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XL Capital Ltd Reports Third Quarter 2005 Net Loss of $1,049.2 Million, or $7.53 per Ordinary Share

 — Nine months 2005 Net Loss of $470.4 million, or $3.39 per ordinary share Strong underlying fundamentals overshadowed by third quarter catastrophes (versus third quarter of 2004): -- Combined ratio from general operations was 182.2%, or 88.7% excluding the impact of third quarter catastrophes. -- Contribution from financial operations was $51.3 million. -- Net investment income from general operations increased 17% to $184.1 million. -- Net income from investment affiliates was $56.7 million, compared with $5.2 million. -- Cash flow from operations was $551.7 million, or $837.9 million including structured and spread transactions.

HAMILTON, Bermuda, Oct. 31 /PRNewswire/-- XL Capital Ltd ("XL" or the "Company") (NYSE: XL) today reported a net loss to ordinary shareholders for the quarter ended September 30, 2005 of $1,049.2 million, or a loss of $7.53 per ordinary share, compared with net income of $22.5 million, or $0.16 per ordinary share, for the quarter ended September 30, 2004. Net loss for the quarter ended September 30, 2005 included previously announced pre-tax net losses from Hurricane Katrina of $1,158.8 million, Hurricane Rita of $263.6 million and other natural catastrophes of $89.7 million. After taking into account net reinstatement premiums and tax effects, the net income impact of these third quarter catastrophes was $1,474.4 million. Net income for the quarter ended September 30, 2004 included net losses of $420.2 million, net of tax, from catastrophes. See attached table for further details.

"Net loss excluding net realized gains and losses"(1) for the quarter was $1,115.0 million, or $8.01 per ordinary share, compared with a loss of $31.2 million, or $0.23 per ordinary share, for the year ago quarter. See below for a reconciliation of "net loss excluding net realized gains and losses"(1) to net loss available to ordinary shareholders.

Commenting on these results, President and Chief Executive Officer Brian M. O'Hara said: "The third quarter's insured market catastrophe losses, which we estimate at $60 billion to $72 billion, were greater than our industry has seen in any previous calendar year. Our loss estimation process has embraced the extraordinary breadth, magnitude and complexity of these events."

"First and foremost we would like to re-emphasize our commitment to maintain our financial strength and leadership position in catastrophe exposed lines of business," he continued. "In the wake of these catastrophes, we expect to see significant opportunities across the board, especially in these lines, for the 2006 renewal season".

"In addition, we are pleased to announce a strategic initiative that will augment our underwriting capacity to take advantage of these opportunities. XL has agreed in principle to enter into a quota share reinsurance treaty with a newly formed reinsurance company. This company will be funded with $500 million to $1 billion of dedicated capital from its parent holding company, which, in turn, will be owned by a group of institutional investors. The lead investor in this company is expected to be investment funds managed by an alternative asset manager with which XL has had a long-standing relationship. XL will not be an equity investor in this new company. Under this agreement, XL expects to cede to this company specified portions of XL's property catastrophe and retrocessional lines of business. We believe that this treaty will reinforce XL's leadership position in these lines of business, reduce our volatility, provide incremental earnings, and therefore maximize our shareholders' risk adjusted return."

For the nine months ended September 30, 2005, net loss to ordinary shareholders was $470.4 million, or a loss of $3.39 per ordinary share, compared with net income of $838.2 million or $6.05 per ordinary share for the nine months of 2004. "Net loss excluding net realized gains and losses"(1) for the first nine months ended September 30, 2005 was $667.2 million or a loss of $4.81 per ordinary share as compared with "net income excluding net realized gains and losses"(1) of $621.3 million or $4.49 per ordinary share for the first nine months of 2004.

Total net invested assets were $37.2 billion, up 15% from December 31, 2004, and total assets were $54.9 billion, up 11% from December 31, 2004.

Segment Highlights:

Insurance Operations

Underwriting loss for the quarter ended September 30, 2005 was $625.7 million as compared with a loss of $85.9 million in the quarter ended September 30, 2004. These results included the net impact of third quarter catastrophes of $751.0 million and $200.0 million, respectively. See attached table for further details.

