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XL Capital Ltd Reports Second Quarter 2003 Results

 —

Record Net Income $347.7 million, or $2.51 per ordinary share

HAMILTON, BERMUDA, July 31, 2003 -- XL Capital Ltd (“XL” or the “Company”) (NYSE: XL) today reported net income available to ordinary shareholders for the quarter ended June 30, 2003 of $347.7 million, or $2.51 per ordinary share, compared with a net loss of $91.7 million, or $0.68 per ordinary share, in the second quarter of 2002. ‘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 second quarter of 2003 was $268.6 million, or $1.94 per ordinary share, compared with $26.4 million, or $0.19 per ordinary share, for the quarter ended June 30, 2002. ‘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’ is a non-GAAP measure. See below for a reconciliation of this measure to net income available to ordinary shareholders.

Commenting on the second quarter 2003 results, Brian M. O'Hara, President and Chief Executive Officer of XL, stated: "We had a strong quarter with net income, total assets and shareholders' equity reaching record levels. Cash flow from operations was a robust $952 million for the second quarter. Adding the $669 million in XL Life and Annuity transactions this quarter increased cash flow to $1.6 billion. Net premiums earned from general operations increased by more than 40% compared with the second quarter a year ago and we achieved satisfactory combined ratios of 92.2% in the second quarter and 89.2% for the six months ended June 30, 2003."

"We are strategically positioned in all of the business lines and regions where we want to be and continue to capitalize on the current strong market conditions in our areas of focus," stated Mr. O'Hara. "We are particularly well-placed in those lines of business which are still seeing the largest rate increases, notably professional lines and casualty worldwide which currently comprise nearly half of our general operations' portfolio. The Company's life and annuity businesses and our financial operations also performed well and both areas are gaining momentum."

Mr. O'Hara also commented: "We were also pleased with our total investment earnings, comprising both investment income and our equity in the earnings of our investment affiliates, of $224.9 million in the quarter ended June 30, 2003, as compared with $182.7 million in the prior year's quarter."

For the six months ended June 30, 2003, net income available to ordinary shareholders was $587.5 million, or $4.25 per ordinary share, compared with a net loss of $2.3 million, or $0.02 per ordinary share, in the six months ended June 30, 2002. '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 six months ended June 30, 2003 was $518.7 million, or $3.76 per ordinary share, compared with $234.0 million, or $1.70 per ordinary share, for the six months ended June 30, 2002. See below for the 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.

Total assets as of June 30, 2003 were $39.2 billion compared with $35.6 billion as of December 31, 2002. Book value per ordinary share as at June 30, 2003 increased to $51.40 compared with $44.48 as at December 31, 2002.

Summary unaudited consolidated financial data for the quarter and six months ended June 30, 2003 and 2002, respectively, are set forth below (in millions, except per share amounts):


                              Three months ended            Six months ended
                                   June 30 June 30
                                (Unaudited)                    (Unaudited)


                              2003          2002         2003           2002
    Gross premiums
     written              $ 2,037.2     $ 1,538.3     $ 5,184.3     $ 4,342.9

    Net premiums written    1,571.9       1,138.7       4,061.0       3,297.5
    Net premiums earned     1,575.8       1,057.5       3,127.4       2,122.3

    Net income (loss)       $ 357.7      $ (91.7)       $ 607.7       $ (2.3)
    Preference dividend       (10.0)         (--)        (20.2)          (--)
    Net income available to
     ordinary shareholders  $ 347.7      $ (91.7)       $ 587.5       $ (2.3)

    Per ordinary
     share results:
    Net income (loss)
     available to ordinary
     shareholders (a)        $ 2.51      $ (0.68)        $ 4.25      $ (0.02)

    Weighted average
     ordinary shares
     outstanding:
    Basic                   136,791       135,662       136,527       135,431
    Diluted                 138,634       138,231       138,084       137,743

    Note:
    (a) Average stock options outstanding have been excluded where anti-
        dilutive to earnings per ordinary share. Consequently, where there is
        a net loss, basic weighted average ordinary shares outstanding is used
        to calculate net loss per ordinary share.

Effective this quarter the presentation of the Company's results have been reported in general operations, life and annuity operations and financial operations in order to provide additional information relating to XL's financial products and services segment. Prior periods have been reclassified to reflect this expanded presentation.

Gross premiums written for general operations in the second quarter of 2003 were $1.9 billion compared with $1.4 billion in the second quarter of 2002. Net premiums written increased to $1.4 billion from $1.0 billion and net premiums earned rose to $1.5 billion from $1.0 billion in the respective quarters of 2003 and 2002. For the six months ended June 30, 2003, gross premiums written for general operations were $4.8 billion compared with $4.2 billion in the year ago period. Net premiums written for the first six months of 2002 were $3.8 billion compared with $3.2 billion a year- ago. Net premiums earned were $2.9 billion for the first six months of 2003 as compared with $2.0 billion for the first six months of 2002.

