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XL Capital Ltd Reports Record First Quarter 2004 Results

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First Quarter 2004 Net Income $452.2 million, or $3.25 per ordinary share up from $239.9 million, or $1.74 per ordinary share in First Quarter 2003.

HAMILTON, BERMUDA, May 3, 2004 -- XL Capital Ltd (“XL” or the “Company”) (NYSE: XL) today reported record net income available to ordinary shareholders for the quarter ended March 31, 2004 of $452.2 million, or $3.25 per ordinary share, compared with $239.9 million, or $1.74 per ordinary share, for the quarter ended March 31, 2003.

Net income excluding net realized gains and losses on investments and net realized and unrealized gains and losses on credit and investment derivative instruments, net of tax, for the first quarter of 2004 was a record $328.8 million, or $2.36 per ordinary share, compared with $250.2 million, or $1.82 per ordinary share, for the quarter ended March 31, 2003.

First Quarter Operating Highlights 2004 vs. 2003:

  • • Net premiums written from general operations increased 19% to $2.8 billion
  • • Combined ratio from general operations was a satisfactory 88.8%
  • • Net investment income up 19% to $228 million
  • • Earnings from equity in investment affiliates up 163% to $70 million
  • • Cash flow from operations $527 million, or $752 million, including structured and spread transactions
  • • Total net invested assets exceeded $27 billion, up 30%
  • • Total assets increased 18% to a record $44 billion
  • • Book value up $2.84 from December 31, 2003 to $49.58
  • • Return on ordinary shareholders’ equity at 19.8%

Commenting on the first quarter 2004 results, Brian M. O’Hara, President and Chief Executive Officer of XL, stated: “I am pleased to announce record first quarter results with all segments of our business being profitable and contributing to this impressive performance.”

“Our general operations continue to experience overall premium growth and remain very profitable as evidenced by our 88.8% combined ratio in the first quarter of 2004, despite increasing competition. We also enjoyed the benefits of our diversification strategy with very good results from our investments in affiliates as well as solid contributions from our Financial Products and Services segment and our Life and Annuity Reinsurance activities,” Mr. O’Hara noted.

Total assets as of March 31, 2004 were a record $44.2 billion compared with $40.8 billion as of December 31, 2003. Book value per ordinary share as at March 31, 2004 increased by 6.1% to $49.58 from $46.74 as at December 31, 2003.

A live on-line web cast of XL’s call with analysts and investors to review the first quarter 2004 results will be held at 10:00 a.m. Eastern Time on May 4, 2004 at www.xlgroup.com. A telephone replay of the conference call will be available beginning at 1:00 p.m. Eastern Time on May 4, until 8:00 p.m. Eastern Time on May 11, 2004 by dialing (201) 612-7415 (account number: 7716 and conference I.D. number: 100381). An unaudited financial information supplement relating to the Company’s 2004 first quarter results is available on its website: www.xlgroup.com

XL Capital Ltd, through its operating subsidiaries, is a leading provider of insurance and reinsurance coverages and financial products and services to industrial, commercial and professional service firms, insurance companies and other enterprises on a worldwide basis.

This presentation contains forward-looking statements that involve inherent risks and uncertainties. Statements that are not historical facts, including statements about XL’s beliefs, plans or expectations, are forward-looking statements. These statements are based on current plans, estimates, and expectations. Actual results may differ materially from those projected in such forward-looking statements and therefore you should not place undue reliance on them. A non-exclusive list of the important factors that could cause actual results to differ materially from those in such forward-looking statements includes the following: (a) rate increases and improvements in terms and conditions may not be as large or sustainable as XL is currently projecting; (b) greater frequency or severity of claims and loss activity than XL’s underwriting, reserving or investment practices anticipate based on historical experience or industry data; (c) developments in the world’s financial and capital markets which adversely affect the performance of XL’s investments or access to such markets; (d) changes in general economic conditions, including foreign currency exchange rates, inflation and other factors; and (e) the other factors set forth in XL’s most recent reports on Form 10-K, Form 10-Q, and other documents on file with the Securities and Exchange Commission. XL undertakes no obligation to update or revise publicly any forward-looking statement, whether as a result of new information, future developments or otherwise.

