<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended JANUARY 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 0-22118
MID OCEAN LIMITED
(Exact name of registrant as specified in its charter)
Cayman Islands Not Applicable
(State of other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
Richmond House, 12 Par-la-Ville Road, Hamilton HM
08, Bermuda (Address of principal
executive offices)
Telephone Number: (441) 292-1358
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No ___
As of March 10, 1998 there were outstanding 36,087,767 Class A Ordinary Shares,
1,190,292 Class B Ordinary Shares and 1,860,000 Class C Ordinary Shares, each of
$0.20 par value, of the registrant.
<PAGE> 2
MID OCEAN LIMITED
INDEX
PART I - FINANCIAL INFORMATION
Financial Statements: Page
Consolidated Balance Sheets 3
at January 31, 1998 (unaudited) and October 31, 1997
Consolidated Statements of Operations 4
for the three months ended January 31, 1998 and 1997 (unaudited)
Consolidated Statements of Cash Flows 5
for the three months ended January 31, 1998 and 1997 (unaudited)
Notes to Consolidated Financial Statements (unaudited) 6
Management Discussion and Analysis of Financial 7
Condition and Results of Operations
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 15
Exhibit 11. Computation of Earnings per Share 16
Signatures 17
<PAGE> 3
PART I. FINANCIAL INFORMATION
MID OCEAN LIMITED
CONSOLIDATED BALANCE SHEETS
(THOUSANDS OF UNITED STATES DOLLARS)
<TABLE>
<CAPTION>
JANUARY 31, 1998 OCTOBER 31, 1997
ASSETS (UNAUDITED) (AUDITED)
Investments available for sale at fair value:
<S> <C> <C>
Fixed maturities (Amortized cost $1,384,234; 1997: $1,484,353) $ 1,404,058 $ 1,502,213
Equities (cost $100,898: $22,388) 103,782 23,539
Short-term investments (Amortized cost $ 69,843 ; 1997: $21,087) 69,958 21,092
----------- -----------
Total investments available for sale 1,577,798 1,546,844
Unquoted investments at cost 10,201 9,880
Cash and cash equivalents 133,948 122,784
Accrued investment income 20,319 22,076
Premiums receivable 401,002 280,792
Funds withheld by cedents 7,576 20,963
Outstanding losses recoverable from reinsurers 10,912 17,792
Prepaid reinsurance premium 13,712 14,679
Profit commissions receivable 34,180 32,484
Investments pending settlement -- 1,809
Deferred acquisition costs 64,813 45,856
Goodwill 110,631 112,506
Other assets 64,993 42,140
----------- -----------
TOTAL ASSETS $ 2,450,085 $ 2,270,605
=========== ===========
LIABILITIES
Losses and loss expenses $ 505,396 $ 496,952
Unearned premiums 446,772 321,845
Investments pending settlement 2,830 --
Reinsurance balances payable 15,087 12,973
Loan Notes 10,526 10,573
Other liabilities 58,942 55,301
----------- -----------
TOTAL LIABILITIES 1,039,553 897,644
----------- -----------
SHAREHOLDERS' EQUITY
Ordinary Shares (par value $0.20; authorized 200,000,000 shares;
issued and outstanding, 39,127,559; 38,984,080) 7,825 7,797
Additional paid-in capital 745,956 740,538
Net unrealized appreciation on investments 21,892 18,679
Foreign currency translation adjustments 1,538 386
Deferred compensation (8,974) (5,286)
Retained earnings 642,295 610,847
----------- -----------
TOTAL SHAREHOLDERS' EQUITY 1,410,532 1,372,961
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 2,450,085 $ 2,270,605
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 4
MID OCEAN LIMITED
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(THOUSANDS OF UNITED STATES DOLLARS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
REVENUES JANUARY 31, 1998 JANUARY 31, 1997
<S> <C> <C>
Gross premiums written $ 261,648 $ 259,835
Change in unearned premium (126,179) (138,877)
------------ ------------
Premiums earned 135,469 120,958
Premiums ceded 12,505 9,697
Change in prepaid premiums (17) 3,184
------------ ------------
Premiums ceded 12,488 12,881
Net premiums earned 122,981 108,077
Net investment income 26,383 23,840
Net gains on investments 14,280 2,658
Exchange loss (2,638) (6,886)
Managing agency income 3,679 3,250
Other income 1,767 1,040
------------ ------------
TOTAL REVENUES 166,452 131,979
------------ ------------
EXPENSES
Losses and loss expenses incurred 68,674 57,231
