of any fringe benefit enjoyed by
him at the time of the Change of Control, or the
failure to provide him with the number of paid
vacation days to which he was entitled on the basis
of the Company's practice with respect to him as in
effect at the time of the Change of Control.
-26-
<PAGE> 1
23
Exhibit 11.1
MID OCEAN LIMITED
STATEMENT OF COMPUTATION OF EARNINGS PER SHARE
YEARS ENDED OCTOBER 31, 1996, 1995 AND 1994
(EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS
EXCEPT FOR NUMBER OF SHARES AND EARNINGS PER SHARE)
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------
1996 1995 1994
Primary Fully Primary Fully Primary Fully
Diluted Diluted Diluted
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net Income $211,644 $211,644 $182,935 $182,935 $90,978 $90,978
Number of Shares
Weighted average
shares outstanding 34,453,134 34,453,134 35,657,570 35,657,570 36,234,313 36,234,313
Incremental shares of
outstanding options (1) 434,588 451,297 271,243 318,597 228,575 233,511
Incremental shares
of outstanding stock options
of Mid Ocean (2) 1,951,235 1,997,912 1,417,690 1,555,992 1,272,536 1,287,915
--------- --------- --------- --------- --------- ---------
36,838,957 36,902,343 37,346,503 37,532,159 37,735,424 37,755,739
---------- ---------- ---------- ---------- ---------- ----------
Earnings per share: $5.75 $5.74 $4.90 $4.87 $2.41 $2.41
===== ===== ===== ===== ===== =====
</TABLE>
(1) As of October 31, 1996, the Company has 903,454 (1995: 947,838; 1994:
894,838) options outstanding. The dilution on a primary basis would be the
equivalent of approximately 434,588 (1995: 271,243; 1994: 228,575) shares, using
the treasury stock method, based on the average market price.
(2) As of October 31, 1996, Mid Ocean has 560,645 (1995: 560,645; 1994: 560,645)
options outstanding. Each holder of Mid Ocean options has entered into a
put/call agreement which entitles it to put the shares of Mid Ocean issued upon
the exercise of its options to the Company in exchange for, at the election of
the Company, shares of the Company having a fair market value or an amount of
cash equal to the fair market value of the Mid Ocean shares so put. Such
agreements also permit the Company to call any Mid Ocean shares so issued in
exchange for shares of the Company having a fair market value equal to the fair
market value of the Mid Ocean shares so called. Dilution on a primary basis
would be the equivalent of 1,951,235 (1995: 1,417,690; 1994: 1,272,536) shares
using the treasury stock method, based on the receipt of six shares of the
Company for each share of Mid Ocean common stock issued upon the exercise of the
options and the average market price for the year.
<PAGE> 1
EXHIBIT 13.1
PAGES 9 THROUGH 37 OF THE
1997 ANNUAL REPORT TO SHAREHOLDERS
SELECTED FINANCIAL DATA
(Expressed in thousand of United States dollars, except per share data and Other
Data)
The selected financial data below should be read in conjunction with the
consolidated financial statements of the Company and the related notes (pages 19
- - 37) and "Management's Discussion and Analysis of Results of Operations and
Financial Condition" (pages 10-17).
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
OCTOBER 31, OCTOBER 31, OCTOBER 31, OCTOBER 31,
1996 1995 1994 1993
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Gross premiums written $566,287 $445,819 $358,620 $257,541
Net premiums written 525,672 434,977 346,455 246,755
Net premiums earned 436,097 379,390 301,017 138,155
Net investment income 83,261 73,835 51,457 23,229
Net gains (losses) on investments 2,126 1,476 (18,196) 11,939
Total Revenues 539,116 452,265 338,135 173,227
Net losses and loss expenses incurred 211,888 198,650 197,072 74,685
Acquisition and operational expenses 104,527 70,067 49,472 30,864
Net income 211,644 182,935 90,978 67,678
Net income per share (1) 5.75 4.90 2.41 2.60
BALANCE SHEET DATA:
Total investments available for sale at market
value, cash and cash equivalents, accrued
investment income and investments pending
settlement $1,531,345 $1,272,135 $1,006,563 $839,567
Total assets 2,022,699 1,655,508 1,215,886 960,294
Net reserve for losses and loss expenses 422,251 328,990 215,021 71,359
Net reserve for unearned premiums 287,494 200,859 150,219 108,463
Total shareholders' equity 1,117,199 968,794 804,573 769,433
STATEMENT OF CASH FLOWS DATA:
Net cash flow provided by operating activities $330,847 $290,868 $239,144 $116,728
PER SHARE DATA:
Book value per share, fully diluted (2) $30.88 $26.87 $21.68 $20.82
Stock closing sales prices for year
High $48.125 $36.625 $30.500 $34.625
Low 35.500 22.250 23.375 28.375
Cash dividends per share (3) $1.35 $0.75 $0 $0
Weighted average shares outstanding 36,838,957 37,346,503 37,735,424 26,032,019
Actual shares outstanding 34,401,576 34,555,192 36,274,192 36,209,500
OTHER DATA:
Loss and loss expense ratio............................ 48.6% 52.4% 65.5% 54.1%
Underwriting expense ratio............................. 24.0% 19.2% 15.4% 22.3%
Combined ratio......................................... 72.6% 71.6% 80.9% 76.4%
Return on equity (4)................................... 21.8% 22.7% 11.8% 19.0%
</TABLE>
(1) Includes 903,454 Ordinary Shares reserved for issuance, as of October 31,
1996 (1995: 947,838; 1994; 894,838, 1993; 759,030) upon the exercise of
outstanding options. Also includes Ordinary Shares which may be issued in
exchange for shares of Mid Ocean Reinsurance Company Ltd, common stock
pursuant to certain Put/Call Agreements. (See note x to the Consolidated
Financial Statements page xx).
(2) The fully diluted book value calculations give effect to the exercise of
all options outstanding as of October 31, 1996, 1995 and 1994 and the
payment of the exercise price thereon.
(3) Represents one quarterly dividend of $0.25 per share, one of $0.275 and two
of $0.4125 (1995; three quarterly dividends of $0.25 per share). The
Company first commenced regular quarterly dividends in March 1995.
(4) Based on net income divided by shareholders' equity as reported at
beginning of each year.
<PAGE> 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
General
Mid Ocean Reinsurance Company Ltd., ("Mid Ocean"), the wholly owned subsidiary
of the Company, commenced operations in November 1992.
The Company operates as a reinsurer and insurer of a broad range of
risks including property, catastrophe, marine and energy, aviation and
satellite, motor and various other risks. Accordingly the Company's operating
results in any given period depend, to a certain extent, on the frequency and
severity of catastrophes. The Company expects that its loss experience will
generally be characterized as low frequency but high severity. This may result
in volatility in the Company's financial results for any fiscal quarter or year.
The Company assumes risks which are diversified geographically, which
are diversified across ceding companies, and which have aggregate limits and
varying attachment points. The Company also writes other primarily short tail
lines that are not necessarily catastrophe-related. These other lines include
non-catastrophe property risk covers that respond when losses are in excess of
specified levels, property pro rata covers, marine and energy, aviation,
satellite and other miscellaneous covers. Non-property catastrophe reinsurance
and insurance has represented an increasing percentage of the Company's gross
premiums written, rising from 40.3% in the year ended October 31, 1994 to 54.2%
in the year ended October 31, 1995 to 69.9% in the year ended October 31, 1996.
This is largely the result of opening a branch office in London in August of
1995 which writes marine, energy and aviation excess of loss reinsurance and the
acquisition of 51% of the Brockbank Group ("Brockbank") in December 1995.
Brockbank includes two Lloyd's dedicated syndicates, which commenced writing
business in January 1996, and the associated managing agency. These syndicates
write reinsurance and insurance risks similar in composition to Mid Ocean's
existing non-catastrophe book. In September 1996, Mid Ocean established a branch
office in Singapore which, commencing in fiscal 1997, will write property
treaty, facultative and some casualty business. In addition, Mid Ocean
established a consulting office in Munich in August 1996.
In determining that portion of loss and loss expenses for losses
incurred but not reported ("IBNR") for a year, management classifies business
written by the Company into segments that could reasonably be expected to have
similar loss characteristics. Reporting patterns and initial expected loss
ratios are developed based upon company and industry data, knowledge of the
business written by the Company and general market trends in the reinsurance and
insurance industry. The Company's actuaries, in consultation with the Company's
independent consulting actuaries, develop the IBNR loss reserves.
<PAGE> 3
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 audited Consolidated Financial Statements and related notes
of the Company presented on pages 19 through 37 of this annual report. The
results of operations for any fiscal period are not necessarily indicative of
future financial results. Reference to the Company includes Mid Ocean.
Results of Operations
Fiscal Year ended October 31, 1996, compared with Fiscal Year ended October 31,
1995 Net income for fiscal year 1996 was $211.6 million compared with $182.9
million in fiscal year 1995, an increase of 15.7%. Revenues The following table
depicts the Company's revenues for the periods shown below:
<TABLE>
<CAPTION>
Dollars in thousands Year Ended October 31, Percent
1996 1995 Change
<S> <C> <C> <C>
Gross premiums written $566,287 $445,819 27.0%
Premiums ceded (40,615) (10,842) 274.6%
Net premiums written 525,672 434,977 20.9%
Net premiums earned 436,097 379,390 14.9%
Net investment income 83,261 73,835 12.8%
Net gains on investments 2,126 1,476 44.0%
Exchange loss (1,597) (2,436) 34.4%
Managing agency income 14,391 _ _
Other income 4,838 _ _
Total revenues $539,116 $452,265 19.2%
</TABLE>
For the fiscal year ended October 31, 1996, gross premiums written were
$566.3 million compared with $445.8 million in fiscal 1995, an increase of
$120.5 million or 27.0%. This growth is attributable to the results of the
Brockbank operation which are included in the Company's accounts for the first
time following the acquisition of a 51% interest in the Brockbank Group on
December 29, 1995. Gross premiums written attributable to the two new dedicated
Lloyd's syndicates managed by Brockbank amounted to $147.6 million while another
syndicate, managed by Brockbank and reinsured by Mid Ocean, decreased by $21.5
million resulting in a net increase of $126.1 million. In the aggregate, gross
premiums written on Mid Ocean's remaining book of business was flat. However the
property catastrophe book decreased by $33.9 million and the marine and energy
book decreased by $6.4 million compared with fiscal 1995. These decreases were
offset by increases in aviation and satellite and other lines.
<PAGE> 4
During fiscal 1996, compared to fiscal 1995, property catastrophe
premium rates applicable to Mid Ocean's book of business, measured on an
exposure adjusted basis, were down approximately 6% on major United States
risks. Measured on the same basis, the United Kingdom, Japanese and Australian
markets saw rates decline by approximately 11%, 16% and 7% respectively. The
Company expects that the premium rate environment in 1997 will face somewhat
greater pressures than those experienced in fiscal 1996.
Premiums ceded in fiscal 1996 were $40.6 million compared with $10.8
million in fiscal 1995, an increase of $29.8 million. Approximately $21.9
million of this increase is attributable to Brockbank, which has historically
purchased a significant amount of reinsurance. In addition Mid Ocean purchased
specific reinsurance protection covers at a cost of approximately $13.3 million.
These reinsurances were purchased to protect various aspects of Mid Ocean's book
of business in response to a greater availability of these covers at more
attractive prices.
As a result of the above, net premiums written for the year were $525.7
million compared to $435.0 million during fiscal 1995, an increase of $90.7
million or 20.9%.
Net premiums earned during fiscal 1996 were $436.1 million compared
with $379.4 million during fiscal 1995, an increase of $56.7 million or 14.9%.
The increase is attributable to the increased level of gross premiums written.
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 it can be longer in certain cases, especially with pro rata
reinsurance.
Net investment income was $83.3 million in fiscal 1996 compared with
$73.8 million during fiscal 1995. The increase of $9.5 million or 12.8% results
from a larger investment base. The investment portfolio, measured on a market
value basis, yielded 6.2% in fiscal 1996, compared with 6.4% during fiscal 1995.
