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XL Capital Ltd Reports Record Second Quarter 2004 Net Income Of $363.6 Million, Or $2.62 Per Ordinary Share

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Record First-Half 2004 Net Income of $815.8 million, or $5.88 per ordinary share

HAMILTON, BERMUDA, July 28, 2004 -- XL Capital Ltd (“XL” or the “Company”) (NYSE: XL) today reported net income available to ordinary shareholders for the quarter ended June 30, 2004 of $363.6 million, or $2.62 per ordinary share, compared with $347.7 million, or $2.51 per ordinary share, for the quarter ended June 30, 2003. Annualized net income return on ordinary shareholders’ equity for the quarter was 21.7% compared with 20.8% for the year ago quarter.

‘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 quarter increased 15% to $308.9 million, or $2.23 per ordinary share, compared with $268.6 million, or $1.94 per ordinary share, for the year ago quarter. Annualized return on ordinary shareholders’ equity on the same basis was 18.4% compared with 16.1% 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 and investment derivative instruments, net of tax’ to net income available to ordinary shareholders.

“XL delivered its second highest level of quarterly net income ever this quarter, after our record performance in the first quarter. These results underscore the increasing value of our global diversified platform, significantly expanded product capabilities and focus on improving penetration of existing customer relationships,” said Brian O’Hara, President and Chief Executive Officer of XL.

“The combined ratio for our general operations in the quarter was 87.6%, reflecting the strength of our underwriting discipline and continued solid market fundamentals, despite increasing competition in certain product lines.”

“Our Life and Annuity operations continue to gain critical mass. During the quarter we completed a single premium annuity reinsurance transaction, representing $898 million in up-front premium, with a major UK life insurance company. This was the fourth transaction with up-front premium in excess of $500 million that we have completed since entering the business in 1999.”

“We continue to deliver strong returns to shareholders, with net income return on ordinary shareholders’ equity for the quarter of 21.7%, and 18.4% 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,” said Mr. O’Hara.

For the six months ended June 30, 2004, net income available to ordinary shareholders increased 39% over the year ago period to a record $815.8 million, or $5.88 per ordinary share. ‘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 same period increased 23% to $637.7 million or $4.60 per ordinary share.

Second Quarter 2004 Highlights (versus second quarter of 2003, unless noted):

  • Net premiums written from general operations increased 24% to $1.7 billion
  • Combined ratio from general operations improved 4.6 points to 87.6%
  • Net investment income increased 23% to $235.2 million
  • Cash flow from operations of $1.4 billion, or $1.9 billion including structured and spread transactions
  • Total net invested assets of $28.5 billion, up 12% from December 31, 2003
  • Total assets of $45.5 billion, up 12% from December 31, 2003
  • Book value per ordinary share was $47.40, up from $46.74 at December 31, 2003

SEGMENT HIGHLIGHTS:

Insurance Operations
Underwriting profit for the quarter was $109.8 million, an increase of 41% over the second quarter of 2003. Net premium written increased 36% to $1.2 billion, driven primarily by higher new business volumes, commutations on certain reinsurance treaties, greater retentions on new and existing product lines and the impact of favorable foreign exchange movements. The combined ratio improved 2.3 points compared with the 2003 second quarter to 89.7%, driven by a 2.4 point improvement in the acquisition expense ratio, due primarily to changes in product mix. The loss ratio in the quarter of 63.8% was essentially flat versus the 2003 second quarter. During the quarter, the Company announced two important new initiatives within this segment: the launching of its whole account commercial property initiative with capacity of up to $500 million and the commencement of primary directors’ and officers’ liability coverage in Europe.

Reinsurance Operations
General Operations - Underwriting profit from General Operations for the quarter was $108.9 million, an increase of 71% from the second quarter of 2003. Net premium written increased 3% from the 2003 second quarter to $537 million driven primarily by the impact of favorable foreign exchange movement. A low level of large losses in the quarter compared with the year ago period contributed to a 9.6 point improvement in the loss ratio to 53.3%, among the lowest loss ratios in XL’s history. The acquisition and operating expense ratios increased modestly and the combined ratio was 84.4%.

