10-Q 1 c21553_10-q.txt QUARTERLY REPORT 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 JUNE 30, 2001 COMMISSION FILE NUMBER 1-10804 XL CAPITAL LTD (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) CAYMAN ISLANDS 98-0191089 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) XL HOUSE, ONE BERMUDIANA ROAD, 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 August 9, 2001, there were outstanding 125,692,218 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 June 30, 2001 and December 31, 2000 (Unaudited) ................................... 3 Consolidated Statements of Income and Comprehensive Income for the Three Months Ended June 30, 2001 and 2000 (Unaudited) and the Six Months Ended June 30, 2001 and 2000 (Unaudited) ..... 4 Consolidated Statements of Shareholders' Equity for the Six Months Ended June 30, 2001 and 2000 (Unaudited) ............. 5 Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2001 and 2000 (Unaudited) ........................ 6 Notes to Unaudited Consolidated Financial Statements ............ 7 Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition .............................. 15 Item 3. Quantitative and Qualitative Disclosure about Market Risk........ 29 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 ................................................................. 32 2 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS XL CAPITAL LTD CONSOLIDATED BALANCE SHEETS (U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS) (UNAUDITED) --------------------------- JUNE 30, DECEMBER 31, 2001 2000 A S S E T S ------------ ------------ Investments: Fixed maturities, at fair value (amortized cost: 2001, $8,735,489; 2000, $8,714,196) ............................ $ 8,583,185 $ 8,605,081 Equity securities, at fair value (cost: 2001, $531,546; 2000, $515,440) ....... 512,042 557,460 Short-term investments, at fair value (amortized cost: 2001, $315,546; 2000, $347,147) .............................. 313,039 339,007 ------------ ------------ Total investments available for sale ..... 9,408,266 9,501,548 Investments in affiliates ...................... 909,000 792,723 Other investments .............................. 245,106 177,651 ------------ ------------ Total investments ........................ 10,562,372 10,471,922 Cash and cash equivalents ........................ 1,676,981 930,469 Accrued investment income ........................ 148,911 143,235 Deferred acquisition costs ....................... 379,751 309,268 Prepaid reinsurance premiums ..................... 471,278 391,789 Premiums receivable .............................. 1,487,691 1,119,723 Reinsurance balances receivable .................. 282,231 196,002 Unpaid losses and loss expenses recoverable ...... 1,633,094 1,339,767 Intangible assets (accumulated amortization: 2001, $206,431; 2000, $177,260) ................ 1,575,275 1,591,108 Deferred tax asset, net .......................... 162,739 152,168 Other assets ..................................... 335,360 296,501 ------------ ------------ Total assets ............................. $ 18,715,683 $ 16,941,952 ============ ============ L I A B I L I T I E S A N D S H A R E H O L D E R S' E Q U I T Y Liabilities: Unpaid losses and loss expenses .................. $ 6,050,013 $ 5,672,062 Deposit liabilities and policy benefit reserves .. 1,234,317 1,209,926 Unearned premiums ................................ 2,188,254 1,741,393 Notes payable and debt ........................... 1,294,673 450,032 Reinsurance balances payable ..................... 547,938 441,900 Net payable for investments purchased ............ 1,068,027 1,372,476 Other liabilities ................................ 611,569 439,433 Minority interest ................................ 41,578 41,062 ------------ ------------ Total liabilities ........................ $ 13,036,369 $ 11,368,284 ------------ ------------ Commitments and Contingencies Shareholders' Equity: Authorized, 999,990,000 ordinary shares, par value $0.01 Issued and outstanding: Ordinary shares (2001, 125,654,707; 2000, 125,020,676) ............................. $ 1,256 $ 1,250 Contributed surplus .............................. 2,537,435 2,497,416 Accumulated other comprehensive loss ............. (247,900) (104,712) Deferred compensation ............................ (28,055) (17,727) Retained earnings ................................ 3,416,578 3,197,441 ------------ ------------ Total shareholders' equity .............. $ 5,679,314 $ 5,573,668 ------------ ------------ Total liabilities and shareholders' equity .................. $ 18,715,683 $ 16,941,952 ============ ============ 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 SIX MONTHS ENDED JUNE 30 JUNE 30 ------------------------- --------------------------- 2001 2000 2001 2000 --------- ----------- ----------- ----------- Revenues: Net premiums earned ................................. $ 640,984 $ 503,375 $ 1,183,138 $ 997,874 Net investment income ............................... 140,800 136,440 270,151 264,967 Net realized (losses) gains on investments .......... (31,072) 5,075 29,099 73,782 Equity in net income of affiliates .................. 29,514 25,756 57,902 43,235 Fee income and other ................................ 11,493 3,340 18,562 8,296 --------- ----------- ----------- ----------- Total revenues .................................. 791,719 673,986 1,558,852 1,388,154 --------- ----------- ----------- ----------- Expenses: Losses and loss expenses ............................ 386,951 328,540 717,155 631,374 Acquisition costs ................................... 143,202 115,658 269,074 219,352 Operating expenses .................................. 89,506 67,798 161,394 137,074 Interest expense .................................... 15,800 7,402 23,312 15,897 Amortization of intangible assets ................... 14,703 13,756 29,171 27,808 --------- ----------- ----------- ----------- Total expenses .............................. 650,162 533,154 1,200,106 1,031,505 --------- ----------- ----------- ----------- Income before minority interest and income tax .......... 141,557 140,832 358,746 356,649 Minority interest in net income of subsidiary ....... (652) 522 517 727 Income tax expense (benefit) ........................ 13,603 (2,174) 10,694 (10,321) --------- ----------- ----------- ----------- Net income .............................................. $ 128,606 $ 142,484 $ 347,535 $ 366,243 --------- ----------- ----------- ----------- Change in net unrealized depreciation of investments .... (59,299) (132,990) (109,706) (138,660) Foreign currency translation adjustments ................ (7,360) (6,605) (33,482) (10,315) --------- ----------- ----------- ----------- Comprehensive income .................................... $ 61,947 $ 2,889 $ 204,347 $ 217,268 ========= =========== =========== =========== Weighted average ordinary shares and ordinary share equivalents outstanding-basic ......................... 125,396 124,431 125,312 124,948 ========= =========== =========== =========== Weighted average ordinary shares and ordinary share equivalents outstanding - diluted ..................... 127,765 125,680 127,546 125,878 ========= =========== =========== =========== Earnings per ordinary share and ordinary share equivalent-basic ...................................... $1.03 $1.15 $2.77 $2.93 ===== ===== ===== ===== Earnings per ordinary share and ordinary share equivalent - diluted .................................. $1.01 $1.13 $2.72 $2.91 ===== ===== ===== =====
See accompanying notes to Unaudited Consolidated Financial Statements. 4 XL CAPITAL LTD CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (U.S. DOLLARS IN THOUSANDS) (UNAUDITED) SIX MONTHS ENDED JUNE 30 -------------------------- 2001 2000 ----------- ----------- Ordinary Shares: Balance-beginning of year ..................... $ 1,250 $ 1,278 Issue of shares ............................... 1 -- Exercise of stock options ..................... 7 9 Repurchase of treasury shares ................. (2) (49) ----------- ----------- Balance-end of period ...................... $ 1,256 $ 1,238 ----------- ----------- Contributed Surplus: Balance-beginning of year ..................... $ 2,497,416 $ 2,520,136 Issue of shares ............................... 15,993 345 Exercise of stock options ..................... 28,633 18,872 Repurchase of treasury shares ................. (4,607) (95,996) ----------- ----------- Balance-end of period ...................... $ 2,537,435 $ 2,443,357 ----------- ----------- Accumulated other comprehensive (loss) income: Balance-beginning of year ..................... $ (104,712) $ 19,311 Net change in unrealized losses on investment portfolio, net of tax ...................... (110,470) (132,370) Net change in unrealized gains (losses) on investment portfolio of affiliate .......... 764 (6,290) Currency translation adjustments .............. (33,482) (10,315) ----------- ----------- Balance-end of period ...................... $ (247,900) $ (129,664) ----------- ----------- Deferred Compensation: Balance-beginning of year ..................... $ (17,727) $ (28,797) (Issue) forfeit of restricted shares .......... (15,103) 1,676 Amortization .................................. 4,775 3,937 ----------- ----------- Balance-end of period ...................... $ (28,055) $ (23,184) ----------- ----------- Retained Earnings: Balance-beginning of year ..................... $ 3,197,441 $ 3,065,150 Net income .................................... 347,535 366,243 Cash dividends paid ........................... (116,944) (113,358) Repurchase of treasury shares ................. (11,454) (136,637) ----------- ----------- Balance-end of period ...................... $ 3,416,578 $ 3,181,398 ----------- ----------- Total shareholders' equity ....................... $ 5,679,314 $ 5,473,145 =========== =========== See accompanying notes to Unaudited Consolidated Financial Statements. 