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XL Capital Ltd Reports Third Quarter 2004 Net Income Of $22.5 Million, Or $0.16 Per Ordinary Share

HAMILTON, BERMUDA, November 1, 2004 -- XL Capital Ltd (“XL” or the “Company”) (NYSE: XL) today reported net income available to ordinary shareholders for the quarter ended September 30, 2004 of $22.5 million, or $0.16 per ordinary share, compared with $99.0 million, or $0.71 per ordinary share, for the quarter ended September 30, 2003. Results for the 2004 third quarter include the impact of a net $420.1 million after-tax charge related to hurricane activity during the quarter.

‘Net loss 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 was $15.4 million, or a loss of $0.11 per ordinary share, compared with net income of $124.1 million, or $0.90 per ordinary share, for the year ago quarter. See below for a reconciliation of ‘net income (loss) 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.

For the nine months ended September 30, 2004, net income available to ordinary shareholders increased 22% over the year ago period to a record $838.2 million, or $6.05 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 nine month period was $622.3 million, or $4.49 per ordinary share, a decrease of 3% compared with the year ago period. Annualized return on ordinary shareholders’ equity on the same basis was 12.5%, compared with 13.3% for the nine months to September 30, 2003.

“In a quarter that witnessed unprecedented natural catastrophe activity, XL delivered solid underlying results,” commented Brian O’Hara, President and Chief Executive Officer of XL. “The combined ratio from our general operations, excluding hurricane-related losses, was 86.7% reflecting the strength of our underwriting discipline and the continued generally healthy market conditions. The combination of our global presence, diversified product expertise and ratings strength allows us to continue to see attractive market opportunities, although we have selectively reduced writings in certain lines where price competition has become aggressive.”

“Cash flow from operations, net invested assets and net investment income all recorded solid increases over year ago levels. Our affiliate investments also delivered particularly strong results in the quarter, benefiting from the IPO’s of Admiral Group and Primus Guaranty and the sale of our 30% stake in Pareto Partners. These events, combined, contributed income of $100.9 million after-tax in the quarter.”

Third Quarter 2004 Highlights (versus third quarter of 2003, unless noted):

  • Net premiums written from general operations decreased 9% to $1.4 billion
  • Combined ratio from general operations was 110.6%. Excluding hurricane-related losses, the combined ratio was 86.7%
  • Net investment income increased 33% to $253.1 million
  • Cash flow from operations was $1.1 billion, or $1.4 billion including structured and spread transactions
  • Total net invested assets were $30.3 billion, up 19% from December 31, 2003
  • Total assets of $46.8 billion, increased 15% from December 31, 2003
  • Book value per ordinary share of $49.45, increased 6% from $46.74 at December 31, 2003

SEGMENT HIGHLIGHTS:

Insurance Operations
Underwriting loss for the quarter was $83.7 million, compared with underwriting profit of $119.6 million in the prior year quarter. Net premium written increased 3% compared with the 2003 third quarter to $897.9 million, as the impacts of price decreases, the non-renewal of certain portfolios and ceded reinstatement premiums related to hurricane losses in the quarter, were offset by new business and favorable foreign exchange movement. The loss ratio increased 21.8 points, compared with the 2003 third quarter, to 83.2%, with hurricane-related net losses of $188.0 million contributing 18.3 points and prior period net reserve strengthening, relating primarily to European excess professional lines, contributing $89.0 million or 8.3 points. The underwriting expense ratio of 27.3% was essentially flat compared with the same period last year.

Reinsurance Operations
General Operations - Underwriting loss for the quarter was $78.3 million compared with a loss of $74.5 million in the 2003 third quarter. The prior year quarter included a $184 million pre-tax charge for adverse development primarily related to North American casualty reinsurance business written in the 1997-2001 period. Net premium written decreased 24% to $511.4 million compared with the 2003 third quarter, driven primarily by the timing of renewals of several large policies and the non-renewal of certain programs in Latin America. The loss ratio of 83.7% in the quarter included $258.7 million, or 31.6 points of hurricane-related losses. Excluding the impact of these hurricanes, the loss ratio was 52.1%, the lowest level recorded in this segment in XL’s history. The underwriting expense ratio decreased slightly compared with the year ago period to 27.0% from 27.9%.

Life and Annuity Operations – Income from Life and Annuity operations for the quarter more than doubled compared with the 2003 third quarter to $14.1 million. Net premiums written increased 20% to $72.7 million, due primarily to further premium generated by several term assurance treaties entered into in the fourth quarter of 2003. Net investment income increased 61% to $57.2 million driven by a 56% increase in net invested assets to $4.1 billion related to several large annuity contracts written since the third quarter of last year.

