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XL Capital Reports Second Quarter 2006 Net Income of $377.1 Million, or $2.10 Per Ordinary Share
HAMILTON, BERMUDA - July 26, 2006
First-Half 2006 Net Income of $835.6 million, or $4.64 per ordinary share
Second Quarter Highlights
- • "Net income excluding net realized gains and losses"(1) was $375.8 million, or $2.10 per ordinary share
- • Combined ratio was 90.0%
- • Total net investment income increased 28.9% to $473.6 million
- • Contribution from financial operations was $59.9 million
- • Cash flow from operations was $726.5 million
- • Annualized return on ordinary shareholders' equity, based on "net income excluding net realized gains and losses"(1), was 18.8%
HAMILTON, Bermuda, July 26 /PRNewswire-FirstCall/ -- XL Capital Ltd(NYSE: XL) ("XL" or the "Company") today reported net income available toordinary shareholders for the quarter ended June 30, 2006 of $377.1 million,or $2.10 per ordinary share, compared with net income of $135.9 million, or$0.97 per ordinary share, for the quarter ended June 30, 2005. "Net incomeexcluding net realized gains and losses"(1) for the second quarter of 2006 was$375.8 million, or $2.10 per ordinary share, compared with $101.3 million, or$0.72 per ordinary share, for the prior year period.
Included in both net income and "net income excluding net realized gainsand losses" for the quarter ended June 30, 2005 was a prior year reservestrengthening for the Company's North American Reinsurance operations of$186.3 million, after tax. The prior year quarter also included a charge of$63.3 million, after tax, related to an increase in future policy benefitreserves and a write off of deferred acquisition costs with respect to certainnovated blocks of U.S.-based term-life mortality business.
Commenting on the current quarter results, President and Chief ExecutiveOfficer Brian M. O'Hara said: "I am pleased to report the momentum generatedwith our first quarter's record results continued in the second quarter. Ourrisk management initiatives are well under way, our underwriting results aresolid, and our investment performance is strong. The IPO of SCA, ourfinancial guaranty business, is on track. We remain committed to generatingattractive returns and XL is well positioned to take advantage of theopportunities presented by current market conditions".
For the first half of 2006, net income available to ordinary shareholderswas $835.6 million, or $4.64 per ordinary share, compared with $578.8 million,or $4.14 per ordinary share, in the first half of 2005. "Net income excludingnet realized gains and losses" for the same period was $781.4 million, or$4.34 per ordinary share, as compared with $447.8 million, or $3.20 perordinary share, in the first half of 2005.
SEGMENT HIGHLIGHTS - SECOND QUARTER 2006 VERSUS SECOND QUARTER 2005
Insurance General Operations
Underwriting profit for the quarter ended June 30, 2006 was $37.0 millioncompared with $149.9 million in the prior year period. This decrease was duemainly to a foreign exchange loss of $46.3 million in the current quarter asopposed to a gain of $34.1 million in the prior year quarter.
* Gross premiums written decreased 3.0% primarily as a result of corporate risk management initiatives. Net premiums written decreased by 0.4%, or 6.3% excluding the positive impact of a commutation of a ceded reinsurance contract of $65.1 million in the current quarter. * Net premiums earned decreased 2.4%, or 8.6% excluding the impact of the commutation premium noted above. This decrease was primarily due to lower net premiums written over the previous twelve months. * The combined ratio was 92.6%. The loss ratio excluding the impact of the commutation was 64.4%, relatively flat as compared with 64.2% in the prior year quarter.
Reinsurance General Operations
Underwriting profit for the quarter ended June 30, 2006 was $113.7 millioncompared with an underwriting loss of $104.5 million for the prior yearperiod. The prior year period included a net prior year reserve increase of$186.3 million, after tax, for the Company's North American reinsuranceoperations. In addition, there was a foreign exchange gain of $21.1 million inthe current quarter as opposed to a loss of $21.9 million in the prior yearquarter.
* Gross and net premiums written increased 15.0% and 26.5%, respectively, primarily due to certain premium adjustments of $54.7 million in the current quarter. Excluding these adjustments, the increase was 4.2% and 12.5%, respectively, with the increase in net premiums written due to lower ceded premiums in the current quarter. * Net premiums earned decreased 0.2%, including the earned impact of the above premium adjustments. Excluding these adjustments, the decrease was 6.4% reflecting the effects of lower net premiums written over the previous twenty four months. * The combined ratio was 85.9% compared with 112.2% in the prior year period, or 83.9% excluding the reserve increase related to the Company's North American reinsurance operations in the prior period, principally reflecting higher acquisition costs in the current quarter.
