The Company's and X.L.'s principal executive offices are at Cumberland House, Hamilton, Bermuda, XLGRe's offices are in Windsor Place, Hamilton, Bermuda and X.L.E.'s offices are in La Touche House, International Financial Centre, Dublin, the Republic of Ireland. In 1997, the Company acquired commercial real estate in Hamilton, Bermuda, for the purpose of securing long- term office space to meet its anticipated needs.
The selected consolidated financial data below should be read in conjunction with the consolidated financial statements and the notes thereto presented under Item 8.
In 1990, X.L. provided the capital to incorporate through two holding companies, X.L.E., under the laws of the Republic of Ireland.
On November 1, 1995, X.L. Reinsurance Company, Ltd. (XLRe) was incorporated under the laws of Bermuda as a wholly-owned subsidiary of X.L. and subsequently commenced operations effective December 1, 1995. On June 12, 1997, the Company, through a subsidiary, acquired GCR Holdings Limited. The net assets of this company's wholly-owned operating subsidiary, Global Capital Reinsurance Company Limited (GCR) were combined with XLRe with effect from this day. On November 4, 1997 XLRe was renamed X.L. Global Reinsurance Company, Ltd. (XLGRe).
Professional liability coverage, for certain categories of risk, up to a maximum of $50 million with a minimum attachment point of $25 million, or $20 million for law firms.
The general liability and the professional liability coverages are also offered with the premiums calculated utilizing an alternate rating formula. These policies have a minimum attachment point of $10 million with the maximum limit not to exceed $150 million for general liability and $50 million for professional liability.
X.L. provides on a claims-made and reported policy form employment practices liability up to a maximum of $100 million with a minimum attachment of $1 million.
During February 1996, X.L. Risk Solutions and CIGNA Risk Solutions were announced as a coordinated initiative between X.L. and CIGNA Property & Casualty ("CIGNA"). The product provides combined capacity for traditional casualty and property coverages provided by X.L. or CIGNA. Available capacity by line of coverage is $60 million to $200 million depending upon the lines selected. Attachment levels, may in certain situations be provided below traditional stated levels subject to the underwriting requirements.
Presently, eighty percent of the portfolio consists of short-tail business and is written on a guaranteed cost basis, loss sensitive rating approach or a combination of both.
Effective December 1, 1995, X.L. entered into a quota share reinsurance policy with five U.S. reinsurers and one non-U.S. reinsurer covering general liability risks only. Effective December 1, 1996, two additional reinsurers were added to the program, of which one is RCRe. Under the terms of the policy, X.L. will cede 20% of risks with total limits up to $100 million and 25% of risks with total limits in excess of $100 million. The maximum amount recoverable from the reinsurers will be the ceded percentage of the original policy limit on a per occurrence basis, with an annual aggregate of 225% of the total premium ceded. No single reinsurer participates in excess of 23% of the quota share. With the exception of RCRe, all the reinsurers are rated, of which the lowest as rated by S&P is BBB.
With respect to employment practices liability cover, X.L. reinsures on a quota share basis one third of the first $75 million to a U.S. insurer and cedes the remaining excess layer of $25 million to a Bermuda based insurer. Both reinsurers are rated, of which the lowest as rated by A.M. Best is A.
Effective September 1, 1997, X.L. and X.L.E. entered into an excess of loss casualty catastrophe reinsurance contract covering all general liability risks. Under the terms of this policy, X.L. and X.L.E. are reinsured for $80 million ultimate net loss each occurrence excess of a per occurrence retention, subject to an annual aggregate retention. The maximum amount recoverable from the reinsurers will be an annual aggregate of $250 million. For the year ended November 30, 1997, 92.5% of this reinsurance has been placed with seventeen reinsurers, all of which are rated. With the exception of two reinsurers, the lowest as rated by S&P is A-. The other two reinsurers are rated BBB and BB by S&P, representing 3.5% participation on this program.
