ITEM 1. BUSINESS
Introduction
EXEL Limited, a Cayman Islands corporation (the "Company"), and its wholly- owned subsidiary X.L. Insurance Company, Ltd., a Bermuda corporation ("X.L."), were incorporated in 1986. These entities were formed in response to a shortage of high excess liability underwriting capacity in the insurance industry at that time. In 1990, X.L. Europe Insurance ("X.L.E."), a subsidiary of X.L., was organized in the Republic of Ireland to serve the European Community. 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 commenced operations effective December 1, 1995. On June 12, 1997, the Company , through a subsidiary, acquired control of GCR Holdings Limited ("GCRH"), a Cayman Islands company, and its wholly-owned operating subsidiary, Global Capital Reinsurance Company Limited, a Bermuda company ("GCR"). XLRe and GCR were amalgamated under the laws of Bermuda effective November 4, 1997, and the amalgamated entity was renamed X.L. Global Reinsurance Company, Ltd. ("XLGRe"). On October 27, 1997, XLGRe 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 XLGRe 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.
The Company, through its subsidiaries, provides excess liability insurance coverage to industrial, commercial and other enterprises, directors and officers of such enterprises, professional firms, high excess property coverage, and the assumption of reinsurance contracts on a worldwide basis. X.L. reinsures X.L.E. for a minimum of 75% of each risk written.
Four principal types of excess liability coverage are provided in the areas of third party general liability, employment practices liability, directors and officers liability and professional liability (the latter primarily for law firms, insurance companies and insurance brokers). General liability coverage is generally offered up to a maximum limit of $150 million per occurrence (and annual aggregate) in excess of a minimum attachment point generally of $25 million for United States risks and in excess of a minimum attachment point of $15 million for non-United States risks. Employment practices liability coverage is offered up to a maximum of $100 million in excess of a minimum attachment point of $1 million per occurrence (and annual aggregate). Directors and officers liability coverage is currently offered up to a maximum of $25 million in excess of not less than $20 million of underlying insurance coverage for United States risks, and up to $50 million for individual director indemnification and excluding corporate reimbursement in excess of $20 million, (or up to $15 million of coverage in excess of $15 million of underlying coverage for non-United States risks), and professional liability coverage currently is offered with limits no greater than the attachment point up to a maximum of $50 million, subject to a minimum attachment point of $25 million or $20 million for law firms.
Property coverage is currently offered up to $100 million of capacity per occurrence plus $10 million annual aggregate for high frequency/severity earthquake. The minimum attachment is generally $25 million for industrial/commercial accounts and $100 million for oil/petrochemical accounts.
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 additional underwriting requirements.
XLGRe provides large net line capacity for specialized programs to insurance and reinsurance companies. X.L. reinsures XLGRe for 75% of each risk written. In general, XLGRe provides third-party liability cover up to $100 million, directors and officers liability and professional liability up to $75 million per claim, high excess
property reinsurance up to $50 million per occurrence and financial reinsurance, credit enhancement and other collateralized and financial transactions. Following the Company's acquisition of GCRH and the amalgamation of XLRe and GCR, XLGRe also provides property catastrophe and other short-tail property reinsurance on a worldwide basis. In general, XLGRe limits its property catastrophe exposure under any single contract, or under all contracts with a single client, to $25 million per catastrophe event, with the majority of contracts written with limits of $5 million or less. XLGRe provides cover primarily on either an excess of loss or quota share basis.
BUSINESS STRATEGY
The Company's strategy is to be the premier provider of strategic financial risk solutions to specific global markets by applying intellectual and financial capital to assure its customers' economic vitality and enhance their competitive positions. Management believes that pursuing this strategy will improve the Company's ability to differentiate itself from its competitors, diversify its mix of business and revenue stream, reduce its dependence on existing core business lines which are cyclical and build shareholder value.
The Company's strategy calls for its subsidiaries to go beyond offering traditional insurance and reinsurance products to designing risk transfer programs that address specific customer needs with respect to a broad range of risks. These include certain types of financial risks and other non- traditional insurance risks which the Company believes can be properly analyzed and underwritten. As part of this approach, the Company's strategy contemplates providing income statement and balance sheet protection to its customers, involving in some instances structured portfolio transfers. The Company also believes there will be opportunities to build investment features into its risk transfer products. The Company intends to retain its traditional focus on high severity, low frequency risks.
In order to pursue its strategy effectively, the Company may need to secure access to skills and capabilities in areas which historically have not been found in the insurance and reinsurance industry. Accordingly, successful implementation of the Company's strategy is expected to involve not only maximizing its financial strength but attracting and retaining highly skilled and motivated employees. It may also require entering into coordinated initiatives, joint ventures or strategic alliances with one or more partners, making investments in and, where appropriate, acquiring other businesses of strategic value to the Company and its subsidiaries.
GENERAL LIABILITY
General liability policies offered by the Company's insurance subsidiaries cover occurrences causing unexpected and unintended personal injury and/or property damage (as well as advertising liability) to third parties arising from events or conditions which commence at or subsequent to an inception date (or retroactive date, if applicable, but not prior to January 1, 1986) and prior to the expiration of the policy, provided proper notice is given to X.L. or X.L.E. during the term of the policy or the discovery period. With respect to the use of products, the coverage applies where unexpected and unintended personal injury or property damage to a third party caused, allegedly caused or deemed to have been caused by the use of a product takes place during the term of the policy. Where certain injury, damage or liability to third parties is expected or intended by the insured, the policy provides coverage for injury, damage or liability when the actual injury, damage or liability incurred is fundamentally different in nature or vastly greater in order of magnitude than expected. All claims for integrated occurrences are added together and treated as one occurrence (and thereby limiting such losses to one policy limit) with respect to the policy in effect when the occurrence or claim is first reported regardless of the length of the period over which such losses or liabilities occur, although special notice requirements are imposed with respect to such losses. The general liability policies generally do not "drop down" to provide coverage below the per-occurrence attachment point even in the event of exhausted underlying insurance policy aggregates.
Coverage includes product liability, claims resulting from abrupt pollution, punitive damages (for unexpected or unintended damage/injury) and payment of legal fees, as well as a broad range of catastrophic exposures such as explosions, fires, utility blackouts and other catastrophic events not excluded from coverage. Coverage generally excludes gradual pollution (other than gradual pollution resulting from a products liability
claim), property damage arising out of most professional services, commercial airline risks, certain marine exposures, and liability for injury or damage caused by, among other things, asbestos, tobacco, intra-uterine devices, silicone implants and nuclear risks. Unlike traditional insurance policy forms, disputes under the policies are required to be settled by arbitration in London. Under the policy arbitration clause, each party selects one arbitrator and the two arbitrators so selected choose a third arbitrator. The English Arbitration Act of 1950, as amended and supplemented, governs the arbitration under X.L. policies (with International Chamber of Commerce rules governing X.L.E. policies).
