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XL Capital Ltd Reports Second Quarter 2005 Net Income of $135.9 Million, or $0.97 per Ordinary Share
HAMILTON, BERMUDA - July 27, 2005HAMILTON, Bermuda, July 27 /PRNewswire/ -- XL Capital Ltd ("XL" or the"Company") (NYSE: XL) today reported net income available to ordinaryshareholders for the quarter ended June 30, 2005 of $135.9 million, or $0.97per ordinary share, compared with $363.6 million, or $2.62 per ordinary share,for the quarter ended June 30, 2004. Annualized net income return on ordinaryshareholders' equity for the quarter was 7.2% compared with 21.7% for the yearago quarter.
'Net income excluding net realized gains and losses'(1) for the quarterwas $101.3 million, or $0.72 per ordinary share, compared with $319.9 million,or $2.31 per ordinary share, for the year ago quarter. Annualized return onordinary shareholders' equity on the same basis was 5.3% compared with 19.1%for the year ago quarter. See below for a reconciliation of 'net incomeexcluding net realized gains and losses on investments and net realized andunrealized gains and losses on credit, structured financial and investmentderivatives, net of tax' to net income available to ordinary shareholders.
Included in both net income and 'net income excluding net realized gainsand losses'(1) in the quarter is a charge of $63.3 million, after tax,relating to an increase in future policy benefit reserves and a write off ofdeferred acquisition costs with respect to certain novated blocks of U.S.-based term-life mortality reinsurance business. In addition, these resultsalso include the previously announced prior year reserve strengthening for theCompany's North American Reinsurance operations of $186.3 million, after tax.
Commenting on these results, President and Chief Executive Officer BrianM. O'Hara said: "While the two reserve actions in the quarter are extremelydisappointing, I am very pleased to see the strong underwriting results ofXL's underlying general insurance and reinsurance operations as reflected intheir combined ratio which, excluding the reserve increase, was 86.8%. Thisquarter we also closed a U.K. annuity reinsurance transaction whichcontributed $1.8 billion of premium and is the largest such transactionconcluded to date in our ongoing life reinsurance business. Net investmentincome increased substantially from last year's second quarter, althoughequity in investment affiliates generated a loss for the quarter.
We concluded the quarter with record book value per ordinary share of$55.95, an 8% increase from December 31, 2004, and annualized net incomereturn on ordinary shareholders' equity of 7% in the quarter and 15% for thehalf year despite the reserve charges."
For the first half of 2005, net income available to ordinary shareholderswas $578.8 million, or $4.14 per ordinary share, compared with $815.8 millionor $5.88 per ordinary share in the first half of 2004. 'Net income excludingnet realized gains and losses' for the same period was $447.8 million or $3.20per ordinary share as compared with $652.5 million or $4.71 per ordinary sharein the first half of 2004.
Second Quarter 2005 Operating Highlights (versus second quarter of 2004,unless noted):
-- Total revenues up 30% to $4.1 billion -- Combined ratio from general operations was 97.9%, or 86.8% excluding the reinsurance reserve increase -- Net investment income from general operations increased 43% to $209.7 million, of which $28.6 million was attributable to the close- out of a structured credit investment -- Cash flow from operations of $2.4 billion, or $3.2 billion including all structured and spread transactions up from $1.4 billion and $1.8 billion, respectively -- Total net invested assets of $36.4 billion, up 12% from December 31, 2004 -- Total assets of $53.3 billion, up 8% from December 31, 2004 -- Record book value per ordinary share of $55.95, up from $51.98 at December 31, 2004
Underwriting profit for the quarter was $149.9 million, an increase of 41%over the second quarter of 2004. Net premiums written were $1.1 billion, down7% from last year's second quarter, driven by market conditions in certainlines and reinsurance commutations of $78.8 million in the prior year secondquarter. The combined ratio of 88.7% represents a 1.2 point improvement overthe second quarter of 2004, primarily due to a reduction in acquisitionexpenses. The 64.2% loss ratio in the quarter was essentially flat versus64.1% in the second quarter of 2004.
General Operations - Underwriting results were negatively impacted by thepreviously announced reserve increase in XL's North American Reinsuranceoperations of $186.3 million, after tax. The combined ratio was 112.2% or83.9% excluding this reserve increase. This resulted in an underwriting lossof $104.5 million for the quarter. Net premiums written were $347.5 million,down 36% from the second quarter of 2004. Over 50% of this decrease was due totiming differences on gross and ceded premiums that negatively impacted theyear-over-year net premiums written comparison by $104.4 million. Net premiumsearned were down 7% reflecting lower net premiums written over the last twentyfour months.
