-----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, DO2zjhTATdR097+sqxtdM/fO69PoP0+box7QrPJC73nkF2POEKnRkAmUUyxguRIF Wy+UddlXYtfZiDfGzC329g== 0000930413-02-001812.txt : 20020514 0000930413-02-001812.hdr.sgml : 20020514 ACCESSION NUMBER: 0000930413-02-001812 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 20020331 FILED AS OF DATE: 20020514 FILER: COMPANY DATA: COMPANY CONFORMED NAME: XL CAPITAL LTD CENTRAL INDEX KEY: 0000875159 STANDARD INDUSTRIAL CLASSIFICATION: SURETY INSURANCE [6351] IRS NUMBER: 980058718 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-10804 FILM NUMBER: 02646383 BUSINESS ADDRESS: STREET 1: XL HOUSE STREET 2: ONE BERMUDIANA ROAD 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 c24198_10q.txt SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2002 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 May 10, 2002, there were 135,465,673 outstanding 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 March 31, 2002 and December 31, 2001 (Unaudited).............................. 1 Consolidated Statements of Income and Comprehensive Income for the Three Months Ended March 31, 2002 and 2001 (Unaudited)................................................ 2 Consolidated Statements of Shareholders' Equity for the Three Months Ended March 31, 2002 and 2001 (Unaudited)................................................ 3 Notes to Unaudited Consolidated Financial Statements ...... 5 Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition ........................ 13 Item 3. Quantitative and Qualitative Disclosure about Market Risk.. 23 PART II. OTHER INFORMATION Item 1. Legal Proceedings ......................................... 26 Item 4. Submission of Matters to a Vote of Shareholders ........... 26 Item 6. Exhibits and Reports on Form 8-K .......................... 26 Signatures PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS XL CAPITAL LTD CONSOLIDATED BALANCE SHEETS (U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED) ----------------------------- MARCH 31, DECEMBER 31, 2002 2001 ------------ ------------ ASSETS Investments: Fixed maturities at fair value (amortized cost: 2002, $11,752,123; 2001, $10,945,568) ..................................................... $ 11,525,883 $ 10,831,927 Equity securities, at fair value (cost: 2002, $684,441; 2001, $575,090) .. 678,319 547,805 Short-term investments, at fair value (amortized cost: 2002, $630,074; 2001, $1,050,015) ...................................................... 629,399 1,050,113 ------------ ------------ Total investments available for sale .............................. 12,833,601 12,429,845 Investments in affiliates ................................................ 1,162,725 1,037,344 Other investments ........................................................ 250,384 273,528 ------------ ------------ Total investments ................................................. 14,246,710 13,740,717 Cash and cash equivalents ................................................... 2,066,413 1,863,861 Accrued investment income ................................................... 193,662 180,305 Deferred acquisition costs .................................................. 614,717 394,258 Prepaid reinsurance premiums ................................................ 1,080,629 846,081 Premiums receivable ......................................................... 3,404,981 2,182,348 Reinsurance balances receivable ............................................. 1,398,557 1,246,106 Unpaid losses and loss expenses recoverable ................................. 5,063,661 5,033,952 Goodwill and other intangible assets......................................... 1,677,597 1,616,943 Deferred tax asset, net ..................................................... 340,875 419,222 Other assets ................................................................ 629,983 439,282 ------------ ------------ Total assets ....................................................... $ 30,717,785 $ 27,963,075 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Unpaid losses and loss expenses ............................................. $ 12,275,728 $ 11,825,680 Deposit liabilities and policy benefit reserves ............................. 2,409,481 2,374,164 Unearned premiums ........................................................... 4,091,367 2,682,089 Notes payable and debt ..................................................... 1,857,670 1,604,877 Reinsurance balances payable ................................................ 1,886,357 1,672,122 Net payable for investments purchased ....................................... 1,483,177 1,247,027 Other liabilities ........................................................... 1,215,846 1,071,402 Minority interest ........................................................... 48,095 48,530 ------------ ------------ Total liabilities .................................................. $ 25,267,721 $ 22,525,891 ------------ ------------ Commitments and Contingencies Shareholders' Equity: Authorized, 999,990,000 Class A ordinary shares, par value $0.01 Issued and outstanding: (2002, 135,511,183; 2001, 134,734,491) ........... $ 1,355 $ 1,347 Contributed surplus ......................................................... 3,427,920 3,378,549 Accumulated other comprehensive loss ........................................ (260,250) (213,013) Deferred compensation ....................................................... (41,965) (27,177) Retained earnings ........................................................... 2,323,004 2,297,478 ------------ ------------ Total shareholders' equity ......................................... $ 5,450,064 $ 5,437,184 ------------ ------------ Total liabilities and shareholders' equity ......................... $ 30,717,785 $ 27,963,075 ============ ============
See accompanying Notes to Consolidated Financial Statements 1 XL CAPITAL LTD CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (U.S. DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED) THREE MONTHS ENDED MARCH 31 --------------------------- 2002 2001 ----------- ----------- REVENUES: Net premiums earned - general operations ................................ $ 1,032,953 $ 542,154 Net premiums earned - life operations ................................... 39,193 -- Net investment income ................................................... 171,127 143,096 Net realized (losses) gains on investments .............................. (106,020) 62,535 Net realized and unrealized losses on derivative instruments ............ (13,200) (2,364) Equity in net income of investment affiliates ........................... 32,185 20,374 Fee income and other..................................................... 8,868 7,069 ----------- ----------- Total revenues .................................................. 1,165,106 772,864 ----------- ----------- EXPENSES: Net losses and loss expenses incurred - general operations .............. 646,924 330,204 Claims and policy benefit reserves - life operations .................... 47,763 -- Acquisition costs ....................................................... 185,732 125,872 Operating expenses ...................................................... 145,145 73,058 Exchange gains .......................................................... (8,364) (1,170) Interest expense ....................................................... 41,622 21,257 Amortization of intangible assets ..................................... 614 14,468 ----------- ----------- Total expenses ..................................................... 1,059,436 563,689 ----------- ----------- Income before minority interest, income tax expense and equity in net income of insurance affiliates ............................................. 105,670 209,175 Minority interest in net income of subsidiary ........................... 2,255 1,169 Income tax expense (benefit) ............................................ 13,954 (2,909) Equity in net income of insurance affiliates ............................ (32) (8,014) ----------- ----------- Net income ................................................................... $ 89,493 $ 218,929 ----------- ----------- Change in net unrealized depreciation of investments ......................... (104,314) (29,407) Foreign currency translation adjustments ..................................... 57,077 (47,122) ----------- ----------- Comprehensive income ......................................................... $ 42,256 $ 142,400 =========== =========== Weighted average ordinary shares and ordinary share equivalents outstanding-basic ............................................. 135,119 124,464 =========== =========== Weighted average ordinary shares and ordinary share equivalents outstanding - diluted ......................................... 137,843 126,782 =========== =========== Earnings per ordinary share and ordinary share equivalent-basic........................................................... $ 0.66 $ 1.76 =========== =========== Earnings per ordinary share and ordinary share equivalent - diluted....................................................... $ 0.65 $ 1.73 =========== ===========
See accompanying Notes to Consolidated Financial Statements 2 XL CAPITAL LTD CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (U.S. DOLLARS IN THOUSANDS)
(UNAUDITED) THREE MONTHS ENDED MARCH 31 --------------------------- 2002 2001 ----------- ----------- ORDINARY SHARES: Balance-beginning of year ......................................... $ 1,347 $ 1,250 Issue of shares ................................................... -- -- Exercise of stock options ......................................... 8 3 Repurchase of shares .............................................. -- (2) ----------- ----------- Balance-end of year .......................................... 1,355 1,251 ----------- ----------- CONTRIBUTED SURPLUS: Balance-beginning of year ......................................... 3,378,549 2,497,416 Issue of shares ................................................... -- -- Exercise of stock options ......................................... 49,371 16,699 Repurchase of shares .............................................. -- (3,904) ----------- ----------- Balance-end of year .......................................... 3,427,920 2,510,211 ----------- ----------- ACCUMULATED OTHER COMPREHENSIVE LOSS: Balance-beginning of year ......................................... (213,013) (104,712) Net change in unrealized gains on investment portfolio, net of tax (103,836) (50,407) Net change in unrealized gains on investment portfolio of affiliate (478) -- Currency translation adjustments .................................. 57,077 (26,122) ----------- ----------- Balance-end of year .......................................... (260,250) (181,241) ----------- ----------- DEFERRED COMPENSATION: Balance-beginning of year ......................................... (27,177) (17,727) Issue of restricted shares ........................................ (18,150) (1,240) Amortization ...................................................... 3,362 1,998 ----------- ----------- Balance-end of year .......................................... (41,965) (16,969) ----------- ----------- RETAINED EARNINGS: Balance-beginning of year ......................................... 2,297,478 3,197,441 Net income ........................................................ 89,493 218,929 Cash dividends paid ............................................... (63,967) (58,090) Repurchase of shares .............................................. -- (9,726) ----------- ----------- Balance-end of year .......................................... 2,323,004 3,348,554 ----------- ----------- $ 5,450,064 $ 5,661,806 TOTAL SHAREHOLDERS' EQUITY ............................................. =========== ===========
See accompanying Notes to Consolidated Financial Statements 3 XL CAPITAL LTD CONSOLIDATED STATEMENTS OF CASH FLOWS (U.S. DOLLARS IN THOUSANDS)
(UNAUDITED) THREE MONTHS ENDED MARCH 31 ----------------------------- 2002 2001 ------------ ------------ CASH FLOWS PROVIDED (USED IN) BY OPERATING ACTIVITIES: Net income ........................................................... $ 89,493 $ 218,929 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Net realized losses (gains) on sales of investments ................... 106,020 (62,535) Net realized and unrealized losses on derivative instruments .......... 13,200 2,364 Amortization of discounts on fixed maturities ......................... (7,743) (11,850) Equity in net income of investment and insurance affiliates ........... (32,212) (28,388) Amortization of deferred compensation ................................. 3,362 1,998 Amortization of intangible assets ..................................... 614 14,468 Accretion of deposit liabilities ...................................... 13,870 22,250 Unpaid losses and loss expenses ....................................... (52,635) 174,097 Unearned premiums ..................................................... 1,339,880 314,286 Premiums receivable ................................................... (1,150,144) (246,394) Unpaid losses and loss expenses recoverable ........................... 25,401 (183,837) Prepaid reinsurance premiums .......................................... (226,174) (57,125) Reinsurance balances receivable ....................................... (89,718) (36,306) Deferred acquisition costs ............................................ (220,209) (64,009) Reinsurance balances payable .......................................... 145,068 111,738 Deferred tax asset .................................................... 81,911 (5,840) Other ................................................................. (83,304) 36,713 ------------ ------------ Total adjustments ................................................ (132,813) (18,370) ------------ ------------ Net cash (used in) provided by operating activities ................... (43,320) 200,559 CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES: Proceeds from sale of fixed maturities and short-term investments ..... 12,166,903 7,477,629 Proceeds from redemption of fixed maturities and short-term investments 978,384 167,189 Proceeds from sale of equity securities ............................... 208,126 350,307 Purchases of fixed maturities and short-term investments .............. (12,970,202) (7,810,907) Purchases of equity securities ........................................ (89,354) (287,367) Investments in affiliates, net of dividends received .................. (219,822) (48,647) Acquisition of subsidiaries, net of cash acquired ..................... (45,466) (20,586) Other investments ..................................................... 9,440 (27,361) Fixed assets and other ................................................ (1,170) (5,749) ------------ ------------ Net cash provided by (used in) investing activities ................... 36,839 (205,492) CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES: Proceeds from exercise of stock options ............................... 30,187 14,606 Repurchase of shares .................................................. -- (13,632) Dividends paid ........................................................ (63,967) (58,090) Proceeds from notes payable and debt .................................. 596,814 50,000 Repayment of notes payable and debt ................................... (350,000) -- Deposit liabilities ................................................... (3,973) 20,000 ------------ ------------ Net cash provided by financing activities .................................. 209,061 12,884 Effects of exchange rate changes on foreign currency cash .................. (28) (1,134) ------------ ------------ Increase in cash and cash equivalents ...................................... 202,552 6,817 Cash and cash equivalents - beginning of year .............................. $ 1,863,861 $ 930,469 ============ ============ Cash and cash equivalents - end of year .................................... $ 2,066,413 $ 937,286 ============ ============
See accompanying Notes to Consolidated Financial Statements 4 XL CAPITAL LTD NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (U.S. DOLLARS IN THOUSANDS) 1. BASIS OF PREPARATION AND CONSOLIDATION These unaudited consolidated financial statements include the accounts of XL Capital Ltd and all of 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 amounts 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 these estimates. Certain reclassifications have been made to prior year consolidated financial statement amounts to conform to current year presentation. There was no effect on net income from this change in presentation. 2. ACCOUNTING PRONOUNCEMENTS Effective January 1, 2002, the Company adopted Financial Accounting Standard ("FAS") 142, "Goodwill and Other Intangible Assets". FAS 142 addresses financial accounting and reporting for goodwill and other intangible assets both upon acquisition and after these assets have initially been recognized in the financial statements. Adoption of FAS 142 has resulted in the Company ceasing to amortize goodwill. The Company believes there will be no significant effect on its financial position following the final assessment of the adoption of FAS 142, expected to be completed in the second quarter of 2002. The following is the pro forma effect on net income and earnings per share for the quarter ended March 31, 2001 had FAS 142 been effective January 1, 2001 as compared to the net income and earnings per share for the quarter ended March 31, 2002 THREE MONTHS ENDED MARCH 31 --------------------------- 2002 2001 -------- --------- NET INCOME : Reported net income ........................... $ 89,493 $ 218,929 Add back : Goodwill amortization ............... -- 14,104 -------- --------- Adjusted net income ............................ $ 89,493 $ 233,033 -------- --------- BASIC EARNINGS PER SHARE Reported basic earnings per share .............. $ 0.66 $ 1.76 Goodwill amortization .......................... -- 0.11 -------- --------- Adjusted basic earnings per share .............. $ 0.66 $ 1.87 -------- --------- DILUTED EARNINGS PER SHARE Reported diluted earnings per share ............ $ 0.65 $ 1.73 Goodwill amortization .......................... -- 0.11 -------- --------- Adjusted diluted earnings per share ............ $ 0.65 $ 1.84 -------- --------- Of the total goodwill and other intangible assets at March 31, 2002 of $1,677,597, approximately $1,630,000 is goodwill. The remaining balance is intangible assets which are being amortized over their estimated useful lives of periods between six and twenty years. 5 XL CAPITAL LTD NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (U.S. DOLLARS IN THOUSANDS) 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 and financing operations of the Company. General operations and life operations are disclosed separately within each segment. There were no significant life operations in the quarter ended March 31, 2001. General operations include property and casualty lines of business and financial products and services. Effective January 1, 2002, the Company provides 100% of the capacity of its Lloyd's syndicates and these operations are no longer shown separately within the insurance segment. 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 for general operations. In addition, the Company does not allocate assets by segment for its general operations. Investment assets related to the Company's life operations are held in portfolios that are separately managed. Net investment income from these assets are included in net income from life operations. Certain general 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. 6 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 results to net income: QUARTER ENDED MARCH 31, 2002:
TOTAL FINANCIAL INSURANCE AND PRODUCTS AND INSURANCE REINSURANCE REINSURANCE SERVICES TOTAL --------- ----------- ----------- ------------ --------- GENERAL OPERATIONS: Net premiums earned $ 592,656 $ 421,167 $ 1,013,823 $ 19,130 $1,032,953 Fee income and other 6,545 899 7,444 1,422 8,866 Net losses and loss expenses 376,380 264,632 641,012 5,912 646,924 Acquisition costs 91,965 92,214 184,179 958 185,137 Operating expenses (1) 88,973 18,686 107,659 14,990 122,649 Exchange gains (2,112) (6,252) (8,364) -- (8,364) --------- --------- ----------- --------- ---------- Underwriting profit (loss) $ 43,995 $ 52,786 $ 96,781 $ (1,308) $ 95,473 --------- --------- ----------- --------- ---------- LIFE OPERATIONS: Life premiums earned $ -- $ 39,193 39,193 $ -- $ 39,193 Fee income and other -- 2 2 -- 2 Claims and policy benefit reserves -- 47,763 47,763 -- 47,763 Acquisition costs and operating expenses -- 1,678 1,678 -- 1,678 Net investment income -- 15,518 15,518 -- 15,518 Net realized losses on investments -- 618 618 -- 618 --------- --------- ----------- --------- ---------- Net income from life operations $ -- $ 4,654 $ 4,654 $ -- $ 4,654 --------- --------- ----------- --------- ---------- Net investment income 155,609 Net realized and unrealized losses on investments and derivative instruments 118,602 Equity in net income of affiliates 32,217 Interest expense 41,622 Amortization of intangible assets 614 Corporate operating expenses (1) 21,413 Minority interest 2,255 Income tax expense 13,954 ---------- Net income $ 89,493 ========== Loss and loss expense ratio (2) 63.5% 62.8% 63.2% Underwriting expense ratio (2) 30.5% 26.3% 28.8% ----- ----- ----- Combined ratio (2) 94.0% 89.1% 92.0% ===== ===== =====
(1) Operating expenses exclude corporate operating expenses, shown separately. (2) Ratios are based on net premiums earned from general insurance and reinsurance operations, excluding fee income and other. The underwriting expense ratio excludes exchange gains. 7 XL CAPITAL LTD NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (U.S. DOLLARS IN THOUSANDS) 3. SEGMENT INFORMATION (CONTINUED) QUARTER ENDED MARCH 31, 2001:
TOTAL FINANCIAL INSURANCE AND PRODUCTS AND INSURANCE REINSURANCE REINSURANCE SERVICES TOTAL --------- --------- ------------- ------------- --------- GENERAL OPERATIONS: Net premiums earned $ 269,473 $ 266,860 $ 536,333 $ 5,821 $ 542,154 Fee income and other 2,625 (563) 2,062 5,007 7,069 Net losses and loss expenses 160,131 168,458 328,589 1,615 330,204 Acquisition costs 55,951 69,600 125,551 321 125,872 Operating expenses (1) 32,787 16,706 49,493 11,357 60,850 Exchange (gains) losses (1,382) 212 (1,170) -- (1,170) --------- --------- --------- --------- --------- Underwriting profit (loss) $ 24,611 $ 11,321 $ 35,932 $ (2,465) $ 33,467 --------- --------- --------- --------- --------- Net investment income 143,096 Net realized and unrealized gains on investments and derivative instruments 60,171 Equity in net income of affiliates 28,388 Interest expense 21,257 Amortization of intangible assets 14,468 Corporate operating expenses (1) 12,208 Minority interest 1,169 Income tax benefit 2,909 --------- Net income $ 218,929 ========= Loss and loss expense ratio (2) 59.4% 63.1% 61.3% Underwriting expense ratio (2) 32.9% 32.4% 32.6% ----- ----- ----- Combined ratio (2) 92.3% 95.5% 93.9% ===== ===== =====
