-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, MXiCzVrp1chd/eHF4MtbE4EjPABlo55XzuaEr9D1w5TIgTyiBvz4btuYSJ8pc1oj CBSpLmLh7Jd9Uck1kbNJaA== 0000912057-00-024880.txt : 20000516 0000912057-00-024880.hdr.sgml : 20000516 ACCESSION NUMBER: 0000912057-00-024880 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20000331 FILED AS OF DATE: 20000515 FILER: COMPANY DATA: COMPANY CONFORMED NAME: XL CAPITAL LTD CENTRAL INDEX KEY: 0000875159 STANDARD INDUSTRIAL CLASSIFICATION: SURETY INSURANCE [6351] IRS NUMBER: 980058718 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-10804 FILM NUMBER: 635933 BUSINESS ADDRESS: STREET 1: CUMBERLAND HOUSE STREET 2: 1 VICTORIA ST CITY: HAMILTON HM11 BERMUD STATE: D2 BUSINESS PHONE: 4412928515 MAIL ADDRESS: STREET 1: CAHILL GORDON & REINDEL(IMMANUEL KOHN) STREET 2: 80 PINE STREET CITY: NEW YORKI STATE: NY ZIP: 10005 FORMER COMPANY: FORMER CONFORMED NAME: EXEL LTD DATE OF NAME CHANGE: 19950720 10-Q 1 FORM 10-Q - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2000 COMMISSION FILE NUMBER 1-10804 ------------------------ XL CAPITAL LTD (Exact name of registrant as specified in its charter) CAYMAN ISLANDS 98-0191089 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.)
------------------------ CUMBERLAND HOUSE, 1 VICTORIA STREET, HAMILTON, BERMUDA HM11 (Address of principal executive offices and zip code) ------------------------ (441) 292-8515 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes /X/ No / / As of May 12, 2000, there were outstanding 121,373,186 Class A Ordinary Shares, $0.01 par value per share, and 3,115,873 Class B Ordinary Shares, $0.01 par value per share, of the registrant. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- XL CAPITAL LTD INDEX TO FORM 10-Q
PAGE NO. -------- PART I. FINANCIAL INFORMATION Item 1. Financial Statements: Consolidated Balance Sheets as at March 31, 2000 and December 31, 1999 (Unaudited)............................... 3 Consolidated Statements of Income and Comprehensive Income for the Three Months Ended March 31, 2000 and 1999 (Unaudited)................................................. 4 Consolidated Statements of Shareholders' Equity for the Three Months Ended March 31, 2000 and 1999 (Unaudited)...... 5 Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2000 and 1999 (Unaudited)................... 6 Notes to Unaudited Consolidated Financial Statements........ 7 Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition.......................... 12 Item 3. Quantitative and Qualitative Disclosures about Market Risk........................................................ 20 PART II. OTHER INFORMATION Item 1. Legal Proceedings........................................... 23 Item 4. Submission of Matters to a Vote of Shareholders............. 23 Item. 6 Exhibits and Reports on Form 8-K............................ 23 Signatures............................................................ 24
2 PART I--FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS XL CAPITAL LTD CONSOLIDATED BALANCE SHEETS (U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
MARCH 31, DECEMBER 31, 2000 1999 ----------- ----------------- (UNAUDITED) A S S E T S Investments: Fixed maturities, available for sale at fair value (amortized cost: 2000, $7,925,178; 1999, $7,835,919).... $ 7,736,785 $ 7,581,151 Equity securities, at fair value (cost: 2000, $720,289; 1999, $863,020)......................................... 922,604 1,136,180 Short-term investments, at fair value (amortized cost: 2000, $543,590; 1999, $405,375)......................... 537,579 405,260 ----------- ----------------- Total investments..................................... 9,196,968 9,122,591 Cash and cash equivalents................................... 844,296 557,749 Investments in affiliates (cost: 2000, $619,070; 1999, $478,266)................................................. 628,266 479,911 Other investments........................................... 157,317 165,613 Accrued investment income................................... 130,974 111,590 Deferred acquisition costs.................................. 331,546 275,716 Prepaid reinsurance premiums................................ 322,727 217,314 Premiums receivable......................................... 1,387,103 1,126,397 Reinsurance balances receivable............................. 108,183 149,880 Unpaid losses and loss expenses recoverable................. 1,056,317 831,864 Intangible assets (accumulated amortization: 2000, $132,715; 1999, $118,663)........................................... 1,621,513 1,626,946 Deferred tax asset, net..................................... 103,533 97,928 Other assets................................................ 320,197 327,413 ----------- ----------------- Total assets.......................................... $16,208,940 $ 15,090,912 =========== ================= L I A B I L I T I E S A N D S H A R E H O L D E R S' E Q U I T Y Liabilities: Unpaid losses and loss expenses............................. $ 5,395,499 $ 5,369,402 Deposit liabilities and policy benefit reserves............. 1,076,566 837,893 Unearned premiums........................................... 1,762,022 1,497,376 Notes payable and debt...................................... 410,726 410,726 Reinsurance balances payable................................ 648,546 387,916 Net payable for investments purchased....................... 1,008,605 622,260 Other liabilities........................................... 314,177 345,738 Minority interest........................................... 17,173 42,523 ----------- ----------------- Total liabilities..................................... $10,633,314 $ 9,513,834 ----------- ----------------- Commitments and Contingencies Shareholders' Equity: Authorized, 999,990,000 ordinary shares, par value $0.01 Issued and outstanding: Class A ordinary shares (2000, 121,333,024; 1999, 124,691,541)............................................ 1,213 1,247 Class B ordinary shares (2000, 3,115,873; 1999, 3,115,873).............................................. 31 31 Contributed surplus......................................... 2,449,861 2,520,136 Accumulated other comprehensive income...................... 9,931 19,311 Deferred compensation....................................... (24,358) (28,797) Retained earnings........................................... 3,138,948 3,065,150 ----------- ----------------- Total shareholders' equity............................ $ 5,575,626 $ 5,577,078 ----------- ----------------- Total liabilities and shareholders' equity............ $16,208,940 $ 15,090,912 =========== =================
See accompanying notes to Unaudited Consolidated Financial Statements. 3 XL CAPITAL LTD CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (U.S. DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED MARCH 31 ------------------- 2000 1999 -------- -------- (UNAUDITED) Revenues: Net premiums earned....................................... $494,499 $386,753 Net investment income..................................... 128,527 135,680 Net realized gains on sales of investments................ 68,707 67,476 Equity in net income (loss) of affiliates................. 17,479 (7,307) Fee and other income...................................... 4,956 10,551 -------- -------- Total revenues.......................................... 714,168 593,153 -------- -------- Expenses: Losses and loss expenses.................................. 302,834 214,450 Acquisition costs......................................... 103,694 76,789 Operating expenses........................................ 69,276 66,368 Interest expense.......................................... 8,495 11,025 Amortization of intangible assets......................... 14,052 10,407 -------- -------- Total expenses.......................................... 498,351 379,039 -------- -------- Income before minority interest and income tax expense...... 215,817 214,114 Minority interest in net income of subsidiary............. 205 (515) Income tax (benefit) expense.............................. (8,147) 4,817 -------- -------- Net income.................................................. $223,759 $209,812 -------- -------- Change in net unrealized appreciation of investments........ (10,216) (109,681) Foreign currency translation adjustments.................... 836 (2,985) -------- -------- Comprehensive Income........................................ $214,379 $ 97,146 ======== ======== Weighted average ordinary shares and ordinary share equivalents outstanding--basic............................ 125,671 128,414 ======== ======== Weighted average ordinary shares and ordinary share equivalents outstanding--diluted.......................... 126,764 132,404 ======== ======== Earnings per ordinary share and ordinary share equivalent--basic......................................... $ 1.78 $ 1.63 ======== ======== Earnings per ordinary share and ordinary share equivalent--diluted....................................... $ 1.77 $ 1.58 ======== ========
