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XL Capital Reports Third Quarter 2007 Net Income of $328.0 Million, or $1.82 Per Ordinary Share



First Nine Months of 2007 Net Income of $1.42 billion, or $7.89 per ordinary share

Third Quarter Highlights

  • •  "Net income excluding net realized gains and losses"(1) was a record $562.8 million, or $3.13 per ordinary share
  • •  Total net investment income increased 9.6% to $568.0 million
  • •  Combined ratio from P&C operations was 85.3%
  • •  Return on ordinary shareholders' equity, based on "net income excluding net realized gains and losses"(1), was 22.3% for the quarter (annualized)
  • •  Diluted book value per ordinary share increased to $56.29 from $54.74 at June 30, 2007

HAMILTON, Bermuda, Oct. 23 XL Capital Ltd ("XL" or the "Company") today reported net income available to ordinary shareholders for the quarter ended September 30, 2007 of $328.0 million, or $1.82 per ordinary share, compared with net income of $415.8 million, or $2.32 per ordinary share, for the quarter ended September 30, 2006. Included in net income for the quarter ended September 30, 2007 are net realized losses on investments of $160.2 million and net realized and unrealized losses on derivative instruments of $58.2 million.

"Net income excluding net realized gains and losses"(1) for the third quarter of 2007 was a record $562.8 million, or $3.13 per ordinary share, compared with $468.7 million, or $2.61 per ordinary share, for the prior year period. As this is the first full quarter in which the Company has accounted for Security Capital Assurance Ltd ("SCA") as an affiliate, the Company has amended its definition of "Net income excluding net realized gains and losses". The definition now excludes the Company's share of net realized gains and losses on investments, net realized and unrealized losses on credit, structured financial and investment derivatives, net of tax, for SCA and the Company's other insurance company operating affiliates. "Net income excluding net realized gains and losses" in prior periods has been amended to conform with the current period presentation. There was no effect on net income as a result of these changes.

For the first nine months of 2007, net income available to ordinary shareholders was a record $1.42 billion, or $7.89 per ordinary share, compared with $1.25 billion, or $6.98 per ordinary share, in the first nine months of 2006. "Net income excluding net realized gains and losses" for the same period was a record $1.63 billion, or $9.03 per ordinary share, as compared with $1.25 billion, or $6.95 per ordinary share, in the first nine months of 2006.

Return on ordinary shareholders' equity, based on net income was 13.0% and 19.2% for the three and nine months ended September 30, 2007, respectively. Return on ordinary shareholders' equity, based on net income excluding net realized gains and losses was 22.3% and 22.0% for the three and nine months ended September 30, 2007, respectively.

Commenting on the current quarter results, President and Chief Executive Officer Brian M. O'Hara said: "I am proud to report that XL has again delivered to shareholders record operating results for both the quarter and year to date. All of our segments contributed to these excellent results. Our investment operations, in the face of challenging market conditions, generated solid net investment income and returns from investment fund affiliates."

At September 30, 2007, diluted book value per ordinary share was $56.29, as compared to $54.74 as at June 30, 2007. Basic book value per ordinary share was $56.45 at September 30, 2007 as compared to $55.01 as at June 30, 2007.

SEGMENT HIGHLIGHTS - THIRD QUARTER 2007 VERSUS THIRD QUARTER 2006

Insurance

Underwriting profit for the quarter ended September 30, 2007 was $129.7 million compared with $110.7 million in the prior year period. This increase was due mainly to net favorable prior year development of $60.7 million, as compared to net favorable prior year development of $9.5 million in the prior year period. The increase was partially offset by lower net premiums earned of $1.01 billion compared to $1.02 billion in the prior year period.

    -- Gross premiums written decreased 9.4% primarily due to competitive
       market conditions across most lines in the current quarter as well as
       continued corporate risk management initiatives.
    -- Net premiums written increased by 5.1% through changes in program
       structures and favorable pricing conditions on reinsurance purchased.
    -- Net premiums earned decreased marginally as a result of the earned
       impact of lower levels of gross premiums written in previous quarters.
    -- The combined ratio was 87.4% compared with 89.6% for the prior year
       period. The loss ratio excluding the impact of net prior year
       development for the current and prior year quarter was 68.7% and 63.9%,
       respectively.