In accordance with the Financial Accounting Standards Board Statement
of Financial Accounting Standards ("SFAS") 115, the Company carries its
investment portfolio at fair value and has classified it as "available for
sale". As a result, the net unrealized market appreciation or depreciation
attributable to securities held in the portfolio is included as a separate
component of shareholders' equity. At October 31, 1996, shareholders' equity
included unrealized appreciation of $6.9 million compared with $13.8 million in
October 31, 1995. This was the result of slightly higher interest rates. Total
returns on investments, measured on a market value basis, were 5.95% for the
year ended October 31, 1996 compared with 12.37% for fiscal 1995.
Managing agency income of $14.4 million for the year ended October 31,
1996 is that income generated by the managing agency acquired as a part of the
Brockbank acquisition. It includes fees earned in respect of its management of
Lloyd's underwriting
<PAGE> 5
syndicates and earned profit commissions which are estimated based on
anticipated results of the syndicates it manages.
Other income of $4.8 million results from fee income from other
insurance related services of Brockbank.
For the year ended October 31, 1996, total revenues were $539.1 million
compared with $452.3 million in fiscal 1995, an increase of $86.8 million or
19.2%.
Expenses
The following table sets forth the Company's combined ratio and its components
for the periods indicated:
<TABLE>
<CAPTION>
Year Ended October 31,
1996 1995
<S> <C> <C>
Net loss and loss expense ratio 48.6% 52.4%
Underwriting expense ratio 24.0% 18.6%
Combined ratio 72.6% 71.0%
</TABLE>
During the year ended October 31, 1996, Mid Ocean incurred loss and
loss expenses of $211.9 million compared with $198.7 million during fiscal 1995
which, net of reinsurance recoveries of $4.6 million and $1.4 million
respectively, is a net increase of $13.2 million. Mid Ocean established a
specific aviation IBNR reserve of $7.5 million during the year ended October 31,
1996. The only significant catastrophe provisions established during the year
ended October 31, 1995, were a $5.0 million provision in respect of the Great
Hanshin, Kobe earthquake on January 17, 1995 and a $21.5 million provision in
respect of Hurricanes Luis and Marilyn.
At October 31, 1996, net loss reserves amounted to $422.3 million
compared to $329.0 million at year end 1995. Net reserves for IBNR losses were
$318.0 million and $258.0 million respectively. The Company paid losses during
fiscal 1996 of $118.6 million which included $11.3 million in respect of the
Northridge, California earthquake ("Northridge") on January 17, 1994, $13.4
million in respect of Hurricanes Luis and Marilyn and $11.2 million in respect
of three risk excess losses. In fiscal 1995 the Company paid losses of $84.7
million which included $26.5 million in respect of Northridge and $8.5 million
in respect of a single risk excess loss.
The following table sets out the components of the underwriting expense
ratio:
<PAGE> 6
<TABLE>
<CAPTION>
Year Ended October 31,
1996 1995
<S> <C> <C>
Acquisition expense ratio 16.1% 14.1%
Operational expense ratio 7.9% 4.5%
Total underwriting expense ratio 24.0% 18.6%
</TABLE>
Underwriting expenses are comprised of acquisition expenses and
operational expenses which included the amortization of goodwill relating to the
Brockbank acquisition. In fiscal 1995 and prior fiscal years, organizational
expenses were also included. Exchange gains and losses were included as expenses
in previously reported fiscal years but have been reclassified for all fiscal
years reported herein to revenues. For the year ended October 31, 1996,
underwriting expenses were $104.5 million, or 24.0% of net premiums earned,
compared with $70.7 million, or 18.6% of net premiums earned during year ended
October 31, 1995.
For the year ended October 31, 1996, the acquisition expenses were
$70.1 million, or 16.1% of net premiums earned, compared with $53.4 million, or
14.1% of net premiums earned, for the year ended October 31, 1995. The increase
is primarily attributable to higher profit commissions to cedents and the
inclusion of Brockbank, whose acquisition expense ratio was approximately 21.3%
during fiscal 1996. As the Company's pro rata business has developed over time,
profitability has increased relative to the original estimates, with a resulting
increase in profit commissions. In the year ended October 31, 1996, total
expenses were $321.4 million compared with $269.3 million for the year ended
October 31, 1995, an increase of $52.1 million, or 19.3%.
Operational expenses were $34.4 million, or 7.9% of net premiums
earned, for the year ended October 31, 1996 compared with $17.3 million, or 4.5%
of net premiums earned, during the year ended October 31, 1995, an increase of
$17.1 million. Approximately $14.0 million of the increase results from
Brockbank while the remainder is attributable to the growth of Mid Ocean's
operations.
Managing agency expenses of $5.0 million are the costs of operating the
managing agency acquired in the Brockbank acquisition. These costs are
associated with managing agency income noted above in the discussion of revenues
and are not included in the determination of Mid Ocean's expense ratio.
The United States dollar is the Company's functional currency.
However, certain of the Company's reinsurance balances receivable and payable
are denominated in currencies other than the United States dollar. These
balances are revalued at current exchange rates at each balance sheet date.
Future losses in currencies other than the United States dollar
represent a potential for foreign exchange exposure. The Company therefore
expects that it could experience
<PAGE> 7
significant exchange gains or losses that, in turn, could affect the Company's
consolidated statement of operations. The Company does not seek to hedge its
currency exposures with respect to such losses before the occurrence of an event
that produces a claim. Certain of Mid Ocean's future cash flows are denominated
in component currencies of its expected liability profile and it may hold
investments, cash and cash equivalents denominated in some of these currencies;
thus, the currency exposure on the underlying risks is reduced, to some extent.
The Company considers 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.
Fiscal Year ended October 31, 1995, compared with Fiscal Year ended October 31,
1994 Net income for fiscal year 1995 was $182.9 million compared with $91.0
million in fiscal year 1994, an increase of 101.1%.
Revenues
The following table depicts the Company's revenues for the periods shown below:
<TABLE>
<CAPTION>
Dollars in thousands Year Ended October 31, Percent
1995 1994 Change
<S> <C> <C> <C>
Gross premiums written $445,819 $358,620 24.3%
Premiums ceded 10,842 12,165 (10.9%)
Net premiums written $434,977 $346,455 25.6%
Net premiums earned $379,390 $301,017 26.0%
Net investment income 73,835 51,457 43.5%
Net gains (losses) on investments 1,476 (18,196) _
Exchange (loss) gain (2,436) 3,857 _
Total revenues $452,265 $338,135 33.8%
</TABLE>
For the fiscal year ended October 31, 1995, gross premiums written were
$445.8 million compared with $358.6 million in fiscal 1994, an increase of
24.3%. This growth was attributable in part to a substantial reinsurance
contract, provided to a syndicate managed by Brockbank, written in the first
quarter of fiscal 1995 with an estimated gross written premium of approximately
$45.9 million. This contract was renewed in 1996 but at a reduced level of
premium of approximately $24.4 million. This contract had a common account
reinsurance protection cost of 15% of the gross premiums written and the profile
of its underlying business is similar in composition to the Company's
non-property catastrophe book of business. The balance of the increase in gross
premiums written is attributable in part to marine, energy and aviation accounts
which were
<PAGE> 8
underwritten from Bermuda prior to the establishment of the London branch and
increases in all other lines besides the property catastrophe book. Gross
premiums written for the property catastrophe reinsurance book decreased by $9.7
million, or 4.5% compared with fiscal 1994. During fiscal 1995, compared to
fiscal 1994, property catastrophe premium rates applicable to Mid Ocean's book
of business, measured on an exposure adjusted basis, were generally stable to
slightly down on United States risks and the United Kingdom, Japanese and
Australian markets, measured on the same basis, saw rates decline by
approximately 10% to 15%.
Premiums ceded in fiscal 1995 were $10.8 million compared with $12.2
million in fiscal 1994. Premiums ceded were in respect of common account
protection on certain pro rata contracts purchased on behalf of the Company by
the cedent. The majority of contracts with common account protection are
generally written in the first quarter of the Company's fiscal year.
Net premiums written during fiscal 1995 were $435.0 million compared
with $346.5 million written during fiscal 1994, an increase of 25.6%. This
increase is largely attributable to increased gross premiums written during the
quarter ended January 31, 1995, when compared with gross premiums written during
the quarter ended January 31, 1994.
Net premiums earned during fiscal 1995 were $379.4 million compared
with $301.0 million during fiscal 1994, an increase of 26.0%. The increase is
attributable to the increased level of gross premiums written.
Net investment income was $73.8 million in fiscal 1995 compared with
$51.5 million during fiscal 1994. The 43.5% increase results from a larger
investment base and improved investment yields. The investment portfolio,
measured on a market value basis, yielded 6.4% in fiscal 1995, compared with
5.7% during fiscal 1994.
At October 31, 1995, shareholders' equity included unrealized
appreciation of $13.8 million compared with unrealized depreciation of $41.8
million in October 31, 1994. This change is principally as a result of
appreciation in market values on the fixed income investment portfolio as a
result of falling interest rates. Total returns on investments, measured on a
market value basis, were 12.37% for the year ended October 31, 1995 compared
with negative 2.16% for fiscal 1994.
For the year ended October 31, 1995, total revenues were $452.3 million
compared with $338.1 million in fiscal 1994, an increase of $114.2 million, or
33.8%.
Expenses
The following table sets forth the Company's combined ratio and its components
for the periods indicated:
<PAGE> 9
<TABLE>
<CAPTION>
Year Ended October 31,
1995 1994
<S> <C> <C>
Net loss and loss expense ratio 52.4% 65.5%
Underwriting expense ratio 18.6% 16.6%
Combined ratio 71.0% 82.1%
</TABLE>
In the year ended October 31, 1995, Mid Ocean incurred loss and loss
expenses of $198.7 million compared with $197.1 million during fiscal 1994, net
of reinsurance recoveries of $1.4 million and $9.0 million respectively, for a
net increase of $1.6 million. Included in the year ended October 31, 1994 was a
$95.0 million provision for the Northridge earthquake. The only significant
catastrophe provisions established during the
year ended October 31, 1995 were a $5.0 million provision in respect of the
Great Hanshin, Kobe earthquake on January 17, 1995 and a $21.5 million provision
in respect of Hurricanes Luis and Marilyn. The Company also incurred a $9.5
million loss in respect of a single risk excess contract.
At October 31, 1995, net loss reserves amounted to $329.0 million
compared to $215.0 million at year end 1994. Net reserves for IBNR losses were
$258.0 million and $162.5 million respectively. The Company's net reserves in
respect of the Northridge earthquake were $35.5 million at October 31, 1995
compared with $62.0 million at October 31, 1994. Northridge IBNR reserves were
$18.2 million at October 31, 1995 compared with $31.0 million at October 31,
1994. The Company paid losses during fiscal 1995 of $84.7 million which included
$26.5 million in respect of Northridge and $8.5 million in respect of a single
risk excess loss, compared to $53.4 million in fiscal 1994. In fiscal 1994, the
Company paid losses of $33 million for Northridge.
The following table sets out the components of the underwriting expense
ratio:
<TABLE>
<CAPTION>
Year Ended October 31,
1995 1994
<S> <C> <C>
Acquisition expense ratio 14.1% 12.3%
Operational expense ratio 4.5% 4.3%
Total underwriting expense ratio 18.6% 16.6%
</TABLE>
Underwriting expenses are comprised of acquisition expenses and
operational expenses (which include organizational expenses). For the year ended
October 31, 1995, underwriting expenses were $70.7 million, or 18.6% of net
premiums earned, compared with $50.1 million, or 16.6% of net premiums earned,
during year ended October 31, 1994.
For the year ended October 31, 1995, the acquisition expense ratio was
14.1% compared with 12.3% for the year ended October 31, 1994. The increase is
primarily
<PAGE> 10
attributable to a higher proportion of earned premiums from pro rata contracts
which attract a higher rate of commission and accrued profit commissions to
cedents. As the Company's pro rata business has developed over time,
profitability has increased, with a resulting increase in profit commissions. In
the year ended October 31, 1995, total expenses were $269.3 million compared
with $247.2 million for the year ended October 31, 1994, an increase of $22.1
million, or 9.0%.