See accompanying notes to Unaudited Consolidated Financial Statements. 4 XL CAPITAL LTD CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (U.S. DOLLARS IN THOUSANDS)
THREE MONTHS ENDED MARCH 31 ----------------------- 2000 1999 ---------- ---------- (UNAUDITED) Ordinary Shares: Balance-beginning of year................................. $ 1,278 $ 1,287 Issue of shares........................................... -- -- Exercise of stock options................................. 3 1 Repurchase of treasury shares............................. (37) (8) ---------- ---------- Balance-end of period................................... $ 1,244 $ 1,280 ---------- ---------- Contributed Surplus: Balance-beginning of year................................. $2,520,136 $2,508,062 (Forfeit) issue of shares................................. (510) 11,571 Exercise of stock options................................. 3,190 4,006 Repurchase of treasury shares............................. (72,955) (11,530) ---------- ---------- Balance-end of period................................... $2,449,861 $2,512,109 ---------- ---------- Accumulated other comprehensive income: Balance-beginning of year................................. $ 19,311 $ 235,185 Net change in unrealized gains on investment portfolio, net of tax.............................................. 620 (111,879) Net change in unrealized gains on investment portfolio of affiliate............................................... (10,836) (2,919) Currency translation adjustments.......................... 836 (2,985) ---------- ---------- Balance-end of period................................... $ 9,931 $ 117,402 ---------- ---------- Deferred Compensation: Balance-beginning of year................................. $ (28,797) $ (22,954) Forfeit (issue) of restricted shares...................... 2,504 (2,901) Amortization.............................................. 1,935 1,914 ---------- ---------- Balance-end of period................................... $ (24,358) $ (23,941) ---------- ---------- Retained Earnings: Balance-beginning of year................................. $3,065,150 $2,891,023 Net income................................................ 223,759 209,812 Cash dividends paid....................................... (57,064) (49,406) Repurchase of treasury shares............................. (92,897) (37,047) ---------- ---------- Balance-end of period................................... $3,138,948 $3,014,382 ---------- ---------- Total shareholders' equity.................................. $5,575,626 $5,621,232 ========== ==========
See accompanying notes to Unaudited Consolidated Financial Statements. 5 XL CAPITAL LTD CONSOLIDATED STATEMENTS OF CASH FLOWS (U.S. DOLLARS IN THOUSANDS)
THREE MONTHS ENDED MARCH 31, ------------------------- 2000 1999 ----------- ----------- (UNAUDITED) Cash flows (used in) provided by operating activities: Net income................................................ $ 223,759 $ 209,812 Adjustments to reconcile net income to net cash provided by operating activities: Net realized gains on sales of investments................ (68,707) (67,476) Amortization of discounts on fixed maturities............. (9,365) (4,150) Equity in net (income) loss of affiliates, net of cash received................................................ (17,479) 12,953 Amortization of deferred compensation..................... 2,896 1,914 Amortization of intangible assets......................... 14,052 10,407 Unpaid losses and loss expenses........................... (16,835) 12,079 Unearned premiums......................................... 264,646 234,183 Premiums receivable....................................... (260,706) (182,165) Unpaid losses and loss expenses recoverable............... (222,792) (7,720) Prepaid reinsurance premiums.............................. (105,413) (35,722) Reinsurance balances receivable........................... 41,697 14,840 Other..................................................... 139,096 (87,098) ----------- ----------- Total adjustments..................................... (238,910) (97,955) ----------- ----------- Net cash (used in) provided by operating activities....... (15,151) 111,857 ----------- ----------- Cash flows provided by (used in) investing activities: Proceeds from sale of fixed maturities and short-term investments............................................. 5,862,142 3,123,515 Proceeds from redemption of fixed maturities and short-term investments.................................. 52,030 61,452 Proceeds from sale of equity securities................... 660,943 474,480 Purchases of fixed maturities and short-term investments............................................. (5,718,001) (3,321,388) Purchases of equity securities............................ (466,929) (377,688) Deferred losses on forward contracts...................... 509 97 Investments in affiliates................................. (95,360) (82,500) Acquisition of subsidiaries, net of cash acquired......... (3,094) -- Other investments......................................... (16,251) 1,495 Deposit liabilities and policy benefit reserve............ 250,826 -- Other assets.............................................. (9,617) (8,798) ----------- ----------- Net cash provided by (used) in investing activities....... 517,198 (129,335) ----------- ----------- Cash flows used in financing activities: Issue of restricted shares................................ 1,994 8,670 Proceeds from exercise of stock options................... 3,193 4,007 Repurchase of treasury shares............................. (165,889) (48,585) Dividends paid............................................ (57,064) (49,406) Proceeds from loans....................................... 250,300 -- Repayment of loans........................................ (250,300) -- Minority interest......................................... -- (4,900) ----------- ----------- Net cash used in financing activities....................... (217,766) (90,214) ----------- ----------- Effects of exchange rate changes on cash on foreign currency cash balances............................................. 2,266 24 ----------- ----------- Increase (decrease) in cash and cash equivalents............ 286,547 (107,668) Cash and cash equivalents-beginning of year................. 557,749 480,874 ----------- ----------- Cash and cash equivalents-end of period..................... $ 844,296 $ 373,206 =========== ===========