Reinsurance Life and Annuity Operations
Gross premiums written were $189.2 million compared with $1.9 billion inthe prior year quarter. The prior year quarter included a $1.8 billion U.K.annuity reinsurance transaction. Net income was $18.1 million as compared witha net loss of $55.9 million in the second quarter last year. The net loss inthe prior year period included a $37.4 million increase in policy benefitreserves and a $25.9 million write off of deferred acquisition costs withrespect to certain novated blocks of U.S.-based term-life mortalityreinsurance business.
Financial Products and Services Operations
Total contribution for the segment was $59.9 million, an increase of$25.3 million, driven by higher net income from financial guaranty operations,primarily as a result of net premiums earned due to early terminations ofcertain insured transactions. In addition, net income from financialaffiliates was $12.3 million as compared with a net loss of $7.4 million inthe prior year quarter. These increases were partially offset by lower netgains from structured derivatives.
Net investment income from general operations increased 24.7% from theprior year period to $261.4 million due to a continued rise in average yieldsand higher investment asset base. The prior year quarter included incomerelated to the close out of a structured credit investment of $28.6 million.Excluding this income in the prior year quarter, net investment income fromgeneral operations increased 44.3%. Net income from investment affiliates was$28.8 million in the second quarter of 2006 compared with a net loss of $10.8million in the second quarter of 2005.
Net realized losses on investments were $23.6 million in the quarter,compared with net realized gains of $90.1 million in the prior year period.Net unrealized losses on investments, net of tax, were $253.6 million at June30, 2006 compared with net unrealized gains of $103.7 million and $502.9million at March 31, 2006 and December 31, 2005, respectively. This decreaseof $357.3 million for the quarter and $756.5 million for the six months endedJune 30, 2006, was primarily due to the rise in U.S., United Kingdom and Euro-Zone interest rates during these periods.
Total operating expenses were $279.5 million in the quarter, up from$248.9 million in the prior year period. Cash flow from operations was $726.5million, as compared with $2.4 billion in the prior year quarter. The prioryear quarter included the U.K. annuity reinsurance transaction of$1.8 billion.
The Company will host a conference call to discuss its second quarter 2006results on Thursday, July 27, 2006 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 # 2458767. The webcast willbe available on XL's website located at www.xlgroup.com and will be archivedon this site from approximately 1:00 p.m. Eastern time on July 27, 2006through midnight Eastern time on August 27, 2006. A slide presentationaccompanying the Company's discussion of its second quarter results will alsobe available on the Company's website located at www.xlgroup.com beginningapproximately 15 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 July 27, 2006 until 1:00 p.m.Eastern time on August 17, 2006 by dialing (800) 642-1687 or (706) 645-9291,Conference ID #2458767. An unaudited financial supplement relating to theCompany's second 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 June 30, 2006, XL Capital Ltdhad consolidated assets of approximately $58.5 billion and consolidatedshareholders' equity of $8.5 billion. More information about XL Capital Ltd isavailable 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 other catastrophelosses in 2005; (b) greater frequency or severity of claims and loss activitythan XL's underwriting, reserving or investment practices anticipate based onhistorical experience or industry data; (c) trends in rates for property andcasualty insurance and reinsurance; (d) developments in the world's financialand capital markets that adversely affect the performance of XL's investmentsor access to such markets; (e) changes in general economic conditions,including foreign currency exchange rates, inflation and other factors; and(f) the other factors set forth in XL's most recent reports on Form 10-K, Form10-Q, and other documents on file with the Securities and Exchange Commission,as well 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 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 excluding net realized gains and losses". "Net income 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. 