-----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, R9gtBkN7l6zg1/MJrMAWflqLdcuJRemph+5ZO8roJV2BFne1oEDI/hKaY6ZUah73 RdjW8CKbj0Oi1K6WvHEXuA== /in/edgar/work/0000912057-00-049942/0000912057-00-049942.txt : 20001115 0000912057-00-049942.hdr.sgml : 20001115 ACCESSION NUMBER: 0000912057-00-049942 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000930 FILED AS OF DATE: 20001114 FILER: COMPANY DATA: COMPANY CONFORMED NAME: XL CAPITAL LTD CENTRAL INDEX KEY: 0000875159 STANDARD INDUSTRIAL CLASSIFICATION: [6351 ] IRS NUMBER: 980058718 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-10804 FILM NUMBER: 766809 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 a2030161z10-q.txt 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 SEPTEMBER 30, 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 (IRS 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 November 9, 2000, there were outstanding 124,364,866 Class A 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 September 30, 2000 and December 31, 1999 (Unaudited)............................. 3 Consolidated Statements of Income and Comprehensive Income for the Three Months Ended September 30, 2000 and 1999 (Unaudited) and the Nine Months Ended September 30, 2000 and 1999 (Unaudited)...................................... 4 Consolidated Statements of Shareholders' Equity for the Nine Months Ended September 30, 2000 and 1999 (Unaudited)...... 5 Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 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........................ 14 Item 3. Quantitative and Qualitative Disclosures about Market Risk...................................................... 28 PART II. OTHER INFORMATION Item 1. Legal Proceedings........................................... 31 Item 4. Submission of Matters to a Vote of Shareholders............. 31 Item 6. Exhibits and Reports on Form 8-K............................ 31 Signatures........................................................... 33
2 PART I--FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS XL CAPITAL LTD CONSOLIDATED BALANCE SHEETS (U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED) ---------------------------- SEPTEMBER 30, DECEMBER 31, 2000 1999 ------------- ------------ ASSETS Investments: Fixed maturities, available for sale at fair value (amortized cost: 2000, $8,601,100; 1999, $7,835,919).... $ 8,359,040 $ 7,581,151 Equity securities, at fair value (cost: 2000, $537,560; 1999, $863,020)......................................... 617,076 1,136,180 Short-term investments, at fair value (amortized cost: 2000, $205,696; 1999, $405,375)......................... 198,221 405,260 ----------- ----------- Total investments..................................... 9,174,337 9,122,591 Cash and cash equivalents................................... 931,502 557,749 Investments in affiliates................................... 725,860 479,911 Other investments........................................... 168,840 165,613 Accrued investment income................................... 141,149 111,590 Deferred acquisition costs.................................. 325,392 275,716 Prepaid reinsurance premiums................................ 398,186 217,314 Premiums receivable......................................... 1,212,912 1,126,397 Reinsurance balances receivable............................. 135,047 149,880 Unpaid losses and loss expenses recoverable................. 1,100,796 831,864 Intangible assets (accumulated amortization: 2000, $160,072, 1999, $118,663)........................................... 1,595,132 1,626,946 Deferred tax asset, net..................................... 103,533 97,928 Other assets................................................ 356,267 327,413 ----------- ----------- Total assets.......................................... $16,368,953 $15,090,912 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Unpaid losses and loss expenses............................. $ 5,369,143 $ 5,369,402 Deposit liabilities and policy benefit reserves............. 1,169,487 837,893 Unearned premiums........................................... 1,776,193 1,497,376 Notes payable and debt...................................... 450,030 410,726 Reinsurance balances payable................................ 431,804 387,916 Net payable for investments purchased....................... 1,225,484 622,260 Other liabilities........................................... 362,749 345,738 Minority interest........................................... 17,496 42,523 ----------- ----------- Total liabilities..................................... $10,802,386 $ 9,513,834 ----------- ----------- Commitments and Contingencies Shareholders' Equity: Authorized, 999,990,000 ordinary shares, par value $0.01 Issued and outstanding, ordinary shares (2000, 124,271,366; 1999, 127,807,414)........................................ 1,243 1,278 Contributed surplus......................................... 2,459,927 2,520,136 Accumulated other comprehensive (loss) income............... (138,400) 19,311 Deferred compensation....................................... (21,108) (28,797) Retained earnings........................................... 3,264,905 3,065,150 ----------- ----------- Total shareholders' equity............................ $ 5,566,567 $ 5,577,078 ----------- ----------- Total liabilities and shareholders' equity............ $16,368,953 $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)
(UNAUDITED) (UNAUDITED) THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30 SEPTEMBER 30 ------------------- ----------------------- 2000 1999 2000 1999 -------- -------- ---------- ---------- Revenues: Net premiums earned............................ $539,945 $488,729 $1,537,819 $1,289,868 Net investment income.......................... 134,624 126,560 399,591 394,833 Net realized gains (losses) on sales of investments.................................. 1,026 (12,671) 74,808 72,389 Equity in net income of affiliates............. 18,447 15,372 61,682 24,707 Fee and other income........................... 539 28,800 8,835 43,221 -------- -------- ---------- ---------- Total revenues............................... 694,581 646,790 2,082,735 1,825,018 -------- -------- ---------- ---------- Expenses: Losses and loss expenses....................... 338,000 310,013 969,374 875,635 Acquisition costs.............................. 130,032 103,736 349,384 268,755 Operating expenses............................. 66,809 68,336 203,883 229,932 Interest expense............................... 7,822 11,414 23,719 31,220 Amortization of intangible assets.............. 13,601 13,864 41,409 37,049 -------- -------- ---------- ---------- Total expenses............................... 556,264 507,363 1,587,769 1,442,591 -------- -------- ---------- ---------- Income before minority interest and income tax expense........................................ 138,317 139,427 494,966 382,427 Minority interest.............................. (199) 320 528 (220) Income tax (benefit) expense................... (945) 1,705 (11,266) (27,274) -------- -------- ---------- ---------- Net income....................................... 139,461 137,402 505,704 409,921 -------- -------- ---------- ---------- Change in net unrealized appreciation of investments.................................... 74 (88,852) (138,586) (295,926) Foreign currency translation adjustments......... (8,880) 1,113 (19,195) (2,801) -------- -------- ---------- ---------- Comprehensive income............................. $130,655 $ 49,663 $ 347,923 $ 111,194 ======== ======== ========== ========== Weighted average ordinary shares and ordinary share equivalents outstanding--basic........... 123,821 127,544 123,962 127,580 ======== ======== ========== ========== Weighted average ordinary shares and ordinary share equivalents outstanding--diluted......... 126,286 129,032 125,679 130,727 ======== ======== ========== ========== Earnings per ordinary share and ordinary share equivalent--basic.............................. 1.13 1.08 4.08 3.21 ======== ======== ========== ========== Earnings per ordinary share and ordinary share equivalent--diluted............................ 1.10 1.06 4.02 3.14 ======== ======== ========== ==========
See accompanying notes to Unaudited Consolidated Financial Statements. 4 XL CAPITAL LTD CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (U.S. DOLLARS IN THOUSANDS)
