The selected consolidated financial data below includes the results of NAC Re as required by the pooling of interests accounting and is based upon the Company's new fiscal year end of December 31. The selected consolidated financial data should be read in conjunction with the consolidated financial statements and the notes thereto presented under Item 8.
(3) Underwriting expense ratio is the sum of acquisition expenses and operating expenses divided by net premiums earned. For the year ended December 31, 1998, operating expenses exclude one-time charges of $17.5 million associated with the merger with Mid Ocean.
(4) Loss and loss expense ratio is calculated by dividing the net losses and loss expenses incurred by the net premiums earned.
XL Capital Ltd ("XL" or the "Company") is a holding company organized under the laws of the Cayman Islands. XL was incorporated on March 16, 1998, as the successor to EXEL Limited, a Cayman Islands corporation organized in 1986 ("EXEL"), in connection with EXEL's merger with Mid Ocean Limited, a Cayman Islands corporation ("Mid Ocean"). The merger was accounted for as a purchase under U.S generally accepted accounting principles ("GAAP") and as such, results of operations of Mid Ocean are included from August 1, 1998, the effective date of the merger. In the merger all of the shares of EXEL and Mid Ocean were exchanged for shares in the Company pursuant to two schemes of arrangement approved by the Grand Court of the Cayman Islands in accordance with Section 85 of the Companies Law (1995 Revision) of the Cayman Islands. The Company operated under the name "EXEL Limited" from completion of the merger until February 1, 1999 when its current name was approved by the requisite vote of the Company's shareholders. References herein to "XL" or the "Company" also shall include EXEL unless the context otherwise requires. Through its subsidiaries, the Company is a leading provider of insurance and reinsurance, including coverages relating to certain financial risks, to industrial, commercial and professional service firms, insurance companies and other enterprises on a worldwide basis.
XL Insurance Ltd, an insurance company organized under the laws of Bermuda ("XLI"), and its subsidiaries are the Company's principal insurance subsidiaries. XLI was formed in 1986 in response to a shortage of high excess liability coverage for Fortune 500 companies in the United States. In 1990, XLI formed XL Europe Insurance, an insurance company organized under the laws of the Republic of Ireland ("XLE"), to serve European clients. In 1998, XLI acquired Folksamerica General Insurance Company (renamed X.L Insurance Company of America, Inc), an insurance company domiciled in the State of New York and possessing property and casualty insurance licenses in approximately 20 states and reinsurance licenses in approximately 14 states, and formed X.L Risk Solutions, Inc., an insurance company domiciled in the State of Connecticut. XLI also has a representative office in Australia.
The Brockbank Group plc ("Brockbank") was acquired through the merger with Mid Ocean. Brockbank is a company organized under the laws of England and is a leading Lloyds managing agency which provides underwriting and similar services to five Lloyd's syndicates. Two of these syndicates are dedicated corporate syndicates ("corporate syndicates") whose capital is provided solely by the Company and its subsidiaries. Mid Ocean acquired 51% of Brockbank in December 1995 and the remaining 49% in August 1997. The two corporate syndicates, which commenced operations with effect from January 1, 1996, underwrite property, marine and energy, aviation, satellite, professional indemnity U.K motor and other specialty lines of insurance and reinsurance to a global client base. In 1998, the aggregate premium limit of the two corporate syndicates was approximately $340 million, and the total capacity under management by Brockbank was approximately $900 million. As a managing agency, Brockbank receives fees and commissions in respect of underwriting services it provides to syndicates.
In November 1998, the Company entered into a joint venture with Financial Security Assurance Holdings Ltd., a New York corporation ("FSA"), to write certain types of financial guaranty insurance on asset-backed and municipal obligations. Under the terms of the joint venture, each of the Company and FSA formed a Bermuda insurance company in which it was the majority shareholder and made a minority investment in the company formed by its co-venturer. The Company formed and maintains majority ownership of XL Financial Assurance Ltd ("XLFA"). FSA formed and maintains majority ownership of Financial Security Assurance International Ltd. (FSAI"). Each of XLFA and FSAI has a capitalization of approximately $100 million. As part of the joint venture, the Company and FSA exchanged approximately $80 million of each other's stock, following which the Company owned approximately 6% of the issued and outstanding common stock of FSA.