5 XL CAPITAL LTD CONSOLIDATED STATEMENTS OF CASH FLOWS (U.S. DOLLARS IN THOUSANDS) (UNAUDITED) SIX MONTHS ENDED JUNE 30 ------------------------ 2001 2000 ----------- ----------- Cash flows provided by (used in) operating activities: Net income ....................................... $ 347,535 $ 366,243 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Net realized gains on investments ................ (29,099) (73,782) Amortization of discounts on fixed maturities .... (21,517) (18,327) Equity in net income of affiliates ............... (57,902) (43,235) Amortization of deferred compensation ............ 4,775 4,898 Accretion of convertible debt..................... 3,138 -- Amortization of intangible assets ................ 29,171 27,808 Accretion of deposit liabilities and policy reserves ...................................... 39,639 -- Unpaid losses and loss expenses .................. 373,453 (116,737) Unearned premiums ................................ 446,861 260,638 Premiums receivable .............................. (367,968) (345,456) Unpaid losses and loss expenses recoverable ...... (293,327) (218,180) Prepaid reinsurance premiums ..................... (79,489) (115,636) Reinsurance balances receivable .................. (86,229) 17,336 Deferred acquisition costs ....................... (69,323) (57,458) Reinsurance balances payable ..................... 106,038 224,121 Other ............................................ 88,806 (43,731) ----------- ----------- Total adjustments ............................. 87,027 (497,741) ----------- ----------- Net cash provided by (used in) operating activities .................................... 434,562 (131,498) ----------- ----------- Cash flows provided by (used in) investing activities: Proceeds from sale of fixed maturities and short-term investments ........................ 13,857,761 11,969,453 Proceeds from redemption of fixed maturities and short-term investments ........................ 345,521 252,794 Proceeds from sale of equity securities .......... 515,591 910,895 Purchases of fixed maturities and short-term investments ........................ (14,506,336) (11,793,330) Purchases of equity securities ................... (475,660) (687,876) Deferred gains on forward contracts .............. -- (1,747) Investments in affiliates ........................ (66,974) (131,005) Acquisition of subsidiaries, net of cash acquired (20,586) (3,094) Other investments ................................ (76,145) (29,659) Fixed assets ..................................... (14,599) (18,525) ----------- ----------- Net cash (used in) provided by investing activities .................................... (441,427) 467,906 ----------- ----------- Cash flows provided by (used in) financing activities: Issue of shares .................................. -- 2,021 Proceeds from exercise of share options .......... 28,640 18,881 Repurchase of treasury shares .................... (16,063) (232,682) Dividends paid ................................... (116,944) (113,358) Proceeds from loans .............................. 891,500 50,300 Repayment of loans ............................... (50,000) -- Deposit liabilities and policy benefit reserves .. 16,699 253,373 ----------- ----------- Net cash provided by (used in) financing activities .................................... 753,832 (21,465) ----------- ----------- Effects of exchange rate changes on foreign currency cash .................................... (455) 1,455 ----------- ----------- Increase in cash and cash equivalents ............... 746,512 316,398 Cash and cash equivalents-beginning of year ......... 930,469 557,749 ----------- ----------- Cash and cash equivalents-end of period ............. $ 1,676,981 $ 874,147 =========== =========== 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 at the end of and for the periods presented. The results of operations for any interim period are not necessarily indicative of the results for a full year. All significant intercompany accounts and transactions have been eliminated. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 2. ACCOUNTING PRONOUNCEMENTS The Financial Accounting Standards Board issued Statement ("SFAS") No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets," in July, 2001. SFAS 141 addresses financial accounting and reporting for the acquisition of other companies and is effective for transactions initiated after June 30, 2001. The Company will adopt this standard for the acquisition of Winterthur International (see Note 7). SFAS 142 addresses financial accounting and reporting for acquired goodwill and other intangible assets both upon their acquisition and after they have initially been recognized in the financial statements. This standard is effective for fiscal years beginning after December 15, 2001, and will be adopted by the Company on January 1, 2002. The Company is currently in the process of assessing the effect of the adoption of SFAS 142 on its results of operations, financial condition and liquidity. 3. SEGMENT INFORMATION The Company is organized into three underwriting segments - insurance, reinsurance and financial products and services - in addition to a corporate segment that includes the investment operations of the Company. Lloyd's syndicates are part of the insurance segment but are described separately as the nature of the business written and the market in which the Lloyd's syndicates underwrite are significantly different to the Company's other insurance operations. The Company evaluates the performance of each segment based on underwriting profit or loss. Certain business written by the Company has loss experience generally characterized as low frequency and high severity. This may result in volatility in both the Company's and an individual segment's results and operational cash flows. See "Cautionary Note Regarding Forward-Looking Statements" in Item 3. Other items of revenue and expenditure of the Company are not evaluated at the segment level. In addition, the Company does not currently allocate assets by segment. 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 JUNE 30, 2001
FINANCIAL PRODUCTS LLOYD'S AND INSURANCE SYNDICATES REINSURANCE SERVICES TOTAL --------- --------- -------- ------- -------- Net premiums earned $ 221,536 $ 118,387 $292,407 $ 8,654 $640,984 Fee income and other 2,624 (2,211) 714 10,366 11,493 Net losses and loss expenses 123,162 78,436 183,339 2,014 386,951 Acquisition costs 31,368 34,551 76,126 1,157 143,202 Operating expenses 28,621 4,944 23,069 6,863 63,497 Exchange (gains) losses (639) 3,422 4,825 -- 7,608 --------- --------- -------- ------- -------- Underwriting profit (loss) $ 41,648 $ (5,177) $ 5,762 $ 8,986 $ 51,219 --------- --------- -------- ------- Net investment income 140,800 Net realized losses on investments (31,072) Equity in net income of affiliates 29,514 Interest expense 15,800 Amortization of intangible assets 14,703 Corporate operating expenses 18,401 Minority interest (652) Income tax 13,603 -------- Net income $128,606 ======== Loss and loss expense ratio 55.6% 66.2% 62.7% 23.3% 60.4% Underwriting expense ratio 27.1% 33.4% 33.9% 92.7% 32.2% --------- --------- -------- ------- -------- Combined ratio 82.7% 99.6% 96.6% 116.0% 92.6% ========= ========= ======== ======= ========
8 XL CAPITAL LTD NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (U.S. DOLLARS IN THOUSANDS) 3. SEGMENT INFORMATION (CONTINUED) QUARTER ENDED JUNE 30, 2000
FINANCIAL PRODUCTS LLOYD'S AND INSURANCE SYNDICATES REINSURANCE SERVICES TOTAL --------- --------- -------- -------- -------- Net premiums earned $ 151,279 $ 95,158 $ 250,110 $6,828 $ 503,375 Fee income and other 3,934 (2,565) 3 1,968 3,340 Net losses and loss expenses (1) 92,058 63,003 171,671 1,808 328,540 Acquisition costs 22,726 31,883 60,678 371 115,658 Operating expenses 19,724 3,072 26,220 6,414 55,430 Exchange (gains) losses 480 (2,090) (95) -- (1,705) --------- -------- --------- ------ --------- Underwriting profit (loss) $ 20,225 $ (3,275) $ (8,361) $ 203 $ 8,792 --------- -------- --------- ------ Net investment income 136,440 Net realized gains on investments 5,075 Equity in net income of affiliates 25,756 Interest expense 7,402 Amortization of intangible assets 13,756 Corporate operating expenses 14,073 Minority interest 522 Income tax (2,174) --------- Net income $ 142,484 ========= Loss and loss expense ratio (1) 60.8% 66.2% 68.6% 26.5% 65.3% Underwriting expense ratio 28.1% 36.7% 34.8% 99.4% 34.0% --------- -------- --------- ------ --------- Combined ratio 88.9% 102.9% 103.4% 125.9% 99.3% ========= ======== ========= ====== =========
(1) Net losses incurred for the insurance segment include, and the reinsurance segment exclude, $11.2 million relating to an intercompany stop loss arrangement. Consolidated results are not affected by this arrangement. The loss and loss expense ratio would have been 53.4% and 73.1% and the underwriting profit (loss) would have been $31.4 million and $(19.6) million in the insurance and reinsurance segments, respectively, had this stop loss arrangement not been in place. 9 XL CAPITAL LTD NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (U.S. DOLLARS IN THOUSANDS) 3. SEGMENT INFORMATION (CONTINUED) SIX MONTHS ENDED JUNE 30, 2001
FINANCIAL PRODUCTS LLOYD'S AND INSURANCE SYNDICATES REINSURANCE SERVICES TOTAL --------- --------- -------- -------- -------- Net premiums earned $ 398,850 $ 210,546 $559,267 $14,475 $1,183,138 Fee income and other 4,647 (1,609) 151 15,373 18,562 Net losses and loss expenses 217,367 144,362 351,797 3,629 717,155 Acquisition costs 56,171 65,699 145,726 1,478 269,074 Operating expenses 54,596 11,756 39,775 18,220 124,347 Exchange losses (gains) (1,186) 2,587 5,037 -- 6,438 --------- --------- -------- ------- ---------- Underwriting profit (loss) $ 76,549 $ (15,467) $ 17,083 $ 6,521 $ 84,686 --------- --------- -------- ------- Net investment income 270,151 Net realized gains on investments 29,099 Equity in net income of affiliates 57,902 Interest expense 23,312 Amortization of intangible assets 29,171 Corporate operating expenses 30,609 Minority interest 517 Income tax 10,694 --------- Net income $ 347,535 ========= Loss and loss expense ratio 54.5% 68.6% 62.9% 25.1% 60.6% Underwriting expense ratio 27.8% 36.8% 33.2% 136.1% 33.3% --------- --------- -------- ------- ---------- Combined ratio 82.3% 105.4% 96.1% 161.2% 93.9% ========= ========= ======== ======= ==========