(1) Operating expenses exclude corporate operating expenses, shown separately. (2) Ratios are based on net premiums earned from general insurance and reinsurance operations, excluding fee income and other. The underwriting expense ratio excludes exchange gains and losses. 8 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 MARCH 31, 2002: GROSS PREMIUMS NET PREMIUMS NET PREMIUMS WRITTEN WRITTEN EARNED ---------- ---------- ---------- Casualty insurance $ 495,236 $ 365,476 $ 236,868 Casualty reinsurance 450,329 376,442 159,845 Property catastrophe 197,746 177,402 60,325 Other property 579,257 379,764 229,785 Marine, energy, aviation and satellite 297,870 226,257 103,787 Lloyd's syndicates (1) 333,725 263,814 120,362 Accident and health (2) 127,906 104,977 19,658 Financial products and services 71,796 69,185 19,130 Other insurance (3) 125,599 98,740 57,059 Other reinsurance (3) 132,207 105,351 26,134 ---------- ---------- ---------- Total general operations 2,811,671 2,167,408 1,032,953 Life 38,528 36,968 39,193 ---------- ---------- ---------- Total $2,850,199 $2,204,376 $1,072,146 ========== ========== ========== QUARTER ENDED MARCH 31, 2001: GROSS PREMIUMS NET PREMIUMS NET PREMIUMS WRITTEN WRITTEN EARNED ---------- ---------- ---------- Casualty insurance $ 189,187 $ 111,709 $ 85,008 Casualty reinsurance 171,390 123,045 71,389 Property catastrophe 102,158 97,842 36,822 Other property 177,546 126,893 94,331 Marine, energy, aviation and satellite 177,577 115,408 61,822 Lloyd's syndicates (1) 216,996 134,540 92,159 Financial products and services 11,989 11,933 5,821 Other insurance (3) 66,687 42,654 33,579 Other reinsurance (3) 37,315 48,230 61,223 ---------- ---------- ---------- Total $1,150,845 $ 812,254 $ 542,154 ========== ========== ========== (1) The Company's Lloyd's syndicates write a variety of coverages encompassing most of the above lines of business. (2) The Company did not write any significant accident and health business in the quarter ended March 31, 2001. (3) Other insurance and reinsurance premiums written and earned include political risk, surety, bonding and warranty lines. 9 XL CAPITAL LTD NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (U.S. DOLLARS IN THOUSANDS) 4. BUSINESS COMBINATIONS (A) LE MANS RE Effective January 2002, the Company increased its shareholding in Le Mans Re from 49% at December 31, 2001 to 67% in order to acquire a majority ownership and to expand its international reinsurance operations. Le Mans Re underwrites a worldwide portfolio comprising most classes of property and casualty reinsurance business together with a selective portfolio of life reinsurance business. The remaining 33% ownership is held by Les Mutuelles du Mans Assurances Group ("MMA"). However, MMA does not have any economic interest in the future earnings of Le Mans Re as a result of this ownership. Accordingly, no minority interest has been recorded. The Company has the option to buy the remaining shares from MMA for cash in the amount of approximately $119.0 million on December 13, 2002. MMA has the option to sell the remaining shares to the Company on December 13, 2003, or earlier if specific events occur, for approximately $119.0 million in cash. These events include, but are not limited to, a reduction of the Standard & Poor's rating of Le Mans Re and a change of control in either the Company or Le Mans Re. If the Company or MMA have not exercised their options by December 13, 2003, the parties may agree to extend the exercise period. The Company has accrued a liability for the purchase of the remaining shares at approximately $119.0 million, included in other liabilities at March 31, 2002. The cost of the acquisition, including the liability discussed above was approximately $171.1 million. Goodwill arising from the acquisition was approximately $50.0 million. The Company is continuing its assessment of the value of tangible net assets and intangible assets acquired. Cash paid, net of cash acquired was $45.5 million during the quarter ended March 31, 2002. (B) LYNDON LIFE INS. CO. In the first quarter of 2002, the Company acquired Lyndon Life Ins. Co., a shell company licensed in forty nine U.S. states, for the purpose of obtaining licenses for the Company's life operations. The cost of the acquisition was $13.5 million, paid in April 2002, and intangible assets arising from the acquisition were $3.5 million. (C) WINTERTHUR INTERNATIONAL On July 25, 2001, the Company completed the acquisition of Winterthur International, a division of Winterthur Swiss Insurance Company, specializing in writing property and casualty insurance coverages to large multinational companies. The following unaudited pro forma financial information for the three months ended March 31, 2001, include the unaudited financial information for Winterthur International for the three months ended March 31, 2001 as if the acquisition of the Winterthur International operations occurred on January 1, 2001. Winterthur International results of operations for the three months ended March 31, 2001, included in the pro forma financial information have not been adjusted for the contractual protection that the Company has received from the seller with effect from July 1, 2001. The pro forma financial information is based upon information currently available and certain assumptions that the Company's management believes are reasonable. The pro forma financial information does not purport to represent what the Company's results of operations or financial condition would have been had the transaction occurred on such dates or to project the Company's results of operations or financial condition for any future period or date. As a result of the above, the pro forma financial information should be reviewed with caution and undue reliance should not be placed on such information. ACTUAL PRO FORMA QUARTER ENDED QUARTER ENDED MARCH 31, 2002 MARCH 31, 2001 -------------- -------------- Total revenues $1,165,106 $961,362 Net income $89,493 $142,432 Earnings per ordinary share -- Basic $0.66 $1.14 Earnings per ordinary share -- Diluted $0.65 $1.12 10 XL CAPITAL LTD NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (U.S. DOLLARS IN THOUSANDS) 5. NOTES PAYABLE AND DEBT AND FINANCING ARRANGEMENTS In January 2002, the Company issued $600.0 million par value Guaranteed Senior Notes due January 2012. The Notes were issued at $99.469 and gross proceeds were $596.8 million. The Guaranteed Senior Notes have a coupon of 6.5%. Related expenses of the offering amounted to $7.9 million. Proceeds of the Notes were used to pay down $350.0 million of outstanding revolving credit in February 2002 that would have expired in June 2002, and for general corporate purposes. 6. DERIVATIVE INSTRUMENTS The Company enters into derivative instruments for both risk management and trading purposes. The Company is exposed to potential loss from various market risks, including changes in interest rates, foreign currency exchange rates and commodity values. The commodity risk relates to the Company's participation in the weather risk management market. The Company manages its market risks based on guidelines established by management. These derivative instruments are carried at fair value with the resulting gains and losses recognized in income in the period in which they occur. The following table summarizes these instruments and the effect on net income in the quarters ended March 31, 2002 and 2001: 2002 2001 -------- -------- CREDIT DEFAULT SWAPS: Net premiums earned ............................ $ 7,431 $ -- Losses and loss expenses ....................... (4,626) -- Net unrealized losses on derivative instruments .................................. (1,449) -- Fee income and other ........................... -- 3,344 -------- -------- Total .......................................... $ 1,356 $ 3,344 -------- -------- WEATHER RISK MANAGEMENT PRODUCTS: Fee income and other ........................... $ 919 $ 687 INVESTMENT DERIVATIVES: Net realized gains (losses) on derivative instruments .................................. $ 1,307 $(12,683) Net unrealized (losses) gains on derivative instruments .................................. (13,058) 10,319 -------- -------- Total .......................................... $(11,751) $ (2,364) -------- -------- EFFECT ON NET INCOME .............................. $ (9,476) $ 1,667 ======== ======== The Company holds warrants in conjunction with certain of its other investments. These warrants are recorded at fair value based on quoted market prices. At March 31, 2002, the Company recorded an unrealized loss of $13.4 million related to the change in fair value of these warrants, included in net unrealized (losses) gains on derivative instruments. 11 XL CAPITAL LTD NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (U.S. DOLLARS IN THOUSANDS) 7. COMPUTATION OF EARNINGS PER ORDINARY SHARE AND ORDINARY SHARE EQUIVALENT THREE MONTHS ENDED MARCH 31 -------------------- 2002 2001 -------- -------- BASIC EARNINGS PER SHARE: Net income ............................................. $ 89,493 $218,929 Weighted average ordinary shares outstanding ........... 135,119 124,464 Basic earnings per share ............................... $ 0.66 $ 1.76 ======== ======== DILUTED EARNINGS PER SHARE: Net income ............................................. $ 89,493 $218,929 Weighted average ordinary shares outstanding-basic ..... 135,119 124,464 Average stock options outstanding (1) .................. 2,724 2,318 -------- -------- Weighted average ordinary shares outstanding-diluted ... 137,843 126,782 -------- -------- Diluted earnings per share........................... $ 0.65 $ 1.73 ======== ======== DIVIDENDS PER SHARE $ 0.47 $ 0.46 ======== ======== (1) Net of shares repurchased under the treasury stock method. Future weighted average number of shares outstanding may increase by the convertible debt issued during 2001. Due to the contingent nature of the conversion features of the debt, there is no effect on diluted earnings per share for the quarter ended March 31, 2002. 12 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2002 COMPARED TO THE THREE MONTHS ENDED MARCH 31, 2001 (U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) GENERAL The following is a discussion of the Company's results of operations and financial condition. Certain aspects of the Company's business have loss experience characterized as low frequency and high severity. This may result in volatility in both the Company's results of operations and financial condition. The Company's results for the three months ended March 31, 2002 include the results of Winterthur International, a division of Winterthur Swiss Insurance Company specializing in writing property and casualty insurance coverages to large multinational companies, that was acquired by the Company with effect from July 1, 2001. They also include the results of Le Mans Re, accounted for as a subsidiary with effect from January 1, 2002. Previously, the Company's share of Le Mans Re's net income was included in equity in net income of insurance affiliates. Consequently, period to period comparisons of the Company's results of operations and financial condition may not be meaningful. 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 projections. Actual results may differ materially from those projected in such forward-looking statements, and therefore undue reliance should not be placed on them. See Item 3, "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, 2001. CRITICAL ACCOUNTING POLICIES For a full description of the Company's critical accounting policies, refer to Item 7 of the Company's Form 10-K for the year ended December 31, 2001. RESULTS OF OPERATIONS The following table presents an after-tax analysis of the Company's net income and earnings per share for the three months ended March 31, 2002 and 2001: (UNAUDITED) THREE MONTHS ENDED MARCH 31 ----------------------- 2002 2001 --------- --------- Net operating income (1) $ 210,384 $ 156,734 Net realized (losses) gains on investments (107,691) 64,559 Net realized and unrealized losses on derivative instruments (13,200) (2,364) --------- --------- Net income $ 89,493 $ 218,929 ========= ========= Earnings per share - basic $ 0.66 $ 1.76 ========= ========= Earnings per share - diluted $ 0.65 $ 1.73 ========= ========= 13 (1) Net operating income excludes after-tax net realized gains and losses on investments and net realized and unrealized losses on derivative instruments. Net operating income increased in the first quarter of 2002 compared to the first quarter of 2001 primarily due to an increase in underwriting profits. Underwriting results increased primarily due to growth and pricing increases in premiums in the insurance and reinsurance segments and the inclusion of Winterthur International and Le Mans Re. Net income was significantly reduced by net realized investment losses in the first quarter of 2002 compared to the same prior year quarter. Included in net realized losses on investments was a $69.3 million write-down of certain of the Company's fixed income and equity investments in circumstances where the Company believed that there was an other than temporary decline in the value of those investments. SEGMENTS INSURANCE OPERATIONS General 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 customs bonds, surety, political risk and specialty lines. No life insurance business has been written in this segment. The following table summarizes the underwriting results for this segment: (UNAUDITED) THREE MONTHS ENDED MARCH 31 ----------------------- 2002 2001 % CHANGE --------- --------- -------- GENERAL: Net premiums earned $ 592,656 $ 269,473 119.9% Fee income and other 6,545 2,625 149.3% Net losses and loss expenses 376,380 160,131 135.0% Acquisition costs 91,965 55,951 64.4% Operating expenses 88,973 32,787 171.4% Exchange gains (2,112) (1,382) 52.8% --------- --------- ----- Underwriting profit $ 43,995 $ 24,611 78.8% ========= ========= ===== Net unrealized losses on credit default swaps $ 6,748 $ -- NM ========= ========= ====== *NM - Not Meaningful In the quarter ended March 31, 2002, the insurance segment included the results of Winterthur International, which acquisition was effective July 1, 2001. Each of the above line items experienced growth primarily as a result of the inclusion of business written and earned by Winterthur International. Consequently, period to period comparisons may not be meaningful. Net premiums earned included $161.6 million from Winterthur International in the quarter ended March 31, 2002. Excluding Winterthur International, net premiums earned increased in the quarter ended March 31, 2002 compared to the quarter ended March 31, 2001 by approximately $131.0 million due to growth in new business written and pricing increases across all lines of business, principally risk management, professional lines, program business and aviation and marine. Pricing increases were partially in response to market corrections following the terrorist attacks on September 11, 2001. The Lloyds' syndicates contributed approximately $30.0 million of additional net premiums earned, mainly as a result 14 of the acquisition of full ownership of the underwriting capacity of the syndicates and the earning of increased premiums written in 2001. The increase in fee income and other for the first quarter of 2002 over the first quarter of 2001 related primarily to consulting and administration services provided by Winterthur International for employee benefit plans of unrelated companies. In 2001, the Company began to write credit default swaps at primary layers in this segment. During the quarter ended March 31, 2002 the Company recorded an unrealized loss of $6.7 million related to the fair value adjustment for these credit default swaps. The following table presents the ratios for the insurance segment: (UNAUDITED) THREE MONTHS ENDED MARCH 31 ------------------------ 2002 2001 ---------- --------- Loss and loss expense ratio 63.5% 59.4% Underwriting expense ratio 30.5% 32.9% ---------- --------- Combined ratio 94.0% 92.3% ========== ========= The loss ratio increased in the quarter ended March 31, 2002 compared to the same period of 2001 due to the emergence of a lower level of reported losses in the quarter ended March 31, 2001 for prior underwriting years. In addition, the loss ratio in the quarter ended March 31, 2002 included approximately $107.3 million of losses related to premiums earned by Winterthur International. It is uncertain at this time whether the ongoing political and economic crisis in Argentina will result in losses under political risk insurance policies written by the Company's insurance operations. Although no such losses were paid or payable in the first quarter of 2002, the Company believes both the possibility and magnitude of such losses are likely to increase the longer the crisis remains unsolved, potentially increasing this segment's loss and loss expense ratio in future quarters. The underwriting expense ratio in the quarter ended March 31, 2002 included acquisition and operating expenses for Winterthur International of $47.4 million. These expenses were reduced by the effect of purchase accounting treatment on the deferred acquisition costs. Had an historical level of deferred acquisition costs for Winterthur International been amortized, the expense ratio for this segment would have been 32.2% in the quarter ended March 31, 2002. REINSURANCE OPERATIONS GENERAL General 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; political risk, and various other reinsurance to insurers on a worldwide basis. The Company endeavors to manage its exposures to catastrophic events by 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. 15 The following table summarizes the underwriting results for general operations for this segment: (UNAUDITED) THREE MONTHS ENDED MARCH 31 -------------------------- 2002 2001 % CHANGE ---------- ---------- -------- Net premiums earned $ 421,167 $ 266,860 57.8% Fee income and other 899 (563) NM Net losses and loss expenses 264,632 168,458 57.1% Acquisition costs 92,214 69,600 32.5% Operating expenses 18,686 16,706 11.9% Exchange (gains) losses (6,252) 212 NM ---------- ---------- -------- Underwriting profit $ 52,786 $ 11,321 NM ========== ========== ======== Net premiums earned in the first quarter of 2002 increased compared to the first quarter of 2001 primarily due to strong growth and pricing increases in business written in 2002 and the latter half of 2001 across most lines of business, notably casualty reinsurance and property lines. In addition, the inclusion of Le Mans Re consolidated as a subsidiary effective January 1, 2002 contributed $63.6 million of additional net premiums earned for the first quarter of 2002. The increase in net premiums earned also reflected significant price increases across all lines of business in response to market corrections following the terrorist attacks on September 11, 2001. Fee income and other in the quarter ended March 31, 2001 was negative due to certain non-underwriting costs for outward reinsurance. There were no such costs in the quarter ended March 31, 2002. The following table presents the ratios for the reinsurance segment: (UNAUDITED) THREE MONTHS ENDED MARCH 31 ------------------------- 2002 2001 ------- ------- Loss and loss expense ratio 62.8% 63.1% Underwriting expense ratio 26.3% 32.4% ------- ------- Combined ratio 89.1% 95.5% ======= ======= The loss and loss expense ratio for the quarter ended March 31, 2001 included losses arising from the Petrobras oil rig loss and the Seattle earthquake. There were no significant catastrophe losses in the first quarter of 2002. The change in the loss and loss expense ratio and in the underwriting expense ratio for the period ended March 31, 2002 reflected the inclusion of Le Mans Re, which generally carries a higher loss ratio and lower underwriting expense ratio than other entities in this segment. The reinsurance operations of the Company have some exposure to political risk losses related to Argentina if and to the extent any such losses materialize, potentially increasing this segment's loss and loss expense ratio in future quarters. The underwriting expense ratio was reduced in the quarter ended March 31, 2002 by the effect of the purchase accounting treatment on the deferred acquisition costs of Le Mans Re of $4.3 million. In addition, the underwriting expense ratio was reduced by approximately $8.0 million related to the curtailment of a pension plan in the U.S. during the quarter ended March 31, 2002. 16 LIFE Life business written by the Company includes long duration annuity contracts and traditional mortality risk reinsurance. No such contracts were written in the first quarter of 2001. Due to the nature of some of these contracts, premium volume may vary significantly from period to period. The following summarizes net income from life operations: (UNAUDITED) THREE MONTHS ENDED MARCH 31 ---------------------------- 2002 2001 ---------- -------- Net premiums earned $ 39,193 $ -- Fee income and other 2 -- Claims and policy benefit reserves 47,763 -- Acquisition costs 595 -- Operating expenses 1,083 -- Net investment income 15,518 -- Net realized losses on investments 618 -- ---------- -------- Net income from life operations $ 4,654 $ -- ========== ======== Net investment income is included in net income from life operations as it relates to income earned on portfolios of segregated life investment assets received that are matched by the assumption of policy benefit reserves on contracts written. The accretion of the policy benefit reserves is included in claims and policy benefit reserves. FINANCIAL PRODUCTS AND SERVICES OPERATIONS Financial products and services business written includes insurance, reinsurance and derivative solutions for complex financial risks. These include financial guaranty insurance and reinsurance, credit enhancement swaps, other collateralized transactions and weather and other commodity risk management products. While each of these is unique and is tailored for the specific needs of the insured or user, they are often multi-year contracts. Due to the nature of these types of contracts, premium volume as well as underwriting results may vary significantly from period to period. Financial guaranties are conditional commitments that guarantee the performance of certain financial obligations by an obligor 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. The Company also guaranties payment obligations of counterparties under credit default swaps. At March 31, 2002, the Company's net aggregate insurance in force was approximately $30.5 billion. The range of maturity of the insured obligations is one to thirty five years. 17 The following table summarizes the underwriting results for this segment: (UNAUDITED) THREE MONTHS ENDED MARCH 31 -------------------------------- 2002 2001 % CHANGE -------- -------- -------- GENERAL: Net premiums earned $ 19,130 $ 5,821 228.6% Fee income and other 1,422 5,007 (71.6%) Net losses and loss expenses 5,912 1,615 266.1% Acquisition costs 958 321 198.4% Operating expenses 14,990 11,357 32.0% -------- -------- ----- Underwriting loss $ (1,308) $ (2,465) (46.9%) ======== ======== ===== Net unrealized gains on credit default swaps $ 5,299 $ -- NM ======== ======== ====== Net premiums earned increased in the first quarter of 2002 as compared to the first quarter of 2001 primarily due to significantly greater premiums written in the financial guaranty business. Net premiums earned in the first quarter of 2002 also included approximately $2.1 million of weather related risk management transactions. There were no premiums earned from weather related risk management transactions in the first quarter of 2001. A component of financial guaranty business is written in credit default swap form. The Company fair values credit default swaps by modeling its exposures and creating indices by using proxies of the spreads on similar categories of exposures. For the first quarter of 2001, all adjustments to the fair value of credit default swaps were included in fee income and other. For the first quarter of 2002, the components of the fair value changes are included in net premiums earned, net losses and loss expenses and in net realized and unrealized gains and losses on derivative instruments. Net losses and loss expenses increased in the quarter ended March 31, 2002 relative to the growth in net premiums earned. The increase in operating expenses reflected the continued expansion of operations in this segment. These expenses, relative to the segment's revenues, have improved compared to the prior year's quarter as the growing portfolio of aggregate insurance in force is earned. INVESTMENT OPERATIONS The following table illustrates the change in net investment income and net realized (losses) gains on investments for the quarters ended March 31, 2002 and 2001:
(UNAUDITED) THREE MONTHS ENDED MARCH 31 ------------------------------------ 2002 2001 % CHANGE --------- --------- -------- Net investment income $ 155,609 $ 143,096 8.7% Net realized (losses) gains on investments (105,402) 62,535 NM Net realized and unrealized losses on investment derivative instruments (11,751) (2,364) NM
