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XL Capital Ltd Reports Second Quarter 2005 Net Income of $135.9 Million, or $0.97 per Ordinary Share

 — HAMILTON, Bermuda, July 27 /PRNewswire/ -- XL Capital Ltd ("XL" or the "Company") (NYSE: XL) today reported net income available to ordinary shareholders for the quarter ended June 30, 2005 of $135.9 million, or $0.97 per ordinary share, compared with $363.6 million, or $2.62 per ordinary share, for the quarter ended June 30, 2004. Annualized net income return on ordinary shareholders' equity for the quarter was 7.2% compared with 21.7% for the year ago quarter.

'Net income excluding net realized gains and losses'(1) for the quarter was $101.3 million, or $0.72 per ordinary share, compared with $319.9 million, or $2.31 per ordinary share, for the year ago quarter. Annualized return on ordinary shareholders' equity on the same basis was 5.3% compared with 19.1% for the year ago quarter. See below for a reconciliation of 'net income excluding net realized gains and losses on investments and net realized and unrealized gains and losses on credit, structured financial and investment derivatives, net of tax' to net income available to ordinary shareholders.

Included in both net income and 'net income excluding net realized gains and losses'(1) in the quarter is a charge of $63.3 million, after tax, relating to an increase in future policy benefit reserves and a write off of deferred acquisition costs with respect to certain novated blocks of U.S.- based term-life mortality reinsurance business. In addition, these results also include the previously announced prior year reserve strengthening for the Company's North American Reinsurance operations of $186.3 million, after tax.

Commenting on these results, President and Chief Executive Officer Brian M. O'Hara said: "While the two reserve actions in the quarter are extremely disappointing, I am very pleased to see the strong underwriting results of XL's underlying general insurance and reinsurance operations as reflected in their combined ratio which, excluding the reserve increase, was 86.8%. This quarter we also closed a U.K. annuity reinsurance transaction which contributed $1.8 billion of premium and is the largest such transaction concluded to date in our ongoing life reinsurance business. Net investment income increased substantially from last year's second quarter, although equity in investment affiliates generated a loss for the quarter.

We concluded the quarter with record book value per ordinary share of $55.95, an 8% increase from December 31, 2004, and annualized net income return on ordinary shareholders' equity of 7% in the quarter and 15% for the half year despite the reserve charges."

For the first half of 2005, net income available to ordinary shareholders was $578.8 million, or $4.14 per ordinary share, compared with $815.8 million or $5.88 per ordinary share in the first half of 2004. 'Net income excluding net realized gains and losses' for the same period was $447.8 million or $3.20 per ordinary share as compared with $652.5 million or $4.71 per ordinary share in the first half of 2004.

Second Quarter 2005 Operating Highlights (versus second quarter of 2004, unless noted):

    -- Total revenues up 30% to $4.1 billion
    -- Combined ratio from general operations was 97.9%, or 86.8% excluding
       the reinsurance reserve increase
    -- Net investment income from general operations increased 43% to
       $209.7 million, of which $28.6 million was attributable to the close-
       out of a structured credit investment
    -- Cash flow from operations of $2.4 billion, or $3.2 billion including
       all structured and spread transactions up from $1.4 billion and
       $1.8 billion, respectively
    -- Total net invested assets of $36.4 billion, up 12% from
       December 31, 2004
    -- Total assets of $53.3 billion, up 8% from December 31, 2004
    -- Record book value per ordinary share of $55.95, up from $51.98 at
       December 31, 2004

SEGMENT HIGHLIGHTS:
Insurance Operations

Underwriting profit for the quarter was $149.9 million, an increase of 41% over the second quarter of 2004. Net premiums written were $1.1 billion, down 7% from last year's second quarter, driven by market conditions in certain lines and reinsurance commutations of $78.8 million in the prior year second quarter. The combined ratio of 88.7% represents a 1.2 point improvement over the second quarter of 2004, primarily due to a reduction in acquisition expenses. The 64.2% loss ratio in the quarter was essentially flat versus 64.1% in the second quarter of 2004.

Reinsurance Operations

General Operations - Underwriting results were negatively impacted by the previously announced reserve increase in XL's North American Reinsurance operations of $186.3 million, after tax. The combined ratio was 112.2% or 83.9% excluding this reserve increase. This resulted in an underwriting loss of $104.5 million for the quarter. Net premiums written were $347.5 million, down 36% from the second quarter of 2004. Over 50% of this decrease was due to timing differences on gross and ceded premiums that negatively impacted the year-over-year net premiums written comparison by $104.4 million. Net premiums earned were down 7% reflecting lower net premiums written over the last twenty four months.

