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XL Capital Reports Record First Quarter 2006 Net Income of $458.5 Million, Resulting in $2.56 Per Ordinary Share
HAMILTON, BERMUDA - April 25, 2006
- • Record net income excluding net realized gains and losses(1) of $405.5 million, resulting in earnings of $2.26 per ordinary share
- • Combined ratio was 89.6%
- • Net investment income increased 50% to $463.7 million
- • Record net income from investment affiliates was $106.4 million
- • Contribution from financial operations was $64.5 million
- • Cash flow from operations was $555.0 million
- • Annualized return on ordinary shareholders' equity, based on net income excluding net realized gains and losses, was 20.4%
HAMILTON, Bermuda, April 25, 2006 /PRNewswire-FirstCall via COMTEX News Network/ -- XL Capital Ltd(NYSE: XL) ("XL" or the "Company") today reported net income available toordinary shareholders for the quarter ended March 31, 2006 of $458.5 million,or $2.56 per ordinary share, compared with net income of $442.9 million, or$3.18 per ordinary share, for the quarter ended March 31, 2005. Net incomeexcluding net realized gains and losses(1) for the first quarter of 2006 was$405.5 million, or $2.26 per ordinary share, compared with $346.5 million, or$2.49 per ordinary share, for the prior year period.
Commenting on these results, President and Chief Executive Officer BrianM. O'Hara said: "As we enter our twentieth year, I am pleased to report recordearnings for the quarter with solid results in each of our business segments,as well as very strong investment returns. Our lower P&C net premiums writtenis principally reflective of our previously announced corporate-wide riskmanagement initiatives to maximize risk-adjusted returns and the concentrationin the first quarter of European renewals that were impacted by lower propertyrates and foreign exchange movements. I believe we will see continuing robustP&C market conditions and returns as renewals proceed through the remainder ofthe year."
FIRST QUARTER 2006 SEGMENT HIGHLIGHTS (comparisons are to the prior yearquarter, unless otherwise noted):
Insurance General Operations
Underwriting profit for the quarter ended March 31, 2006 was $64.7 millioncompared with $82.0 million in the prior year period.
-- Gross and net premiums written decreased 7.1% and 9.9%, respectively as a result of a decrease in European property rates, unfavorable foreign exchange movements, lower multi-year premiums and ongoing risk management initiatives. -- Net premiums earned decreased 4.7% primarily due to the lower net premium written. -- The combined ratio was 91.5% in both quarters.
Reinsurance General Operations
Underwriting profit for the quarter ended March 31, 2006 was $84.9 millioncompared with $93.4 million for the prior year period.
-- Gross and net premiums written were down 12.5% and 17.8%, respectively primarily due to ongoing risk management initiatives and selective treaty cancellations. -- Net premiums earned were down 7.1% reflecting the effects of lower net premiums written over the previous twenty four months. -- The combined ratio was 86.6% compared with 86.9% in the prior year period.
Reinsurance Life and Annuity Operations
Gross premiums written were $99.6 million, up 9.5%. Net income was$14.1 million, an increase from $5.0 million in the prior year period in partdue to higher net investment income from an increase in the asset base.
Financial Products and Services Operations
Total contribution for the segment was $64.5 million, a decrease of$13.2 million from the prior year period. Strong performances in net premiumsearned, net spread income on structured products, and a net gain onderivatives were offset by a loss reserve on a structured finance transactionand a decrease in fee and other income. The $18.9 million net gain onderivatives was largely the result of realized gains in the weather and energyportfolio.
Net investment income from general operations increased 52.6% from theprior year period to $262.4 million due to a higher investment asset base anda rise in average yields. Net income from investment affiliates was$106.4 million in the first quarter of 2006 compared with $70.5 million in thefirst quarter of 2005 due to strong performance on the alternative and privateequity portfolios.
Net realized gains on investments were $22.8 million in the quarter,compared with $60.7 million in the prior year period. Net unrealized gains oninvestments, net of tax, were $103.7 million at March 31, 2006 compared with$502.9 million at December 31, 2005. This reduction of $399.2 millionprimarily reflected a rise in U.S., United Kingdom and Euro-Zone interestrates during the quarter.
