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XL Capital Reports Second Quarter 2007 Net Income of $544.5 Million, or $3.00 Per Ordinary Share.
HAMILTON, BERMUDA - July 24, 2007First-Half 2007 Net Income of $1.09 billion, or $6.06 per ordinary shareSecond Quarter Highlights
- • "Net income excluding net realized gains and losses"(1) was $516.2 million, or $2.84 per ordinary share
- • Total net investment income increased 19.8% to $567.2 million
- • Net income from investment and operating affiliates was $108.7 million
- • Combined ratio from P&C operations was 86.3%
- • Return on ordinary shareholders' equity, based on "net income excluding net realized gains and losses"(1), was 20.9% for the quarter (annualized)
- • Fully diluted book value per ordinary share was $54.74
Included in net realized gains and losses on investments for the quarterended June 30, 2007 is a gain of $81.3 million related to the previouslyannounced sale of 16.6% of Security Capital Assurance Ltd ("SCA") commonshares. After the sale, the Company owns approximately 46% of SCA commonshares.
Commenting on the current quarter results, President and Chief ExecutiveOfficer Brian M. O'Hara said: "XL's six consecutive quarters of excellentearnings demonstrate the advantages of our unique dual platform. Ourcontinuous improvement in risk management, commitment to disciplined growth,along with our sharpened strategic focus, have all contributed to theachievement of record results, and as we have demonstrated in this quarter,provide a solid platform for delivering shareholder value."
For the first half of 2007, net income available to ordinary shareholderswas a record $1.09 billion, or $6.06 per ordinary share, compared with$835.6 million, or $4.64 per ordinary share, in the first half of 2006. "Netincome excluding net realized gains and losses" for the same period was$1.06 billion, or $5.87 per ordinary share, as compared with $781.4 million,or $4.34 per ordinary share, in the first half of 2006.
At June 30, 2007, fully diluted book value per ordinary share was $54.74,as compared to $54.85 as at March 31, 2007. Offsetting net income for thequarter was a decrease in net unrealized gains/losses on investments of$615.5 million, due to the rise in interest rates. Basic book value perordinary share was $55.01 at June 30, 2007 as compared to $54.95 and $53.12 asat March 31, 2007 and December 31, 2006, respectively.
Segment results reflect the Company's previously announced realignment ofits operating segments. As a result, information related to prior periods hasbeen re-presented to conform to the current period presentation. There was noeffect on net income as a result of these changes.
SEGMENT HIGHLIGHTS - SECOND QUARTER 2007 VERSUS SECOND QUARTER 2006
Underwriting profit for the quarter ended June 30, 2007 was $102.2 millioncompared with $63.8 million in the prior year period. This increase was duemainly to net favorable prior year development of $43.7 million, as comparedto net adverse development of $4.8 million in the prior year.
-- Gross premiums written increased 2.1% primarily as a result of favorable foreign exchange movements and new business operations. -- Net premiums written decreased by 1.7% mainly due to the effect of commutations of ceded treaties in the prior year quarter. -- Net premiums earned increased marginally as a result of the above factors. -- The combined ratio was 90.6% compared with 94.7% for the prior year period. The loss ratio excluding the impact of net prior year development for the current and prior year quarter was 66.8% and 67.9%, respectively.
Underwriting profit for the quarter ended June 30, 2007 was $129.8 millioncompared with $81.8 million for the prior year period. The increase isprincipally due to net favorable prior year development of $80.4 million,compared to net adverse development of $3.0 million in the prior year period.The current quarter net favorable prior year development of $80.4 millionincludes $48.5 million related to property and other short-tail lines and$31.9 million related to casualty and other lines.
-- Gross premiums written decreased by 13.1% due primarily to continued increased retentions by cedants and reduced share participations on certain casualty lines as well as the impact of positive premium adjustments in the prior year quarter. -- Net premiums earned decreased 11.3% reflecting the effects of lower net premiums written in the current and prior periods. -- The combined ratio was 78.4% compared with 87.7% in the prior year period. The loss ratio excluding the impact of the net prior year development for the current and prior year quarter was 60.3% and 59.0%, respectively.
Gross premiums written were $235.0 million compared with $194.7 million inthe prior year quarter, reflecting continued growth in the underlying businessand favorable foreign exchange movements. Net income was $24.7 million ascompared with $27.7 million in the second quarter last year.
SCA's results for the quarter ended June 30, 2007 are consolidated for theperiod through the effective date of the sale. Comparative results for thequarter ended June 30, 2006 are for the full quarter. XL's share of SCA'sresults from the date of sale to June 30, 2007 are included in net income fromoperating affiliates.
Net income for the segment before equity minority interest was$23.5 million compared with $38.3 million in the prior year quarter. Thecurrent quarter included an equity minority interest charge of $9.1 million.