In June 1998, the Company formed Reeve Court Insurance Ltd., an insurance company organized under the laws of Bermuda, as a joint venture with such company's management for the purpose of providing life insurance to high net worth individuals.
In October 1997, the Company and another company formed Latin American Reinsurance Company Ltd., under the laws of Bermuda ("LARe"). LARe provides multi-line reinsurance to the Latin American reinsurance market, concentrating on short-tail, multi-peril property reinsurance, and, to a lesser extent, casualty, marine, aviation and other lines of reinsurance on both a treaty and facultative basis. The Company owns approximately 75% of the outstanding shares of LARC.
In March 1997, XLI became a founding shareholder along with an affiliate of the Company and another insurance company, of Sovereign Risk Insurance Ltd. ("Sovereign"), a Bermuda-based managing general agency formed to write selected political risk insurance coverages. The Company owns 40.5% of Sovereign.
Acquisition costs which vary with and are primarily related to the acquisition of policies, primarily commissions paid to insurance brokers, are deferred and amortized over the period the premiums are earned. Future earned premiums and the anticipated losses, investment income and other costs related to those premiums are also considered in determining the level of acquisition costs to be deferred.
In the normal course of business, the Company seeks to reduce the loss that may arise from events that could cause unfavorable underwriting results by reinsuring certain levels of risk in various areas of exposure with other insurance enterprises or reinsurers. Reinsurance premiums ceded and the commissions recorded thereon are expensed and earned on a monthly pro-rata basis over the period the reinsurance coverage is provided. Amounts recoverable from reinsurers are estimated in a manner consistent with the claim liability associated with the reinsured policy.
Investments are considered available for sale and are carried at fair value. The fair value of investments is based upon quoted market values where available or by reference to broker or underwriter bid indications. The net unrealized appreciation or depreciation on investments is included in accumulated other comprehensive income.
Financial futures and forward currency contracts are carried at fair value, 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.
Assets and liabilities of foreign operations whose functional currency is other than the US dollar are translated at year end exchange rates. Revenue and expenses of such foreign operations are translated at average exchange rates during the year. The effect of the translation adjustments for foreign operations is recorded, net of applicable deferred income taxes, as a separate component of accumulated other comprehensive income in shareholders' equity.
Other monetary assets and liabilities denominated in foreign currencies are translated at the exchange rate in effect at the balance sheet date with the resulting foreign exchange gains and losses recognized in income, unless the foreign currency exposure is directly hedged as discussed in note 10. Revenue and expense transactions are translated at the average exchange rates prevailing during the year.
Investments in which the Company has significant influence over the operations of its affiliates are carried under the equity method of accounting. Under this method, the Company records its proportionate share of income or loss for such investments in its results of operations.
Management believes that the reserves for unpaid losses and loss expenses are sufficient to pay any losses that fall within coverages assumed by the Company. However, there can be no assurance that losses will not exceed the Company's total reserves. The methodology of estimating loss reserves is periodically reviewed to ensure that the assumptions made continue to be appropriate and any adjustments resulting therefrom are reflected in income of the year in which the adjustments are made.
The Company accounts for stock compensation plans in accordance with Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees.". Accordingly, compensation expense for stock option grants and stock appreciation rights ("SARs") is recognized to the extent that the fair value of the stock exceeds the exercise price of the option at the measurement date.
FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," which is required to be adopted in years beginning after June 15, 2000. The Company has not yet assessed the affect of the adoption of this standard on its financial statements.
The insurance business is written primarily by the following; XL Insurance, XL Europe Insurance, XL Insurance Company of New York, Greenwich and Indian Harbor Insurance. Business written includes general liability, other liability (including directors and officers, professional and employment practices liability), property, program business, marine, aviation, satellite and other product lines (including customs, bond surety, political risk, financial services and specialty lines). The liability insurance is written on an excess basis and the loss experience is characterized as low frequency and high severity.