Gross premiums written for life and annuity operations in the second quarter of 2003 were $75.9 million compared with $20.0 million in the second quarter of 2002. Net premiums written for life and annuity operations in the second quarter of 2003 were $63.7 million compared with $11.5 million in the second quarter of 2002 and net premiums earned were $70.5 million in the second quarter of 2003 compared with $10.5 million in the second quarter of 2002. For the six months ended June 30, 2003, gross premiums written for life operations were $187.2 million compared with $58.5 million in the year ago period. Net premiums written were $161.0 million in the first six months of 2003 compared with $48.5 million in the first six months of 2002. Net premiums earned were $163.3 million and $49.7 million in the respective six month periods of 2003 and 2002.

Gross premiums written for financial operations in the second quarter of 2003 were $106.3 million compared with $75.8 million in the second quarter of 2002. Net premiums written for financial operations in the second quarter of 2003 were $104.5 million compared with $73.4 million in the second quarter of 2002 and net premiums earned were $35.8 million in the second quarter of 2003 compared with $10.8 million in the second quarter of 2002. For the first six months of 2003 gross premiums written for financial operations were $151.0 million compared with $102.1 million in the year ago period. Net premiums written for financial operations were $148.5 million in the first six months of 2003 compared with $97.1 million in 2002 and net premiums earned were $62.8 million and $25.4 million in the respective six month periods of 2003 and 2002.

Net investment income from general operations was $145.1 million in the second quarter of 2003, compared with $151.6 million in 2002's second quarter. Net investment income from life and annuity and financial operations was $45.5 million in the second quarter of 2003 compared with $23.2 million for the quarter ended June 30, 2002. For the first six months of 2003 net investment income from general operations was $294.1 million in compared with $300.9 million in the year ago period. Net investment income from life and annuity and financial operations was $88.4 million in the first six months of 2003 compared with $45.0 million for the first six months of 2002.

The Company's equity in the net income of its investment affiliates for the second quarter of 2003 was $34.3 million versus $7.9 million in the second quarter of 2002. The Company's equity in net income of its insurance and financial affiliates was $16.5 million in the second quarter of 2003 versus net income of $0.4 million in the second quarter of 2002. The Company's equity in the net income of its investment affiliates for the first six months of 2003 was $61.1 million versus $40.1 million in the first six months of 2002. The Company's equity in net loss of its insurance and financial affiliates was $24.6 million in the first six months of 2003 versus net income of $0.4 million in the first six months of 2002.

The combined ratio for the Company's general insurance and reinsurance operations was 92.2% in the second quarter of 2003, versus 109.2% in the second quarter of 2002. The loss ratios were 63.2% and 79.3% in the quarters ended June 30, 2003 and 2002, with corresponding expense ratios of 29.0% and 29.9% for the same quarters, respectively. The combined ratio for the Company's general insurance and reinsurance operations was 89.2% in the first six months of 2003, versus 100.8% in the first six months of 2002. The loss ratios were 62.1% and 71.4% in the six months ended June 30, 2003 and 2002, with corresponding expense ratios of 27.1% and 29.4% for the same periods, respectively. In the second quarter and six months ended June 30, 2002, the Company's results were impacted by increased reserves for the September 11 event.

A live on-line web cast of XL's call with analysts and investors to review the second quarter 2003 results will be held at 10 a.m. Eastern Time on August 1, 2003 at www.xlgroup.com. An unaudited financial information supplement relating to the Company's 2003 and 2002 quarterly and full year results is available on its website: www.xlgroup.com (under "Investor Relations -- Financial Information").

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 press release 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, including as a result of natural or man-made catastrophic events, 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 and XL's 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 report on Form 10-K, Form 10-Q/A and XL's other documents on file with the Securities and Exchange Commission. XL undertakes no obligation to update publicly or revise any forward-looking statement, whether as a result of new information, future developments or otherwise.

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

                             Three Months Ended         Six Months Ended
                                   June 30 June 30
                                 (Unaudited)              (Unaudited)
                            2003         2002(a)      2003         2002(a)
    Income Statement Data:
    Revenues:
      Gross premiums
       written --general,
       life and annuity
       and financial
       operations        $2,037,193 $1,538,257 $5,184,332 $4,342,933
     Net premiums
      written -- general,
      life and annuity
      and financial
      operations          1,571,882     1,138,660   4,060,966     3,297,513
     Net premiums earned
      -- general
     operations          $1,469,520 $1,036,231 $2,901,407 $2,047,199
     Net premiums earned
      -- life and annuity
      operations             70,482        10,497     163,253        49,690
     Net premiums earned
      -- financial
      operations             35,807        10,813      62,780        25,367
     Net investment income
      -- general operations 145,088       151,553     294,089       300,907
     Net investment income
      -- life and annuity
      operations             40,234        16,825      77,693        32,343
     Net investment income
      -- financial operations 5,229         6,365      10,673        12,620
     Net realized gains
      (losses) on
      investments            93,687      (110,002)     89,024      (216,022)
     Net realized and
      unrealized (losses)
      gains on derivative
      instruments           (12,257)       (5,134)      2,236       (14,610)
     Equity in net income
      of investment
      affiliates             34,306         7,931      61,104        40,116
     Fee and other income     9,792        20,459      22,069        28,408
                         $1,891,888 $1,145,538 $3,684,328 $2,306,018