Reinsurance recoveries (6,389) (5,793)
------------ ------------
Net losses and loss expenses incurred 62,285 51,438
Acquisition expenses 20,049 16,683
Managing agency expenses 1,803 (13)
Operational expenses 15,989 9,430
------------ ------------
TOTAL EXPENSES 100,126 77,538
------------ ------------
INCOME
Net income before tax and minority interest 66,326 54,441
Income tax (2,605) (2,006)
Minority interest 0 (432)
------------ ------------
NET INCOME $ 63,721 $ 52,003
============ ============
PER SHARE DATA
Net income per ordinary share:
Basic $ 1.63 $ 1.45
Diluted $ 1.62 $ 1.43
Dividend per ordinary share $ 0.825 $ 0.75
Weighted average number of ordinary shares outstanding :
Basic 39,103,640 35,982,820
Diluted 39,447,599 36,314,837
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE> 5
MID OCEAN LIMITED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(THOUSANDS OF UNITED STATES DOLLARS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
CASH FLOWS FROM OPERATING JANUARY 31, 1998 JANUARY 31, 1997
ACTIVITIES
<S> <C> <C>
Net Income $ 63,721 $ 52,003
Adjustment to reconcile net income to cash provided
by operating activities:
Amortization of goodwill 1,873 455
Net gains on investments (14,280) (2,658)
Premiums receivable (118,452) (104,102)
Deferred acquisition costs (18,541) (16,966)
Outstanding losses recoverable from reinsurers 7,148 731
Prepaid reinsurance premium 1,206 11,318
Losses and loss expenses 6,892 12,793
Unearned premiums 122,282 129,687
Reinsurance balances payable 2,028 (2,432)
Funds withheld by cedents 13,808 (1,741)
Other (18,660) (20,144)
----------- -----------
Net cash provided by operating activities 49,025 58,944
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale and maturity of investments 924,044 1,277,931
Purchase of investments available for sale (856,619) (1,294,106)
Proceeds from sale of equity securities 2,022 --
Purchase of equity securities (80,792) --
Settlement of futures contracts 1,638 --
Other investing activities 959 438
----------- -----------
Net cash applied to investing activities (8,748) (15,737)
----------- -----------
CASH FLOWS FROM FINANCING
ACTIVITIES
Options exercised 511 61,301
Repurchase of shares 0 (10,214)
Dividends paid (32,272) (28,458)
----------- -----------
Net cash (applied to) provided by financing activities (31,761) 22,629
----------- -----------
FOREIGN CURRENCY TRANSLATION ADJUSTMENTS 2,648 4,817
NET INCREASE IN CASH AND CASH EQUIVALENTS 11,164 70,653
BALANCE AT BEGINNING OF PERIOD 122,784 163,968
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 133,948 $ 234,621
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE> 6
MID OCEAN LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note A: Basis of Presentation
The accompanying consolidated financial statements have not been audited except
for the balance sheet at October 31, 1997. In the opinion of the Company's
management, the financial statements reflect all adjustments necessary to
present fairly the results of operations for the three month periods ended
January 31, 1998 and 1997, the financial position at January 31, 1998 and the
cash flows for the three month periods ended January 31, 1998 and 1997. The
results of operations for the three months ended January 31, 1998 are not
necessarily indicative of future financial results.
Note B: Accounting policy
The Company has adopted Financial Accounting Standards Board Statement 128 that
establishes new standards for computing and reporting earnings per share.
Comparative amounts have been restated. Exhibit 11 shows the computation of
earnings per share under the new standard.
Note C: Subsequent Event
On March 16, 1998, EXEL Limited ("EXEL") and the Company announced that they
have signed a definitive agreement to merge, creating an organization with
assets in excess of $9.1 billion, shareholders' equity of approximately $4.8
billion and estimated market capitalization of more than $8.0 billion. EXEL
would be the holding of the new organization. EXEL and the Company plan to
combine their reinsurance operations which will operate as X.L. Mid Ocean
Reinsurance Company, Ltd. and will be headquartered in Bermuda.