Rather than issuing separate annual policies, a perpetual policy is issued (which is subject to an annual underwriting review) with an annual aggregate limit (subject to reinstatement). The policy remains in effect until canceled or not continued. The terms, conditions, exclusions, deductibles and limit applicable to an occurrence are determined by the policy in effect at the time notice thereof is first given. Because the inception date (or, if applicable, the retroactive date) remains unchanged, the exposure of a claim to X.L. or X.L.E. under each policy usually increases each additional year that the policy is in force. The exposure to unreported claims thus rolls forward each year, which is provided for by the establishment of significant incurred but not reported ("IBNR") reserves. Each year's coverage, however, is subject to an aggregate limit, and the limits of any given year are not available for occurrences first reported in a subsequent year notwithstanding that the injury or damage took place in that year. Premiums are adjusted annually. A single event or set of circumstances may constitute an insured occurrence under policies of different policyholders, resulting in multiple claims exposure with respect thereto. Such events or circumstances could have a material adverse effect on the results of the Company.
The policy permits cancellation by X.L. or X.L.E. with refund of the unearned premium at any time, except in the case of discovery period coverage, upon 90 days' prior written notice to the policyholder. The policy permits cancellation by a policyholder at any time with a pro-rata refund of premium. If the basic coverage of the policy is canceled or discontinued, the insured is given the option of purchasing discovery coverage (in respect of occurrences taking place subsequent to the inception/retroactive date and prior to cancellation or discontinuance of basic coverage) on an ongoing basis for as long as is desired by the policyholder (with no maximum duration) for predetermined annual premiums.
As contrasted with the standard policy form, which provides for annual determination of premiums and limits, the Company offers to certain of its policyholders endorsements providing coverage generally for two additional annual periods (aggregating a total of three years), with either an annual aggregate or term limit and with the provision for reinstatement of the limit selected. Premiums are generally prepaid in whole or in part for the period of the contract. Such endorsements limit the circumstances under which either the policyholder or the Company may cancel and provide that the otherwise predetermined premium for the three-year period may be adjusted in certain specified circumstances. It is contemplated that policyholders may be given the opportunity to roll the three-year term forward year-by-year based on premiums and other terms and conditions to be negotiated each year.
The Company also offers an alternate rating methodology to be used with multi-year general liability policies. These policies are written on a form affording the same scope of coverage as the general liability form described above, but the policies have several different features. Generally, these policies have a three to five-year term (which may be extended by mutual agreement year-by-year on a rolling basis), and provide that a portion of the aggregate limit may apply, depending upon the terms of the policy, to the entire term, but such aggregate limit, or a portion thereof, will be subject to one or more mandatory reinstatements if it is eroded by paid and/or reserved losses beyond a certain point or to reinstatement at the option of the policyholder. The annual premiums generally are higher than those charged for the standard single-year policies for the same layers, and the mandatory reinstatement premiums generally exceed the annual premiums. If, however, loss experience is favorable, the insured would be permitted to recapture a portion of the amount by which premiums exceed losses. Such recapture may be contingent upon commutation of the Company's liability for further loss payments. These multi-year policies may be written with attachment points below $25 million per occurrence but not less than $10 million per occurrence, and the limits thereof may be incremental to the otherwise applicable $150 million maximum limit.
DIRECTORS AND OFFICERS LIABILITY
Directors and Officers coverage is written on a claims-made basis, and the policy generally adopts the terms, conditions and exclusions in the primary or other underlying policy. Each insured is rated separately. In contrast to the general liability policy, the directors and officers policy is for a designated period. Also, unlike the general liability policy, the directors and officers policy "drops down" upon erosion or exhaustion of underlying aggregates by multiple claims. The policy can be canceled by X.L. or X.L.E. upon typically 90 days' notice (with X.L. or X.L.E. retaining a pro rata proportion of the premium) or by the policyholder at any time with the Company retaining a short rate proportion (i.e., more than pro rata) of the premium. As with the general liability form, disputes are required to be settled by arbitration in London. Under the policy arbitration clause, each party selects one arbitrator and the two arbitrators so selected choose a third arbitrator.
If X.L. or X.L.E. cancels or refuses to renew the policy, the policyholder is given the option of purchasing discovery coverage for a specified period of time (generally one to three years) at a predetermined premium.
PROFESSIONAL LIABILITY
Professional liability risks are written either on a follow-form basis (i.e., the policy generally adopts the terms, conditions and exclusions of the underlying policy, which usually is a "claims-made" policy) or on a form which is structured similarly to the general liability form in that it is extended from year to year (with annual underwriting reviews) and rolls coverage forward to the year when X.L. or X.L.E. receives notice. The policy covers "wrongful acts" (instead of occurrences), subject to customary exclusions, and covers punitive damages arising therefrom. As with the other policy forms, disputes are required to be settled by arbitration in London. In contrast to the general liability policy, the discovery period is of finite duration (generally one to three years). Whether the policy is written on a claims made "stand alone" basis (i.e., it does not follow the warranties, terms, conditions or exclusions of underlying policies), it does "drop down" upon erosion or exhaustion of the aggregate limits of underlying policies by multiple wrongful acts in the case of law firms and certain other insureds (i.e., in these instances the attachment point applies on an aggregate rather than a per wrongful act basis). The underlying policies of an insured seeking professional liability coverage are reviewed and evaluated as part of the underwriting process.
EMPLOYMENT PRACTICES LIABILITY
In 1996, X.L. introduced coverage for employment practices liability. Employment practices liability risks are written on a claims made and reported policy. The policy is written on an annual basis and covers claims brought by an employee against an insured for certain covered employment practices. As with other X.L. products, the employment practices liability policy has X.L.'s standard arbitration clause which requires disputes to be settled by arbitration in London.
PROPERTY EXCESS OF LOSS
Property policies are primarily underwritten on an excess of loss occurrence form (except earthquake and flood when provided) utilizing engineering reports, statement of values, prior loss history, annual report and other publically available information. Earthquake and flood coverage are written on an excess of loss attachment basis which may be eroded in a given policy year by accumulated losses from separate occurrences as customary in the industry. When written as such, earthquake and flood have annual aggregate limits. All classes of business are considered. The minimum attachment points are generally $25 million for industrial/commercial accounts and $100 million for oil/petrochemical accounts.