Third quarter 2005 as compared with third quarter 2004 results excluding the impact of catastrophes in both quarters:


    -- Gross premiums written were down slightly, due to competitive market
       pressure in most lines of business partially offset by growth in excess
       casualty lines.
    -- Net premiums written were $916.0 million, up 1.9%, due primarily to
       increased net retentions.
    -- Net premiums earned decreased, reflecting the earned impact of
       decreasing premium rates over the last twelve months.
    -- The combined ratio was 88.5%, a 3.5 point improvement, largely due to
       lower acquisition expenses from reduced brokerage costs and a lower
       loss ratio.  The loss ratio was 63.6%, an improvement of 1.4 points,
       due mainly to prior year net reserve strengthening in 2004.

Reinsurance Operations

General Operations - Underwriting loss for the quarter ended September 30, 2005 was $738.2 million as compared with a loss of $76.6 million in the quarter ended September 30, 2004. These results included the net impact of third quarter catastrophes of $802.3 million and $245.9 million, respectively. See attached table for further details.

Third quarter 2005 as compared with third quarter 2004 results excluding the impact of catastrophes in both quarters:


    -- Gross and net premiums written were up 13.9% and 11.5%, respectively
       driven primarily by timing differences, reported last quarter, on
       assumed and ceded premiums related to two large contracts.
    -- Net premiums earned were down 10.6% representing lower net premiums
       written over the last twenty four months.
    -- The combined ratio was 89.1% as compared with 79.5%, due mainly to a
       higher loss ratio. The loss ratio increased primarily due to the impact
       of relatively lower premium rates together with other non
       catastrophe losses.

Life and Annuity Operations -- Gross premiums written increased 3.8% as a result of continued growth in the term assurance business. Net income was $11.2 million, an increase of $6.9 million from the third quarter of 2004.

Financial Products and Services Operations

Total contribution and underwriting income for the segment were $51.3 million and $1.7 million, respectively, in the third quarter 2005 as compared with a $0.3 million contribution and $29.6 million underwriting loss in the third quarter of 2004. Underwriting profit in the third quarter of 2005 included a $21.4 million net loss from Hurricane Katrina that arose from the XL Financial Solutions business. Total contribution in the third quarter of 2005 was driven largely by favorable performance in the quarter in XL Financial Solutions' structured finance business and the year over year increase in net invested assets related to municipal GIC and funding agreement issuances.

Corporate Items

Net investment income from general operations increased 17% over the third quarter of 2004 to $184.1 million principally due to a higher investment base and yields. Net income from investment affiliates increased to $56.7 million as compared with $5.2 million in the third quarter of 2004, due primarily to strong performance in the alternative fund affiliates. Net realized gains on investments were $53.2 million in the quarter, compared with $57.0 million in the prior year period. Net unrealized gains on investments, net of tax, were $551.6 million at September 30, 2005 compared with $819.2 million at June 30, 2005 primarily reflecting the increase in overall interest rates in the quarter.

Total operating expenses in the quarter were $262.3 million compared with $271.9 million in the third quarter of 2004. The third quarter of 2005 and 2004 effective tax rates reflect the limited deductibility of the catastrophe losses.

The Company will host a conference call to discuss its third quarter 2005 results on November 1, 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 XL1101. The webcast will be available on XL's website located at http://www.xlgroup.com and will be archived on XL's website from approximately 1:00 p.m. Eastern time on November 1, 2005 through midnight Eastern time on November 30, 2005. A slide presentation accompanying the Company's discussion of its third quarter 2005 results will also be available on the Company's Web site located at http://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 November 1, 2005 until approximately 8:00 p.m. Eastern time on November 8, 2005 by dialing (201) 612-7415 (account number: 290 and conference I.D. number: 156740). An unaudited financial supplement relating to the Company's third quarter 2005 results is available on its website located at http://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 September 30, 2005, XL Capital Group Ltd had consolidated assets of approximately $54.9 billion and consolidated shareholders' equity of approximately $7.0 billion. More information about XL Capital Ltd is available at http://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) changes in the size of XL's claims relating to the hurricane losses described above due to the preliminary nature of some of the reports and estimates of loss and damage to date, (b) 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; (c) 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; (d) trends in rates for property and casualty insurance and reinsurance; (e) developments in the world's financial and capital markets that adversely affect the performance of XL's investments or access to such markets; (f) changes in general economic conditions, including foreign currency exchange rates, inflation and other factors; and (g) 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)

    Income Statement
     Data:                    Three Months Ended       Nine Months Ended
                                (September 30            (September 30
                                (Unaudited)               (Unaudited)
                             2005         2004        2005           2004
                                        (Note 1)                   (Note 1)
    Revenues:
    Gross premiums
     written:
       - general
         operations       $ 2,184,571  $ 2,006,523  $ 7,477,187   $7,570,127