Net investment income from P&C operations, excluding investment incomefrom Structured Products, increased 23.6% from the prior year period to$323.0 million due to a continued rise in average yields. Net income frominvestment affiliates was $67.0 million in the second quarter of 2007 comparedwith $28.8 million in the second quarter of 2006. Net income from investmentmanager affiliates increased to $43.9 million as compared to $28.3 million forthe prior year period.
Total net realized gains on investments were $18.3 million in the quarter,or a loss of $63.0 million excluding the gain on sale of SCA shares, comparedwith net realized losses of $23.6 million in the prior year period. Netunrealized losses on investments, net of tax, were $309.9 million at June 30,2007 compared with net unrealized gains of $305.6 million and $410.5 millionat March 31, 2007 and December 31, 2006, respectively. This decrease of$615.5 million for the quarter and $720.4 million for the six months endedJune 30, 2007, was substantially due to the rise in U.S., U.K. and Euro-Zoneinterest rates during these periods.
Total operating expenses were $306.6 million in the quarter, up from$279.5 million in the prior year period. The increase was due mainly to anincrease in compensation costs related to both business developmentinitiatives and performance-based programs and the impact of foreign exchange.
During the quarter, the Company repurchased 7.7 million ordinary shares atan average price of $77.92 per share. Year to date, the Company repurchased10.9 million ordinary shares at an average price of $75.56 per share. TheCompany has approximately $177.1 million remaining from its previouslyauthorized share repurchase program.
On May 15, 2007, the Company settled the purchase contract component ofits Equity Security Units originally issued on March 23, 2004, and also boughtback all of its 2.53% Senior Notes due 2009 that formed a part thereof. Thesettlement of the purchase contracts resulted in the issuance of approximately10.8 million of the Company's ordinary shares.
On May 7, 2007, the Company issued $325 million of 6.25% Senior Notes.
The Company will host a conference call to discuss its second quarter 2007results on Wednesday, July 25, 2007 at 10:00 a.m. Eastern time. The conferencecall can be accessed through a listen-only dial-in number or through a livewebcast. To listen to the conference call, please dial (877) 422-4657 or(706) 679-0474, Conference ID# 4428219. 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 July 25, 2007 through midnight Easterntime on August 27, 2007. A slide presentation accompanying the Company'sdiscussion of its second 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 1:00 pm. Eastern time on July 25, 2007 until midnight Easterntime on August 15, 2007 by dialing (800) 642-1687 or (706) 645-9291,Conference ID # 4428219. An unaudited financial supplement relating to theCompany's second quarter 2007 results is available on its website located atwww.xlgroup.com.
XL Capital Ltd, through its operating subsidiaries, is a leading providerof global insurance and reinsurance coverages to industrial, commercial andprofessional service firms, insurance companies and other enterprises on aworldwide basis. As of June 30, 2007, XL Capital Ltd had consolidated assetsof $60.2 billion and consolidated shareholders' equity of $11.5 billion. Moreinformation about XL Capital 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)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.
(1) Defined as net income excluding net realized gains and losses oninvestments and net realized and unrealized gains and losses on credit,structured financial and investment derivatives, net of tax, herein referredto as "net income excluding net realized gains and losses". "Net incomeexcluding net realized gains and losses" is a non-GAAP measure. See theschedule entitled "Reconciliation" at the end of this release for areconciliation of net income/loss excluding net realized gains and losses tonet income available to ordinary shareholders.
XL Capital Ltd SUMMARY CONSOLIDATED FINANCIAL DATA (U.S. dollars in thousands) Three Months Ended Six Months Ended Income Statement Data: June 30 June 30 (Unaudited) (Unaudited) 2007 2006 2007 2006 Revenues: (Note 1) (Note 1) Gross premiums written: - P&C operations $1,944,186 $1,995,325 $4,898,478 $4,985,515 - Life operations 234,961 194,682 448,236 366,442 - Financial operations 52,025 106,174 156,983 186,737 Net premiums written: - P&C operations 1,504,533 1,587,270 3,902,540 3,975,337 - Life operations 224,487 185,335 427,425 347,159 - Financial operations 45,720 102,222 130,445 181,269 Net premiums earned: - P&C operations 1,651,149 1,723,231 3,248,820 3,389,567 - Life operations 239,853 201,911 386,847 310,547 - Financial operations 39,303 59,448 85,682 103,025 Net investment income 567,215 473,622 1,120,307 937,364 Net realized gains (losses) on investments 18,296 (23,604) 27,588 (839) Net realized and unrealized gains on derivative investments 9,188 29,238 