Coverage can be provided worldwide on an all-risk or named peril basis of direct physical loss or damage with options for time element (e.g., business interruption, extra expense, rental value, etc.), earthquake, flood, and boiler and machinery coverage. Policies can be written on a modified follow form or X.L. form. Typical exclusions include but are not limited to war risk, nuclear, pollution, and others customary in property policy
coverage. Unlike traditional property policies, disputes under X.L. policies are required to be settled by arbitration in London with each party selecting one arbitrator and the two arbitrators so selected choosing a third arbitrator.
X.L.'s and X.L.E.'s maximum net capacity for any one insured is $100 million per occurrence with $10 million annual aggregate for high frequency/severity earthquake (California, Japan, etc.) when provided. Earthquake and coastal wind exposures are carefully identified and monitored (policy limit accumulations) by subzones worldwide in order to limit exposure to an excessive concentration of catastrophic loss.
The policy is generally written on a multi-year basis with annual underwriting review. However, it may be canceled on a pro-rata basis at any time in the mid-term of an annual period with a written notice to the named insured, or retroactively to anniversary if premium is not paid within 5 days of anniversary.
X.L. RISK SOLUTIONS
X.L. Risk Solutions is a coordinated initiative with CIGNA Risk Solutions offering multi-year, combined line coverages for traditional casualty coverages, including general, directors and officers and professional liability, and property coverage plus blended finite coverage for risks which traditionally have had difficulty placing cover. The target market is large and medium size companies that are trying to simplify and streamline the risk transfer process. CIGNA provides services and fronting policies to meet U.S. regulatory requirements and X.L. provides an excess policy for the balance of capacity and coverages required. Programs are typically custom designed to meet specific needs with each customer.
POLITICAL RISK INSURANCE
In March 1997, X.L. became a founding shareholder in Sovereign Risk Insurance Ltd. ("Sovereign"), a Bermuda based managing general agency formed to underwrite selected political risk insurance coverages, including expropriation, currency inconvertibility and certain other types of political risk associated with cross-border investment. Sovereign was formed as a joint venture among X.L., A.C.E. Insurance Company, Ltd. ("ACE") and RCRe. Policies written by Sovereign are subscribed 50% by each of X.L. and ACE, with RCRe participating in up to 10% of each risk written on a quota share basis. Sovereign's per-country aggregate limit is $100 million, except with respect to Argentina, Brazil, China and Indonesia which have an aggregate limit of $250 million each, and its per risk limit is $50 million.
REINSURANCE ASSUMED
During 1995 X.L. and X.L.E. assumed reinsurance contracts for specific risks. As of December 1, 1995, these risks were continued as and if appropriate in XLGRe.
XLGRe provides large net line capacity for specialized programs to insurance and reinsurance companies. X.L. reinsures XLGRe for 75% of each risk written. XLGRe in general provides third party liability cover up to $100 million, directors and officers liability and professional liability up to $75 million per claim. Financial reinsurance, credit enhancement and other collateralized and financial transactions may involve larger nominal limits, but XLGRe's net risk exposure is maintained within ranges set by management through the use of reinsurance or capital market products. XLGRe also provides reinsurance with respect to certain marine, aviation, satellite and political risks.
Property reinsurance is written on both an excess and quota share basis, with the majority being catastrophe-related business written on an excess of loss basis. Limits vary by program but range from under $5 million up to $25 million, with the majority of limits being under $5 million. Risks are evaluated using computer driven modelling techniques combined with qualitative underwriting techniques. Risk is diversified by type of reinsurance, geographic coverage and by varying the level of attachment. Aggregate loss exposure is managed by means of geographic zone limits.
REINSURANCE
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 U.S. reinsurers were added to this 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 Standard & Poors ("S&P") is BBB.
Effective September 1, 1997, X.L. and X.L.E. entered into an excess of loss casualty catastrophe contract covering 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.
Property quota share reinsurance of 25% (subject to catastrophe occurrence limit restrictions) of the X.L. property policy limit is purchased from three Bermuda-based property reinsurers, two U.S. reinsurers and one non-U.S. reinsurer. Mid Ocean Reinsurance Company, Limited, a wholly-owned subsidiary of Mid Ocean Limited ("MOCL"), has a 30% participation on this program. The Company owns 29.1% of the issued and outstanding voting shares of MOCL. All property reinsurers are rated with a minimum S&P rating of A.
X.L. reinsures one third of the first $75 million in limits of employment practices liability to a U.S. insurer and the remaining excess layer of $25 million to a Bermuda-based insurer.
A quota share arrangement exists between X.L. and CIGNA based on pre-agreed percentages by line of coverage for blended covers written through X.L. Risk Solutions and CIGNA Risk Solutions. These percentages vary from 12.5% to 90%, but do not exceed X.L.'s normal capacity on individual lines of cover. X.L. may underwrite an account 100% without CIGNA participation.
COMPETITION
The property-casualty insurance and reinsurance industry is highly competitive, particularly in the case of large risk accounts in the United States and Europe, which represent the vast majority of the Company's customer base. The markets for the Company's insurance and reinsurance products are characterized by strong, and at times intense, price competition driven largely by the substantial amount of excess capacity and relatively inexpensive reinsurance currently present in the industry. The Company believes that such competitive forces will be present in the industry for at least the short to medium term.
Whereas only a small number of insurers used to compete with the Company's property-casualty lines of business at the attachments and limits offered by it, the Company currently estimates there to be approximately 12 competitors worldwide with respect to such business. Similarly, the Company believes there to be a large number of reinsurers which compete with its property catastrophe-specialty reinsurance business. Many of the Company's competitors possess significantly greater financial and other resources than the Company. The Company generally competes on the basis of price, financial strength, coverage terms, claims paying reputation and customer service.
Notwithstanding the foregoing, the Company believes it is one of the leading excess general liability insurers at its attachment point and limit levels for major corporations domiciled in the U.S. The Company's principal competitors with respect to excess general liability are other Bermuda-based insurers, industry mutuals
which limit coverages to their industry, Lloyds of London and several large European insurers and reinsurers. There is no one or small group of dominant insurers in the property and directors and officers and professional excess liability insurance areas; the Company believes it is a significant competitor at its attachment point and limit levels in these lines.