XL Insurance, as part of the financial services business, also offers insurance and reinsurance solutions for complex financial risks. These include financial insurance and reinsurance, credit enhancement, swaps and other collateralized transactions. While each of these are unique and are tailored for the specific needs of the insured, they are typically multi-year policies. Due to the nature of these types of policies, premium volume as well as profit margin can vary significantly from period to period. The Company has approached this market on a "net-line" perspective, but may cede a portion of some policies to third parties from time to time.
NAC Re and its subsidiaries are principally engaged in providing treaty and facultative reinsurance to primary insurers of casualty risks (principally general liability, professional liability, automobile and workers' compensation) and commercial and personal property risks and specialty risks (including fidelity, surety and ocean marine).
A significant portion of XLMORe'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 endeavors to manage its exposures to catastrophic events by limiting the amount of its exposure in each geographic zone worldwide and requires that its property catastrophe contracts provide for aggregate limits and varying attachment points.
The Lloyd's operations comprise Brockbank and Denham. Corporate syndicates managed by Brockbank write property, marine and energy, aviation and satellite, motor, professional indemnity and other specialty lines, primarily of insurance but also reinsurance. The Denham syndicate specializes in liability coverages.
The Company evaluates performance of each segment based on net underwriting profit or loss. Other items of revenue and expenditure of the Company are not evaluated at the segment level. In addition, management does not consider the allocation of assets by segment. The following is an analysis of the underwriting profit or loss by segment together with a reconciliation of underwriting profit or loss to net income:
The following table shows an analysis of the Company's net premiums written by geographical location of subsidiary:
During 1998, 1997 and 1996, approximately 34%, 35% and 34% of the Company's consolidated gross written premiums were generated from or placed by Marsh McLennan Companies and its subsidiaries. During 1998, 1997 and 1996, approximately 19%, 18% and 21% of the Company's consolidated gross written premiums were generated from or placed by AON Corporation and its subsidiaries. No other broker accounted for more than 10% of gross premiums written in each of the three years ended December 31, 1998.
The following represents an analysis of realized and the change in unrealized appreciation on investments:
Included in cash and invested assets at December 31, 1998, are approximately $22.4 million of assets held in a "holding company" escrow account arising from a tax allocation agreement between NAC Re and its domestic subsidiaries.
The Company owned 29.1% of the issued voting shares and 24.8% of the total issued shares of Mid Ocean as at December 31, 1997. The Company accounted for its share of Mid Ocean's earnings to July 31, 1998 on an equity basis. Subsequent to this date, Mid Ocean was acquired by the Company and has been consolidated as a wholly owned subsidiary of XL.
On June 18, 1999, the Company completed its merger with NAC Re Corp. ("NAC Re") in an all stock transaction. Shareholders of NAC Re received 0.915 Company share for each NAC Re share in a tax free exchange. Approximately 16.9 million of the Company's Class A ordinary shares were issued in this transaction. The merger transaction has been accounted for as a pooling of interests under U.S GAAP. Accordingly, all prior period results of operations, statement of position and cash flows include the results of NAC Re as though it had always been a part of the Company.
The following table presents a reconciliation of the total revenues, net income, and earnings per share of the Company as previously reported as adjusted for the change in fiscal year end, together with the combined results of NAC Re:
The following table represents an analysis of paid and unpaid losses and loss expenses and a reconciliation of the beginning and ending unpaid loss and loss expenses for the years indicated:
The 1998 current year increase in net losses incurred and paid reflects the inclusion of the operations of Mid Ocean acquired on August 7, 1998. These operations incurred $257.6 million in net losses in 1998. These losses were largely attributable to Hurricane Georges and SwissAir.
Several aspects of the Company's casualty insurance operations complicate the actuarial reserving techniques for loss reserves as compared to other insurance operations. Among these aspects are the differences in the policy forms from more traditional forms, the lack of complete historical loss data for losses of the same type intended to be covered by the policies and the expectation that losses in excess of the attachment level of the Company's policies generally will be characterized by low frequency and high severity, limiting the utility of claims experience of other insurers for similar claims. While management believes it has made a reasonable estimate of ultimate losses, the ultimate claims experience may not be as reliably predicted as may be the case with other insurance operations, and there can be no assurance that losses and loss expenses will not exceed the total reserves.