Liquidity and Capital Resources
The Company's assets consist of its investment in the stock of Mid Ocean. The
Company relies primarily on cash dividends from Mid Ocean; these 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. The provisions of the above-noted acts are not expected
to limit payment of any dividends from retained earnings by Mid Ocean to the
Company. During fiscal 1996, annualized dividends declared by the Company were
increased from $1.00 per share to $1.10 per
share and then to $1.65 per share. In December 1996, the annualized dividend was
further increased to $3.00 per share. The payment of the dividend in any quarter
is at the discretion of the Board of Directors of the Company. At October 31,
1996, shareholders equity was $1,117.2 million, of which $480.3 million was
retained earnings.
At October 31, 1996, Mid Ocean held $164.0 million of cash and cash
equivalents compared with $215.0 million at October 31, 1995. The decrease is
attributable to a change in the composition of the investment portfolio. The
Company has no debt.
Subsequent to October 31, 1996, approximately 3.4 million options which
in effect were payable in shares of Company stock, and 0.2 million options to
purchase stock in the company, were exercised generating approximately $61.3
million. After giving effect to the exercise of such options and their exchange
into company stock, in accordance with their terms, on October 31, 1996 there
would have been 37,919,538 shares outstanding.
Net cash flow provided by operating activities was $330.8 million in
fiscal 1996, as compared with $290.9 million in fiscal 1995. This results
primarily from receipt of premium income net of paid losses, acquisition costs
and other related expenses and investment income. Mid Ocean expects cash inflows
will continue to be strong, primarily from 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 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 October 31, 1996, Mid Ocean's investment portfolio, measured
at fair
<PAGE> 11
value, including accrued investment income, trades pending settlement and cash
and cash equivalents, was $1,531.3 million compared with $1,272.1 million at
October 31, 1995. The portfolio is presently made up of bonds, short-term
investments and cash. At October 31, 1996, 95.0% of the fair value of securities
held was in U.S. Government securities or in obligations rated A or better by
Moody's Investors Service Inc. or Standard & Poor's Corporation. These
securities represented 95.2% of the fair value of the portfolio at October 31,
1995. The balance was in investment grade fixed income securities. The Company
presently has no investments in real estate or mortgage loans.
Under the terms of certain reinsurance contracts, Mid Ocean is required
to provide letters of credit to reinsureds in respect of loss reserves and/or
unearned premiums. In addition, the Company has largely funded the capital
requirements of the two dedicated Lloyd's syndicates, a part of the Brockbank
acquisition, by letters of credit amounting to $79.7 million. Mid Ocean has a
facility of approximately $280 million provided for the issuing of letters of
credit. This facility is secured by a lien on a portion of Mid Ocean's
investment portfolio. At October 31, 1996, Mid Ocean had provided letters of
credit amounting to $164.8 million compared with $71.2 million at October 31,
1995.
The Company has committed to invest up to $18.7 million, principally as
a special limited partner, in The Trident Partnership L.P., a limited
partnership organized for investment in the insurance industry. At October 31,
1996, the investment in Trident was $6.9 million compared with $2.5 million at
October 31, 1995.
In December, 1995, Mid Ocean invested oe50 million through a wholly
owned subsidiary to capitalize two limited liability dedicated corporate
syndicates at Lloyd's. These syndicates are underwritten by Brockbank in
parallel with its existing syndicates. Mid Ocean and Brockbank also agreed to
combine the Brockbank Group's existing business and the newly formed corporate
syndicates to form a larger overall group of which Mid Ocean owns 51%. 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
the Company.
On March 3, 1995, the Board of Directors authorized the Company to
repurchase up to $75 million of the Company's common stock. As of October 31,
1996, 2,141,000 Ordinary Shares had been repurchased at an aggregate cost of
approximately $62.4 million. Subsequently, in December 1996 the company
repurchased a further 200,000 shares at a cost of approximately $10.2 million.
Accounting Standards
The FASB issued SFAS No. 123 "Accounting for Stock-Based Compensation" which the
Company adopted on November 1, 1995. This standard requires the Company to
disclose the fair value of all share purchase options granted during the year.
<PAGE> 12
Outlook
While future results cannot be predicted and are likely to be impacted
by loss activity, Mid Ocean believes there will be more pricing pressure in the
rating environment in 1997 than in 1996. Mid Ocean also believes that certain
ceding companies may increase retentions while some may increase the upper
limits of their reinsurance programs. As a result, premiums in several segments
of Mid Ocean's book of business may be down compared to fiscal 1996. However
premiums is expected to be generated by the Brockbank Group both as a result of
an increase in the capacity of the two dedicated Lloyd's syndicates and the
inclusion of four quarters of Brockbank operations in the 1997 accounts compared
with only three in 1996. In addition the favorable loss environment of the past
four years may not continue.
Certain statements made in this document, including in this
Management's Discussion and Analysis, may be considered forward-looking
statements within the meaning of section 27A of the United States Securities Act
of 1933, as amended, and Section 21E of the United States Securities Exchange
Act of 1934, as amended. Many factors may affect the accuracy of such
statements, including (i) the frequency and severity of catastrophic events;
(ii) a change in the demand for or pricing of property catastrophe or other
reinsurance or insurance; (iii) an increase in the supply of property
catastrophe reinsurance or other reinsurance or insurance; (iv) increased
competitive pressure; (v) the availability of, and pricing of, retrocessions;
(vi) loss of the services of any of the company's executive officers; (vii)
actual losses and loss expenses exceeding the company's reserve for losses and
loss expenses; (viii) changing rates of inflation and other general economic
conditions; (ix) losses due to foreign currency exchange rate fluctuations; and
(x) changes in or new applications of the legal or regulatory frameworks in
which the company operates. The foregoing review of important factors should not
be construed as exhaustive and should be read in conjunction with other
cautionary statements that are included herein. The company undertakes no
obligation to release publicly the results of any future revisions it may make
to forward-looking statements to reflect events or circumstances after the date
hereof or to reflect the occurrence of unanticipated events.
<PAGE> 13
INDEPENDENT AUDITORS' REPORT
KPMG Peat Marwick
Chartered Accountants
Vallis Building Telephone: (441) 295-5063
P.O. Box HM906 Cables: Varitatem
Hamilton HM DX Telex: 3319 Ordit BA
Bermuda Telefax: (441) 295-9132
The Board of Directors and Shareholders
Mid Ocean Limited
We have audited the accompanying consolidated balance sheets of Mid Ocean
Limited and subsidiaries as at October 31, 1996 and 1995 and the related
consolidated statements of operations, shareholders' equity and cash flows for
each of the years in the three year period ended October 31, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with United States generally
accepted auditing standards. Those standards require that we plan and perform
an audit to obtain reasonable assurance whether the financial statements are
free of material misstatements. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Mid Ocean Limited and subsidiaries as at October 31, 1996 in conformity with
accounting principles generally accepted in the United States of America.
/s/ KPMG Peat Marwick
Chartered Accountants
Hamilton, Bermuda
November 25, 1996
<PAGE> 14
CONSOLIDATED BALANCE SHEETS
YEARS ENDED OCTOBER 31, 1996 AND 1995
(Expressed in thousands of United States Dollars)
<TABLE>
<CAPTION>
ASSETS 1996 1995
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Investments available for sale: (notes 3 and 10(c))
Fixed maturities at fair value $1,360,210 $1,141,069
(amortized cost $1,353,056;1995: $1,127,785)
Short-term investments at fair value 26,435 30,712
---------- ----------
(amortized cost $26,226; 1995: $30,714)
Total investments available for sale 1,386,645 1,171,781
Unquoted investments, at cost (note 10(e)) 7,914 3,453
Cash and cash equivalents 163,968 215,048
Accrued investment income 24,106 21,272
Reinsurance premiums receivable (note 10(c)) 276,360 202,762
Funds withheld by cedents 8,696 4,531
Outstanding losses recoverable from reinsurers 5,466 7,061
Prepaid reinsurance premium 15,846 5,476
Profit commissions receivable 50,338 -
Deferred acquisition expenses 42,647 22,774
Goodwill (note 4) 24,416 -
Other assets 16,297 1,350
----------- -----------
TOTAL ASSETS $2,022,699 $1,655,508
========= =========
LIABILITIES
- ------------------------------------------------------------------------------------------------------------
Reserve for losses and loss expenses (note 6) $ 427,717 $ 336,051
Reserve for unearned premiums 303,340 206,335
Investments pending settlement (note 10(b)) 43,374 135,966
Reinsurance balances payable 5,870 -
Other liabilities 72,525 8,362
-------- ---------
TOTAL LIABILITIES 852,826 686,714
Minority interest 52,674 -
-------- ------------
TOTAL LIABILITIES AND MINORITY INTEREST $905,500 $686,714
------- -------
SHAREHOLDERS' EQUITY
- ------------------------------------------------------------------------------------------------------------
Ordinary shares (par value $0.20, authorised 200,000,000; $ 6,880 $ 6,911
Issued and outstanding 34,401,576;1995: 34,555,192) (notes 7 and 8)
Additional paid in capital 625,048 632,926
Net unrealized appreciation on investments 6,920 13,789
Foreign currency translation adjustments 99 -
Deferred compensation (2,058) -
Retained earnings 480,310 315,168
---------- -------
TOTAL SHAREHOLDERS' EQUITY $1,117,199 $968,794
--------- -------
Commitments and contingencies (note 10)
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $2,022,699 $1,655,508
========= =========
</TABLE>
See accompanying notes to consolidated financial statements
<PAGE> 15
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED OCTOBER 31, 1996, 1995 AND 1994
(Expressed in thousands of United States Dollars, except for share data)
<TABLE>
<CAPTION>
REVENUES 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Gross premiums written (notes 10(c) and 14) $566,287 $445,819 $358,620
Premiums ceded 40,615 10,842 12,165
-------- ------ ---------
Net premiums written 525,672 434,977 346,455
Change in unearned premiums 89,575 55,587 45,438
------- -------- --------
Net premiums earned (note 5) 436,097 379,390 301,017
Net investment income (note 3) 83,261 73,835 51,457
Net gains (losses) on investments 2,126 1,476 (18,196)
Exchange (loss) gain (note 15) (1,597) (2,436) 3,857
Managing agency income (note 9) 14,391 - -
Other income 4,838 - -
--------- ------------ ------------
TOTAL REVENUES $539,116 $452,265 $338,135
======= ======= =======
EXPENSES
- ---------------------------------------------------------------------------------------------------------------
Losses and loss expenses incurred $216,458 $200,061 $206,113
Reinsurance recoveries 4,570 1,411 9,041
--------- --------- ----------
Net losses and loss expenses incurred (note 6) 211,888 198,650 197,072
Acquisition expenses 70,125 53,352 37,028
Managing agency expenses 4,969 - -
Operational expenses 34,402 16,715 12,444
Organizational expenses - 613 613
------------ --------- ---------
TOTAL EXPENSES $321,384 $269,330 $247,157
======= ======= =======
Net income before tax and
minority interest $217,732 $182,935 $90,978
Income taxes (note 12) (4,478) - -
Minority interest (1,610) - -
-------- ------------ ----------
NET INCOME $211,644 $182,935 $90,978
======= ======= ======
PER SHARE DATA
- ---------------------------------------------------------------------------------------------------------------
Net income per ordinary share $5.75 $4.90 $2.41
==== ==== ====
Weighted average number of ordinary and ordinary 36,838,957 37,346,503 37,735,424
========== ========== ==========
equivalent shares outstanding
</TABLE>
See accompanying notes to consolidated financial statements
<PAGE> 16
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED OCTOBER 31, 1996, 1995 AND 1994
(Expressed in thousands of United States Dollars)
<TABLE>
<CAPTION>
1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ORDINARY SHARES
Balance at beginning of year $6,911 $ 7,255 $ 7,242
Issuance of shares 44 9 13
Repurchase of shares (75) (353) -
-------- -------- --------
Balance at end of year $6,880 $ 6,911 $ 7,255
===== ======== =======
ADDITIONAL PAID IN CAPITAL
Balance at beginning of year $632,926 $680,434 $679,369
Issuance of shares 5,491 1,068 1,065
Repurchase of shares (13,369) (48,576) -
-------- -------- --------
Balance at end of year $625,048 $632,926 $680,434
======= ========= ========
NET UNREALIZED APPRECIATION (DEPRECIATION) ON INVESTMENTS
Balance at beginning of year $13,789 ($41,772) $15,144
Net change for year (6,869) 55,561 (56,916)