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) 2006 2005 2006 2005 Revenues: Gross premiums written: - general operations $1,954,437 $1,920,639 $4,995,815 $5,292,616 - life and annuity operations 189,174 1,942,748 288,816 2,033,757 - financial operations 152,570 102,450 254,063 163,397 Net premiums written: - general operations 1,546,929 1,459,704 3,989,093 4,307,724 - life and annuity operations 179,678 1,933,008 270,146 2,014,264 - financial operations 148,220 100,386 244,526 153,015 Net premiums earned: - general operations 1,701,006 1,727,561 3,367,430 3,493,830 - life and annuity operations 179,894 1,933,215 270,559 2,014,686 - financial operations 103,690 51,992 165,150 103,687 Net investment income 473,622 367,401 937,364 675,606 Net realized (losses) gains on investments (23,604) 90,055 (839) 150,726 Net realized and unrealized gains (losses) on derivatives 29,238 (47,941) 78,089 (2,763) Net income (loss) from investment affiliates 28,849 (10,774) 135,242 59,738 Fee and other income 6,630 (3,048) 19,592 14,112 Total revenues $2,499,325 $4,108,461 $4,972,587 $6,509,622 Expenses: Net losses and loss expenses incurred $1,119,561 $1,261,707 $2,216,685 $2,404,768 Claims and policy benefits 232,453 2,020,664 375,333 2,146,291 Acquisition costs 295,512 310,988 562,599 605,382 Operating expenses 279,464 248,950 541,025 496,106 Exchange losses (gains) 22,693 (10,693) 53,442 229 Interest expense 134,632 97,766 262,501 186,052 Amortization of intangible assets 420 3,043 1,515 5,836 Total expenses $2,084,735 $3,932,425 $4,013,100 $5,844,664 Net income before minority interest, income tax and net income from operating affiliates $414,590 $176,036 $959,487 $664,958 Minority interest in net income of subsidiary - 2,079 2,258 4,354 Income tax 66,437 41,776 133,073 94,650 Net (income) from operating affiliates (39,016) (13,794) (31,596) (33,046) Net income $387,169 $145,975 $855,752 $599,000 Preference share dividends (10,080) (10,080) (20,160) (20,160) Net income available to ordinary shareholders $377,089 $135,895 $835,592 $578,840 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) 2006 2005 2006 2005 Weighted average number of ordinary shares and ordinary share equivalents: Basic 178,728 138,948 179,631 138,488 Diluted 179,198 140,404 180,069 139,841 Per Share Data: Net income available to ordinary shareholders $2.10 $0.97 $4.64 $4.14 Ratios - General insurance and reinsurance operations: Loss ratio 62.0% 72.0% 62.9% 68.1% Expense ratio 28.0% 25.9% 26.9% 25.6% Combined ratio 90.0% 97.9% 89.8% 93.7% 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, 2006 December 31, 2005 (Unaudited) Total investments available for sale $36,403,324 $35,724,439 Cash and cash equivalents 2,566,768 3,693,475 Investments in affiliates 2,021,256 2,046,721 Unpaid losses and loss expenses recoverable 6,148,443 6,441,522 Total assets 58,527,353 58,454,901 Unpaid losses and loss expenses 23,733,500 23,767,672 Deposit liabilities 7,559,896 8,240,987 Future policy benefit reserves 6,069,691 5,606,461 Unearned premiums 6,372,442 5,388,996 Notes payable and debt 3,367,887 3,412,698 Total shareholders' equity 8,547,284 8,471,811 Book value per ordinary share $44.51 $44.31
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, 2006 and 2005 (U.S. dollars in millions, except pershare amounts):
Three Months Ended Six Months Ended June 30 June 30 (Unaudited) (Unaudited) 2006 2005 2006 2005 Net income available to ordinary shareholders $377.1 $135.9 $835.6 $578.8 Net realized losses (gains) on investments, net of tax 26.2 (86.2) 1.0 (143.9) Net realized and unrealized (gains) losses on investment derivatives, net of tax (25.7) 65.1 (55.3) 36.3 Net realized and unrealized (gains) losses on credit and structured financial derivatives, net of tax (1.8) (13.5) 0.1 (23.4) Net income excluding net realized gains and losses (Note 1) $375.8 $101.3 $781.4 $447.8 Per ordinary share results: Net income available to ordinary shareholders $2.10 $0.97 $4.64 $4.14 Net income excluding net realized gains and losses (Note 1) $2.10 $0.72 $4.34 $3.20 Weighted average ordinary shares outstanding: Basic 178,728 138,948 179,631 138,488 Diluted 179,198 140,404 180,069 139,841 Return on Ordinary Shareholders' Equity: Average ordinary shareholders' equity $8,001.4 $7,575.9 $7,992.0 $7,537.7 Net income excluding net realized gains and losses (Note 1) $375.8 $101.3 $781.4 $447.8 Annualized net income excluding net realized gains and losses (Note 1) $1,503.4 $405.2 $1,562.8 $895.6 Annualized Return on Ordinary Shareholders' Equity - Net income excluding net realized gains and losses (Note 1) 18.8% 5.3% 19.6% 11.9% 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 income excludingnet realized gains and losses on investments and net realized and unrealizedgains and losses on credit, structured financial and investment derivatives,net of tax' and (ii) annualized return on ordinary shareholders' equity (basedon net income minus the Exclusions) to average ordinary shareholders' equity.These items are "non-GAAP financial measures" as defined in Regulation G. Thereconciliation of such measures to the most directly comparable GAAP financialmeasures in accordance with Regulation 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 value,which include ROE.