Certain amounts in the financial statements for prior years have been reclassified to conform with the 1997 presentation. All share amounts have been adjusted for the one-for-one stock dividend paid to shareholders of record July 26, 1996.
Investments are available for sale and are carried at market value. The net unrealized appreciation or depreciation on investments is included as a separate component of shareholders' equity.
All investment transactions are recorded on a trade date basis. Realized gains and losses on sale of investments are determined on the basis of average cost or amortized cost. Investment income is recognized when earned and includes the amortization of premium and discount on fixed maturities and short-term investments.
Financial futures and forward currency contracts are marked to market, with the corresponding realized or unrealized gain or loss included in income, except in the instance of forward foreign currency contracts that are used to hedge currency risks on specific investments. Gains and losses from these contracts are deferred and included in shareholders' equity until the corresponding asset is sold.
For purposes of the statements of cash flows, cash equivalents include fixed interest deposits placed with a maturity of under 90 days when purchased.
The Company owns 27.9% and 22.1% of the issued shares of RCHI as at November 30, 1997 and 1996, respectively. Outstanding share warrants if exercised would dilute the Company's ownership to 22.8% and 17.6%. RCHI commenced operations on November 6, 1995.
The Company has committed to invest in several limited partnerships as part of its overall corporate strategy. The primary purpose of these partnerships is to invest capital provided by the partners in various insurance and reinsurance ventures. The Company had invested $27.2 million and $23.8 million as at November 30, 1997 and 1996, respectively, with commitments to invest a further $41.2 million and $44.9 million respectively, over the next eight years. The Company received income from its investments of $4.3 million and $Nil for the years ended November 30, 1997 and 1996, respectively. The Company continually reviews the performance of the partnerships to ensure there is no decrease in the values of its investments. The Company is a limited partner and, as such, does not actively participate in the management of the partnerships.
Unpaid losses and loss expenses net of reinsurance balances receivable comprise (U.S. dollars in thousands):
During 1997, the Company established three new 1997 casualty indemnity reserves totalling $145 million. Historically, such losses have not emerged this quickly. The nature of the Company's losses are low frequency, high severity. The Company's reserving model, which was enhanced in 1996, reacts to loss experience relative to its loss history. Accordingly, one or two losses outside of the expected frequency can have a significant impact on any given year, and the high level of the 1997 current year incurred losses was a result of this. Should actual loss history prove to be different than the model's indicated outcome, these reserves will be adjusted accordingly.
On December 24, 1997, the Company received a firm commitment from a syndicate of commercial banks led by Mellon Bank to replace its existing letter of credit facility with a $500 million letter of credit facility which will be secured against the Company's investment portfolio. Existing letters of credit will become part of this facility.
On November 16, 1996, the Company established a revolving line of credit with Mellon Bank. On June 11, 1997, this was replaced by two unsecured revolving lines of credit of $250 million each, one for 364 days (short-term) and the other for 5 years (long-term). During the year a total of $620 million was borrowed at a weighted
The Credit Agreement for both facilities contains various financial and non- financial covenants, including a requirement for the Company to maintain consolidated net worth of at least $1.2 billion. The Company was in compliance with all covenants under the Credit Agreement as at November 30, 1997.
On September 29, 1993, the Company initiated its first of several buy back programs from the public market. The following table summarizes these programs and their related costs from September 29, 1993 to November 30, 1997:
granted with or without SARs. Grant prices are established at the fair market value of the Company's common stock at the date of grant. Options and SARs have a life of 10 years and vest annually over three years from date of grant.
Restricted stock awards issued under the plan vest over a five year period from the date of grant. These shares contained certain restrictions, for said period, relating to among other things, forfeiture in the event of termination of employment and transferability. As the shares are issued, deferred compensation equivalent to the difference between the issue price and the estimated fair market value on the date of the grant is charged to shareholder's equity and subsequently amortized over the five year restriction period. Restricted stock issued under the plan totalled 274,300 shares, 120,500 shares and 98,000 shares in 1997, 1996 and 1995, respectively.