Financial Products and Services Operations
Financial Operations – Contribution in the quarter was a loss of $6.7 million, a decrease of $19.9 million compared with the 2003 third quarter. Net premiums written decreased 41% compared with the 2003 third quarter driven primarily by a lower level of large, upfront premium transactions written compared with the prior year quarter and generally more competitive market conditions. During the quarter, the Company recorded a loss on an insured project financing structure which added $41.7 million to net losses and $23.3 million to net premiums earned.

Life and Annuity Operations – Income in the quarter decreased $8.0 million compared with the prior year quarter to a loss of $4.8 million, as higher claims and policy benefits costs more than offset higher net investment income less related interest expense. The total average balance of funding agreements and municipal reinvestment contracts increased $1.7 billion compared with the 2003 third quarter to $3.1 billion.

Corporate Items
Net investment income for the quarter increased 33% over the 2003 third quarter to $253.1 million driven primarily by 28% year-over-year growth in invested assets. Net income from investment affiliates increased $21.0 million over the prior year quarter to $47.3 million, with continuing good performance in the financial results of investment managers where the Company holds minority interests, combined with a $35.4 million gain related to the sale of the Company’s 30% stake in Pareto Partners, offsetting generally weaker performance from our affiliate funds investments.

Net realized gains on investments were $57.0 million in the quarter compared with losses of $8.7 million in the third quarter of 2003. Net unrealized gains on investments, net of tax, were $488.6 million at September 30, 2004 compared with $158.6 million at June 30, 2004.

Total operating expenses in the quarter were $271.9 million, up 27% from the prior year quarter. This increase was driven primarily by costs associated with new business initiatives, the continuing build-out of the Company’s operations globally, work related to complying with Sarbanes-Oxley requirements, and the impact of foreign exchange movement.

# # #

The Company will host a conference call to discuss its third quarter 2004 results on Tuesday, November 2 at 10:00 Eastern Time. A live webcast of this call will be available at www.xlgroup.com and will be archived on XL’s website from approximately 1:00 p.m. Eastern Time on November 2, 2004 through midnight Eastern Time on December 2, 2004. A telephone replay of the conference call will be available beginning at 1:00 p.m. Eastern Time on November 2, 2004 until 8:00 p.m. Eastern Time on November 9, 2004 by dialing (201) 612-7415 (account number: 7716 and conference I.D. number: 118726). An unaudited financial supplement relating to the Company’s 2004 third quarter results is available on its website at www.xlgroup.com.

XL Capital Ltd, through its operating subsidiaries, is a leading provider of insurance and reinsurance coverages and financial products and services to industrial, commercial and professional service firms, insurance companies and other enterprises on a worldwide basis.

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) the size of XL’s claims relating to the hurricane losses described above may change due to the preliminary nature of some of the reports and estimates of loss and damage to date; (b) greater frequency or severity of claims and loss activity than XL’s underwriting, reserving or investment practices anticipate based on historical experience or industry data; (c) developments in the world’s financial and capital markets which 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. 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        Nine Months Ended
    Income Statement Data:              Sept 30                 Sept 30
                                      (Unaudited)             (Unaudited)
                                    2004       2003       2004         2003
    Revenues:
    Gross premiums written
    - general operations       $2,014,643 $2,108,611 $7,566,171    $6,954,698
    - life and annuity
      operations                   97,884     88,988  1,206,804       276,201
    - financial operations         59,605     91,642    191,282       242,674

    Net premiums written
    - general operations        1,409,287  1,543,903  5,932,776     5,295,391
    - life and annuity
      operations                   97,160     84,296  1,206,213       245,312
    - financial operations         52,748     89,585    176,932       238,047

    Net premiums earned
    - general operations        1,867,284  1,663,713  5,272,434     4,565,120
    - life and annuity
      operations                   97,378     86,428  1,208,358       249,681
    - financial operations         56,471     35,307    123,083        98,087
    Net investment income         253,076    190,763    716,599       573,218
    Net realized gains
     (losses) on investments       57,015     (8,693)   181,115        80,331
    Net realized and
     unrealized (losses) gains
     on derivative instruments    (19,587)   (28,346)    34,150       (26,110)
    Net income from investment
     affiliates                    47,283     26,240    144,392        87,344
    Fee and other income           10,811      3,920     25,870        25,989
                               $2,369,731 $1,969,332 $7,706,001    $5,653,660
         Expenses:
    Net losses and loss
     expenses incurred         $1,609,126 $1,173,558 $3,672,980    $2,996,387
    Claims and policy benefit
     reserves                     127,947     99,954  1,268,519       302,737
    Acquisition costs             341,010    323,913    965,688       862,775
    Operating expenses            271,852    213,311    764,868       597,738
    Exchange (gains) losses       (27,837)    (4,076)   (22,648)      (30,130)
    Interest expense               71,712     49,671    166,730       142,093
    Amortization of intangible
     assets                         3,256        375      9,770         1,125
                               $2,397,066 $1,856,706 $6,825,907    $4,872,725