-------- -------- --------
Balance at end of year $ 6,920 $13,789 ($41,772)
======== ======= =======
FOREIGN CURRENCY TRANSLATION ADJUSTMENTS
Balance at beginning of year $ - $ - $ -
Translation adjustments for the year 99 - -
-------- -------- --------
Balance at end of year $ 99 $ - $ -
======== ======== =========
DEFERRED COMPENSATION
Balance at beginning of year $ - $ - $ -
Issuance of shares (3,135) - -
Amortization 1,077 - -
-------- -------- --------
Balance at end of year $ (2,058) $ - $ -
======== ========= =========
RETAINED EARNINGS
Balance at beginning of year $315,168 $158,656 $ 67,678
Net income 211,644 182,935 90,978
Dividends paid (46,502) (26,423) -
-------- -------- --------
Balance at end of year $480,310 $315,168 $158,656
======== ======== ========
Total shareholders' equity $1,117,199 $968,794 $804,573
========== ========= ========
</TABLE>
See accompanying notes to consolidated financial statements
<PAGE> 17
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED OCTOBER 31, 1996, 1995 AND 1994
(Expressed in thousands of United States Dollars)
<TABLE>
<CAPTION>
1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $211,644 $182,935 $90,978
Adjustments to reconcile net income
to cash provided by operating activities:
Amortization of premiums on investments 9,207 3,073 6,692
Amortization of goodwill 1,500 - -
Amortization of organizational expenses - 613 613
Provision for depreciation 789 559 376
Amortization of deferred compensation 1,077 - -
Net (gains) losses on investments (2,126) (1,476) 18,196
Minority interest 597 - -
Accrued investment income (1,752) 957 (9,175)
Reinsurance premiums receivable (73,598) (55,822) (49,588)
Deferred acquisition expenses (19,873) (4,478) (4,264)
Outstanding losses recoverable from reinsurers 1,595 2,736 (7,797)
Prepaid reinsurance premiums (10,370) (632) (544)
Profit commissions receivable 1,662 - -
Reserve for losses and loss expenses 91,666 111,233 151,459
Reserve for unearned premiums 97,005 51,272 42,300
Reinsurance balances payable 5,870 - -
Other liabilities 24,688 1,370 2,253
Foreign currency translation adjustment 200 - -
Funds withheld by cedents (4,165) (2,130) (1,835)
Other assets (4,769) 658 (520)
--------- --------- ---------
Net cash provided by operating activities 330,847 290,868 239,144
======= ======= =======
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale and maturity of investments 3,285,221 3,230,775 2,292,658
Purchase of investments available for sale (3,545,275) (3,413,488) (2,410,215)
Deferred (losses)/gains on forward contracts (760) 507 -
Purchase of unquoted investments (4,461) (2,856) (597)
Net investment in Brockbank Group (59,106) - -
-------- ----------- -----------
Net cash applied to investing activities (324,381) (185,062) (118,154)
======== ========= =========
CASH FLOWS FROM FINANCING ACTIVITIES
Options exercised 2,400 25 1,078
Repurchase of share capital (13,444) (48,929) -
Dividends paid (46,502) (26,423) -
------- -------- ---------
Net cash (applied to) provided by financing activities (57,546) (75,327) 1,078
======= ======== ========
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (51,080) 30,479 122,068
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 215,048 184,569 62,501
------- ------- -------
CASH AND CASH EQUIVALENTS AT END OF YEAR $163,968 $215,048 $184,569
======= ======= =======
Income taxes paid $ 2,210 $ - $ -
===== ======= =======
</TABLE>
See accompanying notes to consolidated financial statements
<PAGE> 18
MID OCEAN LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED OCTOBER 31, 1996, 1995 AND 1994
(Expressed in thousands of United States Dollars, except for share data)
1. GENERAL
The Company was incorporated on April 8, 1993 under the laws of the Cayman
Islands as Mid Ocean Reinsurance Holdings Company Ltd. By resolution of the
members, the Company's name was changed to Mid Ocean Limited ("the Company") on
May 11, 1993.
On June 23, 1993, the Company acquired the entire issued share capital of Mid
Ocean Reinsurance Company Ltd ("Mid Ocean") by an exchange of six shares of the
Company for each share of Mid Ocean ("the Exchange Offer"). At the same time,
each option to purchase a share of Mid Ocean that was granted to officers and
directors was exchanged for options to purchase six shares of the Company. Mid
Ocean was incorporated on August 4, 1992 under the laws of Bermuda and is
licensed under the Insurance Act 1978 of Bermuda to write insurance business.
Mid Ocean commenced operations on November 1, 1992 and is a leading reinsurer
providing property, including property catastrophe, property risk excess of
loss, property pro rata and marine, energy, aviation, satellite and other
reinsurance to insurers on a worldwide basis. Effective November 1, 1995, Mid
Ocean's London Branch commenced underwriting marine, energy and aviation
reinsurance on a worldwide basis.
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, invested $77,650 in two new
Lloyd's dedicated corporate syndicates. Such combination resulted in the
formation of the Brockbank Group. As a result of this combination, Mid Ocean
owns 51% of the Brockbank Group. The corporate syndicates provide a composite
range of coverage with emphasis on marine, energy and motor business.
On August 1, 1996, Mid Ocean established Mid Ocean Reinsurance Consulting GmbH,
a wholly owned subsidiary located in Munich, Germany, which will be Mid Ocean's
European contact office. Effective September 25, 1996, Mid Ocean received
approval from the Monetary Authority of Singapore to open a branch in Singapore.
The branch office will write general reinsurance, treaty and facultative
business.
A significant portion of the Company's business underwritten consists of large
aggregate exposures to man-made and natural disasters and generally loss
experience is characterized as low frequency and high severity. This may result
in volatility in the Company's financial results. The Company endeavours to
manage its exposures to catastrophic events by limiting the amount of its
exposure in each geographic zone worldwide and requiring that its property
catastrophe contracts provide for aggregate limits and attachment points.
2. SIGNIFICANT ACCOUNTING POLICIES
The accompanying consolidated financial statements of the Company have been
prepared in accordance with United States generally accepted accounting
principles. The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. The
following are the significant accounting policies adopted by the Company:
<PAGE> 19
(a) Basis of consolidation
The consolidated financial statements include the accounts of the Company and
its subsidiaries. All significant inter-company accounts and transactions have
been eliminated.
(b) Premiums assumed and ceded
Premiums written are estimated based on information received from ceding
companies and any subsequent differences arising on such estimates are recorded
in the period in which they are determined. Premiums are earned on a monthly
pro-rata basis over the period the coverage is provided. Unearned premiums
represent the portion of premiums written which is applicable to the unexpired
terms of the policies in force.
Premiums ceded are recorded as incurred on a pro-rata basis over the contract
period.
(c) Deferred acquisition expenses
Acquisition expenses, mainly commissions and brokerage, related to unearned
premiums are deferred and amortized over the period the coverage is provided.
Anticipated losses and other expenses related to those premiums are considered
in determining the recoverability of deferred acquisition expenses.
(d) Losses and loss expenses
The reserve for losses and loss expenses includes reserves for unpaid reported
losses and loss expenses and for losses incurred but not reported ("IBNR"). The
reserve for unpaid reported losses and loss expenses is established by
management based upon reports received from ceding companies supplemented with
the Company's case reserve estimates. The Company only has four years' loss
history and accordingly the reserve for IBNR has been established by management
in consultation with independent actuaries and is based on Company and industry
experience and judgement. Amounts recoverable from reinsurers are estimated in a
manner consistent with the underlying liabilities.
Management believes that the reserve for losses and loss expenses and IBNR is
adequate to cover the ultimate cost of losses and loss expenses incurred.
However, such reserve is necessarily an estimate and therefore the amount
ultimately paid may be more or less than such an estimate. The methodology of
estimating the reserve is periodically reviewed to ensure that the assumptions
made continue to be appropriate and any adjustments resulting therefrom are
reflected in income in the period the adjustments are made.
(e) Investments
Investments available for sale are carried at fair value. The net unrealized
appreciation or depreciation on investments available for sale is included as a
separate component of shareholders' equity. Investments are recorded on a trade
date basis with balances pending settlement accrued in the balance sheet.
Realized gains and losses on sales of investments are determined on the basis of
average cost. Investment income is recognized when earned and includes the
amortization of premium or discount on investments.
Short-term investments include investments with a maturity of greater than
ninety days but less than one year.
Unquoted investments comprise investments in companies for which there is no
quoted market price. It is not practicable to estimate the fair value of the
investments and thus they are carried at original cost.
(f) Translation of foreign currencies
All assets and liabilities in the balance sheets of foreign subsidiaries whose
functional currency is other than the US dollar are translated at the year end
exchange rates, other than the Brockbank
<PAGE> 20
Group, which is translated at September 30, 1996. Revenue and expense items are
translated at average exchange rates prevailing during the year. Translation
gains and losses are not included in determining net income but are accumulated
as a separate component of shareholders' equity. Foreign currency assets and
liabilities in the balance sheets of subsidiaries whose functional currency is
the US dollar are translated at exchange rates in effect at the balance sheet
date. The reserve for unearned premium and deferred acquisition costs are
translated at historic rates. Foreign currency revenues and expenses are
translated at the average exchange rates prevailing during the year and exchange
gains and losses are included in the determination of net income. Realized and
unrealized gains and losses on forward exchange contracts used to hedge foreign
currency investments are deferred and included in shareholders' equity until the
hedged investments are sold.
(g) Managing agency income
Managing agency income includes fees earned by the Brockbank managing agency in
respect of its management of Lloyd's underwriting syndicates. It also includes
earned profit commissions which are estimated by management based on anticipated
results of the syndicates managed by Brockbank. Profit commissions are settled
once a Lloyd's underwriting year has been closed after three years.
(h) Other income
Other income relates to fees earned in respect of ancillary services provided by
the Brockbank Group.
(i) Depreciation and amortization
Depreciation of fixed assets is provided on a straight line basis over their
estimated useful lives ranging from 3 to 5 years.
Goodwill related to the acquisition of the Brockbank Group is amortized on a
straight line basis over 15 years.
(j) Organizational and placement costs
Organizational costs are deferred and expensed over three years from November 1,
1992. Placement costs represent costs relating to the issuance of share capital
and are deducted from additional paid in capital.
(k) Income taxes
The Company records its income tax liability and deferred tax asset in
accordance with Statement of Financial Accounting Standards (SFAS) No. 109,
under which the Company records deferred income taxes which reflect the net tax
effect of the temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and their respective tax bases.
(l) Cash and cash equivalents
For the purposes of the statement of cash flows, cash equivalents include money
market instruments with a maturity of ninety days or less when purchased.
(m) Fair value of financial instruments
Fair values of investments are based on quoted market prices. Fair values for
forward foreign exchange contracts are based on contract prices and are revalued
at exchange rates in effect at the balance sheet date.
(n) Income per ordinary share
Income per ordinary share is based upon the weighted average number of ordinary
shares outstanding using the treasury stock method for share options and
assuming that six shares of the Company will be issued for each share of Mid
Ocean common stock issued upon exercise of
<PAGE> 21
outstanding Mid Ocean options under the put/call agreements described in Note 8.
There is no material difference between primary and fully diluted net income per
ordinary share.
(o) Reinsurance premiums receivable
Reinsurance premiums receivable are stated net of any allowance for doubtful
accounts.
(p) Stock-based compensation
The Company adopted SFAS No. 123 "Accounting for Stock-Based Compensation"
effective November 1, 1995. As allowed under this standard, the Company has
chosen to follow the provisions of APB Opinion No. 25. Pro forma disclosure of
net income and earnings per share as if the fair value based method of SFAS No.
123 had been adopted is provided in note 8.