The all stock transaction will result in EXEL issuing 1.0215 of its ordinary
shares for each share of Mid Ocean Limited that it does not already own. EXEL
already owns 9.7 million, or 26.82 percent of the outstanding shares of the
Company. The transaction is subject to the approval of shareholders of both
companies, as well as certain regulatory approvals. The Board of Directors of
EXEL and the Company have, by vote of unaffiliated directors, unanimously agreed
to the merger which is expected to be completed by mid summer 1998. The merger
will be accounted for as a purchase under U.S. generally accepted accounting
principals ("GAAP").
6
<PAGE> 7
MID OCEAN LIMITED
MANAGEMENT DISCUSSION & ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
This discussion and analysis should be read in conjunction with the attached
unaudited consolidated financial statements and notes thereto of the Company for
the quarter ended January 31, 1998 together with the consolidated financial
statements for the year ended October 31, 1997 and the notes thereto included in
the Company's Annual Report on Form 10-K. The results of operations for any
fiscal period are not necessarily indicative of future financial results.
On March 16, 1998, EXEL Limited ("EXEL") and the Company announced that they
have signed a definitive agreement to merge, creating an organization with
assets in excess of $9.1 billion, shareholders' equity of approximately $4.8
billion and estimated market capitalization of more than $8.0 billion. EXEL
would be the holding of the new organization. EXEL and the Company plan to
combine their reinsurance operations which will operate as X.L. Mid Ocean
Reinsurance Company, Ltd. and will be headquartered in Bermuda.
The all stock transaction will result in EXEL issuing 1.0215 of its ordinary
shares for each share of Mid Ocean Limited that it does not already own. EXEL
already owns 9.7 million, or 26.82 percent of the outstanding shares of the
Company. The transaction is subject to the approval of shareholders of both
companies, as well as certain regulatory approvals. The Board of Directors of
EXEL and the Company have, by vote of unaffiliated directors, unanimously agreed
to the merger which is expected to be completed by mid summer 1998. The merger
will be accounted for as a purchase under U.S. generally accepted accounting
principals ("GAAP").
Mid Ocean Limited is the parent company of Mid Ocean Holdings Limited
("Holdings") which has two wholly-owned subsidiaries, Mid Ocean Reinsurance
Company Limited ("Mid Ocean Reinsurance") and Ridgewood Holdings Ltd
("Ridgewood"). Ridgewood is the Bermuda holding company of the Brockbank Group
plc ("Brockbank"). Brockbank includes two Lloyds dedicated corporate syndicates
("corporate syndicates") and a Lloyds managing agency. The Company, through its
subsidiaries, provides a broad range of reinsurance and insurance products on a
global basis.
The Company's fiscal year end is October 31. Brockbank's fiscal year end is
December 31. Brockbank's results of operations for the quarter end December 31,
1997 and 1996 are included in the company's results of operations for the
quarter end January 31, 1998 and 1997 respectively.
7
<PAGE> 8
RESULTS OF OPERATIONS
FIRST QUARTER ENDED JANUARY 31, 1998 COMPARED TO FIRST QUARTER ENDED JANUARY 31,
1997.
<TABLE>
<CAPTION>
($ millions) 1998 % Change 1997
------- ------- -------
Net operating income
<S> <C> <C> <C>
(excluding net gain on investments) $ 49.4 0.2% $ 49.3
Net gains on investments 14.3 429.6 2.7
------- ------- -------
Net income $ 63.7 22.5% $ 52.0
======= ======= =======
</TABLE>
Net income for the quarter ended January 31, 1998 increased 22.5% over
the first quarter ended January 31, 1997 due primarily to a $ 11.6 million
increase in net gains on investments. Net operating income increased 0.2% to $
49.4 million for the quarter ended January 31, 1998. There was relatively low
loss activity in both quarters.