RATING METHODOLOGY
X.L. and X.L.E. write liability and property coverage for a wide array of industry groups, including chemical, industrial, pharmaceutical, property owners, landlords and tenants, utilities, auto, consumer, rail, oil and construction with respect to third-party general liability and first-party property; industrial/manufacturing, utilities, chemical/pharmaceutical and financial advisors with respect to directors and officers liability; and lawyers, insurance brokers and insurance companies for professional liability. Although rates are influenced by a number of factors, including competition, the Company's rating methodology seeks to set rates individually for each insured in accordance with claims potential as measured by past experience and future expectations, the attachment point and amount of underlying insurance, the nature and scope of insured operations (including the industry group in which the insured operates), exposures to loss, and other specific risk factors relevant in the judgment of the underwriters and insurance market conditions. Underwriters separately evaluate each industry category (and sub- groups within each category) and premiums are set and adjusted for an insured based in large part on the industry group in which the insured is placed and the insured's risk relative to the other risks in the insured's industry group. Each industry group is reviewed annually to take into account outstanding case losses and new loss incident reports within each group. Rates may vary significantly according to the industry group of the insured as well as within the group.
UNDERWRITING AND MARKETING
Underwriting activities are conducted only through the offices of the Company's subsidiaries in Bermuda and the Republic of Ireland. A marketing office has recently been opened in Sydney, Australia. In addition, a London contact office has been established for the purpose of servicing XLGRe. Accordingly, the Company and its subsidiaries do not maintain an office, solicit or advertise in the U.S. and are not admitted as insurers in the U.S. On November 6, 1997, the Company entered into a definitive agreement to purchase all of the outstanding shares of Folksamerica General Reinsurance Company ("Folksamerica General"), which has property and casualty licences in approximately 20 states and reinsurance licenses in approximately 14 states. The closing of this transaction is subject to receipt of certain regulatory approvals and satisfaction of certain other conditions precedent.
All insureds are referred to the Company's subsidiaries through approximately 50 non-U.S. insurance brokers who receive from the insured a brokerage commission equal to a percentage of gross premiums. Neither X.L. nor X.L.E. nor XLGRe is committed to accept any business from any particular broker, and brokers do not have the authority to bind either X.L., X.L.E. or XLGRe. All policy applications are subject to approval and acceptance by the Company's subsidiaries. During 1997 Marsh & McLennan Incorporated acquired J&H Intermediaries Limited to form J&H Marsh McLennan Global Broking Limited ("J&H Marsh"). In addition, AON Intermediaries Limited acquired Alexander Howden Group Limited. Since the Company's inception, J&H Marsh or affiliated companies have placed a significant amount of insurance business with the Company's subsidiaries. In fiscal 1995, 1996 and 1997, approximately 50%, 52% and 52%, respectively, of the Company's consolidated gross premiums were placed by J&H Marsh or its predecessors and approximately 17% and 19%, respectively, were placed by AON or its predecessors in fiscal 1996 and 1997, respectively . No other broker accounted for more than 10% of gross premiums written in any fiscal year during such period.
UNPAID LOSSES AND LOSS EXPENSES
Significant periods of time may lapse between the occurrence of an insured loss, the reporting of the loss to X.L., X.L.E., or XLGRe and their payment of that loss. To recognize liabilities for unpaid losses, the Company establishes reserves, which are balance sheet liabilities representing estimates of future amounts needed to pay
claims and related expenses with respect to insured events which have been reported to the Company. The Company's reserving practices and the establishment of any particular reserve reflect management's judgement concerning sound financial practice and do not represent any admission of liability with respect to any claims made against the Company's subsidiaries.
After a claim is reported to X.L., X.L.E. or XLGRe, its claims personnel determine whether to establish a "case reserve" for the estimated amount of the ultimate settlement, if any. The estimate reflects the judgment of claims personnel, based on general corporate reserving practices and on the experience and knowledge of such personnel regarding the nature and value of the specific type of claim and, where appropriate, advice of counsel. Periodically, adjustments to the case reserves may be made as additional information regarding the claims becomes known and/or partial payments are made. Case reserves generally are established by the Company from previously established IBNR reserves. Reserves are also established to provide for the estimated expense of settling claims, including legal and other fees and the general expenses of administering the claims adjustment process ("loss expense").
The IBNR reserves for fiscal years prior to 1996 was estimated utilizing the Bornhuetter-Ferguson ("B-F") actuarial method modified for actual loss experience. The B-F method is a generally accepted actuarial technique for estimating loss reserve levels where an insurer does not have sufficient relevant historical loss experience to employ other methods. The position has been reviewed and the IBNR reserves are now estimated by using several actuarial reserving techniques. The vast majority of the Company's IBNR derives from general liability, professional liability and property coverages written by X.L. and X.L.E. This IBNR is calculated in two steps. First, case reserve development is calculated with the use of the loss development factor ("LDF") method. Second, "pure" IBNR is estimated with a frequency/severity approach. Since X.L. and X.L.E.'s coverage is usually triggered when a notice is submitted by the insured, "pure" IBNR losses exist only when claims with a loss notice develop into their layers of coverage. The method calculates the ultimate number of claims (i.e. frequency) via the B-F technique. The severity component ( average claim size) is developed via a single parameter Pareto loss distribution, adjusted for X.L. and X.L.E.'s average attachment points and limits.
A minority of the Company's IBNR derives from contracts which are very specific and unique to each situation. Because each contract will exhibit different reporting, frequency and profitability characteristics, they are reserved for separately via the expected loss ratio ("ELR") method. The loss ratio used is specific to each contract and is generally based on cash flow and profitability considerations.
The Company believes it applies the most appropriate actuarial methods for estimating reserves for the types of liability that the Company retains. X.L. and X.L.E.'s loss experience is typified by very low frequency and very high severity events. The ultimate claims experience of X.L., X.L.E. and XLGRe is subject to a greater level of uncertainty than may be the case with traditional insurance companies, and there can be no assurance that losses and loss expenses will not exceed the total reserves.
Several aspects of the operations of X.L. and X.L.E. complicate the actuarial reserving techniques for loss reserves as compared to a more conventional insurance company. 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 will be characterized by low frequency and high severity, limiting the utility of claims experience of other insurers for similar claims. Accordingly, the ultimate claims experience of X.L. and X.L.E. cannot be as reliably predicted as may be the case with traditional insurance companies, and there can be no assurance that losses and loss expenses will not exceed the total reserves.
Losses and loss expenses are charged to income as incurred. The reserve for unpaid losses and loss expenses represents the accumulation of case reserves, loss expense reserves and IBNR. During the loss settlement period, which can be many years in duration, additional facts regarding individual claims and trends usually will become known. As these become apparent, it often may become necessary to refine and adjust the reserves upward or downward from time to time. The final liability nonetheless may be significantly less than or greater than the prior estimates.