3. INVESTMENTS AVAILABLE FOR SALE
Amortized cost, fair value and related unrealized gains or losses on fixed
maturities and short term investments are as follows:
<TABLE>
<CAPTION>
OCTOBER 31, 1996 AMORTIZED GROSS GROSS FAIR
COST UNREALIZED UNREALIZED VALUE
GAINS LOSSES
<S> <C> <C> <C> <C>
FIXED MATURITIES:
US government and
government agency bonds $629,924 $5,842 ($1,465) $634,301
Corporate bonds 226,738 2,415 (1,995) 227,158
Non US sovereign government bonds 240,524 2,109 (1,190) 241,443
Mortgage and asset-backed securities 255,870 1,826 (388) 257,308
---------- ------- ------ ---------
Total Fixed Maturities $1,353,056 $12,192 ($5,038) $1,360,210
========= ====== ===== =========
SHORT-TERM INVESTMENTS:
US government and
government agency bonds $17,546 $ 45 $ - $17,591
Corporate bonds 825 - - 825
Non US sovereign government bonds 7,855 164 - 8,019
------- ------ ------- -------
Total Short-term Investments $26,226 $ 209 $ - $26,435
====== ====== ======= ======
<CAPTION>
OCTOBER 31, 1996 AMORTIZED GROSS GROSS FAIR
COST UNREALIZED UNREALIZED VALUE
GAINS LOSSES
<S> <C> <C> <C> <C>
FIXED MATURITIES:
US government and
government agency bonds $ 505,131 $ 7,453 $ (13) $ 512,571
Corporate bonds 125,354 1,832 (710) 126,476
Non US sovereign government bonds 222,936 3,344 (117) 226,163
Mortgage and asset-backed securities 274,364 1,559 (64) 275,859
---------- ------- --------- ----------
Total Fixed Maturities $1,127,785 $14,188 $ (904) $1,141,069
========= ====== ========= =========
SHORT-TERM INVESTMENTS:
US government and
government agency bonds $14,179 $ - $ - $14,179
Corporate bonds 13,500 3 (8) 13,495
Non US sovereign government bonds 3,035 3 - 3,038
------- --------- --------- ------
Total Short-term Investments $30,714 $ 6 $ (8) $30,712
====== ========= ======== ======
</TABLE>
<PAGE> 22
The portfolio of fixed maturities available for sale at October 31, 1996 by
contractual maturity, is shown below. Actual maturity of investments may differ.
<TABLE>
<CAPTION>
AMORTIZED FAIR
COST VALUE
<S> <C> <C>
Due after one through five years $ 628,085 $ 630,651
Due after five through ten years 272,536 273,086
Due after ten years 196,565 199,165
---------- ----------
1,097,186 1,102,902
Mortgage and asset-backed securities 255,870 257,308
---------- ----------
$1,353,056 $1,360,210
--------- ---------
</TABLE>
The following table summarizes the composition of the fair value of the
investments available for sale portfolio by rating (as assigned by Standard &
Poor's Corporation ("S&P") or Moody's or, with respect to non-rated issues, as
estimated by the Company's investment managers as to the rating S&P or Moody's
would assign if such issues were rated).
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
US Government and Government Agency 45.2 % 51.4 %
AAA 38.2 39.1
AA 9.4 3.4
A 2.2 1.3
BAA 4.7 4.4
BA 0.3 -
BBB - 0.4
------ ------
100.0 % 100.0 %
====== ======
</TABLE>
Net investment income comprises:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Interest income on investments $94,155 $79,437 $60,970
Amortization of premiums on investments (9,207) (3,073) (6,692)
Expenses (1,687) (2,529) (2,821)
------- ------- -------
$83,261 $73,835 $51,457
====== ======= ======
</TABLE>
The Company has obtained a facility providing for the issuance of letters of
credit up to $274,000. The facility is secured by a lien on a portion of the
Company's investment portfolio. Letters of credit of $164,794 were outstanding
at October 31, 1996 (1995: $71,156). This amount included $79,738 (1995: $nil)
in respect of the two Lloyd's corporate syndicates which has been issued in lieu
of capital.
4. ACQUISITIONS
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 invested $77,650 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.
<PAGE> 23
In consideration of Mid Ocean's investment of $77,650 and related costs of
$2,106, the fair value of the net assets acquired was $54,179 and goodwill
arising thereon of $25,577 is being amortized on a straight line basis over 15
years.
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Goodwill at start of year $ - $ - $ -
Additions 25,916 - -
Amortization (1,500) - -
-------- ------- -------
Goodwill at end of year $24,416 $ - $ -
------- ------- -------
</TABLE>
Additions to goodwill include purchased goodwill of $339.
The Brockbank Group's fiscal year end is December 31. Results of operations for
the nine month period ended September 30, 1996 and financial position at that
date have been included in the consolidated financial statements of the Company
for the year ended October 31, 1996.
Unaudited proforma information relating to the Brockbank acquisition has not
been included as management does not consider this to be material or meaningful
to these consolidated financial statements.
5. REINSURANCE
Reinsurance premiums ceded are in respect of common account protection purchased
by the Company on certain proportional reinsurance treaties together with the
purchase of reinsurance protection on certain aspects of its book of business.
The Company is contingently liable with respect to reinsurance ceded to the
extent that any reinsurance company fails to meet its obligation. The Company
regularly monitors the financial condition of its reinsurers and believes all
amounts due to be recoverable.
The effect of reinsurance on premiums written and earned is as follows:
<TABLE>
<CAPTION>
1996 1995 1994
WRITTEN EARNED WRITTEN EARNED WRITTEN EARNED
<S> <C> <C> <C> <C> <C> <C>
Direct $94,350 $36,329 $ - $ - $ - $ -
Assumed 471,937 429,692 445,819 389,600 358,620 312,657
Ceded (40,615) (29,924) (10,842) (10,210) (12,165) (11,640)
---------- ---------- ----------- ----------- ----------- ----------
Net Premiums $525,672 $436,097 $434,977 $379,390 $346,455 $301,017
======= ======= ======= ======= ======= =======
</TABLE>
6. RESERVE FOR LOSSES AND LOSS EXPENSES
The movement in the net reserve for losses and loss expenses is summarized
below:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Balance at beginning of year $336,051 $224,818 $73,359
Less reinsurance recoverables 7,061 9,797 2,000
--------- --------- -------
Net balance at beginning of year 328,990 215,021 71,359
======= ======= ======
</TABLE>
Incurred related to:
<PAGE> 24
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Current year 281,402 245,750 232,172
Prior years (69,514) (47,100) (35,100)
-------- -------- --------
Total incurred 211,888 198,650 197,072
======= ======= =======
Paid related to:
Current year 36,397 25,981 44,210
Prior years 82,230 58,700 9,200
------ ------ -------
Total paid 118,627 84,681 53,410
======= ====== ======
Net balance at end of year 422,251 328,990 215,021
Plus reinsurance recoverables 5,466 7,061 9,797
------- ------- -------
Balance at end of year $427,717 $336,051 $224,818
======= ======= =======
</TABLE>
Losses for certain events in prior years were based on data available at the
time. Current information available to the Company indicates that those losses
are unlikely to develop to the extent initially anticipated.
As a result of the settlement of claims and changes in estimates of reinsured
events, the net incurred losses and loss expenses attributable to prior years
decreased by $69,514 in the current year (1995:$47,100; 1994: $35,100).
7. SHARE CAPITAL AND ADDITIONAL PAID IN CAPITAL
The authorized share capital of the Company is $40,000 comprised of 200,000,000
ordinary shares with a par value of $0.20 each. The share capital may be used as
Class A, Class B or Class C Shares. As of October 31, 1996, 1995 and 1994, the
following shares have been issued and fully paid:
<TABLE>
<CAPTION>
1996 1995 1994
SHARES SHARE ADDITIONAL SHARES SHARE ADDITIONAL SHARES SHARE ADDITIONAL
ISSUED CAPITAL PAID IN ISSUED CAPITAL PAID IN ISSUED CAPITAL PAID IN
CAPITAL CAPITAL CAPITAL
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Class A 32,541,576 $6,508 $594,414 32,503,192 $6,501 $599,494 33,838,192 $6,768 $641,102
Class B -- -- -- -- -- -- -- -- --
Class C 1,860,000 372 30,634 2,052,000 410 33,432 2,436,000 487 39,332
---------- ------- --------- ---------- ------- -------- --------- ------ -------
34,401,576 $6,880 $625,048 34,555,192 $ 6,911 $ 632,926 36,274,192 $7,255 $680,434
========== ===== ======= ========== ===== ======= ========== ===== =======
</TABLE>
Holders of Class A shares are entitled to one vote for each share held. Class B
shares are entitled to one tenth vote per share and Class C shares are not
entitled to vote. In all other respects, Class A, B and C shares rank pari
passu. There are also certain restrictions relating to the transfer of shares.
Mid Ocean raised $359,020 of capital (net of placement costs of $7,180) through
a private placement offering on November 17, 1992. The Company also raised
$323,675 (net of placement costs and underwriting discount of $17,493) through a
public offering and direct sale on August 4, 1993.
On October 2, 1995, the Company completed a secondary offering of 4,203,600
Ordinary Shares (the "Secondary") priced to the public at $33.75 per share. All
shares offered were sold by existing shareholders and no proceeds of the
Secondary were received by the Company.
<PAGE> 25
The following is a summary of shares issued and outstanding:
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Balance at beginning of year 34,555,192 36,274,192 36,209,500
Exercise of options 139,884 1,500 64,692
Share grants 82,500 44,500 --
Repurchase of shares (376,000) (1,765,000) --
---------- ----------- ----------
Balance at end of year 34,401,576 34,555,192 36,274,192
========== ========== ==========
</TABLE>
On September 12, 1996, the Company announced that its Board of Directors adopted
a shareholder rights plan. The Company adopted the plan to protect shareholders
against unsolicited attempts to acquire control of the Company that do not offer
what the Company believes to be an adequate price to all shareholders. The plan
has been designed to allow EXEL Limited (EXEL) to maintain its existing
holdings. The rights were issued to shareholders of record on October 1, 1996.
The plan provides for the issuance of one right for each Class A ordinary share.
Each right entitles the holder to purchase from the Company one Class A ordinary
share at an initial price of $140.00.
The rights will become exercisable and will detach from the Class A ordinary
shares a specified period of time after any person has become the beneficial
owner of 20% or more of the Company's common shares or commenced a tender or
exchange offer which, if consummated, would result in any person becoming the
beneficial owner of 20% or more of the common shares. Persons (such as EXEL)
owning 20% or more of the common shares of the Company on the date the plan was
adopted, and certain transferees of such persons, would not cause the rights to
become exercisable subject to certain limitations on such persons' ability to
acquire additional common shares.
If any person becomes the beneficial owner of 20% or more of the Company's
common shares (other than persons referred to in the previous sentence), each
right will entitle the holder, other than the acquiring person, to purchase for
the then applicable purchase price, the Company's common shares having a value
of twice the purchase price.
If, following an acquisition of 20% or more of the Company's common shares, the
Company is involved in certain mergers or other business combinations or sells
or transfers more than 50% of its assets or earning power, each right will
entitle the holder to purchase for the then applicable purchase price common
stock of the other party to such transaction having a value of twice the
purchase price.
At any time after a person has acquired 20% or more (but before any person has
acquired more than 50%) of the Company's common shares, the Company may exchange
all or part of the rights for common shares at an exchange ratio of one Class A
ordinary share per right, subject to rights holders delivering to the company an
amount in cash equal to the par value of each Class A ordinary share to be
received.
The Company may redeem the rights at a price of $.01 per right at any time prior
to a specified period of time after a person has become the beneficial owner of
20% or more of its common shares. The rights will expire on October 1, 2006,
unless earlier exchanged or redeemed.
8. SHARE PURCHASE OPTIONS AND SHARE AWARD PLAN
The Company has adopted its 1993 Long-Term Incentive and Share Award Plan ("the
Plan"). The Plan is designed to provide a means to attract, retain and motivate
employees in order to achieve the long-term growth and profitability objectives
of the Company. The Plan provides for the issuance of options and other
stock-based awards covering up to an aggregate of 2,250,000 ordinary shares. The
Company has recorded compensation expenses of $1,077 in respect of share grants
and options (1995: $nil; 1994:
<PAGE> 26
$1,051). Deferred compensation includes 54,167 share grants not vested at
October 31, 1996.