PREMIUMS
<TABLE>
<CAPTION>
NET PREMIUMS WRITTEN 1998 % Change 1997
------- ------- -------
($ millions)
<S> <C> <C> <C>
Property catastrophe $ 69.1 (28.3)% $ 96.4
Property other 58.7 4.6 56.1
Marine & energy 28.8 (23.4) 37.6
Aviation & satellite 30.4 (3.8) 31.6
Corporate syndicates 47.3 124.2 21.1
Other 14.8 102.7 7.3
------- ------- -------
Total $ 249.1 (0.4)% $ 250.1
======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
NET PREMIUMS EARNED 1998 % Change 1997
------- ----- -------
($ millions)
<S> <C> <C> <C>
Property catastrophe $ 34.1 1.5% $ 33.6
Property other 14.7 (38.2) 23.8
Marine & energy 8.5 (37.0) 13.5
Aviation & satellite 8.3 (5.7) 8.8
Corporate syndicates 53.6 110.2 25.5
Other 3.8 31.0 2.9
------ ------ ------
Total $123.0 13.8% $108.1
====== ====== ======
</TABLE>
Net premiums written decreased $1.0 million or 0.4% in the first quarter of 1998
compared to the first quarter of 1997. This slight decline is due to a reduction
of $27.2 million of net written premiums by Mid Ocean Reinsurance which is
offset by an increase of $26.2 million relating to the corporate syndicates.
The majority of premiums written by the Company renew on January 1. Brockbank's
January 1, 1998 renewal premiums will not be reflected in the Company's results
until the quarter ended April 30, 1998.
8
<PAGE> 9
The decrease in net premiums written by Mid Ocean Reinsurance was due to several
factors. Premium rates continued to decline in a competitive pricing environment
and in the first quarter of 1997 there was premium of $ 12.9 million on a
contract which was written covering a two year period with no comparable premium
in first quarter 1998. The decline in premium rates was across most classes of
business that Mid Ocean Reinsurance writes. In particular, measured on an
exposure adjusted basis, property catastrophe premium rates were down
approximately 15% on major United States risks. In the international catastrophe
markets rates declined by approximately 20%.
The increase in net premiums written by the corporate syndicates is largely due
to a 40% increase in underwriting capacity provided to these syndicates for the
1997 underwriting year as compared to the 1996 underwriting year.
Premiums ceded during the first quarter 1998 were $12.5 million compared with
$9.7 million in the first quarter 1997. The majority of this increase is
attributable to the corporate syndicates.
Net premiums earned during the first quarter 1998 increased $14.9 million or
13.8% over the first quarter 1997. This increase is due to a $28.1 million
increase relating to the corporate syndicates offset by a decrease for Mid Ocean
Reinsurance of $13.2 million. The increase in net premiums earned for the
corporate syndicates is in line with the increased level of net premiums written
and because net premiums have been earned in respect of two underwriting years
in the first quarter 1998 compared to one in the first quarter 1997. Net
premiums earned decreased for Mid Ocean Reinsurance due to the reduction in net
premiums written.
Premiums written are earned over the underlying risk period of each contract,
commencing at the inception of the contract. The majority of contracts have a
risk period of one year; however, for many contracts it is longer and therefore
analysis between classes of business written and earned in any one quarter or
year is not always comparable.
<TABLE>
<CAPTION>
INVESTMENT RESULTS 1997 % Change 1998
---- -------- ----
($ millions)
<S> <C> <C> <C>
Net investment income $26.4 10.9% $23.8
Net gains on investments 14.3 429.6% 2.7
</TABLE>
The increases in net investment income resulted from the continued
growth of the investment base and from the relatively higher returns. The
investment portfolio, measured on a market value basis, yielded 6.24% for the
first quarter 1998 compared with 6.16% in the first quarter 1997.
The net unrealized market appreciation or depreciation attributable to
securities held in the portfolio is included as a separate component of
shareholders' equity. At January 31, 1998, shareholders' equity included
unrealized appreciation of $21.9 million compared with $18.7 million at October
31, 1997. Total returns on investments, measured on a market value basis, were
2.58% in the first quarter 1998 compared to 1.3% in the first quarter of 1997 .
9
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<TABLE>
<CAPTION>
OTHER REVENUE 1998 % Change 1997
--------- --------- ---------
($ millions)
<S> <C> <C> <C>
Exchange loss $ (2.6) (62.3)% $ (6.9)
Managing agency income 3.7 12.1% 3.3
Other income 1.8 80.0% 1.0
</TABLE>
The exchange loss in the first quarters of 1998 and 1997 relate mainly
to the British pound exchange rate movements and is largely unrealized. The
majority of Mid Ocean Reinsurance's British pound denominated premiums written
are recorded on January 1, which was at a higher exchange rate than that on
January 31 of each year when the related premium receivables in the Balance
Sheet were revalued.
