EXEL Limited ("EXEL or the Company") was incorporated with limited liability under the Cayman Islands Companies Act on April 14, 1986 to own all of the outstanding shares of, and to provide capital for, X.L. On January 8, 1990, X.L. obtained a Certificate of Continuance from the Bermuda Government, having originally been incorporated with limited liability under the Barbados Companies Act 1982 on April 11, 1986.
X.L. provided the capital to incorporate X.L.I. on November 16, 1987 under the laws of Bermuda. X.L.I. in turn provided the capital to incorporate X.L.I.B. on May 19, 1989 under the laws of Barbados.
In 1990, X.L. provided the capital to incorporate, through two holding companies, X.L.E., under the laws of the Republic of Ireland.
Directors and Officers liability up to a maximum of $25 million in excess of $20 million for United States risks and up to $50 million for individual director indemnification and excluding corporate reimbursement in excess of $20 million, or $15 million in excess of $15 million for non-United States risks, or a limit of $25 million in excess of not less than $25 million.
During February 1996, X.L. Risk Solutions and CIGNA Risk Solutions were announced as a coordinated initiative between the Company and CIGNA Property & Casualty ("CIGNA"). The product provides combined capacity for traditional casualty and property coverages provided by subsidiaries of the Company 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 stringent 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.
A clash reinsurance policy covering all excess liability business written by X.L. and X.L.E. with limits of $100 million ultimate net loss each occurrence and in the aggregate excess of $150 million ultimate net loss each occurrence had been arranged. For the year ended November 30, 1994 the placement was 90.0 percent. Due to unacceptable renewal terms, this reinsurance policy was not renewed on December 1, 1994.
Property quota share reinsurance of 17.5% (subject to catastrophe occurrence limit restrictions) of the X.L. and X.L.E. property limits was purchased from two Bermuda based property reinsurers, effective April 1, 1994. The quota share was increased to 25% of the X.L. and X.L.E. property limits, effective April 14, 1995, with the additional cover provided by Mid Ocean Reinsurance Company, Ltd. ("MOR"), a wholly-owned subsidiary of MOCL. All property reinsurers are rated, two having Standard & Poors ("S&P") ratings of A or higher and the reinsurer not rated by S&P having an A. M. Best rating of A-.
Effective December 1, 1995, X.L. and X.L.E. 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 Risk Capital Reinsurance Company ("RCR"), a wholly-owned subsidiary of Risk Capital Holding, Inc. ("RCHI"). Under the terms of the policy, X.L. and X.L.E. 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 RCR, all the reinsurers are rated, of which the lowest as rated by S&P is A-.
These consolidated financial statements include the accounts of the Company and all of its subsidiaries and have been prepared in accordance with accounting principles generally accepted in the United States of America.
All material intercompany accounts and transactions have been eliminated. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amount 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.
Certain amounts in the financial statements for prior years have been reclassified to conform with the 1996 presentation. All share amounts have been adjusted for the one-for-one stock dividend paid to shareholders of record July 26, 1996.
The Company has investments in MOCL and RCHI. Both are carried on the equity basis. The Company owns 29.9% and 29.6% of the issued voting shares and 28.1% and 27.9% of the total issued shares of MOCL as at November 30, 1996 and 1995, respectively. Outstanding share purchase options if exercised would reduce the Company's ownership position to 29.6% and 29.3% of the issued voting shares and 25% and 24.8% of the total issued shares, as at November 30, 1996 and 1995, respectively. The Company, through its subsidiary XLRe, provides reinsurance cover to MOR, on an excess basis.
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 $23.8 million and $10.1 million as at November 30, 1996 and 1995, respectively, with commitments to invest a further $41.2 million and $44.9 million respectively, over the next ten years. Any income or loss generated by the partnerships is not recorded until such time as it is allocated to the individual partners. During the years ended November 30, 1996 and 1995, there was no such income or loss recorded on these investments, however 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.
The reserve for losses incurred but not reported has been estimated by management in consultation with independent actuaries and is based on loss development patterns determined by reference to the Company's underwriting practices, the policy form and the experience of the excess liability insurance industry.
The portfolio of fixed maturities as of November 30, 1996 and 1995 matures as follows (U.S. dollars in thousands):
Unpaid losses and loss expenses net of reinsurance recoveries comprise (U.S. dollars in thousands):
The Company has also contracted to letters of credit totalling $108.1 million through Mellon Bank on behalf of Venton Underwriting Agency, Ltd. ("VUA"). The Trident Limited Partnership, L.P. ("Trident"), an investment fund of which the Company is a 7.5% limited partner, and RCHI are invested in Venton Holdings, Ltd., which owns VUA. All fees and drawdowns are, in effect, covered on a pro rata basis by Trident and RCHI.
The authorized share capital is 999,990,000 ordinary voting shares of a par value of $0.01 each.
