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XL Capital Reports First Quarter 2005 Net Income of $442.9 Million, or $3.18 per Ordinary Share
HAMILTON, BERMUDA - April 26, 2005HAMILTON, Bermuda, April 26 /PRNewswire-FirstCall/ -- XL Capital Ltd(NYSE: XL) ("XL" or the "Company") today reported net income available toordinary shareholders for the quarter ended March 31, 2005 of $442.9 million,or $3.18 per ordinary share, compared with net income of $452.2 million, or$3.25 per ordinary share for the quarter ended March 31, 2004. Net incomeexcluding net realized gains and losses(1) for the first quarter of 2005 was arecord at $346.5 million, or $2.49 per ordinary share, compared with$332.5 million, or $2.39 per ordinary share, for the year ago quarter.
Commenting on XL's first quarter 2005 results, President and ChiefExecutive Officer Brian M. O'Hara said: "I am pleased to report XL deliveredone of its highest levels of net income ever this quarter and record netincome excluding net realized gains and losses. These results are a testamentto the strength of our diversified growth strategy, with solid underwritingprofitability in our insurance and reinsurance general operations,complimented by strong performances in our financial products and investmentaffiliates businesses. Annualized return on shareholders' equity, based on netincome excluding net realized gains and losses, was a very satisfactory 19.1%and book value per ordinary share increased to $52.13, despite the increase ininterest rates during the quarter."
FIRST QUARTER 2005 HIGHLIGHTS(comparisons are to the equivalent prior year period, unless noted)
- • Net premiums written from general operations increased 2% to $2.8 billion
- • The combined ratio from general operations was 89.7%
- • Losses from European storm Erwin were approximately $50 million, after-tax
- • Net investment income from general operations increased 17% to $171.9 million
- • Contribution from financial operations doubled to $77.7 million
- • Net income from investment affiliates increased 11% to $70.5 million
- • Cash flow from operations was $270.6 million, or $650.1 million including structured and spread transactions
- • Annualized return on ordinary shareholders' equity, based on net income excluding net realized gains and losses, was 19.1%
- • Total net invested assets at March 31, 2005 were $32.8 billion, up 1% from December 31, 2004
- • Total assets at March 31, 2005 were $50.9 billion, up 3% from December 31, 2004
- • Book value per ordinary share was $52.13, compared with $51.98 at December 31, 2004
FIRST QUARTER 2005 SEGMENT HIGHLIGHTSInsurance
Underwriting profit for the quarter was $82.0 million, compared with$89.9 million for the prior year period. Net premiums written of$1,280 million decreased 1%, compared with the 2004 first quarter. The lossratio of 67.0% increased 5.2 points from the prior year period and includedlosses of $6.6 million, pre-tax, from European storm Erwin, in addition tounfavorable prior year net loss development of $48.0 million, pre-tax,primarily in professional lines. The underwriting expense ratio of 24.5%decreased 3.5 points, compared with the prior year period, driven primarily bya 2.9 point decrease in the operating expense ratio, principally reflectinghigher net premiums earned.
General Operations -- Underwriting profit for the quarter was$93.4 million, compared with $101.3 million for the prior year period. Netpremiums written of $1,568 million increased 4%, compared with the 2004 firstquarter, driven primarily by a lower level of ceded premium. The loss ratiowas 60.0%, compared with 60.9% in the prior year period, and included pre-taxlosses of $45.3 million related to European storm Erwin, partially offset byfavorable prior year net loss development of $18.0 million, pre-tax, primarilyin property lines. The underwriting expense ratio increased marginally,compared with the prior year period, to 26.9%.
Life and Annuity Operations -- Income from Life and Annuity reinsuranceoperations was $5.0 million, compared with $12.8 million for the first quarterof 2004. Net premiums written of $81.3 million decreased 11%, compared withthe prior year period, primarily reflecting a higher level of ceded premiumrelated to reinsurance treaties entered into during the first quarter of 2005.Claims and policy benefits increased 9% to $125.6 million due to increasedlosses associated with certain run-off blocks of U.S. life and annuitybusiness. Net investment income increased 33% to $59.9 million, driven by a34% increase in net invested assets to $4.7 billion.
Financial Products and Services
Contribution from financial operations was $77.7 million, an increase of$39.1 million from the prior year period. Market conditions within thefinancial guaranty industry remained competitive during the quarter,contributing to a 21% decrease in net premiums written, compared with theprior year period, to $52.6 million. Underwriting profit increased$10.1 million to $33.0 million, driven primarily by a higher level of feeincome in both the Company's Financial Guaranty and Financial Solutionsbusinesses. The increase in contribution from financial operations was furtherdriven by a $11.9 million increase in results from derivatives, due primarilyto the settlement of certain weather contracts; increases of $6.4 million and$6.1 million in financial guaranty net investment income and net income fromaffiliates, respectively; and a $5.6 million decrease in structured productsoperating expenses, due primarily to lower compensation costs.