Managing agency income relates to fees earned by the managing agency in
respect of its management of Lloyd's underwriting syndicates and earned profit
commissions which are estimated based on anticipated results of the syndicates
it manages. Managing agency income attributable to the corporate syndicates is
eliminated on consolidation. Profit commissions are paid to the managing agency
three years after an underwriting year incepts.
Other income relates to fee income from other insurance related
services of Brockbank and the corporate syndicates. The increase in other income
for the first quarter 1998 over 1997 is related to an increase in the premiums
written by the corporate syndicates.
<TABLE>
<CAPTION>
EXPENSES 1998 1997
------ ------
<S> <C> <C>
Net loss and loss expense ratio 50.7% 47.6%
Underwriting expense ratio 29.3% 24.2%
------ ------
Combined ratio 80.0% 71.8%
====== ======
</TABLE>
The combined ratio is computed based on the relationship of net
losses and underwriting expenses to net earned premiums. The combined ratio is a
principal indicator of underwriting performance, with less than 100% indicating
an underwriting profit.
<TABLE>
<CAPTION>
LOSS AND LOSS EXPENSES 1998 1997
----------- -----------
($millions)
<S> <C> <C>
Loss and loss expenses $ 68.7 $ 57.2
Reinsurance recoveries (6.4) (5.8)
----------- -----------
Net loss and loss expenses $ 62.3 $ 51.4
=========== ===========
Net loss and loss expense ratio 50.7% 47.6%
</TABLE>
During the first quarter 1998 the Company's incurred net loss
and loss expenses increased $10.9 million over the first quarter 1997. This
increase is due to an increase in the losses incurred relating to the corporate
syndicates offset by a decrease in losses incurred by Mid Ocean
10
<PAGE> 11
Reinsurance. The Company established a $ 9 million incurred but not reported
("IBNR") loss reserve for the Canadian Ice Storms in the first quarter of 1998.
There were no significant catastrophic events during the first quarter of 1997.
As in previous quarters, the Company continued to review and release loss
reserves established on business written in prior years where actual reported
losses have developed more favourably than initial loss estimates. There was an
overall reduction in the loss ratio for Mid Ocean Reinsurance for the quarter
ended January 31, 1998 over 1997 which is offset by higher incurred loss ratios
relating to the business written by the corporate syndicates. The higher
incurred loss ratios of the corporate syndicates on increased amount of net
premiums earned has given rise to an increased amount of losses incurred for the
first quarter 1998 over 1997.
Net loss reserves amounted to $494.5 million and $479.2 million at January 31,
1998 and October 31, 1997 respectively. Included in this amount are net reserves
for IBNR losses of 339.7 million and $ 351.0 million respectively.
In determining that portion of loss and loss expenses for IBNR, 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. Mid Ocean's loss experience to date has
been more favorable than originally assumed and has led to the releases of loss
reserves established in prior years.
UNDERWRITING EXPENSES
<TABLE>
<CAPTION>
ACQUISITION EXPENSES AND RATIO: 1998 1997
------- -------
($ millions)
<S> <C> <C>
Acquisition expense $ 20.0 $ 16.7
Acquisition expense ratio 16.3% 15.5%
</TABLE>
The $ 3.3 million increase in acquisition expenses in the first quarter
1998 over 1997 is due to an increased amount of net earned premiums. The
increase in the acquisition expense ratio is attributable to an increase in Mid
Ocean Reinsurance's acquisition expenses on net premiums earned on its pro rata
business as compared to the first quarter 1997.
<TABLE>
<CAPTION>
OPERATION EXPENSES AND RATIO: 1998 1997
------- -------
($ millions)
<S> <C> <C>
Operational expenses $ 16.0 $ 9.4
Operational expense ratio 13.0% 8.7%
</TABLE>
The $6.6 million or 70.2% increase in operational expenses in first
quarter 1998 over 1997 is due to an increase in the goodwill amortization charge
associated with the completion of the acquisition of Brockbank in August 1997
together with the continued growth of the Company's operations for Mid Ocean
Reinsurance and Brockbank. In addition there were corrections to some
11
<PAGE> 12
previously accrued expenses in the first quarter 1997 which gave rise to a lower
amount of operational expenses than usual.
The increase in the operational expenses ratio is the result of the
Company's operational expenses which is greater than the increase in the net
earned premium for the first quarter 1998 over the first quarter 1997.