On September 30, 1994, the Company's Board of Directors authorized the Company to repurchase four million shares as circumstances warrant. As of November 30, 1994, the Company had repurchased 1.1 million shares at a cost of $21.8 million. The balance of the repurchase program was completed by June 23, 1995, at a cost of $69.2 million. On June 23, 1995, the Company's Board of Directors authorized the repurchase of a further ten million shares as circumstances warrant. This repurchase program was completed by October 11, 1995, at a cost of $270.0 million. On December 1, 1995, the Company's Board of Directors authorized the Company to repurchase six million of its shares as circumstances warrant. This program was completed on July 8, 1996 at a cost of $207.7 million. On June 28, 1996, the Company's Board of Directors authorized the Company to repurchase a further 5 million shares. As at November 30, 1996 the Company has purchased 2.2 million shares at a cost of $74.8 million.
Following is a summary of shares issued and outstanding (in thousands):
Employees and Directors also hold options, which are exercisable at prices between $5.00 and $35.56 per share, within a period of ten years from the date of the award. Total options exercisable at November 30, 1996, 1995 and 1994 were 2,112,148, 2,228,582 and 1,890,284, respectively.
Under the laws of the Cayman Islands, the use of EXEL's contributed surplus is restricted to the issuance of fully paid shares (i.e. stock dividend or stock split) and the payment of any premium on the redemption of ordinary shares.
Restricted stock awards to certain officers and key employees are at the discretion of the Compensation Committee of the Board of Directors under the terms of the 1991 Performance Incentive Program. These shares contain certain restrictions, for a five-year 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 value on the date of the grant is charged to shareholders' equity and subsequently amortized over the five- year restriction period. Awards under the 1991 Performance Incentive Program were made in the 1996 and 1995 years of 120,500 shares and 98,000 shares, respectively.
Under current Cayman Islands law, EXEL will not be obliged to pay any taxes in the Cayman Islands on its income or gains until May 2006 pursuant to the provisions of the Tax Concessions Law, as amended.
X.L.I.B. 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%.
At November 30, 1996, 1995 and 1994, forward foreign exchange contracts having notional principal amounts of $683.3 million, $127.2 million and $961.1 million, respectively, were outstanding. At November 30, 1996, the market value of the outstanding forward foreign exchange contracts was $686.4 million. Contracts with a notional principal amount of $182.6 million and a market value of $182.4 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. Effective 1996 the balance of the contracts are utilized to reduce the foreign exchange risk on foreign currency equities, 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.
The Company is exposed to credit risk 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 market value is the Company's maximum credit exposure. This is included in net unrealized appreciation (depreciation) of investments in shareholders' equity and amounted to $3.1 million for the year ended November 30, 1996.
In accordance with its current investment guidelines, the Company may invest up to 30% of its investment portfolio in equity securities. During 1996 these guidelines were amended so that this exposure could 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 with an exposure approximately equal in amount to the market value of underlying assets held in this fund. As at November 30, 1996, the portfolio held $248.2 million in exposure of S&P 500 Index futures together with fixed maturities, short-term investments and cash amounting to $247.6 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 November 30, 1996, net realized gains from index futures totalled $37.4 million.
XLRe's statutory capital surplus and minimum required by the Act for the year ended November 30, 1996 were $271.4 million and $100 million, respectively.
Effective June 1995, the Insurance Act Amendment 1995 was enacted. As a result, X.L. was classified as a Class 4 insurer which increases its minimum solvency requirements. One such requirement will only allow the payment of dividends in any one financial year in excess of 25% of the prior year's statutory capital and surplus if the insurer's directors attest that such dividends will not cause the insurer to fail to meet its relevant margins. X.L., being a heavily capitalized company, was not affected by this change. X.L. could legally have paid dividends in the amount of approximately $1.1 billion, $930 million and $1.1 billion at November 30, 1996, 1995 and 1994, respectively. XLRe was classified as a Class 4 reinsurer upon its incorporation.
The unaudited quarterly financial data for 1996 and 1995 follows (U.S. dollars in thousands, except per share amounts):
The Financial Accounting Standards Board has issued Statement No. 123, "Accounting for Stock-Based Compensation", effective for fiscal years beginning after December 15, 1995, recognizing awards granted in the first fiscal year after December 15, 1994. This Statement defines a fair value based method of accounting for stock options or similar equity instruments in which an entity acquires goods or services by issuing same. Entities can either adopt the new method or continue to use APB Opinion No. 25, providing pro forma disclosure of net income and earnings per share as if the fair value based method had been adopted. The Company intends to follow the latter alternative, providing the necessary disclosure for the fiscal year ending 1997. (The presentation of 1996 pro forma disclosure needs only to be provided whenever financial statements for said fiscal year are presented for comparative purposes with financial statements for later fiscal years.)
Summarized condensed financial information of Mid Ocean Limited, a 28% owned affiliate, which is accounted for by the equity method, is as follows:
STATEMENTS OF INCOME AND RETAINED EARNINGS FOR THE YEARS ENDED NOVEMBER 30, 1996, 1995 AND 1994