Had the compensation cost for this plan been determined consistent with the fair
value method recommended in FASB Statement No. 123, the Company's net income and
earnings per share would have been reduced to the following pro forma amounts:
<TABLE>
<CAPTION>
1996
<S> <C> <C>
Net income As reported $211,644
Pro forma $211,309
Earnings per share As reported $5.75
Pro forma $5.74
</TABLE>
Because the SFAS No. 123 fair value method of accounting has not been applied to
options granted prior to November 1, 1995, the resulting pro forma compensation
cost may not be representative of that to be expected in future years.
The Company has issued a number of share purchase options to shareholders,
officers and employees of the Company. These options are exercisable within a
period of ten years from the date of the award. Each non-management director is
granted an option each year to purchase 1,500 shares from the Company. The
following is a summary of the options granted and outstanding:
<TABLE>
<CAPTION>
1996 1995 1994
NUMBER WEIGHTED AV. NUMBER WEIGHTED AV. NUMBER WEIGHTED AV.
OF SHARES EXERCISE PRICE OF SHARES EXERCISE PRICE OF SHARES EXERCISE PRICE
<S> <C> <C> <C> <C> <C> <C>
Outstanding at 947,838 $20.61 894,838 $20.35 795,030 $18.80
beginning of year
Granted 95,500 $38.08 54,500 $24.82 164,500 $26.39
Exercised 139,884 $17.16 1,500 $16.67 64,692 $16.67
Outstanding at
end of year 903,454 $22.99 947,838 $20.61 894,838 $20.35
------- ----- ------- ----- ------- -----
Exercisable at
end of year 661,054 $20.85 663,674 $19.01 492,282 $18.21
------- ----- ------- ----- ------- -----
</TABLE>
The weighted average fair value of options granted in 1996 was $12.50. The
903,454 options outstanding at October 31,1996 have exercise prices between
$16.67 and $40.25, with a weighted average exercise price of $22.99.
Of the 903,454 (1995: 947,838; 1994:894,838) options granted to officers and
directors, 661,054 (1995: 663,674; 1994:492,282) are presently exercisable. The
remaining options are not presently exercisable and of these, nil (1995:
29,564;1994:105,192) vest over a three-year period from the date of the award,
and 242,400 (1995: 254,600;1994:361,000) vest over a five-year period from the
date of the award.
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted average
assumptions used for grants in 1996: risk-free interest rate of 6.47 percent;
expected dividend yield of 3.16 percent; expected life of 10 years; expected
volatility of 28.01 percent.
<PAGE> 27
In the event that prior to the expiration of the options there occurs any change
in the number or nature of the shares outstanding by reason of certain events,
the number of shares subject to the options and the option price shall be
adjusted accordingly.
Additionally, Mid Ocean has the following stock options outstanding:
<TABLE>
<CAPTION>
COMPANY PUT/CALL
MID OCEAN OPTIONS AGREEMENT (ESTIMATED)
NUMBER OF NUMBER OF
SHARES OF CLASS EXERCISE EXERCISE SHARES OF EFFECTIVE
MID OCEAN OF SHARE PRICE PERIOD COMPANY PRICE
<S> <C> <C> <C> <C> <C> <C>
Marsh & McLennan Risk 297,573 non-voting $100 January 1, 1993 to 1,785,438 $16.67
Capital Corp. September 15, 2002
J P Morgan Capital Corp. 198,382 non-voting $100 January 1, 1993 to 1,190,292 $16.67
September 15, 2002
Fund American 64,690 non-voting $100 January 1, 1993 to 388,140 $16.67
------ -------
September 15, 2002
560,645 3,363,870
======= =========
</TABLE>
Each holder of Mid Ocean options has entered into a put/call agreement which
entitles it to put the shares of Mid Ocean issued upon the exercise of its
options to the Company in exchange for, at the election of the Company, shares
of the Company having a fair market value or an amount of cash equal to the fair
market value of the Mid Ocean shares so put. Such agreements also permit the
Company to call any Mid Ocean shares so issued in exchange for shares of the
Company having a fair market value equal to the fair market value of the Mid
Ocean shares so called. The number of shares shown as issuable pursuant to such
put/call agreements in the table above assumes that Company shares are exchanged
for shares of Mid Ocean common stock at the same ratio used in the Exchange
Offer.
9. RELATED PARTY TRANSACTIONS
One of the Company's subsidiaries is a managing agency at Lloyd's which manages
a syndicate which ceded premium to Mid Ocean in 1995 and 1996. Gross premiums
written for this contract were $18,790 for the year ended October 31, 1996. The
Company also recorded earned profit commission and fee income of $14,391 for the
year ended October 31, 1996 for the managing agency in respect of its management
of Lloyd's syndicates.
On April 1, 1996, the Company entered into a three year reinsurance agreement
with X.L. Insurance Company, Ltd., a subsidiary of a principal shareholder, for
catastrophe excess of loss protection. Net premiums earned include an expense of
$1,167 relating to this contract for the year ended October 31, 1996. There have
been no loss recoveries recorded to date.
10. COMMITMENTS AND CONTINGENCIES
(a) Commitments
The Company has rented space for its principal executive offices under leases
which expire up to June 2009. Total rent expense for the year ended October 31,
1996 was approximately $774 (1995:$341; 1994:$260). Future minimum rental
payments under the leases are expected to be as follows:
<PAGE> 28
<TABLE>
<CAPTION>
<S> <C> <C>
Year ending October 31: 1997 $3,708
1998 2,440
1999 2,269
2000 2,119
2001 2,114
Later years 13,793
-------
Total minimum future rentals $26,443
=======
</TABLE>
These minimum future rentals exclude recharges which are anticipated to be made
to third parties.
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 the Company.
(b) Financial instruments with off-balance sheet risk
The net fair value of the forward foreign exchange contracts at October 31,
1996, included in investments pending settlement, is $976 payable (1995: $680
payable). Forward foreign exchange contracts outstanding at the year end were as
follows:
<TABLE>
<CAPTION>
1996 1995
Notional Principal Notional Principal
Amount Fair Value Amount Fair Value
<S> <C> <C> <C> <C>
Receivable $61,882 $62,048 $81,506 $80,788
Payable (61,882) (63,024) (81,506) (81,468)
-------- -------- -------- --------
Net $ 0 $ (976) $ 0 $ (680)
======== ======== ======== ========
</TABLE>
Included in the table above are forward foreign exchange contracts which have
been closed by the purchase of matching contracts for the delivery of foreign
currency on the same date with an aggregate notional principal amount of $9,408
(1995: $nil) and a net fair value of $33 payable (1995: $nil).
The forward foreign exchange contracts are primarily for hedging purposes and
changes in the value of these contracts offset the foreign exchange gains and
losses of the foreign currency investments being hedged. The maturity dates of
these contracts range from between 30 and 90 days from the inception date of the
contract. The Company is exposed to credit loss in the event of non-performance
by the other parties to the contracts; however, the Company does not anticipate
non-performance. The difference between the notional principal amounts and the
associated fair value is the Company's maximum credit exposure. Net losses
resulting from forward foreign exchange contracts included in net gains on
investments amounted to $2,335 (1995: losses $8,528; 1994: losses $40,113).
(c) Concentration of credit risk
The Company does not have any investment in a single corporate security which
exceeds 5% of the carrying value of its investments.
Approximately 4.5% (1995: 10.3%; 1994: 5.1%) of gross premium written for the
year was in respect of one cedent.
$24,096 (1995: $28,530) of reinsurance premiums receivable is in respect of one
cedent.
Four (1995: six; 1994: five) brokers each produce more than 5% of the Company's
business and in total produce approximately 44.8% (1995: 66.6%; 1994: 59.3%).
Approximately 25.5% (1995: 40.9%; 1994: 34.1%) of all business written was
arranged by one broker and its affiliates.
<PAGE> 29
(d) Employment contracts
The Company has entered into employment agreements with its executive officers
for periods up to August 19, 1999. These agreements provide for compensation in
the form of salary, annual bonus, options to purchase shares in the Company and
reimbursement of certain expenses.
(e) Trident
The Company, Marsh & McLennan Risk Capital Corp., JP Morgan Capital Corp., and
BYRNE & sons l.p., have organized The Trident Partnership LP, to invest
principally in newly formed insurance and reinsurance ventures organized by
Trident. The Company has made a commitment to invest up to $18,700 in Trident.
At October 31, 1996 the Company has invested $6,914 (1995: $2,453).
11. PENSION PLAN
Effective January 1993, the Company adopted a money accumulation pension plan
for all eligible employees. Under this plan, the Company contributes on a
monthly basis 10% of a participant's base salary which vests at 20% per annum
for the first five years of service. Pension costs amounted to $589 for the year
ended October 31, 1996 (1995: $282; 1994: $219).
12. TAXATION
Under current Cayman Islands law, the Company is not required to pay any taxes
in Cayman Islands on either income or capital gains. The Company has received an
undertaking that in the event of any such taxes the Company will be exempted
from Cayman Islands income or capital gains tax until the year 2013. Under
current Bermuda law, neither the Company nor Mid Ocean is required to pay any
taxes in Bermuda on either income or capital gains. The Company and Mid Ocean
have received an undertaking from the Minister of Finance in Bermuda that in the
event of any such taxes being imposed, the Company and Mid Ocean will be
exempted from income or capital gains taxation until the year 2016.
The Company does not consider itself to be engaged in trade or business in the
United States and accordingly does not expect to be subject to direct United
States income taxation.
Profits of the London branch and Brockbank Group are subject to United Kingdom
corporation taxes.
Profits of the Singapore branch will be subject to Singapore corporation taxes.
The German subsidiary will be subject to taxation in Germany.
Non-U.S. income tax expense is solely attributable to income from continuing
operations and consists of:
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Current $4,478 $ - $ -
Deferred - - -
------ ----- ------
$4,478 $ - $ -
===== ===== ======
</TABLE>
The effective tax rate on income from continuing operations differs from the
Statutory US Federal tax rate for the following reasons:
<PAGE> 30
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Year ended October 31 35.0% 35.0% 35.0%
Increase (reduction) in income taxes resulting from:
Income not subject to US taxes (35.0%) (35.0%) (35.0%)
Foreign Taxes 2.1% 0% 0%
------ --------- --------
2.1% 0% 0%
------ --------- --------
</TABLE>
Management considers the tax effects of temporary differences that give rise to
deferred tax assets and deferred tax liabilities at October 31, 1996, 1995 and
1994 to be insignificant and immaterial to the consolidated financial
statements.
13. STATUTORY DATA
The Company's ability to pay dividends is subject to certain regulatory
restrictions on the payment of dividends by Mid Ocean. Under the Insurance Act
1978, amendments thereto and related regulations of Bermuda ("the 1978 Act"),
Mid Ocean is required to prepare statutory financial statements and to file in
Bermuda a statutory financial return. In April 1995, the Insurance Amendment Act
1995 ("the 1995 Act") became effective. Under the 1995 Act, Mid Ocean is
registered as a Class 4 insurer and is required to maintain certain measures of
solvency and liquidity during the year.
The statutory capital and surplus of Mid Ocean at October 31, 1996 was
approximately $1,044,914 (1995: $945,978) and the minimum required statutory
capital and surplus was approximately $262,836 at October 31, 1996 (1995:
$217,488). Currently there are no effective statutory restrictions on the
payment of dividends from retained earnings by Mid Ocean or the Company as the
minimum statutory capital and surplus is satisfied by share capital and
additional paid in capital.
Mid Ocean's London Branch is subject to regulation in the United Kingdom under
the Insurance Companies Act 1982. Under this Act, Mid Ocean is required to
maintain a margin of solvency and prepare a global return to the U.K. Department
of Trade and Industry (DTI) incorporating financial statement data of Mid Ocean.
These DTI regulations do not currently restrict payment of dividends by Mid
Ocean or the Company.