(UNAUDITED) NINE MONTHS ENDED SEPTEMBER 30 ----------------------- 2000 1999 ---------- ---------- Ordinary Shares: Balance--beginning of year................................ $ 1,278 $ 1,287 Issue of shares........................................... -- 1 Exercise of stock options................................. 14 21 Repurchase of treasury shares............................. (49) (33) ---------- ---------- Balance--end of period................................ $ 1,243 $ 1,276 ---------- ---------- Contributed Surplus: Balance--beginning of year................................ $2,520,136 $2,508,062 Issue of shares........................................... 1,133 11,019 Exercise of stock options................................. 34,653 7,271 Repurchase of treasury shares............................. (95,995) (15,588) ---------- ---------- Balance--end of period................................ $2,459,927 $2,510,764 ---------- ---------- Accumulated other comprehensive (loss) income: Balance--beginning of year................................ $ 19,311 $ 235,185 Net change in unrealized gains on investment portfolio, net of tax.............................................. (132,296) (291,019) Net change in unrealized gains on investment portfolio of affiliate............................................... (6,290) (4,907) Currency translation adjustments.......................... (19,125) (2,802) ---------- ---------- Balance--end of period................................ $ (138,400) $ (63,543) ---------- ---------- Deferred Compensation: Balance--beginning of year................................ $ (28,797) $ (22,954) Forfeit (issue) of restricted shares...................... 1,676 (9,535) Amortization.............................................. 6,013 6,359 ---------- ---------- Balance--end of period................................ $ (21,108) $ (26,130) ---------- ---------- Retained Earnings: Balance--beginning of year................................ $3,065,150 $2,891,023 Net income................................................ 505,704 409,921 Cash dividends paid....................................... (169,313) (211,778) Repurchase of treasury shares............................. (136,636) (83,724) ---------- ---------- Balance--end of period................................ $3,264,905 $3,005,442 ---------- ---------- Total shareholders' equity.................................. $5,566,567 $5,427,809 ========== ==========
See accompanying notes to Unaudited Consolidated Financial Statements. 5 XL CAPITAL LTD CONSOLIDATED STATEMENTS OF CASH FLOWS (U.S. DOLLARS IN THOUSANDS)
(UNAUDITED) NINE MONTHS ENDED SEPTEMBER 30 ------------------------- 2000 1999 ----------- ----------- Cash flows provided by (used in) operating activities: Net income................................................ $ 505,704 $ 409,921 Adjustments to reconcile net income to net cash provided by operating activities: Net realized gains on sales of investments................ (74,808) (72,389) Amortization of discounts on fixed maturities............. (35,801) (17,007) Equity in net income of affiliates........................ (61,682) (24,707) Amortization of deferred compensation..................... 6,974 6,359 Amortization of intangible assets......................... 41,409 37,049 Unpaid losses and loss expenses........................... (43,191) 111,169 Unearned premiums......................................... 278,817 350,412 Premiums receivable....................................... (86,515) (159,808) Reinsurance balances receivable........................... 14,833 (9,081) Unpaid losses and loss expenses recoverable............... (267,271) (130,234) Prepaid reinsurance premiums.............................. (180,872) (143,367) Other..................................................... (52,936) 197,109 ----------- ----------- Total adjustments....................................... (461,043) 145,505 ----------- ----------- Net cash provided by operating activities................. 44,661 555,426 ----------- ----------- Cash flows provided by (used in) investing activities: Proceeds from sale of fixed maturities and short-term investments............................................. 17,942,935 12,788,599 Proceeds from redemption of fixed maturities and short-term investments.................................. 430,274 89,264 Proceeds from sale of equity securities................... 1,136,214 994,189 Purchases of fixed maturities and short-term investments............................................. (18,207,937) (12,651,260) Purchases of equity securities............................ (837,356) (758,301) Deferred gains on forward contracts....................... (1,231) (283) Net acquisitions of affiliates............................ (135,407) (202,128) Acquisition of subsidiaries, net of cash acquired......... (3,094) (173,334) Other investments......................................... (26,683) (51,160) Deposit liabilities and policy benefit reserves........... 386,318 -- Other assets.............................................. (28,276) (61,112) ----------- ----------- Net cash provided by (used in) investing activities....... 655,757 (25,526) ----------- ----------- Cash flows provided by (used in) financing activities: Proceeds from exercise of stock options................... 34,667 8,777 Repurchase of treasury shares............................. (232,680) (99,344) Dividends paid............................................ (169,313) (211,778) Proceeds from loans....................................... 50,304 328,700 Repayment of notes........................................ (11,000) (331,924) Repayment of long term debt............................... -- (201,737) Minority interest......................................... -- (5,340) ----------- ----------- Net cash used in financing activities....................... (328,022) (512,646) ----------- ----------- Effects of exchange rate changes on foreign currency cash balances.................................................. 1,357 (552) ----------- ----------- Increase in cash and cash equivalents....................... 373,753 16,702 Cash and cash equivalents-beginning of year................. 557,749 480,874 ----------- ----------- Cash and cash equivalents-end of period..................... $ 931,502 $ 497,576 =========== ===========
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. 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. As part of this agreement, the Company received the remaining ownership (other than management shares) in Latin American Re. (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. 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 the 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 allocate 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 the Company's results, the segment results and operational cash flows. 7 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 SEPTEMBER 30, 2000
LLOYD'S FINANCIAL INSURANCE REINSURANCE SYNDICATES SERVICES TOTAL --------- ----------- ---------- --------- -------- Net premiums earned....................... $177,992 $263,033 $93,378 $5,542 $539,945 Fee and other income...................... 147 (1,461) 79 1,774 539 Net losses and loss expenses (1).......... 125,965 149,649 60,924 1,462 338,000 Acquisition costs......................... 31,402 68,412 29,109 1,109 130,032 Operating expenses........................ 21,134 17,802 8,528 5,261 52,725 Exchange gains............................ (2,555) (377) (803) -- (3,735) -------- -------- ------- ------ -------- Underwriting profit (loss)................ $ 2,193 $ 26,086 $(4,301) $ (516) $ 23,462 Net investment income..................... 134,624 Net realized gains on investments......... 1,026 Equity in net income of affiliates........ 18,447 Interest expense.......................... 7,822 Amortization of intangible assets......... 13,601 Corporate operating expenses.............. 17,819 Minority interest......................... (199) Income tax benefit........................ (945) -------- Net income................................ $139,461 ======== Loss and loss expense ratio (1)........... 70.8% 56.9% 65.3% 26.4% 62.6% Underwriting expense ratio................ 29.5% 32.8% 40.3% 114.9% 33.8% -------- -------- ------- ------ -------- Combined ratio............................ 100.3% 89.7% 105.6% 141.3% 96.4% ======== ======== ======= ====== ========
- ------------------------ (1) Net losses incurred for the insurance segment include, and the reinsurance segment exclude, $11.2 million relating to an intercompany stop loss agreement. Consolidated results are not affected by this agreement. The loss and loss expense ratio would have been 64.5% and 61.1% and the underwriting profit would have been $13.4 million and $14.9 million in the insurance and reinsurance segments, respectively, had this stop loss agreement not been in place. 8 XL CAPITAL LTD NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (U.S. DOLLARS IN THOUSANDS) 3. SEGMENT INFORMATION (CONTINUED) QUARTER ENDED SEPTEMBER 30, 1999
LLOYD'S FINANCIAL INSURANCE REINSURANCE SYNDICATES SERVICES TOTAL --------- ----------- ---------- --------- -------- Net premiums earned....................... $155,542 $235,159 $95,085 $ 2,943 $488,729 Fee and other income...................... 7,586 -- 6,669 14,545 28,800 Net losses and loss expenses.............. 98,861 137,722 72,601 829 310,013 Acquisition costs......................... 20,593 62,395 20,726 22 103,736 Operating expenses........................ 22,636 24,554 8,729 2,760 58,679 Exchange gains............................ (724) (2,418) (523) -- (3,665) -------- -------- ------- ------- -------- Underwriting profit....................... $ 21,762 $ 12,906 $ 221 $13,877 $ 48,766 Net investment income..................... 126,560 Net realized losses on investments........ (12,671) Equity in net income of affiliates........ 15,372 Interest expense.......................... 11,414 Amortization of intangible assets......... 13,864 Corporate operating expenses.............. 13,322 Minority interest......................... 320 Income tax expense........................ 1,705 -------- Net income................................ $137,402 ======== Loss and loss expense ratio............... 63.6% 58.5% 76.3% 28.2% 63.4% Underwriting expense ratio................ 27.8% 37.0% 31.0% 94.5% 33.2% -------- -------- ------- ------- -------- Combined ratio............................ 91.4% 95.5% 107.3% 122.7% 96.6% ======== ======== ======= ======= ========