10 XL CAPITAL LTD NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (U.S. DOLLARS IN THOUSANDS) 3. SEGMENT INFORMATION (CONTINUED) SIX MONTHS ENDED JUNE 30, 2000
FINANCIAL PRODUCTS LLOYD'S AND INSURANCE SYNDICATES REINSURANCE SERVICES TOTAL --------- --------- -------- -------- -------- Net premiums earned $ 297,580 $ 198,220 $489,150 $12,924 $ 997,874 Fee income and other 5,206 (3,733) 232 6,591 8,296 Net losses and loss expenses (1) 177,592 143,690 306,849 3,243 631,374 Acquisition costs 42,712 59,054 116,873 713 219,352 Operating expenses 38,162 7,943 52,652 11,648 110,405 Exchange (gains) losses 470 (2,394) 1,641 -- (283) --------- --------- -------- ------- --------- Underwriting profit (loss) $ 43,850 $ (13,806) $ 11,367 $ 3,911 $ 45,322 --------- --------- -------- ------- Net investment income 264,967 Net realized gains on investments 73,782 Equity in net income of affiliates 43,235 Interest expense 15,897 Amortization of intangible assets 27,808 Corporate operating expenses 26,952 Minority interest 727 Income tax (10,321) --------- Net income $ 366,243 ========= Loss and loss expense ratio (1) 59.7% 72.5% 62.7% 25.1% 63.3% Underwriting expense ratio 27.2% 33.8% 34.7% 95.6% 33.0% --------- --------- -------- ------- --------- Combined ratio 86.9% 106.3% 97.4% 120.7% 96.3% ========= ========= ======== ======= =========
------ (1) Net losses incurred for the insurance segment include, and the reinsurance segment exclude, $11.2 million relating to an intercompany stop loss arrangement. Consolidated results are not affected by this arrangement. The loss and loss expense ratio would have been 55.9% and 65.0% and the underwriting profit would have been $55.1 million and $0.2 million in the insurance and reinsurance segments, respectively, had this stop loss arrangement not been in place. 11 XL CAPITAL LTD NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (U.S. DOLLARS IN THOUSANDS) 3. SEGMENT INFORMATION (CONTINUED) The following tables summarize the Company's gross premiums written, net premiums written and net premiums earned by line of business: QUARTER ENDED JUNE 30, 2001 GROSS NET NET PREMIUMS PREMIUMS PREMIUMS WRITTEN WRITTEN EARNED ---------- -------- -------- Casualty insurance $ 250,039 $170,261 $113,502 Casualty reinsurance 118,932 81,271 92,391 Property catastrophe 50,892 44,726 41,035 Other property 175,535 128,075 124,787 Marine, energy, aviation and satellite 77,088 36,959 49,606 Lloyd's syndicates 162,242 145,042 118,387 Other 171,119 142,818 101,276 ---------- -------- -------- Total $1,005,847 $749,152 $640,984 ========== ======== ======== QUARTER ENDED JUNE 30, 2000 GROSS NET NET PREMIUMS PREMIUMS PREMIUMS WRITTEN WRITTEN EARNED ---------- -------- -------- Casualty insurance $ 137,041 $ 96,029 $ 79,674 Casualty reinsurance 102,627 65,362 104,289 Property catastrophe 46,995 41,397 36,358 Other property 121,385 94,841 91,577 Marine, energy, aviation and satellite 78,810 35,565 41,100 Lloyd's syndicates 131,867 110,304 95,158 Other 77,828 56,411 55,219 ---------- -------- -------- Total $ 696,553 $499,909 $503,375 ========== ======== ======== 12 XL CAPITAL LTD NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (U.S. DOLLARS IN THOUSANDS) 3. SEGMENT INFORMATION (CONTINUED) SIX MONTHS ENDED JUNE 30, 2001 GROSS NET NET PREMIUMS PREMIUMS PREMIUMS WRITTEN WRITTEN EARNED ---------- ---------- ---------- Casualty insurance $ 439,226 $ 281,970 $ 198,510 Casualty reinsurance 290,322 204,316 163,780 Property catastrophe 153,050 142,568 77,857 Other property 353,081 254,968 219,118 Marine, energy, aviation and satellite 254,665 152,367 111,428 Lloyd's syndicates 379,238 279,582 210,546 Other 287,110 245,635 201,899 ---------- ---------- ---------- Total $2,156,692 $1,561,406 $1,183,138 ========== ========== ========== SIX MONTHS ENDED JUNE 30, 2000 GROSS NET NET PREMIUMS PREMIUMS PREMIUMS WRITTEN WRITTEN EARNED ---------- ---------- ---------- Casualty insurance $ 234,538 $ 169,566 $ 157,902 Casualty reinsurance 257,793 179,116 192,226 Property catastrophe 124,831 118,617 65,636 Other property 286,686 216,856 174,183 Marine, energy, aviation and satellite 234,451 155,475 85,616 Lloyd's syndicates 295,606 169,981 198,220 Other 181,585 142,397 124,091 ---------- ---------- ---------- Total $1,615,490 $1,152,008 $ 997,874 ========== ========== ========== The Company's Lloyd's syndicates write a variety of coverages encompassing most of the above lines of business. Other premiums written and earned include political risk, surety, bonding and warranty. 4. BUSINESS COMBINATION During the six months ended June 30, 2001, the Company acquired The London Assurance of America, Inc., a company licensed in forty five U.S. States, for the purpose of obtaining licenses for the financial guaranty operations of the Company. The cost of the acquisition less cash acquired was $20.6 million. Goodwill arising from the acquisition amounted to $11.3 million. 5. NOTES PAYABLE AND DEBT AND FINANCING ARRANGEMENTS In April 2001, the Company issued at par $255.0 million of 6.58% Guaranteed Senior Notes due April 2011 through a private placement to institutional investors. Proceeds of this debt will be used for general corporate purposes. In May 2001, the Company issued Zero Coupon Convertible Debentures due 2021 with a yield to maturity of 2.625%. The gross proceeds to the Company were $600.0 million. Funds were received net of $13.5 million of related expenses that were capitalized and will be expensed over one year. Proceeds of the debt will be used to finance the Winterthur International acquisition discussed in Note 7 below and general corporate purposes. 13 XL CAPITAL LTD NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (U.S. DOLLARS IN THOUSANDS) 6. COMPUTATION OF EARNINGS PER ORDINARY SHARE AND ORDINARY SHARE EQUIVALENT THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30 JUNE 30 ------------------ ------------------ 2001 2000 2001 2000 -------- -------- -------- -------- BASIC EARNINGS PER SHARE : Net income ............................. $128,606 $142,484 $347,535 $366,243 Weighted average ordinary shares outstanding ................... 125,396 124,431 125,312 124,948 Basic earnings per share ............... $ 1.03 $ 1.15 $ 2.77 $ 2.93 ======== ======== ======== ======== DILUTED EARNINGS PER SHARE : Net income ............................. $128,606 $142,484 $347,535 $366,243 Weighted average ordinary shares outstanding-basic .................... 125,396 124,431 125,312 124,948 Average stock options outstanding (1) .. 2,369 1,249 2,234 930 -------------------------------------- Weighted average ordinary shares outstanding-diluted .................. 127,765 125,680 127,546 125,878 -------------------------------------- Diluted earnings per share ............. $ 1.01 $ 1.13 $ 2.72 $ 2.91 ======== ======== ======== ======== DIVIDENDS PER SHARE .................... $ 0.46 $ 0.45 $ 0.92 $ 0.90 ======== ======== ======== ======== (1) Net of shares repurchased under the treasury stock method. 7. SUBSEQUENT EVENT On July 25, 2001, the Company completed the acquisition of Winterthur International ("WI") in an all-cash transaction valued at approximately $405.0 million. The purchase price of the acquisition is based on financial statements for the business being acquired as at December 31, 2000, and is subject to adjustment based on the completion of audited financial statements for WI as at and for the period ended June 30, 2001. The acquisition of WI will be given economic effect as at July 1, 2001. 14 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2001 COMPARED TO THE THREE MONTHS ENDED JUNE 30, 2000 (U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) This "Management's Discussion and Analysis of Results of Operations and Financial Condition" contains forward-looking statements which involve inherent risks and uncertainties. Statements that are not historical facts, including statements about the Company's beliefs and expectations, are forward-looking statements. These statements are based upon current plans, estimates and expectations. Actual results may differ materially from those projected in such forward-looking statements, and therefore you should not place undue reliance on them. See "--Cautionary Note Regarding Forward-Looking Statements" for a list of factors that could cause actual results to differ materially from those contained in any forward-looking statement. This discussion and analysis should be read in conjunction with the Management's Discussion and Analysis of Results of Operations and Financial Condition, and the audited Consolidated Financial Statements and notes thereto presented under Item 7 and Item 8, respectively, of the Company's Form 10-K for the year ended December 31, 2000. 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 June 30, 2001 and 2000: (UNAUDITED) THREE MONTHS ENDED JUNE 30 ------------------------ 2001 2000 % CHANGE --------- ---------- -------- Net operating income (excluding net realized gains and losses on investments) $ 160,062 $ 135,491 18.1% Net realized (losses) gains on investments (31,456) 6,993 NM --------- ---------- Net income .............................. $ 128,606 $ 142,484 (9.7)% ========= ========== Earnings per share - basic .............. $1.03 $1.15 Earnings per share - diluted ............ $1.01 $1.13 * NM - Not Meaningful Net operating income increased in the second quarter of 2001 compared to the second quarter of 2000 primarily due to an improvement in underwriting profit. The increase in underwriting profit was partially offset by an increase in income tax expense. Underwriting results are discussed in further detail in each of the following segments. SEGMENTS The Company is organized into three underwriting segments - insurance, reinsurance and financial products and services - in addition to a corporate segment, which includes the investment operations of the Company. Lloyd's syndicates are part of the insurance segment but are described separately as the nature of the business written and the market in which the Lloyd's syndicates underwrite are significantly different to the Company's other insurance operations. The results of each segment are discussed below. The calculations of the underwriting ratios for all segments follow. 