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XL Capital Reports Record First Quarter 2007 Net Income of $549.7 Million, or $3.06 Per Ordinary Share
HAMILTON, BERMUDA - April 24, 2007
First Quarter 2007 Highlights
- • "Net income excluding net realized gains and losses"1 was a record $543.4 million, or $3.03 per ordinary share
- • Total net investment income for the quarter increased to $553.1 million
- • Net income from investment and operating affiliates was $176.0 million
- • The Company repurchased 3.17 million ordinary shares at an average price of $69.82 per share in connection with the recently announced share repurchase program
- • Return on ordinary shareholders' equity, based on "net income excluding net realized gains and losses"1, was 22.4% for the quarter (annualized)
- • Book value per ordinary share increased 3.4% to $54.95, which includes the impact of the shares repurchased
HAMILTON, BERMUDA, April 24, 2007 -- XL Capital Ltd ("XL" or the "Company") (NYSE: XL) today("XL" or the "Company") XL today reported net income available toordinary shareholders for the quarter ended March 31, 2007 of $549.7 million,or $3.06 per ordinary share, compared with net income of $458.5 million, or$2.56 per ordinary share, for the quarter ended March 31, 2006. Net incomefor the quarter ended March 31, 2007 included pre-tax, net losses fromWindstorm Kyrill ("Kyrill") of $55.0 million, which is lower than theCompany's previously announced estimated range of between $60 million and$75 million. After taking into account net reinstatement premiums and taxeffects, the net income impact of this event was $42.0 million. "Net incomeexcluding net realized gains and losses"(1) for the first quarter of 2007 was$543.4 million, or $3.03 per ordinary share, compared with "net incomeexcluding net realized gains and losses" of $405.5 million, or $2.26 perordinary share, for the prior year period.
1Defined 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, herein referred to as "net income/loss excluding net realized gains and losses". "Net income/loss 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.
At March 31, 2007, net book value per ordinary share was $54.95 ascompared with $53.12 at December 31, 2006.
Commenting on these results, President and Chief Executive Officer BrianM. O'Hara said: "This quarter's excellent results reflect our drive to delivervalue for our shareholders. Underwriting results in Insurance were strong andReinsurance results were solid despite losses from Windstorm Kyrill. Ourother segments continued their positive contributions and our affiliatesgenerated outstanding returns again."
SEGMENT HIGHLIGHTS - FIRST QUARTER 2007 VERSUS FIRST QUARTER 2006
Underwriting profit for the quarter ended March 31, 2007 was$107.3 million compared with $64.7 million in the prior year period. Thecurrent quarter included a foreign exchange loss of $7.3 million as comparedwith a loss of $30.7 million in the prior year quarter. These resultsincluded pre-tax, net losses related to Kyrill of $10.0 million.
* Gross premiums written decreased marginally by 0.3%. An increase in long term agreements and favorable foreign exchange movements was offset by modest rate reductions on certain long tail lines and reduced property exposures. Net premiums written increased by 6% primarily due to higher retentions in certain long tail lines and changes in business mix. * Net premiums earned increased 0.7% reflecting higher net premiums written in prior periods. * The loss ratio was 61.4% as compared with 65.7%. The current quarter included favorable net prior year development of $20.2 million as opposed to adverse net prior year development of $11.6 million in the prior year quarter. * The underwriting expense ratio was 27.7% as compared with 25.8% due mainly to an increase in compensation costs arising from investments in new business activities.
Effective January 1, 2007, there was an internal change in executiveresponsibility for a block of European life, accident and health business("LAH"), which moved from Reinsurance to Life operations. To assistcomparability, prior period segment results have been re-presented to reflectthis change.
Underwriting profit for the quarter ended March 31, 2007, was$19.9 million compared with $82.9 million for the prior year period. Thecurrent quarter included a foreign exchange loss of $16.6 million as opposedto a loss of $3.4 million in the prior year quarter. These results alsoincluded pre-tax, net losses related to Kyrill of $45.0 million. After takinginto account reinstatement premiums for this event, the net impact on theunderwriting profit of the Reinsurance segment was a loss of $39.0 million.