Net investment income increased in the first quarter of 2002 as compared to the first quarter of 2001 due primarily to a higher investment base in 2002. The growth in the investment base included the receipt of funds related to new debt and equity issued by the Company and the addition of assets from Winterthur International and Le Mans Re. The effect of the higher investment base was partially offset by decreases in 18 general interest rate levels for the three months ended March 31, 2002 compared to the three months ended March 31, 2001. Assets related to deposit liabilities are included in investments available for sale. Interest earned on deposit liability assets is included in investment income, however the investment expense related to the accretion of deposit liabilities is included in interest expense. Previously, the accretion charge was included in net investment income. The first quarter of 2001 has been reclassified for this change. There was no effect on net income from this change in presentation. Net realized losses on investments in the first quarter of 2002 included a loss of approximately $69.3 million related to a write-down of certain of the Company's fixed income and equity investments in circumstances where the Company believed that there was an other than temporary decline in the value of those investments. Net realized and unrealized losses on investment derivative instruments resulted primarily from the fair value of warrants held by the Company in conjunction with certain of its other investments, based on quoted market values. See Item 3, "Quantitative and Qualitative Disclosure About Market Risk", for a more detailed analysis. OTHER REVENUES AND EXPENSES The following table sets forth other revenues and expenses for the three months ended March 31, 2002 and 2001: (UNAUDITED) THREE MONTHS ENDED MARCH 31 --------------------------------- 2002 2001 % CHANGE -------- -------- -------- Equity in net income of investment affiliates $ 32,185 $ 20,374 58.0% Equity in net income of insurance affiliates 32 8,014 (99.6%) Amortization of intangible assets 614 14,468 (95.8%) Corporate operating expenses 21,413 12,208 75.4% Interest expense 41,622 21,257 95.8% Minority interest 2,255 1,169 92.9% Income tax expense (benefit) 13,954 (2,909) NM Equity in net income of investment affiliates increased in the first quarter of 2002 over the first quarter of 2001 due primarily to an increase in returns on the Company's investments in closed-end investment funds and the management companies that administer these investment funds. The decrease in equity in net income of insurance affiliates primarily resulted from the acquisition of a majority shareholding in Le Mans Re, and its consolidation as a subsidiary of the Company effective January 1, 2002. Previously, the Company's share of Le Mans Re's net income was included in equity in net income of insurance affiliates. Amortization of intangible assets decreased in the first quarter of 2002 compared to the first quarter of 2001 due to the adoption of FAS 142, where the Company is no longer required to amortize goodwill. Had FAS 142 been effective January 1, 2001, the amortization expense would have been approximately $364 in the quarter ended March 31, 2001. The Company believes there will be no significant effect on its financial position following the final assessment of the adoption of FAS 142. Corporate operating expenses in the quarter ended March 31, 2002 have increased compared to the three months ended March 31, 2001 due to the continued worldwide expansion of the Company's operations. 19 The increase in interest expense primarily reflects an increase in the level of indebtedness from March 31, 2001 to March 31, 2002. The Company's financing structure is outlined in "--Financial Condition and Liquidity." The change in the income taxes of the Company primarily reflected an improvement in the profitability of the Company's operations in the first quarter of 2002 as compared to the first quarter of 2001. FINANCIAL CONDITION AND LIQUIDITY As a holding company, the Company's assets consist primarily of its investments in subsidiaries, and the Company's future cash flows depend on the availability of dividends or other statutorily permissible payments from its subsidiaries. The ability to pay such dividends is limited by the applicable laws and regulations of the various countries the Company operates in including, among others, Bermuda, the United States, Ireland, Switzerland and the United Kingdom, and 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 ability to underwrite business is largely dependent upon the quality of its claims paying and financial strength ratings as evaluated by independent agencies. The Company regularly provides financial information to these agencies to both maintain and enhance existing ratings. The Company's shareholders' equity at March 31, 2002 was $5.5 billion of which $2.3 billion was retained earnings. The Company's fixed income investments including short-term investments and cash equivalents at March 31, 2002 represented approximately 90% of invested assets and were managed by several outside investment management firms. Approximately 92.5% of fixed income securities are investment grade, with 68.4% rated Aa or AA or better by a nationally recognized rating agency. The average quality of the fixed income portfolio was Aa2. At March 31, 2002, total investments available for sale and cash, net of unsettled investment trades, were $13.4 billion compared to $13.0 billion at December 31, 2001. The net payable for investments purchased increased from $1.2 billion at December 31, 2001 to $1.5 billion at March 31, 2002. This increase results from timing differences as investments are accounted for on a trade date basis. For the quarter ended March 31, 2002, currency translation adjustments were $57.1 million. This is shown as part of accumulated other comprehensive loss and primarily related to unrealized gains on foreign currency exchange rate movement at Winterthur International and Le Mans Re, where most operations have a functional currency that is 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. Inflation can, among other things, lead to increased damage awards and potentially result in larger claims. The Company's underwriting philosophy is to adjust premiums in response to inflation, although this may not always be possible due to competitive pressures. Inflationary factors are considered in determining the premium level on any multi-year policies at the time contracts are written. The Company's liquidity depends on operating, investing and financing cash flows, discussed below. 20 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. Operational cash flows during the first three months of 2002 decreased from the same period of 2001 primarily due to increased losses paid in 2002. In the three months ended March 31, 2002 and 2001, the net amount of losses paid by the Company was $636.8 million and $334.6 million, respectively. The increase in 2002 is due to growth in operations and the inclusion of Winterthur International and Le Mans Re. This cash outflow is expected to be partially offset by an anticipated increased flow of premiums in the remaining quarters of 2002. The Company's cash flow has not yet been adversely affected by the terrorist attacks on September 11, 2001 as the majority of losses are in unpaid losses and loss expense reserves at March 31, 2002. Settlement of most of these claims is expected to occur beginning in 2002. The Company has reviewed the anticipated cash flow from the terrorist attacks on September 11, 2001 and believes it has sufficient liquidity to meet its obligations. In the three months ended March 31, 2002, the Company made the following significant investments: (1) Effective January 2002, the Company completed the acquisition of a 67% majority shareholding in Le Mans Re, increasing its shareholding from 49% at December 31, 2001. Cash paid, net of cash acquired, was $45.5 million. (2) The Company invested a further $219.9 million in affiliates, the majority of which related to investments in alternative investment managers and related investment funds. As at March 31, 2002, the Company had bank, letter of credit and loan facilities available from a variety of sources including commercial banks totaling $4.8 billion, of which $1.9 billion in debt was outstanding. In addition, $2.0 billion of letters of credit were outstanding, 6% of which were collateralized by the Company's investment portfolio, supporting U.S. non-admitted business and the Company's Lloyd's capital requirements. The following tables present the Company's indebtedness under outstanding securities and lenders' commitments as at March 31, 2002:
PAYMENTS DUE BY PERIOD ---------------------------------------------------- LESS YEAR OF THAN 1 TO 3 4 TO 5 AFTER 6 NOTES PAYABLE AND DEBT COMMITMENT IN USE EXPIRY 1 YEAR YEARS YEARS YEARS - ---------------------- ---------- ---------- ------- ---------- ---------- ---------- ---------- 364-day revolver ...................... $ 500,000 $ -- 2002 $ -- $ -- $ -- $ -- 7.15% Senior Notes .................... 100,000 99,974 2005 -- 100,000 -- -- 6.58% Guaranteed Senior Notes . ....... 255,000 255,000 2011 -- -- -- 255,000 6.50% Guaranteed Senior Notes ......... 600,000 596,894 2012 -- -- -- 600,000 Zero Coupon Convertible Debentures (1) 613,603 613,603 2021 -- -- -- 1,010,833 Liquid Yield Option Notes(TM) (1) ..... 292,199 292,199 2021 -- -- -- 508,842 ---------- ---------- ---------- ---------- ---------- ---------- Total ................................. $2,360,802 $1,857,670 $ -- $ 100,000 $ -- $2,374,675 ========== ========== ========== ========== ========== ==========
(1) "Commitment" and "In Use" data represent March 31, 2002 accreted values. "After 6 years" data represent ultimate redemption values. The convertibles may be "put" or converted by the bondholders at various times prior to the 2021 redemption date. The Company may also choose to "call" the debt from May and September 2004 onwards. In January 2002, the Company issued $600.0 million par value 6.50% Guaranteed Senior Notes due January 2012. The notes were issued at $99.469 and gross proceeds were $596.8 million. Related expenses of the offering amounted to $7.9 million. Proceeds of the Notes were used to pay down two 5-year revolving credit facilities of $350.0 million and for general corporate purposes. These credit facilities were subsequently canceled. 21 The total pre-tax interest expense on the borrowings described above was $27.7 million and $8.5 million for the three months ended March 31, 2002 and 2001, respectively.
AMOUNT OF COMMITMENT EXPIRATION PER PERIOD ---------------------------------------------------- LESS YEAR OF THAN 1 TO 3 4 TO 5 AFTER 6 OTHER COMMERCIAL COMMITMENTS COMMITMENT IN USE EXPIRY 1 YEAR YEARS YEARS YEARS - ---------------------------- ---------- ---------- ------- ---------- ---------- ---------- ---------- Letter of Credit Facilities........... $ 2,474,000 $ 1,990,000 2002 $ 2,474,000 -- -- --
The Company has several letter of credit facilities provided on a syndicated and bilateral basis from commercial banks and, in the case of the Winterthur International operations, from the previous owner of those operations. These facilities are utilized to support non-admitted insurance and reinsurance operations in the U.S. and capital requirements at Lloyd's. All of the commercial facilities are scheduled for renewal during 2002, and the Winterthur International arrangement will terminate in July 2002. In addition to letters of credit, the Company has established insurance trusts in the U.S. that provide cedents with statutory relief required under state insurance regulation in the U.S. It is anticipated that the commercial facilities will be renewed on expiry but such renewals are subject to the availability of credit from banks utilized by the Company. In the event that such credit support is insufficient, the Company could be required to provide alternative security to cedents. This could take the form of additional insurance trusts supported by the Company's investment portfolio or funds withheld using the Company's cash resources. The value of letters of credit required is driven by, among other things, loss development of existing reserves, the payment pattern of such reserves, the expansion of business written by the Company and the loss experience of such business. The letter of credit facilities included a $150.0 million secured letter of credit facility established in January 2002. This facility is unutilized and will expire at the end of 2002. In addition, Le Mans Re has a secured letter of credit facility, included in the table above, under which letters of credit amounting to $42.0 million were issued. For information on cross-default and other provisions in the Company's debt documents, see Item 7 of the Company's Form 10-K for the year ended December 31, 2001. 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. Under this plan, the Company has purchased 6.6 million shares at an aggregate cost of $364.6 million or an average cost of $55.24 per share. The Company has $135.4 million remaining in its share repurchase authorization. No shares were repurchased during the quarter ended March 31, 2002. As previously reported by the Company, XL Capital Partners L.L.P., an investment partnership (the "Partnership"), was formed in 2001. The general partner (the "General Partner") of the Partnership is a wholly-owned subsidiary of the Company and the limited partners include current and former employees and directors of the Company. The Partnership has determined not to make any additional investments in which current or former senior officers or directors participate or co-invest with the General Partner and return uninvested cash to such individuals. After giving effect to maximum committed investments, the General Partner would have invested approximately $16.2 million in the Partnership. CURRENT OUTLOOK In the first quarter of 2002, the Company recognized record levels of net premiums earned, primarily due to increases in pricing across virtually all property and casualty lines of insurance and reinsurance business following the terrorist attacks on September 11, 2001, the acquisition of Winterthur International effective July 1, 2001 and taking a majority ownership stake in Le Mans Re, effective January 1, 2002. The Company believes current market conditions will prevail through 2002 for most lines of property and casualty business the Company writes, which should translate to sustained rates and improved terms and conditions. These improvements are, however, tempered by, among other things, a challenging investment income environment and potential unusual loss events. 22 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE OF MARKET RISK The Company is exposed to potential loss from various market risks, including changes in interest rates, foreign currency exchange rates, equity prices and commodity values, as it relates to the Company's participation in the weather risk management market. The Company manages its market risks based on guidelines established by senior management. The Company enters into derivatives and other financial instruments for trading and risk management purposes. These derivative instruments are carried at fair market value with the resulting gains and losses recognized in income in the period in which they occur. This risk management discussion and the estimated amounts generated from the sensitivity and value-at-risk ("VaR") analyses presented in this document are forward-looking statements of market risk assuming certain adverse market conditions occur. Actual results in the future may differ materially from these estimated results due to, among other things, 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." COMMODITY RISK The Company offers weather risk management products in insurance or derivative form to end-users, while hedging the risks in the over-the-counter and exchange traded derivatives markets. In addition to entering into transactions with end-users, the Company also maintains a weather derivatives trading portfolio, with the majority of contracts outstanding for less than twelve months. The fair values of these transactions are determined using quantitative analysis. The models used to determine these fair values are consistent with the models used to estimate the Company's VaR exposure to weather risk. The Company's high, low and average aggregate seasonal VaR amounts during the period ended March 31, 2002 were $25.1 million, $1.8 million and $8.8 million, respectively, calculated at a 99% confidence level. The Company calculates its aggregate VaR by summing the VaR amounts for each of its seasonal portfolio. Since VaR statistics are estimates based on historical position and market data, VaR should not be viewed as an absolute, predictive gauge of future financial performance or as a way for the Company to predict risk. There can be no assurance that the Company's actual future losses will not exceed its VaR amounts. The following table summarizes the movement in the fair value of contracts outstanding during the quarter ended March 31, 2002: Fair value of contracts outstanding, beginning of the year.......... $(1,104) Contracts realized or otherwise settled ............................ (8,343) Fair value of new contracts ........................................ 4,497 Other changes in fair value......................................... 10,769 ------- Fair value of contracts outstanding, end of period.................. $ 5,819 ------- 23 The following table summarizes the maturity of contracts outstanding at March 31, 2002:
Greater Less than than 5 Total Fair Source of Fair Value 1 Year 1-3 Years 4-5 Years Years Value -------------------- ------ --------- --------- ------- ---------- Prices actively quoted............................... $ (241) $ -- $ -- $ -- $ (241) Prices based on models and other valuation methods... 5,387 673 -- -- 6,060 ------ ---- ---- ---- ------ Total fair value of contracts outstanding............ $5,146 $673 $ -- $ -- $5,819 ------ ---- ---- ---- ------
The Company seeks to identify, assess, monitor and manage, in accordance with defined policies and procedures its market, credit, operational and legal risks. The Company's senior management takes an active role in the risk management process and has developed and implemented policies and procedures that require specific administrative and business functions to assist in the identification, assessment and control of various risks. Due to the changing nature of the global marketplace, the Company's risk management policies, procedures and methodologies are evolving and are subject to ongoing review and modification. Market, credit, operational, legal and other risks are inherent in the Company's weather risk management business and cannot be wholly eliminated or reduced despite the Company's risk management policies, procedures and methodologies, which are subject to limitations and assumptions. The Company has written a small number of exchange traded energy contracts in the first quarter of 2002. The fair value of those contracts is not significant. INVESTMENT MARKET RISK 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. External investment professionals manage the Company's portfolio under the direction of the Company's management in accordance with detailed investment guidelines provided by the Company. These guidelines encompass investments in derivatives. Derivatives can only be utilized for purposes of managing interest rate risk, foreign exchange risk and credit risk, provided the use of such instruments are incorporated in the overall portfolio duration, spread, convexity and other relevant portfolio metrics. The use of derivatives is not permitted to economically leverage the portfolio outside of the stated guidelines. VaR is one of the tools used by management to measure potential losses in fair values using historical rates, market movements and credit spreads 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. The VaR of the investment portfolio, including all investment related derivatives, at March 31, 2002 was approximately $260.0 million. The Company also uses derivative investments to add value to the investment 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. At March 31, 2002, bond and stock index futures outstanding were $193.4 million with underlying investments having a market value of $1.8 billion. Gains of $2.1 million were realized on these contracts for the three months ended March 31, 2002. The Company reduces its exposure to these futures through offsetting transactions, including options and forwards. The VaR of all investment related derivatives at March 31, 2002 was approximately $5.8 million. The Company holds warrants in conjunction with certain of its other investments. These warrants are recorded at fair value based on quoted market prices. For the quarter ended March 31, 2002, the Company recorded an unrealized loss of $13.4 million related to the change in fair value of these warrants. CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS The Private Securities Litigation Reform Act of 1995 ("PSLRA") provides a "safe harbor" for forward-looking statements. Any prospectus, prospectus supplement, the Company's Annual Report to 24 Shareholders, any proxy statement, any Form 10-K, Form 10-Q 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 in general, and the insurance, reinsurance and financial products and services sectors in particular (both as to underwriting and investment matters). Statements that are not historical facts, including statements about the Company's beliefs and expectations, are forward-looking statements. These statements are based on current plans, estimates and projections. 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 inherent risks and uncertainties. Accordingly, there are or will be important factors that could cause actual results to differ materially from those indicated in such forward-looking statements. The Company believes that these factors include, but are not limited to, the following: (i) rate increases and improvements in terms and conditions may not be as large or sustainable as the Company is currently projecting; (ii) the size of the Company's claims may change due to the preliminary nature of reports and estimates of loss and damage, or due to adverse development over time, including in relation to the attacks in the United States on September 11, 2001; (iii) the timely and full recoverability of reinsurance placed by the Company with third parties; (iv) the projected amount of ceded reinsurance recoverables and the ratings and creditworthiness of reinsurers may change; (v) the timing of claims payments being faster or the receipt of reinsurance recoverables being slower than anticipated by the Company; (vi) ineffectiveness or obsolescence of the Company's business strategy due to changes in current or future market conditions; (vii) increased competition on the basis of pricing, capacity, coverage terms or other factors; (viii) 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; (ix) developments in the world's financial and capital markets which adversely affect the performance of the Company's investments and the Company's access to such markets; (x) the potential impact of government-sponsored solutions to make available insurance coverage for acts of terrorism; (xi) developments in the Enron Corp. bankruptcy proceedings or other developments related to Enron Corp. in so far as they affect property and casualty insurance and reinsurance coverages; (xii) availability of borrowings and letters of credit under the Company's credit facilities; (xiii) changes in regulation or tax laws applicable to the Company and its subsidiaries, brokers or customers; (xiv) acceptance of the Company's products and services, including new products and services; (xv) changes in the availability, cost or quality of reinsurance; (xvi) changes in the distribution or placement of risks due to increased consolidation of insurance and reinsurance brokers; (xvii) loss of key personnel; (xviii) the effects of mergers, acquisitions and divestitures, including, without limitation, the Winterthur International acquisition; (xix) changes in rating agency policies or practices; (xx) changes in accounting policies or practices that could adversely affect the Company's financial statutory and other statements and reports; (xxi) legislative, tax or regulatory developments that could adversely affect the Company or the ability of customers or brokers to do business with the Company; (xxii) changes in general economic conditions, including inflation, foreign currency exchange rates and other factors; (xxiii) the effects of business disruption or economic contraction due to terrorism or other hostilities; (xxiv) developments relating to Argentina, including the impact of any potential International Monetary Fund assistance or structural reforms within Argentina; and (xxv) the other factors set forth in the Company's most recent report on Form 10-K and the Company's other documents on file with the SEC. 