See accompanying notes to Unaudited Consolidated Financial Statements. 6 XL CAPITAL LTD NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (U.S. DOLLARS IN THOUSANDS) 1. BASIS OF PRESENTATION These unaudited consolidated financial statements include the accounts of XL Capital Ltd and its subsidiaries (collectively referred to as the "Company") and have been prepared in accordance with U.S. generally accepted accounting principles ("GAAP") for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, these unaudited financial statements reflect all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of financial position and results of operations as of the end of and for the periods presented. The results of operations for any interim period are not necessarily indicative of the results for a full year. All material intercompany accounts and transactions have been eliminated. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 2. BUSINESS COMBINATIONS AND CHANGE IN FISCAL YEAR END (A) LATIN AMERICAN RE On January 17, 2000, the Company entered into a stock repurchase agreement with Risk Capital Holdings. Under this agreement, in exchange for its shares in Risk Capital and $3.6 million in cash, the Company received the effective remaining ownership in Latin American Re and 1.4 million shares and 100,000 warrants in Annuity & Life Re, in which the Company had an existing investment. The total value of the transaction was $62.8 million. (B) NAC RE CORP In June 1999, the Company completed its merger with NAC Re Corp in an all-stock transaction. Following the merger, the Company changed its fiscal year end from November 30 to December 31 as a conforming pooling adjustment. All prior period information includes NAC as though it had always been a part of the Company. No adjustments were necessary to conform NAC's accounting policies although certain reclassifications were made to the NAC financial statements to conform to the Company's presentations. 7 XL CAPITAL LTD NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (U.S. DOLLARS IN THOUSANDS) 2. BUSINESS COMBINATIONS AND CHANGE IN FISCAL YEAR END (CONTINUED) The following table presents a reconciliation of consolidated total revenues, net income and shareholders' equity of the Company as previously reported, as adjusted for the Company's change in fiscal year end, and combined with the results of NAC for the three months ended March 31, 1999:
CONSOLIDATED CONSOLIDATED TOTAL CONSOLIDATED SHAREHOLDERS' REVENUES NET INCOME EQUITY ------------ ------------ ------------- XL Capital--three months ended February 28, 1999.... $425,594 $191,733 $4,811,389 Less one month December 31, 1998.................... 202,210 29,785 -- Add one month March 31, 1999........................ 201,526 27,036 57,160 -------- -------- ---------- XL Capital--three months ended March 31, 1999....... 424,910 188,984 4,868,549 NAC Re--three months ended March 31, 1999........... 168,243 20,828 752,683 -------- -------- ---------- Combined results--three months ended March 31, 1999.............................................. $593,153 $209,812 $5,621,232 ======== ======== ==========
3. SEGMENT INFORMATION The Company is organized into four underwriting segments--insurance, reinsurance, Lloyd's syndicates and financial services--in addition to a corporate segment that includes the investment operations of the Company. The Company evaluates performance of each segment based on underwriting profit or loss. Other items of revenue and expenditure of the Company are not evaluated at the segment level. In addition, management does not consider the allocation of assets by segment. Certain business written by the Company has loss experience generally characterized as low frequency and high severity. This may result in volatility in both the Company's results and operational cash flows. 8 XL CAPITAL LTD NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (U.S. DOLLARS IN THOUSANDS) 3. SEGMENT INFORMATION (CONTINUED) The following is an analysis of the underwriting profit or loss by segment together with a reconciliation of underwriting profit or loss to net income: QUARTER ENDED MARCH 31, 2000
LLOYD'S FINANCIAL INSURANCE REINSURANCE SYNDICATES SERVICES TOTAL --------- ----------- ---------- --------- -------- Net premiums earned....................... $146,301 $239,040 $103,062 $6,096 $494,499 Fee and other income...................... 1,272 229 (1,168) 4,623 4,956 Net losses and loss expenses.............. 85,534 135,178 80,687 1,435 302,834 Acquisition costs......................... 19,986 56,195 27,171 342 103,694 Operating expenses........................ 18,438 26,432 4,871 5,234 54,975 Exchange (gains) losses................... (10) 1,736 (304) -- 1,422 -------- -------- -------- ------ -------- Underwriting profit (loss)................ $ 23,625 $ 19,728 $(10,531) $3,708 $ 36,530 Net investment income..................... 128,527 Net realized gains on investments......... 68,707 Equity in net earnings of affiliates...... 17,479 Interest expense.......................... 8,495 Amortization of intangible assets......... 14,052 Corporate operating expenses.............. 12,879 Minority interest......................... 205 Income tax benefit........................ 8,147 -------- Net income................................ $223,759 -------- Loss and loss expense ratio............... 58.4% 56.5% 78.3% 23.5% 61.2% Underwriting expense ratio................ 26.3% 34.6% 31.1% 91.5% 32.1% -------- -------- -------- ------ -------- Combined ratio............................ 84.7% 91.1% 109.4% 115.0% 93.3% ======== ======== ======== ====== ========
9 XL CAPITAL LTD NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (U.S. DOLLARS IN THOUSANDS) 3. SEGMENT INFORMATION (CONTINUED) QUARTER ENDED MARCH 31, 1999
LLOYD'S FINANCIAL INSURANCE REINSURANCE SYNDICATES SERVICES TOTAL --------- ----------- ---------- --------- -------- Net premiums earned....................... $102,291 $198,639 $ 81,299 $4,524 $386,753 Fee and other income...................... 663 -- 7,433 -- 8,096 Net losses and loss expenses (1).......... 47,064 108,115 58,495 776 214,450 Acquisition costs......................... 14,188 44,469 17,727 405 76,789 Operating expenses........................ 15,484 23,133 12,629 3,078 54,324 Exchange (gains) losses................... 419 1,762 (539) -- 1,642 -------- -------- -------- ------ -------- Underwriting profit....................... $ 25,799 $ 21,160 $ 420 $ 265 $ 47,644 Net investment income..................... 135,680 Net realized gains on investments......... 67,476 Other income.............................. 2,455 Equity in net losses of affiliates........ 7,307 Interest expense.......................... 11,025 Amortization of intangible assets......... 10,407 Corporate operating expenses.............. 10,402 Minority interest......................... 515 Income tax expense........................ 4,817 -------- Net income................................ $209,812 ======== Loss and loss expense ratio (1)........... 46.0% 54.5% 72.0% 17.1% 55.4% Underwriting expense ratio................ 29.0% 34.0% 37.3% 77.0% 33.9% -------- -------- -------- ------ -------- Combined ratio............................ 75.0% 88.5% 109.3% 94.1% 89.3% ======== ======== ======== ====== ========
- ------------------------ (1) Net losses incurred for the insurance segment include, and the reinsurance segment exclude, $10.5 million relating to an intercompany stop loss agreement. Consolidated results are not affected. The loss and loss expense ratio would have been 35.7% and 59.7% and the underwriting profit would have been $36.3 million and $10.6 million in the insurance and reinsurance segments, respectively, had this stop loss agreement not been in place. 10 XL CAPITAL LTD NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (U.S. DOLLARS IN THOUSANDS) 3. SEGMENT INFORMATION (CONTINUED) The following table is an analysis of the Company's gross premiums written, net premiums written and net premiums earned by line of business: QUARTER ENDED MARCH 31, 2000
GROSS PREMIUMS NET PREMIUMS NET PREMIUMS WRITTEN WRITTEN EARNED -------------- ------------ ------------ Casualty insurance................... $ 97,497 $ 73,537 $ 78,228 Casualty reinsurance................. 246,713 189,997 141,682 Property catastrophe................. 77,836 77,220 29,278 Other property....................... 95,888 66,645 44,682 Marine, energy, aviation and satellite.......................... 155,641 119,910 44,516 Lloyd's syndicates................... 163,739 59,677 103,062 Other................................ 81,623 65,113 53,051 -------- -------- -------- Total................................ $918,937 $652,099 $494,499 ======== ======== ========
