WIXL
(The Winterthur International business acquired by XL)
Combined Financial Statements
(With Independent Auditors' Report Thereon)
December 31, 2000
Private & confidential
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
Winterthur Swiss Insurance Company and Winterthur International Insurance
Company Limited
We have audited the accompanying combined statement of assets and liabilities as
of December 31, 2000 and the related combined statements of revenues and
expenses, cash flows and changes in net assets for the year then ended of the
Winterthur International businesses to be acquired by XL Insurance Ltd. ("XL"),
referred to as Winterthur International XL business, ("WIXL"), and as set out in
note 1 to the combined financial statements. These combined financial statements
are the responsibility of the management of Winterthur Swiss Insurance Company
and Winterthur International Insurance Company Limited. Our responsibility is to
express an opinion on these financial statements based on our audit.
We have conducted our audit in accordance with generally accepted auditing
standards 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 combined
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 audit provides a
reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the assets and liabilities of WIXL as of
December 31, 2000 and WIXL's combined revenues and expenses and cash flows for
the year then ended in conformity with generally accepted accounting principles
in the United States of America.
KPMG Audit Plc
24 July 2001
F-1
WIXL
(The Winterthur International business acquired by XL)
Combined Statement of Assets and Liabilities
December 31, 2000
(Expressed in Thousands of United States Dollars, except per share amounts)
- -------------------------------------------------------------------------------------------------------------------
2000
Assets
Cash and cash equivalents $ 105,819
Portfolio assets (Note 1) 565,360
Fixed interest securities, available for sale, at fair value (Note 3) 701,429
Equity securities, available for sale, at fair value (Note 3) 130,500
Short-term investments, at fair value (Note 3) 188,913
Other investments (Note 3) 10,283
Accrued interest income 20,203
Deferred acquisition expenses 24,909
Prepaid reinsurance premiums 345,671
Premiums and insurance balances receivable 463,445
Reinsurance balances receivable and reinsurance deposits 471,269
Unpaid losses and loss adjustment expenses recoverable (Note 4) 1,284,838
Fixed assets (Note 6) 44,177
Other assets (including due from related parties of $109,405 (Note 14)) 255,784
---------------
Total assets 4,612,600
Less: Excluded business assets (Note 1) (220,337)
---------------
Total assets to be acquired $ 4,392,263
---------------
Liabilities
Unpaid losses and loss adjustment expenses (Note 4) $ 2,380,568
Unearned premiums 436,117
Provision for future dividends to policyholders 21,799
Deposit liabilities 154,764
Reinsurance balances payable 570,493
Funds held under reinsurance agreements 69,041
Other liabilities (including due to related parties of $305,707 (Note 14)) 389,337
---------------
Total liabilities 4,022,119
---------------
Net assets 370,144
===============
See accompanying notes to the combined financial statements
These combined financial statements were approved by the Board of Directors of
Winterthur Swiss Insurance Company and Winterthur International Insurance
Company Limited on 24 July, 2001.
_______________ Director, Winterthur Swiss Insurance Company Limited
_______________ Director, Winterthur International Insurance Company Limited
F-2
WIXL
(The Winterthur International business acquired by XL)
Combined Statement of Revenues and Expenses
Year Ended December 31, 2000
(Expressed in Thousands of United States Dollars, except per share amounts)
- -------------------------------------------------------------------------------------------------------------------
2000
Revenues
Net premiums earned (Note 5) $ 533,627
Net investment income (Note 3) 69,986
Net realized gains on sale of investments 11,017
Fees and other income 12,185
---------------
Total revenues 626,815
---------------
Expenses
Losses and loss adjustment expenses incurred 1,196,515
Unpaid losses and loss adjustment expenses recoverable (742,832)
---------------
Net losses and loss adjustment expenses incurred (Note 4) 453,683
Dividends paid to policyholders 6,637
Acquisition costs 82,470
Operating expenses 102,591
Other expenses 13,934
Exchange gains (30,583)
Amortization of intangible assets 37,861
---------------
Total expenses 666,593
---------------
Net loss before income tax expense (39,778)
Income tax benefit (Note 9) 4,550
---------------
Net loss (35,228)
---------------
Other comprehensive loss, net of tax
Foreign currency translation adjustments (18,328)
Unrealized gains
Unrealized holding losses arising during the year (net of tax of $1,927) (4,497)
Less: reclassification of adjustment for realized gains included
in net loss (net of tax of $3,305) 7,712
-----------
(12,209)
---------------
Other comprehensive loss, net of tax (30,537)
---------------
Comprehensive loss $ (65,765)
===============
See accompanying notes to the combined financial statements
F-3
WIXL
(The Winterthur International business acquired by XL)
Combined Statement of Changes in Net Assets
Year Ended December 31, 2000
(Expressed in Thousands of United States Dollars, except per share amounts)
- --------------------------------------------------------------------------------
2000
----
Opening net assets $ 352,328
Additional share capital during the year 36,706
Additional contributed surplus during the year 18,897
Other comprehensive loss:
Net change in unrealized gains (losses) on investments,
net of tax of $5,232 (12,209)
Currency translations adjustments (18,329)
------------
(30,538)
Net loss for the year (35,228)
Less: net loss on WI portfolios 25,338
Add: net income on excluded business 2,639
------------
(7,251)
------------
Closing net assets $ 370,144
============
See accompanying notes to the combined financial statements
F-4
WIXL
(The Winterthur International business acquired by XL)
Combined Statement of Cash Flows
Year Ended December 31, 2000
(Expressed in Thousands of United States Dollars, except per share amounts)
- -------------------------------------------------------------------------------------------------------------------
2000
----
Cash flows from operating activities
Net loss $ (35,228)
Less: net loss on WI portfolios 25,338
Add: net income on excluded business 2,639
--------------
Adjusted net loss (7,251)
Adjustments to reconcile net loss to net cash provided by operating activities:
Net realized gains on sales of investments (11,017)
Realized gains on sale of fixed assets (37)