Reinsurance

Underwriting profit for the quarter ended September 30, 2007 was $107.2 million compared with $117.0 million for the prior year period. The decrease is principally due to lower premiums written and earned during the quarter in comparison to the prior year period. This decrease was partially offset by higher favorable net prior year development of $83.3 million as compared with $24.3 million in the prior year quarter.

    -- Gross premiums written decreased by 17.7% due primarily to certain
       premium adjustments in the prior year quarter, partially offset by
       timing differences.  Excluding these items, gross premiums written
       decreased 8.7%.  The decline in gross premiums written was due to
       increased retentions by cedants and competitive market conditions.
    -- Net premiums earned decreased 13.9% reflecting the effects of lower net
       premiums written throughout the year.
    -- The combined ratio was 81.3% compared with 82.5% in the prior year
       period.  The loss ratio excluding the impact of net prior year
       development for the current and prior year quarter was 64.6% and 60.2%,
       respectively.

Life Operations

Gross premiums written were $140.7 million compared with $113.4 million in the prior year quarter, principally due to growth in the core portfolio of regular premium business and favorable foreign exchange impacts. Net income was $27.0 million as compared with $17.8 million in the third quarter last year.

Investment Operations

Net investment income from P&C operations, excluding investment income from Structured Products, increased 15.0% from the prior year period to $325.5 million primarily due to higher investment yields. Net income from investment affiliates was $69.4 million in the third quarter of 2007 compared with $39.4 million in the third quarter of 2006. Net income from investment manager affiliates increased to $23.2 million as compared to $9.1 million for the prior year period.

Total net realized losses on investments were $160.2 million in the quarter compared with net realized losses of $52.7 million in the prior year period. This includes charges for other-than-temporary impairment of $110.9 million primarily related to the deterioration in the credit markets. Most of these losses were borne by our Other Financial Lines operations, representing our muni-GIC and funding agreement businesses which are inherently more exposed to events in the credit markets. Net realized losses on derivatives were $58.2 million compared to a gain in the prior year period of $0.6 million. Net unrealized losses on investments, net of tax, were $452.2 million at September 30, 2007 compared with net unrealized losses of $309.9 million and net unrealized gains of $410.4 million at June 30, 2007 and December 31, 2006, respectively. The increase in net unrealized losses of $142.3 million for the quarter and $862.6 million for the nine months ended September 30, 2007, was substantially due to widening credit spreads on corporate and structured credit investments, partially offset by the effect of declining U.S., U.K. and Euro-zone government interest rates. The Company has also posted on its web-site Structured Credit data to provide detail on its exposures as at September 30, 2007.

Other Items

During the quarter, the Company repurchased 2.3 million ordinary shares at an average price of $76.66 per share. Year to date, the Company has repurchased 13.2 million ordinary shares at an average price of $75.76 per share. As at September 30, 2007, there were 179.7 million ordinary shares issued and outstanding. The Company redeemed its Series A preference shares on August 14, 2007 and declared its first dividend on the Series E preference shares of $38.64 per share or $38.6 million payable October 15, 2007.

Total operating expenses were $270.5 million, a decrease from $276.4 million in the quarter ended September 30, 2006. The decrease is due to operating expenses of SCA included in the prior year quarter, partially offset by higher compensation costs for business development and performance-based programs, and the impact of foreign exchange.

Foreign exchange gains were $26.2 million compared with a loss of $21.9 million in the prior year quarter.

The Company will host a conference call to discuss its third quarter 2007 results on Wednesday, October 24, 2007 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 (877) 422-4657 or (706) 679-0474, Conference ID# 15842595. The webcast will be available on XL's website located at www.xlgroup.com and will be archived on this site from approximately 1:00 p.m. Eastern Time on October 24, 2007 through midnight Eastern Time on November 26, 2007. A slide presentation accompanying the Company's discussion of its third quarter results 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 pm. Eastern Time on October 24, 2007 until midnight Eastern Time on November 14, 2007 by dialing (800) 642-1687 or (706) 645-9291, Conference ID #15842595. An unaudited financial supplement relating to the Company's third quarter 2007 results is available on its website located at www.xlgroup.com.

XL Capital Ltd, through its operating subsidiaries, is a leading provider of global insurance and reinsurance coverages to industrial, commercial and professional service firms, insurance companies and other enterprises on a worldwide basis. As of September 30, 2007, XL Capital Ltd had consolidated assets of $60.9 billion and consolidated shareholders' equity of $11.4 billion. More information about XL Capital Ltd is available at www.xlgroup.com.