<TABLE>
<CAPTION>
OTHER EXPENSES 1998 % Change 1997
------- -------- -------
($ millions)
<S> <C> <C> <C>
Managing agency expenses $1.8 -- $0.0
Income taxes $2.6 30.0% $2.0
</TABLE>
Managing agency expenses are the costs of operating the Brockbank
managing agency. During the first quarter of 1997 there was an adjustment of
certain expenses which had previously been reported, some of which were
allocated directly to the syndicates that are managed.
Income taxes represent estimated income taxes in the United Kingdom for
Brockbank and Mid Ocean Reinsurance's London branch operations. The increase for
the quarter end January 31, 1998 over 1997 is due to increased profits of these
entities.
FINANCIAL CONDITION AND LIQUIDITY
The Company's assets consist of its investment in the stock of
Holdings, which is the parent company of Mid Ocean and Brockbank. The Company
relies primarily on cash dividends from Holdings, which relies on dividends from
its direct and indirect subsidiaries. The payment of such dividends is
restricted by applicable law under Bermuda and United Kingdom insurance law and
regulations, including those promulgated by the Society of Lloyd's. Currently
there are no effective statutory restrictions on the payment of dividends by the
Company or its subsidiaries. On December 4, 1997 the Board of Directors approved
an increase in annualized dividends to $3.30 from $3.00 during 1997. The payment
of the dividend in any quarter is at the discretion of the Board of Directors of
the Company.
At January 31, 1998, shareholders' equity was $1,410.5 million, of
which $642.3 million was retained earnings.
At January 31, 1998, the Company held $133.9 million of cash and cash
equivalents compared with $122.8 million at October 31, 1997. The Company's
consolidated sources of funds consist primarily of net premiums written,
investment income, and the proceeds from sales and maturities of investments.
Funds are used primarily to pay claims, operating expenses and dividends and for
the purchase of investments. Net cash flow provided by operating activities was
$49.0 million in the first quarter of 1998 compared with $58.9 million in the
first quarter of 1997. The decrease is mainly due to an increase in the amount
of paid losses settled. The Company 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.
12
<PAGE> 13
Primarily due to the potential for large loss payments, the Company's
investment portfolio is structured to provide a high level of liquidity to meet
its obligations. At January 31, 1998, the investment portfolio, measured at fair
value, including accrued investment income, trades pending settlement and cash
and cash equivalents, was $1,729.2 million compared with $1,693.5 million at
October 31, 1997. The portfolio is presently made up of fixed maturities, equity
securities, short-term investments and cash and cash equivalents. At January 31,
1998 and October 31, 1997, 84.7% of the fair value of debt 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. The Company presently
has no investments in real estate or mortgage loans.
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 January 31,
1998, the investment in Trident was $5.9 million compared with $5.7 million at
October 31, 1997.
In connection with the completion of the acquisition of Brockbank in
August 1997, the Company has issued loan notes and the value outstanding at
January 31, 1998 was $ 10.5 million. Interest is payable on these notes
semi-annually at a rate of 0.5% below LIBOR. These loan notes are redeemable at
the option of the holder under various conditions and any loan notes outstanding
at June 30, 2003 will be redeemed in full at par.
In 1997, the Company obtained multi-currency committed lines of credit
provided by a syndicate of nine major international banks led by Chase Manhattan
Bank, N.A., which provides for unsecured borrowing up to an aggregate amount of
$200 million subject to certain conditions. There has been no drawdown on these
facilities.
Under the terms of certain reinsurance contracts, Mid Ocean Reinsurance
is required to provide letters of credit to reinsureds in respect of loss
reserves and/or unearned premiums. Mid Ocean Reinsurance has a facility of
approximately $ 263.3 million provided for the issuing of letters of credit.
This facility is secured by a lien on a portion of Mid Ocean Reinsurance's
investment portfolio. At January 31, 1998 Mid Ocean Reinsurance had provided
letters of credit amounting to $ 250.9 million compared with $187.9 million at
October 31, 1997. Included in this amount is the funding for the capital
requirements of the two dedicated corporate syndicates of $ 159.0 million at
January 31, 1998 compared to $ 109.0 million at January 31, 1998.
