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XL Capital Reports Third Quarter 2006 Net Income of $415.8 Million, or $2.32 Per Ordinary Share
HAMILTON, BERMUDA - October 24, 2006
First nine months 2006 Net Income of $1,251.4 million, or $6.98 per ordinary share
Third Quarter Highlights
- • "Net income excluding net realized gains and losses"(1) was a record $468.2 million, or $2.61 per ordinary share
- • Combined ratio from general operations was 86.8%
- • Total net investment income increased 41.3% to $518.3 million
- • Book value per ordinary share increased 12.1% to $49.90
- • Cash flow from operations was $800.2 million
- • Annualized return on ordinary shareholders' equity, based on "net income excluding net realized gains and losses"(1), was 22.0%
HAMILTON, Bermuda, Oct. 24 /PRNewswire-FirstCall/ -- XL Capital Ltd(NYSE: XL) ("XL" or the "Company") today reported net income available toordinary shareholders for the quarter ended September 30, 2006 of$415.8 million, or $2.32 per ordinary share, compared with a net loss of$1,049.2 million, or a net loss of $7.53 per ordinary share, for the quarterended September 30, 2005. "Net income excluding net realized gains and losses"(1) for the third quarter of 2006 was $468.2 million, or $2.61 per ordinaryshare, compared with a net loss of $1,115.0 million, or a net loss of $8.01per ordinary share, for the prior year period. Included in both net income and"net income excluding net realized gains and losses" for the quarter endedSeptember 30, 2005 was a net loss after tax of $1,474.4 million related toHurricanes Katrina, Rita and other natural catastrophes.
Commenting on the current quarter results, President and Chief ExecutiveOfficer Brian M. O'Hara said: "I am pleased to report that each of our fivebusiness segments, along with investment operations, contributed to anotherrecord quarter for XL Capital Group. Our book value rose by over 12% this quarter,and our return on equity of 22% was exceptional, demonstrating the success ofXL's risk management, underwriting and investment disciplines. I believe ourinitial public offering of SCA should put them on a very solid foundation forfuture growth and profitability. As we enter the fourth quarter of XL'stwentieth year, we remain committed to disciplined execution and maintainingthe momentum we have built for the benefit of our shareholders."
For the first nine months of 2006, net income available to ordinaryshareholders was $1,251.4 million, or $6.98 per ordinary share, compared witha net loss of $470.4 million, or a loss of $3.39 per ordinary share, in thefirst nine months of 2005. "Net income excluding net realized gains andlosses" for the same period was $1,249.5 million, or $6.97 per ordinary share,as compared with a net loss of $667.2 million, or a loss of $4.81 per ordinaryshare, in the first nine months of 2005.
SEGMENT HIGHLIGHTS - THIRD QUARTER 2006 VERSUS THIRD QUARTER 2005
Insurance General Operations
Underwriting profit for the quarter ended September 30, 2006 was$85.6 million compared with a loss of $625.7 million in the prior year periodwhich included the net impact of third quarter catastrophes of $751.0 million.See attached table for further details. In addition, the current quarterincluded a foreign exchange loss of $23.7 million as opposed to a gain of$8.1 million in the prior year quarter.
Third quarter 2006 as compared to third quarter 2005 excluding the impactof the catastrophes in the third quarter 2005:
* Gross premiums written decreased 2.9% primarily as a result of competitive market conditions for certain casualty lines and corporate risk management initiatives. Net premiums written decreased by 14.0% primarily due to higher ceded reinsurance costs in certain property lines. * Net premiums earned reflect minimal change over the prior year quarter despite lower net premiums written due mainly to the earned impact of certain reinsurance costs in the prior year quarter. * The combined ratio was 89.5% as compared with 88.5% due primarily to a higher operating expense ratio.
Reinsurance General Operations
Underwriting profit for the quarter ended September 30, 2006 was$119.6 million compared with an underwriting loss of $738.2 million for theprior year period which included the net impact of third quarter catastrophesof $802.3 million. See attached table for further details. In addition, thecurrent quarter included a foreign exchange gain of $2.4 million as opposed toa loss of $12.4 million in the prior year quarter.