Except for certain workers' compensation unpaid losses, the Company does not discount its liabilities for unpaid losses and loss expenses. The Company utilizes tabular reserving for workers' compensation unpaid losses that are considered fixed and determinable and discounts such losses using an interest rate of 7% for financial statements prepared in accordance with GAAP and a 5% interest rate for U.S statutory accounting purposes. The tabular reserving methodology results in applying a uniform and consistent criteria for establishing expected future indemnity and medical payments (including an explicit factor for inflation) and the use of mortality tables to determine expected payment periods. Tabular unpaid losses and loss expenses, net of reinsurance, at December 31, 1998, 1997 and 1996 were $61.3 million, $42.4 million and $35.8 million, respectively. The related discounted unpaid losses and loss expenses were $20.7 million, $16.1 million and $15.0 million as of December 31, 1998, 1997 and 1996, respectively.
Incurred but not reported (IBNR) losses, net of reinsurance, included in the above table was $17.0 million in 1998, $16.6 million in 1997 and $13.4 million in 1996. Unpaid losses recoverable are net of potential uncollectable amounts.
The Company believes it has made reasonable provision for its asbestos and environmental exposures and is unaware of any specific issues which would materially affect its estimate for losses and loss expenses. The estimation of loss and loss expense liabilities for asbestos and environmental exposures is subject to much greater uncertainty than is normally associated with the establishment of liabilities for certain other exposures due to several factors, including: i) uncertain legal interpretation and application of insurance and reinsurance coverage and liability; ii) the lack of reliability of available historical claims data as an indicator of future claims development; iii) an uncertain political climate which may impact, among other areas, the nature and amount of costs for remediating waste sites; and iv) the potential of insurers and reinsurers to reach agreements in order to avoid further significant legal costs. Due to the potential significance of these uncertainties, the Company believes that no meaningful range of loss and loss expense liabilities beyond recorded reserves can be established. As these uncertainties are resolved, additional reserve provisions, which could be material in amount, may be necessary.
The Company, through its subsidiaries, utilizes reinsurance and retrocession agreements principally to increase aggregate capacity and to reduce the risk of loss on business assumed. The Company's reinsurance
and retrocession agreements provide for recovery of a portion of loss and loss expenses from reinsurers and reinsurance recoverables are recorded as assets. The Company is liable if the reinsurers are unable to satisfy their obligations under the agreements.
A quota share reinsurance policy exists with several U.S. reinsurers covering general liability insurance risks only. Under the terms of this reinsurance, the Company ceded either 20% or 25% of each risk depending upon the underlying limit written. The maximum amount recoverable from the reinsurers is the ceded percentage of the original policy limit on a per occurrence basis, with an annual aggregate of 225% of the total premium ceded.
The Company's Lloyd's syndicates have traditionally purchased a significant amount of reinsurance to protect against extraordinary loss and/or loss involving one or more of the lines of business written. Reinsurance is purchased on an excess of loss and quota share basis.
Increases in all of the above balances in 1998 over 1997 is primarily due to the acquisition of Mid Ocean. The Company is the beneficiary of letters of credit, trust accounts and funds withheld in the aggregate amount of $130 million at December 31, 1998, collateralizing reinsurance recoverables with respect to certain retrocessionnaires.
As at December 31, 1998, the Company and its subsidiaries had bank and loan facilities available from a variety of resources including commercial banks totaling $2.24 billion of which $613.9 million was outstanding. In addition $348.9 million of letters of credit were outstanding, most of which were collateralized by the Company's investment portfolio, primarily supporting U.S. non admitted business and the Company's Lloyd's capital requirements. The financing structure at December 31, 1998 was as follows:
The one-year facilities are provided by two syndicates of banks where the borrowings are unsecured, and by a U.S. bank where the borrowings are collateralized and guaranteed by a subsidiary of the Company. Amounts borrowed and outstanding at December 31, 1998 under these facilities were used primarily to fund the Company's U.S. operations. The weighted average interest rate on the funds borrowed during 1998 was approximately 5.9%.