Conditions and trends that have affected development of liability in the past may not necessarily occur in the future. Accordingly, it may not be appropriate to extrapolate future redundancies or deficiencies based on the tables below.
The "Analysis of Consolidated Loss and Loss Expense Reserve Development" set forth below, presents the development of balance sheet unpaid loss and loss expense reserves for the fiscal years 1986 through 1997.
ANALYSIS OF CONSOLIDATED LOSS AND LOSS EXPENSE RESERVE DEVELOPMENT
The following table presents a reconciliation of beginning and ending reserve balances for the periods indicated on a net basis:
RECONCILIATION OF UNPAID LOSSES AND LOSS EXPENSES
The computation of the Company's reserves for Bermuda statutory purposes is the same as for the purposes of generally accepted accounting principles in the United States ("GAAP").
Case reserves as a component of total reserves in 1997 increased to $801 million from $787 million after the payment of $262 million in losses. The increase is in part due to three new reserves totaling $145 million in 1997 that are integrated to a common casualty event. In addition there were three new reserves in 1996 from unrelated causes totaling $85 million. The balance of the change is not attributable to any single or group of related events, but to normal attrition as losses have developed over time into the Company's layers of exposure, consistent with the nature of excess casualty insurance.
The changes in reserves between years are in mostly due to the reserving methodology. One of the major driving factors in estimating IBNR is the estimated frequency of loss. Since the nature of the Company's casualty book is low frequency high severity, the emergence or non emergence of a few losses relative to historical development can have a significant impact on increases or reductions in reserves between individual years. This is readily apparent in 1997, where incurred losses amounted to $644 million. The claims frequency for this year is higher than the historical frequency due to the emergence of the three integrated casualty claims, resulting in increased levels of IBNR. It should also be noted that if in the subsequent development of the 1997 year, actual losses may prove to be lower than the derived frequency, it will result in a reduction in these reserves. Another contributing factor to the high incurred losses for this year, were treaty losses realized on the reinsurance book of business of $36 million.
Total reserves increased in 1996 by $23 million reflecting the unrelated indemnity reserves of $85 million mentioned previously. This change reflects an increase to the expected frequency. Reserves of $138 million, $43 million, $84 million, $27 million, $3 million and $11 million were reduced for the years from 1995, 1994, 1993, 1992, 1991 and 1990, respectively. The 1995 year reflects the elimination of one indemnity reserve (due to the cancellation of a general liability policy) in a year where the claim frequency is already low. As previously mentioned, changes in frequencies will have a significant effect. The 1993 year also reflects the "release" of an indemnity reserves, which has been reclassified to 1994, resulting in an effect similar to 1995. The other years reflect frequency emergence patterns lower than historical expectations.
Due to the nature of the Company's policy form and the level of coverage provided, with limits generally up to $150 million, adjustments to reserves for individual years can be irregular and significant. Such adjustments are part of the normal course of business for the Company. Conditions and trends that have affected development of liability in the past may not necessarily occur in the future. Accordingly, it is inappropriate to extrapolate future redundancies or deficiencies based upon historical experience.
CLAIMS ADMINISTRATION
All claims management activities are conducted at the offices of the Company's subsidiaries in Bermuda and the Republic of Ireland. Claims management includes the review of initial loss reports, creation of claims files, administration of claims data base, generation of appropriate response to claims reports including identification and handling of coverage issues, determination of whether further investigation is required and, where appropriate, retention of claims counsel, establishment of case reserves, payment of claims, and notification to reinsurers.
INVESTMENTS
X.L. Investments Ltd., a Bermuda corporation ("X.L.I."), is a wholly-owned subsidiary of X.L. The Finance Committee of the Board of EXEL and management oversee investment strategy, establish guidelines for the various investment managers and implement investment decisions with the assistance of such managers. The current investment strategy seeks to maximize investment income through a high-quality, diversified portfolio whilst focusing on preserving principal and maintaining liquidity. In this regard, at November 30, 1997, the Company's fixed income investment portfolio includes U.S. and non-U.S. sovereign government obligations, corporate bonds and other securities, 58% of which were rated Aa or AA or better by a nationally recognized rating agency. Under current investment guidelines, up to 30% of the Company's investment portfolio may be invested in equity securities. Applicable insurance laws and regulations do not restrict the Company's investments except that certain types of investments (such as unquoted equity securities, investments in affiliates, real estate and collateral loans) may not qualify as a "relevant asset" for purposes of satisfying Bermuda statutory financial requirements. At each of November 30, 1997, 1996 and 1995, 19%, 14% and 13% of the Company's investments in fixed maturity and short-term investments and 42%, 45% and 33% of the Company's investments in equity securities were represented by securities of non-U.S issuers. 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 November 30, 1997, 1996 or 1995.
X.L. Investments (Barbados) Inc. ("X.L.I.B."), a Barbados corporation and wholly-owned subsidiary of X.L.I., maintains portfolios of equity securities with the assistance of investment managers.
The following table reflects investment results for the Company for each of the five years in the period ended November 30, 1997:
- -------- (1) Average of the beginning and ending amounts of investments and cash and cash equivalents net of pending trades for the period. Investment securities are carried at market value. (2) After investment expenses, excluding realized net capital gains (losses).
REGULATION
Bermuda
The Insurance Act 1978 of Bermuda, amendments thereto and related regulations (the "Act"), regulates the business of X.L. and XLGRe. The Act imposes on Bermuda insurance companies solvency and liquidity standards and auditing and reporting requirements and grants to the Minister of Finance powers to supervise, investigate and intervene in the affairs of insurance companies.
REPUBLIC OF IRELAND
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 operations, however, are largely restricted to the Republic of Ireland and are 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 1989 (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 Community's (Non-Life Insurance Accounts) Regulations, 1976 and the European Community's (Non-Life Insurance Accounts) Regulations, 1977 and related administrative rules (the "Irish Regulations").
X.L.E.'s insurance activities are subject to extensive regulation in the Republic of Ireland, principally under the Irish Acts and Irish Regulations, which impose on insurers headquartered in the Republic of Ireland minimum solvency and reserve standards and auditing and reporting requirements and grant to the Minister for Enterprise and Employment (the "Irish Minister") wide powers to supervise, investigate and intervene in the affairs of such insurers. The Irish Minister's powers and functions are exercised through the Department of Enterprise and Employment.