Net investment income from general operations for the quarter increased17%, compared with the 2004 first quarter, to $171.9 million driven primarilyby a 21% year-over-year increase in total net invested assets to$32.8 billion. Net income from investment affiliates increased 11% over theprior year period to $70.5 million, driven primarily by a stronger performancein private equity fund investments.
Net realized gains on investments were $60.7 million in the quarter,compared with $115.3 million in the prior year period. Net unrealized gains oninvestments, net of tax, were $428.4 million at March 31, 2005, compared with$769.5 million at December 31, 2004.
Total operating expenses were $247.2 million in the quarter, up marginallycompared with $245.3 million in the prior year period.
(1) Defined as "net income excluding net realized gains and losses oninvestments and net realized and unrealized gains and losses on creditand investment derivatives, net of tax" (herein referred to as "netincome excluding net realized gains and losses"). Net incomeexcluding net realized gains and losses is a non-GAAP measure. Seethe schedule entitled "Reconciliation" at the end of this releasefor a reconciliation of net income excluding net realized gains andlosses to net income available to ordinary shareholders.
Update on Winterthur Independent Actuarial Process
XL recently met with the independent actuary and Winterthur SwissInsurance Company ("Winterthur Swiss") with respect to the post-closingseasoning process relating to XL's acquisition of Winterthur Internationalfrom Winterthur Swiss in 2001. Based on these discussions, XL expects that theindependent actuary's report will be issued in the fourth quarter of thisyear. XL's submission would result in a net payable to XL of approximately$1.45 billion in aggregate and Winterthur Swiss' submission would result in anet payable to XL of approximately $541 million in aggregate. The independentvaluation process is a "baseball-type" process, whereby either XL's submittednumber or Winterthur Swiss' submitted number will be the actual final seasonedamount, depending upon which number is closest to the number developed by theindependent actuary.
The Company will host a conference call to discuss its first quarter 2005results on Wednesday, April 27, 2005 at 10:00 am EDT. The conference call canbe accessed through a listen-only dial-in number or through a live webcast. Tolisten to the conference call, please dial (201) 689-8320 password XL427. Thewebcast will be available on XL's website at www.xlgroup.com and will bearchived on XL's website from approximately 1:00 pm EDT on April 27, 2005through midnight EDT on May 27, 2005. A slide presentation accompanying theCompany's discussion of its first quarter 2005 results will also be availableon the Company's website at www.xlgroup.com beginning approximately 15minutes before the commencement of the conference call. A telephone replay ofthe conference call will be available beginning at 1:00 pm EDT on April 27,2005 until 8:00 pm EDT on May 4, 2005 by dialing (201) 612 7415 (accountnumber: 290 and conference ID number: 145318). An unaudited financialsupplement relating to the Company's first quarter 2005 results is availableon its website at www.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,and other enterprises on a worldwide basis. As of March 31, 2005, XL Capital GroupLtd had consolidated assets of approximately $50.9 billion and consolidatedshareholders' equity of approximately $7.8 billion. More information about XLCapital Ltd is available at www.xlgroup.com .
This document contains forward-looking statements that involve inherentrisks and uncertainties. Statements that are not historical facts, includingstatements about XL's beliefs, plans or expectations, are forward-lookingstatements. These statements are based on current plans, estimates, andexpectations. Actual results may differ materially from those included in suchforward-looking statements and therefore you should not place undue relianceon them. A non-exclusive list of the important factors that could cause actualresults to differ materially from those in such forward-looking statementsincludes the following: (a) the timely and full recoverability of reinsuranceplaced 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 othercontractual arrangements; (b) greater frequency or severity of claims and lossactivity than XL's underwriting, reserving or investment practices anticipatebased on historical experience or industry data; (c) trends in rates forproperty and casualty insurance and reinsurance; (d) developments in theworld's financial and capital markets which adversely affect the performanceof XL's investments or access to such markets; (e) changes in general economicconditions, including foreign currency exchange rates, inflation and otherfactors; and (f) the other factors set forth in XL's most recent reports onForm 10-K, Form 10-Q, and other documents on file with the Securities andExchange Commission, as well as management's response to any of theaforementioned factors. XL undertakes no obligation to update or revisepublicly any forward-looking statement, whether as a result of newinformation, future developments or otherwise.