Amortisation of premium/discount on fixed interest securities 948
Depreciation of fixed assets 7,349
Depreciation of real estate held for investment 384
Amortization and impairments of intangible assets 37,861
Change in Portfolio assets, net of assets for excluded business (6,123)
Change in Accrued investment income (5,120)
Change in Deferred acquisition expenses (5,700)
Change in Prepaid reinsurance premiums (153,173)
Change in Premiums and insurance balances receivable 61,115
Change in Reinsurance balances receivable and deposits (255,921)
Change in Unpaid losses and loss expenses recoverable (172,445)
Change in Other assets 62,181
Change in Unpaid losses and loss expenses 278,106
Change in Unearned premiums 174,032
Change in Deposit liabilities 75,799
Change in Provisions for future dividends to policyholders (1,746)
Change in Reinsurance balances payable 34,839
Change in Funds held under reinsurance agreements 24,685
Change in Other liabilities (136,632)
--------------
Cash provided by operating activities 2,134
--------------
Cash flows from investing activities
Proceeds on sale of fixed interest securities 222,431
Proceeds on maturity of fixed interest securities 45,854
Proceeds on sale of equity securities 53,186
Proceeds on sale of other investments 1,022,652
Proceeds on sale of fixed assets 219
Purchases of fixed interest securities (271,419)
Purchases of equity securities (50,185)
Purchases of other investments (1,007,074)
Purchases of fixed assets (10,113)
--------------
Cash used by investing activities
5,551
--------------
F-5
Cash flows used in financing activities
Proceeds received from issuance of share capital 36,706
Contributed surplus 18,897
--------------
Cash provided by financing activities 55,603
--------------
Increase in cash and cash equivalents 63,288
Cash and cash equivalents at beginning of year 42,531
--------------
Cash and cash equivalents at end of year $ 105,819
=============
See accompanying notes to the combined financial statements
F-6
WIXL
(The Winterthur International business acquired by XL)
Notes to Combined Financial Statements
Year Ended December 31, 2000
(Expressed in Thousands of United States Dollars, except per share amounts)
- --------------------------------------------------------------------------------
1. General
On 15 February 2001, Winterthur Swiss Insurance Company ("Winterthur")
entered into a Sale and Purchase Agreement ("the Agreement") with XL
Insurance Ltd ("XL") to sell selected lines of its large multinational
corporates insurance business, referred to as Winterthur International
XL business, ("WIXL"). Winterthur is a wholly owned subsidiary of
Credit Suisse Group, a company domiciled in Switzerland.
Winterthur International is the large commercial account property and
casualty insurance business of Winterthur. WIXL's business is written
primarily in Europe and approximately 75% of its net assets are
employed in Europe. The agreement provides for the sale of selected
business of certain wholly owned Winterthur International subsidiaries
of Winterthur ("WI companies") as well as certain portfolios of
Winterthur International lines of business ("WI portfolios"). Principal
WI companies and WI portfolios included in the agreement are listed in
Note 10.
On 24 July 2001, WIXL entered into a reinsurance agreement with
Winterthur to protect WIXL from adverse run-off development after
December 31, 2000 of the deferred acquisition expenses, unpaid losses
and loss adjustment expenses recoverable, unpaid losses and loss
adjustment expenses, unearned premiums balances and reinsurance
recoveries (collectively the "Net Reserves") as at December 31, 2000.
The premium for this reinsurance agreement is US$ 100. The agreement
reinsures WIXL against a run-off loss in excess of US$ 30,000 up to a
limit of US$ 1,300,000. In addition Winterthur receives the benefit of
any run-off profit in excess of US$ 30,000.
This reinsurance agreement has the effect of stabilizing the Net
Reserves of WIXL without affecting the economics of the Sale and
Purchase Agreement.
The Agreement to sell WIXL was entered into subsequent to the date of
the combined financial statements presented and will not be complete
until all regulatory approvals have been obtained.
Basis of preparation
These combined financial statements represent the combined statement of
assets and liabilities and the related combined statement of revenues
and expenses, cash flows and changes in net assets of WIXL. They do not
purport to reflect the results of operations which would have been
achieved if WIXL had operated as an unaffiliated group. In accordance
with the Agreement, the net assets transferred for the WI portfolios
comprise portfolio assets, deferred acquisition expenses, unpaid losses
and loss expenses recoverable, unearned premium reserve, and unpaid
losses and loss adjustment expenses. Assets equal to the amount of the
net technical liabilities transferred for the WI portfolios have been
recorded in the combined statement of assets and liabilities as
portfolio assets. The net income of the WI portfolios included in these
combined financial statements consists of the underwriting result plus
an allocation of investment income and income tax expense. Retained
earnings in the combined statement of changes in net assets have been
adjusted to remove the net result of the WI portfolios.
F-7
WIXL
(The Winterthur International business acquired by XL)
Notes to Combined Financial Statements
Year Ended December 31, 2000
(Expressed in Thousands of United States Dollars, except per share amounts)
- --------------------------------------------------------------------------------
1. General (Continued)
These combined financial statements do not constitute the financial
statements of a subsidiary or division of Winterthur but are an
aggregation of the assets and liabilities and revenues and expenses of
WIXL as defined in the Agreement. Certain income and expenses which
were not directly identifiable have been allocated between Winterthur
and WIXL. Management believes that these allocations are reasonable.
However these allocated income and expenses are not necessarily
indicative of income and expenses which would have been received or
incurred had WIXL been operating as a separate group. Income tax
expense was calculated as if WIXL filed separate income tax returns
with the exception of portfolios and excluded business for which the
local statutory rate was applied to the profit or loss before income
tax expense. As WIXL will become part of XL, its tax position will be
managed on a consolidated basis with XL and its effective tax rate in
the future could vary from its historical effective tax rate. There is
no assurance that these results would be achieved if WIXL was a
separate business.