Third quarter 2006 as compared to third quarter 2005 excluding the impactof the catastrophes in the third quarter 2005:
* Gross premiums written increased 2.5% primarily due to certain premium adjustments in the current quarter. Excluding these adjustments, gross premiums written is down approximately 15% due mainly to corporate risk management initiatives, the loss of one account as a result of a client merger and also selected cancellations in the casualty portfolio due to competitive market conditions. * Net premiums written decreased 11.7% or 15.3% excluding the effects of the above premium adjustments, in line with the decrease in gross premiums written. * Net premiums earned decreased 2.7% or 4.9% excluding the effects of the above premium adjustments, reflecting the effects of lower net premiums written over the previous twenty four months. * The combined ratio was 82.8% compared with 89.2% in the prior year period driven primarily by an improved current year loss ratio and a lower acquisition expense ratio.
Gross premiums written were $107.4 million, an increase of 10.9% from theprior year quarter reflecting growth in the underlying business. Net incomewas $15.2 million as compared with $11.2 million in the prior year quarter duemainly to higher net premiums earned.
* Financial lines
Total contribution for the segment was $27.8 million compared with$24.0 million in the prior year quarter. The prior year quarter included netlosses from Hurricane Katrina of $21.4 million. Gross and net premiums writtenin the current quarter were negatively impacted by the transfer of certainbusiness to Security Capital Assurance Ltd ("SCA"). The net spread income onstructured products decreased compared to the prior year quarter primarily dueto a lower interest expense in the prior year quarter related to a change inthe timing of estimated cash flows.
Net income for the segment was $20.6 million compared with $27.1 millionin the prior year quarter. The current quarter included a minority interestcharge of 37% of two months net income of SCA from the date of SCA's initialpublic offering. Net premiums earned increased 13.6% primarily due to growthin their in force book of business. Higher net investment income was partiallyoffset by an increase in operating and tax expenses.
Net investment income from general operations increased 53.7% from theprior year quarter to $282.9 million due primarily to a continued rise inaverage yields and a higher investment asset base. Net income from investmentaffiliates was $39.4 million in the third quarter of 2006 compared with $56.7million in the third quarter of 2005.
Net realized losses on investments were $52.7 million in the quarter,compared with net realized gains of $53.2 million in the prior year quarter.Net unrealized gains on investments, net of tax, were $394.5 million atSeptember 30, 2006 compared with net unrealized losses of $253.6 million atJune 30, 2006. This increase of $648.1 million for the quarter ended September30, 2006, was primarily due to the decline in U.S., United Kingdom and Euro-Zone interest rates.
Total operating expenses were $276.4 million in the quarter, up from$262.3 million in the prior year quarter. Cash flow from operations was$800.2 million, as compared with $551.7 million in the prior year quarter.
The Company will host a conference call to discuss its third quarter 2006results on Wednesday, October 25, 2006 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# 7503058. The webcast will beavailable on XL's website located at www.xlgroup.com and will be archived onthis site from approximately 1:00 p.m. Eastern time on October 25, 2006through midnight Eastern time on November 25, 2006. 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 25, 2006 until 1:00 p.m.Eastern time on November 15, 2006 by dialing (800) 642-1687 or (706) 645-9291,Conference ID # 7503058. An unaudited financial supplement relating to theCompany's third 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 September 30, 2006, XL Capital GroupLtd had consolidated assets of approximately $59.8 billion and consolidatedshareholders' equity of $9.5 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/loss 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/loss excluding net realized gains and losses". "Netincome/loss excluding net realized gains and losses" is a non-GAAP measure.See the schedule 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 Nine