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 15 dividing net losses and loss expenses by net premiums earned, and the underwriting expense ratio is calculated by dividing the total of acquisition costs and operating expenses by net premiums earned. INSURANCE OPERATIONS - EXCLUDING LLOYD'S SYNDICATES Insurance business written includes general liability, other liability including directors and officers, professional and employment practices liability, environmental liability, property, program business, marine, aviation, satellite and other product lines including U.S. Customs bonds, surety, political risk and specialty lines. The following table summarizes the underwriting profit for this segment: (UNAUDITED) THREE MONTHS ENDED JUNE 30 ----------------------- 2001 2000 % CHANGE -------- -------- -------- Net premiums earned $221,536 $151,279 46.4% Fee income and other 2,624 3,934 (33.3)% Net losses and loss expenses 123,162 92,058 33.8% Acquisition costs 31,368 22,726 38.0% Operating expenses 28,621 19,724 45.1% Exchange (gains) losses (639) 480 NM -------- -------- ----- Underwriting profit $ 41,648 $ 20,225 106.0% ======== ======== ===== The insurance segment experienced growth in net premiums earned primarily as a result of a continued increase in gross premiums written in the current and prior periods. Gross premiums written increased in the quarter ended June 30, 2001 compared to the quarter ended June 30, 2000 principally due to new business written in environmental, professional liability and directors and officers liability lines, contributing approximately $65.0 million of additional gross written premiums and $30.0 million of additional net premiums earned in the quarter. The Company also wrote approximately $40.0 million and earned approximately $27.0 million in certain aviation and satellite business in the second quarter of 2001. This business was included in the reinsurance segment until December 31, 2000, when the Company realigned its operations. The insurance operations generally continue to experience premium rate increases in most lines of business, ranging from 5% to 8% on excess casualty lines and up to 20% on large property risks assumed. The following table presents the ratios for the insurance segment: (UNAUDITED) THREE MONTHS ENDED JUNE 30 ------------------------ 2001 2000 ---------- ---------- Loss and loss expense ratio 55.6% 60.8% Underwriting expense ratio 27.1% 28.1% ---------- ---------- Combined ratio 82.7% 88.9% ========== ========== Net losses and loss expenses in the second quarter of 2000 included $11.2 million relating to an intercompany stop loss arrangement. The loss and loss expense ratio would have been 53.4% had this arrangement not been in place. There was no intercompany stop loss arrangement in effect in 2001. Excluding the effects of the intercompany stop loss arrangement, the loss ratio was higher in 2001 compared to 2000 due in part to net losses incurred of $5.3 million related to Tropical Storm Allison. The three months ended June 30, 2001 and 2000 included favorable development of loss reserves related to previous underwriting years. In 2001, the effect of this development was offset by the change in the mix of business and the related loss ratios. 16 The underwriting expense ratio decreased in the second quarter of 2001 compared to the second quarter of 2000 due to the significant increase in net premiums earned relative to the change in operating expenses. INSURANCE OPERATIONS - LLOYD'S SYNDICATES The Lloyd's syndicates write property, marine and energy, aviation and satellite, professional indemnity, liability coverage and other specialty lines, primarily of insurance but also reinsurance. The following table summarizes the underwriting loss for the Lloyd's syndicates: (UNAUDITED) THREE MONTHS ENDED JUNE 30 ------------------------ 2001 2000 % CHANGE --------- -------- -------- Net premiums earned $ 118,387 $ 95,158 24.4% Fee income and other (2,211) (2,565) 13.8% Net losses and loss expenses 78,436 63,003 24.5% Acquisition costs 34,551 31,883 8.4% Operating expenses 4,944 3,072 61.0% Exchange losses (gains) 3,422 (2,090) NM --------- -------- ------ Underwriting loss $ (5,177) $ (3,275) (58.1)% ========= ======== ====== Net premiums earned for the second quarter of 2001 increased due to greater gross premiums written. Gross premiums written in the same period increased by approximately $30.4 million from the second quarter of 2000 primarily due to a higher proportion of the total syndicates' capacity provided by the Company, currently at 63% compared to 53% in the prior year. Net premiums earned were partially offset by the reduction in net premiums earned related to the motor business sold at the end of 1999. The Company retains the residual liability on this business, and the related net premiums earned in the three months ended June 30, 2001 and 2000 were nil and $19.9 million, respectively. Net premiums earned were also affected by a decrease in reinsurance costs relating to a stop loss policy under which coverage was significantly reduced in 2001 as compared to 2000. While this has reduced reinsurance costs, it exposes the Company's Lloyd's syndicates to potentially higher net losses. The Company's Lloyd's managing agencies earn fees and may, dependent upon underwriting results, earn profit commissions from syndicates they manage in order to offset their operating expenses. No commissions were earned in the second quarters of 2001 and 2000 due to loss deterioration in the Lloyd's market, resulting in expenses in excess of fee income. The exchange loss in the second quarter of 2001 is due to the decrease in the U.K. sterling exchange rate against the U.S. dollar applied to net monetary assets denominated in U.K. sterling. Conversely, in the second quarter of 2000, the exchange rate moved in the opposite direction. The following table presents the ratios for the Lloyd's syndicates: (UNAUDITED) THREE MONTHS ENDED JUNE 30 -------------------------- 2001 2000 ----------- ------------ Loss and loss expense ratio 66.2% 66.2% Underwriting expense ratio 33.4% 36.7% ----------- ------------ Combined ratio 99.6% 102.9% =========== ============ 17 Although the loss and loss expense ratio is unchanged from the second quarter of 2000 to the second quarter of 2001, the second quarter of 2000 included the residual liability of the motor business, which had a loss ratio of 94.3% on net premiums earned of $19.9 million. Excluding the motor business, the loss and loss expense ratio for the second quarter of 2000 would have been 58.8%. No losses were realized on the motor business in the second quarter of 2001. The increase in the loss and loss expense ratio resulted from continued deterioration on reserves related to prior underwriting years in addition to net losses incurred of $3.0 million related to Tropical Storm Allison. The underwriting expense ratio decreased in the second quarter of 2001 compared to the second quarter of 2000 primarily due to the effect of higher reinsurance costs in 2000 that reduced net premiums earned on the non-motor book. The increase in operating expenses also reflects the increase in the syndicates' capacity provided by the Company and therefore, a greater proportion of expenses is allocated to the Company. REINSURANCE OPERATIONS Reinsurance business written includes treaty and facultative reinsurance to primary insurers of casualty risks, principally general liability, professional liability, automobile and workers' compensation, commercial and personal property risks, specialty risks including fidelity and surety and ocean marine, property catastrophe, property excess of loss, property pro-rata, marine and energy, aviation and satellite, and various other reinsurance to insurers on a worldwide basis. The Company endeavors to manage its exposures to catastrophic events by, among other things, limiting the amount of its exposure in each geographic zone worldwide and requiring that its property catastrophe contracts provide for aggregate limits and varying attachment points. The following table summarizes the underwriting results for this segment: (UNAUDITED) THREE MONTHS ENDED JUNE 30 ------------------------ 2001 2000 % CHANGE -------- --------- -------- Net premiums earned $292,407 $ 250,110 16.9% Fee income and other 714 3 NM Net losses and loss expenses 183,339 171,671 6.8% Acquisition costs 76,126 60,678 25.5% Operating expenses 23,069 26,220 (12.0)% Exchange losses (gains) 4,825 (95) NM -------- --------- ------ Underwriting profit (loss) $ 5,762 $ (8,361) NM ======== ========= ====== The increase in net premiums earned reflects increases in gross premiums written across most lines of business in the second quarter of 2001 compared to the second quarter of 2000 primarily due to an increase in premium rates across most lines of business, including up to 20% on property catastrophe and U.S. casualty lines. The effect of the increases was reduced by premiums earned by certain aviation and satellite business that is now included in the insurance segment. This business was included in the reinsurance segment until December 31, 2000. Exchange losses in the second quarter of 2001 related to exchange rate movements of the U.S. dollar applied to net monetary assets denominated in foreign currencies. The following table presents the ratios for the reinsurance segment: (UNAUDITED) THREE MONTHS ENDED JUNE 30 --------------------------- 2001 2000 ----------- ------------ Loss and loss expense ratio 62.7% 68.6% Underwriting expense ratio 33.9% 34.8% ----------- ------------ Combined ratio 96.6% 103.4% =========== ============ 18 Net losses and loss expenses in the second quarter of 2000 exclude $11.2 million relating to