United States and other
The insurance laws of each state of the United States and of many foreign countries regulate the sale of insurance within their jurisdictions by alien insurers, such as X.L. 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, among 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 assurance, however, that the activities of the Company will not be challenged in the future or that the Company will be able to successfully defend against such challenges or that legislation will not be enacted that will affect the Company's ability to conduct its business.
TAX MATTERS
The Company is a Cayman Islands corporation and has never paid United States corporate income taxes (other than withholding taxes on dividend income) on the basis that it is not engaged in a trade or business in the United States; however, because definitive identification of the activities which constitute being engaged in trade or business in the United States is not provided by the U.S. Internal Revenue Code of 1986, regulations or court decisions, there can be no assurance that the U.S. Internal Revenue Service will not contend that the Company or its subsidiaries are engaged in trade or business in the United States. If the Company or its subsidiaries were considered to be engaged in trade or business in the United States (and, if the Company or its subsidiaries were to qualify for the benefits under the income tax treaty between the United States and Bermuda, such businesses were attributable to a "permanent establishment" in the United States), the Company or its subsidiaries could be subject to U.S. tax at regular corporate tax rates on its taxable income that is effectively connected with such U.S. trade or business plus an additional 30% "branch profits" tax on such income remaining after the regular tax, in which case there could be a material adverse effect on the Company's shareholders' equity and earnings.
As described above, on November 6, 1997, the Company entered into a definitive agreement to purchase all of the outstanding shares of Folksamerica General, a New York corporation which is subject to applicable U.S. federal, state and local corporate income taxes. Folksamerica General will continue to be subject to such corporate income taxes following the closing of the transaction, which remains subject to the receipt of the required regulatory approvals and certain other conditions precedent.
EMPLOYEES
At November 30, 1997, the Company and its subsidiaries employed a total of 184 employees, of which 149 were located in Bermuda and 35 in the Republic of Ireland. None of the these employees are represented by a labour union and the Company believes that its employee relations are excellent.
ITEM 2.
ITEM 2. PROPERTIES
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.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
The Company, through its insurance subsidiaries, in common with the insurance industry in general, is subject to litigation in the normal course of its business. Although most of its policies provide for resolution of disputes by arbitration in London, X.L. has been sued several times in United States courts and is defending each suit vigorously, both on procedural grounds and the merits. As of November 30, 1997, the Company was not a party to any material litigation other than as routinely encountered in claims activity, none of which is expected by management to have a material adverse effect on the Company's financial condition.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of stockholders during the fourth quarter of the fiscal year covered by this report.
EXECUTIVE OFFICERS OF THE COMPANY
The table below sets forth the names, ages and titles of the persons who were the executive officers of the Company for the year ended November 30, 1997.
Brian M. O'Hara has been President and Chief Executive Officer of the Company since 1994 and a Director of the Company since 1986, having previously served as Vice Chairman of the Company from 1987. He has been Chairman and Chief Executive Officer of X.L. since December 1995, having previously served as Chairman, President and Chief Executive Officer from 1994, President and Chief Executive Officer from 1992, and as President and Chief Operating Officer from 1986.
Robert J. Cooney has been Executive Vice President of the Company since March 1995 and President and Chief Operating Officer of X.L. since December 1995, having previously served as Executive Vice President and Chief Underwriting Officer of X.L. from 1992, and as a Senior Vice President from 1987.
Brian G. Walford has been Executive Vice President of the Company and X.L. since 1991 and Chief Financial Officer of the Company since 1990. Mr. Walford has been Secretary of the Company since 1991 and X.L. since 1990. Mr. Walford previously served as Chief Financial Officer of X.L. from 1990 to 1996 and as Senior Vice President of the Company and X.L. from 1988 to 1991. Mr. Walford retired from the Company and X.L. on December 31, 1997.
K. Bruce Connell has been Executive Vice President of the Company and President and Chief Operating Officer of XLGRe since October 1997, having previously served as Executive Vice President and President of XLGRe since December 1995, and as Senior Vice President of X.L. from 1990 to 1995.
Christopher V. Greetham has been Senior Vice President and Chief Investment Officer of the Company since 1996. Prior to joining the Company, Mr. Greetham served as Senior Vice President and Chief Financial Officer of OIL Insurance Ltd. from 1982 to 1996 and as Vice President of Bankers Trust Company from 1975 to 1982.
Paul S. Giordano has been Senior Vice President and General Counsel of the Company, X.L. and XLGRe since January 1997. From 1990 to 1996, Mr. Giordano was associated with major law firms in New York and London prior to joining the Company.
PART II
ITEM 5.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
(a) The Company's Common Stock, $0.01 par value, is listed on the New York Stock Exchange under the symbol XL.
The following table sets forth the high and low closing sales prices per share of the Company's Ordinary Shares per fiscal quarter, as reported on the New York Stock Exchange Composite Tape, adjusted for the one for one stock dividend on July 26, 1996.
Each Ordinary Share has one vote, except that if, and so long as, the Controlled Shares of any person constitute ten percent (10%) or more of the issued Ordinary Shares, the voting rights with respect to the Controlled Shares owned by such person shall be limited, in the aggregate, to a voting power of approximately 10%, pursuant to a formula specified in the Articles of Association. "Controlled Shares" shall include, among other things, all Ordinary Shares for which such person is deemed to beneficially own directly, indirectly or constructively (within the meaning of Section 13(d)(3) of the Securities Exchange Act of 1934).
(b) The approximate number of record holders of Ordinary Shares as of November 30, 1997 was 209.
(c) Company paid four regular quarterly dividends, three of $0.32 per share to all shareholders of record on February 6, 1997, April 22, 1997 and July 11, 1997 and one of $0.40 per share to all shareholders of record on September 25, 1997.
The declaration and payment of future dividends by the Company will be at the discretion of the Board of Directors and will depend upon many factors, including the Company's earnings, financial condition, business needs, capital and surplus requirements of the Company's operating subsidiaries and regulatory considerations.
The Company is a holding company whose principal source of income is dividends from X.L. The payment of dividends by X.L. is subject to restriction under Bermuda insurance and corporate law and regulations. At November 30, 1997 X.L. could legally have paid dividends in the amount of approximately $1.5 billion at such date.