       - life and annuity
         operations            96,870       93,326    2,130,627    1,171,509

       - financial operations  99,437       77,393      262,834      247,904


    Net premiums written:
       - general operations 1,411,482    1,400,514    5,719,206    5,937,033

       - life and annuity
         operations            87,762       92,928    2,102,026    1,169,985

       - financial operations  95,557       70,862      248,572      234,188



    Net premiums earned:
       - general operations 1,655,329    1,862,748    5,149,159    5,282,209

       - life and annuity
         operations            87,964       93,111    2,102,650    1,171,849

       - financial operations  56,761       70,383      160,448      175,101

    Net investment income     366,692      268,045    1,042,298      747,538

    Net realized gains
     on investments            53,223       57,015      203,949      181,115

    Net realized and
     unrealized gains
     (losses) on
     derivatives               17,982      (3,827)       15,219       34,814

    Net income from
     investment affiliates     56,735        5,218      116,473       76,680

    Fee income and other        1,621       10,811       15,733       25,870

    Total revenues        $ 2,296,307  $ 2,363,504  $ 8,805,929   $7,695,176

    Expenses:
    Net losses and loss
     expenses incurred    $ 2,590,969  $ 1,629,938  $ 4,995,737   $3,714,036

    Claims and policy
     benefits                 142,957      128,004    2,289,248    1,253,411

    Acquisition costs         296,018      341,010      901,400      965,688

    Operating expenses        262,315      271,852      758,421      764,869

    Exchange losses (gains)     5,159     (27,837)        5,388     (22,648)

    Interest expense           89,748       83,048      275,800      192,418

    Amortization of
     intangible assets          2,668        3,256        8,504        9,770

    Total expenses        $ 3,389,834  $ 2,429,271  $ 9,234,498   $6,877,544


    Net (loss) income
     before minority interest,
     income tax and net
     income from
     operating
     affiliates          $(1,093,527)    $(65,767)   $(428,569)    $ 817,632


    Minority interest
     in net income of
     subsidiary                2,411        1,097        6,765        8,041

    Income tax               (47,338)       13,975       47,312       82,126

    Net (income) from
     operating affiliates     (9,479)    (113,391)     (42,525)    (141,019)


    Net (loss) income    $(1,039,121)      $32,552   $(440,121)    $ 868,484

    Preference share
     dividends               (10,080)     (10,081)     (30,240)     (30,240)

    Net (loss) income
     available to ordinary
     shareholders        $(1,049,201)     $22,471    $(470,361)    $838,244

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)

    Income Statement Data
     (continued):           Three Months Ended        Nine Months Ended
                              September 30              September 30
                           2005         2004         2005         2004
                                      (Note 1)                  (Note 1)

    Weighted average
     number of ordinary
     shares and ordinary
     share equivalents :

        Basic:             139,266      138,043      138,823      137,800

        Diluted:           139,266      138,932      138,823      138,511


    Per Share Data:
    Net (loss) income
     available to ordinary
     shareholders          ($7.53)        $0.16      ($3.39)        $6.05


    Ratios -           - General
     insurance and
     reinsurance
     operations
    Loss ratio              154.6%        83.4%        95.9%        68.5%

    Expense ratio            27.6%        27.3%        26.3%        27.4%


    Combined ratio          182.2%       110.7%       122.2%        95.9%

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
                                        September 30, 2005   December 31, 2004
                                            (Unaudited)          (Note 1)



    Total investments available for
     sale                                   $32,429,517          $27,823,828

    Net payable for investments
     purchased                                  182,929              273,535

    Cash and cash equivalents                 2,150,609            2,304,303

    Investments in affiliates                 2,078,582            1,936,852

    Unpaid losses and loss expenses           7,604,187            6,971,356
    recoverable

    Total assets                             54,860,110           49,245,469


    Unpaid losses and loss expenses          22,664,845           19,837,669

    Deposit liabilities and policy           13,329,834           10,309,782
     benefit
    reserves

    Unearned premiums                         5,869,857            5,191,368

    Notes payable and debt                    2,722,162            2,721,431

    Total shareholders' equity                7,039,300            7,738,695

    Book value per ordinary share                $46.41               $51.98

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



                                  XL Capital Ltd
      SUMMARY OF FINANCIAL IMPACT OF THIRD QUARTER NATURAL CATASTROPHES
                          (U.S. dollars in millions)