In accordance with the Agreement certain lines of business and
transactions are excluded and have not been recorded in the combined
statements of revenue and expenses. In order to reflect the net assets
of the WI companies acquired, the impact of excluding these lines of
business has been recorded in the combined statement of changes in net
assets. Within assets, the individual captions include amounts relating
to excluded businesses which are then deducted in total from the
footings, as shown on the face of the combined statement of assets and
liabilities. Within liabilities, the amounts attributed to excluded
businesses are generally excluded from the amounts shown under the
individual captions.
For the year covered by the combined financial statements, WIXL's
operations were operated and accounted for as part of Winterthur. These
combined financial statements have been carved out from Winterthur's
accounting records. All WIXL intercompany transactions and balances
have been eliminated. All balances with Winterthur entities have been
included in amounts due to and due from related parties.
Accordingly the financial information included herein may not
necessarily reflect the revenues, expenses, cash flows and changes in
net assets of WIXL in the future or what they would have been had it
been a separate, stand alone entity during the period presented.
In preparing the combined financial statements management has made
estimates and assumptions that affect the reported amount of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the combined financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could
differ from those estimates. These estimates affect particularly gross
loss reserves and the related reinsurance recoveries.
F-8
WIXL
(The Winterthur International business acquired by XL)
Notes to Combined Financial Statements
Year Ended December 31, 2000
(Expressed in Thousands of United States Dollars, except per share amounts)
- --------------------------------------------------------------------------------
2. Summary of significant accounting policies
(a) Premiums and acquisition costs
Premiums written are recorded in accordance with the terms of the
underlying policies. Premiums are earned primarily on a 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.
Acquisition costs, which vary with and are primarily related to the
acquisition of policies, mainly commissions, underwriting expenses, premium
taxes and policy issuance costs are deferred and amortized over the period
the premiums are earned. Future investment income is taken into account in
measuring the recoverability of this asset.
(b) Reinsurance
Reinsurance premiums ceded, and the commissions recorded thereon, are
expensed on a pro-rata basis over the period the reinsurance coverage is
provided. Amounts recoverable from reinsurers are estimated in a manner
consistent with the claim liability associated with the reinsured policy.
Provision is made for estimated irrecoverable reinsurance.
(c) Investments
Investments are considered available for sale and carried at their fair
value. The fair value of investments is based upon quoted market values
where available. Unrealized gains and losses including foreign exchange
gains and losses are included in other comprehensive income, net of tax.
Realized gains and losses on securities are determined using the specific
identification method. Any unrealized depreciation in value considered by
management to be other than temporary is charged to revenue in the period
in which it is determined.
Investment income is recognized when earned. Net investment income includes
interest, dividends, realized gains and losses, amortization of premium and
discount relating to debt securities and write-offs due to other than
temporary impairments.
Included in the net income for the WI portfolios is an allocation of
investment income based on the investment pools managed by Winterthur.
Investment income is allocated using an expected rate of interest on each
investment portfolio.
Any financial futures or forward currency contracts are carried at fair
value, with the corresponding realized or unrealized gain or loss included
in income, except in the instance of forward foreign currency contracts
that are used to hedge currency risks on specific investments. Gains and
losses from these contacts are deferred and included in equity until the
corresponding asset is sold.
F-9
WIXL
(The Winterthur International business acquired by XL)
Notes to Combined Financial Statements
Year Ended December 31, 2000
(Expressed in Thousands of United States Dollars, except per share amounts)
- --------------------------------------------------------------------------------
2. Summary of significant accounting policies (Continued)
(d) Short term investments
Short term investments, primarily time deposits, are carried at the nominal
value, net of any provisions for impairment.
(e) Other investments
Other investments consist primarily of real estate held for investment and
other investments not classified elsewhere. Real estate held for investment
including capital improvements, is carried at cost less accumulated
depreciation over its estimated useful life. No depreciation is charged on
land. Valuation adjustments are recorded for any other than temporary
impairment of investments. Depreciation and write downs are included in net
investment income. Other investments are carried at cost or market values
depending upon the nature of the underlying asset.
(f) Cash and cash equivalents
Cash equivalents include fixed interest deposits placed with a maturity of
under ninety days when purchased.
(g) Foreign currency translation
Assets and liabilities of foreign operations whose functional currency is
other than US dollars are translated at year end exchange rates. Revenues
and expenses of such foreign operations are translated at the average
exchange rate applicable to the year. The effect of the translation
adjustments for foreign operations is recorded, net of applicable deferred
income taxes, as a separate component of other comprehensive loss in the
statement of changes in net assets.
(h) Unpaid losses and loss adjustment expenses
Unpaid losses and loss adjustment expenses are recorded as incurred. Unpaid
losses and loss adjustment expenses comprise estimates of the unpaid
portion of the reported losses and estimates of the amount of losses
incurred but not reported. Management relies on past loss experience
adjusted for factors that would modify past loss experience and accepted
actuarial techniques to estimate the reserves for losses incurred but not
reported. The methodology of estimating loss reserves is periodically
reviewed to ensure that the assumptions made continue to be appropriate and
any adjustments resulting therefrom are reflected in income of the year in
which the adjustments are made.
Certain claims reserves for which the payment pattern and ultimate cost are
fixed and reliably determinable on an individual claim basis are discounted
using interest rates ranging from 3% to 3.25%.
Management believes that the reserve for unpaid losses and loss adjustment
expenses are sufficient to pay any losses that fall within the coverages
assumed by WIXL. However, there can be no assurances
F-10
WIXL
(The Winterthur International business acquired by XL)
Notes to Combined Financial Statements
Year Ended December 31, 2000
(Expressed in Thousands of United States Dollars, except per share amounts)
- --------------------------------------------------------------------------------
2. Summary of significant accounting policies (Continued)
that losses will not exceed WIXL's total reserves and it is at least
reasonably possible that management will revise this estimate significantly
in the near term. Any subsequent differences arising are recorded in the
period in which they are determined. Such differences may be material to
the results of operations and could occur in a future period.
(i) Income taxes
Income tax expense represents the aggregation of the WI portfolios and the
individual WI companies' amounts. Income tax expense for the WI portfolios
has been calculated based on the net income of the portfolio business using
the statutory tax rate in each country.