(d) Rights to purchase Ordinary Shares were distributed as a dividend at the rate of one Right for each EXEL Ordinary Share held of record as of the close of business on January 15, 1996. Each Right entitles holders of EXEL Ordinary Shares to buy one Ordinary Share at an exercise price of U.S. $125.00. The Rights would be exercisable, and would detach from the Ordinary Shares, only if a person or group were to acquire 20 per cent or more of EXEL'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 per cent or more of EXEL's Ordinary Shares. Upon a person or group without prior approval of the Board acquiring 20 per cent or more of EXEL's Ordinary Shares, each Right would entitle the holder (other than such an acquiring person or group) to purchase EXEL 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. EXEL will be entitled to redeem the Rights at U.S. $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 August 31, 2005.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated financial data below should be read in conjunction with the consolidated financial statements and the notes thereto presented under Item 8.
- -------- (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.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
The following is a discussion of the Company's results of operations and financial condition. This discussion and analysis should be read in conjunction with the consolidated financial statements and the notes thereto presented under Item 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
EXEL LIMITED
CONSOLIDATED BALANCE SHEETS AS AT NOVEMBER 30, 1997 AND 1996
(EXPRESSED IN THOUSANDS OF U.S. DOLLARS)
See accompanying notes to Consolidated Financial Statements
EXEL LIMITED
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED NOVEMBER 30, 1997, 1996 AND 1995
(EXPRESSED IN THOUSANDS OF U.S. DOLLARS, EXCEPT PER SHARE AMOUNTS)
See accompanying notes to Consolidated Financial Statements
EXEL LIMITED
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED NOVEMBER 30, 1997, 1996 AND 1995
(EXPRESSED IN THOUSANDS OF U.S. DOLLARS)
See accompanying notes to Consolidated Financial Statements
EXEL LIMITED
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED NOVEMBER 30, 1997, 1996 AND 1995
(EXPRESSED IN THOUSANDS OF U.S. DOLLARS)
See accompanying notes to Consolidated Financial Statements
EXEL LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED NOVEMBER 30, 1997, 1996 AND 1995
(EXPRESSED IN U.S. DOLLARS)
1. GENERAL OPERATIONS
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.
X.L. provided the capital to incorporate X.L. Investments Ltd. (X.L.I.) on November 16, 1987 under the laws of Bermuda. X.L.I. in turn provided the capital to incorporate X.L. Investments (Barbados), Inc. (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.
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).
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.
X.L. and X.L.E. provide on an occurrence-reported policy form:
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.
X.L. and X.L.E. provide on a claims-made policy form:
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.
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.
EXEL LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
X.L. and X.L.E. provide coverage for high excess property insurance currently offered up to $100 million of capacity per occurrence and $10 million annual aggregate for high frequency/severity earthquake. The minimum attachment is generally $25 million for industrial/commercial accounts and $100 million for oil/petrochemical accounts.
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.
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.
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.
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-.
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.
A quota share arrangement exists between X.L. and CIGNA based on pre agreed percentages by line of coverage for blended covers written through Risk Solutions. These percentages vary from 12.5% to 90%, but do not exceed X.L.'s normal capacity on individual lines of cover. X.L. may underwrite an account 100% without CIGNA participation.
EXEL LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
2. SIGNIFICANT ACCOUNTING POLICIES
(a) Basis of Preparation
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 1997 presentation. All share amounts have been adjusted for the one-for-one stock dividend paid to shareholders of record July 26, 1996.
(b) Premiums and Acquisition Costs
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.
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 and other costs related to those premiums are also considered in determining the level of acquisition costs to be deferred.
(c) Investments
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.
Short-term investments comprise investments with a maturity equal to or greater than 90 days but less than one year.
EXEL LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
(d) Foreign Currency Translation
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.
(e) Investment in Affiliates
The Company accounts for its investments in affiliates on the equity basis.
(f) Other Investments
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.
(g) Amortization of Intangible Assets
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.
(h) Losses and Loss Expenses
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
EXEL LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
(i) Statements of Cash Flows
For purposes of the statements of cash flows, cash equivalents include fixed interest deposits placed with a maturity of under 90 days when purchased.
(j) Income per Ordinary Share and Ordinary Share Equivalent
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.
3. INVESTMENTS
Net investment income is derived from the following sources (U.S. dollars in thousands):
The following represents an analysis of realized and the change in unrealized gains (losses) on investments (U.S. dollars in thousands):
EXEL LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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):
EXEL LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
4. INVESTMENT IN AFFILIATES
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.
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 owns 30% of Pareto Partners, a partnership engaged in the business of providing investment advisory and discretionary management services.
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.
5. OTHER INVESTMENTS
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.
6. LOSSES AND LOSS EXPENSES
Unpaid losses and loss expenses net of reinsurance balances receivable comprise (U.S. dollars in thousands):
EXEL LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Reconciliation of unpaid losses and loss expenses:
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.
The 1997 current paid losses represents, reinsurance treaty losses on the Company's short tail business.
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.
Losses and loss expenses incurred for prior years during 1996 and 1995 are not attributable to any single event or group of related events, but the development of losses at a higher rate than the expected loss emergence pattern.
7. CONTINGENCIES AND COMMITMENTS
The Company has committed to unsecured letters of credit totalling $138.6 million and (Pounds)10.2 million as at November 30, 1997.
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.
8. CREDIT AGREEMENT
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
EXEL LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
average rate of 6.058%. Total interest expense and facility costs amounted to $7.18 million for the year ended November 30, 1997. As at November 30, 1997, the outstanding balance was $130.0 million and is repayable within the next twelve months.
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 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.
9. SHARE CAPITAL
Authorized and Issued
The authorized share capital is 999,990,000 ordinary voting shares of a par value of $0.01 each.
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:
(SHARE UNITS AND US DOLLARS IN THOUSANDS)
The following table is a summary of shares issued and outstanding (in thousands):
Stock plans
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
EXEL LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
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. All options vest immediately on grant date.
Under this plan, directors may also 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 totalled 3,048, 4,048 and 3,372 in 1997, 1996 and 1995, respectively.
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:
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions:
Total stock based compensation recognized in net income was $3.2 million and $1.3 million in 1997 and 1996, respectively.
EXEL LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Options
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.
Voting
EXEL's Articles of Association restrict the voting power of any person to less than 10% of total voting power.
10. CONTRIBUTED SURPLUS
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.
11. PREMIUMS
Premiums comprise (U.S. dollars in thousands):
12. REINSURANCE
The Company is contingently liable with respect to reinsurance ceded to the extent that any reinsurance company fails to meet its obligation to the Company.
EXEL LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
13. DIVIDENDS
In 1997, four regular quarterly dividends were paid, three of $0.32 per share to shareholders of record at February 6, April 22 and July 11, and one of $0.40 per share to shareholders of record at September 25.