14. FOREIGN SALES AND OPERATIONS
Financial information relating to premiums assumed by geographic area is as
follows:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
OCTOBER 31, 1996 OCTOBER 31, 1995 OCTOBER 31,1994
PREMIUMS PERCENTAGE PREMIUMS PERCENTAGE PREMIUMS PERCENTAGE
WRITTEN WRITTEN WRITTEN
<S> <C> <C> <C> <C> <C> <C>
Worldwide $250,450 44.2 % $191,801 43.0 % $126,234 35.2 %
United States 135,830 24.0 126,553 28.4 119,420 33.3
United Kingdom 85,330 15.1 37,920 8.5 37,296 10.4
Japan 19,452 3.4 23,882 5.4 21,876 6.1
Australasia 13,744 2.4 16,049 3.6 17,214 4.8
Other 61,481 10.9 49,614 11.1 36,580 10.2
------- ----- ------ ----- ------ ----
$566,287 100.0 % $445,819 100.0 % $358,620 100.0 %
======= ===== ======= ===== ======= =====
</TABLE>
Financial information relating to foreign operations is as follows:
<PAGE> 31
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
OCTOBER 31, 1996 OCTOBER 31,1995 OCTOBER 31,1994
<S> <C> <C> <C>
PREMIUMS WRITTEN
Bermuda $377,963 $445,819 $358,620
United Kingdom 188,324 - -
-------- -------- --------
$566,287 $445,819 $358,620
======== ======== ========
NET INCOME
Bermuda $211,039 $182,935 $90,978
United Kingdom 605 - -
-------- -------- --------
$211,644 $182,935 $90,978
======== ======== =======
TOTAL ASSETS
Bermuda $1,767,020 $1,655,508 $1,215,886
United Kingdom 255,679 - -
---------- ---------- ----------
$2,022,699 $1,655,508 $1,215,886
========== ========== ==========
</TABLE>
15. EXCHANGE (LOSS) GAIN
Exchange gains and losses comprise the net effect of realized and unrealized
exchange gains and losses relating to the underwriting activities of Mid Ocean.
The unrealized component arises from the revaluation of certain foreign currency
assets and liabilities at the year end. The realized component arises from the
difference between amounts previously recorded for foreign currency assets and
liabilities and actual amounts received or paid during the year. The exchange
gains and losses are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Realized (loss) gain $(3,599) $ (868) $2,964
Unrealized gain (loss) 2,002 (1,568) 893
----- ------ ---
$(1,597) $(2,436) $3,857
======= ======= =====
</TABLE>
16. DIVIDENDS
In 1996, four quarterly dividends were paid; $0.25 per share to shareholders of
record on December 19, 1995, $0.275 per share to shareholders of record on March
22, 1996 and two of $0.4125 per share to shareholders of record on June 28, 1996
and September 27, 1996.
In 1995, three quarterly dividends of $0.25 per share were paid to shareholders
of record March 24, June 23 and September 25, 1995.
17. LITIGATION
A writ has been issued against a subsidiary company as follows:
Brockbank Syndicate Management Limited previously operated as both a managing
agent and a members' agent prior to transferring out its member's agency
business in 1988. The following writ is in respect of its former activities as a
members' agent at Lloyd's. A name, N. Sarif, is claiming compensation in respect
of the agency's failure to notify personal stop loss insurers of one syndicate
left open. No proceedings have been commenced and negotiations for an extra
gratia payment from the stop loss insurers are taking place. While any
litigation contains an element of uncertainty, management presently believes the
outcome of the above will not have a material adverse effect on the Company.
<PAGE> 32
18. ADOPTION OF NEW ACCOUNTING STANDARDS
The Company adopted SFAS No. 123 "Accounting for Stock-Based Compensation",
effective November 1, 1995. The accounting policy followed is detailed in note 2
(p).
19. UNAUDITED QUARTERLY FINANCIAL DATA
YEAR ENDED OCTOBER 31, 1996
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
<S> <C> <C> <C> <C>
Net premiums earned $102,106 $102,274 $114,102 $117,615
Net investment income 19,046 19,911 21,052 23,252
Net gains (losses) on investments 9,181 (1,986) (8,396) 3,327
Other income (1,380) 6,270 7,301 5,441
----- ----- ----- -----
Total revenues $128,953 $126,469 $134,059 $149,635
======= ======= ======= =======
Net losses and loss expenses incurred $53,204 $45,133 $56,739 $56,812
------ ------ ------ ------
Net income $57,814 $50,972 $46,217 $56,641
------ ------ ------ ------
Net income per share $1.57 $1.38 $1.26 $1.54
---- ---- ---- ----
</TABLE>
YEAR ENDED OCTOBER 31, 1995
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
<S> <C> <C> <C> <C>
Net premiums earned $90,311 $98,869 $90,796 $99,414
Net investment income 17,300 18,747 18,716 19,072
Net (losses) gains on investments (22,815) 5,891 15,308 3,092
Other income (1,123) 2,286 (1,362) (2,237)
------ ----- ------ ------
Total revenues $83,673 $125,793 $123,458 $119,341
====== ======= ======= =======
Net losses and loss expenses incurred $50,639 $52,043 $39,807 $56,161
------ ------ ------ ------
Net income $18,064 $55,579 $66,140 $43,152
------ ------ ------ ------
Net income per share $0.48 $1.46 $1.76 $1.18
---- ---- ---- ----
</TABLE>
<PAGE> 1
24
Exhibit 21.1
MID OCEAN LIMITED
AND
SUBSIDIARIES
<TABLE>
<CAPTION>
% Beneficial Jurisdiction
Ownership by of
Immediate Parent Incorporation
---------------- -------------
<S> <C> <C>
Mid Ocean Limited -- Cayman Islands
Mid Ocean Reinsurance Company Ltd 100 Bermuda
Baltusrol Holdings Limited 51 Bermuda
Dornoch Limited 100 United Kingdom
County Down Limited 100 United Kingdom
Brockbank Holdings Limited 51 United Kingdom
Brockbank Underwriting Limited 100 United Kingdom
Brockbank Syndicate Management Limited 100 United Kingdom
Admiral Insurance Services Limited 80 United Kingdom
Admiral Services (Europe) Limited 100 United Kingdom
Able Insurance Services Limited 100 United Kingdom
Brockbank Personal Lines Limited 100 United Kingdom
Zenith Policy Services Limited 100 United Kingdom
Cassidy Brockbank Limited 100 United Kingdom
Brockbank Dedicated Insurance Limited 100 United Kingdom
Brockbank Financial Services Limited 100 United Kingdom
Mid Ocean Reinsurance Consulting GmbH 100 Germany
</TABLE>
<PAGE> 1
Exhibit 23.1
CONSENT OF INDEPENDENT AUDITOR
To the Board of Directors of
Mid Ocean Limited
We consent to the incorporation by reference in the registration statement
(No. 33-78626) on Form S-8 and Form S-3 of Mid Ocean Limited of our report
dated November 25, 1996, relating to the consolidated balance sheets of Mid
Ocean Limited and subsidiary as of October 31, 1996 and 1995 and the related
consolidated statements of operations, shareholders' equity and cash flows for
each of the years in the three year period ended October 31, 1996 and our
report dated November 25, 1996 on the schedules included in Form 10-K which
reports appear in the October 31, 1996 annual report on Form 10-K of Mid Ocean
Limited by reference.
Hamilton, Bermuda KPMG Peat Marwick
January 29, 1997 Chartered Accountants
<PAGE> 1
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS THAT the undersigned director of Mid
Ocean Limited, a Cayman Islands company, does hereby constitute and appoint
Robert J. Newhouse, Jr., Michael A. Butt, Charles F. Hays, and John M. Wadson,
and each of them acting singly, a true and lawful attorney in his name, place
and stead, in any and all capacities, to sign his or her name to the Annual
Report of Mid Ocean Limited on Form 10-K for the year ended October 31, 1996,
under the Securities Exchange Act of 1934, as amended, and to any and all
amendments thereto, and to cause the same to be filed with the Securities and
Exchange Commission, granting unto said attorneys and each of them full power
and authority t do and perform any act and thing necessary and proper to be done
in the premises, as fully and to all intents and purposes as the undersigned
could do if personally present, and the undersigned hereby ratifies and confirms
all that said attorneys or any one of them shall lawfully do or any one of them
shall lawfully do or cause to be done by virtue hereof.
Dated: January 3, 1997
/s/Frank J. Borelli
---------------------------------
Frank J. Borelli
<PAGE> 2
KNOW ALL MEN BY THESE PRESENTS THAT the undersigned director of Mid Ocean
Limited, a Cayman Islands company, does hereby constitute and appoint Robert J.
Newhouse, Jr., Michael A. Butt, Charles F. Hays, and John M. Wadson, and each of
them acting singly, a true and lawful attorney in his name, place and stead, in
any and all capacities, to sign his or her name to the Annual Report of Mid
Ocean Limited on Form 10-K for the year ended October 31, 1996, under the
Securities Exchange Act of 1934, as amended, and to any and all amendments
thereto, and to cause the same to be filed with the Securities and Exchange
Commission, granting unto said attorneys and each of them full power and
authority t do and perform any act and thing necessary and proper to be done in
the premises, as fully and to all intents and purposes as the undersigned could
do if personally present, and the undersigned hereby ratifies and confirms all
that said attorneys or any one of them shall lawfully do or any one of them
shall lawfully do or cause to be done by virtue hereof.
Dated: January 3, 1997
/s/ Brian Corby
-----------------------------
Sir Brian Corby
<PAGE> 3
KNOW ALL MEN BY THESE PRESENTS THAT the undersigned director of Mid Ocean
Limited, a Cayman Islands company, does hereby constitute and appoint Robert J.
Newhouse, Jr., Michael A. Butt, Charles F. Hays, and John M. Wadson, and each of
them acting singly, a true and lawful attorney in his name, place and stead, in
any and all capacities, to sign his or her name to the Annual Report of Mid
Ocean Limited on Form 10-K for the year ended October 31, 1996, under the
Securities Exchange Act of 1934, as amended, and to any and all amendments
thereto, and to cause the same to be filed with the Securities and Exchange
Commission, granting unto said attorneys and each of them full power and
authority t do and perform any act and thing necessary and proper to be done in
the premises, as fully and to all intents and purposes as the undersigned could
do if personally present, and the undersigned hereby ratifies and confirms all
that said attorneys or any one of them shall lawfully do or any one of them
shall lawfully do or cause to be done by virtue hereof.
Dated: January 3, 1997
/s/ Geoffrey Elliott
---------------------------------
Geoffrey Elliott
<PAGE> 4
KNOW ALL MEN BY THESE PRESENTS THAT the undersigned director of Mid Ocean
Limited, a Cayman Islands company, does hereby constitute and appoint Robert J.
Newhouse, Jr., Michael A. Butt, Charles F. Hays, and John M. Wadson, and each of
them acting singly, a true and lawful attorney in his name, place and stead, in
any and all capacities, to sign his or her name to the Annual Report of Mid
Ocean Limited on Form 10-K for the year ended October 31, 1996, under the
Securities Exchange Act of 1934, as amended, and to any and all amendments
thereto, and to cause the same to be filed with the Securities and Exchange
Commission, granting unto said attorneys and each of them full power and
authority t do and perform any act and thing necessary and proper to be done in
the premises, as fully and to all intents and purposes as the undersigned could
do if personally present, and the undersigned hereby ratifies and confirms all
that said attorneys or any one of them shall lawfully do or any one of them
shall lawfully do or cause to be done by virtue hereof.
Dated: January 4, 1997
/s/ Michael P. Esposito, Jr.
------------------------------------
Michael P. Esposito, Jr.
<PAGE> 5
KNOW ALL MEN BY THESE PRESENTS THAT the undersigned director of Mid Ocean
Limited, a Cayman Islands company, does hereby constitute and appoint Robert J.