9 XL CAPITAL LTD NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (U.S. DOLLARS IN THOUSANDS) 3. SEGMENT INFORMATION (CONTINUED) NINE MONTHS ENDED SEPTEMBER 30, 2000
LLOYD'S FINANCIAL INSURANCE REINSURANCE SYNDICATES SERVICES TOTAL --------- ----------- ---------- --------- ---------- Net premiums earned...................... $475,572 $752,183 $291,598 $18,466 $1,537,819 Fee and other income..................... 5,353 (1,229) (3,654) 8,365 8,835 Net losses and loss expenses (1)......... 303,557 456,498 204,614 4,705 969,374 Acquisition costs........................ 74,114 185,285 88,163 1,822 349,384 Operating expenses....................... 59,296 70,454 16,471 16,909 163,130 Exchange (gains) losses.................. (2,085) 1,264 (3,197) -- (4,018) -------- -------- -------- ------- ---------- Underwriting profit (loss)............... $ 46,043 $ 37,453 $(18,107) $ 3,395 $ 68,784 Net investment income.................... 399,591 Net realized gains on investments........ 74,808 Equity in net income of affiliates....... 61,682 Interest expense......................... 23,719 Amortization of intangible assets........ 41,409 Corporate operating expenses............. 44,771 Minority interest........................ 528 Income tax benefit....................... (11,266) ---------- Net income............................... $ 505,704 ========== Loss and loss expense ratio (1).......... 63.8% 60.7% 70.2% 25.5% 63.1% Underwriting expense ratio............... 28.1% 34.0% 35.9% 101.4% 33.3% -------- -------- -------- ------- ---------- Combined ratio........................... 91.9% 94.7% 106.1% 126.9% 96.4% ======== ======== ======== ======= ==========
- ------------------------ (1) Net losses incurred for the insurance segment include, and the reinsurance segment exclude, $22.3 million relating to an intercompany stop loss agreement. Consolidated results are not affected by this agreement. The loss and loss expense ratio would have been 59.1% and 63.7% and the underwriting profit would have been $68.4 million and $15.1 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) NINE MONTHS ENDED SEPTEMBER 30, 1999
LLOYD'S FINANCIAL INSURANCE REINSURANCE SYNDICATES SERVICES TOTAL --------- ----------- ---------- --------- ---------- Net premiums earned...................... $352,027 $653,254 $269,274 $15,313 $1,289,868 Fee and other income..................... 7,584 -- 20,495 15,142 43,221 Net losses and loss expenses (1) (2)..... 211,375 354,766 210,733 3,761 780,635 Acquisition costs........................ 50,746 156,020 61,989 -- 268,755 Operating expenses (3)................... 48,602 67,727 28,701 8,910 153,940 Exchange (gains) losses.................. 383 1,733 (2,855) -- (739) -------- -------- -------- ------- ---------- Underwriting profit (loss)............... $ 48,505 $ 73,008 $ (8,799) $17,784 $ 130,498 Net investment income.................... 394,833 Net realized gains on investments........ 72,389 Equity in net income of affiliates....... 24,707 Interest expense......................... 31,220 Amortization of intangible assets........ 37,049 Corporate operating expenses............. 31,459 Loss reserve adjustment (2).............. 95,000 One-time charges (3)..................... 45,272 Minority interest........................ (220) Income tax benefit....................... (27,274) ---------- Net income............................... $ 409,921 ========== Loss and loss expense ratio (1).......... 60.1% 54.3% 78.2% 24.6% 60.5% Underwriting expense ratio............... 28.2% 34.3% 33.7% 58.2% 32.8% -------- -------- -------- ------- ---------- Combined ratio........................... 88.3% 88.6% 111.9% 82.8% 93.3% ======== ======== ======== ======= ==========
- ------------------------ (1) Net losses incurred for the insurance segment include, and the reinsurance segment exclude, $72.5 million relating to an intercompany stop loss agreement. Consolidated results are not affected by this agreement. The loss and loss expense ratio would have been 39.5% and 65.4% and the underwriting profit would have been $121.0 million and $0.5 million in the insurance and reinsurance segments, respectively, had this stop loss agreement not been in place. (2) Net losses and loss expenses exclude an increase to loss reserves of $95.0 million associated with the merger with NAC. (3) Operating expenses exclude one-time charges of $45.3 million associated with the merger with NAC. 11 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 SEPTEMBER 30, 2000
GROSS PREMIUMS NET PREMIUMS NET PREMIUMS WRITTEN WRITTEN EARNED -------------- ------------ ------------ Casualty insurance................................... $190,337 $ 97,772 $ 87,945 Casualty reinsurance................................. 84,972 67,037 104,781 Property catastrophe................................. 30,997 15,422 35,328 Other property....................................... 157,211 113,825 105,797 Marine, energy, aviation and satellite............... 72,709 60,643 78,552 Lloyd's syndicates................................... 104,339 90,398 93,378 Other................................................ 95,992 55,005 34,164 -------- -------- -------- Total................................................ $736,557 $500,102 $539,945 ======== ======== ========
QUARTER ENDED SEPTEMBER 30, 1999
GROSS PREMIUMS NET PREMIUMS NET PREMIUMS WRITTEN WRITTEN EARNED -------------- ------------ ------------ Casualty insurance................................... $ 93,812 $ 79,704 $ 82,869 Casualty reinsurance................................. 131,530 103,226 82,579 Property catastrophe................................. 27,964 23,416 32,335 Other property....................................... 94,814 67,809 88,556 Marine, energy, aviation and satellite............... 44,231 25,698 48,848 Lloyd's syndicates................................... 146,864 120,911 95,085 Other................................................ 90,402 74,053 58,457 -------- -------- -------- Total................................................ $629,617 $494,817 $488,729 ======== ======== ========
12 XL CAPITAL LTD NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (U.S. DOLLARS IN THOUSANDS) 3. SEGMENT INFORMATION (CONTINUED) (CONTINUED) NINE MONTHS ENDED SEPTEMBER 30, 2000
GROSS PREMIUMS NET PREMIUMS NET PREMIUMS WRITTEN WRITTEN EARNED -------------- ------------ ------------ Casualty insurance................................... $ 424,875 $ 267,338 $ 245,847 Casualty reinsurance................................. 342,765 246,153 297,007 Property catastrophe................................. 155,828 134,039 100,964 Other property....................................... 443,897 330,681 279,980 Marine, energy, aviation and satellite............... 307,160 216,118 164,168 Lloyd's syndicates................................... 399,945 260,379 291,598 Other................................................ 277,577 197,402 158,255 ---------- ---------- ---------- Total................................................ $2,352,047 $1,652,110 $1,537,819 ========== ========== ==========
NINE MONTHS ENDED SEPTEMBER 30, 1999
GROSS PREMIUMS NET PREMIUMS NET PREMIUMS WRITTEN WRITTEN EARNED -------------- ------------ ------------ Casualty insurance................................... $ 241,831 $ 192,608 $ 214,096 Casualty reinsurance................................. 299,628 252,716 223,011 Property catastrophe................................. 138,674 124,215 99,216 Other property....................................... 308,373 226,953 233,711 Marine, energy, aviation and satellite............... 183,774 137,299 118,709 Lloyd's syndicates................................... 480,236 355,227 269,274 Other................................................ 210,397 177,805 131,851 ---------- ---------- ---------- Total................................................ $1,862,913 $1,466,823 $1,289,868 ========== ========== ==========
4. SHARE CAPITAL In June 2000, the Company's Class B ordinary shares were converted into Class A ordinary shares on a one-for-one basis. 5. SUBSEQUENT EVENT In connection with the Company's decision in the fourth quarter of 2000 to realign its business focus, the Company expects to incur a one-time charge in the fourth quarter of 2000 of approximately $100.0 million to $125.0 million. This cost relates to the realignment, including the exit from certain unprofitable lines of business and employee severance charges. The Company is in the process of finalizing this cost and accordingly, no assurance can be provided that this charge will not be larger than anticipated. XL Specialty, Lloyd's and NAC Re are most affected by these actions. Business lines that will be exited include Illinois-based transportation and marine cargo and onshore energy at Lloyd's. NAC Re will exit the pooled aviation and medical stop loss reinsurance businesses. Approximately $200.0 million of annual gross premium written is associated with the exited lines of business. 13 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THE THREE MONTHS SEPTEMBER 30, 1999 (U.S. DOLLARS IN THOUSANDS EXCEPT 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 of the Company and NAC. This "Management's Discussion and Analysis of Results of Operations and Financial Condition" contains forward-looking statements that 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 significantly 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" for a list of factors that could cause actual results to differ significantly 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 September 30, 2000 and 1999:
(UNAUDITED) THREE MONTHS ENDED SEPTEMBER 30 ------------------- 2000 1999 -------- -------- Net operating income (excluding net realized gains on investments).......................................... $138,333 $149,654 Net realized gains (losses) on investments.............. 1,128 (12,252) -------- -------- Net income.............................................. $139,461 $137,402 ======== ======== Earnings per share--basic............................... $ 1.13 $ 1.08 Earnings per share--diluted............................. $ 1.10 $ 1.06
Net operating income decreased in the third quarter 2000 compared to the same period in 1999 primarily due to lower underwriting profit. In the third quarter 1999, higher fee and other income was recorded relating to the Company's insurance, reinsurance and Lloyd's segment operations as compared to the third quarter 2000. These are discussed below. 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. 14 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. Insurance business written includes general liability, environmental 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:
(UNAUDITED) THREE MONTHS ENDED SEPTEMBER 30 ------------------- 2000 1999 % CHANGE -------- -------- -------- Net premiums earned........................... $177,992 $155,542 14.4% Fee and other income.......................... 147 7,586 NM Net losses and loss expenses.................. 125,965 98,861 27.4% Acquisition costs............................. 31,402 20,593 52.5% Operating expenses............................ 21,134 22,636 (6.6)% Exchange gains................................ (2,555) (724) NM -------- -------- ------- Underwriting profit........................... $ 2,193 $ 21,762 (89.9)% ======== ======== =======
- ------------------------ * NM--Not Meaningful Growth in net premiums earned is mainly due to the inclusion of new business, primarily environmental liability, written by ECS. ECS contributed approximately $80.0 million in gross premiums written and $30.0 million in net premiums earned during the third quarter of 2000. No premiums were written or earned in this segment in the third quarter of 1999 as ECS commenced writing business on behalf of the Company with effect from January 1, 2000. Prior to this date, ECS had agency agreements in place with other companies. Price increases have been experienced in the property lines which have contributed to the growth of net premiums earned. However, pricing generally has remained relatively unchanged on the liability lines of business. Net premiums earned in the quarter ended September 30, 2000 have been reduced by approximately $9.0 million relating to additional reinsurance purchased effective June 1, 2000. In 1999, fee and other income was earned primarily from ECS by providing agency and risk management consulting services. As ECS now generates premiums on behalf of the Company, fee income has declined in the quarter ended September 30, 2000 compared to the same period in 1999. The increases in net losses and loss expenses, acquisition costs and operating expenses are also primarily attributable to the new business generated by ECS. In addition, $4.1 million of the increase in acquisition costs in the third quarter of 2000 is due to a reallocation of certain costs from the reinsurance segment to the insurance segment to more appropriately match costs with revenues by segment. 15 The following table presents the ratios for the insurance segment:
(UNAUDITED) THREE MONTHS ENDED SEPTEMBER 30 ------------------- 2000 1999 -------- -------- Loss and loss expense ratio............................. 70.8% 63.6% Underwriting expense ratio.............................. 29.5% 27.8% ------ ----- Combined ratio.......................................... 100.3% 91.4% ====== =====
In the quarter ended September 30, 2000, $11.2 million of losses were included in the insurance segment and excluded from the reinsurance segment due to an intercompany stop loss agreement with a company in the reinsurance segment. The loss and loss expense ratio would have been 64.5% and the underwriting profit would have been $13.4 million in 2000 had this agreement not been in place. There were no losses under this agreement in the third quarter of 1999. In addition, since the first quarter of 2000, the Company has applied higher loss ratios to certain of its casualty lines written in the current year. These loss ratios have been actuarially estimated and reflect the continued negative impact that competitive market conditions have had on premium rates for these lines of business. The loss ratio also reflects the change in mix of business in net premiums earned in the quarter ended September 30, 2000 compared to the third quarter of 1999. The increase in the underwriting expense ratio is primarily due to the reallocation of certain costs from the reinsurance segment to the insurance segment as described above. REINSURANCE OPERATIONS The reinsurance business written by XL Mid Ocean Re and Latin American Re is primarily short-tail in nature, while that written by NAC Re is primarily 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:
(UNAUDITED) THREE MONTHS ENDED SEPTEMBER 30 ------------------- 2000 1999 % CHANGE -------- -------- -------- Net premiums earned........................... $263,033 $235,159 11.9% Fee and other income.......................... (1,461) -- NM Net losses and loss expenses.................. 149,649 137,722 8.7% Acquisition costs............................. 68,412 62,395 9.6% Operating expenses............................ 17,802 24,554 (27.5)% Exchange gains................................ (377) (2,418) NM -------- -------- ------- Underwriting profit........................... $ 26,086 $ 12,906 102.1% ======== ======== =======
The increase in net premiums earned reflects additional net premiums written in prior quarters, particularly on the property and other short-tail lines of business, partially offset by decreases in casualty reinsurance written. The Company has experienced some price increases in the other property, marine, aviation and satellite lines of business. However, pricing has remained generally unchanged in the international property (excluding property catastrophe) and liability lines of business written by the Company. 16 Negative fee and other income in the third quarter of 2000 represents administrative costs relating to an outward reinsurance contract. The decrease in operating expenses is due mainly to a $4.1 million reallocation of costs in the third quarter of 2000 from the reinsurance segment to the insurance segment to more appropriately match costs with revenues by segment. The following table presents the ratios for the reinsurance segment:
(UNAUDITED) THREE MONTHS ENDED SEPTEMBER 30 ------------------- 2000 1999 -------- -------- Loss and loss expense ratio............................. 56.9% 58.5% Underwriting expense ratio.............................. 32.8% 37.0% ----- ----- Combined ratio.......................................... 89.7% 95.5% ===== =====
In the quarter ended September 30, 2000, $11.2 million of losses were included in the insurance segment and excluded from the reinsurance segment due to an intercompany stop loss agreement with a company in the insurance segment. The loss and loss expense ratio in the third quarter of 2000 would have been 61.1% and the underwriting profit would have been $14.9 million had this agreement not been in place. There were no losses under this agreement in the third quarter 1999. The increase in the loss ratio, excluding the effect of the stop loss, relates mainly to an increase in the loss ratios booked on selected casualty lines. The Company has recently purchased additional catastrophe reinsurance that is expected to reduce the Company's overall exposure to certain catastrophic events. The reduction in the underwriting expense ratio is mainly due to the decrease in operating expenses described above. 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 write a range of specialty lines, primarily 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 (loss) profit for this segment:
(UNAUDITED) THREE MONTHS ENDED SEPTEMBER 30 ------------------- 2000 1999 % CHANGE -------- -------- -------- Net premiums earned............................. $93,378 $95,085 (1.8)% Fee and other income............................ 79 6,669 NM Net losses and loss expenses.................... 60,924 72,601 (16.1)% Acquisition costs............................... 29,109 20,726 40.4% Operating expenses.............................. 8,528 8,729 (2.3)% Exchange gains.................................. (803) (523) NM ------- ------- ------- Underwriting (loss) profit...................... $(4,301) $ 221 NM ======= ======= =======