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 exchange rates current 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 exchange gains or losses that, in turn, could affect the Company's
consolidated statement of operations. The Company generally has not sought to
hedge its currency exposures with respect to such losses before the occurrence
of an event that produces a claim. However, certain of the Company'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.
13
<PAGE> 14
The Company formed a committee in 1997 to address the Year 2000 issue
and its potential impact on the Company. Consideration is being given to both
computer systems that the Company uses internally and does have some direct
influence and control over, together with those of third parties by whom the
Company could be significantly affected and over whom the Company does not have
control. These third parties who provide information upon which the Company
relies, include intermediaries, banks, investment managers, software companies
and cedents. The Company has developed a formal testing plan to ensure that all
systems are Year 2000 compliant. Such testing has already begun and will
continue throughout 1998 and 1999. In addition, the Company will be in contact
will all third parties with regard to Year 2000 compliance. As testing is
performed and inquiries are received, the Company will be in a position to judge
the need to change, update, and/or acquire systems that are Year 2000 compliant,
and will take action as appropriate.
14
<PAGE> 15
PART II OTHER INFORMATION
MID OCEAN LIMITED
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the three months ended January 31,
1998.
15
<PAGE> 16
MID OCEAN LIMITED
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MID OCEAN LIMITED
(Registrant)
/s/ Charles F Hays
CHARLES F HAYS
Senior Vice President,
Chief Financial and Administrative Officer
(Principal Financial Officer
and Accounting Officer)
Date: March 16, 1998
17
<PAGE> 1
EXHIBIT 11
MID OCEAN LIMITED
COMPUTATIONS OF EARNINGS PER SHARE
(UNAUDITED)
(Thousands of United States Dollars except share and per share amounts)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JANUARY 31, 1998 JANUARY 31, 1997
<S> <C> <C>
Net Income $ 63,721 $ 52,003
=========== ===========
Basic weighted average ordinary shares outstanding 39,103,640 35,982,820
Common share equivalents associated with options 343,959 332,017
----------- -----------
Diluted weighted average ordinary shares
and ordinary share equivalents outstanding 39,447,599 36,314,837
=========== ===========
Net income per ordinary share and ordinary share equivalent :
Basic $ 1.63 $ 1.45
=========== ===========
Diluted $ 1.62 $ 1.43
=========== ===========
</TABLE>
16
<TABLE> <S> <C>
<ARTICLE> 7
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> OCT-31-1998
<PERIOD-START> NOV-01-1997
<PERIOD-END> JAN-31-1998
<DEBT-HELD-FOR-SALE> 1,404,058<F1>
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 103,782
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 1,587,999
<CASH> 133,948
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 64,813
<TOTAL-ASSETS> 2,450,085
<POLICY-LOSSES> 505,396<F2>
<UNEARNED-PREMIUMS> 446,772<F3>
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 10,526
0
0
<COMMON> 753,781<F4>
<OTHER-SE> 656,751<F5>
<TOTAL-LIABILITY-AND-EQUITY> 2,450,085
122,981
<INVESTMENT-INCOME> 26,383
<INVESTMENT-GAINS> 14,280
<OTHER-INCOME> 2,808
<BENEFITS> 62,285
<UNDERWRITING-AMORTIZATION> 20,049
<UNDERWRITING-OTHER> 17,792
<INCOME-PRETAX> 66,326
<INCOME-TAX> 2,605
<INCOME-CONTINUING> 63,721
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 63,721
<EPS-PRIMARY> 1.63
<EPS-DILUTED> 1.62
<RESERVE-OPEN> 0
<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>EXCLUDES THE REDUCTION FOR OUTSTANDING LOSSES RECOVERABLE FROM REINSURERS
($10,912) WHICH IS INCLUDED IN TOTAL ASSETS.
<F3>EXCLUDE THE REDUCTION FOR PREPAID REINSURANCE PREMIUM ($13,712) WHICH IS
INCLUDED IN TOTAL ASSETS.
<F4>INCLUDES ORDINARY SHARES OF $7,825 AND ADDITIONAL PAID IN CAPITAL $745,956.
<F5>INCLUDES RETAINED EARNINGS, NET UNREALIZED APPRECIATION ON INVESTMENTS,
FOREIGN CURRENCY TRANSLATION ADJUSTMENTS AND DEFERRED COMPENSATION.
</FN>
</TABLE>
