Stamford, CT - October 23, 2007
First Nine Months of 2007 Net Income of $1.42 billion, or $7.89 per ordinary shareThird Quarter Highlights
- • "Net income excluding net realized gains and losses"(1) was a record $562.8 million, or $3.13 per ordinary share
- • Total net investment income increased 9.6% to $568.0 million
- • Combined ratio from P&C operations was 85.3%
- • Return on ordinary shareholders' equity, based on "net income excluding net realized gains and losses"(1), was 22.3% for the quarter (annualized)
- • Diluted book value per ordinary share increased to $56.29 from $54.74 at June 30, 2007
"Net income excluding net realized gains and losses"(1) for the thirdquarter of 2007 was a record $562.8 million, or $3.13 per ordinary share,compared with $468.7 million, or $2.61 per ordinary share, for the prior yearperiod. As this is the first full quarter in which the Company has accountedfor Security Capital Assurance Ltd ("SCA") as an affiliate, the Company hasamended its definition of "Net income excluding net realized gains andlosses". The definition now excludes the Company's share of net realizedgains and losses on investments, net realized and unrealized losses on credit,structured financial and investment derivatives, net of tax, for SCA and theCompany's other insurance company operating affiliates. "Net income excludingnet realized gains and losses" in prior periods has been amended to conformwith the current period presentation. There was no effect on net income as aresult of these changes.
For the first nine months of 2007, net income available to ordinaryshareholders was a record $1.42 billion, or $7.89 per ordinary share, comparedwith $1.25 billion, or $6.98 per ordinary share, in the first nine months of2006. "Net income excluding net realized gains and losses" for the same periodwas a record $1.63 billion, or $9.03 per ordinary share, as compared with$1.25 billion, or $6.95 per ordinary share, in the first nine months of 2006.
Return on ordinary shareholders' equity, based on net income was 13.0% and19.2% for the three and nine months ended September 30, 2007, respectively.Return on ordinary shareholders' equity, based on net income excluding netrealized gains and losses was 22.3% and 22.0% for the three and nine monthsended September 30, 2007, respectively.
Commenting on the current quarter results, President and Chief ExecutiveOfficer Brian M. O'Hara said: "I am proud to report that XL has againdelivered to shareholders record operating results for both the quarter andyear to date. All of our segments contributed to these excellent results. Ourinvestment operations, in the face of challenging market conditions, generatedsolid net investment income and returns from investment fund affiliates."
At September 30, 2007, diluted book value per ordinary share was $56.29,as compared to $54.74 as at June 30, 2007. Basic book value per ordinaryshare was $56.45 at September 30, 2007 as compared to $55.01 as at June 30,2007.
SEGMENT HIGHLIGHTS - THIRD QUARTER 2007 VERSUS THIRD QUARTER 2006
Insurance
Underwriting profit for the quarter ended September 30, 2007 was$129.7 million compared with $110.7 million in the prior year period. Thisincrease was due mainly to net favorable prior year development of$60.7 million, as compared to net favorable prior year development of$9.5 million in the prior year period. The increase was partially offset bylower net premiums earned of $1.01 billion compared to $1.02 billion in theprior year period.
-- Gross premiums written decreased 9.4% primarily due to competitive market conditions across most lines in the current quarter as well as continued corporate risk management initiatives. -- Net premiums written increased by 5.1% through changes in program structures and favorable pricing conditions on reinsurance purchased. -- Net premiums earned decreased marginally as a result of the earned impact of lower levels of gross premiums written in previous quarters. -- The combined ratio was 87.4% compared with 89.6% for the prior year period. The loss ratio excluding the impact of net prior year development for the current and prior year quarter was 68.7% and 63.9%, respectively.
Reinsurance
Underwriting profit for the quarter ended September 30, 2007 was$107.2 million compared with $117.0 million for the prior year period. Thedecrease is principally due to lower premiums written and earned during thequarter in comparison to the prior year period. This decrease was partiallyoffset by higher favorable net prior year development of $83.3 million ascompared with $24.3 million in the prior year quarter.
-- Gross premiums written decreased by 17.7% due primarily to certain premium adjustments in the prior year quarter, partially offset by timing differences. Excluding these items, gross premiums written decreased 8.7%. The decline in gross premiums written was due to increased retentions by cedants and competitive market conditions. -- Net premiums earned decreased 13.9% reflecting the effects of lower net premiums written throughout the year. -- The combined ratio was 81.3% compared with 82.5% in the prior year period. The loss ratio excluding the impact of net prior year development for the current and prior year quarter was 64.6% and 60.2%, respectively.