Total operating expenses were $261.6 million in the quarter, up from$247.2 million in the prior year period. Cash flow from operations was$555.0 million, up from $270.6 million in the prior year period.
The Company will host a conference call to discuss its first quarter 2006results on Wednesday, April 26, 2006 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(706) 679-0474, password 042606. The webcast will be available on XL'swebsite located at www.xlgroup.com and will be archived on this site fromapproximately 1:00 p.m. Eastern time on April 26, 2006 through midnightEastern time on May 26, 2006. A slide presentation accompanying the Company'sdiscussion of its first quarter results will also be available on theCompany's website located at www.xlgroup.com beginning approximately 15minutes before the commencement of the conference call.
A telephone replay of the conference call will be available beginning atapproximately 11:00 a.m. Eastern time on April 26, 2006 until 11:00 p.m.Eastern time on May 26, 2006 by dialing (800) 642-1687 or (706) 645-9291,Conference ID #7311747. An unaudited financial supplement relating to theCompany's first quarter 2006 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, 2006, XL Capital Ltdhad consolidated assets of approximately $58.8 billion and consolidatedshareholders' equity of approximately $8.5 billion. More information about XLCapital Ltd is 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) changes in the size of XL's claims relating to hurricane and othercatastrophe losses in 2005; (b) greater frequency or severity of claims andloss activity than XL's underwriting, reserving or investment practicesanticipate based on historical experience or industry data; (c) trends inrates for property and casualty insurance and reinsurance; (d) developmentsin the world's financial and capital markets that adversely affect theperformance of XL's investments or access to such markets; (e) changes ingeneral economic conditions, including foreign currency exchange rates,inflation and other factors; and (f) the other factors set forth in XL's mostrecent reports on Form 10-K, Form 10-Q, and other documents on file with theSecurities and Exchange Commission, as well as management's response to any ofthe aforementioned factors. XL undertakes no obligation to update or revisepublicly any forward-looking statement, whether as a result of newinformation, future developments or otherwise.
(1) Defined as "net income excluding net realized gains and losses oninvestments and net realized and unrealized gains and losses oncredit, structured financial and investment derivatives, net of tax"herein referred to as "net income excluding net realized gains andlosses". Net income excluding net realized gains and losses is anon-GAAP measure. See the schedule entitled "Reconciliation" at theend of this release for a reconciliation of net income/loss excludingnet realized gains and losses to net income available to ordinaryshareholders.
XL Capital Ltd SUMMARY CONSOLIDATED FINANCIAL DATA (U.S. dollars in thousands) Three Months Ended Income Statement Data: March 31 (Unaudited) 2006 2005 Revenues: Gross premiums written: - general operations $3,041,378 $3,371,977 - life and annuity operations 99,642 91,009 - financial operations 101,493 60,947 Net premiums written: - general operations 2,442,164 2,848,020 - life and annuity operations 90,468 81,256 - financial operations 96,306 52,629 Net premiums earned: - general operations 1,666,424 1,766,269 - life and annuity operations 90,665 81,471 - financial operations 61,460 51,695 Net investment income 463,742 308,205 Net realized gains on investments 22,765 60,671 Net realized and unrealized gains on derivatives 48,851 45,178 Net income from investment affiliates 106,393 70,512 Fee and other income 12,962 17,160 Total revenues $2,473,262 $2,401,161 Expenses: Net losses and loss expenses incurred $1,097,124 $1,143,061 Claims and policy benefits 142,880 125,627 Acquisition costs 267,087 294,394 Operating expenses 261,561 247,156 Exchange losses 30,749 10,922 Interest expense 127,869 88,286 Amortization of intangible assets 1,095 2,793 Total expenses $1,928,365 $1,912,239 Net income before minority interest, income tax and net income from operating affiliates $544,897 $488,922 Minority interest in net income of subsidiary 2,258 2,275 Income tax 66,636 52,874 Net loss (income) from operating affiliates 7,420 (19,252) Net income $468,583 $453,025 Preference share dividends (10,080) (10,080) Net income available to ordinary