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. 25 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 None ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (A) EXHIBITS 10.58 Nicholas M. Brown, Jr. Employment Agreement, dated April 1, 2002. 10.59 Nicholas M. Brown, Jr. Retirement Agreement, dated April 1, 2002. 10.60 Amendment No. 2, dated March 15, 2002, to the 364-Day Credit Agreement, dated June 29, 2001 between XL Capital Ltd, X.L. America, Inc., XL Insurance (Bermuda) Ltd, XL Europe Ltd, XL Re Ltd, as borrowers and guarantors, the lenders party thereto and JPMorgan Chase Bank (formerly The Chase Manhattan Bank), as administrative agent. 10.61 Amendment No. 2, dated March 15, 2002, to the Letter of Credit and Reimbursement Agreement, dated June 29, 2001 between XL Capital Ltd, X.L. America, Inc., XL Insurance (Bermuda) Ltd, XL Europe Ltd, XL Re Ltd, as account parties and guarantors, the lenders party thereto and JPMorgan Chase Bank (formerly The Chase Manhattan Bank), as administrative agent. 10.62 Amendment No. 1, dated March 21, 2002 to the Letter of Credit Facility and Reimbursement Agreement, dated November 20, 2001 between XL Capital Ltd, X.L. America, Inc., XL Insurance (Bermuda) Ltd, XL Europe Ltd, XL Re Ltd, as guarantors and Citibank International Plc, as agent and security trustee. 99.7 XL Capital Assurance Inc. unaudited condensed financial statements for the three month periods ended March 31, 2002 and 2001. 99.8 XL Financial Assurance Ltd. unaudited condensed financial statements for the three month periods ended March 31, 2002 and 2001. (B) REPORTS ON FORM 8-K None. 26 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) /S/ BRIAN M. O'HARA --------------------------------------------------------- BRIAN M. O'HARA PRESIDENT AND CHIEF EXECUTIVE OFFICER /S/ JERRY DE ST. PAER --------------------------------------------------------- JERRY DE ST. PAER EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL OFFICER 27 EX-10.58 3 c24198_ex1058.txt EMPLOYMENT AGREEMENT Exhibit 10.58 EMPLOYMENT AGREEMENT THIS AGREEMENT is made and entered into on April, 1, 2002, by and among, XL Capital Ltd, a Cayman Islands corporation ("XL"), XL Insurance, Inc., a Delaware corporation ("XLI") and XL America, Inc. (the "Company"), and Nicholas M. Brown, Jr. (the "Executive"). WHEREAS, the Executive has been in the employ of the Company; WHEREAS, the Company and the Executive desire to continue such employment and to memorialize the terms and conditions of such employment by this agreement; NOW, THEREFORE, in consideration of the premises and mutual covenants contained herein and for other good and valuable consideration, the Company, XL, XLI and the Executive (the "Parties") agree as follows: 1. EMPLOYMENT. The Company hereby employs the Executive, and the Executive hereby accepts employment with the Company, for the term of this Agreement as set forth in Section 2, below, in the positions and with duties and responsibilities set forth in Section 3, below, and upon such other terms and conditions as are hereinafter stated. 2. TERM OF EMPLOYMENT. The stated term of employment under this Agreement shall commence on January 1, 2002 (the "Date of the Agreement") and shall continue through the close of business on the third anniversary of the Date of the Agreement, subject to earlier termination as provided in Section 8 below. Notwithstanding anything herein to the contrary, the expiration of this Agreement on the third anniversary of the Date of the Agreement shall not constitute a termination of the Executive's employment by the Company or by the Executive. 3. POSITIONS, DUTIES AND RESPONSIBILITIES. (a) GENERAL. The Executive shall be employed as (a) the Chief Executive of Insurance Operations for XL; (b) Executive Vice President of XL; (c) Chief Executive Officer of XLI; and (d) a senior executive officer of the Company, or, if the Company assigns this Agreement to an Affiliate (as defined in Section 11, below) in accordance with the provisions of Section 16, a senior executive officer of such Affiliate, but in any event not reporting to any person other than the Chief Executive Officer of XL. In his capacity as Chief Executive of Insurance Operations for XL and Executive Vice President of XL the Executive shall report to the Chief Executive Officer of XL, and in his other capacities the Executive shall report the Board of Directors of the Company (or an Affiliate thereof if this Agreement is assigned to such Affiliate). The Executive will have such duties and responsibilities as are customary for such positions in an insurance company, subject to such limitations as the Company may reasonably impose due to legal, regulatory or tax requirements of the Company or its Affiliates. During the term of this Agreement, the Executive shall devote his full business time to the business and affairs of XL, the Company and their Affiliates, as appropriate. (b) PERFORMANCE OF SERVICES. The Executive's services under this Agreement (i) on behalf of XL shall be performed outside the United States and generally in Bermuda or (ii) on behalf of the Company and the other employers primarily in Stamford, Connecticut, and the area within a 50 mile radius thereof, in each case unless the Executive and XL mutually agree in writing to the performance of such services in another location. The Executive may travel to any location in connection with the performance of the Executive's duties hereunder provided that such travel is in accordance with the guidelines established by the Company from time to time. The allocation of the Executive's business time between services on behalf of XL and services on behalf of the Company and the other employers shall be comparable to the allocation of the Executive's time prior to the Date of the Agreement. (c) PERMITTED ACTIVITIES; DIRECTORSHIPS. Anything in this Section 3 to the contrary notwithstanding, nothing shall preclude the Executive from (i) serving on the boards of directors of a reasonable number of other corporations or the boards of a reasonable number of trade associations and/or charitable organizations, (ii) engaging in 2 charitable activities and community affairs and (iii) managing his personal investments and affairs; provided such activities do not materially interfere with the proper performance of his duties and responsibilities hereunder or as an officer or director of XL, the Company or their Affiliates, or create an actual or potential conflict of interest or the appearance thereof, as determined in good faith by the XL Board of Directors. It is agreed that the Executive will be considered for membership on the XL Board of Directors if the current practice of restricting membership to one member of management is revised. 4. BASE SALARY. The Executive shall be paid a Base Salary by the Company equal to his base salary as in effect on the date hereof, payable in accordance with the Company's regular pay practices. Such Base Salary shall be subject to annual review in accordance with the Company's practices for comparable executives as in effect from time to time and may be increased (but not decreased) at the discretion of the Compensation Committee of the XL Board of Directors (the "Compensation Committee"). 5. BONUSES. (a) In addition to the Base Salary provided for in Section 4, above, the Executive shall be eligible for an annual cash bonus under the Company's bonus plan as in effect from time to time. The Executive may be awarded such annual bonuses thereunder as may be approved by the Compensation Committee based on corporate, individual and business unit performance measures, as appropriate, established or approved from time to time, by the Compensation Committee after good faith consultation between the Executive and the Chief Executive Officer of XL. The Executive shall have an annual target bonus equal to 90% of Base Salary (within a range of 45% of Base Salary for threshold performance to 270% of Base Salary for superior performance), based on corporate, business unit and individual performance measures comparable to those used for comparable senior executives. Any annual bonus shall be paid in cash in a lump sum promptly following approval thereof or, at Executive's option, deferred in accordance with any bonus deferral plans of the Company in effect from time to time. Nothing in this Section 5(a) shall confer upon the Executive any right to a minimum annual bonus if one or more performance targets are not achieved. 3 (b) SPECIAL BONUS AND VESTING. In recognition of the Executive's service to XL and in consideration for his entering into this Agreement, on the effective date of this Agreement the Executive shall be entitled to a special bonus in the amount of US$2,600,000 which shall be paid to him as soon as practicable thereafter. In addition, XL shall (i) cause the restricted stock and option awards listed in Exhibit C hereto that would otherwise vest in June, 2002 to become fully vested to the extent not then otherwise fully vested, upon the Executive's termination of employment by the Company in accordance with the provisions of Sections 8(d)(ii) or 8(d)(iii) hereof, the Executive's termination of employment in accordance with the provisions of Sections 8(d)(iii) or 8(d)(iv) hereof or upon the Executive's death or disability and (ii) cause the restricted stock and option awards listed in Exhibit C hereto that would otherwise vest in June, 2003 to become fully vested to the extent not then otherwise fully vested, upon the termination of Executive's employment with the Company for any reason or no reason by the Company or the Executive. 6. EMPLOYEE BENEFIT PROGRAMS. During the term of the Executive's employment under this Agreement, the Executive shall be entitled to participate in all employee benefit programs of the Company and its Affiliates applicable to the Executive as are in effect from time to time and in which senior U.S.-based executives of the Company and its Affiliates are eligible to participate, including medical, hospitalization, life, travel and accident insurance, disability protection and retirement benefits, at a level commensurate with his positions. The Executive shall also be entitled to receive the same life insurance benefits provided to other senior executive officers of XL residing in Bermuda. The Executive will also be eligible, on the same basis as comparable executives of XL, to participate in the XL 1991 Performance Incentive Program (or any successor plan) as determined in the discretion of the committee administering the 1991 Performance Incentive Program (or its successor). The Executive shall be entitled to no less than five (5) weeks of paid vacation per year. The Company shall pay to the Executive a mortgage subsidy of US$65,000 per year in equal monthly installments. 7. BUSINESS EXPENSE REIMBURSEMENT AND FRINGE BENEFITS. (a) EXPENSE REIMBURSEMENT. During the term of the Executive's employment under this Agreement, the Execu- 4 tive shall be entitled to receive reimbursement by the Company for all reasonable out-of-pocket travel expenses, entertainment expenses and other expenses incurred by him in performing his duties under this Agreement, provided that the Executive submits reasonable documentation with respect to such expenses. This shall include, without limitation, reimbursements of any such costs for air fare, hotel accommodations and meals, in each case at the same level and class as other comparable senior executives. (b) FRINGE BENEFITS. During the term of the Executive's employment under this Agreement, the Executive shall be entitled to participate in any of the Company's executive fringe benefits in accordance with the terms and conditions of such arrangements as are in effect from time to time for the Company's senior executives. In all events, without limiting the foregoing, the Executive shall be entitled during the period he is employed to the following: (i) use of an automobile of a make and model commensurate with the Executive's position, plus maintenance, licensing and insurance costs, (ii) direct payment or reimbursement by the Company for the reasonable cost of financial and tax planning, such payment or reimbursement not to exceed US$10,000 per year, and (iii) such other benefits for which a Grade 11 executive based in the United States shall be eligible from time to time. 8. TERMINATION OF EMPLOYMENT. (a) TERMINATION DUE TO DEATH. In the event the Executive dies during the term of employment hereunder, the Executive's spouse, if the spouse survives the Executive, shall be entitled to receive the Base Salary as provided in Section 4, above, at the rate in effect at the time of Executive's death, to be paid in accordance with the Company's regular payroll practices or in a lump sum, at the Company's option, through the end of the sixth month after the month in which the Executive dies. In the event that the Executive's spouse does not survive him, the estate or other legal representative of the Executive shall be entitled to receive the Base Salary as provided in Section 4, above, at the rate in effect at the time of the Executive's death, to be paid in accordance with the Company's regular payroll 5 practices or in a lump sum, at the Company's option, through the end of the sixth month after the month in which the Executive dies. In addition to the above, the estate or other legal representative of the Executive shall be entitled to: (i) any annual bonus earned in accordance with the Company's bonus program or awarded but not yet paid under Section 5(a), above, (which shall be deemed earned if Executive is employed hereunder on the last day of the fiscal year ending on or immediately preceding the date of termination), (ii) a pro rata bonus for the year of death in an amount determined by the Compensation Committee, but in no event less than a pro rata portion of the Executive's target bonus for the year, (iii) full and immediate vesting as of the date of death of all rights under any options to purchase equity securities of the Company or other rights with respect to equity securities of the Company, including any restricted stock or other securities, held by the Executive, (iv) full and immediate vesting under the Company's pension plans as of the date of death, to the extent permitted by applicable law; provided, however, that to the extent such vesting cannot be effected under applicable law, economically equivalent benefits determined on an after-tax basis to the Executive shall be provided through arrangements outside such pension plans in lieu thereof, and (v) any other rights and benefits, if any, available under employee benefit programs of the Company, or their equivalent, as provided in Section 6, above, and under business expense reimbursement and fringe benefits programs as described in Section 7, above, determined in accordance with the applicable terms and provisions of such programs, PROVIDED that such rights and benefits (excluding any right to be considered for additional grants under XL's stock option and other stock-based compensation or incentive plans), or the economic equivalent thereof on an after-tax basis to the Executive's estate or other legal representative, shall continue for at least six months (or such longer continuation period as then provided by the Company and its Affiliates to other senior executives generally) following the end of the month in which the Executive dies. 6 (b) TERMINATION DUE TO DISABILITY. In the event the Executive's employment hereunder is terminated due to his disability, as determined under the Company's long-term disability plan, the Executive shall be entitled to: (i) the Base Salary as provided in Section 4, above, at the rate in effect at the time of Executive's termination due to disability, to be paid in accordance with regular payroll practices or in a lump sum, at the Company's option, through the end of the sixth month after the month in which the Executive's employment terminates due to disability, (ii) any annual bonus earned in accordance with the Company's bonus program or awarded but not yet paid under Section 5(a)(which shall be deemed earned if Executive is employed hereunder on the last day of the fiscal year ending on or immediately preceding the date of termination), (iii) a pro rata bonus for the year of disability in an amount determined by the Compensation Committee, but in no event less than a pro rata portion of the Executive's target bonus for the year, (iv) full and immediate vesting as of the date of disability of all rights under any options to purchase equity securities of the Company or other rights with respect to equity securities of the Company, including any restricted stock or other securities, held by the Executive, (v) full and immediate vesting under the Company's pension plans as of the date of disability, to the extent permitted by applicable law; provided, however, that to the extent such vesting cannot be effected under applicable law, economically equivalent benefits determined on an after-tax basis to the Executive shall be provided through arrangements outside such pension plans in lieu thereof, and (vi) any other rights and benefits, if any, available under employee benefit programs of the Company, or their equivalent, as provided in Section 6, above, including, without limitation, the terms of any long-term disability plan, and under the business expense reimbursement and fringe benefits programs as described in Section 7, above, determined in accordance with the applicable terms and provisions of such programs, PROVIDED that such rights and 7 benefits (excluding any right to be considered for additional grants under XL's stock option and other stock-based compensation or incentive plans), or the economic equivalent thereof on an after-tax basis to the Executive, shall continue for at least six months (or such longer continuation period as then provided by the Company and its Affiliates to other senior executives generally) following the end of the month in which the Executive's employment is terminated due to disability. (c) TERMINATION FOR CAUSE. (i) The employment of the Executive under this Agreement may be terminated by the Company for Cause, such termination to be effective upon the Company giving the Executive written notice of termination in accordance with the provisions of this Agreement. For this purpose, "Cause" shall mean: (A) conviction of the Executive of a felony involving moral turpitude, dishonesty or laws to which the Company or its Affiliates are subject in connection with the conduct of its or their business, or (B) the Executive, in carrying out his duties for the Company under this Agreement, has been guilty of (1) willful misconduct in connection with the performance of the Executive's duties hereunder that is materially injurious to the Company or its reputation or (2) substantial and continual refusal by the Executive to attempt substantially to perform the duties assigned to the Executive pursuant to the terms hereof (other than any such failure resulting from incapacity due to physical or mental illness which failure is not remedied within 10 business days of written notice from the Company specifying the details thereof, provided that alcohol or substance abuse shall not be deemed a physical or mental illness); -------- provided, however, that any act or failure to act by the Executive shall not constitute -------- ------- Cause for purposes of this Section 8(c)(i)(B) if such act or failure to act was committed, or omitted, by the Executive in good faith and in a manner he reasonably believed to be in the overall best interests of the Company, as the case may be. (C) the Executive's continued willful refusal to obey any material, lawful written policy or re- 8 quirement, not constituting a breach of this Agreement, duly adopted by the Board of Directors of XL or the Board of Directors of the Company and the continuance of such refusal after receipt of written notice. (ii) In the event of a termination for Cause under Section 8(c)(i), above, the Executive shall be entitled only to: (A) Base Salary as provided in Section 4, above, at the rate in effect at the time of his termination of employment for Cause, through the date on which termination for Cause occurs, (B) the rights under any options to purchase equity securities of XL or other rights with respect to equity securities of XL, including any restricted stock or other securities, held by the Executive, determined in accordance with the terms thereof and hereof, and (C) any other rights and benefits, if any, available under employee benefit programs of the Company, or their equivalent, as provided in Section 6, above, and under the business expense reimbursement and fringe benefits programs as described in Section 7, above, determined in accordance with the applicable terms and provisions of such programs; PROVIDED that the Executive shall not be entitled to any such rights or benefits unless the terms and provisions of such programs expressly state that the Executive shall be entitled thereto in the event his employment is terminated for Cause (as defined in this Agreement or otherwise); PROVIDED FURTHER that any such continued coverage shall be offset by comparable coverage provided to the Executive in connection with subsequent full-time employment. (d) TERMINATION WITHOUT CAUSE. (i) Anything in this Agreement to the contrary notwithstanding, the Executive's employment may be terminated by the Company without Cause as provided in this Section 8(d) upon at least 60 days' prior written notice to the Executive. A termination due to death or disability, as described in Section 8(a) or (b), above, or a termination for Cause, as described in Section 8(c), above, shall not 9 be deemed a termination without Cause under this Section 8(d). (ii) In the event the Executive's employment is terminated by the Company without Cause (x) prior to a Change in Control (other than as provided in the last paragraph of Section 8(d)(iii), in which case the provisions of Section 8(d)(iii) shall apply in lieu of this Section 8(d)(ii)) or (y) following the Post-Change Period (as hereinafter defined), the Executive shall be entitled to: (A) Base Salary as provided in Section 4, above, at the rate in effect at the time of his termination of employment without Cause, through the date on which termination without Cause occurs, (B) a cash lump sum payment equal to (x) the amount of the Executive's Base Salary, at the annual rate in effect in accordance with Section 4, above, immediately prior to such termination, which would have been payable to the Executive over twenty-four months and (y) two times (or one times if the date of such termination is after January 1, 2003) the higher of the targeted annual bonus for the year of such termination or the bonus actually awarded to the Executive for the year immediately preceding the year of termination, (C) any annual bonus earned in accordance with the Company's bonus program or awarded but not yet paid under Section 5(a), above (which shall be deemed earned if Executive is employed hereunder on the last day of the fiscal year ending or immediately preceding the date of termination), (D) a pro rata bonus for the year of termination