Life and Annuity Operations - Net premiums written increased 96%. This reflects a $1.8 billion U.K. annuity reinsurance transaction in this quarter compared to a similar annuity transaction of $898 million in the second quarter of last year. There was a $55.9 million net loss from Life and Annuity Operations for the quarter that included a $37.4 million increase in policy benefit reserves and a $25.9 million write off of deferred acquisition costs with respect to certain novated blocks of U.S.-based term-life mortality reinsurance business. This charge was the result of the completion of the previously announced actuarial review of these blocks of business. These blocks were not written as part of XL's ongoing life reinsurance operations.

Financial Products and Services Operations

Underwriting profit and total contribution from this segment were $8.7 million and $34.6 million, respectively, in the quarter compared with $24.9 million and $55.8 million, respectively, in the second quarter of 2004. Underwriting profit decreased mainly due to lower net earned premium and higher net incurred losses in the financial guaranty business versus last year's second quarter. Contribution from financial operations also declined in 2005 largely due to a $7.4 million net loss from financial affiliates and the segment's share of the loss from investment affiliates.

Corporate Items

Net investment income from general operations increased 43% over the second quarter of 2004 to $209.7 million, principally reflecting a year-over- year increase in net invested assets and the close out of a structured credit investment. There was a net loss from investment affiliates of $10.8 million as compared to net income of $8.0 million in the second quarter of 2004, due primarily to weaker performance in the alternative investment portfolio.

Net realized gains on investments were $90.1 million in the quarter, compared with $8.8 million in the prior year period. Net unrealized gains on investments, net of tax, were $819.2 million at June 30, 2005 compared with $428.4 million at March 31, 2005.

Total operating expenses in the quarter of $248.9 million were generally in line with the Company's run-rate expectation and compared with $247.7 million in the second quarter of 2004. The tax rate of 22.3% reflects the limited deductibility of the reserve charges taken during the second quarter of 2005.


    (1) Defined as "net income excluding net realized gains and losses on
        investments and net realized and unrealized gains and losses on
        credit, structured financial and investment derivatives, net of tax"
        (herein referred to as "net income excluding net realized gains and
        losses"). Net income excluding net realized gains and losses is a non-
        GAAP measure. See the schedule entitled "Reconciliation" at the end of
        this release for a reconciliation of net income excluding net realized
        gains and losses to net income available to ordinary shareholders.

The Company will host a conference call to discuss its second quarter 2005 results on July 28, 2005 at 10:00 a.m. Eastern time. The conference call can be accessed through a listen-only dial-in number or through a live webcast. To listen to the conference call, please dial (201) 689-8320 password XL728. The webcast will be available on XL's website located at www.xlgroup.com and will be archived on XL's website from approximately 1:00 p.m. Eastern time on July 28, 2005 through approximately midnight Eastern time on August 29, 2005. A slide presentation accompanying the Company's discussion of its second quarter 2005 results (including revised 2005 guidance) will also be available on the Company's website located at www.xlgroup.com beginning approximately 15 minutes before the commencement of the conference call.

A telephone replay of the conference call will be available beginning at approximately 1:00 p.m. Eastern time July 28, 2005 until approximately 8:00 p.m. Eastern time on August 4, 2005 by dialing (201) 612-7415 (account number: 290 and conference I.D. number: 156740). An unaudited financial supplement relating to the Company's second quarter 2005 results is available on its website located at 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. As of June 30, 2005, XL Capital Ltd had consolidated assets of approximately $53.3 billion and consolidated shareholders' equity of approximately $8.4 billion. More information about XL Capital Ltd is available at www.xlgroup.com.

This document 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 included 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) the timely and full recoverability of reinsurance placed by XL with third parties, or other amounts due to XL, including, without limitation, amounts due to XL from Winterthur Swiss Insurance Company (i) in connection with the independent actuarial process or (ii) under other contractual arrangements; (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) trends in rates for property and casualty insurance and reinsurance; (d) developments in the world's financial and capital markets that adversely affect the performance of XL's investments or access to such markets; (e) changes in general economic conditions, including foreign currency exchange rates, inflation and other factors; and (f) 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, as well as management's response to any of the aforementioned factors. XL undertakes no obligation to update or revise publicly any forward-looking statement, whether as a result of new information, future developments or otherwise.