The deferred tax assets and liabilities represent the aggregation of the
deferred tax assets and liabilities of the WI companies. Deferred tax
assets and liabilities are recognized for the expected future tax
consequences of temporary differences between the carrying amounts of
assets and liabilities for financial reporting purposes and the amounts
used for income tax purposes. This amount together with income taxes
payable or receivable in the current year represents the total income tax
expense and is recognized subject to management's judgement that
realization is more likely than not.
Deferred tax assets and liabilities are calculated based on the expected
rate of taxation. Deferred income tax expense represents the net change in
the deferred tax asset or liability balance during the year and is charged
to tax expense.
In various countries, certain WIXL entities are members of tax groups
within Credit Suisse Group companies.
(j) Fixed assets
Real estate held for own use, including capital improvements, is carried at
cost less accumulated depreciation. Depreciation is provided over the
estimated useful life of the properties. No depreciation is charged on land
except where valuation adjustments are recorded for impairment.
Fixed assets such as furniture and fixtures, computers and computer
software, and capital improvements to rented premises, are depreciated
using the straight line method over their estimated useful life, generally
3 to 5 years.
(k) Pension plans
WI companies' pension plans include both defined benefit and defined
contribution plans. There are no separate pension plans for the WI
portfolios. Employees employed by WI portfolio companies participate in the
various pension plans of that company. Pension expense for defined benefit
plans is recorded in personnel expenses and is based on actuarial valuation
methods and projected plan liabilities for accrued service.
F-11
WIXL
(The Winterthur International business acquired by XL)
Notes to Combined Financial Statements
Year Ended December 31, 2000
(Expressed in Thousands of United States Dollars, except per share amounts)
- --------------------------------------------------------------------------------
2. Summary of significant accounting policies (Continued)
(l) Intangible assets
Intangible assets represent goodwill, which is amortized on a straight-line
basis over five years. Management evaluates the recoverability of its
intangible assets whenever changes in circumstances warrant. If it is
determined that an impairment exists, the excess of the unamortized balance
over the fair value of the intangible asset will be charged to earnings at
that time. Amortization for the year ended December 31, 2000 was $37,861 of
which $28,496 relates to an impairment of goodwill following a review of
the ongoing profitability of certain sites in light of the 2000 results.
The net book value of intangible assets at December 31, 2000 was $Nil.
(m) Deposit liabilities
Short duration contracts which are deemed not to transfer significant
underwriting and/or timing risk are accounted for as deposits, whereby
liabilities are recorded and are matched by an equivalent amount of cash
and investments. Management will periodically re-assess the amount of
deposit liabilities. Changes are recorded in the period in which they are
determined as either interest income where the contract does not transfer
risk, or net losses and loss expenses incurred where the contract does not
transfer significant timing risk.
3. Investments
(a) The cost (amortised cost for fixed interest securities), market value
and related unrealized gains (losses) of investments are as follows:
At December 31, 2000 Cost of Gross Gross
Amortised Unrealised Unrealised Market
Cost Gains Loss Value
---- ----- ---- -----
Fixed interest securities
US Government $ 102,366 $ 3,160 $ 326 $ 105,200
Swiss Government 9,121 241 -- 9,362
Other Foreign Government 340,005 6,808 8,109 338,704
Mortgage-backed securities 19,568 -- -- 19,568
Corporate 227,718 1,515 6,896 222,337
Other 4,389 1,869 -- 6,258
----------- ----------- ----------- -----------
Total fixed interest securities $ 703,167 $ 13,593 $ 15,331 $ 701,429
----------- ----------- ----------- -----------
Short-term investments $ 188,913 $ -- $ -- $ 188,913
----------- ----------- ----------- -----------
Equity securities $ 116,806 $ 14,417 $ 723 $ 130,500
----------- ----------- ----------- -----------
F-12
WIXL
(The Winterthur International business acquired by XL)
Notes to Combined Financial Statements
Year Ended December 31, 2000
(Expressed in Thousands of United States Dollars, except per share amounts)
- --------------------------------------------------------------------------------
3. Investments (Continued)
(b) The contractual maturities of fixed interest securities are shown
below. Actual maturities may differ from contractual maturities
because borrowers may have the right to call or prepay obligations
with or without call or prepayment penalties.
Amortised Fair
Cost Value
---- -----
Due less than one year $ 54,794 $ 56,450
Due after 1 through 5 years 231,278 232,918
Due after 5 through 10 years 322,018 313,626
Due after 10 years 75,509 78,867
Mortgaged-backed securities 19,568 19,568
------------- -------------
$ 703,167 $ 701,429
============= =============
(c) During the year ended December 31, 2000, proceeds from the sales and
maturities of fixed interest securities and sale of equity securities
and sales of other investments were $268,285, $53,186 and $1,022,652
respectively, resulting in net realized gains (losses) of $(725),
$11,309 and $433 respectively. During the year ended December 31,
2000, purchases of fixed interest securities, equity securities and
other investments were $271,419, $50,185 and $1,007,074 respectively.
(d) Other investments primarily consist of real estate held for
investment. Cost and accumulated depreciation of real estate held for
investment as of December 31, 2000 are $10,169 and $389 respectively.
Depreciation for the year ended December 31, 2000 was $384 and has
been included in net investment income.
(e) Net investment income for the year ended December 31, 2000 is
comprised of the following:
Interest income $ 50,345
Investment income 17,865
Allocation of interest income on portfolios and
excluded business 20,847
Less: Interest paid (13,713)
Investment expenses (5,358)
--------------
Net investment income $ 69,986
==============
(f) A deferred tax asset and liability of $2,764 and $4,821 respectively
as of December 31, 2000 have been provided against unrealized losses
and gains on securities held as available for sale, which has been
presented net as a component of accumulated other comprehensive
income.
F-13
WIXL
(The Winterthur International business acquired by XL)
Notes to Combined Financial Statements
Year Ended December 31, 2000
(Expressed in Thousands of United States Dollars, except per share amounts)
- --------------------------------------------------------------------------------
3. Investments (Continued)
(g) Investments in the amount of $15,148 were deposited by WIXL under
requirements of regulatory authorities as of December 31, 2000.