in an amount determined by the Compensation Committee, based on actual achievement of corporate, business unit and individual performance results for the fiscal year of termination and the portion of the fiscal year in which the Executive was employed by the Company in the year of termination, provided, however, that the determination of the achievement of individual performance results shall be determined by the Compensation Committee in good faith following the completion of such fiscal year, 10 (E) the rights under any options to purchase equity securities of XL or other rights with respect to equity securities of XL, including any restricted stock or other securities, held by the Executive, determined in accordance with the terms thereof and hereof, and (F) any other rights and benefits, if any, available under the employee benefit programs of the Company, or their equivalent, as provided in Section 6(a) above, and under the business expense reimbursement and fringe benefits programs as described in Section 7, above, determined in accordance with the applicable terms and provisions of such programs, for the remainder of the stated term of the agreement from termination or until the second anniversary of the date of termination, whichever is shorter; PROVIDED, HOWEVER, that any such continued coverage shall be offset by comparable coverage provided to the Executive in connection with subsequent full-time employment and to the extent the Company is unable to continue such coverage, the Company shall provide the Executive with economically equivalent benefits determined on an after-tax basis to the Executive; PROVIDED FURTHER, HOWEVER, that in no event shall the Executive have a right to be considered for additional grants under XL's stock option and other stock-based compensation or incentive plans or be eligible for employer contributions under the Company's retirement benefit plans (other than to the extent specifically required in the supplemental retirement benefit agreement of even date herewith) at any time in whole or in part following the Executive's termination of employment pursuant to this Section 8(d)(ii). (iii) In the event the Executive's employment is terminated by (x) the Company without Cause within the twenty-four month period following a Change in Control (as defined in Exhibit A hereto) and, if the Change in Control is stockholder approval of an Event (as defined in Exhibit A), prior to a termination of the agreement to effect the Event (the "Post-Change Period") or (y) the Executive terminates his employment for "Good Reason" (as defined in Exhibit B hereto) during the Post-Change Period, the Executive shall be entitled to: 11 (A) Base Salary as provided in Section 4, above, at the rate in effect at the time of his termination of employment, through the date on which termination occurs, (B) a cash lump sum payment equal to two times the Executive's annual Base Salary, at the annual rate in effect in accordance with Section 4, above, immediately prior to such termination or Change in Control, whichever is greater, (C) a cash lump sum payment equal to two times the largest annual bonus awarded to the Executive in the three-year period prior to the year in which the Change in Control occurs, provided such bonuses shall be at least equal to the targeted annual bonus for the year of such termination, (D) an amount equal to (i) the higher of (x) the bonus actually awarded to the Executive for the year immediately preceding the year in which the Change in Control occurs or (y) the targeted amount of bonus that would have been awarded to the Executive in respect of the year in which the termination of employment occurs, multiplied by (ii) a fraction, the numerator of which is the number of months or fraction thereof in which the Executive was employed by the Company in the year of termination of employment, and the denominator of which is 12, (E) full and immediate vesting as of the date of termination of all rights under any options to purchase equity securities of XL or other rights with respect to equity securities of XL held by the Executive outstanding on the Date of this Agreement to the extent specified in the individual award agreement (which XL and the Company acknowledge is the case with regard to all grants heretofore made but based on the definition of change in control (or words of like import) in such grants) or herein, which shall continue to be exercisable for three years from the date of termination of employment, notwithstanding the Executive's termination of employment, or the original full term of the option or other right, if shorter, (F) any other rights and benefits, if any, available under the employee and fringe benefit pro- 12 grams of the Company, or their equivalent, as provided in Sections 6 and 7, above, in which the Executive was participating at the time of his termination of employment for a two-year period from termination, as determined in accordance with the applicable terms and provisions of such programs; PROVIDED, HOWEVER, that any such continued coverage shall be offset by comparable coverage provided to the Executive in connection with subsequent full-time employment and, to the extent the Company unable to continue such coverage, the Company shall provide the Executive with economically equivalent benefits determined on an after-tax basis to the Executive; PROVIDED FURTHER, HOWEVER, that in no event shall the Executive have a right to be considered for additional grants under XL's stock option and other stock-based compensation or incentive plans at any time in whole or in part following the Executive's termination of employment pursuant to this Section 8(d)(iii), (G) full and immediate vesting under the Company's pension plans as of the date of termination, to the extent permitted by applicable law; provided, however, that to the extent such vesting cannot be effected under applicable law, economically equivalent benefits determined on an after-tax basis to the Executive shall be provided through arrangements outside such pension plans in lieu thereof, (H) continued coverage under and contributions by the Company to the Executive's accounts under the Company's pension plans for two years following the Executive's termination of employment, such contributions to be based on the Executive's compensation and the Company's practices as in effect at the time of such termination or Change in Control, whichever is greater; PROVIDED, HOWEVER, that if such continued coverage and contributions cannot be provided under the pension plans under applicable law, then economically equivalent benefits determined on an after-tax basis to the Executive shall be provided through arrangements outside the applicable pension plans, and (I) any annual bonus earned in accordance with the Company's bonus program or awarded but not yet paid under Section 5(a), above (which shall be deemed earned if Executive is employed hereunder on the last 13 day of the fiscal year ending on or immediately preceding the date of termination). Anything in this Agreement to the contrary notwithstanding, the Executive shall be entitled to the benefits described in (A)-(I) above (subject to reduction or offset for any payments or benefits received under Section 8(d)(ii)), if the Executive's employment or status as an elected officer with the Company is terminated (other than due to death or disability or for Cause) within one year prior to the date on which a Change in Control occurs, and it is reasonably demonstrated that such termination (i) was at the request of a third party who has taken steps reasonably calculated or intended to effect a Change in Control or (ii) otherwise arose in connection with or anticipation of a Change in Control. (iv) If, in situations where Section 8(d)(iii) does not apply, at any time during the term of the Executive's employment hereunder, without the Executive's consent, (A) the Executive fails to be appointed (or re-appointed, as appropriate) to the positions set forth in Section 3(a) hereof (or, if agreed in writing by the Executive, an equivalent or superior position), (B) duties are assigned to the Executive that are inconsistent with his positions set forth in Section 3(a) hereof or a material reduction or diminution in the Executive's authorities, duties or responsibilities or reporting requirements with the Company or XL as set forth in Section 3(a) hereof, (C) the Executive's annual base salary as in effect on the Date of the Agreement, or as the same may be increased from time to time, is reduced, (D) the Executive is based at any office or located more than 50 miles from Stamford, Connecticut, except for travel reasonably required in the performance of the Executive's duties, (E) there is a substantial reduction in the employee pension and welfare benefit plans provided to the Executive on the Date of the Agreement, or (F) there is a material breach by the Company of any provision of this Agreement, which, in any such case described in any of clauses (A) through (F) hereof, the Company does not cure within 20 calendar days following written notice of same by the Executive, then the Executive shall have the right to terminate his employment within 30 calendar days of such failure to cure and such termination shall be deemed a termination by the Company without Cause under Section 8(d)(ii), above. 14 (e) VOLUNTARY TERMINATION BY THE EXECUTIVE. The Executive may voluntarily terminate his employment prior to the expiration of the term of this Agreement upon at least 60 days' prior written notice to the Company. Such termination shall constitute a voluntary termination and, except as provided in Section 8(d)(iii) or Section 8(d)(iv), above, in such event the Executive shall be limited to the same rights and benefits as applicable to a termination by the Company for Cause as provided in Section 8(c), above. A voluntary termination in accordance with this Section 8(e) shall not be deemed a breach of this Agreement. A termination of the Executive's employment due to disability or death as described in Section 8(b) or 8(a), above, a termination by the Executive which the Executive is entitled to treat as a termination by the Company pursuant to Section 8(d)(iii), above, or a termination by the Executive under Section 8(d)(iv), above, shall not be deemed a voluntary termination within the meaning of this Section 8(e). (f) ACCRUED BENEFITS. In the event of any termi-nation pursuant to this Section 8, the Executive shall also be entitled to receive (i) reimbursement for any unreim-bursed expenses incurred through the date of termination; (ii) any accrued vacation; (iii) benefits under the supple-mental retirement benefit agreement of even date herewith and (iv) all other payments, benefits or fringe benefits to which the Executive may be entitled under the terms of any applicable employee benefit program of the Company, as pro-vided in Section 6, above, or under the fringe benefits pro-grams, as provided in Section 7(b), above, or this Agree-ment. Nothing in this Section 8(f) shall result in duplication of payments or benefits otherwise provided in Section 8. 9. CERTAIN ADDITIONAL PAYMENTS BY THE COMPANY. (a) Anything in this Agreement to the contrary notwithstanding, in the event it shall be determined that (i) any payment or distribution made, or benefit provided (including, without limitation, the acceleration of any payment, distribution or benefit or accelerated vesting or exercisability of any award) by the Company or any Affiliate (or by any person whose actions result in a change of ownership or effective control of the Company covered by Section 280G(b)(2) of the United States Internal Revenue Code of 1986, as amended (the "Code") or any person affiliated with the Company or any Affiliate or such person to or for the benefit of the Executive (whether paid or payable or dis- 15 tributed or distributable pursuant to the terms of this Agreement or otherwise, but determined without regard to any additional payments required under this Section 9) (a "Payment") would be subject to the excise tax imposed by Section 4999 of the Code (or any successor provision or similar excise tax), or any interest or penalties are incurred by the Executive with respect to such excise tax (such excise tax, together with any such interest and penalties, are hereinafter collectively referred to as the "Excise Tax"), (ii) the aggregate amount of the Executive's Parachute Payments (as defined in Section 280G(b)(2)(A) of the Code) is less than 3.25 times the Executive's Base Amount (as defined in Section 280G(b)(3)(A) of the Code), and (iii) no such Payment would be subject to the Excise Tax if the payments set forth in Section 8(d)(iii)(B) and (C) hereof were each reduced by up to 20 percent, then the payments set forth in Section 8(d)(iii)(B) and (C) will each be reduced to the smallest extent possible (and in no event by more than 20 percent in the aggregate) such that no Payment is subject to the Excise Tax. (b) Anything in this Agreement to the contrary notwithstanding, in the event it shall be determined that (i) the aggregate amount of the Executive's Parachute Payments equals or exceeds 3.25 times the Executive's Base Amount, (ii) the aggregate amount of the Executive's Parachute Payments is less than 3.25 times the Base Amount but one or more Payments would be subject to the Excise Tax even if the payments set forth in Section 8(d)(iii)(B) and (C) hereof were each reduced by 20 percent, or (iii) notwithstanding a reduction in payments pursuant to Section 9(a) above, an Excise Tax is payable by the Executive on one or more Payments, then, in any such case, Payments shall not be reduced and the Executive shall be entitled to receive an additional payment (a "Gross-Up Payment") in an amount such that after payment by the Executive of all taxes (including any income or Excise Tax) imposed upon the Gross-Up Payment and any interest or penalties imposed with respect to such taxes, the Executive retains from the Gross-Up Payment an amount equal to the Excise Tax imposed upon the Payments. (c) Subject to the provisions of Section 9(d), all determinations required to be made under this Section 9, including determination of whether a Gross-Up Payment is required and of the amount of any such Gross-Up Payment, shall be made by a nationally recognized public accounting firm selected by the Executive (the "Accounting Firm") which shall provide detailed supporting calculations both to the 16 Company and the Executive within 15 business days of the date of termination of the Executive's employment, if applicable, or such earlier time as is requested. The initial Gross-Up Payment, if any, as determined pursuant to this Section 9(c), shall be paid to the Executive within five business days of the receipt of the Accounting Firm's determination. If the Accounting Firm determines that no Excise Tax is payable by the Executive, it shall furnish the Executive with a written opinion that he has substantial authority not to report any Excise Tax on his Federal income tax return. Any determination by the Accounting Firm meeting the requirements of this Section 9(c) shall be binding upon the Company and the Executive, subject only to payments pursuant to the following sentence based on a determination that additional Gross-Up Payments should have been made, consistent with the calculations required to be made hereunder (the amount of such additional payments are referred to herein as the "Gross-Up Underpayment"). In the event that the Company exhausts its remedies pursuant to Section 9(d) and the Executive thereafter is required to make a payment of any Excise Tax, the Accounting Firm shall determine the amount of the Gross-Up Underpayment that has occurred and any such Gross-Up Underpayment shall be promptly paid by the Company to or for the benefit of the Executive. The fees and disbursements of the Accounting Firm shall be paid by the Company. (d) The Executive shall notify the Company in writing of any claim by the United States Internal Revenue Service that, if successful, would require the payment by the Executive of any Excise Tax and, therefore, the payment by the Company of a Gross-Up Payment. Such notification shall be given as soon as practicable but not later than 30 business days after the Executive receives written notice of such claim and shall apprise the Company of the nature of such claim and the date on which such claim is requested to be paid. The Executive shall not pay such claim prior to the expiration of the 30-day period following the date on which he gives such notice to the Company (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Company notifies the Executive in writing prior to the expiration of such period that it desires, in good faith, to contest such claim (which notice shall set forth the bases for such contest) and that it will bear the costs and provide the indemnification as required by this sentence, the Executive shall, in good faith: 17 (i) give the Company any information reasonably requested by the Company relating to such claim, (ii) take such action in connection with contesting such claim as the Company shall, in good faith, reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney selected by the Company and reasonably acceptable to the Executive, (iii) cooperate with the Company in good faith in order effectively to contest such claim, and (iv) permit the Company to participate, in good faith, in any proceedings relating to such claim; PROVIDED, HOWEVER, that the Company shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest and shall indemnify and hold the Executive harmless, on an after-tax basis to the Executive, for any Excise Tax or income tax, including interest and penalties with respect thereto, imposed as a result of such representation and payment of all costs and expenses. Without limitation on the foregoing provisions of this Section 9(d), the Company shall, exercising good faith, control all proceedings taken in connection with such contest and, at its sole option (but in good faith), may pursue or forego any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim and may, at its sole option (but in good faith), either direct the Executive to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and the Executive agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine; PROVIDED, HOWEVER, that if the Company directs the Executive to pay such claim and sue for a refund, the Company shall advance the amount of such payment to the Executive, on an interest-free basis and shall indemnify and hold the Executive harmless, on an after-tax basis to the Executive, from any Excise Tax or income tax, including interest or penalties with respect thereto, imposed with respect to such advance or with respect to any imputed income with respect to such advance; AND FURTHER PROVIDED that any extension of the statute of limitations relating to the payment of taxes for the taxable year of the Executive with respect to which such contested 18 amount is claimed to be due is limited solely to such contested amount. Furthermore, the Company's control of the contest shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder and the Executive shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. If, after the receipt by the Executive of an amount advanced by the Company pursuant to Section 9(d), the Executive becomes entitled to receive any refund with respect to such claim, the Executive shall (subject to the Company's complying with the requirements of Section 9(d)) promptly pay to the Company, as the case may be, the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto). If, after the receipt by the Executive of an amount advanced by the Company pursuant to Section 9(d), a determination is made that the Executive shall not be entitled to any refund with respect to such claim and the Company does not notify the Executive in writing of its intent to contest such denial of refund prior to the expiration of 30 days after such determination, then any obligation of the Executive to repay such advance shall be forgiven and the amount of such advance shall offset, to the extent thereof, the amount of Gross-Up Payment required to be paid. Notwithstanding any provision herein to the contrary, the Executive's failure to strictly comply with the notice provisions set forth in this Section 9, so long as such failure does not prevent the Company from contesting an excise tax claim, shall not adversely affect the Executive's rights under this Section 9. 10. NO MITIGATION; NO OFFSET. In the event of any termination of employment under Section 8, above, the Executive shall be under no obligation to mitigate damages or seek other employment, and, except as expressly set forth herein, there shall be no offset against amounts due the Executive under this Agreement on account of any remuneration attributable to any subsequent employment that he may obtain. Except as set forth in this Agreement, the Company's obligation to make the payments provided for in this Agreement and otherwise to perform its obligations hereunder shall not be affected by any circumstances, including without limitation, set-off, counterclaim, recoupment, defense or other claim, right or action which the Company may have against the Executive or others, PROVIDED, HOWEVER, that the Company's obligation to make the payments provided for in this Agreement 19 may be reduced by any fixed amount due and owing from the Executive to the Company. 