This press release contains forward-looking statements. 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) 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) trends in rates for property and casualty insurance and reinsurance; (c) developments in the world's financial and capital markets that 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, 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.

(1) Defined as net income excluding net realized gains and losses on investments, net realized and unrealized gains and losses on credit, structured financial and investment derivatives, net of tax, for the Company and its share of these items for Security Capital Assurance Ltd ("SCA") and the Company's other insurance company operating affiliates, 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/loss excluding net realized gains and losses to net income available to ordinary shareholders.

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

                                   Three Months Ended        Nine Months Ended
    Income Statement Data:             September 30             September 30
                                       (Unaudited)              (Unaudited)
                                    2007         2006        2007         2006
    Revenues:                                (Note 1)                 (Note 1)
    Gross premiums written:
            - P&C operations  $1,793,738   $2,048,842  $6,692,216  $7,034,357
           - Life operations     140,694      113,371     588,930     479,813
      - Financial operations           -       85,570     156,983     272,307

     Net premiums written:
            - P&C operations   1,256,118    1,271,732   5,158,658   5,247,069
           - Life operations     129,353      103,306     556,778     450,465
      - Financial operations           -      100,478     130,445     281,747

    Net premiums earned:
            - P&C operations   1,583,343    1,688,687   4,832,163   5,078,254
           - Life operations     147,239      120,922     534,086     431,469
      - Financial operations           -       45,455      85,682     148,480
     Net investment income       567,987      518,281   1,688,294   1,455,645
     Net realized (losses)
      on investments            (160,208)     (52,656)   (132,620)    (53,495)
     Net realized and
      unrealized (losses) gains
      on derivative instruments  (58,162)         611     (41,233)     78,700
     Net income from
      investment affiliates       69,435       39,370     255,414     174,612
     Fee and other income          3,653        3,494      11,639      23,086
             Total revenues   $2,153,287   $2,364,164  $7,233,425  $7,336,751
     Expenses:
     Net losses and loss
      expenses incurred         $920,564   $1,025,740  $2,857,299  $3,229,249
     Claims and policy benefits  195,440      170,455     662,883     558,964
     Acquisition costs           253,077      260,877     811,049     823,476
     Operating expenses          270,540      276,425     857,595     817,450
     Exchange (gains) losses     (26,204)      21,943      19,965      75,385
     Interest expense            151,018      150,388     458,504     412,889
     Amortization of
      intangible assets              420          420       1,260       1,935
             Total expenses   $1,764,855   $1,906,248  $5,668,555  $5,919,348

       Net income before
        minority interest,
        income tax and net
        income from operating
        affiliates              $388,432     $457,916  $1,564,870  $1,417,403

     Minority interest in net
      income of subsidiary             -        8,355      23,994      10,613
     Income tax                   58,715       43,655     192,758     176,728
     Net (income) from
      operating affiliates       (41,919)     (19,964)   (140,640)    (51,560)

     Net income                 $371,636     $425,870  $1,488,758  $1,281,622
     Preference share dividends  (43,661)     (10,081)    (66,530)    (30,241)
     Net income available
      to ordinary shareholders  $327,975     $415,789  $1,422,228  $1,251,381

     Note 1: Certain amounts in 2006 have been reclassified to conform with
             the current period presentation


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

                                       Three Months Ended    Nine Months Ended
    Income Statement Data (continued):    September 30          September 30
                                          (Unaudited)           (Unaudited)
                                         2007     2006       2007       2006
                                                (Note 1)              (Note 1)

    Weighted average number
     of ordinary shares and
     ordinary share equivalents:

                       Basic          178,788  178,818    178,886    178,662
                     Diluted          179,781  179,439    180,340    179,298

    Per Share Data:
    Net income available
     to ordinary shareholders           $1.82    $2.32      $7.89      $6.98

    Ratios - P&C operations:
    Loss ratio                           58.1%    60.4%      59.1%      63.4%
    Expense ratio                        27.2%    26.3%      28.1%      26.4%

    Combined ratio                       85.3%    86.7%      87.2%      89.8%


    Note 1: Certain amounts in 2006 have been reclassified to conform with the
            current period presentation


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


    Balance Sheet Data:                As at                 As at
                                 September 30, 2007     December 31, 2006
                                    (Unaudited)
                                                            (Note 1)


    Total investments
     available for sale                 $38,638,635           $39,350,983

