- -------- (1) Net income per share is based on the weighted average number of ordinary shares and ordinary share equivalents outstanding for each period using the modified treasury stock method. (2) All share and per share information has been retroactively restated to give effect to a one for one stock dividend paid to shareholders of record on July 26, 1996.
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. Insurance Company, Ltd. (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.
On October 27, 1997 XLRe and Risk Capital Reinsurance Company (RCRe), a wholly-owned subsidiary of Risk Capital Holdings, Inc. (RCHI) formed Latin American Reinsurance Company, Ltd. (LARe) under the laws of Bermuda. RCHI is an affiliate of X.L. LARe was capitalized with $100 million, of which XLRe and RCRe contributed approximately 75% and 25% respectively. LARe will provide multi-line reinsurance to the Latin American market, emphasizing short-tail, multi-peril property reinsurance and, to a limited extent, casualty, marine, aviation and other lines of reinsurance. To date no contracts have been written.
Third party liability coverage up to a maximum of $150 million per occurrence and annual aggregate in excess of a minimum attachment point of $25 million and $15 million per occurrence, respectively.
XLGRe provides large net line capacity for specialized programs to insurance/reinsurance companies, predominately in the United States and Bermuda, and to a lesser extent, other geographic regions around the world. Each contract is underwritten utilizing actuarial models to develop expected outcomes and to determine the amount of capital necessary to support the transaction. In general the cover provided by XLGRe is either on an excess of loss or quota share basis within the following guidelines:
. Third party liability coverage for up to $100 million. . Directors and officers liability up to $75 million per claim. . High excess property reinsurance for up to $50 million per occurrence. . Financial reinsurance, credit enhancement, swaps and other collateralized transactions for up to $100 million in limits.
Property quota share reinsurance of 17.5% (subject to catastrophe occurrence limit restrictions) of the X.L. property limits was purchased from two Bermuda based property reinsurers, effective April 1, 1994. GCR was one of these reinsurers. The quota share was increased to 25% of the X.L. property limits, effective April 14, 1995, with the additional cover provided by Mid Ocean Reinsurance Company, Ltd. ("MOR"), a wholly-owned subsidiary of MOCL. GCR participation on this program was cancelled with effect from June 12, 1997 and replaced with two U.S. reinsurers and one non-U.S. reinsurer, effective July 15, 1997. All property 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.
Premiums written are earned on a monthly pro-rata basis over the period the coverage is provided. Unearned premiums represent the portion of premiums written which is applicable to the unexpired terms of policies in force. Premiums written under the multi-year alternate rating methodology may be subject to a mandatory reinstatement premium in the event of a loss. An asset is accrued to reflect the obligation of the insured's reinstatement premium and the premium is earned in accordance with the "with or without" method; that is, the pricing of the premium is evaluated in terms of a no loss situation and the resultant premium is earned over the remaining term of the policy. The balance of the reinstatement premium is earned to the extent of the loss reaching the full policy limit; that is, in the event of a full limit loss the balance of the reinstatement premium together with any unearned premium of the underlying cover would be fully earned. Premiums written and unearned premiums are presented after deductions for reinsurance ceded to other insurance companies.
The functional and reporting currency of the Company and its subsidiaries is U.S. Dollars. Unhedged monetary assets and liabilities 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. Revenue and expense transactions are translated at the average exchange rates prevailing during the year.
The Company accounts for its other investments on a cost basis. Assets are written down to there realizable value where there is a permanent decrease in value. Income is recorded when received.
Intangible assets recorded in connection with the Company's business combinations are amortized on a straight-line basis over the expected life of the related operations acquired or twenty years, whichever is less.
Unpaid losses and loss expenses includes reserves for unpaid reported losses and loss expenses and for losses incurred but not reported. The reserve for unpaid reported losses and loss expenses has been established by management in consultation with independent legal counsel and represents the estimated ultimate cost of events or conditions that have been reported to or specifically identified by the Company.
The Company recognizes as a component of loss reserves, the loss experience accounts of insurers for policies written under the applicable multi-year alternate rating methodology. Such experience accounts are a percentage of premiums net of related losses paid. Interest is earned on liable amounts and charged to investment income. In the event the insured cancels the policy, the return of the experience account is treated as a commutation if previously notified of a loss, or as a return premium if there has been no loss notification.
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 relevant insurance industries.
Management believes that the reserves for unpaid losses and loss expenses are sufficient to pay any claims that may penetrate the minimum attachment point. However, there can be no assurance that losses will not exceed the Company's total reserves. The methodology of estimating the reserve is periodically reviewed to ensure that
the assumptions made continue to be appropriate and any adjustments resulting therefrom are reflected in income of the year in which the adjustments are made.
Income per ordinary share and ordinary share equivalent is based upon the weighted average number of shares outstanding using the modified treasury stock method for share options. There is no material difference between primary and fully diluted net income per ordinary share and ordinary share equivalent.