XL Capital Ltd SUMMARY CONSOLIDATED FINANCIAL DATA (U.S. dollars in thousands) Three Months Ended Income Statement Data: March 31 (Unaudited) 2005 2004 Revenues: (Note 1) Gross premiums written: -- general operations $3,371,977 $3,419,182 -- life and annuity operations 91,009 91,664 -- financial operations 60,947 70,966 Net premiums written: -- general operations 2,848,020 2,803,744 -- life and annuity operations 81,256 90,938 -- financial operations 52,629 66,656 Net premiums earned: -- general operations 1,766,269 1,593,246 -- life and annuity operations 81,471 91,808 -- financial operations 51,695 47,748 Net investment income 308,205 239,067 Net realized gains on investments 60,671 115,337 Net realized and unrealized gains on derivatives 45,178 7,767 Net income from investment affiliates 70,512 63,493 Fee and other income 17,160 6,907 Total revenues $2,401,161 $2,165,373 Expenses: Net losses and loss expenses incurred $1,143,061 $987,258 Claims and policy benefits 125,627 115,276 Acquisition costs 294,394 277,270 Operating expenses 247,156 245,300 Exchange losses (gains) 10,922 (10,724) Interest expense 88,286 50,250 Amortization of intangible assets 2,793 3,257 Total expenses $1,912,239 $1,667,887 Net income before minority interest, income tax and net income from operating affiliates $488,922 $497,486 Minority interest in net income of subsidiary 2,275 4,660 Income tax 52,874 35,885 Net (income) from operating affiliates (19,252) (5,308) Net income $453,025 $462,249 Preference share dividends (10,080) (10,080) Net income available to ordinary shareholders $442,945 $452,169 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) Three Months Ended Income Statement Data (continued) : March 31 (Unaudited) 2005 2004 (Note 1) Weighted average number of ordinary shares and ordinary share equivalents: Basic 138,035 137,624 Diluted 139,147 139,044 Per Share Data: Net income available to ordinary shareholders $3.18 $3.25 Ratios -- General insurance and reinsurance operations Loss ratio 64.3% 61.4% Expense ratio 25.4% 27.4% Combined ratio 89.7% 88.8% 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 March 31, As at December 31, 2005 2004 (Unaudited) (Unaudited) (Note 1) Total investments available for sale $28,212,758 $27,823,828 Net payable for investments purchased 304,143 273,535 Cash and cash equivalents 2,287,562 2,304,303 Investments in affiliates 2,042,343 1,936,852 Total assets 50,867,003 49,245,469 Unpaid losses and loss expenses 19,907,703 19,837,669 Deposit liabilities and policy benefit reserves 10,623,651 10,309,782 Notes payable and debt 2,721,672 2,721,431 Total shareholders' equity 7,815,069 7,738,695 Book value per ordinary share $52.13 $51.98 Note 1: Certain amounts in prior periods have been reclassified to conform with the current year presentation.XL Capital LtdRECONCILIATION
The following is a reconciliation of the Company's (i) net income to 'netincome excluding net realized gains and losses on investments and netrealized and unrealized gains and losses on credit and investment derivativeinstruments, net of tax' (which is a non-GAAP measure, the "Exclusions") and(ii) annualized return on shareholders' equity (based on net income minus theExclusions) to average ordinary shareholders' equity for the three monthsended March 31, 2005 and 2004 (in millions, except per share amounts):
Three Months Ended March 31 (Unaudited) 2005 2004 (Note 1) Net income available to ordinary shareholders $442.9 $452.1 Net realized (gains) on investments, net of tax (57.7) (107.6) Net realized and unrealized (gains) on investment and structured financial derivative instruments, net of tax (28.8) (2.9) Net realized and unrealized (gains) on credit derivatives, net of tax (9.9) (9.1) 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 $346.5 $332.5 Per ordinary share results: Net income available to ordinary shareholders $3.18 $3.25 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 $2.49 $2.39 Weighted average ordinary shares outstanding: Basic 138.0 137.6 Diluted 139.1 139.0 Return on Ordinary Shareholders'Equity: Average ordinary shareholders' equity $7,259.4 $6,632.3 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 $346.5 $332.5 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 $1,386.0 $1,330.0 Annualized Return on Ordinary Shareholders' Equity -- 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 19.1% 20.1% Note 1: Certain amounts in prior periods have been reclassified to conform with the current year presentation.Comment on Regulation G
This press release contains the presentation of (i) 'net income excludingnet realized gains and losses on investments and net realized and unrealizedgains and losses on credit and investment derivatives, net of tax' and(ii) annualized return on ordinary shareholders' equity (based on net incomeminus the Exclusions). 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, XLbelieves that showing net income exclusive of the items mentioned aboveenables investors and other users of XL's financial information to analyzeXL'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 makes it much more difficult for users of XL'sfinancial information to evaluate XL's underlying business. Also, as statedabove, XL believes that the equity analysts and certain rating agencies whofollow 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") minus theExclusions is a widely used measure of any company's profitability. Annualizedreturn on average ordinary shareholders' equity (minus the Exclusions) iscalculated by dividing annualized net income minus the Exclusions for anyperiod by the average of the opening and closing ordinary shareholder'sequity. XL establishes target ROE's for its total operations, segments andlines of business. If XL's ROE return targets are not met with respect to anyline of business over time, the Company seeks to re-evaluate these lines. Inaddition, XL's compensation of its senior officers is significantly dependanton the achievement of performance goals to enhance shareholder value whichinclude ROE.