QUARTER ENDED MARCH 31, 1999
GROSS PREMIUMS NET PREMIUMS NET PREMIUMS WRITTEN WRITTEN EARNED -------------- ------------ ------------ Casualty insurance................... $ 79,756 $ 59,670 $ 65,630 Casualty reinsurance................. 131,288 109,218 106,426 Property catastrophe................. 81,846 80,932 28,971 Other property....................... 97,590 85,243 48,713 Marine, energy, aviation and satellite.......................... 103,169 84,410 36,290 Lloyd's syndicates................... 183,820 108,397 81,299 Other................................ 54,522 56,051 19,424 -------- -------- -------- Total................................ $731,991 $583,921 $386,753 ======== ======== ========
11 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2000 COMPARED TO THE THREE MONTHS ENDED MARCH 31, 1999 (U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) The following is a discussion of the Company's results of operations and financial condition. Prior period information presented is the combination of the results previously reported by the Company and NAC. This "Management's Discussion and Analysis of Results of Operations and Financial Condition" contains forward-looking statements which involve inherent risks and uncertainties. Statements that are not historical facts, including statements about our beliefs and expectations, are forward looking-statements. These statements are based upon current plans, estimates and expectations. Actual results may differ materially from those projected in such forward-looking statements, and therefore you should not place undue reliance on them. See "--Cautionary Note Regarding Forward-Looking Statements" below for a list of factors that could cause actual results to differ materially from those contained in any forward-looking statement. This discussion and analysis should be read in conjunction with the audited Consolidated Financial Statements and notes thereto presented under Item 8 on Form 10-K for the year ended December 31, 1999. RESULTS OF OPERATIONS The following table presents an after tax analysis of the Company's net income and earnings per share for the three months ended March 31, 2000 and 1999:
THREE MONTHS ENDED MARCH 31 ------------------- 2000 1999 % CHANGE -------- -------- --------- (UNAUDITED) Net operating income (excluding net realized gains on investments)........................ 150,801 143,272 5.3% Net realized gains on investments.............. 72,958 66,540 9.6% ------- ------- ---- Net income..................................... 223,759 209,812 6.6% ======= ======= ==== Earnings per share--basic...................... $ 1.78 $ 1.63 Earnings per share--fully diluted.............. $ 1.77 $ 1.58
SEGMENTS The Company is organized into four underwriting segments--insurance, reinsurance, Lloyd's syndicates and financial services--in addition to a corporate segment, which includes the investment operations of the Company. The results of each segment are discussed below. The calculation of the underwriting ratios for all segments is as follows: The combined ratio is the sum of the loss and loss expense ratio and the underwriting expense ratio. The loss and loss expense ratio is calculated by dividing net losses and loss expenses by net premiums earned, and the underwriting expense ratio is calculated by dividing the total of acquisition costs and operating expenses by net premiums earned. INSURANCE OPERATIONS The insurance business is written primarily by XL Insurance, XL Europe, XL Insurance Company of New York, Greenwich Insurance, Indian Harbor Insurance, ECS and XL Specialty Insurance (formerly, 12 INSURANCE OPERATIONS (CONTINUED) Intercargo Corporation). Insurance business written includes general liability, other liability (including directors and officers, professional and employment practices liability), property, program business, marine, aviation, satellite and other product lines (including U.S. customs bond, surety, political risk and specialty lines). The following table summarizes the underwriting profit for this segment:
THREE MONTHS ENDED MARCH 31 ------------------- 2000 1999 % CHANGE -------- -------- -------- (UNAUDITED) Net premiums earned........................... $146,301 $102,291 43.0% Fee and other income.......................... 1,272 663 NM Net losses and loss expenses.................. 85,534 47,064 81.7% Acquisition costs............................. 19,986 14,188 40.9% Operating expenses............................ 18,438 15,484 19.1% Exchange (gains) losses....................... (10) 419 NM -------- -------- ----- Net underwriting profit....................... $ 23,625 $ 25,799 (8.4%) ======== ======== =====
* NM--Not Meaningful The insurance segment has experienced growth in net premiums earned primarily as a result of increased premiums written in the U.S. primary other liability business, and growth in the other property line worldwide. The growth in the U.S. business was mainly due to the acquisition of Intercargo (now known as XL Specialty Insurance) and ECS in the second quarter of 1999. These companies contributed approximately $60.0 million in gross premiums written and $15.0 million in net premiums earned during the quarter. There is no comparative figure included in the 1999 results. The following table presents the ratios for the insurance segment:
THREE MONTHS ENDED MARCH 31 ------------------- 2000 1999 -------- -------- (UNAUDITED) Loss and loss expense ratio................................. 58.4% 46.0% Underwriting expense ratio.................................. 26.3% 29.0% ----- ----- Combined ratio.............................................. 84.7% 75.0% ===== =====
The increase in the combined ratio is due to the increase in the loss and loss expense ratio which in 2000, reflects the application of higher actuarially determined loss ratios to the casualty business lines written in 2000 as competitive market conditions continued to affect premium rates. In 1999, there was a reduction in loss reserves established on the Company's other liability lines written in prior years due to updated actuarially determined reserve estimates, where loss experience had developed more favorably than expected. In addition, the 1999 loss ratio was affected by an intercompany stop loss agreement under which a subsidiary in the reinsurance segment was covered for losses exceeding a specified loss ratio up to $100.0 million. In the quarter ended March 31, 1999, $10.5 million of losses were included in the insurance segment losses and excluded from the reinsurance segment. The loss ratio in 1999 would have been 35.7% and the underwriting profit would have been $36.3 million had this agreement not been in place. 13 INSURANCE OPERATIONS (CONTINUED) The decrease in the expense ratio in the first quarter of 2000 is primarily the result of an increase in earned premiums. Acquisition costs as a percentage of earned premium are relatively the same year over year for this segment. Although operating costs are higher in 2000 due to the acquisition of Intercargo and ECS in the second quarter of 1999, the growth in net premiums earned was proportionately greater, which resulted in a lower expense ratio. REINSURANCE OPERATIONS The reinsurance business is written by XL Mid Ocean Re and Latin American Re, which primarily write property lines that are short-tail in nature, NAC Re, which primarily writes long-tail casualty business. Business written in this segment includes casualty, property catastrophe, other property, marine, energy, aviation, satellite and other lines including political risk and specialty lines. The following table summarizes the underwriting profit for this segment:
THREE MONTHS ENDED MARCH 31 ------------------- 2000 1999 % CHANGE -------- -------- -------- (UNAUDITED) Net premiums earned........................... $239,040 $198,639 20.3% Fee and other income.......................... 229 -- NM Net losses and loss expenses.................. 135,178 108,115 25.0% Acquisition costs............................. 56,195 44,469 26.4% Operating expenses............................ 26,432 23,133 14.3% Exchange losses............................... 1,736 1,762 (1.5)% -------- -------- ------ Net underwriting profit....................... $ 19,728 $ 21,160 (6.8)% ======== ======== ======
The increase in net premiums earned reflects price increases in marine and other liability markets, with increased writings in accident and health liability. This business was written both in the U.S. and internationally. The increase in earned premium also reflects a large treaty assumed by NAC Re in the fourth quarter of 1999 which resulted in a full quarter of earned premium in 2000. The following table presents the ratios for the reinsurance segment:
THREE MONTHS ENDED MARCH 31 ------------------- 2000 1999 -------- -------- (UNAUDITED) Loss and loss expense ratio............................. 56.5% 54.5% Underwriting expense ratio.............................. 34.6% 34.0% ----- ----- Combined ratio.......................................... 91.1% 88.5% ===== =====
The increase in the combined ratio is primarily due to the effect of an intercompany reinsurance agreement with one of the Company's subsidiaries in the insurance segment in 1999. Net losses and loss expenses incurred in this segment in 1999 reflect a recovery of $10.5 million with respect to this agreement. The loss and loss expense ratio would have been 59.7% and the underwriting profit would have been $10.6 million had this agreement not been in place. The underwriting expense ratio is relatively unchanged compared to the first quarter of 1999. The small increase in this ratio reflects an increase in acquisition costs as a percentage of premiums earned. 14 LLOYD'S SYNDICATES The Lloyd's operations comprise Brockbank and Denham. Brockbank provides underwriting and other services to five Lloyd's syndicates, two of which are dedicated corporate syndicates whose capital is provided by the Company. These dedicated corporate syndicates wrote a range of specialty lines, primarily of insurance but also reinsurance, in parallel with other syndicates managed by Brockbank. Denham provides similar services to one corporate syndicate whose capital is primarily provided by the Company and which specializes in liability coverages. The following table summarizes the underwriting profit (loss) for this segment:
THREE MONTHS ENDED MARCH 31 ------------------- 2000 1999 % CHANGE -------- -------- -------- (UNAUDITED) Net premiums earned............................ $103,062 $81,299 26.8% Fee and other income........................... (1,168) 7,433 NM Net losses and loss expenses................... 80,687 58,495 37.9% Acquisition costs.............................. 27,171 17,727 53.3% Operating expenses............................. 4,871 12,629 (61.4)% Exchange gains................................. (304) (539) NM -------- ------- ------- Net underwriting profit (loss)................. $(10,531) $ 420 NM ======== ======= =======
Net premiums earned reflect the growth in business written by Brockbank and Denham due to an increase in corporate capacity in the 2000 quarter over 1999. The corporate syndicates increased capacity from approximately 43% to 50% at Brockbank and from 43% to 75% at Denham. Net earned premium in 2000 was also affected by premium written in 1999 from the motor business at Brockbank, which was sold with effect from January 1, 2000. The Company retains the run-off experience of this business. Lower earned premiums relating to the motor business will result in subsequent quarters. Fee and other income was also generated from the motor business on behalf of third parties resulting in $6.0 million of income in 1999. No such income was earned in 2000. The Company's Lloyd's managing agency also earns profit commissions from the syndicates it manages. The first quarter of 1999 included $2.0 million in profit commissions but due to the loss deterioration in the Lloyd's market place, no commissions were recorded in the first quarter of 2000. Managing agency expenses are offset against this income which has resulted in negative fee and other income in the quarter ended March 31, 2000. The following table presents the combined ratios for this segment:
THREE MONTHS ENDED MARCH 31 ------------------- 2000 1999 -------- -------- (UNAUDITED) Loss and loss expense ratio............................... 78.3% 72.0% Underwriting expense ratio................................ 31.1% 37.3% ------ ------ Combined ratio............................................ 109.4% 109.3% ====== ======
The increase in the loss ratio is primarily the result of the increased capacity of Denham which underwrites casualty business. This business tends to have a higher loss ratio than the short-tail business that is part of the business Brockbank underwrites. The loss ratio was also affected by the run-off of the Company's motor business on which the loss ratio had deteriorated. The reduction in the underwriting expense ratio reflects a reduction in operating expenses due to the sale of the Company's motor business. 15 FINANCIAL SERVICES The financial services business includes credit enhancements by financial guaranty insurance and reinsurance policies and credit default swaps written in respect of asset-backed, municipal and corporate risk obligation transactions. The following table summarizes the underwriting profit for this segment:
THREE MONTHS ENDED MARCH 31 ------------------- 2000 1999 % CHANGE -------- -------- -------- (UNAUDITED) Net premiums earned............................... $6,096 $4,524 34.7% Fee and other income.............................. 4,623 -- NM Net losses and loss expenses...................... 1,435 776 84.9% Acquisition costs................................. 342 405 (15.6)% Operating expenses................................ 5,234 3,078 70.0% ------ ------ ------- Net underwriting profit........................... $3,708 $ 265 NM ====== ====== =======
Financial guaranty premiums are earned over the life of the exposure and certain transactions such as installment premiums are not recognized as premiums written until the premium is received. Premiums received in respect of credit default swap transactions are included as fee income and earned over the life of the policies. In addition, from time to time the Company will assist in structuring transactions that will result in fee income. These transactions tend to be irregular in nature. Such transactions require an investment of Company resources which are included in operating expenses. During the first quarter of 2000, the Company wrote a loss portfolio transfer contract which was accounted for on a deposit basis. The Company received a fee of approximately $1.7 million on this transaction. The following table presents the combined ratios for this segment:
THREE MONTHS ENDED MARCH 31 ------------------- 2000 1999 -------- -------- (UNAUDITED) Loss and loss expense ratio................................ 23.5% 17.1% Underwriting expense ratio................................. 91.5% 77.0% ------ ----- Combined ratio............................................. 115.0% 94.1% ====== =====
This segment generally writes business to a loss ratio of approximately 25%. The high expense ratio reflects the start up nature of this segment. 16 INVESTMENT OPERATIONS The following table illustrates the change in net investment income and net realized gains for the three month periods ended March 31, 2000 and 1999:
THREE MONTHS ENDED MARCH 31 ------------------- 2000 1999 % CHANGE -------- -------- -------- (UNAUDITED) Net investment income......................... $128,527 $135,680 (5.3)% Net realized gains............................ $ 68,707 $ 67,476 1.8%