                                XL Capital Ltd
                     SUMMARY CONSOLIDATED FINANCIAL DATA
                         (U.S. dollars in thousands)


                                    Three Months Ended       Six Months Ended
    Income Statement Data:               June 30                 June 30
                                       (Unaudited)             (Unaudited)
                                     2005        2004        2005        2004
    Revenues:                                 (Note 1)                (Note 1)
    Gross premiums written:
        - general operations   $1,920,639  $2,144,422  $5,292,616  $5,563,604
          - life and annuity
                  operations    1,942,748     986,519   2,033,757   1,078,183
      - financial operations      102,450      99,545     163,397     170,511

    Net premiums written:
        - general operations    1,459,704   1,732,775   4,307,724   4,536,519
          - life and annuity
                  operations    1,933,008     986,119   2,014,264   1,077,057
      - financial operations      100,386      96,670     153,015     163,326

    Net premiums earned:
        - general operations    1,727,561   1,826,215   3,493,830   3,419,461
          - life and annuity
                  operations    1,933,215     986,930   2,014,686   1,078,738
      - financial operations       51,992      56,970     103,687     104,718
    Net investment income         367,401     240,426     675,606     479,493
    Net realized gains on
     investments                   90,055       8,763     150,726     124,100
    Net realized and
     unrealized (losses) gains
     on derivatives               (47,941)     30,874      (2,763)     38,641
    Net (loss) income from
     investment affiliates        (10,774)      7,969      59,738      71,462
    Fee income and other           (3,048)      8,152      14,112      15,059
              Total revenues   $4,108,461  $3,166,299  $6,509,622  $5,331,672
    Expenses:
    Net losses and loss
     expenses incurred         $1,261,707  $1,096,840  $2,404,768  $2,084,098
    Claims and policy benefits  2,020,664   1,010,131   2,146,291   1,125,407
    Acquisition costs             310,988     347,408     605,382     624,678
    Operating expenses            248,950     247,716     496,106     493,016
    Exchange (gains) losses       (10,693)     15,913         229       5,189
    Interest expense               97,766      59,120     186,052     109,370
    Amortization of intangible
     assets                         3,043       3,257       5,836       6,514
              Total expenses   $3,932,425  $2,780,385  $5,844,664  $4,448,272

    Net income before minority
     interest, income tax
     and net income from
      operating affiliates       $176,036    $385,914    $664,958    $883,400

    Minority interest in net
     income of subsidiary           2,079       2,284       4,354       6,944
    Income tax                     41,776      32,266      94,650      68,151
    Net (income) from
     operating affiliates         (13,794)    (22,320)    (33,046)    (27,628)

    Net income                   $145,975    $373,684    $599,000    $835,933
    Preference share dividends    (10,080)    (10,080)    (20,160)    (20,160)
    Net income available to
     ordinary shareholders       $135,895    $363,604    $578,840    $815,773


    Note 1: Certain amounts in prior periods have been reclassified to
    conform with the current year presentation.



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


                                          Three Months Ended  Six Months Ended
    Income Statement Data (continued):           June 30           June 30
                                               (Unaudited)       (Unaudited)
                                              2005     2004     2005     2004
                                                    (Note 1)          (Note 1)

      Weighted average number of ordinary shares and ordinary share
      equivalents:

                                   Basic : 138,948  137,655  138,488  137,568
                                 Diluted : 140,404  138,741  139,841  138,648

      Per Share Data:
      Net income available to ordinary
       shareholders                          $0.97    $2.62    $4.14    $5.88

      Ratios - General insurance and
       reinsurance operations
      Loss ratio                             72.0%    59.4%    68.1%    60.3%
      Expense ratio                          25.9%    27.7%    25.6%    27.6%

      Combined ratio                         97.9%    87.1%    93.7%    87.9%

    Note 1: Certain amounts in prior periods have been reclassified to
    conform with the current year presentation.