an intercompany stop loss arrangement. The loss and loss expense ratio would have been 73.1% had this arrangement not been in place. The reduction in the loss ratio in 2001 compared to 2000 is due to several factors. The second quarter of 2000 included loss deterioration in the casualty lines. In the second quarter of 2001, there was favorable loss development on non-casualty business written in prior underwriting years. This was partially offset by a net loss of $20.0 million relating to Tropical Storm Allison. The underwriting expense ratio is slightly lower in the second quarter of 2001 compared to the second quarter of 2000 due mainly to lower operating expenses on a higher net premium earned base. Operating expenses decreased in the second quarter of 2001 as compared to the second quarter of 2000 primarily due to a reduction in certain accrued compensation expenses of $2.0 million. FINANCIAL PRODUCTS AND SERVICES Financial products and services business written includes insurance and reinsurance solutions for complex financial risks. These include financial guaranty insurance and reinsurance, credit default swaps and other collateralized transactions. In 2001, the Company also began to write weather related insurance products. While each of these transactions is unique and is tailored for the specific needs of the insured, they are typically multi-year transactions. Due to the nature of these types of policies, premium volume as well as any profit margin can vary significantly from period to period. Financial guaranties are conditional commitments that guarantee the performance of a customer to a third party. The Company's potential liability in the event of non-performance by the issuer of the insured obligation is represented by its proportionate share of the aggregate outstanding principal and interest payable ("insurance in force") on such insured obligation. At June 30, 2001, the Company's aggregate insurance in force was approximately $16.0 billion. The following table summarizes the underwriting profit for this segment: (UNAUDITED) THREE MONTHS ENDED JUNE 30 ------------------ 2001 2000 % CHANGE ------- ------ -------- Net premiums earned $ 8,654 $6,828 26.7% Fee income and other 10,366 1,968 NM Net losses and loss expenses 2,014 1,808 11.4% Acquisition costs 1,157 371 NM Operating expenses 6,863 6,414 7.0% ------- ------ -------- Underwriting profit $ 8,986 $ 203 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 installment basis, are not earned until the premium is reported. Gross premiums written increased from $13.1 million in the second quarter of 2000 to $29.2 million in the second quarter of 2001 principally due to a new weather related risk management transaction written in 2001. However, net premiums earned increased only marginally for the same period due to a change in the mix of business with longer earnings patterns. The Company provides credit protection in credit default swap form, in addition to financial guaranty insurance form. These contracts are recorded at fair value. Revenues received in respect of credit default swaps, together with fair value adjustments, are included as fee income and earned over the life of the policies. Fee income for the quarters ended June 30, 2001 and 2000 related to credit default swaps and weather related derivative activity. Fee income and other for the quarter ended June 30, 2001 also includes a gain of $1.3 million related to the fair value adjustment on credit default swaps and a gain of $3.9 million related to weather derivatives. 19 The following table presents the combined ratios for this segment: (UNAUDITED) THREE MONTHS ENDED JUNE 30 ---------------------------- 2001 2000 ------------ ------------- Loss and loss expense ratio 23.3% 26.5% Underwriting expense ratio 92.7% 99.4% ------------ ------------- Combined ratio 116.0% 125.9% ============ ============= The Company's financial guaranty operations write business with an expected loss ratio of approximately 25%. The calculation of the underwriting expense ratio excludes fee income and other derived from credit default swap and weather related transactions. If this income were included, the expense ratio and the combined ratio would have been 42.1% and 65.4%, respectively, as at June 30, 2001, and 77.1% and 103.6%, respectively, as at June 30, 2000. Included in the underwriting expense ratio in the quarter ended June 30, 2001 is an adjustment of approximately $3.0 million for the deferral of certain operating expenses related to underwriting activity, in line with industry practice. INVESTMENT OPERATIONS The following table illustrates the change in net investment income and net realized (losses) gains on investments for the quarters ended June 30, 2001 and 2000: (UNAUDITED) THREE MONTHS ENDED JUNE 30 ---------------------- 2001 2000 % CHANGE --------- -------- -------- Net investment income $ 140,800 $136,440 3.2% Net realized (losses) gains on investments $ (31,072) $ 5,075 NM Net investment income increased from the second quarter of 2000 as compared to the second quarter of 2001 due primarily to interest on the receipt of net funds of $844.6 million related to new debt issued by the Company during the second quarter of 2001. The majority of this new debt had not been utilized at June 30, 2001. This interest was partially offset by a reduction in investment yields for the three months ended June 30, 2001 compared to the quarter ended June 30, 2000, respectively. The Company anticipates that future investment income may be negatively affected by the reduction of interest rates by the Federal Reserve. Assets relating to the deposit liabilities are included in investments available for sale. Interest earned on these assets is reduced by the investment expense relating to the accretion of the deposit liabilities. Net realized losses on investments in the second quarter of 2001 related to losses realized on sales of fixed income securities and equities, in addition to losses on derivatives used to increase the duration of investment assets relating to the deposit liabilities. Net realized gains on investments in the second quarter of 2000 were realized primarily from the sale of equity securities. 20 OTHER REVENUES AND EXPENSES The following table sets forth other revenues and expenses for the quarters ended June 30, 2001 and 2000: (UNAUDITED) THREE MONTHS ENDED JUNE 30 --------------------- 2001 2000 % CHANGE -------- -------- -------- Equity in net income of affiliates $ 29,514 $ 25,756 14.6% Amortization of intangible assets 14,703 13,756 6.9% Corporate operating expenses 18,401 14,073 30.8% Interest expense 15,800 7,402 113.5% Minority interest (652) 522 NM Income tax 13,603 (2,174) NM The increase in equity in net income of affiliates for the quarter ended June 30, 2001 compared to the quarter ended June 30, 2000 is primarily attributable to greater returns on the Company's investments in investment funds, partially offset by decreased earnings from investments in the management companies that administer these funds. Earnings from insurance and reinsurance affiliates improved from the second quarter of 2000 to the second quarter of 2001. The increase in corporate operating expenses is a result of the increase in corporate infrastructure necessary to support the expanding worldwide operations of the Company. The increase in interest expense reflects an increase in indebtedness from new debt issued by the Company during the quarter ended June 30, 2001. The Company's financing structure is outlined in "Financial Condition and Liquidity." The change in the income taxes of the Company primarily reflects the effects of an improvement in the results of the Company's U.S. operations in the quarter ended June 30, 2001 as compared to the quarter ended June 30, 2000. RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2001 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 2000 (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 six months ended June 30, 2001 and 2000: (UNAUDITED) SIX MONTHS ENDED JUNE 30 -------------------- 2001 2000 % CHANGE -------- -------- -------- Net operating income (excluding net realized gains on investments) $316,796 $286,292 10.7% Net realized gains on investments 30,739 79,951 (61.6)% -------- -------- Net income $347,535 $366,243 (5.1)% ======== ======== Earnings per share - basic $2.77 $2.93 Earnings per share - diluted $2.72 $2.91 21 Net operating income increased in the first six months of 2001 compared to the first six months of 2000 primarily due to an improvement in underwriting profit and equity in net income of affiliates. This was partially offset by an increase in income tax expense. Underwriting results are discussed in further detail in each of the following segments. INSURANCE OPERATIONS - EXCLUDING LLOYD'S SYNDICATES The following table summarizes the underwriting profit for this segment: (UNAUDITED) SIX MONTHS ENDED JUNE 30 ---------------------- 2001 2000 % CHANGE --------- -------- -------- Net premiums earned $ 398,850 $297,580 34.0% Fee income and other 4,647 5,206 10.7% Net losses and loss expenses 217,367 177,592 22.4% Acquisition costs 56,171 42,712 31.5% Operating expenses 54,596 38,162 43.1% Exchange (gains) losses (1,186) 470 NM --------- -------- -------- Underwriting profit $ 76,549 $ 43,850 74.6% ========= ======== ======== The insurance segment experienced growth in net premiums earned in the six months ended June 30, 2001 primarily as a result of an increase in gross premiums written for the same period. Gross premiums written increased in the six months ended June 30, 2001 compared to the six months ended June 30, 2000 in part due to premium rate increases in most lines of business, ranging from 5% to 8% on excess casualty lines to approximately 20% on large property risks assumed. Significant new business was written in both environmental and professional liability lines. In addition, the Company earned approximately $60.0 million in certain aviation and satellite business in the first six months of 2001. This business was included in the reinsurance segment until December 31, 2000, when the Company realigned its operations The following table presents the ratios for the insurance segment: (UNAUDITED) SIX MONTHS ENDED JUNE 30 --------------------------- 2001 2000 ----------- ----------- Loss and loss expense ratio 54.5% 59.7% Underwriting expense ratio 27.8% 27.2% ----------- ----------- Combined ratio 82.3% 86.9% =========== =========== The loss and loss expense ratio at June 30, 2000 was affected by an intercompany stop loss arrangement with a subsidiary in the reinsurance segment. In the six months ended June 30, 2000, $11.2 million of losses were included in the insurance segment and excluded from the reinsurance segment. The loss and loss expense ratio in 2000 would have been 55.9% had this arrangement not been in place. Excluding the effects of the intercompany stop loss arrangement, the loss and loss expense ratio decreased slightly due to more favorable development of loss reserves related to previous underwriting years during the six months ended June 30, 2001 than in the six months ended June 30, 2000. The underwriting expense ratio increased slightly due principally to changes in the allocation of operating expenses between segments, offset by the significant increase in net premiums earned relative to the change in operating expenses. 