Life and Annuity Operations – Income from Life and Annuity Operations for the quarter was $19.5 million, an increase of 68% from the second quarter of 2003. Net premiums written increased $917 million to $968 million, largely reflecting the closing of a large, single premium annuity reinsurance transaction which contributed up-front premium of $898 million.

Financial Products and Services Operations
Total income contribution in the quarter more than doubled over the second quarter of 2003 to $37.8 million, comprised of $33.0 million from Financial Operations and $4.8 million from Life and Annuity activities. The majority of this increase resulted from a positive $47.7 million change in fair value of derivative form transactions, comprised of both increased premium and positive price and credit changes, which more than offset a $9.1 million decrease in underwriting profit and a $15.3 million reduction in equity in net income of financial affiliates. The decrease in equity in net income of financial affiliates was driven primarily by the Company’s Primus Guaranty Ltd affiliate, reflecting a negative change in the market value of its credit default swap portfolio in the quarter as compared to a positive change in the year ago quarter.

Corporate Items
Net investment income for the quarter increased 23% over the 2003 second quarter to $235.2 million, principally reflecting 25% year-over-year growth in invested assets. Equity in earnings of investment affiliates was $26.7 million, down 22% from the 2003 second quarter and down $43.6 million from the very strong results in the first quarter of 2004.

Net realized gains on investments were $8.8 million in the quarter compared with $93.7 million in the second quarter of 2003. The reduction in realized gains was driven primarily by lower realized gains on US dollar fixed income securities. Net unrealized gains on investments, net of tax were $158.6 million at June 30, 2004, compared with $743.8 million at March 31, 2004. The reduction in net unrealized gains was driven primarily by an increase in US dollar, UK Sterling and Euro interest rates during the quarter.

Total operating expenses in the quarter were $247.7 million, up 28% from the prior year quarter. The increase was driven primarily by costs associated with complying with Sarbanes-Oxley requirements, new business initiatives, the continuing build-out of the Company’s global operations, as well as the unfavorable impact of foreign exchange movement. Compared with the first quarter of this year, expenses grew 1% in the quarter.

# # #

A live on-line web cast of XL’s call with analysts and investors to review the second quarter 2004 results will be held at 10:00 a.m. Eastern Time on July 29, 2004 at www.xlgroup.com. A telephone replay of the conference call will be available beginning at 1:00 p.m. Eastern Time on July 29, 2004 until 8:00 p.m. Eastern Time on August 5, 2004 by dialing (201) 612-7415 (account number: 7716 and conference I.D. number: 109136). An unaudited financial supplement relating to the Company’s 2004 second 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) 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; (b) developments in the world’s financial and capital markets which adversely affect the performance of XL’s investments or access to such markets; (c) changes in general economic conditions, including foreign currency exchange rates, inflation and other factors; and (d) 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.



                                  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)
                                     2004       2003       2004         2003
    Revenues:
    Gross premiums written --
     general operations        $2,150,846 $1,855,038 $5,551,528    $4,846,087
    -- life and annuity
     operations                   993,035     75,889  1,108,920       187,213
    -- financial operations        74,788    106,266    131,677       151,032

    Net premiums written --
     general operations         1,738,728  1,403,713  4,523,489     3,751,488
    -- life and annuity
     operations                   993,169     63,703  1,109,053       161,016
    -- financial operations        71,850    104,466    124,184       148,462

    Net premiums earned --
     general operations         1,830,225  1,469,520  3,405,150     2,901,407
    -- life and annuity
     operations                   994,048     70,482  1,110,980       163,253
    -- financial operations        34,024     35,807     66,612        62,780
    Net investment income         235,177    190,551    463,523       382,455
    Net realized gains on
     investments                    8,763     93,687    124,100        89,024
    Net realized and
     unrealized gains (losses)
     on derivative instruments     42,140    (12,257)    53,737         2,236
    Equity in net income of
     investment affiliates         26,733     34,306     97,109        61,104
    Fee and other income            8,152      9,792     15,059        22,069
                               $3,179,262 $1,891,888 $5,336,270    $3,684,328
    Expenses:
    Net losses and loss
     expenses incurred         $1,099,910   $937,575 $2,063,854    $1,822,829
    Claims and policy benefit
     reserves                   1,006,509     83,225  1,140,572       202,783
    Acquisition costs             347,408    298,550    624,678       538,862
    Operating expenses            247,716    193,908    493,016       384,427
    Exchange losses (gains)        15,913    (23,352)     5,189       (26,054)
    Interest expense               54,961     46,282     95,018        92,422
    Amortization of
     intangible assets              3,257        375      6,514           750
                               $2,775,674 $1,536,563 $4,428,841    $3,016,019