    Cash and cash equivalents             3,185,239             2,223,748

    Investments in affiliates             3,429,614             2,308,781

    Unpaid losses and loss
     expenses recoverable                 4,840,071             5,027,772

    Total assets                         60,888,314            59,308,870


    Unpaid losses and loss expenses      23,014,994            22,895,021

    Deposit liabilities                   8,682,988             7,857,827

    Future policy benefit reserves        6,870,922             6,476,057

    Unearned premiums                     5,371,645             5,652,897

    Notes payable and debt                2,866,399             3,368,376

    Total shareholders' equity           11,431,791            10,131,166

    Diluted book value
     per ordinary share                      $56.29                $53.01

    Basic book value per ordinary share      $56.45                $53.12

    Note 1: Certain amounts in 2006 have been reclassified to conform with
    the current period presentation



                                XL Capital Ltd
                                RECONCILIATION

The following is a reconciliation of the Company's (i) net income (loss) available to ordinary shareholders to 'net income (loss) 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' for the Company and its share of these items for SCA and the Company's other insurance company operating affiliates (which is a non-GAAP measure, the "Exclusions") and (ii) annualized return on ordinary shareholders' equity (based on net income (loss) minus the Exclusions) to average ordinary shareholders' equity for the three and nine months ended September 30, 2007 and 2006 (U.S. dollars in millions, except per share amounts):

                                    Three Months Ended     Nine Months Ended
                                       September 30          September 30
                                       (Unaudited)           (Unaudited)
                                     2007       2006       2007       2006
                                              (Note 1)              (Note 1)
    Net income available to
     ordinary shareholders         $328.0     $415.8   $1,422.2   $1,251.4

    Net realized losses (gains)
     on investments, net of tax     153.1       50.6      118.6       51.5

    Net realized and unrealized
     (gains) losses on investment
     derivatives, net of tax         55.9        2.4       31.6      (52.9)

    Net realized and unrealized
     (gains) losses on credit and
     structured financial
     derivatives, net of tax          4.1       (0.6)      28.4       (0.5)
    Net realized and unrealized
     (gains) losses on investments
     and derivatives of SCA and the
     Company's other insurance
     company operating affiliates    21.7        0.5       28.3       (3.9)

    Net income excluding net
     realized gains and
     losses (Note 2)               $562.8     $468.7   $1,629.1   $1,245.6

    Per ordinary share results:
    Net income available to
     ordinary shareholders          $1.82      $2.32      $7.89      $6.98

    Net income excluding
     net realized gains
     and losses (Note 2)            $3.13      $2.61      $9.03      $6.95

    Weighted average ordinary
     shares outstanding:
    Basic                         178,788    178,818    178,886    178,662
    Diluted                       179,781    179,439    180,340    179,298

    Return on Ordinary
     Shareholders' Equity:
    Average ordinary
     shareholders' equity       $10,074.4   $8,518.1   $9,878.9   $8,480.4

    Net income excluding
     net realized gains
     and losses (Note 2)           $562.8     $468.7   $1,629.1   $1,245.6

    Annualized net income
     excluding net realized
     gains and losses (Note 2)   $2,251.2   $1,874.8   $2,172.1   $1,660.8

    Annualized Return on
     Ordinary Shareholders'
     Equity - Net income
     excluding net realized
     gains and losses (Note 2)       22.3%      22.0%      22.0%      19.6%

    Note 1: Certain amounts in 2006 have been reclassified to conform with the
            current period presentation

    Note 2: Defined as "net income excluding net realized gains and losses on
            investments, net realized and unrealized gains and losses on
            credit, structured financial and investment derivatives, net of
            tax of the Company and its share of these items for SCA and the
            Company's other insurance company operating affiliates."

Comment on Regulation G

This press release contains the presentation of (i) net income (loss) excluding net realized gains and losses on investments, net realized and unrealized gains and losses on credit, structured financial and investment derivatives, net of tax, for the Company and its share of these items for SCA and the Company's other insurance company operating affiliates (the "Exclusions") 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, net realized and unrealized gains and losses on credit, structured financial and investment derivatives, net of tax for the Company and its share of these items for SCA and the Company's other insurance company operating affiliates'. 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, and of those of SCA and the Company's other insurance company operating affiliates, 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 and its insurance company operating affiliates generally hold financial guaranty 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. 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 that 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, for the Company and its share of these items for SCA and the Company's other insurance company operating affiliates (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 shareholders' 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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