Total stock based compensation recognized in net income was $3.2 million and $1.3 million in 1997 and 1996, respectively.
Following is a summary of stock options and related activity :
- -------- * Available for grant includes shares which may be granted on either stock options or restricted stock.
X.L.E. has been approved to carry on business in the International Services Centre in Dublin. Under Section 39 of the Finance Act 1990, X.L.E. is entitled to benefit from a 10% tax rate on profits (including investment income) until the year 2005.
At November 30, 1997, 1996 and 1995, forward foreign exchange contracts having notional principal amounts of $859.3 million, $683.3 million and $127.2 million, respectively, were outstanding. At November 30, 1997, the market value of the outstanding forward foreign exchange contracts was $862.0 million. Contracts with a notional principal amount of $185.3 million and a market value of $188.0 million directly hedge the Company's foreign currency assets and are not held for trading purposes. Changes in the value of these contracts due to currency movements offset the foreign exchange gains and losses of the foreign currency assets being hedged. The balance of the contracts are utilized to reduce the foreign exchange risk on foreign currency assets, but due to the inability to specifically identify and match the hedges to the assets, the contracts are treated as speculative and their value is included in realized gains and losses.
In accordance with its current investment guidelines, the Company may invest up to 30% of its investment portfolio in equity securities. This exposure may be obtained by direct holdings of publicly traded equities and by investing in a synthetic equity portfolio. In this synthetic equity portfolio, S&P 500 Index futures are held
Under The Insurance Act, 1978, amendments thereto and related regulations of Bermuda (the "Act"), X.L. and XLGRe are required to prepare statutory financial statements and to file in Bermuda a statutory financial return. The Act also requires these companies to maintain certain measures of solvency and liquidity during the year.
X.L.'s and XLGRe's statutory capital and surplus and the minimum required by the Act were as follows (U.S. dollars in thousands):
Net income of X.L. calculated under Bermuda statutory accounting principles was $196.3 million and $367.3 million for the years ended November 30, 1997 and 1996, respectively. The principal differences between statutory capital and surplus and statutory net income and shareholder's equity and net income on a GAAP basis relate to deferred acquisition costs and the accounting for the investments of X.L. in its subsidiaries. Net income for XLGRe under these regulations was $58 million and $21.4 million for the years ended November 30, 1997 and 1996 respectively.
X.L.E. is permitted to cover risks throughout the European Community (subject to certain restrictions) pursuant to the "Third Directive" relating to non-life insurance. Its head office is in the Republic of Ireland and it is subject to regulation under Irish regulatory authority. The principal legislation and regulations governing the insurance activities of Irish insurance companies are the Insurance Acts 1909 to 1990 (the "Irish Acts") and a comprehensive network of regulations and statutory provisions empowering the making of regulations of which the most relevant are the European Communities (Non-Life Insurance) Regulations, 1976, the European Communities (Non-Life Insurance Accounts) Regulations, 1995, the European Communities (Non-Life Insurance) Framework Regulations, 1994 and related administrative rules (the "Irish Regulations".)
The unaudited quarterly financial data for 1997 and 1996 follows (U.S. dollars in thousands, except per share amounts):
The Financial Accounting Standards Board ("FASB") issued SFAS No. 128, "Earnings per Share", effective for fiscal years ending after December 15, 1997. Earlier application is not permitted. This statement simplifies the standards in APB-15 for computing earnings per share by replacing primary earnings per share
(EPS) with basic earnings per share. Neither basic nor diluted EPS as calculated in accordance with SFAS 128 would be materially different from primary and fully diluted EPS as presented in these financial statements and by altering the calculation of diluted earnings per share, which replaces fully diluted earnings per share.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of EXEL Limited as of November 30, 1997 and 1996, and the consolidated results of its operations and its cash flows for each of the three years in the period ended November 30, 1997 in conformity with accounting principles generally accepted in the United States of America.