Net investment income decreased in the first quarter of 2000 compared to the same period in 1999 due to relatively higher returns generated in 1999 and a decrease in the Company's investment asset base, (excluding investments relating to the Company's asset accumulation business) in the first quarter of 2000. The Company wrote two structured products transactions in 1999 and one in the first quarter of 2000, all of which are accounted for on a deposit basis. Consequently, while the Company generates investment income on the assets, it must also provide for the accretion of the liability through a charge against investment income. The relative decline in the investment asset base is a result of the claim payments, the repurchase of the Company's shares and the reallocation of such assets to other strategic investments, from which income is accounted for as equity in net earnings of affiliates. OTHER REVENUES AND EXPENSES The following table sets forth other revenues and expenses for the quarters ended March 31, 2000 and 1999:
THREE MONTHS ENDED MARCH 31 ------------------- 2000 1999 % CHANGE -------- -------- -------- (UNAUDITED) Equity in net earnings (loss) of affiliates...... $17,479 $(7,307) NM Other income..................................... -- 2,455 NM Amortization of intangible assets................ 14,052 10,407 35.0% Corporate operating expenses..................... 12,879 10,402 23.8% Interest expense................................. 8,495 11,025 (22.9)% Minority interest................................ 205 (515) NM Income tax (benefit) expenses.................... (8,147) 4,817 NM
Equity in net earnings of affiliates in 2000 results from returns on the Company's strategic investments in investment management companies and the funds managed by these companies. Offsetting these returns was a $3.4 million loss from the Company's equity position in Le Mans Re. The Company did not have these investments at March 31, 1999. The loss experienced in 1999 reflects the Company's share of Risk Capital's net loss for the fourth quarter of 1998. The Company sold its investment in Risk Capital in January 2000. Other income includes a distribution of earnings from the Company's other investments in the first quarter of 1999. No such distribution was received in the equivalent 2000 period. The increase in amortization of intangible assets reflects additional goodwill generated from the acquisition of ECS, Inc. and Intercargo Corporation in the second quarter of 1999. 17 OTHER REVENUES AND EXPENSES (CONTINUED) The increase in operating expenses is a result of the increase in corporate infrastructure necessary to support the expanding worldwide operations of the Company. The decrease in interest expense reflects a reduction in indebtedness carried by the Company through the quarter in 2000 compared to 1999. The Company extinguished convertible debt assumed in connection with the NAC acquisition in the second quarter of 1999. In addition, the Company pooled capital with its existing operations as a result of acquisitions in the U.S. in 1999, which facilitated the repayment of debt during the third quarter of 1999. Offsetting this decrease was interest expense relating to interim borrowings used to finance the repurchase of shares in the quarter ended March 31, 2000. The decrease in income taxes results primarily from lower income earned by certain subsidiaries of the Company during 2000. FINANCIAL CONDITION AND LIQUIDITY As a holding company, XL Capital's assets consist primarily of its investments in subsidiaries and the XL Capital's future cash flows depend on the availability of dividends or other statutorily permissible payments from its subsidiaries. The ability to pay such dividends is limited by the applicable laws and regulations of Bermuda, the United States, Ireland and the United Kingdom, including those of the Society of Lloyd's. No assurance can be given that the XL Capital or its subsidiaries will be permitted to pay dividends in the future. The Company's shareholders' equity at March 31, 2000 was $5.6 billion of which $3.1 billion was retained earnings. At March 31, 2000, total investments available for sale and cash net of unsettled investment trades were $9.0 billion, compared to $9.1 billion at December 31, 1999. This includes investments relating to Company's asset accumulation business. During the quarter, the Company sold investments categorized as available for sale to fund two strategic investments, the payment of claims and the repurchase of shares. The Company's fixed income investments including short-term investments and cash equivalents at March 31, 2000 represented approximately 90% of invested assets and were managed by several outside investment management firms. Approximately 88% of fixed income securities are of investment grade, with 59.4% rated Aa or AA or better by a nationally recognized rating agency. The average quality of the fixed income portfolio was AA-. The net payable for investments purchased increased from $622.3 million at December 31, 1999 to $1.0 billion as at March 31, 2000. This increase results from timing differences as investments are accounted for on a trade basis. Certain business written by the Company has loss experience generally characterized as low frequency and high severity. This may result in volatility in both the Company's results and operational cash flows. For the quarters ended March 31, 2000 and 1999, the net amount of losses due to claims activity paid by the Company was $444.7 million and $223.4 million, respectively. Included in paid losses for the quarter ended March 31, 2000 was an amount of $74 million relating to a commutation payment where unpaid losses have been reduced by the same amount. The higher amount of paid claims in 2000 over 1999 has contributed to the negative operational cash flow. The Company establishes reserves to provide for the estimated expenses of settling claims, the general expenses of administering the claims adjustment process and for losses incurred but not reported. These reserves are determined by using actuarial and other reserving techniques to project the estimated ultimate net liability for losses and loss expenses. The Company's reserving practices and the establishment of any particular reserve reflect management's judgement concerning sound financial practice and does not represent any admission of liability with respect to any claims made against the Company. No assurance 18 FINANCIAL CONDITION AND LIQUIDITY (CONTINUED) can be given that actual claims made and payments related thereto will not be in excess of the amounts reserved. The Company's reserving process includes a supplemental evaluation of the potential impact on claims liabilities from exposure to asbestos and environmental claims, including related loss adjustment expenses. The Company's claims and claim expense reserves for such exposures is less than 1% of the Company's total reserves. The Company has had several stock repurchase programs in the past as part of its capital management. On January 9, 2000, the Board of Directors authorized a new program for the repurchase of shares up to $500 million. The repurchase of shares was announced in conjunction with a small dividend increase of $0.04 per share per annum as part of the Company's capital management strategy. The Company has purchased 3.7 million shares up to May 12, 2000 at a cost of $165.8 million or $44.76 per share. As of March 31, 2000, the Company had bank, letter of credit and loan facilities available from a variety of sources including commercial banks totaling $2.36 billion of which $410.7 million in debt outstanding. In addition, $886.0 million of letters of credit were outstanding, 65% of which were collateralized by the Company's investment portfolio, primarily supporting U.S. non-admitted business, and the Company's Lloyd's capital requirements. The financing structure as of March 31, 2000 was as follows:
IN USE/ FACILITY COMMITMENT OUTSTANDING - -------- ---------- ----------- DEBT: Company Term Note.................................... $ 11,000 $ 11,000 2 facilities of 364 day Revolvers--total............. 650,000 -- 2 facilities of 5 year Revolvers--total.............. 350,000 299,700 NAC Re 7.15% Notes due 2005.......................... 100,000 100,000 ---------- -------- $1,111,000 $410,700 ========== ======== LETTERS OF CREDIT: 7 facilities--total $1,246,500 $886,000 ========== ========