4. Unpaid losses and loss adjustment expenses
The following table represents an analysis of unpaid losses and loss
adjustment expenses and a reconciliation of the beginning and ending unpaid
losses and loss adjustment expenses for 2000:
2000
Gross unpaid losses and loss adjustment expenses at beginning of year $ 2,102,462
Less: Unpaid losses and loss adjustment expenses recoverable 1,112,392
-------------
Net unpaid losses and loss adjustment expenses at beginning of year 990,070
Increase in net losses and loss adjustment expenses incurred in -------------
respect of losses occurring in:
Current year 441,689
Prior years 11,994
-------------
Total net incurred loss and loss adjustment expenses 453,683
-------------
Foreign exchange rate effects (10,001)
Net losses and loss adjustment expenses paid in respect of losses occurring in:
Current year (88,253)
Prior years (249,769)
-------------
Total net paid losses (338,021)
-------------
Net unpaid losses and loss adjustment expenses at end of year 1,095,730
Add: Unpaid losses and loss adjustment expenses recoverable 1,284,838
-------------
Gross unpaid losses and loss adjustment expenses at end of year $ 2,380,568
=============
The unfavorable loss development on prior years is due primarily to the
adverse development on winter storms in Europe during December 1999.
The establishment of the provision for unpaid losses and loss adjustment
expenses is based on known facts and interpretation of circumstances and is
therefore a complex and dynamic process influenced by a large variety of
factors. These factors include WIXL's experience with similar cases and
historical trends involving claim payment patterns, pending levels of
unpaid claims, claim severity and frequency patterns.
F-14
WIXL
(The Winterthur International business acquired by XL)
Notes to Combined Financial Statements
Year Ended December 31, 2000
(Expressed in Thousands of United States Dollars, except per share amounts)
- --------------------------------------------------------------------------------
4. Unpaid losses and loss adjustment expenses (Continued)
Other factors include the continually evolving and changing regulatory and
legal environment, actuarial studies, professional experience and expertise
of WIXL's management, the quality of the data used for projection purposes,
existing claims management and settlement of the claims, the effect of
inflationary trends, court decisions and economic conditions on future
claims settlement costs,. Consequently, the establishment of the provision
for unpaid losses and loss adjustment expenses relies on the judgement and
opinion of a large number of individuals, on historical precedent and
trends, on prevailing legal, economic, social and regulatory trends and on
expectations as to future developments. The process of determining the
provision necessarily involves risks that the actual results will deviate,
perhaps substantially, from the best estimate made.
Certain claims reserves for which the payment pattern and ultimate cost are
fixed and reliably determinable on an individual claim basis are discounted
using interest rates from 3% to 3.25%. The effect of discounting is $29,049
for the year ended December 31, 2000. Accordingly, if claims reserves had
been provided for at undiscounted levels, WIXL's unpaid losses and loss
adjustment expenses would have been $2,347,617 as at December 31, 2000 and
net losses and loss adjustment expenses incurred would have been $482,732
for the year then ended.
5. Reinsurance
WIXL cede some of their insurance risk to third parties in order to provide
additional capacity for underwriting large commercial risks, effect
business sharing arrangements, protect against catastrophic events and
limit the potential for losses arising from large risks. The reinsurance
contracts do not relieve WIXL from its obligation to policyholders and a
credit exposure exists to the extent that any reinsurer is unable to honour
its obligations. WIXL evaluates the financial condition of its reinsurers
and monitors concentrations of credit risk to reinsurers to minimize its
exposure to significant losses from reinsurers' insolvencies. Generally,
WIXL places approximately 75% of its reinsurance business with companies
rated either AAA or AA by Standard & Poor's and approximately 25% of its
reinsurance business through fronting agreements with captive insurance
companies owned by large multinational clients of WIXL. In addition, WIXL
generally hold collateral in the form of cash, securities and letter of
credit as security under the reinsurance agreements. Approximately, 19%,
16% and 13% of WIXL's reinsurance business is ceded to each of the three
reinsurers.
WIXL has a global catastrophic reinsurance protection program providing
coverage for property, liability, and multi-line losses arising from any
one incident in excess of CHF 30,000 (US $18,000). Prior to April 2000, the
maximum retention was CHF 10,000 (US $6,000) for liability and CHF 15,000
(US $9,000) for property. Also, prior to April 2000, WIXL's property
reinsurance program consisted almost exclusively of proportional
reinsurance treaties including surplus treaties. The change from the
property surplus treaty to a non-proportional treaty as at April 2000 has
the effect of increasing retained premium for the property line of business
and the jurisdiction of the coverage. The reinsurance program has also
changed from a risk attaching policy to claims made.
F-15
WIXL
(The Winterthur International business acquired by XL)
Notes to Combined Financial Statements
Year Ended December 31, 2000
(Expressed in Thousands of United States Dollars, except per share amounts)
- --------------------------------------------------------------------------------
5. Reinsurance (Continued)
In general WIXL does not accept assumed reinsurance similar to the business
underwritten by professional reinsurers. Reinsurance is assumed by WIXL
from other companies only to effect the business of insuring large
corporate clients on a customer by customer basis.
WIXL has suffered a few large losses in recent years from medical products
including implants, pharmaceuticals or other medical products. WIXL
actively monitors its exposure to such risks and uses various risk
limitation techniques to control such risks within the overall portfolio.
Such controls include reinsurance to captive insurance companies,
reinsurance pools, facultative reinsurance, and treaty reinsurance. In
addition strict control over coverage, exclusions, and policy wordings is
maintained. The exposure to WIXL never exceeds the standard net retention
under the longstanding treaty reinsurance protections.