11. NONCOMPETITION AND NONSOLICITATION. The Executive represents and warrants that, to the best of his knowledge, he is not using the confidential or proprietary information of any other person in violation of any agreement or rights of others known to him. The Executive agrees that the products of the Company and its Affiliates shall constitute the exclusive property of the Company and its Affiliates. For the avoidance of doubt, all trademarks, policy language or forms, products or services (including products and services under development), trade names, trade secrets, service marks, designs, computer programs and software, utility models, copyrights, know-how and confidential information, applications for registration of any of the foregoing and the right to apply for them in any part of the world (whether any of the foregoing shall be registered or unregistered) created or discovered or participated in by the Executive during the course of his employment (whether or not pursuant to the terms of this Agreement) or under the instructions of the Company or its Affiliate are and shall be the absolute property of the Company and its Affiliates, as appropriate. Without limiting the foregoing, the Executive hereby assigns to the Company any and all of the Executive's right, title and interest, if any, pertaining to the insurance and reinsurance (including, without limitation, finite insurance and reinsurance), risk assumption, risk management, brokerage, financial and other products or services developed or improved upon by the Executive (including, without limitation, any related "know-how") while employed by the Company or its Affiliates, including any patent, trademark, trade name, copyright, ownership or other right that may pertain thereto. Since Executive has obtained and is likely to obtain in the course of Executive's employment with the Company and its Affiliates knowledge of trade names, trade secrets, know-how, products and services (including products and services under development), techniques, methods, lists, computer programs and software and other confidential information relating to the Company and its Affiliates, and their employees, clients, business or business opportunities, Executive hereby undertakes that: 20 (i) Executive will not (either alone or jointly with or on behalf of others and whether directly or indirectly) solicit or endeavor to solicit, or hire or cause to be hired any officer or employee of the Company or its Affiliates away from employment with any such entity or to violate the terms of any employment agreement or arrangement between any such officer or employee and the Company or any of its Affiliates provided that the foregoing shall not preclude the Executive from serving as a reference for any officer or employee of the Company or its Affiliates or, while employed, from encouraging any officer or employee of the Company or its Affiliates to terminate employment with the Company or its Affiliates if such encouragement is consistent with the good faith performance of the Executive's duties hereunder; (ii) Executive will, not directly or indirectly, personally interfere with or disrupt or seek to personally interfere with or disrupt (A) the relationships between the Company and its Affiliates, on the one hand, and any customer or client of the Company and its Affiliates, on the other hand, (including any insured or reinsured party) who during the period of twelve months immediately preceding such termination shall have been such a customer or client, or (B) the supply to the Company and its Affiliates of any services by any supplier or agent or broker who during the period of twelve months immediately preceding such termination shall have supplied services to any such person, nor will Executive, directly or indirectly, personally interfere or seek to interfere with the terms on which such supply or agency or brokering services during such period as aforesaid have been made or provided, however, this Section 11(ii) shall not be violated unless such interference or disruption occurs as a result of an effort targeted at customers, clients, suppliers, agents or brokers of the Company and its Affiliates as opposed to general marketing in which such customers, clients, suppliers, agents or brokers are included; and (iii) Executive will not (either alone or jointly with or on behalf of others and whether directly or indirectly) whether as an employee, director, consultant, partner, principal, agent, distributor, representative or stockholder (except solely as a less than two percent stockholder of a publicly traded company), engage in any activities in Bermuda or North America if such activities are competitive with the property and casualty insurance or reinsurance businesses that (i) are then being con- 21 ducted by the Company or its Affiliates and (ii) during the period of the Executive's employment were either being conducted by the Company or its Affiliates or actively being developed by the Company or its Affiliates; PROVIDED, that the foregoing shall not be violated by involvement with an entity that is only incidentally competitive with the foregoing (when looking at the entity and XL as whole units) so long as the Executive is not directly involved in the day-to-day operations of such competitive units and PROVIDED FURTHER that activities on behalf of insurance brokers are not competitive with the Company and its Affiliates. The provisions of the immediately preceding sentence shall continue as long as the Executive is employed by the Company or its Affiliates under this Agreement and shall continue in effect after such employment is terminated for any reason until the earlier of (A) the third anniversary of the Date of this Agreement and (B) the first anniversary of the earlier of such termination and the receipt of notice of termination delivered pursuant to Sections 8(d) or 8(e), provided that if such employment is terminated by the Company prior to the end of the stated term other than for Cause, or is terminated by the Executive under Section 8(d)(iii) or Section 8(d)(iv), the provisions of clauses (ii) and (iii) shall automatically terminate upon the termination of such employment, unless the Company elects, in writing delivered at the same time as the notice of termination if termination is by the Company or, within 10 days thereafter if termination is by the Executive, upon such termination to continue the provisions of clauses (ii) and (iii) in effect through the six-month anniversary of such termination of employment (but in no event beyond the third anniversary of the Date of this Agreement) in which case the Company shall be obligated to continue (through such six-month anniversary of termination) to pay the Executive, in addition to any of the Executive's rights under Section 8(d)(ii), 8(d)(iii) or Section 8(d)(iv), his Base Salary and the pro rata portion of the Executive's target annual bonus for the year of termination, and such bonus shall be payable at the times annual bonuses for such year are payable to other executives. Notwithstanding any other provision of this paragraph, in the event that the Executive's employment is terminated in accordance with the provisions (including notice requirements) of Sections 8(d) or 8(e), above, and clauses (ii) and (iii) continue in effect after termination of employment, the Executive may elect to terminate such clauses (save as provided below) by (x) delivering a written notice to that effect to XL and the Company and (y) paying to XL the Required Sum (as defined below); 22 PROVIDED, HOWEVER, that Executive shall not be permitted under any circumstances to terminate clauses (ii) and (iii) pursuant to this sentence in order to engage in any activity proscribed by such clauses for the benefit of or on behalf of, directly or indirectly, any one or more of the companies and their Affiliates listed or described in the letter of even date herewith from the Company to the Executive referencing this section of the Agreement except to the extent, and subject to the terms and conditions, described therein. XL may substitute in writing to the Executive at any time at least 60 days prior to the date of termination of the Executive's employment, one or more other competitors for any of those specifically named in the letter referred to above so long as the total number of such companies does not exceed nine, not including any "Excluded Offshore Company" as defined in such letter. "Required Sum" shall mean (i) U.S. $2,600,000 with regard to the entities in the letter described above, (ii) the "Pro-Rata Amount" (as defined below) with regard to any corporation, company, partnership, firm, association or other entity or organization having alone or together with its Affiliates capital and surplus of U.S. $500,000,000 or more and (iii) the lesser of $500,000 or the Pro-Rata Amount with regard to other entities. "Pro-Rata Amount" means U.S. $2,600,000 multiplied by the faction with a numerator equal to 36 months less the number of months (or partial months) from the Date of the Agreement during which the Executive was employed by the Company and a denominator equal to 36. For purposes of this Agreement, an "Affiliate" of the Company (or other person or entity) includes any person, directly or indirectly, through one or more intermediaries, controlling, controlled by, or under common control with the Company (or other person or entity), and such term shall specifically include in the case of the Company, without limitation, XL and XL's majority-owned subsidiaries. While the restrictions aforesaid are considered by the parties hereto to be reasonable in all the circumstances it is recognized that restrictions of the nature in question may fail for reasons unforeseen and accordingly it is hereby declared and agreed that if any of such restrictions or the geographic or other scope thereof shall be adjudged to be void as going beyond what is reasonable in the circumstances for the protection of the interests of the Company and its Affiliates but would be valid if part of the wording thereof were deleted and/or the periods (if any) thereof reduced and/or geographic or other area dealt with thereby reduced in scope then said re- 23 strictions shall apply with such modifications as may be necessary to make them valid and effective. Nothing contained in this Section 11 shall limit in any manner any additional obligations to which Executive may be bound pursuant to any other agreement or any applicable law, rule or regulation and Section 11 shall apply, subject to its terms, after employment has terminated for any reason. 12. CONFIDENTIAL INFORMATION. The Executive covenants that he shall not, without the prior written consent of the Company, disclose to any person (other than an employee, officer or director of the Company and its Affiliates) other than as the Executive determines in his good faith judgment to be necessary or desirable by the Executive in performing his duties hereunder, any confidential, proprietary, secret, or privileged information about the Company or its Affiliates or their business or operations, including, but not limited to, information concerning trade secrets, know-how, software, data processing systems, policy language and forms, inventions, designs, processes, formulae, notations, improvements, financial information, business plans, prospects, referral sources, lists of suppliers and customers, legal advice and other information with respect to the affairs, business, clients, customers, agents or other business relationships of the Company or its Affiliates unless and until such information has become known to the public generally (other than as a result of unauthorized disclosure by the Executive) or unless he is required to disclose such information by a court or by a governmental body with apparent authority to require such disclosure. Executive shall hold in a fiduciary capacity for the benefit of the Company all secret, confidential proprietary or privileged information or data relating to the Company or any of its Affiliates or predecessor companies, and their respective businesses, which shall have been obtained by Executive during his employment, unless and until such information has become known to the public generally (other than as a result of unauthorized disclosure by the Executive) or unless he is required to disclose such information by a court or by a governmental body with apparent authority to require such disclosure. The foregoing covenant by the Executive shall be without limitation as to time and geographic application and this Section 12 shall apply in accordance with its terms after employment has terminated for any reason. The Executive acknowledges and agrees that he shall have no authority to waive any attorney-client or other privilege without the express prior written consent of the Compensation Committee as evi- 24 denced by the signature of XL's General Counsel. Without implication as to any other provision, the provisions of this Section 12 shall survive any termination of this Agreement. 13. WITHHOLDING. Anything in this Agreement to the contrary notwithstanding, all payments required to be made by the Company hereunder to the Executive shall be subject to withholding of such amounts relating to taxes as the Company may reasonably determine should be withheld pursuant to any applicable law or regulation. In lieu of withholding such amounts, in whole or in part, the Company may, in its sole discretion, accept other provision for payment of taxes as required by law, provided it is satisfied that all requirements of law affecting its responsibilities to withhold such taxes have been satisfied. 14. GUARANTY AND AFFILIATE SERVICES. (a) LIABILITY. XL, XLI and the Company hereby agree to be jointly and severally liable for the performance of all obligations and duties, and the payment of all amounts, due to the Executive under this Agreement. (b) RESPONSIBILITY. All of the other terms and provisions of this Agreement relating to the Executive's employment by the Company shall likewise apply MUTATIS MUTANDIS to the Executive's employment by any of its Affiliates, it being understood that if the Executive's employment with the Company is terminated, his employment with its Affiliates shall also be terminated and the Executive shall be required to resign immediately from all directorships and other positions held by the Executive in the Company and its Affiliates or in any other entities in respect of which the Executive was acting as a representative or designee of the Company or its Affiliates in connection with his employment. 15. ENTIRE AGREEMENT. This Agreement, together with the Exhibits, contains the entire agreement between the Parties concerning the subject matter hereof and supersedes all prior agreements, understandings, discussions, negotiations and undertakings, whether written or oral, between the Company and the Executive with respect thereto. Without limiting the generality of the foregoing, this Agreement supersedes the Amended and Restated Employment Agreement made as of June 18, 1999 by and among XL Capital Ltd, Dasher Acquisition Corp., NAC Re Corporation and NAC Reinsur- 25 ance Corporation and the Executive and all other agreements, understandings or arrangements relating thereto, and the Executive hereby releases all of such entities from any and all liability under such agreement and all other agreements, understandings or arrangements relating thereto. 16. ASSIGNABILITY; BINDING NATURE. This Agreement shall be binding upon and inure to the benefit of the Parties and their respective successors, heirs and assigns. No rights or obligations of the Executive under this Agreement may be assigned or transferred by the Executive other than his right to compensation and benefits hereunder, which may be transferred by will or operation of law subject to the limitations of this Agreement. No rights or obligations of the Company or XL under this Agreement may be assigned or transferred by the Company or XL except that such rights or obligations may be assigned or transferred to an Affiliate or pursuant to a merger or consolidation or amalgamation or scheme of arrangement in which the Company or XL, as the case may be, is not the continuing entity, or the sale or liquidation of all or substantially all of the assets of the Company or XL, provided that the assignee or transferee is the successor to all or substantially all of the assets of the Company or XL and such assignee or transferee assumes by operation of law or in writing duly executed by the assignee or transferee all of the liabilities, obligations and duties of the Company or XL, as contained in this Agreement, either contractually or as a matter of law. 17. INDEMNIFICATION. The Executive shall be provided indemnification by the Company to the maximum extent permitted by applicable law and its charter documents. In addition, the Executive shall be covered by a directors' and officers' liability policy with coverage for all directors and officers of the Company in an amount equal to at least US$75,000,000 (but in any event no less than that provided to other officers of XL or any other entity for which the Executive performs services). Such directors' and officers' liability insurance shall be maintained in effect both during and while potential liability exists for a period of six years (or such longer period as then provided to other officers of XL or any other entity for which the Executive performs services) following termination of the Executive's employment. 26 18. SETTLEMENT OF DISPUTES. (a) Any dispute between the Parties arising from or relating to the terms of this Agreement or the Executive's employment with the Company or its Affiliates shall, except as provided in Section 18(b) or Section 18(c), be resolved by arbitration held in New York City in accordance with the rules of the American Arbitration Association. (b) Executive acknowledges that the Company and its Affiliates will suffer irreparable injury, not readily susceptible of valuation in monetary damages, if Executive breaches his obligations under Section 11 or 12. Accordingly, Executive agrees that the Company and its Affiliates will be entitled, in addition to any other available remedies, to obtain injunctive relief against any breach or threatened breach by Executive of his obligations under Section 11 or 12 in any Federal or state court sitting in the City and State of New York or, solely with regard to obtaining injunctive relief against any breach or threatened breach by Executive of such provisions with regard to Excluded Offshore Companies, court sitting in Bermuda, or, at the Company's or any Affiliate's election, in any other jurisdiction in which Executive maintains his residence or his principal place of business. Executive hereby submits to the non-exclusive jurisdiction of all those courts for the purposes of any actions or proceedings instituted by the Company or its Affiliates to obtain such injunctive relief, and Executive agrees that process in any or all of those actions or proceedings may be served by registered mail or delivery, addressed to the last address of Executive known to the Company or its Affiliates, or in any other manner authorized by law. (c) Notwithstanding any other provision of this Agreement, the Executive may elect to resolve any dispute involving a breach or alleged breach of Section 8(d)(iii) in any Federal or State court sitting in the City and State of New York or court sitting in Bermuda. The Company, XL and the Guarantor hereby submit to the non-exclusive jurisdiction of all those courts for the purposes of any actions or proceedings instituted by the Executive to enforce Section 8(d)(iii), and the Company, XL and the Guarantor agree that process in any or all of such actions or proceedings may be served by registered mail or delivery, addressed to the Company and XL as set forth in Section 20, or in any other manner authorized by law. The Company, XL and the Guarantor shall pay all costs associated with any court pro- 27 ceeding under this Section 18(c), including all legal fees and expenses of the Executive, who shall be reimbursed for all such costs promptly upon written demand therefor by the Executive. (d) All costs associated with any proceeding under Sections 18(a) or 18(b) hereof, including all legal fees and expenses, for all Parties shall be borne by the Company, except to the extent that (x) the Executive's employment has not terminated pursuant to Section 8(d)(ii), 8(d)(iii) or Section 8(d)(iv), (y) the dispute relates to Section 11 or 12 and (z) the dispute results in the grant of injunctive relief against the Executive, in which case each Party shall bear its own expenses. The Executive shall be reimbursed by the Company for all such costs promptly upon written demand therefor by the Executive. 19. AMENDMENT OR WAIVER. No provision in this Agreement may be amended unless such amendment is agreed to in writing, signed by the Executive and by a duly authorized officer of the Company, XL and the Guarantor. No waiver by any Party of any breach by the other Party of any condition or provision of this Agreement to be performed by such other Party shall be deemed a waiver of a similar or dissimilar condition or provision at the same or any prior or subsequent time. Any waiver must be in writing and signed by the Executive or a duly authorized officer of the Company, XL and the Guarantor, as the case may be. 20. NOTICES. Any notice required or permitted to be given under this Agreement shall be in writing and shall be deemed to have been given when delivered personally or sent by courier, or by certified or registered mail, postage prepaid, return receipt requested, duly addressed to the Party concerned at the address indicated below or to such changed address as such Party may subsequently by similar process give notice of: If to XL, XLI or the Company: XL Capital Ltd XL HouseOne Bermudiana Road Hamilton HM11 Bermuda Att'n: General Counsel 28 If to the Executive: At the last address shown in the records of the Company 21. SEVERABILITY. In the event that any provision or portion of this Agreement shall be determined to be invalid or unenforceable for any reason, in whole or in part, the remaining provisions of this Agreement shall be unaffected thereby and shall remain in full force and effect to the fullest extent permitted by law. 22. SURVIVORSHIP. The respective rights and obligations of the Parties shall survive any termination of this Agreement to the extent necessary to the intended preservation of such rights and obligations. 23. REFERENCE. In the event of the Executive's death or a judicial determination of his incompetence, reference in this Agreement to the Executive shall be deemed, where appropriate, to refer to his estate or other legal representative. 24. GOVERNING LAW. This Agreement shall be governed by and construed and interpreted in accordance with the laws of the State of New York without reference to the principles of conflict of laws. 25. HEADINGS. The heading of the sections contained in this Agreement are for convenience only and shall not be deemed to control or affect the meaning or construction of any provision of this Agreement. 26. COUNTERPARTS. This Agreement may be executed in one or more counterparts. 29 IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the date first written above. XL CAPITAL LTD By: ---------------------------------- XL INSURANCE, INC. By: ---------------------------------- XL AMERICA, INC. By: ---------------------------------- NICHOLAS M. BROWN, JR. By: ---------------------------------- 30 EXHIBIT A CHANGE IN CONTROL A "Change in Control" shall be deemed to have occurred: (i) if any person (which, for all purposes hereof, shall include, without limitation, an individual, sole proprietorship, partnership, unincorporated association, unincorporated syndicate, unincorporated organization, trust, body corporate and a trustee, executor, administrator or other legal representative)(a "Person") or any group, as defined in Sections 13(d) or 14(d) of the United States Securities Exchange Act of 1934 (other than a group of which the Executive is a member or which has been organized by the Executive), becomes the beneficial owner, directly or indirectly, of securities of XL representing, or acquires the right to control or direct, or to acquire through the conversion of securities or the exercise of warrants or other rights to acquire securities, 30% or more of either (I) the outstanding Ordinary Shares of XL; (II) the outstanding securities of XL having a right to vote in the election of directors or (III) the combined voting power of the outstanding securities of XL having a right to vote in the election of directors; or (ii) if there shall be elected or appointed to the Board of Directors of XL (the "Board") any director or directors whose appointment or election by the Board or nomination for election by XL's shareholders was not approved by a vote of at least a majority of the directors then still in office who were either directors on the date of execution of this Agreement or whose election or appointment or nomination for election was previously so approved; or (iii) if there occurs a reorganization, scheme of arrangement, merger, consolidation, combination, amalgamation, corporate restructuring, liquidation, winding up, exchange of securities, or similar transaction, or stockholder approval of any of the foregoing, (each, an "Event"), in each case, in respect of which the beneficial owners of the outstanding XL Ordinary Shares immediately prior to such Event do not or will not, following such Event, beneficially own, directly or indirectly, more than 60% of each of the outstanding equity share capital and the combined voting power of the then outstanding voting securities entitled to vote in the election of the directors, of XL and any resulting entity, in substantially the same proportions as their ownership, immediately prior to such Event, of the Ordinary Shares and voting power of XL; or (iv) if there occurs an Event involving XL as a result of which 25% of more of the members of the Board of XL are not persons who were members of the Board immediately prior to the earlier of (x) the Event, (y) execution of an agreement, the consummation of which would result in the Event, or (z) announcement by XL of an intention to effect the Event; or (v) approval by the stockholders of XL of a plan of complete liquidation of XL or the closing of the sale or disposition by XL of all or more than 80% of XL's consolidated assets other than the sale of all or 80% of the consolidated assets of XL to a person or persons who beneficially own, directly or indirectly, at least 50% or more of the combined voting power of the outstanding voting securities of XL at the time of the sale; or (vi) the Board adopts a resolution to the effect that, for purposes of this Agreement, a Change in Control has occurred. EXHIBIT