22 INSURANCE OPERATIONS - LLOYD'S SYNDICATES The following table summarizes the underwriting loss for the Lloyd's syndicates: (UNAUDITED) SIX MONTHS ENDED JUNE 30 ----------------------- 2001 2000 % CHANGE --------- --------- -------- Net premiums earned $ 210,546 $ 198,220 6.2% Fee income and other (1,609) (3,733) 56.9% Net losses and loss expenses 144,362 143,690 0.5% Acquisition costs 65,699 59,054 11.3% Operating expenses 11,756 7,943 48.0% Exchange losses (gains) 2,587 (2,394) NM --------- --------- -------- Underwriting loss $ (15,467) $ (13,806) (12.0)% ========= ========= ======== Net premiums earned for the first six months of 2001 increased due to greater gross premiums written. Gross premiums written in the same period increased by approximately $83.6 million from the first six months of 2000 primarily due to a higher proportion of the total syndicates' capacity provided by the Company, currently at 63% compared to 53% in the prior year. Net premiums earned were partially offset by a reduction in net premiums earned related to the motor business sold at the end of 1999. The Company retains the residual liability on this business, and the related net premiums earned in the six months ended June 30, 2001 and 2000 were $2.3 million and $66.6 million, respectively. Net premiums earned were also affected by a decrease in reinsurance costs relating to a stop loss policy under which coverage was significantly reduced in 2001 compared to 2000. While this has reduced reinsurance costs, it exposes the Company's Lloyd's syndicates to potentially higher net losses. The Company's Lloyd's managing agencies earn fees and may, dependent upon underwriting results, earn profit commissions from syndicates they manage in order to offset their operating expenses. Although commissions were received in the first six months of 2001, due to loss deterioration in the Lloyd's market, expenses were in excess of fee income and commissions for the six months ended June 30, 2001 and 2000. The exchange loss in the first six months of 2001 is due to the decrease in the U.K. sterling exchange rate against the U.S. dollar applied to net monetary assets denominated in U.K. sterling. Conversely, in the first six months of 2000, the exchange rate moved in the opposite direction. The following table presents the ratios for this segment: (UNAUDITED) SIX MONTHS ENDED JUNE 30 --------------------------- 2001 2000 ------------ ------------ Loss and loss expense ratio 68.6% 72.5% Underwriting expense ratio 36.8% 33.8% ------------ ------------ Combined ratio 105.4% 106.3% ============ ============ The loss and loss expense ratio for June 30, 2000 included the residual liability of the motor business, which had a loss and loss expense ratio of 89.4% on net premiums earned of $66.6 million. Minimal losses were incurred on the motor business in the first six months of 2001. Excluding the motor business, the loss and loss expense ratio for the first six months of 2000 would have been 63.9%. The increase in the loss and loss expense ratio resulted from continued deterioration of losses related to prior underwriting years and the Petrobras loss in the first six months of 2001. The increase in the underwriting expense ratio includes the effect of the motor book premiums earned in 2000, which typically had a higher loss ratio but lower expense ratio than other business written at Lloyd's. The increase in operating expenses also reflects the increase in the syndicates' capacity provided by the Company and therefore, a greater proportion of expenses is allocated to the Company. 23 REINSURANCE OPERATIONS The following table summarizes the underwriting profit for this segment: (UNAUDITED) SIX MONTHS ENDED JUNE 30 ----------------------- 2001 2000 % CHANGE --------- --------- -------- Net premiums earned $ 559,267 $ 489,150 14.3% Fee income and other 151 232 34.7% Net losses and loss expenses 351,797 306,849 14.6% Acquisition costs 145,726 116,873 24.7% Operating expenses 39,775 52,652 (24.5)% Exchange losses 5,037 1,641 NM --------- --------- -------- Underwriting profit $ 17,083 $ 11,367 50.3% ========= ========= ======== The increase in net premiums earned primarily results from price increases in gross premiums written across all lines of business in the first six months of 2001 compared to the first six months of 2000, including up to 20% on property catastrophe and U.S. casualty lines. The effect of the rate increases was reduced by premiums earned in the first six months of 2001 on certain aviation and satellite business that is now included in the insurance segment. This business was included in the reinsurance segment until December 31, 2000. Exchange losses in the second quarter of 2001 related to exchange rate movements of the U.S. dollar applied to net monetary assets denominated in foreign currencies. The following table presents the ratios for the reinsurance segment: (UNAUDITED) SIX MONTHS ENDED JUNE 30 --------------------------- 2001 2000 ----------- ------------ Loss and loss expense ratio 62.9% 62.7% Underwriting expense ratio 33.2% 34.7% ----------- ------------ Combined ratio 96.1% 97.4% =========== ============ Net losses and loss expenses incurred in this segment in 2000 included a recovery of $11.2 million under an intercompany stop loss arrangement with a subsidiary in the insurance segment. The loss and loss expense ratio in 2000 would have been 65.0% had this arrangement not been in place. Excluding the effects of the intercompany stop loss arrangement, the loss and loss expense ratio has decreased due to favorable development on non-casualty reserves related to prior year losses. This decrease was partially offset by the effect of losses incurred related to Tropical Storm Allison, the Petrobras oil rig and the Seattle earthquake in the first six months of 2001. While acquisition costs have increased due to profit commissions on prior year business assumed, this was offset by a reduction in operating expenses related to certain accrued compensation expenses of approximately $7.0 million. 24 FINANCIAL PRODUCTS AND SERVICES The following table summarizes the underwriting profit for this segment: (UNAUDITED) SIX MONTHS ENDED JUNE 30 ----------------------- 2001 2000 % CHANGE --------- --------- -------- Net premiums earned $ 14,475 $ 12,924 12.0% Fee income and other 15,373 6,591 133.2% Net losses and loss expenses 3,629 3,243 12.0% Acquisition costs 1,478 713 107.3% Operating expenses 18,220 11,648 56.4% --------- --------- -------- Underwriting profit $ 6,521 $ 3,911 66.7% ========= ========= ======== 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. Gross premiums written increased from $20.8 million in the first six months of 2000 to $41.2 million in the first six months of 2001 principally due to new financial guaranty business and a weather related risk management transaction. However, net premiums earned increased only marginally for the same period due to a change in the mix of business with longer earnings patterns. The Company provides credit protection in credit default swap form, in addition to financial guaranty insurance form. These contracts are recorded at fair value. Revenues received in respect of credit default swaps, together with fair value adjustments, are included as fee income and earned over the life of the policies. Fee income for the six months ended June 30, 2001 and 2000 related to credit default swaps and weather related derivative activity. Fee income and other for the six months ended June 30, 2001 also includes a loss of $0.8 million relating to the fair value adjustment on credit default swaps and a gain of $4.6 million related to weather derivatives. The following table presents the ratios for this segment: (UNAUDITED) SIX MONTHS ENDED JUNE 30 --------------------------- 2001 2000 ------------ ------------ Loss and loss expense ratio 25.1% 25.1% Underwriting expense ratio 136.1% 95.6% ------------ ------------ Combined ratio 161.2% 120.7% ============ ============ The Company's financial guaranty operations write business with an expected loss ratio of approximately 25%. The calculation of the underwriting expense ratio excludes fee income and other derived from credit default swap and weather related transactions. If this income were included, the expense ratio and the combined ratio would have been 66.0% and 91.1%, respectively, as at June 30, 2001, and 69.3% and 94.4%, respectively, as at June 30, 2000. Included in the underwriting expense ratio in the six months ended June 30, 2001 is an adjustment of approximately $3.0 million for the deferral of certain operating expenses related to underwriting activity in line with industry practice. 