The 364-day facilities are provided by a syndicate of banks where the borrowings are unsecured, and by a U.S. bank where the borrowings are collateralized and guaranteed. During the three months ended March 31, 2000, up to $200.0 million was outstanding under the 364-day revolvers as interim funding of share buybacks. There were no borrowings outstanding at March 31, 2000. The weighted average interest rate on the funds borrowed during 2000 was approximately 6.3%. On March 31, 2000, the 364-day collateralized revolver provided by a U.S. bank in the amount of $150.0 million expired and was not renewed. Two syndicates of banks provide the two five-year facilities and borrowings are unsecured. Under these facilities, $299.7 million outstanding at March 31, 2000 related primarily to the remaining outstanding balance from the $300.0 million borrowed to finance the cash option election available to shareholders in connection with the Mid Ocean acquisition in August 1998 and $109.7 million borrowed to finance the acquisition of ECS and Intercargo during 1999. The weighted average interest rate on funds borrowed during 2000 was approximately 6.3%. At March 31, 2000 and March 31, 1999, the Company had $100.0 million of 7.15% Senior Notes due November 15, 2005 outstanding. 19 FINANCIAL CONDITION AND LIQUIDITY (CONTINUED) In addition, at March 31, 1999, the following debt was outstanding: (1) $100.0 million of 5.25% Convertible Subordinated Debentures due December 15, 2002. The Debentures were called in June 1999 and converted to approximately 1.8 million of the Company's shares. (2) $100.0 million of 8% Senior Notes due June 15, 1999. These notes were repaid in June 1999 through additional borrowings and internal funds. Total pre-tax interest expense on the borrowings described above was $8.5 million and $11.0 million for the three months ended March 31, 2000 and 1999, respectively. Associated with the Company's bank and loan commitments are various loan covenants with which the Company was in compliance throughout both three month periods. The Company has seven letter of credit facilities available at March 31, 2000, two from two syndicates of banks, three from U.K. banks and two from U.S. banks. These facilities are used to collateralize certain reinsureds' premium and unpaid loss reserves with the Company and for Lloyd's capital requirements of the Company's corporate syndicates. Of the letters of credit outstanding at March 31, 2000, approximately $580.0 million were collateralized against the Company's investment portfolio and $306.0 million were unsecured. YEAR 2000 CONSIDERATIONS There was no significant impact from Year 2000 issues on the Company's technology systems. The Company did not experience any significant disruption due to the impact of Year 2000 issues on its service providers. The Company is subject to risks associated with Year 2000 issues based upon the underwriting exposures that it assumes. All insurance and reinsurance subsidiaries of the Company examined the potential exposure to Year 2000-related risks associated with the coverages that they provided. In some instances, Year 2000-related risks were expressly excluded from or included in certain coverages, and in other instances, coverage in respect of such risks is neither expressly excluded nor included. To the extent that Year 2000-related risks materialize, participants in the property and casualty insurance and reinsurance industry, including the Company, could pay or incur significant claims, losses or defense costs which could have a material adverse effect on the Company's results of operations and financial condition. In view of the apparent lack of significant Year 2000-related losses, the Company does not expect to have a material exposure to Year 2000-related coverage claims. See generally "--Cautionary Note Regarding Forward-Looking Statements". CURRENT OUTLOOK The Company believes competition in the property casualty insurance and reinsurance industry will continue in 2000, and in particular in the liability lines. Although the Company believes some opportunities will exist in 2001 for growth in selected product lines, no assurances can be made that growth in these lines will be sufficient to offset the competitive pressures affecting the majority of the Company's product lines. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is exposed to various market risks, including changes in interest rates and foreign currency exchange rates. The Company manages its market risks based on guidelines established by management. The Company enters into derivatives and other financial instruments primarily for risk management purposes. 20 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK (CONTINUED) This risk management discussion and the estimated amounts generated from the sensitivity analyses are forward-looking statements of market risk assuming certain adverse market conditions occur. Actual results in the future may differ materially from these projected results due to actual developments in the global financial markets. The analysis methods used by the Company to assess and mitigate risk should not be considered projections of future events of losses or lack of losses. See generally "--Cautionary Note Regarding Forward-Looking Statements". The Company's investment portfolio consists of fixed income and equity securities, denominated in both U.S. dollars and foreign currencies. Accordingly, earnings will be affected by, among other things, changes in interest rates, equity prices and foreign currency exchange rates. FOREIGN CURRENCY EXPOSURE MANAGEMENT The Company uses foreign exchange contracts to manage its exposure to the effects of fluctuating foreign currencies on the value of its foreign currency fixed maturities and equity investments. These contracts are not designated as specific hedges for financial reporting purposes and therefore, realized and unrealized gains and losses on these contracts are recorded in income in the period in which they occur. These contracts generally have maturities of three months or less. In addition, where the Company's investment managers are of the opinion that potential gains exist in a particular currency, a forward contract may not be entered into. At March 31, 2000, forward foreign exchange contracts with notional principal amounts totaling $232.0 million were outstanding. The fair value of these contracts as at March 31, 2000 was $241.6 million with unrealized gains of $9.6 million. Gains of $10.2 million were realized during the quarter. Based on this value, a 10% appreciation or depreciation of the U.S. dollar as compared to the level of other currencies under contract at March 31, 2000 would have resulted in approximately $20.6 million in unrealized losses and $27.5 million in unrealized gains. The Company also uses foreign exchange contracts to manage its exposure to the effects of fluctuating foreign currencies on the amount of its known claims payable in foreign currencies. These contracts are not designated as specific hedges for financial reporting purposes and therefore, realized and unrealized gains and losses on these contracts are recorded in income in the period in which they occur. At March 31, 2000, forward foreign exchange contracts with notional principal amounts totaling $64.6 million were outstanding. The fair value of these contracts as at March 31, 2000 was $61.9 million with unrealized losses of $2.7 million. No losses have been realized to date. Based on this value, a 10% appreciation or depreciation of the U.S. dollar as compared to the level of other currencies under contract at March 31, 2000 would have resulted in approximately $6.1 million in unrealized losses and $6.9 million in unrealized gains. In addition, the Company also enters into foreign exchange contracts to buy and sell foreign currencies