Months Ended Income Statement Data: September 30 September 30 (Unaudited) (Unaudited) 2006 2005 2006 2005 Revenues: Gross premiums written: - general operations $2,048,856 $2,184,571 $7,044,671 $7,477,187 - life operations 107,413 96,870 396,229 2,130,627 - financial operations 91,514 99,437 345,577 262,834 Net premiums written: - general operations 1,280,610 1,411,482 5,269,703 5,719,206 - life operations 97,604 87,762 367,750 2,102,026 - financial operations 97,302 95,557 341,828 248,572 Net premiums earned: - general operations 1,699,197 1,655,329 5,066,627 5,149,159 - life operations 97,818 87,964 368,377 2,102,650 - financial operations 58,049 56,761 223,199 160,448 Net investment income 518,281 366,692 1,455,645 1,042,298 Net realized (losses) gains on investments (52,656) 53,223 (53,495) 203,949 Net realized and unrealized gains on derivatives 611 17,982 78,700 15,219 Net income from investment affiliates 39,370 56,735 174,612 116,473 Fee and other income 3,494 1,621 23,086 15,733 Total revenues $2,364,164 $2,296,307 $7,336,751 $8,805,929 Expenses: Net losses and loss expenses incurred $1,040,167 $2,590,969 $3,256,852 $4,995,737 Claims and policy benefits 156,028 142,957 531,361 2,289,248 Acquisition costs 260,877 296,018 823,476 901,400 Operating expenses 276,425 262,315 817,450 758,421 Exchange losses 21,943 5,159 75,385 5,388 Interest expense 150,388 89,748 412,889 275,800 Amortization of intangible assets 420 2,668 1,935 8,504 Total expenses $1,906,248 $3,389,834 $5,919,348 $9,234,498 Net income (loss) before minority interest, income tax and net income from operating affiliates $457,916 $(1,093,527) $1,417,403 $(428,569) Minority interest in net income of subsidiary 8,355 2,411 10,613 6,765 Income tax 43,655 (47,338) 176,728 47,312 Net (income) from operating affiliates (19,964) (9,479) (51,560) (42,525) Net income (loss) $425,870 $(1,039,121) $1,281,622 $(440,121) Preference share dividends (10,081) (10,080) (30,241) (30,240) Net income (loss) available to ordinary shareholders $415,789 $(1,049,201) $1,251,381 $(470,361) 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) 2006 2005 2006 2005 Weighted average number of ordinary shares and ordinary share equivalents: Basic 178,818 139,266 178,662 138,823 Diluted 179,439 139,266 179,298 138,823 Per Share Data: Net income (loss) available to ordinary shareholders $2.32 ($7.53) $6.98 ($3.39) Ratios - - General insurance and reinsurance operations: Loss ratio 60.4% 154.6% 62.1% 95.9% Expense ratio 26.4% 27.6% 26.7% 26.3% Combined ratio 86.8% 182.2% 88.8% 122.2% 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, 2006 December 31, 2005 (Unaudited) Total investments available for sale $38,712,251 $35,724,439 Cash and cash equivalents 2,128,221 3,693,475 Investments in affiliates 2,112,353 2,046,721 Unpaid losses and loss expenses recoverable 5,532,054 6,441,522 Total assets 59,779,999 58,454,901 Unpaid losses and loss expenses 23,292,278 23,767,672 Deposit liabilities 8,103,553 8,240,987 Future policy benefit reserves 6,075,259 5,606,461 Unearned premiums 6,088,306 5,388,996 Notes payable and debt 3,368,132 3,412,698 Minority interest in equity of consolidated subsidiaries 549,327 74,256 Total shareholders' equity 9,523,975 8,471,811 Book value per ordinary share $49.90 $44.31 XL Capital Ltd. SUMMARY FINANCIAL IMPACT OF NATURAL CATASTROPHES IN THE THIRD QUARTER 2005 (U.S. dollars in millions) Three months ended September 30, 2005 Gross Reinsurance Net Reinstatement Net Loss recoveries loss premium impact pre tax Insurance Hurricane Katrina $1,096.0 $598.9 $497.1 $(70.3) $567.4 Hurricane Rita 285.1 151.1 134.0 (11.1) 145.1 Other catastrophes (Note 1) 40.2 1.7 38.5 -- 38.5 $1,421.3 $751.7 $669.6 $(81.4) $751.0 Reinsurance Hurricane Katrina $1,080.0 $439.7 $640.3 $11.5 $628.8 Hurricane Rita 198.5 68.9 129.6 3.9 125.7 Other catastrophes (Note 1) 51.2 -- 51.2 3.4 47.8 $1,329.7 $508.6 $821.1 $18.8 $802.3 Financial lines Hurricane Katrina $21.4 $-- $21.4 $-- $21.4 TOTAL - Pre tax Hurricane Katrina $2,197.4 $1,038.6 $1,158.8 $(58.8) $1,217.6 Hurricane Rita 483.6 220.0 263.6 (7.2) 270.8 Other catastrophes (Note 1) 91.4 1.7 89.7 3.4 86.3 $2,772.4 $1,260.3 $1,512.1 $(62.6) $1,574.7 Tax impact $100.3 TOTAL - Post tax $1,474.4 Notes 1. Includes Hurricanes Dennis, Emily and Ophelia, European and Mumbai floods and Typhoon Mawar XL Capital Ltd. SUMMARY FINANCIAL IMPACT OF NATURAL CATASTROPHES IN THE THIRD QUARTER 2005 (U.S. dollars in