* Gross and net premiums written decreased 3.8% and 6.8% respectively, reflecting increased retentions by cedants and segment cycle management activities resulting in certain contract cancellations and reduced share participations. This was partially offset by timing adjustments mainly on two large contracts. Excluding these timing adjustments, net premiums written were down approximately 11.0%. * Net premiums earned decreased 14.5% reflecting the effects of lower net premiums written in the current and prior periods. * The loss ratio was 63.8% compared with 61.3% in the prior year period. The current quarter included pre-tax, net losses related to Kyrill of $45.0 million offset by favorable net prior year development of $53.6 million. The prior year quarter included adverse net prior year development of $6.7 million. * The underwriting expense ratio increased to 29.2% in the current quarter from 25.2% in the prior year quarter, principally driven by higher operating expenses on a lower net premium earned base and additional acquisition costs.
Prior period segment results have been re-presented to reflect theinternal change in executive responsibility for the block of European LAHbusiness noted above.
Gross premiums written were $213.3 million for the current quarter, anincrease of 24.2% from the prior year quarter primarily due to new business,further growth on existing treaties and favorable foreign exchange movements.Net income from life operations was $23.1 million as compared with$18.2 million in the prior year quarter primarily reflecting growth inoperations.
* Financial lines
Total contribution from the segment was $56.8 million for the currentquarter as compared with $36.0 million in the prior year quarter. During thecurrent quarter, the settlement of a contract arbitration resulted in grossand net premiums written and earned of $16.8 million and additional incurredlosses of $9.1 million. Income from investment and financial affiliatesincreased to $16.6 million from $6.4 million. The prior year quarter includeda loss reserve on a structured finance transaction.
Net income for the segment before equity minority interest was$37.3 million for the current quarter compared with $22.8 million in the prioryear quarter. The current quarter included a 37% equity minority interestcharge of $13.8 million. Higher gross premiums written versus the prior yearquarter were due primarily to an increase in the power and utilities businessand a mix of upfront business. Net premiums earned increased over the prioryear quarter due to the growth of in-force policies. Net investment incomeincreased primarily from a higher asset base following the initial publicoffering in August 2006, but this was partially offset by higher operatingexpenses reflecting the additional costs of being a public company.
Net investment income from general operations was $313.4 million in thequarter, an increase of 20.4% from the prior year quarter. This increase wasdue primarily to a continued rise in average yields and a higher investmentasset base.
Total net income from investment affiliates was $118.9 million in thequarter compared with $106.4 million in the prior year quarter, due to strongreturns in the alternative portfolio and continued contribution from privateinvestments. In addition, net income from investment manager affiliates was$37.4 million in the current quarter compared with a net loss of $9.4 millionin the prior year quarter.
Net realized gains on investments were $9.3 million in the current quartercompared with $22.8 million in the prior year quarter. Net unrealized gainson investments, net of tax, were $305.6 million and $410.5 million, at March31, 2007 and December 31, 2006 respectively. This decline is primarily due tothe effect of the rising UK interest rates on the long duration UK Sterling-denominated life portfolio.
Total operating expenses were $280.5 million in the quarter, up from$261.6 million in the prior year quarter. The increase was due mainly to anincrease in compensation costs related to business development andperformance-based programs.
The Company received net proceeds of $983.8 million related to the issueof Series E Perpetual Non-Cumulative Preference Ordinary Shares in March 2007.In addition to the share repurchase program, the proceeds will be used forgeneral corporate purposes, in particular, to refinance debt and othercomponents of the Company's capital structure. During the quarter, theCompany repurchased 3.17 million ordinary shares at an average price of$69.82 per share.
The Company will host a conference call to discuss its first quarter 2007results on Wednesday, April 25, 2007 at 10:00 a.m. Eastern time. Theconference call can be accessed through a listen-only dial-in number orthrough a live webcast. To listen to the conference call, please dial(877) 422-4657 or (706) 679-0474, Conference ID# 2785039. The webcast will beavailable on XL's website located at www.xlgroup.com and will be archived onthis site from approximately 1:00 p.m. Eastern time on April 25, 2007 throughmidnight Eastern time on May 25, 2007. A slide presentation accompanying theCompany's discussion of its first quarter 2007 results will also be availableon the Company's website located at www.xlgroup.com beginning approximately15 minutes before the commencement of the conference call.
A telephone replay of the conference call will be available beginning atapproximately 1:00 p.m. Eastern time on April 25, 2007 until midnight Easterntime on May 16, 2007 by dialing (800) 642-1687 or (706) 645-9291, ConferenceID # 2785039. An unaudited financial supplement relating to the Company'sfirst quarter 2007 results is available on its website located atwww.xlgroup.com.