25 INVESTMENT OPERATIONS The following table illustrates the change in net investment income and net realized gains for the six-month periods ended June 30, 2001 and 2000: (UNAUDITED) SIX MONTHS ENDED JUNE 30 ----------------------- 2001 2000 % CHANGE --------- --------- -------- Net investment income $ 270,151 $ 264,967 2.0% Net realized gains on investments $ 29,099 $ 73,782 NM Net investment income increased in the first six months of 2001 compared to the first six months of 2000 due primarily to a higher investment base in 2001. The investment base in 2001 included the receipt of net funds of $844.6 million related to new debt issued by the Company during the second quarter of 2001. The investment base for the first six months of 2000 had declined as a result of claims payments, the repurchase of the Company's shares and the reallocation of assets to other strategic investments. The increase in the investment base was partially offset by investment yields that declined in the first six months of 2001 compared to the first six months of 2000. The Company anticipates that future investment income may be negatively affected by the reduction of interest rates by the Federal Reserve. Assets relating to the deposit liabilities are included in investments available for sale. Interest earned on these assets is reduced by the investment expense relating to the accretion of the deposit liabilities. Net realized gains on investments decreased significantly in 2001 due to declining markets in the first six months of the year. Net realized gains on investments in the first six months of 2000 were realized primarily from the sale of equity securities as the stock market reached record levels during that period. OTHER REVENUES AND EXPENSES The following table sets forth other revenues and expenses for the six months ended June 30, 2001 and 2000: (UNAUDITED) SIX MONTHS ENDED JUNE 30 ----------------------- 2001 2000 % CHANGE --------- --------- -------- Equity in net income of affiliates $ 57,902 $ 43,235 34.0% Amortization of intangible assets 29,171 27,808 4.9% Corporate operating expenses 30,609 26,952 13.6% Interest expense 23,312 15,897 46.6% Minority interest 517 727 (28.9)% Income tax 10,694 (10,321) NM The increase in equity in net income of affiliates is primarily attributable to higher returns from the Company's investments in investment funds and insurance and reinsurance affiliates during the first six months of 2001 compared to the first six months of 2000. The increase in corporate operating expenses is primarily a result of the increase in corporate infrastructure necessary to support the expanding worldwide operations of the Company. The increase in interest expense reflects the effect of $844.6 million of new debt raised by the Company in the second quarter of 2001. The Company's financing structure is outlined in "-Financial Condition and Liquidity." 26 The changes in the Company's income taxes principally reflects improving results for the U.S. operations in 2001 compared to 2000. FINANCIAL CONDITION AND LIQUIDITY As a holding company, the Company'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 June 30, 2001 was $5.7 billion of which $3.4 billion was retained earnings. At June 30, 2001, total investments available for sale and cash net of unsettled investment trades were $9.9 billion compared to $9.1 billion at December 31, 2000. This includes investments relating to Company's asset accumulation business. The growth in this position reflects positive operational cash flows together with most of the proceeds from debt issued by the Company during the second quarter of 2001, discussed below. The Company's fixed income investments including short-term investments and cash equivalents at June 30, 2001 represented approximately 90% of invested assets and were managed by several outside investment management firms. Approximately 88.9% of fixed income securities are investment grade, with 59.1% 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 decreased from $1.4 billion at December 31, 2000 to $1.1 billion as at June 30, 2001. This decrease results from timing differences as investments are accounted for on a trade basis. Operational cash flows during the first six months of 2001 improved from the same period of 2000 primarily due to a lower level of losses paid in 2001. 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 six months ended June 30, 2001 and 2000, the net amount of losses due to claims activity paid by the Company was $614.5 million and $976.3 million, respectively. During the six months ended June 30, 2001, negative currency translation adjustments were $33.5 million. This is shown as part of accumulated other comprehensive income and primarily relates to unrealized losses on foreign currency exchange rate movements in the six months on the Company's investment in Le Mans Re and certain subsidiaries where the functional currency in not the U.S. dollar. The Company establishes reserves to provide for estimated claims, the general expenses of administering the claims adjustment process and for losses incurred but not reported. These reserves are calculated 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 judgment 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 has had several share repurchase programs in the past as part of its capital management strategy. On January 9, 2000, the Board of Directors authorized a program for the repurchase of shares up to $500.0 million. The repurchase of shares was announced in conjunction with a small dividend increase of $0.04 per share per annum. Under this plan, the Company has purchased 5.3 million shares up to August 9, 2001 at an aggregate cost of $263.7 million or an average cost of $49.73 per share. As at June 30, 2001, the Company had bank, letter of credit and loan facilities available from a variety of sources including commercial banks totaling $3.2 billion of which $1.3 billion in debt was outstanding. In addition, $1.2 million of letters of credit were outstanding, 7.0% of which were collateralized by the Company's investment portfolio, supporting U.S. non-admitted business and the Company's Lloyd's capital requirements. 27 The financing structure as at June 30, 2001 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 6.58% Guaranteed Senior Notes due 2011 255,000 255,000 Zero Coupon Convertible Debentures due 2021 601,694 589,600 ---------- ---------- $1,806,694 $1,294,600 ========== ========== LETTERS OF CREDIT: 5 facilities - total $1,425,000 $1,150,000 ========== ========== A syndicate of banks provides the $500.0 million 364-day revolving credit facility and borrowings are unsecured. This facility was renewed along with the $1.0 billion letter of credit facility effective June 29, 2001. Two syndicates of banks provide the two five-year facilities and borrowings are unsecured. Under these facilities, the amount of $350.0 million outstanding at June 30, 2001 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 to the $109.7 million borrowed to finance certain acquisitions in 1999. The weighted average interest rate on funds borrowed during the six months ended June 30, 2001 was approximately 5.4%. In 1995, NAC Re Corp, with which the Company merged in 1999, issued $100.0 million of 7.15% Senior Notes due November 15, 2005 through a public offering at a price of $99.9 million. In April 2001, the Company issued at par $255.0 million of 6.58% Guaranteed Senior Notes due April 2011 through a private placement to institutional investors. Proceeds of the debt will be used for general corporate purposes. In May 2001, the Company issued Zero Coupon Convertible Debentures due 2021 with a yield to maturity of 2.625%. The gross proceeds to the Company were $600.0 million and related expenses were $13.5 million. Proceeds of the debt will be used to finance the Winterthur International acquisition and general corporate purposes. Total pre-tax interest expense on the borrowings described above was $23.3 million and $15.9 million for the six months ended June 30, 2001 and 2000, respectively. Associated with the Company's bank and loan commitments are various loan covenants with which the Company was in compliance throughout both six month periods. CURRENT OUTLOOK Most of the property and casualty markets in which the Company operates have seen improvements in pricing and policy terms and conditions for renewals of contracts the Company has underwritten thus far for 2001. However, premium rates have not yet improved to the extent the Company believes to be necessary in certain lines of business. In addition, it is anticipated that underwriting results for the Lloyd's markets may not improve at the expected rate. Loss activity experienced in the first six months of 2001, including the Petrobras oil rig, the Seattle earthquake and Tropical Storm Allison, is expected to continue during the third quarter. In particular, the Company expects to incur losses relating to the Sri Lanka airport attack and a recent satellite loss. With the advent of the hurricane season, further losses could be incurred. Net income will also be affected by the acquisition of Winterthur International, anticipated to be dilutive to earnings for the remainder of 2001. 28 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK The Company is exposed to potential loss from 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, and commenced trading in weather derivatives in 2001. These derivative instruments are carried at fair market value with the resulting gains and losses included in net realized gains or losses on investments. This risk management discussion and the estimated amounts generated from the sensitivity analyses are forward-looking statements of market risk assuming certain adverse market conditions occur. Actual results in the future may differ materially from these projected results due to actual developments in the global financial markets. The results of analysis used by the Company to assess and mitigate risk should not be considered projections of future events 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. 