    Net  income before
     minority interest, income
     tax expense and equity in
     net (income) loss of
     insurance and insurance
     and financial affiliates    $403,588   $355,325   $907,429      $668,309

    Minority interest               2,284      3,166      6,944         5,028
    Income tax                     31,176     11,009     66,533        31,039
    Equity in net (income)
     loss of insurance and
     financial affiliates          (3,556)   (16,522)    (1,981)       24,565

    Net income from operations   $373,684   $357,672   $835,933      $607,677
    Preference dividend           (10,080)   (10,013)   (20,160)      (20,161)
    Net income available to
     ordinary shareholders       $363,604   $347,659   $815,773      $587,516


                                  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)
                                              2004     2003     2004     2003

       Weighted average number of ordinary
        shares and ordinary
        share equivalents :                137,655  136,791  137,568  136,527
                                   Basic
                                   Diluted 138,741  138,634  138,648  138,084

       Per Share Data:
       Net income available to
        ordinary shareholders                $2.62    $2.51    $5.88    $4.25

       Ratios -- General Insurance and
        reinsurance operations
       Loss ratio                            59.7%    63.2%    60.3%    62.1%
       Expense ratio                         27.9%    29.0%    27.8%    27.2%

       Combined ratio                        87.6%    92.2%    88.2%    89.2%


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

    Balance Sheet Data:                     As at June 30,    As at Dec. 31,
                                                   2004              2003
                                               (Unaudited)       (Unaudited)

    Total investments available for sale       $23,599,996       $20,775,257
    Net payable for investments purchased          312,680            96,571
    Cash and cash equivalents                    2,744,878         2,403,121
    Investments in affiliates                    1,898,462         1,903,341
    Total assets                                45,460,035        40,764,215

    Unpaid losses and loss expenses             17,076,770        16,558,788
    Deposit liabilities and policy
     benefit reserves                            8,874,039         7,284,179
    Notes payable and debt                       2,743,368         1,905,483
    Total shareholders' equity                   7,076,572         6,936,915
    Book value per ordinary share                   $47.40            $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 and six months ended June 30, 2004 and 2003 (in millions, except per share amounts):


                                         Three Months Ended   Six Months Ended
                                              June 30             June 30
                                            (Unaudited)         (Unaudited)
                                           2004      2003      2004      2003

    Net income available to
     ordinary shareholders               $363.6    $347.7    $815.8    $587.5

    Net realized (gains) losses on
     investments, net of tax              (13.7)    (96.5)   (121.3)    (82.2)
    Net realized and unrealized gains
     on investment derivatives,
     net of tax                           (14.8)     (3.9)    (17.7)     (8.5)

    Net realized and unrealized
     (gains) losses on credit
     derivatives, net of tax              (26.2)     21.3     (39.1)     21.9
    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             $308.9    $268.6    $637.7    $518.7

    Per ordinary share results:

    Net income available to
     ordinary shareholders                $2.62     $2.51     $5.88     $4.25

    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              $2.23     $1.94     $4.60     $3.76

    Weighted average ordinary
     shares outstanding:
    Basic                                 137.7     136.8     137.6     136.5
    Diluted                               138.7     138.6     138.6     138.1

    Return on Ordinary Shareholders'
     Equity:
    Average ordinary
     shareholders'equity               $6,702.1  $6,671.3  $6,489.2  $6,550.0

    Net income excluding net realized
     gains and losses on investments
     and net unrealized gains and
     losses on credit and investment
     derivative instruments,
     net of tax                          $308.9    $268.6    $637.7    $518.7

    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           $1,235.6  $1,074.4  $1,275.4  $1,037.4

    Annualized Return on Ordinary
     Shareholders' Equity - Net income
     excluding net realized gains and
     losses on investments and net
     unrealized gains and losses on
     credit and investment derivative
     instruments, net of tax              18.4%     16.1%     19.7%     15.8%

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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