XL Capital Ltd, through its operating subsidiaries, is a leading providerof insurance and reinsurance coverages and financial products and services toindustrial, commercial and professional service firms, insurance companies andother enterprises on a worldwide basis. As of March 31, 2007, XL Capital Ltdhad consolidated assets of approximately $62.1 billion and consolidatedshareholders' equity of $11.3 billion. More information about XL Capital Ltdis available at www.xlgroup.com.
This press release contains forward-looking statements. Statements thatare not historical facts, including statements about XL's beliefs, plans orexpectations, are forward-looking statements. These statements are based oncurrent plans, estimates, and expectations. Actual results may differmaterially from those included in such forward-looking statements andtherefore you should not place undue reliance on them. A non-exclusive list ofthe important factors that could cause actual results to differ materiallyfrom those in such forward-looking statements includes the following:(a) greater frequency or severity of claims and loss activity than XL'sunderwriting, reserving or investment practices anticipate based on historicalexperience or industry data; (b) trends in rates for property and casualtyinsurance and reinsurance; (c) developments in the world's financial andcapital markets that adversely affect the performance of XL's investments oraccess to such markets; (d) changes in general economic conditions, includingforeign currency exchange rates, inflation and other factors; and (e) theother 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, aswell as management's response to any of the aforementioned factors. XLundertakes no obligation to update or revise publicly any forward-lookingstatement, whether as a result of new information, future developments orotherwise.
XL Capital Ltd SUMMARY CONSOLIDATED FINANCIAL DATA (U.S. dollars in thousands) Three Months Ended Income Statement Data: March 31 2007 2006 Revenues: (Note 1) Gross premiums written: - general operations $ 2,911,364 $ 2,969,260 - life operations 213,275 171,760 - financial operations 147,886 101,493 Net premiums written: - general operations 2,357,322 2,370,808 - life operations 202,938 161,824 - financial operations 125,410 96,306 Net premiums earned: - general operations 1,566,093 1,648,453 - life operations 146,994 108,636 - financial operations 77,957 61,460 Net investment income 553,092 463,742 Net realized gains on investments 9,292 22,765 Net realized and unrealized gains on derivatives 7,741 48,851 Net income from investment affiliates 118,936 106,393 Fee and other income 3,337 12,962 Total revenues $ 2,483,442 $ 2,473,262 Expenses: Net losses and loss expenses incurred $994,787 $ 1,088,505 Claims and policy benefits 188,343 151,499 Acquisition costs 259,951 267,087 Operating expenses 280,503 261,561 Exchange losses 23,569 30,749 Interest expense 142,791 127,869 Amortization of intangible assets 420 1,095 Total expenses $ 1,890,364 $ 1,928,365 Net income before minority interest, income tax and net income from operating affiliates $ 593,078 $ 544,897 Minority interest in net income of subsidiary 14,898 2,258 Income tax 72,755 66,636 Net (income) loss from operating affiliates (57,082) 7,420 Net income $ 562,507 $ 468,583 Preference share dividends (12,789) (10,080) Net income available to ordinary shareholders $ 549,718 $ 458,503 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 Income Statement Data (continued): March 31 2007 2006 (Note 1) Weighted average number of ordinary shares and ordinary share equivalents: Basic 178,772 178,424 Diluted 179,601 179,158 Per Share Data: Net income available to ordinary shareholders $3.06 $2.56 Ratios - General insurance and reinsurance operations: Loss ratio 62.2% 64.1% Expense ratio 28.2% 25.6% Combined ratio 90.4% 89.7% 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 March 31, 2007 December 31, 2006 (Note 1) Total investments available for sale $39,795,888 $39,350,983 Cash and cash equivalents 3,370,799 2,223,748 Investments in affiliates 2,571,862 2,308,781 Unpaid losses and loss expenses recoverable 4,876,126 5,027,772 Total assets 62,065,100 59,308,870 Unpaid losses and loss expenses 22,806,023 22,895,021 Deposit liabilities 8,029,059 7,857,827 Future policy benefit reserves 6,522,699 6,476,057 Unearned premiums 6,650,972 5,652,897 Notes payable and debt 3,368,615 3,368,376 Minority interest in equity of consolidated subsidiaries 563,082 562,121 Total shareholders' equity 11,312,547 10,131,166 Book value per ordinary share $54.95 $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 netrealized gains and losses on investments and net realized and unrealized gainsand losses on credit, structured financial and investment derivatives, net oftax' (which is a non-GAAP measure, the "Exclusions") and (ii) annualizedreturn on ordinary shareholders' equity (based on net income (loss) minus theExclusions) to average ordinary shareholders' equity for the three monthsended March 31, 2007 and 2006.