Life and Annuity Operations - Net premiums written increased 96%. Thisreflects a $1.8 billion U.K. annuity reinsurance transaction in this quartercompared to a similar annuity transaction of $898 million in the secondquarter of last year. There was a $55.9 million net loss from Life and AnnuityOperations for the quarter that included a $37.4 million increase in policybenefit reserves and a $25.9 million write off of deferred acquisition costswith respect to certain novated blocks of U.S.-based term-life mortalityreinsurance business. This charge was the result of the completion of thepreviously announced actuarial review of these blocks of business. Theseblocks were not written as part of XL's ongoing life reinsurance operations.
Financial Products and Services Operations
Underwriting profit and total contribution from this segment were$8.7 million and $34.6 million, respectively, in the quarter compared with$24.9 million and $55.8 million, respectively, in the second quarter of 2004.Underwriting profit decreased mainly due to lower net earned premium andhigher net incurred losses in the financial guaranty business versus lastyear's second quarter. Contribution from financial operations also declined in2005 largely due to a $7.4 million net loss from financial affiliates and thesegment's share of the loss from investment affiliates.
Net investment income from general operations increased 43% over thesecond quarter of 2004 to $209.7 million, principally reflecting a year-over-year increase in net invested assets and the close out of a structured creditinvestment. There was a net loss from investment affiliates of $10.8 millionas compared to net income of $8.0 million in the second quarter of 2004, dueprimarily to weaker performance in the alternative investment portfolio.
Net realized gains on investments were $90.1 million in the quarter,compared with $8.8 million in the prior year period. Net unrealized gains oninvestments, net of tax, were $819.2 million at June 30, 2005 compared with$428.4 million at March 31, 2005.
Total operating expenses in the quarter of $248.9 million were generallyin line with the Company's run-rate expectation and compared with$247.7 million in the second quarter of 2004. The tax rate of 22.3% reflectsthe limited deductibility of the reserve charges taken during the secondquarter of 2005.
(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 excluding net realized gains and losses to net income available to ordinary shareholders.
The Company will host a conference call to discuss its second quarter 2005results on July 28, 2005 at 10:00 a.m. Eastern time. The conference call canbe accessed through a listen-only dial-in number or through a live webcast.To listen to the conference call, please dial (201) 689-8320 password XL728.The webcast will be available on XL's website located at www.xlgroup.com andwill be archived on XL's website from approximately 1:00 p.m. Eastern time onJuly 28, 2005 through approximately midnight Eastern time on August 29, 2005.A slide presentation accompanying the Company's discussion of its secondquarter 2005 results (including revised 2005 guidance) 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 July 28, 2005 until approximately8:00 p.m. Eastern time on August 4, 2005 by dialing (201) 612-7415 (accountnumber: 290 and conference I.D. number: 156740). An unaudited financialsupplement relating to the Company's second quarter 2005 results is availableon its website located 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 andother enterprises on a worldwide basis. As of June 30, 2005, XL Capital Ltdhad consolidated assets of approximately $53.3 billion and consolidatedshareholders' equity of approximately $8.4 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 that adversely affect the performance ofXL'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 Six Months Ended Income Statement Data: June 30 June 30 (Unaudited) (Unaudited) 2005 2004 2005 2004 Revenues: (Note 1) (Note 1) Gross premiums written: - general operations $1,920,639 $2,144,422 $5,292,616 $5,563,604 - life and annuity operations 1,942,748 986,519 2,033,757 1,078,183 - financial operations 102,450 99,545 163,397 170,511 Net premiums written: - general operations 1,459,704 1,732,775 4,307,724 4,536,519 - life and annuity operations 1,933,008 986,119 2,014,264 1,077,057 - financial operations 100,386 96,670 153,015 163,326 Net premiums earned: - general operations 1,727,561 1,826,215 3,493,830 3,419,461 - life and annuity operations 1,933,215 986,930 2,014,686 1,078,738 - financial operations 51,992 56,970 103,687 104,718 Net investment income 367,401 240,426 675,606 479,493 Net realized gains on investments 90,055 8,763 150,726 124,100 Net realized and unrealized (losses) gains on derivatives (47,941) 30,874 (2,763) 38,641 Net (loss) income from investment affiliates (10,774) 7,969 59,738 71,462 Fee income and other (3,048) 8,152 14,112 15,059 Total revenues $4,108,461 $3,166,299 $6,509,622 $5,331,672 Expenses: Net losses and loss expenses incurred $1,261,707 $1,096,840 $2,404,768 $2,084,098 Claims and policy benefits 2,020,664 1,010,131 2,146,291 1,125,407 Acquisition costs 310,988 347,408 605,382 624,678 Operating expenses 248,950 247,716 496,106 493,016 Exchange (gains) losses (10,693) 15,913 229 5,189 Interest expense 97,766 59,120 186,052 109,370 Amortization of intangible assets 3,043 3,257 5,836 6,514 Total expenses $3,932,425 $2,780,385 $5,844,664 $4,448,272 Net income before minority interest, income tax and net income from operating affiliates $176,036 $385,914 $664,958 $883,400 Minority interest in net income of subsidiary 2,079 2,284 4,354 6,944 Income tax 41,776 32,266 94,650 68,151 Net (income) from operating affiliates (13,794) (22,320) (33,046) (27,628) Net income $145,975 $373,684 $599,000 $835,933 Preference share dividends (10,080) (10,080) (20,160) (20,160) Net income available to ordinary shareholders $135,895 $363,604 $578,840 $815,773 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 Six Months Ended Income Statement Data (continued): June 30 June 30 (Unaudited) (Unaudited) 2005 2004 2005 2004 (Note 1) (Note 1) Weighted average number of ordinary shares and ordinary share equivalents: Basic : 138,948 137,655 138,488 137,568 Diluted : 140,404 138,741 139,841 138,648 Per Share Data: Net income available to ordinary shareholders $0.97 $2.62 $4.14 $5.88 Ratios - General insurance and reinsurance operations Loss ratio 72.0% 59.4% 68.1% 60.3% Expense ratio 25.9% 27.7% 25.6% 27.6% Combined ratio 97.9% 87.1% 93.7% 87.9% 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 As at June 30, 2005 December 31, 2004 (Unaudited) (Note 1) Total investments available for sale $31,448,903 $27,823,828 Net payable for investments purchased 150,842 273,535 Cash and cash equivalents 2,467,775 2,304,303 Investments in affiliates 2,044,085 1,936,852 Unpaid losses and loss expenses recoverable 6,464,019 6,971,356 Total assets 53,324,898 49,245,469 Unpaid losses and loss expenses 19,775,410 19,837,669 Deposit liabilities and policy benefit reserves 13,085,608 10,309,782 Unearned premiums 6,064,286 5,191,368 Notes payable and debt 2,721,916 2,721,431 Total shareholders' equity 8,371,676 7,738,695 Book value per ordinary share $55.95 $51.98 Note 1: Certain amounts in prior periods have been reclassified to conform with the current year presentation. XL Capital Ltd RECONCILIATION
The following is a reconciliation of the Company's (i) net income available toordinary shareholders to 'net income excluding net realized gains and losseson investments and net realized and unrealized gains and losses on credit,structured financial and investment derivatives, net of tax' (which is a non-GAAP measure, the "Exclusions") and (ii) annualized return on shareholders'equity (based on net income minus the Exclusions) to average ordinaryshareholders' equity for the three and six months ended June 30, 2005 and 2004
($ in millions, except per share amounts): Three Months Ended Six Months Ended June 30 June 30 (Unaudited) (Unaudited) 2005 2004 2005 2004 (Note 1) (Note 1) Net income available to ordinary shareholders $135.9 $363.6 $578.8 $815.8 Net realized (gains) on investments, net of tax (86.2) (13.7) (143.9) (121.3) Net realized and unrealized losses (gains) on investment derivatives, net of tax 65.1 (14.7) 36.3 (17.6) Net realized and unrealized (gains) on credit and structured financial derivatives, net of tax (13.5) (15.3) (23.4) (24.4) Net income excluding net realized gains and losses (Note 2) $101.3 $319.9 $447.8 $652.5 Per ordinary share results: Net income available to ordinary shareholders $0.97 $2.62 $4.14 $5.88 Net income excluding net realized gains and losses (Note 2) $0.72 $2.31 $3.20 $4.71 Weighted average ordinary shares outstanding: Basic 138,948 137,655 138,488 137,568 Diluted 140,404 138,741 139,841 138,648 Return on Ordinary Shareholders' Equity: Average ordinary shareholders' equity $7,575.9 $6,702.2 $7,537.7 $6,489.2 Net income excluding net realized gains and losses (Note 2) $101.3 $319.9 $447.8 $652.5 Annualized net income excluding net realized gains and losses (1) $405.2 $1,279.7 $895.6 $1,305.0 Annualized Return on Ordinary Shareholders' Equity - Net income excluding net realized gains and losses (Note 2) 5.3% 19.1% 11.9% 20.1% Note 1: Certain amounts in prior periods have been reclassified to conform with the current year presentation. Note 2: 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' (the "Exclusions") and (ii) annualized return on ordinaryshareholders' equity (based on net income minus the Exclusions). These itemsare "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 minus the Exclusions". Investment derivativesinclude all derivatives entered into by XL other than weather and energy,credit and structured financial 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 users ofXL'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 and structured financial derivatives,because XL generally holds its financial guaranty contracts written inderivative form to maturity, the net effects of the changes in fair value ofthese derivatives are excluded (similar with other companies in the financialguaranty business) as the changes in fair value each quarter are notindicative of underlying business performance of XL's financial guarantyoperations. Unlike these derivatives, XL's weather and energy derivatives areactively traded (i.e., they are not held to maturity) and are, therefore, notexcluded from net income as any gains or losses from this business areconsidered by management when evaluating and managing 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 reason and they request that XL provide this non-GAAP financial information on a regular basis.
Return on average ordinary shareholders' 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 XL's performance goals to enhance shareholdervalue which include ROE.