shareholders $458,503 $442,945 Weighted average number of ordinary shares and ordinary share equivalents : Basic 178,424 138,035 Diluted 179,158 139,147 Per Share Data: Net income available to ordinary shareholders $2.56 $3.18 Ratios Â? General insurance and reinsurance operations Loss ratio 63.9% 64.3% Expense ratio 25.7% 25.4% Combined ratio 89.6% 89.7% 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, 2006 December 31, 2005 (Unaudited) Total investments available for sale $36,771,993 $35,724,439 Net payable for investments purchased 269,167 639,034 Cash and cash equivalents 2,262,824 3,693,475 Investments in affiliates 1,887,228 2,046,721 Unpaid losses and loss expenses recoverable 6,322,630 6,441,522 Total assets 58,755,819 58,454,901 Unpaid losses and loss expenses 23,733,585 23,767,672 Deposit liabilities 7,987,272 8,240,987 Future policy benefit reserves 5,674,221 5,606,461 Unearned premiums 6,392,319 5,388,996 Notes payable and debt 3,367,646 3,412,698 Total shareholders' equity 8,490,580 8,471,811 Book value per ordinary share $44.23 $44.31XL Capital LtdRECONCILIATION
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, 2006 and 2005 (U.S. dollars in millions, except per shareamounts):
Three Months Ended March 31 (Unaudited) 2006 2005 Net income available to ordinary shareholders $458.5 $442.9 Net realized (gains) on investments, net of tax (25.3) (57.7) Net realized and unrealized losses (gains) on investment derivatives, net of tax (29.6) (28.8) Net realized and unrealized losses (gains) on credit and structured financial derivatives, net of tax 1.9 (9.9) Net income excluding net realized gains and losses (Note 1) $405.5 $346.5 Per ordinary share results: Net income available to ordinary shareholders $2.56 $3.18 Net income excluding net realized gains and losses (Note 1) $2.26 $2.49 Weighted average ordinary shares outstanding: Basic 178,424 138,035 Diluted 179,158 139,147 Return on Ordinary Shareholders' Equity: Average ordinary shareholders' equity $7,963.7 $7,259.4 Net income excluding net realized gains and losses (Note 1) $405.5 $346.5 Annualized net income excluding net realized gains and losses (Note 1) $1,622.1 $1,386.0 Annualized Return on Ordinary Shareholders' Equity - Net income excluding net realized gains and losses (Note 1) 20.4% 19.1% Note 1: Defined as "net 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".Comment on Regulation G
This press release contains the presentation of (i) 'net (loss) incomeexcluding 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 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 excluding net realized gains and losses oninvestments and net realized and unrealized gains and losses on credit andinvestment derivatives, net of tax'. Investment derivatives include allderivatives entered into by XL other than weather and energy and creditderivatives (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 creditderivatives, because XL generally holds its financial guarantee contractswritten in credit default derivative form to maturity, the net effects of thechanges in fair value of these credit derivatives are excluded (similar withother companies in the financial guarantee business) as the changes in fairvalue each quarter are not indicative of underlying business performance ofXL's financial guarantee operations. Unlike these credit derivatives, XL'sweather and energy derivatives are actively traded (i.e., they are not held tomaturity) and are, therefore, not excluded from net income as any gains orlosses from this business are considered by management when evaluating andmanaging the underlying 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 agencieswho follow XL (and the insurance industry as a whole) exclude these items fromtheir 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 netrealized gains and losses on investments and net realized and unrealized gainsand 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 theExclusions) is calculated by dividing annualized net income minus theExclusions for any period by the average of the opening and closing ordinaryshareholder's equity. The Company establishes target ROE's for its totaloperations, segments and lines of business. If the Company's ROE returntargets are not met with respect to any line of business over time, theCompany seeks to re-evaluate these lines. In addition, the Company'scompensation of its senior officers is significantly dependant on theachievement of the Company's performance goals to enhance shareholder valuewhich include ROE.