In 1996, four regular quarterly dividends were paid, one of $0.20 per share to shareholders of record at February 2, and three of $0.25 per share to shareholders of record at April 15, July 12 and October 11.
In 1995, four regular quarterly dividends were paid, three of $0.17 per share to shareholders of record at February 2, April 17 and July 7, and one of $0.20 per share to shareholders of record at October 12.
14. TAXATION
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.
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%.
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.
15. FOREIGN EXCHANGE
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.
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.
16. FINANCIAL INSTRUMENTS
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
EXEL LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
17. STATUTORY FINANCIAL DATA
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):
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 only allows 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 $1.5 billion, 1.1 billion and $930 million at November 30, 1997, 1996 and 1995, respectively. XLGRe was classified as a Class 4 reinsurer upon its incorporation.
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.
EXEL LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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".)
X.L.E.'s insurance activities are subject to extensive regulation in the Republic of Ireland, principally under the Irish Acts and Irish Regulations, which impose on insurers headquartered in the Republic of Ireland minimum solvency and reserve standards and auditing and reporting requirements and grant to the Minister for Enterprise and Employment (the "Irish Minister") wide powers to supervise, investigate and intervene in the affairs of such insurers. The Irish Minister's powers and functions are exercised through the medium of the Department of Enterprise and Employment.
18. UNAUDITED QUARTERLY FINANCIAL DATA
The unaudited quarterly financial data for 1997 and 1996 follows (U.S. dollars in thousands, except per share amounts):
19. ACCOUNTING STANDARDS
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
EXEL LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(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.
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.
FASB issued Statement of Financial Accounting Standards No. 131, ("SFAS 131"), "Disclosures about Segments of an Enterprise and Related Information", which the Company will be required to adopt for fiscal year 1998. This statement established standards for reporting information about operating segments in annual financial statements and requires selected information about operation segments in interim financial reports issued to shareholders. It also established standards for related disclosures about products and services, geographic areas and major customers. Under SFAS 131, operating segments are to be determined consistent with the way that management organizes and evaluates financial information internally for making operating decisions and assessing performance. The Company has not determined the impact of the adoption of this new accounting standard on its consolidated financial statement disclosures.
Apart from SFAS No. 131, these new standards are expected to have a minimal impact on the Company's financial statements and disclosures.
EXEL LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
20. INVESTMENT IN AFFILIATE
Summarized condensed financial information of Mid Ocean Limited, a 25% owned affiliate, which is accounted for by the equity method, is as follows:
INCOME STATEMENT DATA
BALANCE SHEET DATA
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.
INDEPENDENT AUDITORS' REPORT
To the Shareholders of EXEL Limited:
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.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
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.
Coopers & Lybrand
Hamilton, Bermuda January 11, 1998
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
There have been no changes in nor any disagreements with accountants on accounting and financial disclosure within the twenty-four months ending November 30, 1997.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
This item is omitted because a definitive proxy statement which involves the election of directors will be filed with the Securities and Exchange Commission not later than 120 days after the close of the fiscal year pursuant to Regulation 14A, which proxy statement is incorporated by reference.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
This item is omitted because a definitive proxy statement which involves the election of directors will be filed with the Securities and Exchange Commission not later than 120 days after the close of the fiscal year pursuant to Regulation 14A, which proxy statement is incorporated by reference.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
This item is omitted because a definitive proxy statement which involves the election of directors will be filed with the Securities and Exchange Commission not later than 120 days after the close of the fiscal year pursuant to Regulation 14A, which proxy statement is incorporated by reference.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
This item is omitted because a definitive proxy statement which involves the election of directors will be filed with the Securities and Exchange Commission not later than 120 days after the close of the fiscal year pursuant to Regulation 14A, which proxy statement is incorporated by reference.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) FINANCIAL STATEMENTS AND EXHIBITS.
1. FINANCIAL STATEMENTS Included in Part II--See Item 8 of this report.
2. FINANCIAL STATEMENT SCHEDULES Included in Part IV of this report:
Other Schedules have been omitted as they are not applicable to the Company.
3. EXHIBITS
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the last quarter of 1997.
AUDITORS' REPORT ON FINANCIAL STATEMENT
SCHEDULES INCLUDED IN FORM 10-K
Our report on the consolidated financial statements of EXEL Limited is included on page 43 of this Form 10-K in connection with our audits of such financial statements. We have also audited the related financial statement schedules listed in the index on page of this Form 10-K.
In our opinion, the financial statement schedules referred to above, when considered in relation to the basic financial statements taken as whole, present fairly, in all material respects, the information required to be included therein.
Coopers & Lybrand
Hamilton, Bermuda January 23, 1998
EXEL LIMITED SUPPLEMENTAL SCHEDULE I
CONSOLIDATED SUMMARY OF INVESTMENTS-OTHER THAN INVESTMENTS IN RELATED PARTIES
NOVEMBER 30, 1997 (IN THOUSANDS)
- -------- (1) Investments in fixed maturities and short-term investments are shown at amortized cost.
EXEL LIMITED
SCHEDULE II
CONDENSED FINANCIAL INFORMATION OF REGISTRANT CONDENSED BALANCE SHEETS--PARENT COMPANY ONLY
FOR THE YEARS ENDED NOVEMBER 30, 1997 AND 1996 (IN THOUSANDS)
See accompanying notes to Consolidated Financial Statements
EXEL LIMITED
SCHEDULE II
CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED) STATEMENT OF INCOME--PARENT COMPANY ONLY
FOR THE YEARS ENDED NOVEMBER 30, 1997, 1996 AND 1995 (IN THOUSANDS)
See accompanying notes to Consolidated Financial Statements
EXEL LIMITED
SCHEDULE II
CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED) STATEMENT OF CASH FLOWS--PARENT COMPANY ONLY
FOR THE YEARS ENDED NOVEMBER 30, 1997, 1996 AND 1995 (IN THOUSANDS)
See accompanying notes to Consolidated Financial Statements
EXEL LIMITED
SCHEDULE IV--REINSURANCE
FOR THE YEARS ENDED NOVEMBER 30, 1997, 1996 AND 1995
(IN THOUSANDS)
EXEL LIMITED
SCHEDULE VI
SUPPLEMENTARY INFORMATION CONCERNING PROPERTY/CASUALTY INSURANCE OPERATIONS
FOR THE YEARS ENDED NOVEMBER 30, 1997, 1996 AND 1995
(IN THOUSANDS)
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) 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.
EXEL Limited
/s/ Brian M. O'Hara By___________________________________ Brian M. O'Hara President and Chief Executive Officer
January 23, 1998
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.