The cost (amortized cost for fixed maturities and short-term investments), market value and related unrealized gains (losses) of investments are as follows (U.S. dollars in thousands):
The portfolio of fixed maturities as of November 30, 1997 and 1996 matures as follows (U.S. dollars in thousands):
The Company has investments in Mid Ocean Company Limited (MOCL), RCHI and Venton Holdings Ltd. (VHL). The Company owns 29.1% and 29.9% of the issued voting shares and 24.8% and 28.1% of the total issued shares of MOCL as at November 30, 1997 and 1996, respectively. The Company, through its subsidiary XLGRe, provides reinsurance cover to Mid Ocean Reinsurance Company Limited, on an excess basis.
In June 1997, X.L. acquired 20% of VHL from the Trident Partnership L.P. of which EXEL is a 7.5% limited partner. The cost of this investment was $34.5 million, $17.3 million of which was paid in cash with a commitment to fund the balance as required. VHL manages three syndicates at Lloyd's of London which underwrite non-marine, marine and all main classes of business, respectively.
The 1997 losses were offset by the release of $279 million in reserves that related to prior years. The change in frequency relative to historical experience resulted in the reserving model reducing the required reserves.
The Company has committed to unsecured letters of credit totalling $138.6 million and (Pounds)10.2 million as at November 30, 1997.
On June 27, 1996, the Company borrowed $11.0 million from the Bank of Bermuda (New York) Limited in order to fund its investment in Pareto Partners, Inc., an investment management company. The loan is repayable in five years. During the year the weighted average interest rate charged on the loan was 6.0532%. Total interest expense amounted to $0.7 million for the year ended November 30, 1997.
The Company's executive stock plan, the "1991 Performance Incentive Program", provides for grants of non qualified or incentive stock options, restricted stock awards and stock appreciation rights (SARs). The plan is administered by the Company and Compensation Committee of the Board of Directors. Stock options may be
A second stock plan, intended to replace the directors' "Retirement Plan for Non-Employee Directors", provides for the issuance of share units equal to the amount that would have been credited to the Retirement Plan, divided by the market price of the Company's stock on December 1 of each year. These units receive dividends in the form of additional units equal to the cash value divided by the market price on the payment date. During 1996 the directors could elect to convert to this plan. Stock units totaling 6,716 and 14,960 were provided for in 1997 and 1996 respectively.
The Company has adopted only the disclosure provisions of Statement of Financial Accounting Standard No. 123, "Accounting for Stock-Based Compensation". Had compensation costs been determined based on the fair value of the stock option awards granted in 1997 and 1996, net income and earnings per share would have been reduced to the proforma amounts indicated below:
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.
Bermuda presently imposes no income, withholding or capital gains taxes. As a result, X.L. and X.L.I. are exempted until March 2016 from any such taxes pursuant to the Bermuda Exempted Undertakings Tax Protection Act 1966, and Amended Act 1987.
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 $2.7 million for the year ended November 30, 1997.
with an exposure approximately equal in amount to the market value of underlying assets held in this fund. As at November 30, 1997 and 1996, the portfolio held $188.8 and $248.2 million, respectively, in positions of S&P 500 Index futures together with fixed maturities, short-term investments and cash amounting to $189.2 and $247.6 million, respectively. 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, 1997 and 1996, net realized gains from index futures totalled $46.3 and $37.4 million, respectively.
With the introduction of new fixed maturity and equity managers earlier in 1997, certain managers may utilize derivative instruments to add value to the investments they manage where they believe market inefficiencies exist. All managers are restricted from leveraging their derivative positions. At November 30, 1997, bond and stock futures outstanding were $302.5 million with underlying investments having a market value of $2.1 billion. For the year ended November 30, 1997 net realized gains from bond and stock futures totalled $19.5 million.
FASB also issued SFAS No. 129, "Disclosure of Information about Capital Structure", effective for fiscal years ending after December 15, 1997. This statement consolidates existing disclosure requirements and eliminates the exemption for non-public entities for certain disclosure.
FASB issued Statement of Financial Accounting Standard No. 130 ("SFAS 130"), "Reporting Comprehensive Income", which the Company will be required to adopt for Fiscal year 1998. This statement will require the Company to report in its financial statements, as an addition to net income, comprehensive income and its components including, as applicable, foreign currency items, minimum pension liability adjustments and unrealized gains and losses on certain investments in debt and equity securities. Upon adoption, the Company will also be required to reclassify financial statements for earlier periods provided for comparative purposes. The Company currently expects that the effect of adoption of SFAS 130 may be primarily from foreign currency translation adjustments and has not yet determined the manner in which comprehensive income will be displayed.
Apart from SFAS No. 131, these new standards are expected to have a minimal impact on the Company's financial statements and disclosures.
Summarized condensed financial information of Mid Ocean Limited, a 25% owned affiliate, which is accounted for by the equity method, is as follows:
The Company received dividends from its affiliate of $29.0, $13.0 and $7.4 million for the years ended November 30, 1997, 1996 and 1995, respectively.
We have audited the accompanying consolidated balance sheets of EXEL Limited as of November 30, 1997 and 1996, and the related consolidated statements of income, shareholders' equity, and cash flows for each of the three years in the period ended November 30, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.