16,929 78,089 Net income from investment affiliates 67,043 28,849 185,979 135,242 Fee and other income 4,649 6,630 7,986 19,592 Total revenues $2,596,696 $2,499,325 $5,080,138 $4,972,587 Expenses: Net losses and loss expenses incurred $941,948 $1,115,004 $1,936,735 $2,203,509 Claims and policy benefits 279,100 237,010 467,443 388,509 Acquisition costs 298,021 295,512 557,972 562,599 Operating expenses 306,552 279,464 587,055 541,025 Exchange losses 22,600 22,693 46,169 53,442 Interest expense 164,695 134,632 307,486 262,501 Amortization of intangible assets 420 420 840 1,515 Total expenses $2,013,336 $2,084,735 $3,903,700 $4,013,100 Net income before minority interest, income tax and net income from operating affiliates $583,360 $414,590 $1,176,438 $959,487 Minority interest in net income of subsidiary 9,096 0 23,994 2,258 Income tax 61,288 66,437 134,043 133,073 Net (income) from operating affiliates (41,639) (39,016) (98,721) (31,596) Net income $554,615 $387,169 $1,117,122 $855,752 Preference share dividends (10,080) (10,080) (22,869) (20,160) Net income available to ordinary shareholders $544,535 $377,089 $1,094,253 $835,592
Note 1: Certain amounts in 2006 have been reclassified to conform with thecurrent period presentation
XL Capital Ltd SUMMARY CONSOLIDATED FINANCIAL DATA (Shares in thousands, except per share amounts) Three Months Ended Six Months Ended Income Statement Data (continued): June 30 June 30 (Unaudited) (Unaudited) 2007 2006 2007 2006 (Note 1) (Note 1) Weighted average number of ordinary shares and ordinary share equivalents: Basic 178,378 178,728 178,650 179,631 Diluted 181,613 179,198 180,570 180,069 Per Share Data: Net income available to ordinary shareholders $3.00 $2.10 $6.06 $4.64 Ratios - P&C operations: Loss ratio 56.9% 64.6% 59.6% 64.8% Expense ratio 29.4% 27.3% 28.6% 26.5% Combined ratio 86.3% 91.9% 88.2% 91.3%
Note 1: Certain amounts in 2006 have been reclassified to conform with thecurrent 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 June 30, 2007 December 31, 2006 (Unaudited) (Note 1) Total investments available for sale $38,461,012 $39,350,983 Cash and cash equivalents 2,744,352 2,223,748 Investments in affiliates 3,150,499 2,308,781 Unpaid losses and loss expenses recoverable 4,745,898 5,027,772 Total assets 60,196,683 59,308,870 Unpaid losses and loss expenses 22,689,706 22,895,021 Deposit liabilities 8,496,507 7,857,827 Future policy benefit reserves 6,700,987 6,476,057 Unearned premiums 5,659,415 5,652,897 Notes payable and debt 2,868,226 3,368,376 Total shareholders' equity 11,522,046 10,131,166 Fully diluted book value per ordinary share $54.74 $53.01 Basic book value per ordinary share $55.01 $53.12 Note 1: Certain amounts in 2006 have been reclassified to conform with thecurrent 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 and sixmonths ended June 30, 2007 and 2006 (U.S. dollars in millions, except pershare amounts):
Three Months Ended Six Months Ended June 30 June 30 (Unaudited) (Unaudited) 2007 2006 2007 2006 Net income available to ordinary shareholders $544.5 $377.1 $1,094.3 $835.6 Net realized losses (gains) on investments, net of tax (21.5) 26.2 (34.7) 1.0 Net realized and unrealized (gains) losses on investment derivatives, net of tax (19.7) (25.7) (24.3) (55.3) Net realized and unrealized (gains) losses on credit and structured financial derivatives, net of tax 12.9 (1.8) 24.3 0.1 Net income excluding net realized gains and losses (Note 1) $516.2 $375.8 $1,059.6 $781.4 Per ordinary share results: Net income available to ordinary shareholders $3.00 $2.10 $6.06 $4.64 Net income excluding net realized gains and losses (Note 1) $2.84 $2.10 $5.87 $4.34 Weighted average ordinary shares outstanding: Basic 178,378 178,728 178,650 179,631 Diluted 181,613 179,198 180,570 180,069 Return on Ordinary Shareholders' Equity: Average ordinary shareholders' equity $9,899.8 $8,001.4 $9,809.1 $7,992.0 Net income excluding net realized gains and losses (Note 1) $516.2 $375.8 $1,059.6 $781.4 Annualized net income excluding net realized gains and losses (Note 1) $2,064.8 $1,503.2 $2,119.2 $1,562.8 Annualized Return on Ordinary Shareholders' Equity - Net income excluding net realized gains and losses (Note 1) 20.9% 18.8% 21.6% 19.6%
Note 1: Defined as "net income excluding net realized gains and losses oninvestments 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' (the "Exclusions") and (ii) annualized return onordinary shareholders' equity (based on net income minus the Exclusions) toaverage ordinary shareholders' equity. These items are "non-GAAP financialmeasures" as defined in Regulation G. The reconciliation of such measures tothe most directly comparable GAAP financial measures in accordance withRegulation G is included 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,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 creditderivatives, because XL generally holds its financial guaranty 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 guaranty 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.