17 The decline in net premiums earned reflects the decrease in premiums written and earned by Brockbank, primarily due to the sale of the motor business with effect from January 1, 2000. Net premiums earned on the motor business of $43.3 million were included in the third quarter of 1999 compared to $8.1 million in the third quarter of 2000. The Company retains the run-off experience of this business and lower earned premiums relating to the motor business will result in subsequent quarters. Partially offsetting the reduction in net premiums earned was an increase in premiums written and earned at Denham and at Brockbank on the remaining book of business. These increases are mainly due to increases in total syndicate capacity provided by the Company for 2000 from approximately 43% to 50% at Brockbank and from approximately 43% to 75% at Denham. The Company expects to provide 100% of the capacity at Denham with effect from 2001. Fee and other income in 1999 includes approximately $6.3 million generated from the motor business. No such income was earned in 2000. Although Brockbank's managing agencies can also earn profit commissions from the syndicates they manage, no commissions were earned in either the third quarter of 2000 or 1999 due to expected lower underwriting profitability of the syndicates. The following table presents the ratios for this segment:
(UNAUDITED) THREE MONTHS ENDED SEPTEMBER 30 ------------------- 2000 1999 -------- -------- Loss and loss expense ratio............................... 65.3% 76.3% Underwriting expense ratio................................ 40.3% 31.0% ------ ------ Combined ratio............................................ 105.6% 107.3% ====== ======
The decrease in the loss ratio and increase in the expense ratio primarily reflects the effect of the sale of the motor business. During the third quarter of 1999, the motor business had a loss ratio of 89.2% and an expense ratio of 20.0%. Other business written by Brockbank and Denham typically has lower loss ratios and higher commission expenses than the motor business. FINANCIAL SERVICES The financial services business includes credit enhancements provided under 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 (loss) profit for this segment:
(UNAUDITED) THREE MONTHS ENDED SEPTEMBER 30 ------------------- 2000 1999 % CHANGE -------- -------- -------- Net premiums earned........................... $5,542 $ 2,943 88.3% Fee and other income.......................... 1,774 14,545 NM Net losses and loss expenses.................. 1,462 829 76.4% Acquisition costs............................. 1,109 22 NM Operating expenses............................ 5,261 2,760 90.6% Exchange gains................................ -- -- -- ------ ------- ----- Underwriting (loss) profit.................... $ (516) $13,877 NM ====== ======= =====
Financial guaranty premiums are earned over the life of the exposure, which is generally longer than that in the Company's other operating segments. Certain premiums, such as those received on an 18 installment basis, are not earned until the premium is reported. The increase in net premiums earned primarily reflects new business written in 2000. Premiums received in respect of credit default swaps are included as fee income and earned over the life of the policies. From time to time, the Company will assist in structuring transactions that may result in fee income. These transactions tend to be irregular in nature. During the quarter ended September 30, 1999, the Company wrote a significant loss portfolio transfer contract, which was accounted for on a deposit basis. The Company realized a fee of approximately $10.0 million on this transaction. The following table presents the ratios for this segment:
(UNAUDITED) THREE MONTHS ENDED SEPTEMBER 30 ------------------- 2000 1999 -------- -------- Loss and loss expense ratio............................. 26.4% 28.2% Underwriting expense ratio.............................. 114.9% 94.5% ------ ------ Combined ratio.......................................... 141.3% 122.7% ====== ======
This segment generally writes business to an estimated loss ratio of approximately 25%. The calculation of the expense ratio excludes fee and other income derived from credit default swap transactions. If this income were included, the expense ratio and the combined ratio in 2000 would have been 87.1% and 113.5%, respectively. The high expense ratio reflects the start up nature of this segment, which commenced towards the end of 1998 and has continued to build its infrastructure through 2000. The nature of this business is such that it writes contracts that extend over several years. Accordingly, as this book of business builds, it is anticipated that the expense ratio will decrease. INVESTMENT OPERATIONS The following table illustrates the changes in net investment income, net realized gains and losses and equity in net income of affiliates for the three-month periods ended September 30, 2000 and 1999:
(UNAUDITED) THREE MONTHS ENDED SEPTEMBER 30 ------------------- 2000 1999 % CHANGE -------- -------- -------- Net investment income......................... $134,624 $126,560 6.4% Net realized gains (losses)................... $ 1,026 $(12,671) NM Equity in net income of affiliates............ $ 18,447 $ 15,372 20.0%
Net investment income has increased in the third quarter 2000 compared to the third quarter 1999 primarily due to an increase in the investment yields on fixed income investments. The investment base at September 30, 2000 includes assets relating to the deposit liabilities assumed late in 1999 and early 2000. Investment income earned on these assets is reduced by the investment expense created by the accretion of these deposit liabilities. In July 2000, the Company sold its investment in FSA Holdings, Inc. Proceeds of the sale were $159.1 million and a gain of $54.1 million was realized in the quarter. Almost entirely offsetting this and other realized investment gains were realized capital losses of approximately $66.2 million on certain other investments where the Company has determined there to be an other than temporary decline in value. Equity in net income of affiliates has increased in the quarter primarily due to an increase in investment in affiliates from September 30, 1999 to September 30, 2000. 19 OTHER REVENUES AND EXPENSES The following table sets forth other revenues and expenses for the quarters ended September 30, 2000 and 1999:
(UNAUDITED) THREE MONTHS ENDED SEPTEMBER 30 ------------------- 2000 1999 % CHANGE -------- -------- -------- Amortization of intangible assets............... $13,601 $13,864 (1.9)% Corporate operating expenses.................... $17,819 $13,322 33.8% Interest expense................................ $ 7,822 $11,414 (31.5)% Minority interest............................... $ (199) $ 320 NM Income tax (benefit) expense.................... $ (945) $ 1,705 NM
The increase in corporate operating expenses is mainly the result of the increase in the corporate infrastructure from September 30, 1999 to September 30, 2000. The decrease in interest expense reflects a reduction in debt carried by the Company through the quarter in 2000 compared to 1999. The Company's U.S. operations pooled capital following acquisitions in the U.S. in 1999, which facilitated the repayment of debt during the third quarter 1999. The change in the income tax from an expense in 1999 to a benefit in 2000 principally reflects a reduction in taxable income due to declines in operating results worldwide. 20 RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THE NINE MONTHS ENDED SEPTEMBER 30, 1999 (U.S. DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) RESULTS OF OPERATIONS The following table presents an after-tax analysis of the Company's net income and earnings per share for the nine months ended September 30, 2000 and 1999:
(UNAUDITED) NINE MONTHS ENDED SEPTEMBER 30 -------------------- 2000 1999 -------- --------- Net operating income (excluding net realized gains on investments and one-time merger related adjustments)......................................... $424,625 $ 440,204 Net realized gains on investments...................... 81,079 71,448 Increase to loss reserves for NAC Re (1)............... -- (61,750) One-time merger related charges (1).................... -- (39,981) -------- --------- Net income............................................. $505,704 $ 409,921 ======== ========= Earnings per share--basic.............................. $ 4.08 $ 3.21 Earnings per share--diluted............................ $ 4.02 $ 3.14
- ------------------------ (1) NAC Re loss reserves were increased to align them with the Company's reserving methodologies and higher loss reserve factors. One-time charges relate to costs associated with the NAC merger. Net operating income decreased in the nine months ended September 30, 2000 compared to the nine months ended September 30, 1999 primarily due to lower underwriting profits in 2000. Partially offsetting this decrease is an increase in equity in net income of affiliates. INSURANCE OPERATIONS The following table summarizes the underwriting profit for this segment:
(UNAUDITED) NINE MONTHS ENDED SEPTEMBER 30 ------------------- 2000 1999 % CHANGE -------- -------- -------- Net premiums earned........................... $475,572 $352,027 35.1% Fee and other income.......................... 5,353 7,584 (29.4)% Net losses and loss expenses.................. 303,557 211,375 43.6% Acquisition costs............................. 74,114 50,746 46.0% Operating expenses............................ 59,296 48,602 22.0% Exchange (gains) losses....................... (2,085) 383 NM -------- -------- ------- Underwriting profit........................... $ 46,043 $ 48,505 (5.1)% ======== ======== =======
Growth in the insurance segment in the first nine months of 2000 compared to 1999 is mainly due to the acquisition of Intercargo (now known as XL Specialty) and ECS in the second quarter of 1999. ECS contributed approximately $180.0 million in gross premiums written and $70.0 million in net premiums earned during the first nine months of 2000. ECS commenced writing business on behalf of the Company with effect from January 1, 2000. Net premiums earned generated by ECS are expected to increase through the remainder of 2000 as net premiums earned catch up to the premium written. 21 In the first nine months of 1999, fee and other income was earned primarily by ECS by providing risk management consulting services. As ECS now generates premium on behalf of the Company in 2000, fee income has declined compared to 1999. The increase in net losses and loss expenses, acquisition costs and operating expenses is primarily attributable to the new business generated by ECS. The following table presents the ratios for the insurance segment:
(UNAUDITED) NINE MONTHS ENDED SEPTEMBER 30 ------------------- 2000 1999 -------- -------- Loss and loss expense ratio.............................. 63.8% 60.1% Underwriting expense ratio............................... 28.1% 28.2% ----- ----- Combined ratio........................................... 91.9% 88.3% ===== =====
The loss and loss expense ratio was affected by an intercompany stop loss agreement with a company in the reinsurance segment. In the nine months ended September 30, 2000 and 1999, $22.3 million and $72.5 million, respectively, of losses were included in the insurance segment and excluded from the reinsurance segment. The loss ratio would have been 59.1% and 39.5% and the underwriting profit would have been $68.4 million and $121.0 million in 2000 and 1999, respectively, had this agreement not been in place. Excluding the effects of the intercompany stop loss agreement, since the first quarter 2000, the Company has applied higher loss ratios to certain of its casualty lines written in the current year. These loss ratios have been actuarially estimated and reflect the continued negative impact that competitive market conditions have had on premium rates for these lines of business. In addition, in the first nine months of 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 developed more favorably than expected. REINSURANCE OPERATIONS The following table summarizes the underwriting profit for this segment:
(UNAUDITED) NINE MONTHS ENDED SEPTEMBER 30 ------------------- 2000 1999 % CHANGE -------- -------- -------- Net premiums earned........................... $752,183 $653,254 15.1% Fee and other income.......................... (1,229) -- NM Net losses and loss expenses.................. 456,498 354,766 28.7% Acquisition costs............................. 185,285 156,020 18.8% Operating expenses............................ 70,454 67,727 4.0% Exchange losses............................... 1,264 1,733 (27.1)% -------- -------- ------- Underwriting profit........................... $ 37,453 $ 73,008 (48.7)% ======== ======== =======
The increase in net premiums earned is mainly a result of an increase in net premiums written across most lines of business. The Company has experienced some price increases in the other property, marine, aviation and satellite lines of business. However, pricing has remained generally unchanged in the international property (excluding property catastrophe) and liability lines of business written by the Company. 22 Negative fee and other income represents administrative costs relating to an outward reinsurance contract. The following table presents the ratios for the reinsurance segment:
(UNAUDITED) NINE MONTHS ENDED SEPTEMBER 30 ------------------- 2000 1999 -------- -------- Loss and loss expense ratio.............................. 60.7% 54.3% Underwriting expense ratio............................... 34.0% 34.3% ----- ----- Combined ratio........................................... 94.7% 88.6% ===== =====
The increase in the combined ratio is primarily due to the effect of an intercompany stop loss agreement with a company in the insurance segment. Net losses and loss expenses incurred in this segment in 2000 and 1999 reflect a recovery of $22.3 million and $72.5 million, respectively, under this agreement. The loss and loss expense ratio in 2000 and 1999 would have been 63.7% and 65.4%, respectively, and the underwriting profit would have been $15.1 million and $0.5 million, respectively, had this agreement not been in place. The 1999 loss ratio does not include an adjustment to reserves for $95.0 million associated with the merger with NAC and is not included as part of the segment information. Excluding the effect of the stop loss agreement, loss ratios for this segment were lower in 2000 compared to 1999 as the first half of 1999 included several property catastrophe loss events, principally the Sydney hailstorms and the Oaklahoma tornadoes. Partially offsetting this reduction in the first nine months of 2000 has been the deterioration of loss ratios relating to casualty business written. LLOYD'S SYNDICATES The following table summarizes the underwriting loss for this segment:
(UNAUDITED) NINE MONTHS ENDED SEPTEMBER 30 ------------------- 2000 1999 % CHANGE -------- -------- -------- Net premiums earned........................... $291,598 $269,274 8.3% Fee and other income.......................... (3,654) 20,495 NM Net losses and loss expenses.................. 204,614 210,733 (2.9)% Acquisition costs............................. 88,163 61,989 42.2% Operating expenses............................ 16,471 28,701 (42.6)% Exchange gains................................ (3,197) (2,855) 12.0% -------- -------- ------- Underwriting loss............................. $(18,107) $ (8,799) NM ======== ======== =======
Net premiums earned reflect the growth in business written by Brockbank and Denham due principally to an increase in syndicate capacity provided by the Company from approximately 43% to 50% at Brockbank and from approximately 43% to 75% at Denham. Partially offsetting this increase is the reduction in net premiums earned relating to the motor business. In the nine months ended September 30, 2000 and 1999, net premiums earned on the motor business were $74.7 million and $108.7 million, respectively. Lower net premiums earned relating to the motor business will continue in subsequent quarters. Fee and other income in the first nine months of 1999 includes $17.3 million generated from the motor business. No such income was earned in the first nine months of 2000. Brockbank's managing agencies can also earn profit commissions from the syndicates they manage, which are offset by the related managing agency expenses. The first nine months of 1999 included $2.0 million in profit commissions. Due 23 to the loss deterioration in the Lloyd's market, no commissions were earned in the first nine months of 2000, resulting in negative fee and other income. The following table presents the ratios for this segment:
(UNAUDITED) NINE MONTHS ENDED SEPTEMBER 30 ------------------- 2000 1999 -------- -------- Loss and loss expense ratio.............................. 70.2% 78.2% Underwriting expense ratio............................... 35.9% 33.7% ------ ------ Combined ratio........................................... 106.1% 111.9% ====== ======
The decrease in the loss ratio primarily reflects the sale of the motor business. Loss ratios on the motor business were 95.4% for the nine months ended September 30, 1999 based on net premiums earned of $108.7 million and 89.0% on net premiums earned of $74.7 million in the nine months of 2000. Other business written by Brockbank and Denham typically has lower loss ratios and higher commission expenses than the motor business. FINANCIAL SERVICES The following table summarizes the underwriting profit for this segment:
(UNAUDITED) NINE MONTHS ENDED SEPTEMBER 30 ------------------- 2000 1999 % CHANGE -------- -------- -------- Net premiums earned............................. $18,466 $15,313 20.6% Fee and other income............................ 8,365 15,142 (44.8)% Net losses and loss expenses.................... 4,705 3,761 25.1% Acquisition costs............................... 1,822 -- NM Operating expenses.............................. 16,909 8,910 89.8% Exchange gains.................................. -- -- NM ------- ------- ------- Underwriting profit............................. $ 3,395 $17,784 (80.9)% ======= ======= =======