millions) GENERAL OPERATIONS Three months ended Three months ended September 30, 2006 September 30, 2005 Including Excluding Catastrophes Catastrophes Catastrophes Total INSURANCE Gross premiums written $1,290.8 $1,329.3 $-- $1,329.3 Net premiums written 787.9 834.6 (81.4) 916.0 Net premiums earned 1,015.0 933.0 (81.4) 1,014.4 Fee and other income 2.8 0.3 -- 0.3 Net losses and loss expenses 639.1 1,314.4 669.6 644.8 Acquisition costs 116.1 119.1 -- 119.1 Operating expenses 153.3 133.6 -- 133.6 Exchange losses (gains) 23.7 (8.1) -- (8.1) Underwriting profit (loss) $85.6 $(625.7) $(751.0) $125.3 Loss ratio 63.0% 140.9% 63.6% Combined ratio 89.5% 168.0% 88.5% REINSURANCE Gross premiums written $758.1 $855.3 $115.7 $739.6 Net premiums written 492.7 576.8 18.8 558.0 Net premiums earned 684.1 722.3 18.8 703.5 Fee and other income (0.2) 0.1 -- 0.1 Net losses and loss expenses 387.9 1,245.3 821.1 424.2 Acquisition costs 130.4 161.4 -- 161.4 Operating expenses 48.4 41.5 -- 41.5 Exchange (gains) losses (2.4) 12.4 -- 12.4 Underwriting profit (loss) $119.6 $(738.2) $(802.3) $64.1 Loss ratio 56.7% 172.4% 60.3% Combined ratio 82.8% 200.5% 89.1% TOTAL Gross premiums written $2,048.9 $2,184.6 $115.7 $2,068.9 Net premiums written 1,280.6 1,411.4 (62.6) 1,474.0 Net premiums earned 1,699.1 1,655.3 (62.6) 1,717.9 Fee and other income 2.6 0.4 -- 0.4 Net losses and loss expenses 1,027.0 2,559.7 1,490.7 1,069.0 Acquisition costs 246.5 280.5 -- 280.5 Operating expenses 201.7 175.1 -- 175.1 Exchange losses (gains) 21.3 4.3 -- 4.3 Underwriting profit (loss) $205.2 $(1,363.9) $(1,553.3) $189.4 Loss ratio 60.4% 154.6% 62.2% Combined ratio 86.8% 182.2% 88.7%
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 ninemonths ended September 30, 2006 and 2005 (U.S. dollars in millions, except pershare amounts):
Three Months Ended Nine Months Ended September 30 September 30 (Unaudited) (Unaudited) 2006 2005 2006 2005 Net income (loss) available to ordinary shareholders $415.8 $(1,049.2) $1,251.4 $(470.4) Net realized losses (gains) on investments, net of tax 50.6 (53.8) 51.5 (197.7) Net realized and unrealized (gains) losses on investment derivatives, net of tax 2.4 (14.4) (52.9) 21.9 Net realized and unrealized (gains) losses on credit and structured financial derivatives, net of tax (0.6) 2.4 (0.5) (21.0) Net income (loss) excluding net realized gains and losses (Note 1) $468.2 $(1,115.0) $1,249.5 $(667.2) Per ordinary share results: Net income (loss) available to ordinary shareholders $2.32 $(7.53) $6.98 $(3.39) Net income (loss) excluding net realized gains and losses (Note 1) $2.61 $(8.01) $6.97 $(4.81) Weighted average ordinary shares outstanding: Basic 178,818 139,266 178,662 138,823 Diluted 179,439 139,266 179,298 138,823 Return on Ordinary Shareholders' Equity: Average ordinary shareholders' equity $8,518.1 $7,188.0 $8,480.4 $6,871.5 Net income (loss) excluding net realized gains and losses (Note 1) $468.2 $(1,115.0) $1,249.5 $(667.2) Annualized net income excluding net realized gains and losses (Note 1) $1,872.6 NM $1,666.0 NM Annualized Return on Ordinary Shareholders' Equity - Net income excluding net realized gains and losses (Note 1) 22.0% N/A 19.6% N/A 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". N/M = Not Meaningful
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' and (ii) annualized return on ordinary shareholders'equity (based on net income (loss) minus the Exclusions) to average ordinaryshareholders' equity. 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,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 credit derivatives, because XL generallyholds its financial guaranty contracts written in credit default derivativeform to maturity, the net effects of the changes in fair value of these creditderivatives are excluded (similar with other companies in the financialguarantee business) as the changes in fair value each quarter are notindicative of underlying business performance of XL's financial guarantyoperations. Unlike these credit derivatives, XL's weather and energyderivatives are actively traded (i.e., they are not held to maturity) and are,therefore, not excluded from net income as any gains or losses from thisbusiness are considered by management when evaluating and managing theunderlying 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") (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 the Company's performance goals to enhanceshareholder value which include ROE.