The effect of reinsurance and retrocessional activity on premiums written
and earned is shown below:
Premiums Premiums
Written Earned
------- ------
Direct $ 1,090,910 $ 922,321
Assumed 116,191 106,366
Ceded (714,057) (495,060)
------------- -------------
Net $ 493,044 $ 533,627
============= =============
Subsequent to the date of the combined statement of assets and liabilities,
WIXL has entered into a reinsurance agreement with Winterthur to protect
WIXL from adverse run-off development after December 31, 2000 of the
deferred acquisition expenses, unpaid losses and loss adjustment expenses
recoverable, unpaid losses and loss adjustment expenses, unearned premiums
and reinsurance recovery balances as at December 31, 2000. The premium for
this reinsurance agreement is US$ 100. The agreement reinsures WIXL against
a run-off loss in excess of US$ 30,000 up to a limit of US$ 1,300,000. In
addition Winterthur receives the benefit of any run-off profit in excess of
US$ 30,000.
In addition, for the financial years 1998, 1999, and 2000, WI Reinsurance
Switzerland had a stop-loss reinsurance protection for the calendar year
combined ratio.
The disclosures above exclude the impact of certain pooling arrangements
which applied to business written in the US in 2000 and prior years. Under
these arrangements, business written by the US operations was pooled with
other Winterthur US business and then 100% retroceded to the WIXL US
companies. However, for the purpose of these combined financial statements
the pooling and retrocession arrangements have been ignored in order to
report on the Winterthur International US business written (i.e. pre
pooling). Key data for the retrocessions under these pooling arrangements
are as follows:
F-16
WIXL
(The Winterthur International business acquired by XL)
Notes to Combined Financial Statements
Year Ended December 31, 2000
(Expressed in Thousands of United States Dollars, except per share amounts)
- --------------------------------------------------------------------------------
5. Reinsurance (Continued)
Net premiums earned $ 72,016
==========
Net loss reserves $ 122,178
==========
F-17
WIXL
(The Winterthur International business acquired by XL)
Notes to Combined Financial Statements
Year Ended December 31, 2000
(Expressed in Thousands of United States Dollars, except per share amounts)
- --------------------------------------------------------------------------------
6. Fixed assets
At December 31, 2000, fixed assets comprised the following:
Land and buildings $ 32,102
Furniture and fixtures 5,480
Computer software 20,277
-------------
Total cost before depreciation 57,859
Less accumulated depreciation (13,682)
-------------
$ 44,177
=============
Depreciation expense for the year ended December 31, 2000 was $7,349.
Proceeds received on the sale of fixed assets during the year were $219
resulting in a realized gain on sale of fixed assets of $37.
7. Commitments and contingencies
(a) Concentration of credit risk
At December 31, 2000, excluding fixed interest securities issued by
governments and reinsurance business (see Note 5), WIXL is not exposed to
any other significant concentrations of credit risk.
(b) Lease commitments
Winterthur leases the majority of the properties occupied by WIXL from
Credit Suisse Group. These commitments will be covered by a service level
agreement which forms part of the Agreement.
In addition, WIXL leases certain property, furniture and fixtures from
third parties. The following is a schedule of future minimum annual rental
payments related to the third party non-cancelable leases as of December
31, 2000:
Year ending December 31, 2001 $ 2,109
Year ending December 31, 2002 1,999
Year ending December 31, 2003 1,972
Year ending December 31, 2004 1,738
Year ending December 31, 2005 1,687
Years ending after December 31, 2005 3,468
-------------
Total minimum future rentals $ 12,973
=============
The rental expense for the year ended December 31, 2000 was $2,080.
F-18
WIXL
(The Winterthur International business acquired by XL)
Notes to Combined Financial Statements
Year Ended December 31, 2000
(Expressed in Thousands of United States Dollars, except per share amounts)
- --------------------------------------------------------------------------------
7. Commitments and contingencies (Continued)
(c) Regulatory approval
The Agreement to sell WIXL to XL will not be complete until all regulatory
approvals in the respective countries have been obtained.
8. Statutory requirements
WI companies prepare individual financial statements based on local laws
and regulations. These laws establish restrictions on the minimum level of
capital and surplus that the companies must maintain and the amount of
dividends that may be paid.
(a) Capital requirements
In accordance with European Union directives, insurance enterprises
organized in European Union member countries are required to maintain
minimum solvency margins. The required minimum solvency margin for insurers
is the greater of two calculations, one based on premiums and one based on
claims. The calculation based on premiums is between 16% and 18% of gross
premiums written for the year, the calculation based on claims is based on
between 23% and 26% of a three-year average of gross claims incurred. Both
calculations are reduced by the percentage of claims recoverable from
reinsurers up to a maximum reduction of 50%.
Switzerland has minimum solvency margin requirements which are similar to
the European Union Directives.
WI companies in the U.S. are also subject to capital adequacy and solvency
margin regulations which are based on factors for asset risk, creditor
risk, underwriting risk and off-balance sheet risk.
As of December 31, 2000, all WI companies were in compliance with all
applicable capital adequacy requirements in all jurisdictions
(b) Dividend restrictions
Certain WI companies are subject to regulatory restrictions in the amount
of dividends which can be paid without prior approval by the appropriate
regulatory authority. Such restrictions provide that a company may only pay
dividends up to an amount in excess of certain regulatory capital levels or
based on the levels of undistributed earned surplus or current year income.
For the year ended December 31, 2000, no dividends were paid.
F-19
WIXL
(The Winterthur International business acquired by XL)
Notes to Combined Financial Statements
Year Ended December 31, 2000
(Expressed in Thousands of United States Dollars, except per share amounts)
- --------------------------------------------------------------------------------
9. Taxation
The WI companies in the U.S. are subject to federal, state and local
corporate income taxes and other taxes applicable to U.S. corporations. The
provision for federal income taxes has been determined on the basis of the
income of each WI company in the U.S. as if a tax return had been prepared
on an individual company basis.
The WI company in Bermuda is not currently required to pay any taxes in
Bermuda on either income or capital gains. The WI company in Bermuda has
received an undertaking from the Minister of Finance in Bermuda that in the
event of any such taxes being imposed, the WI company in Bermuda will be
exempted for taxation until the year 2016.