Financial guaranty premiums are earned over the life of the exposure, which is generally longer than that in the Company's other operating segments. Certain premiums, such as those received on an installment basis, are not earned until the premium is reported. Premiums received in respect of credit default swaps 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 may result in fee income. These transactions tend to be irregular in nature. During the third quarter 1999, the Company wrote a significant loss portfolio transfer contract, which was accounted for on a deposit basis. The Company recognized a fee of approximately $10.0 million on this transaction. The following table presents the ratios for this segment:
(UNAUDITED) NINE MONTHS ENDED SEPTEMBER 30 ------------------- 2000 1999 -------- -------- Loss and loss expense ratio.............................. 25.5% 24.6% Underwriting expense ratio............................... 101.4% 58.2% ------ ----- Combined ratio........................................... 126.9% 82.8% ====== =====
24 This segment generally writes business to a loss ratio of approximately 25%. The calculation of the expense ratio excludes fee and other income, which includes $6.7 million in income from credit default swaps in 2000. If this income were included, the expense ratio and the combined ratio would have been 74.4% and 99.9%, respectively. The high expense ratio reflects the start up nature of this segment. This business commenced towards the end of 1998 and has continued to build out its infrastructure though 2000. Accordingly, as this book of business builds, it is anticipated the expense ratio will decrease. INVESTMENT OPERATIONS The following table illustrates changes in net investment income, net realized gains and equity in net income of affiliates for the nine-month periods ended September 30, 2000 and 1999:
(UNAUDITED) NINE MONTHS ENDED SEPTEMBER 30 ------------------- 2000 1999 % CHANGE -------- -------- -------- Net investment income......................... $399,591 $394,833 1.2% Net realized gains............................ $ 74,808 $ 72,389 3.3% Equity in net income of affiliates............ $ 61,682 $ 24,707 NM
The Company's investment base at September 30, 2000 includes assets relating to deposit liabilities assumed in late 1999 and early 2000. Investment income earned on these assets is reduced by the investment expense created by the accretion of these deposit liabilities. Excluding these assets, the Company's investment base has declined in the first nine months of 2000 compared to the first nine months of 1999 as a result of claims payments, the repurchase of the Company's shares and the reallocation of assets to other strategic investments, from which income is accounted for as equity in net income of affiliates. Offsetting the decline in the investment base, investment yields have been slightly higher for the nine months of 2000 compared to 1999, which together with the additional income derived from the asset accumulation business, has resulted in higher net investment income as shown above. Equity in net income of affiliates in the first nine months of 2000 increased significantly over the first nine months of 1999. This is primarily attributable to new affiliate investments made in 2000 and returns on the Company's strategic investments in investment management companies, including funds managed by these companies. 1999 also included a loss of $2.5 million relating to Risk Capital. This investment was sold in January 2000. OTHER REVENUES AND EXPENSES The following table sets forth other revenues and expenses for the nine months ended September 30, 2000 and 1999:
(UNAUDITED) NINE MONTHS ENDED SEPTEMBER 30 --------------------- 2000 1999 % CHANGE --------- --------- -------- Amortization of intangible assets............ $ 41,409 $ 37,049 11.8% Corporate operating expenses................. $ 44,771 $ 31,459 29.7% Interest expense............................. $ 23,719 $ 31,220 (24.0)% Minority interest............................ $ 528 $ (220) NM Income tax benefit........................... $(11,266) $(27,274) (58.7)%
The increase in amortization of intangible assets is primarily a result of additional goodwill generated from the acquisition of ECS and XL Specialty late in the second quarter of 1999. The increase in corporate operating expenses is mainly a result of the increase in corporate infrastructure from September 30, 1999 to September 30, 2000. 25 The decrease in interest expense reflects a reduction in debt carried by the Company through the nine months of 2000 compared to 1999. The Company extinguished convertible debt assumed in connection with the NAC merger. 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. This decrease was partially offset by interest expense relating to interim borrowings used to finance the repurchase of shares in the six months ended June 30, 2000. The reduction in the income tax benefit of the Company in the first nine months of 2000 compared to the first nine months of 1999 principally reflects a reduction in pre-tax net losses. In 1999, the pre-tax net loss related primarily to a deterioration of the casualty reinsurance book of business underwritten prior to the merger with NAC. FINANCIAL CONDITION AND LIQUIDITY As a holding company, XL Capital's assets consist primarily of its investments in subsidiaries and 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 Company or its subsidiaries will be permitted to pay dividends in the future. The Company's shareholders' equity at September 30, 2000 was $5.6 billion, of which $3.3 billion was retained earnings. At September 30, 2000, total investments available for sale and cash net of unsettled investment trades were $8.9 billion, compared to $9.1 billion at December 31, 1999. This includes investments relating to the Company's asset accumulation business. During the first nine months of 2000, the Company sold investments categorized as available for sale to fund the purchase of 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 September 30, 2000 represented approximately 93.0% of invested assets and were managed by several independent investment management firms. Approximately 87.0% of fixed income securities are of investment grade, with 59.9% 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 relates to timing differences as investments are accounted for on a trade date basis. This increased from $622.3 million at December 31, 1999 to $1.2 billion at September 30, 2000 primarily due to higher investment in certain mortgage-backed securities where the settlement period is generally longer than most other fixed income investments. Certain business written by the Company has loss experience generally characterized as having low frequency and high severity. This may result in volatility in both the Company's results and operational cash flows. For the nine months ended September 30, 2000 and 1999, the net amount of losses due to claims activity paid by the Company was $1.3 billion and $911.0 million, respectively. Paid losses for the nine months ended September 30, 2000 includes $74.0 million relating to a commutation payment. The higher amount of paid claims in the first nine months of 2000 compared to the first nine months of 1999 has contributed to the lower operational cash flow in 2000 as compared to 1999. 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 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 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 reserves. 26 The Company has had several stock repurchase programs in the past as part of its capital management strategy. In June 1999, the Board of Directors rescinded the Company's share repurchase program. On January 9, 2000, the Board of Directors authorized a new program for the repurchase of shares up to $500.0 million. The new share repurchase program was announced in conjunction with a dividend increase of $0.04 per share per annum. Under the current program, the Company has purchased 4.9 million shares up to November 9, 2000 at a cost of $231.9 million or an average of $47.56 per share. As of September 30, 2000, the Company had bank, letter of credit and loan facilities available from a variety of sources including commercial banks totaling $2.6 billion of which $450.0 million in debt was outstanding. In addition, $1.1 billion of letters of credit were outstanding, 26% of which were collateralized by the Company's investment portfolio, supporting U.S. non-admitted business and the Company's Lloyd's capital requirements. Approximately one half of these letters of credit outstanding were issued in connection with intercompany reinsurance agreements. The financing structure as of September 30, 2000 was as follows:
IN USE/ FACILITY COMMITMENT OUTSTANDING - -------- ---------- ----------- DEBT: 364-day Revolver................................... $ 500,000 $ -- 2 facilities of 5-year Revolvers--total............ 350,000 350,000 7.15% Notes due 2005............................... 100,000 100,000 ---------- ---------- $ 950,000 $ 450,000 ========== ========== LETTERS OF CREDIT: 5 facilities--total................................ $1,631,000 $1,086,000 ========== ==========