    Qtr ended
     September
     30, 2005       Gross    Reinsurance        Net  Reinstatement  Net Impact
                     Loss     recoveries       loss     premium       pre tax
    Insurance
     Hurricane
     Katrina     $1,096.0       $598.9       $497.1     $(70.3)     $567.4
     Hurricane
      Rita          285.1        151.1        134.0      (11.1)      145.1
     Other
      catastrophes
      (Note 1)       40.2          1.7         38.5           -       38.5
                 $1,421.3       $751.7       $669.6     $(81.4)     $751.0
    Reinsurance
     Hurricane
      Katrina    $1,080.0       $439.7       $640.3       $11.5     $628.8
      Hurricane
       Rita         198.5         68.9        129.6         3.9      125.7
      Other
      catastrophes
      (Note 1)       51.2           --         51.2         3.4       47.8
                 $1,329.7       $508.6       $821.1       $18.8     $802.3
    Financial
     products and
     services
    Hurricane
     Katrina        $21.4          $--        $21.4         $--      $21.4

    TOTAL - Pre tax
     Hurricane
     Katrina     $2,197.4     $1,038.6     $1,158.8     $(58.8)   $1,217.6
     Hurricane
      Rita          483.6        220.0        263.6       (7.2)      270.8
     Other
     catastrophes
     (Note 1)        91.4          1.7         89.7         3.4       86.3
                 $2,772.4     $1,260.3     $1,512.1     $(62.6)   $1,574.7

    Tax impact                                                      $100.3
    TOTAL - Post
     tax                                                          $1,474.4


    Qtr ended
     September 30,
     2004

    Insurance
     (Note 2)      $272.0        $84.0       $188.0     $(12.0)     $200.0

    Reinsurance
    (Note 2)       $284.2        $25.4       $258.8       $12.9     $245.9

    TOTAL - Pre
    tax            $556.2       $109.4       $446.8       $ 0.9     $445.9

    Tax impact                                                       $25.7
    TOTAL - Post tax                                                $420.2


    

Notes 1. Includes Hurricanes Dennis, Emily and Ophelia, European and Mumbai floods and Typhoon Mawar

    2. Includes Hurricanes Charley, Frances, Ivan and Jeanne.



                                 XL Capital Ltd.
        SUMMARY OF FINANCIAL IMPACT OF THIRD QUARTER NATURAL CATASTROPHES
                           (U.S. dollars in millions)

    GENERAL       Quarter ended September 30,    Quarter ended September 30,
     OPERATIONS              2005                           2004
                                                         (Note 1.)
                 Including           Excluding  Including            Excluding
                  Cats.       Cats.    Cats.      Cats.       Cats.   Cats.

    INSURANCE
    Gross
    premiums
     written     $1,329.3    $   --  $1,329.3   $1,342.7  $     --   $1,342.7
    Net premiums
     written        834.6     (81.4)    916.0      886.9     (12.0)    898.9

    Net premiums
     earned         933.0     (81.4)  1,014.4    1,062.8     (12.0)  1,074.8
    Fee and
    other
     income           0.3        --       0.3        9.0        --       9.0

    Net losses
    and loss
     expenses     1,314.4     669.6     644.8      886.7     188.0     698.7
    Acquisition
     costs          119.1        --     119.1      145.1        --     145.1
    Operating
     expenses       133.6        --     133.6      145.4        --     145.4
    Exchange
    (gains)
     losses          (8.1)       --      (8.1)     (19.5)       --     (19.5)
    Underwriting
    (loss)
     profit       $(625.7)  $(751.0)   $125.3     $(85.9)  $(200.0)   $114.1

    Loss ratio     140.9 %              63.6 %     83.4 %              65.0 %
    Combined
     ratio         168.0 %              88.5 %    110.8 %              92.0 %

    REINSURANCE
    Gross
    premiums
     written       $855.3    $115.7    $739.6     $663.8     $14.5    $649.3
    Net premiums
     written        576.8      18.8     558.0      513.6      12.9     500.7

    Net premiums
     earned         722.3      18.8     703.5      799.9      12.9     787.0
    Fee and
    other
     income           0.1        --       0.1       (0.1)       --      (0.1)