The WI companies in the U.K. are subject to U.K. corporation tax. The
branches of the WI companies in the U.K. are also subject to the relevant
local taxes in their respective jurisdictions.
All other WI companies and WI portfolios are subject to relevant local
taxes in their respective jurisdictions.
The income tax expense (benefit) and deferred tax assets and liabilities in
WIXL's combined financial statements represent the aggregation of income
tax expense (benefit) and deferred tax assets and liabilities of the WI
companies and WI portfolios. Income tax expense (benefit) has been
allocated to the WI portfolios based on the net income of the portfolio
business using the statutory tax rate in that jurisdiction.
The income tax benefit for the year ended December 31, 2000 is comprised of
amounts from the various taxable jurisdictions in which WIXL operates and
consists of:
Current expense (benefit):
US $ 6,892
Foreign (Germany) 12,326
Foreign (United Kingdom) (9,259)
Foreign (Switzerland) 2,462
Other Non U.S. 4,847
-------------
Total current expense 17,268
-------------
F-20
WIXL
(The Winterthur International business acquired by XL)
Notes to Combined Financial Statements
Year Ended December 31, 2000
(Expressed in Thousands of United States Dollars, except per share amounts)
- --------------------------------------------------------------------------------
9. Taxation (Continued)
Deferred benefit:
US (8,265)
Foreign (Germany) -
Foreign (United Kingdom) (7,090)
Foreign (Switzerland) (5,712)
Other Non U.S. (751)
--------------
Total deferred benefit (21,818)
--------------
Total tax benefit $ (4,550)
==============
A reconciliation setting forth the differences by applying the U.S. federal
income tax rate of 35% to net loss before income tax expense is as follows:
2000
----
Computed expected tax benefit $ (13,922)
Tax exempt foreign income (2,694)
Income subject to tax at foreign rates and other
permanent differences 11,715
Change in valuation allowance 351
-------------
Actual income tax benefit $ (4,550)
=============
The actual income tax benefit differs from the expected tax benefit
primarily due to income subject to tax at foreign rates. This difference is
the result of the aggregation of net income, net losses and the related
income tax expenses and benefits for the various WI companies and WI
portfolios and due to WIXL not being a group for taxation purposes, such
that no group taxation relief benefits can be achieved.
The tax effects of temporary differences that give rise to significant
portions of the deferred tax provision are as follows:
Deferred tax asset:
Discount on losses and loss adjustment expenses $ 6,844
Unearned premium reserve 1,260
Unrealized losses on available for sale securities 2,764
Other 2,820
-------------
Gross deferred tax asset 13,688
Less valuation allowance (351)
-------------
Deferred tax asset 13,337
=============
F-21
WIXL
(The Winterthur International business acquired by XL)
Notes to Combined Financial Statements
Year Ended December 31, 2000
(Expressed in Thousands of United States Dollars, except per share amounts)
- --------------------------------------------------------------------------------
9. Taxation (Continued)
Deferred tax liability:
Unrealized gain on available for sale securities $ 4,821
Other 797
-------------
Deferred tax liability $ 5,618
=============
At December 31, 2000, management established a valuation allowance of $351
since it is management's belief that it is not likely certain operating
losses will be utilized in the foreseeable future. As of December 31, 2000,
$1,800 of the remaining deferred tax asset, relating to operating losses,
is available for an unlimited period and the remaining amount is available
for a period of 7 years.
10. Share capital and contributed surplus
(a) Share capital
The authorized, issued and fully paid up share capital of the WI companies
are as follows:
Name of WI company Country of incorporation Paid up share capital
WI Insurance Switzerland Switzerland
Authorized, issued and fully paid 6,000,000 common shares of par value CHF 10 $ 36,706
each
WI Reinsurance Switzerland Switzerland
Authorized, issued and fully paid 8,000 common shares of par value CHF 5,000 22,205
each
WI of Bermuda Ltd. Bermuda
Authorized, issued and fully paid 2,370,000 common shares of par value US$ 1 2,370
each
WI Services Ltd Bermuda
Authorized, issued and fully paid 12,000 common shares of par value CHF 1 each 7
Winterthur Administracao e Brazil
Participacoes Ltd
Authorized 19,366,100, issued and fully paid 19,300,100 shares of par value 10,049
BRZ 1 each
WI America Insurance Company United States
Authorized, issued and fully paid 80,000 common shares of par value US$ 62.50 5,000
each
F-22
WIXL
(The Winterthur International business acquired by XL)
Notes to Combined Financial Statements
Year Ended December 31, 2000
(Expressed in Thousands of United States Dollars, except per share amounts)
- --------------------------------------------------------------------------------
10. Share capital and contributed surplus (Continued)
WI America Underwriters Insurance United States
Company
Authorized, issued and fully paid 820,000 common shares of par value US$ 5 each 4,100
WI Services of America Inc. United States
Authorized, issued and fully paid 10,000 common shares of par value US$ 10 each 100
WI Insurance Company Limited United Kingdom
Authorized 150,000,000, issued and fully paid 120,000,000 common shares of par 192,384
value(pound)1 each
-----------
$ 275,921
===========
During the year ended December 31, 2000, Winterthur incorporated WI
Insurance Switzerland and paid in all of its initial share capital of
$36,706.
(b) Contributed surplus
Contributed surplus represents the aggregation of capital contributed to
each WI company. These amounts do not reflect a premium over the par value
of issued share capital. These amounts have been contributed to the various
WI companies by Winterthur and accordingly do not eliminate on
consolidation of WIXL. During the year ended December 31, 2000, Winterthur
contributed additional surplus to WI Reinsurance Switzerland, WI UK and WI
America Insurance Company of $666, $13,231 and $5,000 respectively.
(c) Preference shares
WI of Bermuda Ltd., in addition to the authorized and issued share capital
above, has issued 50,000 non-voting Class A, 20,000 non-voting Class B and
500 non-voting Class C redeemable preference shares of par value US$ 100
each for total proceeds of $5,431. WI of Bermuda Ltd does not control the
redemption of these preference shares, and accordingly, these have been
classified as a liability as funds held under reinsurance agreements and
not included in WIXL's equity.