B GOOD REASON For purposes of this Agreement, "Good Reason" shall mean any of the following, unless done with the prior express written consent of the Executive: (i) (A) The assignment to Executive of duties inconsistent with Executive's position (including duties, responsibilities, status, titles or offices) as set forth in Section 3 hereof; or (B) any elimination, diminution or reduction of Executive's status, titles, offices, duties or responsibilities except in connection with the termination of Executive's employment for Cause, disability or as a result of Executive's death or by Executive other than for Good Reason; (ii) The (A) reduction in Executive's Base Salary from the level in effect immediately prior to the Change in Control, or (B) payment of an annual bonus in an amount less than the lesser of (x) the most recent annual bonus paid prior to the Change in Control or (y) the greater of (I) the most recent target bonus established prior to the Change in Control or (II) the annual average bonus paid for the preceding three complete years prior to the Change in Control (or such lesser number of complete years as the Executive shall have been employed by the Company); (iii) The failure by the Company, XL or the Guarantor to obtain the specific written assumption of this Agreement by any successor or assign of the Company, XL or the Guarantor or any person acquiring substantially all of the Company's, XL's or the Guarantor's assets; (iv) Any breach by the Company, XL or the Guarantor of any provision of this Agreement or any agreements entered into pursuant thereto that remains uncured for 20 calendar days following written notice of same by the Executive; (v) Requiring the Executive to be based at any office or location more than 50 miles from Stamford, Connecticut, except for travel reasonably required in the performance of the Executive's responsibilities; (vi) During the Post Change Period, (A) the failure to continue in effect any compensation or incentive plan in which Executive participates immediately prior to the time of the Change in Control unless an equitable arrangement (embodied in an ongoing substitute or alternative plan providing Executive with at least the same aggregate economic opportunity on an after-tax basis available to the Executive immediately prior to the Change in Control) has been made with respect to such plan in connection with the Change in Control, or the failure to continue Executive's participation therein on substantially the same basis both in terms of the amount of benefits provided and the level of his participation relative to other participants, as existed at the time of the Change in Control; or (B) the failure to continue to provide Executive with benefits and coverage at least as favorable in the aggregate as those enjoyed by him under the Company's pension, life insurance, medical, health and accident, disability, deferred compensation or savings plans in which he was participating at the time of the Change in Control; or (vii) The failure by the Company to pay within 7 calendar days of the due date any amounts due under any benefit or compensation plan, including any deferred compensation plan. EXHIBIT C RESTRICTED STOCK AND OPTION AWARDS THAT VEST IN ACCORDANCE WITH THE PROVISIONS OF SECTION 5(b) ----------------------------------------------------------- Vesting Options Scheduled Plan Name Grant Date Date to Vest --------- ---------- ---- ----------------- 1997 Incent. & Cap. Acc. Plan 6/10/1997 6/10/02 6,291 1997 Incent. & Cap. Acc. Plan 6/10/1998 6/10/02 6,405 1997 Incent. & Cap. Acc. Plan 6/10/1998 6/10/03 6,405 1997 Incent. & Cap. Acc. Plan 6/10/1998 6/10/02 22,875 1997 Incent. & Cap. Acc. Plan 6/10/1998 6/10/03 22,875 1997 Incent. & Cap. Acc. Plan 6/29/1999 6/29/02 11,333 TOTAL: 76,184 EX-10.59 4 c24198_ex1059.txt AGREEMENT AGREEMENT THIS AGREEMENT is made and entered into as of April 1, 2002 by and among XL Insurance, Inc., a Delaware corporation ("XLI"), XL America, Inc., a Delaware corporation (the "Company") and XL Capital Ltd., a Cayman Islands corporation ("XL") and Nicholas M. Brown, Jr. (the "Executive"). WHEREAS, the Executive has been in the employ of the Company; WHEREAS, the Company and the Executive desire to memorialize the terms and conditions of certain retirement benefits to be provided to the Executive; NOW, THEREFORE, in consideration of the premises and mutual covenants contained herein and for other good and valuable consideration, the Company, XL America and the Executive (the "Parties") agree as follows: 1. Supplemental Retirement Benefit. (i) The Executive shall be paid a lifetime annual retirement benefit, commencing within thirty (30) days following the later of the date of his termination of employment with the Company or its Affiliates or the date of his attainment of age fifty (50), equal to fifty percent (50%) of the Executive's Final Average Compensation (as defined below), reduced by benefits from any defined benefit pension plans maintained (or formerly maintained) by the Company or its Affiliates or any defined benefit pension plans maintained (or formerly maintained) by any previous employers (converted into a life annuity commencing on the date of commencement of benefits hereunder, if necessary, using the actuarial assumptions under the defined benefit pension plan(s) of the Company or its Affiliates or, if none, those deemed reasonable by an independent actuary mutually agreed to by the Company or its Affiliates and the Executive). Any retirement benefit that is payable prior to age sixty (60) shall be reduced by five percent (5%) per year for each year prior to age sixty (60); E.G., at age fifty (50) the benefit would equal twenty five percent ---- (25%) of the Executive's Final Average Compensation. The benefit will be paid to the Executive for his lifetime and, upon his death, fifty percent (50%) of his benefit will be paid to his surviving spouse, if any, for her lifetime. (ii) (1) If the Executive's employment terminates with the Company and its Affiliates due to disability (as defined in the Employment Agreement between the Company and the Executive), the Executive shall receive a supplemental disability benefit equal the difference between (x) fifty -2- percent (50%) of the Executive's Final Average Compensation and (y) the benefit received by Executive under the long term disability plan of the Company or its Affiliates. Such supplemental benefit shall be payable at the same time and under the same terms as the long term disability plan benefit. This supplemental disability benefit shall cease when benefits under the long term disability plan cease. (2) Upon cessation of disability benefits at age sixty-five (65), the Executive will become eligible for a retirement benefit under paragraph (i) of this Section 1. In the event supplemental disability benefits under the long term disability plan of the Company or its Affiliates cease prior to age sixty-five (65) and the Executive does not return to work with the Company or its Affiliates, for purposes of this Section 1, the Executive shall be considered to have terminated employment or died, as appropriate, as of the date supplemental disability benefits under the long term disability plan of the Company or its Affiliates ceased. (iii) In the event of the Executive's death while an employee of the Company prior to commencing benefits hereunder (whether or not the Executive has attained age fifty (50)), a benefit shall be paid to the Executive's surviving spouse, if any, when the Executive would have commenced benefits hereunder for her lifetime equal to the benefit which would have been payable to the spouse assuming the Executive had retired the day preceding the date of death and then died. (iv) The calculation of the benefits payable pursuant to this Section 1 shall be based upon the actuarial assumptions used in the Company's defined benefit plans covering the Executive or, if none then exists, those in the last such plan which covered the Executive. If such a plan exists, the calculation shall be made by the actuary for such plan or, if there is no current plan or actuary, by an independent actuary selected by the Company or its Affiliates, subject to the consent of the Executive (which shall not be unreasonably withheld or delayed). The calculation of the actuary shall be final and binding on all persons provided it was made in good faith. The benefits payable pursuant to this Section 1 shall be unfunded and the Executive will not be considered to have received a taxable economic benefit prior to the time at which benefits are actually payable hereunder. Accordingly, the Company or its Affiliates shall not be required to segregate any of its assets for the benefit of the Executive and the Executive shall have only a contractual right against the Company for the benefits payable hereunder. (v) For purposes of this Agreement, the following terms shall have the following meanings: -3- (1) "Affiliate" means any person, directly or indirectly, through one or more intermediaries, controlling, controlled by, or under common control with the Company (or other person or entity), and such term shall specifically include in the case of the Company, without limitation, XL Capital Ltd. and its majority owned subsidiaries. (2) "Compensation" shall mean the sum of (i) the Executive's annual base salary received from the Company or one of its Affiliates and (ii) the Executive's regular annual bonus at target from the Company or one of its Affiliates (and, for the avoidance of doubt, not including any special bonus). (3) "Final Average Compensation" shall mean the Executive's highest average annual Compensation earned during any consecutive thirty-six (36) complete months (or lesser actual period of receiving Compensation) during the period of sixty (60) complete months (or lesser actual period of receiving Compensation) immediately preceding the Executive's termination of employment with the Company. 2. Retiree Medical Benefits. If the Executive's employment with the Company or its Affiliates ceases for any reason (other than a voluntary resignation prior to December 31, 2004 or a termination by the Company for "cause" (as defined in the Employment Agreement between the Company and the Executive) prior to December 31, 2004), the Executive and his dependents shall, to the extent eligible, continue to receive medical benefits under the medical plans of the Company or its Affiliates. In the event that the Executive and his dependents are not eligible to receive medical benefits under the medical plans of the Company or its Affiliates, the Company or its Affiliates will use its reasonable best efforts to arrange for the provision by third party insurers of medical benefits for the Executive and his dependents substantially comparable to the medical benefits provided to employees of the Company or its Affiliates from time to time. The cost of such medical benefits shall be borne solely by the Executive (or his dependents) unless the Company is otherwise obligated to cover such cost. If the Executive's employment terminates with the Company and its Affiliates for any reason (other than a voluntary resignation prior to December 31, 2004 or a termination by the Company for "cause" (as defined in the Employment Agreement between the Company and the Executive) prior to December 31, 2004), for the purpose of allowing the Executive to receive retiree medical benefits, the Company and its Affiliates shall provide the Executive with additional service credit, equal to seven years service credit. In the event the Executive obtains other employment after the Executive's employment with the Company or its Affiliates ceases which provides health or welfare benefits of the type described in this Section 2, then Executive shall notify the Company promptly of such other employment and other coverage, and the coverage under this provision shall be secondary. -4- 3. Post-Termination Vesting and Exercise Periods. The Company and the Executive acknowledge that with regard to options to purchase equity securities of XL and other equity grants held by the Executive outstanding on January 1, 2002, any termination of the Executive's employment with the Company or its Affiliates after attaining age 50 will qualify as a retirement under the terms of the applicable plan and grants. As such, the Executive shall, as provided in the applicable grant or plan, become fully vested or continue to vest in the grants and have either three or five years after such termination to exercise any such options (but in no event beyond the stated term of the options). The Company and the Executive agree that with regard to any options to purchase equity securities of XL or other equity grants hereafter made, any termination of the Executive's employment with the Company or its Affiliates at or after December 31, 2004 will qualify as a retirement and the Executive shall have such rights as provided under such future grants to senior executives who qualify for retirement. 4. Withholding. Anything in this Agreement to the contrary notwithstanding, all payments required to be made by the Company hereunder to the Executive shall be subject to withholding of such amounts relating to taxes as the Company may reasonably determine should be withheld pursuant to any applicable law or regulation. In lieu of withholding such amounts, in whole or in part, the Company may, in its sole discretion, accept other provision for payment of taxes as required by law, provided it is satisfied that all requirements of law affecting its responsibilities to withhold such taxes have been satisfied. 5. Guaranty. XL, XLI and the Company hereby agree to be jointly and severally liable for the obligations under this Agreement. 6. Settlement of Disputes (i) Any dispute between the Executive and the Company arising from or relating to the terms of this Agreement shall be resolved by arbitration held in New York City in accordance with the rules of the American Arbitration Association. (ii) All costs associated with any proceeding under this Section 6, including all legal fees and expenses, for the Company and its Affiliates and the Executive shall be borne by the Company. The Executive shall be reimbursed by the Company for all such costs promptly upon written demand therefor by the Executive. -5- 7. Entire Agreement. This Agreement contains the entire agreement between the Company and its Affiliates and the Executive concerning the Executive's supplemental retirement and retiree medical benefits and supersedes all prior agreements, understandings, discussions, negotiations and undertakings, whether written or oral, between the Company or its Affiliates and the Executive with respect thereto. 8. Amendment or Waiver. No provision in this Agreement may be amended unless such amendment is agreed to in writing, signed by the Executive and by a duly authorized officer of the Company and XL America. No waiver by the Company or its Affiliates or the Executive of any breach by the other party of any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of a similar or dissimilar condition or provision at the same or any prior or subsequent time. Any waiver must be in writing and signed by the Executive or a duly authorized officer of the Company and XL America, as the case may be. 9. Notices. Any notice required or permitted to be given under this Agreement shall be in writing and shall be deemed to have been given when delivered personally or sent by courier, or by certified or registered mail, postage prepaid, return receipt requested, duly addressed to the Party concerned at the address indicated below or to such changed address as such Party may subsequently by similar process give notice of: If to XL, XLI or the Company: XL Capital Ltd XL HouseOne Bermudiana Road Hamilton HM11 Bermuda Att'n: General Counsel If to the Executive: At the last address shown in the records of the Company 10. Severability. In the event that any provision or portion of this Agreement shall be determined to be invalid or unenforceable for any reason, in whole or in part, the remaining provisions of this Agreement shall be unaffected thereby and shall remain in full force and effect to the fullest extent permitted by law. -6- 11. Survivorship. The respective rights and obligations of the Parties shall survive any termination of this Agreement to the extent necessary to the intended preservation of such rights and obligations. 12. Reference. In the event of the Executive's death or a judicial determination of his incompetence, reference in this Agreement to the Executive shall be deemed, where appropriate, to refer to his estate or other legal representative. 13. Governing Law. Except as otherwise required by the Employee Retirement Income Security Act of 1974, as amended, this Agreement shall be governed by and construed and interpreted in accordance with the laws of the State of New York without reference to the principles of conflict of laws thereof. 14. Headings. The heading of the sections contained in this Agreement are for convenience only and shall not be deemed to control or affect the meaning or construction of any provision of this Agreement. 15. Counterparts. This Agreement may be executed in one or more counterparts. -7- IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the date first written above. XL INSURANCE, INC. By: -------------------------------- XL AMERICA, INC. By: -------------------------------- XL CAPITAL LTD By: -------------------------------- NICHOLAS M. BROWN, JR. By: -------------------------------- EX-10.60 5 c24198_ex1060.txt AMENDMENT OF CREDIT AGREEMENT Exhibit 10.60 EXECUTION COUNTERPART AMENDMENT NO. 2 TO 364-DAY CREDIT AGREEMENT AMENDMENT NO. 2, dated as of March 15, 2002, between XL CAPITAL LTD, a company incorporated under the laws of the Cayman Islands, British West Indies ("XL CAPITAL"), X.L. AMERICA, INC., a Delaware corporation ("XL AMERICA"), XL INSURANCE (BERMUDA) LTD (formerly XL Insurance Ltd), a Bermuda limited liability company ("XL Insurance"), XL EUROPE LTD, a company incorporated under the laws of Ireland ("XL EUROPE"), and XL RE LTD, a Bermuda limited liability company ("XL RE" and, together with XL Capital, XL America, XL Insurance and XL Europe, each a "BORROWER" and each a "GUARANTOR" and, collectively, the "BORROWERS" and the "GUARANTORS"; the Borrowers and the Guarantors being collectively referred to as the "OBLIGORS"), each of the lenders that is a signatory hereto (individually, a "LENDER" and, collectively, the "LENDERS") and JPMORGAN CHASE BANK (formerly The Chase Manhattan Bank), as administrative agent for the Lenders (in such capacity, together with its successors in such capacity, the "ADMINISTRATIVE AGENT"). The Obligors, the Lenders and the Administrative Agent are parties to an Agreement dated as of June 29, 2001, as amended as of September 26, 2001 (the "AGREEMENT"), providing, subject to the terms and conditions thereof, for loans to be made by said Lenders to the Borrowers in an aggregate principal amount not exceeding $500,000,000. The Obligors, the Lenders and the Administrative Agent wish to amend the Agreement in certain respects and, accordingly, the parties hereto hereby agree as follows: Section 1. DEFINITIONS. Except as otherwise defined in this Amendment No. 2, terms defined in the Agreement are used herein as defined therein. Section 2. AMENDMENTS. Effective as provided in Section 4 below, the Agreement is hereby amended as follows: 2.01. References in the Agreement (including references to the Agreement as amended hereby) to "this Agreement" (and indirect references such as "hereunder", "hereby", "herein" and "hereof") shall be deemed to be references to the Agreement as amended hereby. 2.02. Section 6.01 is hereby amended to read in its entirety as follows: "SECTION 6.01. FINANCIAL STATEMENTS AND OTHER INFORMATION. Each Borrower will furnish to the Administrative Agent and each Lender: (a) within 135 days after the end of each fiscal year of each such Borrower except AMENDMENT NO. 2 TO 364-DAY CREDIT AGREEMENT 1 for XL America (but in the case of XL Capital, within 100 days after the end of each fiscal year of XL Capital), the audited consolidated balance sheet and related statements of operations, stockholders' equity and cash flows of such Borrower and its consolidated Subsidiaries as of the end of and for such year, setting forth in each case in comparative form the figures for the previous fiscal year (if such figures were already produced for such corresponding period or periods) (it being understood that delivery to the Lenders of XL Capital's Report on Form 10-K filed with the SEC shall satisfy the financial statement delivery requirements of this paragraph (a) to deliver the annual financial statements of XL Capital so long as the financial information required to be contained in such Report is substantially the same as the financial information required under this paragraph (a)), all reported on by independent public accountants of recognized national standing (without a "going concern" or like qualification or exception and without any qualification or exception as to the scope of such audit) to the effect that such consolidated financial statements present fairly in all material respects the financial condition and results of operations of such Borrower and its consolidated Subsidiaries on a consolidated basis in accordance with GAAP or (in the case of XL Europe, XL Insurance and XL Re) SAP, as the case may be, consistently applied; (b) by June 15 of each year, (i) an unaudited consolidating balance sheet and related statements of operations, stockholders' equity and cash flows of XL America and its consolidated Subsidiaries as of the end of and for such year, setting forth in each case in comparative form the figures for the previous fiscal year (if such figures were already produced for such corresponding period or periods), all certified by a Financial Officer of XL America as presenting fairly in all material respects the financial condition and results of operations of XL America and its consolidated Subsidiaries on a consolidated basis in accordance with GAAP consistently applied, subject to normal year-end audit adjustments and the absence of footnotes, and (ii) audited statutory financial statements for each insurance subsidiary of XL America reported on by independent public accountants of recognized national standing (without a "going concern" or like qualification or exception and without any qualification or exception as to the scope of such audit) to the effect that such audited consolidated financial statements present fairly in all material respects the financial condition and results of operations of such insurance subsidiaries in accordance with SAP, consistently applied; (c) within 60 days after the end of each of the first three fiscal quarters of each fiscal year of such Borrower, the consolidated balance sheet and related statements of AMENDMENT NO. 2 TO 364-DAY CREDIT AGREEMENT 2 operations, stockholders' equity and cash flows of such Borrower and its consolidated Subsidiaries as of the end of and for such fiscal quarter and the then elapsed portion of the fiscal year, setting forth in each case in comparative form the figures for (or, in the case of the balance sheet, as of the end of) the corresponding period or periods of the previous fiscal year (if such figures were already produced for such corresponding period or periods), all certified by a Financial Officer of such Borrower as presenting fairly in all material respects the financial condition and results of operations of such Borrower and its consolidated Subsidiaries on a consolidated basis in accordance with GAAP or (in the case of XL Europe, XL Insurance and XL Re) SAP, as the case may be, consistently applied, subject to normal year-end audit adjustments and the absence of footnotes (it being understood that delivery to the Lenders of XL Capital's Report on Form 10-Q filed with the SEC shall satisfy the financial statement delivery requirements of this paragraph (c) to deliver the quarterly financial statements of XL Capital so long as the financial information required to be contained in such Report is substantially the same as the financial information required under this paragraph (c)); (d) concurrently with any delivery of financial statements under clause (a), (b) or (c) of this Section, a certificate signed on behalf of each Borrower by a Financial Officer (i) certifying as to whether a Default has occurred and, if a Default has occurred, specifying the details thereof and any action taken or proposed to be taken with respect thereto, (ii) setting forth reasonably detailed calculations demonstrating compliance with Sections 7.03, 7.05, 7.06 and 7.07 and (iii) stating whether any change in GAAP or (in the case of XL Europe, XL Insurance, XL Re and any insurance subsidiary of XL America) SAP or in the application thereof has occurred since the date of the audited financial statements referred to in Section 4.04 and, if any such change has occurred, specifying the effect of such change on the financial statements accompanying such certificate; (e) concurrently with any delivery of financial statements under clauses (a) and (b)(ii) of this Section, a certificate of the accounting firm that reported on such financial statements stating whether they obtained knowledge during the course of their examination of such financial statements of any Default (which certificate may be limited to the extent required by accounting rules or guidelines); (f) promptly after the same become publicly available, copies of all periodic and other reports, proxy statements and other materials filed by such Borrower or any of its respective Subsidiaries with the SEC, or any Governmental Authority succeeding to any AMENDMENT NO. 2 TO 364-DAY CREDIT AGREEMENT 3 or all of the functions of said Commission, or with any U.S. or other securities exchange, or distributed by such Borrower to its shareholders generally, as the case may be; (g) concurrently with any delivery of financial statements under clause (a), (b) or (c) of this Section, a certificate of a Financial Officer of XL Capital, setting forth on a consolidated basis for XL Capital and its consolidated Subsidiaries as of the end of the fiscal year or quarter to which such certificate relates (i) the aggregate book value of assets which are subject to Liens permitted under Section 7.03(g) and the aggregate book value of liabilities which are subject to Liens permitted under Section 7.03(g) (it being understood that the reports required by paragraphs (a), (b) and (c) of this Section shall satisfy the requirement of this clause (i) of this paragraph (g) if such reports set forth separately, in accordance with GAAP, line items corresponding to such aggregate book values) and (ii) a calculation showing the portion of each of such aggregate amounts which portion is attributable to transactions among wholly-owned Subsidiaries of XL Capital; and (h) promptly following any request therefor, such other information regarding the operations, business affairs and financial condition of XL Capital or any of its Subsidiaries, or compliance with the terms of this Agreement, as the Administrative Agent or any Lender may reasonably request." 