    Net losses
    and loss
     expenses     1,245.3     821.1     424.2      666.2     258.8     407.4
    Acquisition
     costs          161.4        --     161.4      174.5        --     174.5
    Operating
     expenses        41.5        --      41.5       43.8        --      43.8
    Exchange
    (gains)
     losses          12.4        --      12.4       (8.1)       --      (8.1)
    Underwriting
    (loss)
     profit       $(738.2)  $(802.3)    $64.1     $(76.6)  $(245.9)   $169.3

    Loss ratio     172.4 %              60.3 %     83.3 %              51.8 %
    Combined
     ratio         200.5 %              89.1 %    110.6 %              79.5 %

    TOTAL
    Gross
    premiums
     written     $2,184.6    $115.7  $2,068.9   $2,006.5     $14.5  $1,992.0
    Net premiums
     written      1,411.4     (62.6)  1,474.0    1,400.5       0.9   1,399.6

    Net premiums
     earned       1,655.3     (62.6)  1,717.9    1,862.7       0.9   1,861.8
    Fee and
    other
     income           0.4        --       0.4        8.9        --       8.9

    Net losses
    and loss
     expenses     2,559.7   1,490.7   1,069.0    1,552.9     446.8   1,106.1
    Acquisition
     costs          280.5        --     280.5      319.6        --     319.6
    Operating
     expenses       175.1        --     175.1      189.2        --     189.2
    Exchange
    (gains)
     losses           4.3        --       4.3      (27.6)       --     (27.6)
    Underwriting
    (loss)
     profit     $(1,363.9) $(1,553.3)  $189.4    $(162.5)  $(445.9)   $283.4

    Loss ratio     154.6 %              62.2 %     83.4 %              59.4 %
    Combined
     ratio         182.2 %              88.7 %    110.7 %              86.7 %

     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 (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' (which is a non-GAAP measure, the "Exclusions") and (ii) annualized return on shareholders' equity (based on net income (loss) minus the Exclusions) to average ordinary shareholders' equity for the three and nine months ended September 30, 2005 and 2004 ($ in millions, except per share amounts):





                                Three Months Ended        Nine Months Ended
                                   September 30              September 30
                                   (Unaudited)               (Unaudited)
                                 2005          2004        2005         2004
                                            (Note 1)                 (Note 1)
    Net (loss) income
     available to
    ordinary shareholders   $(1,049.2)        $22.5     $(470.4)      $838.2

    Net realized (gains) on
    investments, net of tax     (53.8)        (56.5)     (197.7)      (177.8)

    Net realized and
     unrealized losses
    (gains) on investment
     derivatives,
    net of tax                  (14.4)         16.6        21.9         (1.0)

    Net realized and
     unrealized losses
    (gains) on credit and
     structured
    financial derivatives,
     net of tax                   2.4         (13.8)      (21.0)       (38.1)

    Net (loss) income
     excluding net
    realized gains and
     losses (Note 2)        $(1,115.0)       $(31.2)    $(667.2)      $621.3

    Per ordinary share
     results:
    Net (loss) income
     available to
    ordinary shareholders      $(7.53)        $0.16      $(3.39)       $6.05

    Net (loss) income
     excluding net
    realized gains and
     losses (Note 2)           $(8.01)       $(0.23)     $(4.81)       $4.49

    Weighted average
     ordinary shares
    outstanding:
    Basic                     139,266       138,043     138,823      137,800
    Diluted                   139,266       138,932     138,823      138,511

    Return on Ordinary
     Shareholders'
    Equity:
    Average ordinary
     shareholders'
    equity                   $7,188.0      $6,706.6    $6,871.5     $6,636.8

    Net (loss) income
     excluding net
    realized gains and
     losses (Note 2)        $(1,115.0)       $(31.2)    $(667.2)      $621.3

    Annualized net (loss)
     income
    excluding net realized
     gains and
    losses (Note 1)                NM            NM          NM       $828.4

    Annualized Return on
     Ordinary
    Shareholders' Equity -
     Net income
    excluding net realized
     gains and
    losses (Note 2)               N/A           N/A         N/A        12.5 %

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

Note 2: Defined as "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".

Comment on Regulation G

This press release contains the presentation of (i) 'net (loss) 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' 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.

(1) Defined as "net 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," herein referred to as "net loss excluding net realized gains and losses". Net loss excluding net realized gains and losses is a non-GAAP measure. See the scheduled entitled "Reconciliation" at the end of this release for a reconciliation of net loss excluding net realized gains and losses to net loss available to ordinary shareholders.

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