The two five year facilities are provided by two syndicates of banks and borrowings are unsecured. The amount of $190 million outstanding at December 31, 1998 relates to the balance remaining from $300 million borrowed to finance the cash option election available to shareholders in connection with the Mid Ocean acquisition in August 1998. The weighted average interest rate on funds borrowed during 1998 was approximately 5.7%
NAC Re's $100 million of 8% Senior Notes due June 15, 1999 were issued in June 1992 through a public offering. These Notes were repaid in June 1999 through additional borrowings and internal funds.
The Company invests in derivative instruments, such as foreign currency forward contracts, and futures for purposes other than trading. These derivative instruments are used for foreign currency exposure management and to obtain exposure to specific financial markets.
In addition, the Company also enters into foreign exchange contracts to buy and sell foreign currencies in the course of trading its foreign currency investments. These contracts are not designated as specific hedges for financial reporting purposes, and generally have maturities of two weeks or less. As such, any realized or unrealized gains or losses are recorded in income in the period in which they occur. At December 31, 1998, the value of such contracts outstanding was not material.
Unrealized foreign exchange gains or losses on foreign exchange contracts hedging non-U.S. Dollar fixed maturity investments are deferred and included in shareholders' equity. As at December 31, 1998, unrealized deferred losses amounted to $1.3 million, and were offset by corresponding increases in the U.S. dollar value of the investments. Realized gains and losses on the maturity of these contracts are also deferred and included in shareholders' equity until the corresponding investment is sold. As at December 31, 1998, realized deferred losses amounted to $0.7 million.
The Company is exposed to credit risk in the event of non-performance by the other parties to the forward contracts, however the Company does not anticipate non-performance. The difference between
The Company also invests in a synthetic equity portfolio of S&P Index futures with an exposure approximately equal in amount to the market value of underlying assets held in this fund. As at December 31 1998, the portfolio held $148.2 million in exposure to S&P 500 Index futures and underlying assets of $149.6 million. The value of the futures is updated daily with the change recorded in income as a realized gain or loss. For the year ended December 31, 1998, net realized gains from index futures totaled $23.2 million.
The Company's investment portfolio is managed by external managers in accordance with guidelines that have been tailored to meet specific investment strategies, including standards of diversification which limit the allowable holdings of any single issue. The Company did not have an aggregate investment in a single entity, other than the U.S. government, in excess of 10% of shareholders' equity at December 31, 1998.
The Company also has stock plans in place for its non-employee directors. The "Stock and Option Plan", issues non-qualified options to the directors--4,000 shares at the commencement of their directorship and 2,000 shares each year thereafter. On December 3, 1997, 5,000 options were granted to each director. All options vest immediately on grant date. Effective April 11, 1997 all options granted to Non-Employee Directors are granted under the 1991 Performance Incentive Program. Directors may also may make an irrevocable election preceding the beginning of each fiscal year to defer cash compensation that would otherwise be payable as his or her annual retainer in increments of $5,000. The deferred payments are credited in the form of shares calculated by dividing 110% of the deferred payment by the market value of the Company's stock at the beginning of the fiscal year. Each anniversary thereafter, 20% of these shares are distributed. Shares issued under the plan totaled 2,737, 3,048 and 4,048 in 1998, 1997 and 1996, respectively.
As a result of the merger with Mid Ocean Limited during August 1998, 791,573 Mid Ocean options were converted to options of XL Capital Ltd. These are 10 year options that generally vest over 3 years.
Following the merger with NAC Re, new option plans were created in the Company to adopt the NAC Re plans. Under such plans, the Company had the authority to grant up to 3,362,625 options at December 31, 1998, of which 1,189,500 options related to a plan implemented in 1997. Options generally have a five or six year vesting schedule, with the majority expiring 10 years from the date of grant; the remainder having no expiration. A stock plan is also maintained for non-employee directors. Under such plan, NAC Re had the authority to grant up to 343,125 options at December 31, 1998. Options expire 10 years from the date of grant and are fully exercisable six months after their grant date.