                                 XL Capital Ltd
                       SUMMARY CONSOLIDATED FINANCIAL DATA
              (U.S. dollars in thousands, except per share amounts)


    Balance Sheet Data:                          As at             As at
                                             June 30, 2005   December 31, 2004
                                              (Unaudited)         (Note 1)



    Total investments available for sale       $31,448,903       $27,823,828

    Net payable for investments purchased          150,842           273,535

    Cash and cash equivalents                    2,467,775         2,304,303

    Investments in affiliates                    2,044,085         1,936,852

    Unpaid losses and loss expenses
     recoverable                                 6,464,019         6,971,356

    Total assets                                53,324,898        49,245,469


    Unpaid losses and loss expenses             19,775,410        19,837,669

    Deposit liabilities and policy
     benefit reserves                           13,085,608        10,309,782

    Unearned premiums                            6,064,286         5,191,368

    Notes payable and debt                       2,721,916         2,721,431

    Total shareholders' equity                   8,371,676         7,738,695

    Book value per ordinary share                   $55.95            $51.98


    Note 1: Certain amounts in prior periods have been reclassified to
    conform with the current year presentation.


                                XL Capital Ltd
                                RECONCILIATION

The following is a reconciliation of the Company's (i) net income available to ordinary shareholders to 'net income excluding net realized gains and losses on investments and net realized and unrealized gains and losses on credit, structured financial and investment derivatives, 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 and six months ended June 30, 2005 and 2004

                  ($ in millions, except per share amounts):


                                       Three Months Ended   Six Months Ended
                                             June 30             June 30
                                           (Unaudited)         (Unaudited)
                                         2005        2004    2005        2004
                                                  (Note 1)            (Note 1)
    Net income available to ordinary
     shareholders                        $135.9    $363.6    $578.8    $815.8

    Net realized (gains) on
     investments, net of tax              (86.2)    (13.7)   (143.9)   (121.3)

    Net realized and unrealized losses
     (gains) on investment
     derivatives, net of tax               65.1     (14.7)     36.3     (17.6)

    Net realized and unrealized
     (gains) on credit and structured
     financial derivatives, net of tax    (13.5)    (15.3)    (23.4)    (24.4)

    Net income excluding net realized
     gains and losses (Note 2)           $101.3    $319.9    $447.8    $652.5

    Per ordinary share results:
    Net income available to ordinary
     shareholders                         $0.97     $2.62     $4.14     $5.88

    Net income excluding net realized
     gains and losses (Note 2)            $0.72     $2.31     $3.20     $4.71

    Weighted average ordinary shares
     outstanding:
    Basic                               138,948   137,655   138,488   137,568
    Diluted                             140,404   138,741   139,841   138,648

    Return on Ordinary Shareholders'
     Equity:
    Average ordinary shareholders'
     equity                            $7,575.9  $6,702.2  $7,537.7  $6,489.2

    Net income excluding net realized
     gains and losses (Note 2)           $101.3    $319.9    $447.8    $652.5

    Annualized net income excluding
     net realized gains and losses (1)   $405.2  $1,279.7    $895.6  $1,305.0

    Annualized Return on Ordinary
     Shareholders' Equity - Net income
     excluding net realized gains and
     losses (Note 2)                       5.3%     19.1%     11.9%     20.1%

    Note 1: Certain amounts in prior periods have been reclassified to
    conform with the current year presentation.
    Note 2: Defined as "net income excluding net realized gains and losses on
    investments and net realized and unrealized gains and losses on credit,
    structured financial and investment derivatives, net of tax".


    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, structured financial and investment derivatives, net of tax' (the "Exclusions") and (ii) annualized return on ordinary shareholders' equity (based on net income minus the Exclusions). 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 minus the Exclusions". Investment derivatives include all derivatives entered into by XL other than weather and energy, credit and structured financial 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 and structured financial derivatives, because XL generally holds its financial guaranty contracts written in derivative form to maturity, the net effects of the changes in fair value of these derivatives are excluded (similar with other companies in the financial guaranty business) as the changes in fair value each quarter are not indicative of underlying business performance of XL's financial guaranty operations. Unlike these 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, XL believes that showing net income 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 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 reason and they request that XL provide this non- GAAP financial information on a regular basis.

Return on average ordinary shareholders' equity ("ROE") (minus 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. XL establishes target ROE's for its total operations, segments and lines of business. If XL's ROE return targets are not met with respect to any line of business over time, XL seeks to re-evaluate these lines. In addition, XL's compensation of its senior officers is significantly dependant on the achievement of XL's performance goals to enhance shareholder value which include ROE.

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