The Company entered a $500.0 million 364-day revolving credit facility effective July 5, 2000 to replace the previous facility in the same amount that expired on June 28, 2000. A syndicate of banks provides the new facility and borrowings are unsecured. There were no borrowings under either the expired or new facility during the nine months ended September 30, 2000. The Company repaid an $11.0 million term note on September 29, 2000. Two syndicates of banks provide the two five-year facilities and borrowings are unsecured. Under these facilities, $350.0 million outstanding at September 30, 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 XL Specialty Insurance during 1999. The weighted average interest rate on funds borrowed during the nine months ended September 30, 2000 was approximately 6.5%. At September 30, 2000 and 1999, the Company had $100.0 million of 7.15% Senior Notes due November 15, 2005 outstanding. Total pre-tax interest expense on the borrowings described above was $23.7 million and $31.2 million for the nine months ended September 30, 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 nine-month periods. The Company had five letter of credit facilities available at September 30, 2000, one from a syndicate of banks, three from U.K. banks and one from a U.S. bank. These facilities include a new $1.0 billion unsecured syndicated letter of credit facility that became available on July 5, 2000, replacing two syndicated facilities. 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 September 30, 2000, approximately $280.0 million were collateralized 27 against the Company's investment portfolio and $806.0 million were unsecured. On November 3, 2000, the Company entered into a new $325.0 million unsecured facility with a group of banks. This new facility will be used to support the Company's Lloyd's capital requirements and will replace several existing facilities. The Company is currently in the process of transferring letters of credit issued out of the replaced facilities into the new syndicated facilities. 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. The Company has been notified of certain Year 2000-related claims. In view of the apparent lack of significant Year 2000-related losses, however, 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 Pricing continues to improve on the Company's short-tail business, namely property, property catastrophe, marine and aviation. There have been some signs of recent price increases in selected liability markets. However, to date, little or no price improvements have been experienced in the international property (excluding property catastrophe) and directors and officers liability lines written by the Company. 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. 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, among other things, 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 28 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 September 30, 2000, forward foreign exchange contracts with notional principal amounts totaling $198.7 million were outstanding. The fair value of these contracts as at September 30, 2000 was $199.9 million with unrealized gains of $1.2 million. Gains of $37.6 million were realized during the nine months ended September 30, 2000. 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 September 30, 2000 would have resulted in approximately $16.3 million in unrealized losses and $12.6 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 September 30, 2000, forward foreign exchange contracts with notional principal amounts totaling $22.8 million were outstanding. The fair value of these contracts as at September 30, 2000 was $22.0 million with unrealized losses of $0.8 million. Gains of $5.9 million were realized during the nine months ended September 30, 2000. 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 September 30, 2000 would have resulted in approximately $2.5 million in unrealized gains and $2.1 million in unrealized losses. 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 September 30, 2000, the value of such contracts was not significant. FINANCIAL MARKET EXPOSURE The Company invests in a synthetic equity portfolio of S&P 500 Index futures with an exposure approximately equal in amount to the market value of underlying assets held in this fund. As at September 30, 2000, the portfolio held $69.1 million in exposure to S&P 500 Index futures and underlying assets of $69.0 million. Based on this value, a 10% increase or decrease in the price of these futures would have resulted in exposure of $76.0 million and $62.1 million, respectively. The value of the futures is updated daily with the change recorded in income as a realized gain or loss. For the nine months ended September 30, 2000, net realized losses from index futures totaled $4.1 million as a result of the 2% decrease in the S&P 500 Index. Derivative investments are also used to add value to the portfolio where market inefficiencies are believed to exist. At September 30, 2000, bond and stock index futures outstanding were $130.0 million with underlying investments having a market value of $4.5 billion. A 10% appreciation or depreciation of these derivative instruments would have resulted in unrealized gains of $13.0 million and unrealized losses of $13.0 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. 29 Such statements include forward-looking statements both with respect to the Company generally, as well as its four underwriting sectors and its corporate segment (both as to underwriting and investment matters) specifically. 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) actual charges of costs associated with the Company's realignment being larger than currently anticipated; (iv) 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; (v) 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; (vi) changes in regulations or tax laws applicable to the Company, its subsidiaries, brokers or customers; (vii) acceptance of the Company's products and services, including new products and services; (viii) changes in the availability, cost or quality of reinsurance or retrocessional coverage; (ix) changes in the distribution or placement of risks due to increased consolidation of insurance and reinsurance brokers; (x) the impact of Year 2000-related issues on the Company's underwriting exposures; (xi) loss of key personnel; (xii) the effects of mergers, acquisitions and divestitures; (xiii) changes in rating agency policies or practices that may adversely affect the Company's claims paying ratings; (xiv) changes in accounting policies or practices; and (xv) 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. 30 XL CAPITAL LTD PART II--OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The Company, in common with the insurance and reinsurance industry in general, 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 (A) EXHIBITS 11. Statement Regarding Computation of Per Share Earnings. (B) REPORTS ON FORM 8-K None. 31 XL CAPITAL LTD COMPUTATION OF EARNINGS PER ORDINARY SHARE AND ORDINARY SHARE EQUIVALENT (U.S. DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED) (UNAUDITED) THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30 SEPTEMBER 30 ------------------- ------------------- 2000 1999 2000 1999 -------- -------- -------- -------- Basic earnings per share: Net income.......................................... $139,461 $137,402 $505,704 $409,921 Weighted average ordinary shares outstanding........ 123,821 127,544 123,962 127,580 Basic earnings per share............................ $ 1.13 $ 1.08 $ 4.08 $ 3.21 ======== ======== ======== ======== Diluted earnings per share: Net income.......................................... $139,461 $137,402 $505,704 $409,921 Add back after-tax interest on convertible debentures........................................ -- 876 -- 1,752 -------- -------- -------- -------- Adjusted net income................................. $139,461 138,278 $505,704 411,673 -------- -------- -------- -------- Weighted average ordinary shares outstanding-basic................................. 124,008 125,449 124,563 126,691 Average stock options outstanding (1)............... 2,278 1,746 1,116 2,199 Assumed conversion of convertible debentures (2).... -- 1,837 -- 1,837 -------- -------- -------- -------- Weighted average ordinary shares outstanding-diluted............................... 126,286 129,032 125,679 130,727 -------- -------- -------- -------- Diluted earnings per share.......................... $ 1.10 $ 1.06 $ 4.02 $ 3.14 ======== ======== ======== ======== Dividends per share................................. $ 0.45 $ 0.44 $ 1.35 $ 1.32 ======== ======== ======== ========
- ------------------------ (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. 32 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. /S/ XL CAPITAL LTD ------------------------------------------------ (Registrant) /s/ BRIAN M. O'HARA ------------------------------------------------ Brian M. O'Hara November 14, 2000 President and Chief Executive Officer /s/ ROBERT R. LUSARDI ------------------------------------------------ Robert R. Lusardi Executive Vice President and Chief Financial November 14, 2000 Officer
33 EX-27 2 a2030161zex-27.txt EXHIBIT 27
7 1,000 9-MOS DEC-31-2000 JAN-01-2000 SEP-30-2000 8,557,261 0 0 617,076 0 0 9,174,337 931,502 135,047 325,392 16,368,953 5,369,143 1,776,193 1,169,487 0 450,030 0 0 1,243 5,565,324 16,368,953 1,537,819 399,591 74,808 8,835 969,374 349,384 269,011 494,966 (11,266) 139,461 0 0 0 139,461 4.08 4.02 0 0 0 0 0 0 0
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