Total stock based compensation recognized in net income was $5.8 million in 1998, $5.2 million in 1997 and $2.4 million in 1996.
XL's Articles of Association restrict the voting power of any person to less than 10% of total voting power.
Rights to purchase Ordinary Shares were distributed as a dividend at the rate of one Right for each outstanding Ordinary Share held of record as of the close of business on October 31, 1998. Each Right entitles holders of XL Ordinary Shares to buy one ordinary share at an exercise price of $350.00. The Rights would be exercisable, and would detach from the Ordinary Shares, only if a person or group were to acquire 20 percent or more of XL's outstanding Ordinary Shares, or were to announce a tender or exchange offer that, if consummated, would result in a person or group beneficially owning 20 percent or more of XL's Ordinary Shares. Upon a person or group without prior approval of the Board acquiring 20 percent or more of XL's Ordinary Shares, each Right would entitle the holder (other than such an acquiring person or group) to purchase XL Ordinary Shares (or, in certain circumstances, Ordinary Shares of the acquiring person) with a value of twice the Rights exercise price upon payment of the Rights exercise price. XL will be entitled to redeem the Rights at $0.01 per Right at any time until the close of business on the tenth day after the Rights become exercisable. The Rights will expire at the close of business on September 30, 2008, and do not initially have a fair value. The Company has initially reserved 119,073,878 Ordinary Shares being authorized and unissued for issuance upon exercise of the Rights.
The Company maintains both defined contribution and defined benefit retirement plans, which vary for each subsidiary. Plan assets are invested principally in equity securities and fixed maturities
Under the NAC Re defined benefit plan, the Company's policy is to make annual contributions to the plan that are deductible for federal income tax purposes and that meet the minimum funding standards required by law. The contribution level is determined by utilizing the entry age cost method and different actuarial assumptions than those used for pension expense purposes. This plan also includes a non-qualified supplemental defined benefit plan designed to compensate individuals to the extent their benefits under the Company's qualified plan are curtailed due to Internal Revenue Code limitations.
The projected benefit obligation, accumulated benefit obligation and fair value of the assets for the NAC Re defined benefit plan with accumulated benefit obligations in excess of the plan assets were $5.0 million, $2.5 million and $0, respectively as of December 31, 1998 and $4.1 million, $2.1 million and $0 as of December 31, 1997, respectively. The discount rates used in determining the actuarial present value
of benefit obligations were 6.5% and 6.75% for 1998 and 1997, respectively. The rate of increase for future compensation levels was 5.5% for both 1998 and 1997. The assumed rate of return on plan assets was 9.0% for 1998 and 8.5% for 1997.
Under current Cayman Islands law, the Company is not subject to pay any taxes in the Cayman Islands on either income or capital gains. The Company have 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 until June 2018.
XL Investments (Barbados), Inc. qualifies as an exempted company under the provisions of the International Business Companies Act 1991-24 and as such is subject to a maximum tax rate in Barbados of 2.50%.
XLE has been approved to carry on business in the International Services Centre in Dublin. Under Section 39 of the Finance Act 1990, XLE is entitled to benefit from a 10% tax rate on profits (including investment income) until the year 2005.
The Company's U.S. subsidiaries are subject to Federal, State and local corporate income taxes and other taxes applicable to U.S. corporations. The provision for federal income taxes has been determined on the basis of a tax return for each of the Company's U.S. subsidiaries. Should the U.S. subsidiaries pay a dividend to the parent, withholding taxes will apply.
The U.S. subsidiary's current U.S. taxable income is based on alternative minimum taxable income. The current U.S. tax expense for the years ended December 31, 1997 and 1996 was based on regular taxable income.
U.S. and Non U.S. taxes paid in the years ended December 31, 1998, 1997 and 1996 were approximately $31 million, $38 million and $24 million, respectively.
Shareholders' equity at December 31, 1998 and 1997 reflects tax benefits of $5.6 million and $4.5 million, respectively, related to compensation expense deductions for stock options exercised for one of the Company's U.S. subsidiaries.