(U.S. dollars in millions, except per share amounts) Three Months Ended March 31 2007 2006 Net income (loss) available to ordinary shareholders $ 549.7 $ 458.5 Net realized losses (gains) on investments, net of tax (13.0) (25.3) Net realized and unrealized (gains) losses on investment derivatives, net of tax (4.7) (29.6) Net realized and unrealized (gains) losses on credit and structured financial derivatives, net of tax 11.4 1.9 Net income excluding net realized gains and losses (Note 1) $ 543.4 $ 405.5 Per ordinary share results: Net income available to ordinary shareholders $ 3.06 $ 2.56 Net income excluding net realized gains and losses (Note 1) $ 3.03 $ 2.26 Weighted average ordinary shares outstanding: Basic 178,772 178,424 Diluted 179,601 179,158 Return on Ordinary Shareholders' Equity: Average ordinary shareholders' equity $ 9,704.4 $ 7,963.7 Net income excluding net realized gains and losses (Note 1) $ 543.4 $ 405.5 Annualized net income excluding net realized gains and losses (Note 1) $ 2,173.6 $ 1,622.1 Annualized Return on Ordinary Shareholders' Equity - Net income excluding net realized gains and losses (Note 1) 22.4% 20.4% Note 1: 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 income (loss)excluding net realized gains and losses on investments and net realized andunrealized gains and losses on credit, structured financial and investmentderivatives, net of tax' and (ii) annualized return on ordinary shareholders'equity (based on net income (loss) minus the Exclusions) to average ordinaryshareholders' equity. These items are "non-GAAP financial measures" asdefined in Regulation G. The reconciliation of such measures to the mostdirectly comparable GAAP financial measures in accordance with Regulation G isincluded above.
XL presents its operations in the way it believes will be most meaningfuland useful to investors, analysts, rating agencies and others who use XL'sfinancial information in evaluating XL's performance. This presentationincludes the use of 'net income/loss excluding net realized gains and losseson investments and net realized and unrealized gains and losses on credit,structured financial and investment derivatives, net of tax'. Investmentderivatives include all derivatives entered into by XL other than weather andenergy and credit derivatives (discussed further below).
Although the investment of premiums to generate income (or loss) andrealized capital gains (or losses) is an integral part of XL's operations, thedetermination to realize capital gains (or losses) is independent of theunderwriting process. In addition, under applicable GAAP accountingrequirements, losses can be created as the result of other than temporarydeclines in value without actual realization. In this regard, certain usersof XL's financial information, including certain rating agencies, evaluateearnings before tax and capital gains to understand the profitability of therecurring sources of income without the effects of these two variables.Furthermore, these users believe that, for many companies, the timing of therealization of capital gains is largely opportunistic and are a function ofeconomic and interest rate conditions.
In addition, with respect to credit derivatives, because XL generallyholds its financial guaranty contracts written in credit default derivativeform to maturity, the net effects of the changes in fair value of these creditderivatives are excluded (similar with other companies in the financialguarantee business) as the changes in fair value each quarter are notindicative of underlying business performance of XL's financial guarantyoperations. Unlike these credit derivatives, XL's weather and energyderivatives 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 thisbusiness are considered by management when evaluating and managing theunderlying business.
In summary, XL evaluates the performance of and manages its business toproduce an underwriting profit. In addition to presenting net income (loss),XL believes that showing net income (loss) exclusive of the items mentionedabove enables investors and other users of XL's financial information toanalyze XL's performance in a manner similar to how management of XL analyzesperformance. In this regard, XL believes that providing only a GAAPpresentation of net income (loss) makes it much more difficult for users ofXL's financial information to evaluate XL's underlying business. Also, asstated above, XL believes that the equity analysts and certain rating agenciesthat follow XL (and the insurance industry as a whole) exclude these itemsfrom their analyses for the same reasons and they request that XL provide thisnon-GAAP financial information on a regular basis.
Return on average ordinary shareholder's equity ("ROE") (minus theExclusions) is a widely used measure of any company's profitability.Annualized return on average ordinary shareholders' equity (minus theExclusions) is calculated by dividing annualized net income minus theExclusions for any period by the average of the opening and closing ordinaryshareholder's equity. XL establishes target ROE's for its total operations,segments and lines of business. If XL's ROE return targets are not met withrespect to any line of business over time, XL seeks to re-evaluate theselines. In addition, XL's compensation of its senior officers is significantlydependant on the achievement of the Company's performance goals to enhanceshareholder value which include ROE.