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                                  XL Capital Ltd
                       SUMMARY CONSOLIDATED FINANCIAL DATA
                     (In thousands, except per share amounts)

                                                   Three Months Ended
    Income Statement Data:                              March 31
                                                      (Unaudited)
                                               2004                      2003
    Revenues:
     Gross premiums written
       --general operations              $3,400,682                $2,991,049
       --life and annuity operations        115,885                   111,324
       --financial operations                56,889                    44,766

     Net premiums written
       --general operations               2,784,761                 2,347,775
       --life and annuity operations        115,884                    97,313
       --financial operations                52,334                    43,996

     Net premiums earned
       --general operations               1,574,925                 1,431,887
       --life and annuity operations        116,932                    92,771
       --financial operations                32,588                    26,973
    Net investment income                   228,346                   191,904
    Net realized gains (losses)
     on investments                         115,337                    (4,663)
    Net realized and unrealized
     gains on derivative instruments         11,597                    14,493
    Equity in net income
     of investment affiliates                70,376                    26,798
    Fee and other income                      6,907                    12,277
                                         $2,157,008                $1,792,440
    Expenses:
    Net losses and
     loss expenses incurred                $963,944                  $885,254
    Claims and policy benefit reserves      134,063                   119,558
    Acquisition costs                       277,270                   240,312
    Operating expenses                      245,300                   190,519
    Exchange gains                          (10,724)                   (2,702)
    Interest expense                         40,057                    46,140
    Amortization of intangible assets         3,257                       375
                                         $1,653,167                $1,479,456

    Income before minority interest,
     income tax expense and equity in
     net (income) loss of insurance
     and financial affiliates              $503,841                  $312,984

    Minority interest                         4,660                     1,862
    Income tax expense                       35,357                    20,030
    Equity in net loss of insurance
     and financial affiliates                 1,575                    41,087

    Net income                             $462,249                  $250,005
    Preference dividend                     (10,080)                  (10,148)
    Net income available
     to ordinary shareholders              $452,169                  $239,857


    Weighted average number of ordinary
     shares and ordinary share equivalents
     :Basic                                 137,624                   136,216
     :Diluted                               139,044                   137,631

    Per Share Data:
    Net income available to
     ordinary shareholders                    $3.25                     $1.74


    Ratios -- General insurance and
     reinsurance operations
    Loss ratio                               61.1%                      60.9%
    Expense ratio                            27.7%                      25.2%

    Combined ratio                           88.8%                      86.1%


                                 XL Capital Ltd
                       SUMMARY CONSOLIDATED FINANCIAL DATA
                    (In thousands, except per share amounts)

                                             As at March 31,    As at Dec. 31,
                                                   2004              2003
                                               (Unaudited)       (Unaudited)

    Balance Sheet Data:
    Total investments available for sale       $22,161,915       $20,775,256
    Net payable for investments purchased           86,577            96,571
    Cash and cash equivalents                    2,646,857         2,403,121
    Investments in affiliates                    2,035,727         1,903,341
    Total assets                                44,170,320        40,764,215

    Unpaid losses and loss expenses             16,718,056        16,558,788
    Deposit liabilities and
     policy benefit reserves                     7,641,086         7,284,179
    Notes payable and debt                       2,736,867         1,905,483
    Total shareholders' equity                   7,362,727         6,936,915
    Book value per ordinary share                   $49.58            $46.74

XL Capital Ltd
RECONCILIATION

The following is a reconciliation of the Company’s (i) net income to ‘net income excluding net realized gains and losses on investments and net realized and unrealized gains and losses on credit and investment derivative instruments, net of tax’ (which is a non-GAAP measure, the “Exclusions”) and (ii) annualized return on shareholders’ equity (based on net income minus the Exclusions) to average ordinary shareholders’ equity for the three months ended March 31, 2004 and 2003 (in millions, except per share amounts):



                                                        Three Months Ended
                                                              March 31
                                                            (Unaudited)
                                                      2004              2003

    Net income available to
     ordinary shareholders                          $452.2            $239.9

    Net realized (gains) losses on
     investments, net of tax                        (107.6)             14.4
    Net realized and unrealized gains on
     investment derivatives, net of tax               (2.9)             (4.7)
    Net realized and unrealized (gains)
     losses on credit derivatives,
     net of tax                                      (12.9)              0.6

    Net income excluding net realized
     gains and losses on investments and
     net realized and unrealized gains
     and losses on credit and investment
     derivative instruments, net of tax             $328.8            $250.2

    Per ordinary share results:

    Net income available to ordinary shareholders    $3.25             $1.74

    Net income excluding net realized
     gains and losses on investments and
     net realized and unrealized gains
     and losses on credit and investment
     derivative instruments, net of tax              $2.36             $1.82

    Weighted average ordinary
     shares outstanding
       :Basic                                        137.6             136.2
       :Diluted                                      139.0             137.6

    Return on ordinary shareholders' equity:

    Average ordinary shareholders' equity
     (excludes preference shares of $517.5)       $6,632.3          $6,173.4

    Net income excluding net realized
     gains and losses on investments and
     net realized and unrealized gains
     and losses on credit and investment
     derivative instruments, net of tax              328.8             250.2

    Annualized net income excluding net
     realized gains and losses on
     investments and net realized and
     unrealized gains and losses on
     credit and investment derivative
     instruments, net of tax                       1,315.3           1,000.6

    Annualized Return on Ordinary
     Shareholders' Equity --
    (Annualized net income excluding net
    realized gains and losses on investments
    and net realized and unrealized gains
    and losses on credit and investment
    derivative instruments, net of tax)              19.8%             16.2%

Comment on Regulation G

This press release contains the presentation of (i) ‘net income excluding net realized gains and losses on investments and net realized and unrealized gains and losses on credit and investment derivatives, net of tax’ and (ii) annualized return on ordinary shareholders’ equity (based on net income minus the Exclusions) to average ordinary shareholders’ equity. These items are “non-GAAP financial measures” as defined in Regulation G. The reconciliation of such measures to the most directly comparable GAAP financial measures in accordance with Regulation G is included above.

XL presents its operations in the way it believes will be most meaningful and useful to investors, analysts, rating agencies and others who use XL’s financial information in evaluating XL’s performance. This presentation includes the use of ‘net income excluding net realized gains and losses on investments and net realized and unrealized gains and losses on credit and investment derivatives, net of tax’. Investment derivatives include all derivatives entered into by XL other than weather and energy and credit derivatives (discussed further below).

Although the investment of premiums to generate income (or loss) and realized capital gains (or losses) is an integral part of XL’s operations, the determination to realize capital gains (or losses) is independent of the underwriting process. In addition, under applicable GAAP accounting requirements, losses can be created as the result of other than temporary declines in value without actual realization. In this regard, certain users of XL’s financial information, including certain rating agencies, evaluate earnings before tax and capital gains to understand the profitability of the recurring sources of income without the effects of these two variables. Furthermore, these users believe that, for many companies, the timing of the realization of capital gains is largely opportunistic and are a function of economic and interest rate conditions. In addition, with respect to credit derivatives, because XL generally holds its financial guarantee contracts written in credit default derivative form to maturity, the net effects of the changes in fair value of these credit derivatives are excluded (similar with other companies in the financial guarantee business) as the changes in fair value each quarter are not indicative of underlying business performance of XL’s financial guarantee operations. Unlike these credit derivatives, XL’s weather and energy derivatives are actively traded (i.e, they are not held to maturity) and are, therefore, not excluded from net income as any gains or losses from this business are considered by management when evaluating and managing the underlying business.

In summary, XL evaluates the performance of and manages its business to produce an underwriting profit. In addition to presenting net income (loss), XL believes that showing net income (loss) exclusive of the items mentioned above enables investors and other users of XL’s financial information to analyze XL’s performance in a manner similar to how management of XL analyzes performance. In this regard, XL believes that providing only a GAAP presentation of net income (loss) makes it much more difficult for users of XL’s financial information to evaluate XL’s underlying business. Also, as stated above, XL believes that the equity analysts and certain rating agencies who follow XL (and the insurance industry as a whole) exclude these items from their analyses for the same reasons and they request that XL provide this non-GAAP financial information on a regular basis.

Return on average ordinary shareholder's equity ("ROE"), excluding net realized gains and losses on investments and net realized and unrealized gains and losses on credit and investment derivative instruments, net of tax (the "Exclusions"), is a widely used measure of any company's profitability. Annualized return on average ordinary shareholders' equity (minus the Exclusions) is calculated by dividing annualized net income minus the Exclusions for any period by the average of the opening and closing ordinary shareholder's equity. The Company establishes target ROE's for its total operations, segments and lines of business. If the Company's ROE return targets are not met with respect to any line of business over time, the Company seeks to re-evaluate these lines. In addition, the Company's compensation of its senior officers is significantly dependant on the achievement of the Company's performance goals to enhance shareholder value which include ROE.

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