    Net (loss) income before
     minority interest, income
     expense and net (income)
     loss from insurance
     and financial affiliates    ($27,335)  $112,626   $880,094      $780,935

    Minority interest               1,097        763      8,041         5,791
    Income tax                     10,342     14,890     76,875        45,929
    Net (income) loss from
     insurance and financial
     affiliates                   (71,326)   (12,078)   (73,307)       12,487

    Net income from operations    $32,552   $109,051   $868,485      $716,728
    Preference dividend           (10,081)   (10,080)   (30,241)      (30,241)
    Net income available to
     ordinary shareholders        $22,471    $98,971   $838,244      $686,487


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

                                            3 Months Ended    9 Months Ended
    Income Statement Data (continued):          Sept 30           Sept 30
                                              (Unaudited)       (Unaudited)
                                             2004     2003     2004     2003

       Weighted average number of
        ordinary shares and
        ordinary share equivalents:
           Basic                           138,043  136,826  137,800  136,744
           Diluted                         138,932  138,423  138,511  138,170

       Per Share Data:
       Net income available to
        ordinary shareholders                $0.16    $0.71    $6.05    $4.97

       Ratios - General Insurance and
        reinsurance operations
       Loss ratio                            83.4%    70.3%    68.5%    65.1%
       Expense ratio                         27.2%    27.7%    27.6%    27.3%

       Combined ratio                       110.6%    98.0%    96.1%    92.4%


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


                                                  As at             As at
    Balance Sheet Data:                       September 30,      December 31,
                                                  2004               2003
                                               (Unaudited)       (Unaudited)



    Total investments available for sale       $25,707,023       $20,775,256

    Net payable for investments purchased          244,051            96,571

    Cash and cash equivalents                    2,267,198         2,403,121

    Investments in affiliates                    1,987,544         1,903,341

    Total assets                                46,822,950        40,764,215


    Unpaid losses and loss expenses             18,252,435        16,558,788

    Deposit liabilities and policy
     benefit reserves                            9,208,047         7,284,179

    Notes payable and debt                       2,730,990         1,905,483

    Total shareholders' equity                   7,371,719         6,936,915

    Book value per ordinary share                   $49.45            $46.74

XL Capital Ltd
RECONCILIATION

The following is a reconciliation of the Company’s (i) net income to ‘net (loss) 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 nine months ended September 30, 2004 and 2003 (in millions, except per share amounts):


                                        Three Months Ended   Nine Months Ended
                                             Sept  30            Sept  30
                                            (Unaudited)         (Unaudited)
                                           2004      2003      2004      2003

    Net income available to ordinary
     shareholders                         $22.5     $99.0    $838.2    $686.5

    Net realized (gains) losses on
     investments, net of tax              (56.5)      7.3    (177.8)    (74.8)
    Net realized and unrealized gains
     on investment derivatives, net of
     tax                                   16.6      16.0      (1.0)      7.5

    Net realized and unrealized
     (gains) losses on credit
     derivatives, net of tax                2.0       1.8     (37.1)     23.7
    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             $(15.4)   $124.1    $622.3    $642.9

    Per ordinary share results:

    Net income available to ordinary
     shareholders                         $0.16     $0.71     $6.05     $4.97

    Net (loss) 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             $(0.11)    $0.90     $4.49     $4.65

    Weighted average ordinary shares
     outstanding:
    Basic                                 138.0     136.8     137.8     136.7
    Diluted                               138.9     138.4     138.5     138.2

    Return on Ordinary Shareholders'
     Equity:
    Average ordinary shareholders'
     equity                            $6,706.6  $6,965.8  $6,636.8  $6,467.9

    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                                 $(15.4)   $124.1    $622.3    $642.9

    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             $(61.6)   $496.4    $829.7    $857.2

    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              NM         7.1%     12.5%     13.3%

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 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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