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 RISK MANAGEMENT The Company uses foreign exchange contracts to manage its exposure to the effects of fluctuating foreign currencies on the value of its foreign currency fixed maturities and equity investments. These contracts are not designated as 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 believe potential gains exist in a particular currency, a forward contract may not be entered into. At June 30, 2001, forward foreign exchange contracts with notional principal amounts totaling $183.4 million were outstanding. The fair value of these contracts as at June 30, 2001 was $185.6 million with unrealized gains of $2.2 million. Gains of $9.7 million were realized during the six months ended June 30, 2001. 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 June 30, 2001 would have resulted in approximately $3.8 million of unrealized losses and $3.0 million in unrealized gains, respectively. 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 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 June 30, 2001, the value of such contracts was insignificant. The Company also uses foreign exchange forward contracts to reduce its exposure to premiums receivable denominated in foreign currencies. The forward contract is closely matched with the receivable maturity date. Both the foreign currency receivable and the offsetting forward contract are marked to market on each balance sheet date, with any gains and losses recognized in the income statement. As at June 30, 2001, the Company had forward contracts outstanding for the sale of $9.4 million of foreign currencies at fixed rates, primarily U.K. Sterling and Euros. Activity was insignificant in the six months ended June 30, 2001. The Company attempts to manage the exchange volatility arising on certain administration costs denominated in foreign currencies. Throughout the year, forward contracts are entered into to acquire the foreign currency at an agreed rate in the future. At June 30, 2001, the Company had forward contracts outstanding for the purchase of $5.6 million of Euros and U.K. Sterling at fixed rates. Activity was insignificant in the six months ended June 30, 2001. FINANCIAL MARKET EXPOSURE The Company also uses derivative instruments to add value to the portfolio where market inefficiencies are believed to exist, to equitize cash holdings of equity managers and to adjust the duration of a portfolio of fixed income securities to match the duration of related deposit liabilities. The Company measures potential losses in fair values using various statistical techniques, including Value at Risk ("VaR"). VaR is a comprehensive statistical measure that uses historical rates, market movements, credit spreads and default rates to estimate the volatility and correlation of these factors to calculate the maximum loss that could occur over a defined period of time given a certain probability. At June 30, 2001, bond and stock index futures outstanding were $1.2 billion with underlying investments having a market value of $3.0 billion. A 10% appreciation or depreciation of these derivative instruments would have resulted in unrealized gains and unrealized losses of $119.6 million, respectively. The Company reduces its exposure to these futures through offsetting transactions, including options and forwards. The VaR of all derivatives at June 30, 2001 was $12.0 million. 29 The Company provides credit protection in both credit default swap form and in financial guaranty insurance form. The Company also trades in weather derivatives. These products are recorded at fair value, and fair value adjustments are recognized in earning in each period as a part of fee income and other, along with all other credit default swap activity. These types of transactions may expose the Company to financial market risk through changes in interest rates, credit spreads and other market factors. For the six months ended June 30, 2001, fee income and other included $15.4 million related to credit default swaps and weather derivatives. ACCOUNTING PRONOUNCEMENTS See Note 2 to the Consolidated Financial Statements. SUBSEQUENT EVENTS See Note 7 to the Consolidated Financial Statements. 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 Shareholders, any proxy statement, any other Form 10-Q, Form 10-K or Form 8-K of the Company or any other written or oral statements made by or on behalf of the Company may include forward-looking statements which reflect the Company's current views with respect to future events and financial performance. Such statements include forward-looking statements both with respect to the Company and the insurance, reinsurance and financial products and services sectors in general (both as to underwriting and investment matters). Statements which include the words "expect", "intend", "plan", "believe", "project", "anticipate", "will", and similar statements of a future or forward-looking nature identify forward-looking statements for purposes of the PSLRA or otherwise. All forward-looking statements address matters that involve risks and uncertainties. Accordingly, there are or will be important factors that could cause actual results to differ materially from those indicated in such statements. The Company believes that these factors include, but are not limited to, the following: (i) ineffectiveness or obsolescence of the Company's business strategy due to changes in current or future market conditions; (ii) increased competition on the basis of pricing, capacity, coverage terms or other factors; (iii) greater frequency or severity of claims and loss activity, including as a result of natural or man-made catastrophic events, than the Company's underwriting, reserving or investment practices anticipate based on historical experience or industry data; (iv) developments in the world's financial and capital markets which adversely affect the performance of the Company's investments; (v) changes in regulation or tax laws applicable to the Company, its subsidiaries, brokers or customers; (vi) acceptance of the Company's products and services, including new products and services; (vii) changes in the availability, cost or quality of reinsurance; (viii) changes in the distribution or placement of risks due to increased consolidation of insurance and reinsurance brokers; (ix) loss of key personnel; (x) the effects of mergers, acquisitions and divestitures, including, without limitation, the Winterthur International acquisition; (xi) changes in rating agency policies or practices; (xii) changes in accounting policies or practices; and (xiii) changes in general economic conditions, including inflation, foreign currency exchange rates and other factors. The foregoing review of important factors should not be construed as exhaustive and should be read in conjunction with the 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 is a party to various legal proceedings, including arbitrations, 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, reinsurance and financial products and services 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 At the Annual General Meeting of Class A shareholders held on May 11, 2001 at the executive offices of the Company, XL House, One Bermudiana Road, Hamilton HM 11, Bermuda, the shareholders approved the following: 1. To elect four Class III directors to hold office until 2004 - M. Butt, J. Loudon, R.S. Parker and A.Z. Senter. Votes in Favor Votes Withheld ---------------------- ------------------------ 102,289,195 519,398 2. To appoint PricewaterhouseCoopers LLP, New York, New York, to act as the independent auditors of the Company for the fiscal year ending December 31, 2001. Votes in Favor Votes Against Abstentions ---------------------- ------------------------ --------------------- 100,713,635 2,059,791 35,167 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K EXHIBITS 10.14.37 Jerry de St. Paer Employment Agreement, dated as of March 1, 2001. 10.14.38 364-day Credit Agreement, dated as of June 29, 2001, between XL Capital Ltd., X.L. America, Inc., XL Insurance Ltd, XL Europe Ltd. and XL Re Ltd, as account parties and guarantors, the lenders party thereto, and The Chase Manhattan Bank, as administrative agent, J.P. Morgan Securities Inc., as advisor, lead arranger and bookrunner and Mellon Bank, N.A. and Citibank, N.A., as co-syndication agents 10.14.39 Letter of Credit and Reimbursement Agreement, dated as of June 29, 2001, between XL Capital Ltd, X.L. America, Inc, XL Insurance Ltd, XL Europe Ltd and XL Re Ltd, as account parties and guarantors, the lenders party thereto and The Chase Manhattan Bank, as administration agent, J.P. Morgan Securities Inc., as advisor, lead arranger and bookrunner and Mellon Bank, N.A. and Citibank, N.A., as co-syndication agents 10.14.40 Indenture, dated May 23, 2001, between XL Capital Ltd and Goldman, Sachs & Co., Deutsche Banc Alex. Brown, and Dresdner Kleinwort Wasserstein L.L.C., as initial purchasers, incorporated by reference as exhibit 4(a) to the Company's Registration Statement on Form S-3 (No. 33-66976) 10.14.41 Form of zero coupon convertible debenture (included in exhibit 4(a) referred to in item 10.14.40 above and incorporated by reference herein) 10.14.42 Registration rights agreement, dated May 23, 2001, between XL Capital Ltd and Goldman, Sachs & Co., Deutsche Banc Alex. Brown, and Dresdner Kleinwort Wasserstein L.L.C., as initial purchasers, as incorporated by reference to the Company's Registration Statement on Form S-3 (No.33-66976) 10.14.43 Form of Note Purchase Agreement, dated as of April 12, 2001, relating to 6.58% guaranteed senior notes due April 12, 2001 REPORTS ON FORM 8-K Current Report on Form 8-K filed on May 18, 2001, under Item 5 thereof. 31 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. XL CAPITAL LTD ------------------------------------------ (REGISTRANT) August 14, 2001 /s/ BRIAN M. O'HARA ------------------------------------------ BRIAN M. O'HARA PRESIDENT AND CHIEF EXECUTIVE OFFICER August 14, 2001 /s/ JERRY DE ST. PAER ------------------------------------------ JERRY DE ST. PAER EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL OFFICER 32