in the course of trading its foreign currency investments. These contracts are not designated as specific hedges, and generally have maturities of two weeks or less. As such, any realized or unrealized gains or losses are recorded in income in the period in which they occur. At March 31, 2000, the value of such contracts outstanding was not significant. FINANCIAL MARKET EXPOSURE The Company also invests in a synthetic equity portfolio of S&P Index futures with an exposure approximately equal in amount to the market value of underlying assets held in this fund. As at March 31, 2000, the portfolio held $83.0 million in exposure to S&P 500 Index futures and underlying assets of $81.7 million. Based on this value, a 10% increase or decrease in the price of these futures would have resulted in exposure of $91.3 million and $74.7 million, respectively. The value of the futures is updated daily with the change recorded in income as a realized gain or loss. For the three months ended March 31, 21 FINANCIAL MARKET EXPOSURE (CONTINUED) 2000, net realized gains from index futures totaled $10.2 million as a result of the 2% increase in the S&P Index. FINANCIAL MARKET EXPOSURE (CONTINUED) Derivative investments are also utilized to add value to the portfolio where market inefficiencies are believed to exist. At March 31, 2000, bond and stock index futures outstanding were $157.4 million with underlying investments having a market value of $4.4 billion. A 10% appreciation or depreciation of these derivative instruments would have resulted in unrealized gains of $15.7 million and losses of $15.7 million. CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS The Private Securities Litigation Reform Act of 1995 ("PSLRA") provides a safe harbor for forward-looking statements. This Form 10-Q, the Company's annual report to stockholders, any proxy statement, any Form 10-K or Form 8-K of the Company, including any amendments thereto, or any other written or oral statements made by or on behalf of the Company may include forward-looking statements which reflect the Company's current views with respect to future events and financial performance. Such statements include forward-looking statements both with respect to the Company and the insurance, reinsurance and financial services sectors in general (both as to underwriting and investment matters). Statements that are not historical facts or that include the words "expect", "intend", "plan, "believe", "project", "anticipate", "will", or similar statements of a future or forward-looking nature identify forward-looking statements for purposes of the PSLRA. All forward-looking statements address matters that involve risks and uncertainties. Accordingly, there are or will be important factors that could cause actual results to differ materially from those indicated in such statements. The Company believes that these factors include but are not limited to the following: (i) ineffectiveness or obsolescence of the Company's business strategy due to changes in current or future market conditions; (ii) increased competition on the basis of pricing, capacity, coverage terms or other factors; (iii) greater frequency or severity of claims and loss activity, including as a result of natural or man-made catastrophic events, than the Company's underwriting, reserving or investment practices anticipate based on historical experience or industry data; (iv) developments in the world's financial and capital markets which adversely affect the performance of the Company's investments or reduce fees earned by the Company's investment management affiliates; (v) changes in regulations or tax laws applicable to the Company, its subsidiaries, brokers or customers; (vi) acceptance of the Company's products and services, including new products and services; (vii) changes in the availability, cost or quality of reinsurance or retrocessional coverage; (viii) changes in the distribution or placement of risks due to increased consolidation of insurance and reinsurance brokers; (ix) the impact of Year 2000-related issues on the Company's underwriting exposures; (x) loss of key personnel; (xi) the effects of mergers, acquisitions and divestitures; (xii) changes in rating agency policies or practices that may adversely affect the Company's claims paying ratings; (xiii) changes in accounting policies or practices; and (xiv) changes in general economic conditions, including inflation, foreign, exchange rates, and other factors. The foregoing review of important factors should not be construed as exhaustive and should be read in conjunction with other cautionary statements that are included herein or elsewhere. The Company undertakes no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future developments or otherwise. 22 XL CAPITAL LTD PART II--OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The Company is a party to various legal proceedings, including arbitration, arising in the ordinary course of business. Such legal proceedings generally relate to claims asserted by or against the Company's subsidiaries in the ordinary course of their respective insurance and reinsurance operations. The Company does not believe that the eventual resolution of any of the legal proceedings to which it is a party will result in a material adverse effect on its financial condition or results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS None. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K EXHIBITS Exhibit 11--Statement Regarding Computation of Per Share Earnings. REPORTS ON FORM 8-K Current Report on Form 8-K filed on February 1, 2000, under Item 8 thereof. 23 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. XL CAPITAL LTD --------------------------------------------- (Registrant) May 15, 2000 By: /s/ BRIAN M. O'HARA ----------------------------------------- Brian M. O'Hara President and Chief Executive Officer May 15, 2000 By: /s/ ROBERT R. LUSARDI ----------------------------------------- Robert R. Lusardi Executive Vice President and Chief Financial Officer
24 EX-11 2 EXHIBIT 11 XL CAPITAL LTD COMPUTATION OF EARNINGS PER ORDINARY SHARE AND ORDINARY SHARE EQUIVALENT (U.S. DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED MARCH 31 ------------------- 2000 1999 -------- -------- (UNAUDITED) BASIC EARNINGS PER SHARE: Net income.................................................. $223,759 $209,812 Weighted average ordinary shares outstanding................ 125,671 128,414 Basic earnings per share.................................... $ 1.78 $ 1.63 ======== ======== DILUTED EARNINGS PER SHARE: Net income.................................................. $223,759 $209,812 Add back after-tax interest on convertible debentures....... -- 876 -------- -------- Adjusted net income......................................... 223,759 210,688 -------- -------- Weighted average ordinary shares outstanding-basic.......... 125,671 128,414 Average stock options outstanding (1)....................... 1,093 1,970 Assumed conversion of convertible debentures (2)............ -- 2,020 -------- -------- Weighted average ordinary shares outstanding-diluted........ 126,764 132,404 -------- -------- Diluted earnings per share.................................. $ 1.77 $ 1.58 ======== ======== DIVIDENDS PER SHARE......................................... $ 0.45 $ 0.44 ======== ========
- ------------------------ (1) Net of shares repurchased under the treasury stock method. (2) 1999 reflects the assumed conversion of the 5.25% Convertible Subordinated Debentures due 2000, formerly issued by NAC Re. These debentures were called in June 1999 and the actual conversion is reflected in 1999. EX-27 3 EXHIBIT 27
7 3-MOS DEC-31-2000 JAN-01-2000 MAR-31-2000 8,274,364 0 0 922,604 0 0 9,196,968 844,296 108,183 331,546 16,208,940 5,395,499 1,762,022 1,076,566 0 410,726 0 0 1,244 5,574,382 16,208,940 494,499 128,527 68,707 4,956 302,834 103,694 91,823 215,612 (8,147) 223,759 0 0 0 223,759 1.78 1.77 0 0 0 0 0 0 0
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