Life Operations
Gross premiums written were $140.7 million compared with $113.4 million inthe prior year quarter, principally due to growth in the core portfolio ofregular premium business and favorable foreign exchange impacts. Net incomewas $27.0 million as compared with $17.8 million in the third quarter lastyear.
Investment Operations
Net investment income from P&C operations, excluding investment incomefrom Structured Products, increased 15.0% from the prior year period to$325.5 million primarily due to higher investment yields. Net income frominvestment affiliates was $69.4 million in the third quarter of 2007 comparedwith $39.4 million in the third quarter of 2006. Net income from investmentmanager affiliates increased to $23.2 million as compared to $9.1 million forthe prior year period.
Total net realized losses on investments were $160.2 million in thequarter compared with net realized losses of $52.7 million in the prior yearperiod. This includes charges for other-than-temporary impairment of$110.9 million primarily related to the deterioration in the credit markets.Most of these losses were borne by our Other Financial Lines operations,representing our muni-GIC and funding agreement businesses which areinherently more exposed to events in the credit markets. Net realized losseson derivatives were $58.2 million compared to a gain in the prior year periodof $0.6 million. Net unrealized losses on investments, net of tax, were$452.2 million at September 30, 2007 compared with net unrealized losses of$309.9 million and net unrealized gains of $410.4 million at June 30, 2007 andDecember 31, 2006, respectively. The increase in net unrealized losses of$142.3 million for the quarter and $862.6 million for the nine months endedSeptember 30, 2007, was substantially due to widening credit spreads oncorporate and structured credit investments, partially offset by the effect ofdeclining U.S., U.K. and Euro-zone government interest rates. The Company hasalso posted on its web-site Structured Credit data to provide detail on itsexposures as at September 30, 2007.
Other Items
During the quarter, the Company repurchased 2.3 million ordinary shares atan average price of $76.66 per share. Year to date, the Company hasrepurchased 13.2 million ordinary shares at an average price of $75.76 pershare. As at September 30, 2007, there were 179.7 million ordinary sharesissued and outstanding. The Company redeemed its Series A preference shareson August 14, 2007 and declared its first dividend on the Series E preferenceshares of $38.64 per share or $38.6 million payable October 15, 2007.
Total operating expenses were $270.5 million, a decrease from$276.4 million in the quarter ended September 30, 2006. The decrease is due tooperating expenses of SCA included in the prior year quarter, partially offsetby higher compensation costs for business development and performance-basedprograms, and the impact of foreign exchange.
Foreign exchange gains were $26.2 million compared with a loss of$21.9 million in the prior year quarter.
The Company will host a conference call to discuss its third quarter 2007results on Wednesday, October 24, 2007 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(877) 422-4657 or (706) 679-0474, Conference ID# 15842595. 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 October 24, 2007through midnight Eastern Time on November 26, 2007. A slide presentationaccompanying the Company's discussion of its third 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 pm. Eastern Time on October 24, 2007 until midnight EasternTime on November 14, 2007 by dialing (800) 642-1687 or (706) 645-9291,Conference ID #15842595. An unaudited financial supplement relating to theCompany's third 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 September 30, 2007, XL Capital Ltd had consolidatedassets of $60.9 billion and consolidated shareholders' equity of$11.4 billion. More information about XL Capital Ltd is available atwww.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, net realized and unrealized gains and losses on credit,structured financial and investment derivatives, net of tax, for the Companyand its share of these items for Security Capital Assurance Ltd ("SCA") andthe Company's other insurance company operating affiliates, herein referred toas "net income excluding net realized gains and losses". "Net income excludingnet realized gains and losses" is a non-GAAP measure. See the scheduleentitled "Reconciliation" at the end of this release for a reconciliation ofnet income/loss excluding net realized gains and losses to net incomeavailable to ordinary shareholders.