(d) Portfolios
The following portfolios of Winterthur International lines of business have
been included, to the extent permitted within the Agreement, within the
combined financial statements.
Lines of business Location
All lines of business China
F-23
WIXL
(The Winterthur International business acquired by XL)
Notes to Combined Financial Statements
Year Ended December 31, 2000
(Expressed in Thousands of United States Dollars, except per share amounts)
- --------------------------------------------------------------------------------
10. Share capital and contributed surplus (Continued)
Lines of business Location
Czech Republic
Germany
Hungary
Japan
Portugal
Poland
Spain
Canada
Accident & health only Belgium
USA
11. Retirement plans
Employees of WIXL participate in either defined benefit or defined
contribution retirement plans, which vary by country. Of the material
geographical locations within WIXL, the UK is the only country with a
pension scheme exclusively for the benefit of staff employed by WIXL.
In the UK, employee retirement benefits are provided by a defined
contribution plan. Winterthur pays contributions at the rate of 5% to 30%
and no compulsory employee contributions are required. Benefits are
provided from contributions plus accumulated investment returns.
Consequently, there is no liability to WIXL in respect of these
arrangements other than the payment of the defined contributions when due.
The remaining principal retirement benefit arrangements, relate to
Winterthur schemes in Switzerland, the U.S. and Germany which are for the
benefit of companies which were not included within the combined financial
statements. In accordance with the Agreement a future transfer of assets
and liabilities from the Winterthur funded plan to a XL plan will be based
on actuarial assumptions agreed between Winterthur and XL. Details of the
underlying Winterthur schemes are provided below for information.
In Switzerland, retirement benefits from the age of 65 are provided through
a funded plan and are based on salary and past service, with early
retirement possible from the age of 60.
In Germany, there are unfunded retirement benefit provided for employees.
Retirement benefits based on salary and service are payable from age 65
with unreduced early retirement benefits payable for employees with at
least 25 years of service. To recognize the unfunded status of the scheme
an amount of $5,600 is recorded in the combined statement of assets and
liabilities as an estimate of the projected benefit obligation less the
fair value of the assets relating to the retirement plan in Germany. This
estimate is based on the number of employees expected to transfer according
to the terms of the Agreement.
F-24
WIXL
(The Winterthur International business acquired by XL)
Notes to Combined Financial Statements
Year Ended December 31, 2000
(Expressed in Thousands of United States Dollars, except per share amounts)
- --------------------------------------------------------------------------------
10. Share capital and contributed surplus (Continued)
In the US, there is both a funded qualified plan and an unfunded
non-qualified plan providing benefits from age 65 based on salary and
service, with reduced early retirement benefits available from age 55.
For all other immaterial countries which have defined benefit plans, the
transfer payments for the employees expected to transfer their pensions to
XL will be based on assumptions agreed with Winterthur.
F-25
WIXL
(The Winterthur International business acquired by XL)
Notes to Combined Financial Statements
Year Ended December 31, 2000
(Expressed in Thousands of United States Dollars, except per share amounts)
- --------------------------------------------------------------------------------
12. Financial instruments and fair values
The following methods and assumptions were used in estimating fair value
disclosures for financial instruments:
Investments: Fair values for investments are based on quoted market prices,
where available, other than real estate held for investment which is
carried at depreciated cost. The fair value of real estate held for
investment is $10,661.
Cash and cash equivalents: The carrying amounts reported in the combined
statement of assets and liabilities for these instruments approximate their
fair values.
Derivative contract: During the year, Winterthur International Insurance
Company Limited, a company within WIXL entered into a contract to hedge
currency exposure. On crystallization of the contract if the counterparty
were to fail, the company's risk would be the difference between the price
contracted and the market price on the day of the counterparty's failure.
As at 31 December 2000 this amount is $3,476.
Other assets and liabilities: The fair value of accrued interest income,
premiums receivable, reinsurance balances receivable, reinsurance balances
payable and accounts payable approximates their carrying value due to their
relative short term nature.
The estimates of fair values presented herein are subjective in nature and
are not necessarily indicative of the amounts that would actually realize
in a current market exchange. However, any differences would not be
expected to be material. Certain instruments such as fixed assets, deferred
acquisition expenses, deferred taxes, losses and loss adjustment expenses
and unearned premiums are excluded from fair value disclosure. Thus the
total fair value amounts cannot be aggregated to determine the underlying
economic value of WIXL.
13. Subsequent events
The Agreement to sell WIXL was entered into subsequent to the date of the
combined financial statements presented and for the major businesses was
completed on July 18, 2001. For certain other businesses completion will
not occur until all regulatory approvals have been obtained.
14. Related party transactions
(a) Transactions with related parties
In the normal course of business WIXL enters into various transactions with
Winterthur on an arm's length basis, including various insurance and
reinsurance contracts, investment administration services, other cost
sharing arrangements and share capital and contributed surplus
subscriptions.
F-26
WIXL
(The Winterthur International business acquired by XL)
Notes to Combined Financial Statements
Year Ended December 31, 2000
(Expressed in Thousands of United States Dollars, except per share amounts)
- --------------------------------------------------------------------------------
14. Related party transactions (Continued)
The following are WIXL's material related party
transactions for the year:
Net premiums earned $ 14,691
Acquisition expenses (868)
Net losses and loss adjustment expenses incurred (53,396)
(b) Amounts due (to)/from related parties
At December 31, 2000, the amounts due (to)/from related
parties is as follows:
Deposits with Winterthur $ 36,706
Insurance balances receivable 35,531
Other assets, due from Winterthur 109,405
Unpaid losses and loss adjustment expenses, net (45,038)
Insurance balances payable (37,278)
Other liabilities, due to Winterthur (305,707)
The amounts above arise out of WIXL's normal insurance operations as
described in Note 1 and are settled on the same basis as those with
unrelated parties.
In addition WIXL has entered into the reinsurance agreement referred to in
Note 5.
F-27