The Company's ability to pay dividends is subject to certain regulatory restrictions on the payment of dividends by its subsidiaries. The Company relies primarily on cash dividends from XLI and Mid Ocean. The payment of such dividends is restricted by applicable laws of Bermuda, Ireland, U.S. and United Kingdom, including those promulgated by the Society of Lloyd's.
Under The Insurance Act, 1978, (as amended by the Insurance Act Amendment 1995) amendments thereto and related regulations of Bermuda (the "Act"), XLI and XLMORe 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.
Under the Act, XLI and XLMORe are classified as a Class 4 insurer and reinsurer, respectively. Therefore they are restricted to the payment of dividends in any one financial year of 25% of the prior year's statutory capital and surplus, unless their directors attest that such dividends will not cause the company to fail to meet its relevant statutory requirements. XLI and XLMORe have not been affected by this. XLI could legally have paid dividends in the amount of approximately $1.8 billion, $1.5 billion and $1.1 billion at November 30, 1998, 1997 and 1996, respectively. XLMORe could legally have paid dividends in the amount of approximately $1.3 billion, $403.4 million and $169.5 million at November 30, 1998, 1997 and 1996, respectively.
The Company's U.S. insurance subsidiaries are subject to regulatory oversight under the insurance statutes and regulations of the jurisdictions in which they conduct business.
NAC is subject to New York insurance law, which imposes certain restrictions on the payment of cash dividends and tax reimbursements. Generally, NAC may pay cash dividends only out of statutory earned surplus which was $231.9 million at December 31, 1998. However, the maximum amount of dividends that may be paid in any twelve- month period without the prior approval of the New York Insurance Department is the lesser of net investment income or 10% of statutory surplus as such terms are defined in the New York insurance law. The maximum amount NAC could pay without such regulatory approval, based on 10% of statutory surplus as of December 31, 1998 is approximately $73.7 million.
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 XLI and XLMORe. The Company believes it is not in violation of the insurance laws of any state in the U.S or any foreign country. From time to time, various proposals for federal legislation within the United States have been circulated which could require the Company to, amongst other things, register as a surplus lines insurer. The Company believes that generally it could meet and comply with the requirements to be registered as a surplus lines insurer and such compliance would not have a material impact on the ability of the Company to conduct its business. There can be no assurances, however, that the activities of the Company will not be challenged in the
As a result of the Company's ownership of Brockbank and Denham, the Company, Brockbank and Denham are subject to the regulatory jurisdiction of the Council of Lloyd's (the "Council"). 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 the bye-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 and capital providers. Under the regulations, the approval of the Council has to be obtained before any person can be a "major shareholder" or "controller" of a corporate Name or managing agency. The Company has been approved as both a "major shareholder" and a "controller" of its corporate Names (the "CCVs") and managing agencies.
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.
The Company is subject to regulation in Australia, Singapore, Madrid, South America and Germany as a result of its representative offices and branches in such jurisdictions.
(2) Reflects the assumed conversion of the NAC Re 5.25% Convertible Subordinated Debentures due 2002.
In March 1999, the Company acquired a passive minority investment in Highfields Capital Management LP, a global equity investment firm.
In June 1999, the Company acquired ECS, Inc. ("ECS"), an underwriting manager headquartered in Exton, Pennsylvania which specializes in environmental insurance coverages and risk management services. ECS placed approximately $200 million of gross premiums written with unaffiliated carriers in 1998. XL intends, commencing January 2000, to have ECS originate and underwrite policies on behalf of the Company's insurance and reinsurance subsidiaries.
The Intercargo and ECS acquisitions are being accounted for under the purchase method of accounting. The combined purchase price was $222.8 million and the resulting goodwill is being amortized over 20 years.
In August 1999, the Company made a minority equity investment in MKP Capital Management, a New York based fixed income investment manager specializing in mortgage-backed securities.
In the fourth quarter of 1999, Brockbank sold its two motor insurance businesses, Admiral and Zenith. The Company expects there to be decreases in premiums, fee income and certain costs. The Company does not expect the overall profitability of its Lloyd's operations to be materially affected by such sales.