    Expenses:
     Net losses and loss
      expenses incurred
      -- general
     operations            $928,755 $822,151 $1,800,546 $1,461,369
     Claims and policy
      benefit reserves --
      life and annuity
      operations             83,225        18,816     202,783        66,579
     Net losses and loss
      expenses incurred --
      financial operations    8,820           (54)     22,283         3,026
     Acquisition costs and
      operating expenses    492,458       355,166     923,289       686,043
     Exchange gains         (23,352)      (23,206)    (26,054)      (31,570)
     Interest expense        46,282        40,139      92,422        81,761
     Amortization of
      intangible assets         375            11         750           625
                         $1,536,563 $1,213,023 $3,016,019 $2,267,833

     Income (loss)
      before minority
      interest, income
      tax expense and
      equity in net loss
      of insurance and
      financial
      affiliates           $355,325     $ (67,485)  $ 668,309 $38,185

     Minority interest        3,166         1,779       5,028         4,034
     Income tax charge       11,009        22,900      31,039        36,854
     Equity in net (income)
      loss of insurance and
      financial affiliates  (16,522)         (416)     24,565          (448)
     Net income (loss)    $357,672     $ (91,748)  $ 607,677      $ (2,255)
     Preference dividend    (10,013)           --     (20,161)           --
     Net income (loss)
      available to ordinary
      shareholders         $347,659     $ (91,748)  $ 587,516      $ (2,255)
     Weighted average
      number of ordinary
      shares and ordinary
      share equivalents
       : Basic              136,791       135,662     136,527       135,431
       : Diluted            138,634       138,231     138,084       137,743

    Per Share Data: (b)
     Net income (loss)
      available to ordinary
      shareholders           $ 2.51        $(0.68)      $4.25        $(0.02)

    Note:
    (a) Certain reclassifications, which have no effect on net income, have
        been made to prior period results to conform to current presentation.
    (b) Average stock options outstanding have been excluded where anti-
        dilutive to earnings per share. Consequently, where there is a net
        loss, basic weighted average ordinary shares outstanding is used to
        calculate net loss per share.


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


                            As at June 30,        As at December 31,
                                 2003                    2002

    Balance Sheet Data:

    Total investments
     available for sale       $17,946,914 $16,022,522

    Segregated assets             341,645                  37,211

    Net payable for
     investments purchased        710,120               1,546,276

    Cash and cash equivalents   3,007,127               3,557,815

    Investments in affiliates   1,809,643               1,750,005

    Intangible assets           1,655,352               1,653,700

    Total assets               39,167,529              35,647,369

    Unpaid losses and
     loss expenses             14,748,208              13,202,736

    Deposit liabilities
     and policy benefit
     reserves                   5,438,842               4,852,785

    Segregated liabilities        341,645                  37,211

    Notes payable and debt      1,890,398               1,877,957

    Total Shareholders'
     equity                     7,565,320               6,569,589

    Book value per
     ordinary share                $51.40 $44.48 XL Capital Ltd
                                RECONCILIATION

The following is a reconciliation of the Company's net income (loss) 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' for the three and six months ended June 30, 2003 and 2002 (in millions except per share amounts):



                                  XL Capital Group
                     SUMMARY CONSOLIDATED FINANCIAL DATA
           (In thousands of U.S. Dollars, except per share amounts)
                                 (Unaudited)

                             Three months ended          Six Months Ended
                                   June 30 June 30
                                 (Unaudited)              (Unaudited)

                              2003         2002          2003         2002
    Net income (loss)
     available to
    ordinary shareholders   $347.7      $ (91.7)      $ 587.5       $ (2.3)

    Net realized (gains)
     and losses on
    investments, net
      of tax                (96.5)         110.0       (82.2)         217.8
    Net realized and
     unrealized (gains)
      losses on investment
      derivatives,
     net of tax              (3.9)         (2.0)        (8.5)           9.7
    Net realized and
     unrealized losses
     (gains) on credit
     derivatives,
     net of tax               21.3          10.1         21.9           8.8

    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            $ 268.6         $26.4       $518.7        $234.0

    Per ordinary share results:

    Net income (loss)
     available to
     ordinary shareholders   $2.51       $(0.68)        $4.25       $(0.02)

    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 $1.94 $0.19 $3.76 $1.70

    Weighted average
     ordinary shares
    outstanding:
     Basic                   136.8         135.7        136.5         135.4
    Diluted                  138.6         138.2        138.1         137.4


    

Comment on Regulation G

This press release contains the presentation 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'. This presentation is a "non-GAAP financial measure" as defined in Regulation G. The reconciliation of such measure to net income (the most directly comparable GAAP financial measure) 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, capital gains are 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, 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 reasons and they request that XL provide this non- GAAP financial information on a regular basis.

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