Newhouse, Jr., Michael A. Butt, Charles F. Hays, and John M. Wadson, and each of
them acting singly, a true and lawful attorney in his name, place and stead, in
any and all capacities, to sign his or her name to the Annual Report of Mid
Ocean Limited on Form 10-K for the year ended October 31, 1996, under the
Securities Exchange Act of 1934, as amended, and to any and all amendments
thereto, and to cause the same to be filed with the Securities and Exchange
Commission, granting unto said attorneys and each of them full power and
authority t do and perform any act and thing necessary and proper to be done in
the premises, as fully and to all intents and purposes as the undersigned could
do if personally present, and the undersigned hereby ratifies and confirms all
that said attorneys or any one of them shall lawfully do or any one of them
shall lawfully do or cause to be done by virtue hereof.
Dated: January 3, 1997
/s/ Robert R. Glauber
------------------------------------
Robert R. Glauber
<PAGE> 6
KNOW ALL MEN BY THESE PRESENTS THAT the undersigned director of Mid Ocean
Limited, a Cayman Islands company, does hereby constitute and appoint Robert J.
Newhouse, Jr., Michael A. Butt, Charles F. Hays, and John M. Wadson, and each of
them acting singly, a true and lawful attorney in his name, place and stead, in
any and all capacities, to sign his or her name to the Annual Report of Mid
Ocean Limited on Form 10-K for the year ended October 31, 1996, under the
Securities Exchange Act of 1934, as amended, and to any and all amendments
thereto, and to cause the same to be filed with the Securities and Exchange
Commission, granting unto said attorneys and each of them full power and
authority t do and perform any act and thing necessary and proper to be done in
the premises, as fully and to all intents and purposes as the undersigned could
do if personally present, and the undersigned hereby ratifies and confirms all
that said attorneys or any one of them shall lawfully do or any one of them
shall lawfully do or cause to be done by virtue hereof.
Dated: January 2, 1997
/s/ Henry U. Harder
-----------------------------------
Henry U. Harder
<PAGE> 7
KNOW ALL MEN BY THESE PRESENTS THAT the undersigned director of Mid Ocean
Limited, a Cayman Islands company, does hereby constitute and appoint Robert J.
Newhouse, Jr., Michael A. Butt, Charles F. Hays, and John M. Wadson, and each of
them acting singly, a true and lawful attorney in his name, place and stead, in
any and all capacities, to sign his or her name to the Annual Report of Mid
Ocean Limited on Form 10-K for the year ended October 31, 1996, under the
Securities Exchange Act of 1934, as amended, and to any and all amendments
thereto, and to cause the same to be filed with the Securities and Exchange
Commission, granting unto said attorneys and each of them full power and
authority t do and perform any act and thing necessary and proper to be done in
the premises, as fully and to all intents and purposes as the undersigned could
do if personally present, and the undersigned hereby ratifies and confirms all
that said attorneys or any one of them shall lawfully do or any one of them
shall lawfully do or cause to be done by virtue hereof.
Dated: January 6, 1997
/s/ Paul Jeanbart
--------------------------------
Paul Jeanbart
<PAGE> 8
KNOW ALL MEN BY THESE PRESENTS THAT the undersigned director of Mid Ocean
Limited, a Cayman Islands company, does hereby constitute and appoint Robert J.
Newhouse, Jr., Michael A. Butt, Charles F. Hays, and John M. Wadson, and each of
them acting singly, a true and lawful attorney in his name, place and stead, in
any and all capacities, to sign his or her name to the Annual Report of Mid
Ocean Limited on Form 10-K for the year ended October 31, 1996, under the
Securities Exchange Act of 1934, as amended, and to any and all amendments
thereto, and to cause the same to be filed with the Securities and Exchange
Commission, granting unto said attorneys and each of them full power and
authority t do and perform any act and thing necessary and proper to be done in
the premises, as fully and to all intents and purposes as the undersigned could
do if personally present, and the undersigned hereby ratifies and confirms all
that said attorneys or any one of them shall lawfully do or any one of them
shall lawfully do or cause to be done by virtue hereof.
Dated: January 6, 1997
/s/ Roberto G. Mendoza
-----------------------------
Roberto G. Mendoza
<PAGE> 9
KNOW ALL MEN BY THESE PRESENTS THAT the undersigned director of Mid Ocean
Limited, a Cayman Islands company, does hereby constitute and appoint Robert J.
Newhouse, Jr., Michael A. Butt, Charles F. Hays, and John M. Wadson, and each of
them acting singly, a true and lawful attorney in his name, place and stead, in
any and all capacities, to sign his or her name to the Annual Report of Mid
Ocean Limited on Form 10-K for the year ended October 31, 1996, under the
Securities Exchange Act of 1934, as amended, and to any and all amendments
thereto, and to cause the same to be filed with the Securities and Exchange
Commission, granting unto said attorneys and each of them full power and
authority t do and perform any act and thing necessary and proper to be done in
the premises, as fully and to all intents and purposes as the undersigned could
do if personally present, and the undersigned hereby ratifies and confirms all
that said attorneys or any one of them shall lawfully do or any one of them
shall lawfully do or cause to be done by virtue hereof.
Dated: January 3, 1997
/s/ Robert J. Newhouse, Jr.
----------------------------
Robert J. Newhouse, Jr.
<PAGE> 10
KNOW ALL MEN BY THESE PRESENTS THAT the undersigned director of Mid Ocean
Limited, a Cayman Islands company, does hereby constitute and appoint Robert J.
Newhouse, Jr., Michael A. Butt, Charles F. Hays, and John M. Wadson, and each of
them acting singly, a true and lawful attorney in his name, place and stead, in
any and all capacities, to sign his or her name to the Annual Report of Mid
Ocean Limited on Form 10-K for the year ended October 31, 1996, under the
Securities Exchange Act of 1934, as amended, and to any and all amendments
thereto, and to cause the same to be filed with the Securities and Exchange
Commission, granting unto said attorneys and each of them full power and
authority t do and perform any act and thing necessary and proper to be done in
the premises, as fully and to all intents and purposes as the undersigned could
do if personally present, and the undersigned hereby ratifies and confirms all
that said attorneys or any one of them shall lawfully do or any one of them
shall lawfully do or cause to be done by virtue hereof.
Dated: January 3, 1997
/s/ Brian M. O'Hara
-----------------------------------
Brian M. O'Hara
<PAGE> 11
KNOW ALL MEN BY THESE PRESENTS THAT the undersigned director of Mid Ocean
Limited, a Cayman Islands company, does hereby constitute and appoint Robert J.
Newhouse, Jr., Michael A. Butt, Charles F. Hays, and John M. Wadson, and each of
them acting singly, a true and lawful attorney in his name, place and stead, in
any and all capacities, to sign his or her name to the Annual Report of Mid
Ocean Limited on Form 10-K for the year ended October 31, 1996, under the
Securities Exchange Act of 1934, as amended, and to any and all amendments
thereto, and to cause the same to be filed with the Securities and Exchange
Commission, granting unto said attorneys and each of them full power and
authority t do and perform any act and thing necessary and proper to be done in
the premises, as fully and to all intents and purposes as the undersigned could
do if personally present, and the undersigned hereby ratifies and confirms all
that said attorneys or any one of them shall lawfully do or any one of them
shall lawfully do or cause to be done by virtue hereof.
Dated: January 2, 1997
/s/ John M. Pasquesi
------------------------------------
John M. Pasquesi
<PAGE> 12
KNOW ALL MEN BY THESE PRESENTS THAT the undersigned director of Mid Ocean
Limited, a Cayman Islands company, does hereby constitute and appoint Robert J.
Newhouse, Jr., Michael A. Butt, Charles F. Hays, and John M. Wadson, and each of
them acting singly, a true and lawful attorney in his name, place and stead, in
any and all capacities, to sign his or her name to the Annual Report of Mid
Ocean Limited on Form 10-K for the year ended October 31, 1996, under the
Securities Exchange Act of 1934, as amended, and to any and all amendments
thereto, and to cause the same to be filed with the Securities and Exchange
Commission, granting unto said attorneys and each of them full power and
authority t do and perform any act and thing necessary and proper to be done in
the premises, as fully and to all intents and purposes as the undersigned could
do if personally present, and the undersigned hereby ratifies and confirms all
that said attorneys or any one of them shall lawfully do or any one of them
shall lawfully do or cause to be done by virtue hereof.
Dated: January 2, 1997
/s/ Henry Haalilio Peters
--------------------------------
Henry Haalilio Peters
<PAGE> 13
KNOW ALL MEN BY THESE PRESENTS THAT the undersigned director of Mid Ocean
Limited, a Cayman Islands company, does hereby constitute and appoint Robert J.
Newhouse, Jr., Michael A. Butt, Charles F. Hays, and John M. Wadson, and each of
them acting singly, a true and lawful attorney in his name, place and stead, in
any and all capacities, to sign his or her name to the Annual Report of Mid
Ocean Limited on Form 10-K for the year ended October 31, 1996, under the
Securities Exchange Act of 1934, as amended, and to any and all amendments
thereto, and to cause the same to be filed with the Securities and Exchange
Commission, granting unto said attorneys and each of them full power and
authority t do and perform any act and thing necessary and proper to be done in
the premises, as fully and to all intents and purposes as the undersigned could
do if personally present, and the undersigned hereby ratifies and confirms all
that said attorneys or any one of them shall lawfully do or any one of them
shall lawfully do or cause to be done by virtue hereof.
Dated: January 3, 1997
/s/ Jeffrey S. Tabak
--------------------------------
Jeffrey S. Tabak
<PAGE> 14
KNOW ALL MEN BY THESE PRESENTS THAT the undersigned director of Mid Ocean
Limited, a Cayman Islands company, does hereby constitute and appoint Robert J.
Newhouse, Jr., Michael A. Butt, Charles F. Hays, and John M. Wadson, and each of
them acting singly, a true and lawful attorney in his name, place and stead, in
any and all capacities, to sign his or her name to the Annual Report of Mid
Ocean Limited on Form 10-K for the year ended October 31, 1996, under the
Securities Exchange Act of 1934, as amended, and to any and all amendments
thereto, and to cause the same to be filed with the Securities and Exchange
Commission, granting unto said attorneys and each of them full power and
authority t do and perform any act and thing necessary and proper to be done in
the premises, as fully and to all intents and purposes as the undersigned could
do if personally present, and the undersigned hereby ratifies and confirms all
that said attorneys or any one of them shall lawfully do or any one of them
shall lawfully do or cause to be done by virtue hereof.
Dated: January 3, 1997
/s/ Frank J. Tasco
----------------------------------
Frank J. Tasco
<TABLE> <S> <C>
<ARTICLE> 7
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1996
<PERIOD-START> NOV-01-1995
<PERIOD-END> OCT-31-1996
<DEBT-HELD-FOR-SALE> 1,360,210<F1>
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 0
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 1,394,559
<CASH> 163,968
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 42,647
<TOTAL-ASSETS> 2,022,699
<POLICY-LOSSES> 427,717<F2>
<UNEARNED-PREMIUMS> 303,340<F3>
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 0
0
0
<COMMON> 631,928<F4>
<OTHER-SE> 485,271<F5>
<TOTAL-LIABILITY-AND-EQUITY> 2,022,699
436,097
<INVESTMENT-INCOME> 83,261
<INVESTMENT-GAINS> 2,126
<OTHER-INCOME> 17,632
<BENEFITS> 211,888
<UNDERWRITING-AMORTIZATION> 70,125
<UNDERWRITING-OTHER> 39,371
<INCOME-PRETAX> 217,732
<INCOME-TAX> 4,478
<INCOME-CONTINUING> 211,644
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 211,644
<EPS-PRIMARY> 5.75
<EPS-DILUTED> 5.74
<RESERVE-OPEN> 0<F6>
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
<FN>
<F1>REPRESENTS FIXED MATURITY INVESTMENTS AVAILABLE FOR SALE. THESE ARE CARRIED AT
MARKET VALUE.
<F2>EXCLUDE THE REDUCTION FOR OUTSTANDING LOSSES RECOVERABLE FROM REINSURERS
($5,466) WHICH IS INCLUDED IN TOTAL ASSETS.
<F3>EXCLUDE THE REDUCTION FOR PREPAID REINSURANCE PREMIUM ($15,846) WHICH IS
INCLUDED IN TOTAL ASSETS.
<F4>INCLUDES ORDINARY SHARES OF $6,880 AND ADDITIONAL PAID IN CAPITAL $625,048.
<F5>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>