XL Capital Ltd SUMMARY CONSOLIDATED FINANCIAL DATA (U.S. dollars in thousands) Three Months Ended Nine Months Ended Income Statement Data: September 30 September 30 (Unaudited) (Unaudited) 2007 2006 2007 2006 Revenues: (Note 1) (Note 1) Gross premiums written: - P&C operations $1,793,738 $2,048,842 $6,692,216 $7,034,357 - Life operations 140,694 113,371 588,930 479,813 - Financial operations - 85,570 156,983 272,307 Net premiums written: - P&C operations 1,256,118 1,271,732 5,158,658 5,247,069 - Life operations 129,353 103,306 556,778 450,465 - Financial operations - 100,478 130,445 281,747 Net premiums earned: - P&C operations 1,583,343 1,688,687 4,832,163 5,078,254 - Life operations 147,239 120,922 534,086 431,469 - Financial operations - 45,455 85,682 148,480 Net investment income 567,987 518,281 1,688,294 1,455,645 Net realized (losses) on investments (160,208) (52,656) (132,620) (53,495) Net realized and unrealized (losses) gains on derivative instruments (58,162) 611 (41,233) 78,700 Net income from investment affiliates 69,435 39,370 255,414 174,612 Fee and other income 3,653 3,494 11,639 23,086 Total revenues $2,153,287 $2,364,164 $7,233,425 $7,336,751 Expenses: Net losses and loss expenses incurred $920,564 $1,025,740 $2,857,299 $3,229,249 Claims and policy benefits 195,440 170,455 662,883 558,964 Acquisition costs 253,077 260,877 811,049 823,476 Operating expenses 270,540 276,425 857,595 817,450 Exchange (gains) losses (26,204) 21,943 19,965 75,385 Interest expense 151,018 150,388 458,504 412,889 Amortization of intangible assets 420 420 1,260 1,935 Total expenses $1,764,855 $1,906,248 $5,668,555 $5,919,348 Net income before minority interest, income tax and net income from operating affiliates $388,432 $457,916 $1,564,870 $1,417,403 Minority interest in net income of subsidiary - 8,355 23,994 10,613 Income tax 58,715 43,655 192,758 176,728 Net (income) from operating affiliates (41,919) (19,964) (140,640) (51,560) Net income $371,636 $425,870 $1,488,758 $1,281,622 Preference share dividends (43,661) (10,081) (66,530) (30,241) Net income available to ordinary shareholders $327,975 $415,789 $1,422,228 $1,251,381 Note 1: Certain amounts in 2006 have been reclassified to conform with the current period presentation XL Capital Ltd SUMMARY CONSOLIDATED FINANCIAL DATA (Shares in thousands, except per share amounts) Three Months Ended Nine Months Ended Income Statement Data (continued): September 30 September 30 (Unaudited) (Unaudited) 2007 2006 2007 2006 (Note 1) (Note 1) Weighted average number of ordinary shares and ordinary share equivalents: Basic 178,788 178,818 178,886 178,662 Diluted 179,781 179,439 180,340 179,298 Per Share Data: Net income available to ordinary shareholders $1.82 $2.32 $7.89 $6.98 Ratios - P&C operations: Loss ratio 58.1% 60.4% 59.1% 63.4% Expense ratio 27.2% 26.3% 28.1% 26.4% Combined ratio 85.3% 86.7% 87.2% 89.8% Note 1: Certain amounts in 2006 have been reclassified to conform with the current 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 September 30, 2007 December 31, 2006 (Unaudited) (Note 1) Total investments available for sale $38,638,635 $39,350,983 Cash and cash equivalents 3,185,239 2,223,748 Investments in affiliates 3,429,614 2,308,781 Unpaid losses and loss expenses recoverable 4,840,071 5,027,772 Total assets 60,888,314 59,308,870 Unpaid losses and loss expenses 23,014,994 22,895,021 Deposit liabilities 8,682,988 7,857,827 Future policy benefit reserves 6,870,922 6,476,057 Unearned premiums 5,371,645 5,652,897 Notes payable and debt 2,866,399 3,368,376 Total shareholders' equity 11,431,791 10,131,166 Diluted book value per ordinary share $56.29 $53.01 Basic book value per ordinary share $56.45 $53.12 Note 1: Certain amounts in 2006 have been reclassified to conform with the current 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' for the Company and its share of these items for SCA and the Company'sother insurance company operating affiliates (which is a non-GAAP measure, the"Exclusions") and (ii) annualized return on ordinary shareholders' equity(based on net income (loss) minus the Exclusions) to average ordinaryshareholders' equity for the three and nine months ended September 30, 2007and 2006 (U.S. dollars in millions, except per share amounts):
Three Months Ended Nine Months Ended September 30 September 30 (Unaudited) (Unaudited) 2007 2006 2007 2006 (Note 1) (Note 1) Net income available to ordinary shareholders $328.0 $415.8 $1,422.2 $1,251.4 Net realized losses (gains) on investments, net of tax 153.1 50.6 118.6 51.5 Net realized and unrealized (gains) losses on investment derivatives, net of tax 55.9 2.4 31.6 (52.9) Net realized and unrealized (gains) losses on credit and structured financial derivatives, net of tax 4.1 (0.6) 28.4 (0.5) Net realized and unrealized (gains) losses on investments and derivatives of SCA and the Company's other insurance company operating affiliates 21.7 0.5 28.3 (3.9) Net income excluding net realized gains and losses (Note 2) $562.8 $468.7 $1,629.1 $1,245.6 Per ordinary share results: Net income available to ordinary shareholders $1.82 $2.32 $7.89 $6.98 Net income excluding net realized gains and losses (Note 2) $3.13 $2.61 $9.03 $6.95 Weighted average ordinary shares outstanding: Basic 178,788 178,818 178,886 178,662 Diluted 179,781 179,439 180,340 179,298 Return on Ordinary Shareholders' Equity: Average ordinary shareholders' equity $10,074.4 $8,518.1 $9,878.9 $8,480.4 Net income excluding net realized gains and losses (Note 2) $562.8 $468.7 $1,629.1 $1,245.6 Annualized net income excluding net realized gains and losses (Note 2) $2,251.2 $1,874.8 $2,172.1 $1,660.8 Annualized Return on Ordinary Shareholders' Equity - Net income excluding net realized gains and losses (Note 2) 22.3% 22.0% 22.0% 19.6% Note 1: Certain amounts in 2006 have been reclassified to conform with the current period presentation Note 2: Defined as "net income excluding net realized gains and losses on investments, net realized and unrealized gains and losses on credit, structured financial and investment derivatives, net of tax of the Company and its share of these items for SCA and the Company's other insurance company operating affiliates."
Comment on Regulation G
This press release contains the presentation of (i) net income (loss)excluding net realized gains and losses on investments, net realized andunrealized gains and losses on credit, structured financial and investmentderivatives, net of tax, for the Company and its share of these items for SCAand the Company's other insurance company operating affiliates (the"Exclusions") and (ii) annualized return on ordinary shareholders' equity(based on net income minus the Exclusions) to average ordinary shareholders'equity. These items are "non-GAAP financial measures" as defined inRegulation G. The reconciliation of such measures to the most directlycomparable GAAP financial measures in accordance with Regulation G is includedabove.
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, net realized and unrealized gains and losses on credit,structured financial and investment derivatives, net of tax for the Companyand its share of these items for SCA and the Company's other insurance companyoperating affiliates'. Investment derivatives include all derivatives enteredinto by XL other than weather and energy and credit derivatives (discussedfurther below).
Although the investment of premiums to generate income (or loss) andrealized capital gains (or losses) is an integral part of XL's operations, andof those of SCA and the Company's other insurance company operatingaffiliates, the determination to realize capital gains (or losses) isindependent of the underwriting process. In addition, under applicable GAAPaccounting requirements, losses can be created as the result of other-than-temporary declines in value without actual realization. In this regard,certain users of XL's financial information, including certain ratingagencies, evaluate earnings before tax and capital gains to understand theprofitability of the recurring sources of income without the effects of thesetwo variables. Furthermore, these users believe that, for many companies, thetiming of the realization of capital gains is largely opportunistic and are afunction of economic and interest rate conditions. In addition, with respectto credit derivatives, because XL and its insurance company operatingaffiliates generally hold financial guaranty contracts written in creditdefault derivative form to maturity, the net effects of the changes in fairvalue of these credit derivatives are excluded (similar with other companiesin the financial guarantee business) as the changes in fair value each quarterare not indicative of underlying business performance. Unlike these creditderivatives, XL's weather and energy derivatives are actively traded (i.e.,they are not held to maturity) and are, therefore, not excluded from netincome as any gains or losses from this business are considered by managementwhen 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 (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 agenciesthat follow XL (and the insurance industry as a whole) exclude these itemsfrom their analyses for the same reasons and they request that XL provide thisnon-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, forthe Company and its share of these items for SCA and the Company's otherinsurance company operating affiliates (the "Exclusions"), is a widely usedmeasure of any company's profitability. Annualized return on average ordinaryshareholders' equity (minus the Exclusions) is calculated by dividingannualized net income minus the Exclusions for any period by the average ofthe opening and closing ordinary shareholders' equity. The Company establishestarget ROE's for its total operations, segments and lines of business. If theCompany's ROE return targets are not met with respect to any line of businessover time, the Company seeks to re-evaluate these lines. In addition, theCompany's compensation of its senior officers is significantly dependant onthe achievement of the Company's performance goals to enhance shareholdervalue which include ROE.
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