2.03. Schedule V is hereby deleted and replaced with Schedule V attached to this Amendment No. 2 and the reference to "as of the date hereof" in the first sentence of Section 4.13 is amended to read "as of September 30, 2001." Section 3. REPRESENTATIONS AND WARRANTIES. Each Borrower hereby represents and warrants to the Administrative Agent and the Lenders that (i) the representations and warranties set forth in Article IV of the Agreement are, on the date hereof, true and complete as if made on the date hereof (and after giving effect to this Amendment No. 2) and as if each reference in said Article IV to "this Agreement" includes reference to this Amendment No. 2 and (ii) both immediately prior to and as of the date hereof, no Default has occurred and is continuing. Section 4. CONDITIONS PRECEDENT. The amendments to the Agreement set forth in Section 2 above shall become effective, as of the date hereof, upon the satisfaction of the following conditions precedent: AMENDMENT NO. 2 TO 364-DAY CREDIT AGREEMENT 4 4.01. EXECUTION BY ALL PARTIES. This Amendment No. 2 shall have been executed and delivered by each of the Obligors and the Required Lenders. 4.02. OTHER DOCUMENTS. Receipt by the Administrative Agent of such other documents as the Administrative Agent or special New York counsel to JPMorgan Chase Bank reasonably request. Section 5. MISCELLANEOUS. Except as herein provided, the Agreement shall remain unchanged and in full force and effect. Nothing in this Amendment No. 2 shall constitute a waiver of any rights and/or remedies that the Lenders and/or the Administrative Agent may have under the Agreement and nothing contained herein shall obligate the Lenders to grant any future waiver of any provision of the Agreement. XL Capital shall pay all reasonable expenses incurred by the Administrative Agent, including the reasonable fees, charges and disbursements of Milbank, Tweed, Hadley & McCloy LLP, special New York counsel to JPMorgan Chase Bank, in connection with the preparation, negotiation, execution and delivery of this Amendment No. 2. This Amendment No. 2 may be executed in any number of counterparts, all of which taken together shall constitute one and the same amendatory instrument and any of the parties hereto may execute this Amendment No. 2 by signing any such counterpart. This Amendment No. 2 shall be governed by, and construed in accordance with, the law of the State of New York. AMENDMENT NO. 2 TO 364-DAY CREDIT AGREEMENT 5 IN WITNESS WHEREOF, the parties hereto have caused this Amendment No. 2 to be duly executed and delivered as of the day and year first above written. X.L. AMERICA, INC., as a Borrower and a Guarantor By: ------------------------------------------- Name: Title: XL INSURANCE (BERMUDA) LTD, as a Borrower and a Guarantor By: ------------------------------------------- Name: Christopher Coelho Title: SVP, Chief Financial Officer XL EUROPE LTD, as a Borrower and a Guarantor By: ------------------------------------------- Name: Title: XL RE LTD, as a Borrower and a Guarantor By: ------------------------------------------- Name: John W. Hume Title: EVP & Chief Financial Officer AMENDMENT NO. 2 TO 364-DAY CREDIT AGREEMENT 6 IN WITNESS WHEREOF, XL Capital has caused this Amendment No. 2 to be duly executed as a Deed by an authorized officer as of the day and year first above written. EXECUTED AS A DEED by XL CAPITAL LTD, as a Borrower and a Guarantor ---------------------------------------------- witness By: ------------------------------------------- Name: Brian M. O'Hara Title: President & CEO AMENDMENT NO. 2 TO 364-DAY CREDIT AGREEMENT 7 LENDERS JPMORGAN CHASE BANK Individually and as Administrative Agent By: ------------------------------------------- Name: Title: CITIBANK, N.A. By: ------------------------------------------- Name: Title: MELLON BANK, N.A. By: ------------------------------------------- Name: Title: BANK OF AMERICA, N.A. By: ------------------------------------------- Name: Title: AMENDMENT NO. 2 TO 364-DAY CREDIT AGREEMENT 8 BANK ONE, NA By: ------------------------------------------- Name: Title: By: ------------------------------------------- Name: Title: BARCLAYS BANK PLC By: ------------------------------------------- Name: Title: By: ------------------------------------------- Name: Title: By: ------------------------------------------- Name: Title: CREDIT LYONNAIS NEW YORK BRANCH By: ------------------------------------------- Name: Title: AMENDMENT NO. 2 TO 364-DAY CREDIT AGREEMENT 9 DEUTSCHE BANK AG New York and/or Cayman Islands Branches By: ------------------------------------------- Name: Title: DRESDNER BANK AG, NEW YORK AND GRAND CAYMAN BRANCHES By: ------------------------------------------- Name: Title: By: ------------------------------------------- Name: Title: FLEET NATIONAL BANK By: ------------------------------------------- Name: Title: AMENDMENT NO. 2 TO 364-DAY CREDIT AGREEMENT 10 LLOYDS TSB BANK PLC By: ------------------------------------------- Name: Title: By: ------------------------------------------- Name: Title: THE BANK OF BERMUDA LIMITED By: ------------------------------------------- Name: Title: By: ------------------------------------------- Name: Title: ABN AMRO BANK N.V., LONDON BRANCH By: ------------------------------------------- Name: Title: By: ------------------------------------------- Name: Title: AMENDMENT NO. 2 TO 364-DAY CREDIT AGREEMENT 11 BANCO SANTANDER CENTRAL HISPANO, S.A. By: ------------------------------------------- Name: Title: By: ------------------------------------------- Name: Title: COMERICA BANK By: ------------------------------------------- Name: Title: FIRST UNION NATIONAL BANK By: ------------------------------------------- Name: Title: NATIONAL WESTMINSTER BANK PLC By: ------------------------------------------- Name: Title: AMENDMENT NO. 2 TO 364-DAY CREDIT AGREEMENT 12 STATE STREET BANK AND TRUST COMPANY By: ------------------------------------------- Name: Title: AMENDMENT NO. 2 TO 364-DAY CREDIT AGREEMENT 13 EX-10.61 6 c24198_ex1061.txt AMENDMENT TO REIMBURSEMENT AGREEMENT Exhibit 10.61 EXECUTION COUNTERPART AMENDMENT NO. 2 TO LETTER OF CREDIT AND REIMBURSEMENT AGREEMENT AMENDMENT NO. 2, dated as of March 15, 2002, between XL CAPITAL LTD, a company incorporated under the laws of the Cayman Islands, British West Indies ("XL CAPITAL"), X.L. AMERICA, INC., a Delaware corporation ("XL AMERICA"), XL INSURANCE (BERMUDA) LTD (formerly XL Insurance Ltd), a Bermuda limited liability company ("XL Insurance"), XL EUROPE LTD, a company incorporated under the laws of Ireland ("XL EUROPE"), and XL RE LTD, a Bermuda limited liability company ("XL RE" and, together with XL Capital, XL America, XL Insurance and XL Europe, each an "ACCOUNT PARTY" and each a "GUARANTOR" and, collectively, the "ACCOUNT PARTIES" and the "GUARANTORS"; the "Account Parties" and the Guarantors being collectively referred to as the "OBLIGORS"), the Lenders party hereto and JPMORGAN CHASE BANK (formerly The Chase Manhattan Bank), as Administrative Agent for the Lenders (in such capacity, together with its successors in such capacity, the "ADMINISTRATIVE AGENT"). The Obligors, the Lenders and the Administrative Agent are parties to a Letter of Credit and Reimbursement Agreement dated as of June 29, 2001, as amended as of September 26, 2001 (the "AGREEMENT"), providing, subject to the terms and conditions thereof, for the issuance of letters of credit for the account of the Account Parties in an aggregate face amount not exceeding $1,000,000,000. The Obligors, the Lenders and the Administrative Agent wish to amend the Agreement in certain respects and, accordingly, the parties hereto hereby agree as follows: Section 1. DEFINITIONS. Except as otherwise defined in this Amendment No. 2, terms defined in the Agreement are used herein as defined therein. Section 2. AMENDMENTS. Effective as provided in Section 4 below, the Agreement is hereby amended as follows: 2.01. References in the Agreement (including references to the Agreement as amended hereby) to "this Agreement" (and indirect references such as "hereunder", "hereby", "herein" and "hereof") shall be deemed to be references to the Agreement as amended hereby. 2.02. Section 6.01 is hereby amended to read in its entirety as follows: "SECTION 6.01. FINANCIAL STATEMENTS AND OTHER INFORMATION. Each Account Party will furnish to the Administrative Agent and each Lender: (a) within 135 days after the end of each fiscal year of each Account Party AMENDMENT NO. 2 TO LETTER OF CREDIT AND REIMBURSEMENT AGREEMENT 1 except for XL America (but in the case of XL Capital, within 100 days after the end of each fiscal year of XL Capital), the audited consolidated balance sheet and related statements of operations, stockholders' equity and cash flows of such Account Party and its consolidated Subsidiaries as of the end of and for such year, setting forth in each case in comparative form the figures for the previous fiscal year (if such figures were already produced for such corresponding period or periods) (it being understood that delivery to the Lenders of XL Capital's Report on Form 10-K filed with the SEC shall satisfy the financial statement delivery requirements of this paragraph (a) to deliver the annual financial statements of XL Capital so long as the financial information required to be contained in such Report is substantially the same as the financial information required under this paragraph (a)), all reported on by independent public accountants of recognized national standing (without a "going concern" or like qualification or exception and without any qualification or exception as to the scope of such audit) to the effect that such consolidated financial statements present fairly in all material respects the financial condition and results of operations of such Account Party and its consolidated Subsidiaries on a consolidated basis in accordance with GAAP or (in the case of XL Europe, XL Insurance and XL Re) SAP, as the case may be, consistently applied; (b) by June 15 of each year, (i) an unaudited consolidating balance sheet and related statements of operations, stockholders' equity and cash flows of XL America and its consolidated Subsidiaries as of the end of and for such year, setting forth in each case in comparative form the figures for the previous fiscal year (if such figures were already produced for such corresponding period or periods), all certified by a Financial Officer of XL America as presenting fairly in all material respects the financial condition and results of operations of XL America and its consolidated Subsidiaries on a consolidated basis in accordance with GAAP consistently applied, subject to normal year-end audit adjustments and the absence of footnotes, and (ii) audited statutory financial statements for each insurance subsidiary of XL America reported on by independent public accountants of recognized national standing (without a "going concern" or like qualification or exception and without any qualification or exception as to the scope of such audit) to the effect that such audited consolidated financial statements present fairly in all material respects the financial condition and results of operations of such insurance subsidiaries in accordance with SAP, consistently applied; (c) within 60 days after the end of each of the first three fiscal quarters of each fiscal year of such Account Party, the consolidated balance sheet and related statements of operations, stockholders' equity and cash flows of such Account Party and its consolidated Subsidiaries as of the end of and for such fiscal quarter and the then elapsed portion of the fiscal year, setting forth in each case in comparative form the figures for (or, in the case of the balance sheet, as of the end of) the corresponding AMENDMENT NO. 2 TO LETTER OF CREDIT AND REIMBURSEMENT AGREEMENT 2 period or periods of the previous fiscal year (if such figures were already produced for such corresponding period or periods), all certified by a Financial Officer of such Account Party as presenting fairly in all material respects the financial condition and results of operations of such Account Party and its consolidated Subsidiaries on a consolidated basis in accordance with GAAP or (in the case of XL Europe, XL Insurance and XL Re) SAP, as the case may be, consistently applied, subject to normal year-end audit adjustments and the absence of footnotes (it being understood that delivery to the Lenders of XL Capital's Report on Form 10-Q filed with the SEC shall satisfy the financial statement delivery requirements of this paragraph (c) to deliver the quarterly financial statements of XL Capital so long as the financial information required to be contained in such Report is substantially the same as the financial information required under this paragraph (c)); (d) concurrently with any delivery of financial statements under clause (a), (b) or (c) of this Section, a certificate signed on behalf of each Account Party by a Financial Officer (i) certifying as to whether a Default has occurred and, if a Default has occurred, specifying the details thereof and any action taken or proposed to be taken with respect thereto, (ii) setting forth reasonably detailed calculations demonstrating compliance with Sections 7.03, 7.05, 7.06 and 7.07 and (iii) stating whether any change in GAAP or (in the case of XL Europe, XL Insurance, XL Re and any insurance subsidiary of XL America) SAP or in the application thereof has occurred since the date of the audited financial statements referred to in Section 4.04 and, if any such change has occurred, specifying the effect of such change on the financial statements accompanying such certificate; (e) concurrently with any delivery of financial statements under clauses (a) and (b)(ii) of this Section, a certificate of the accounting firm that reported on such financial statements stating whether they obtained knowledge during the course of their examination of such financial statements of any Default (which certificate may be limited to the extent required by accounting rules or guidelines); (f) promptly after the same become publicly available, copies of all periodic and other reports, proxy statements and other materials filed by such Account Party or any of its respective Subsidiaries with the SEC, or any Governmental Authority succeeding to any or all of the functions of said Commission, or with any U.S. or other securities exchange, or distributed by such Account Party to its shareholders generally, as the case may be; (g) concurrently with any delivery of financial statements under clause (a), (b) or (c) of this Section, a certificate of a Financial Officer of XL Capital, setting forth on a consolidated basis for XL Capital and its consolidated Subsidiaries as of the end of the fiscal year or quarter to which such certificate relates (i) the aggregate book value AMENDMENT NO. 2 TO LETTER OF CREDIT AND REIMBURSEMENT AGREEMENT 3 of assets which are subject to Liens permitted under Section 7.03(g) and the aggregate book value of liabilities which are subject to Liens permitted under Section 7.03(g)(it being understood that the reports required by paragraphs (a), (b) and (c) of this Section shall satisfy the requirement of this clause (i) of this paragraph (g) if such reports set forth separately, in accordance with GAAP, line items corresponding to such aggregate book values) and (ii) a calculation showing the portion of each of such aggregate amounts which portion is attributable to transactions among wholly-owned Subsidiaries of XL Capital; and (h) promptly following any request therefor, such other information regarding the operations, business affairs and financial condition of XL Capital or any of its Subsidiaries, or compliance with the terms of this Agreement, as the Administrative Agent or any Lender may reasonably request." 2.03. Schedule V is hereby deleted and replaced with Schedule V attached to this Amendment No. 2 and the reference to "as of the date hereof" in the first sentence of Section 4.13 is amended to read "as of September 30, 2001". Section 3. REPRESENTATIONS AND WARRANTIES. Each Account Party hereby represents and warrants to the Administrative Agent and the Lenders that (i) the representations and warranties set forth in Article IV of the Agreement are, on the date hereof, true and complete as if made on the date hereof (and after giving effect to this Amendment No. 2) and as if each reference in said Article IV to "this Agreement" includes reference to this Amendment No. 2 and (ii) both immediately prior to and as of the date hereof, no Default has occurred and is continuing. Section 4. CONDITIONS PRECEDENT. The amendments to the Agreement set forth in Section 2 above shall become effective, as of the date hereof, upon the satisfaction of the following conditions precedent: 4.01. EXECUTION BY ALL PARTIES. This Amendment No. 2 shall have been executed and delivered by each of the Obligors and the Required Lenders. 4.02. OTHER DOCUMENTS. Receipt by the Administrative Agent of such other documents as the Administrative Agent or special New York counsel to JPMorgan Chase Bank may reasonably request. Section 5. MISCELLANEOUS. Except as herein provided, the Agreement shall remain unchanged and in full force and effect. Nothing in this Amendment No. 2 shall constitute a waiver of any rights and/or remedies that the Lenders and/or the Administrative Agent may have under the Agreement and nothing contained herein shall obligate the Lenders to grant any future waiver of any provision of the Agreement. XL Capital shall pay all AMENDMENT NO. 2 TO LETTER OF CREDIT AND REIMBURSEMENT AGREEMENT 4 reasonable expenses incurred by the Administrative Agent, including the reasonable fees, charges and disbursements of Milbank, Tweed, Hadley & McCloy LLP, special New York counsel to JPMorgan Chase Bank, in connection with the preparation, negotiation, execution and delivery of this Amendment No. 2. This Amendment No. 2 may be executed in any number of counterparts, all of which taken together shall constitute one and the same amendatory instrument and any of the parties hereto may execute this Amendment No. 2 by signing any such counterpart. This Amendment No. 2 shall be governed by, and construed in accordance with, the law of the State of New York. AMENDMENT NO. 2 TO LETTER OF CREDIT AND REIMBURSEMENT AGREEMENT 5 IN WITNESS WHEREOF, the parties hereto have caused this Amendment No. 2 to be duly executed and delivered as of the day and year first above written. X.L. AMERICA, INC., as an Account Party and a Guarantor By: ------------------------------------------- Name: Title: XL INSURANCE (BERMUDA) LTD, as an Account Party and a Guarantor By: ------------------------------------------- Name: Title: XL EUROPE LTD, as an Account Party and a Guarantor By: ------------------------------------------- Name: Title: XL RE LTD, as an Account Party and a Guarantor By: ------------------------------------------ Name: John W. Hume Title: EVP & Chief Financial Officer AMENDMENT NO. 2 TO LETTER OF CREDIT AND REIMBURSEMENT AGREEMENT 6 IN WITNESS WHEREOF, XL Capital has caused this Amendment No. 2 to be duly executed as a Deed by an authorized officer as of the day and year first above written. EXECUTED AS A DEED by XL CAPITAL LTD, as an Account Party and a Guarantor ---------------------------------------------- witness By: ------------------------------------------- Name: Brian M. O'Hara Title: President & CEO AMENDMENT NO. 2 TO LETTER OF CREDIT AND REIMBURSEMENT AGREEMENT 7 LENDERS JPMORGAN CHASE BANK Individually and as Administrative Agent By: ------------------------------------------- Name: Title: CITIBANK, N.A. By: ------------------------------------------- Name: Title: MELLON BANK, N.A. By: ------------------------------------------- Name: Title: BANK OF AMERICA, N.A. By: ------------------------------------------- Name: Title: AMENDMENT NO. 2 TO LETTER OF CREDIT AND REIMBURSEMENT AGREEMENT 8 BANK ONE, NA By: ------------------------------------------- Name: Title: By: ------------------------------------------- Name: Title: BARCLAYS BANK PLC By: ------------------------------------------- Name: Title: By: ------------------------------------------- Name: Title: By: ------------------------------------------- Name: Title: CREDIT LYONNAIS NEW YORK BRANCH By: ------------------------------------------- Name: Title: DEUTSCHE BANK AG New York and/or Cayman Islands Branch By: ------------------------------------------- Name: Title: AMENDMENT NO. 2 TO LETTER OF CREDIT AND REIMBURSEMENT AGREEMENT 9 DRESDNER BANK AG, NEW YORK AND GRAND CAYMAN BRANCHES By: ------------------------------------------- Name: Title: FLEET NATIONAL BANK By: ------------------------------------------- Name: Title: LLOYDS TSB BANK PLC By: ------------------------------------------- Name: Title: By: ------------------------------------------- Name: Title: ABN AMRO BANK N.V., LONDON BRANCH By: ------------------------------------------- Name: Title: By: ------------------------------------------- Name: Title: AMENDMENT NO. 2 TO LETTER OF CREDIT AND REIMBURSEMENT AGREEMENT 10 BANCO SANTANDER CENTRAL HISPANO, S.A. By: ------------------------------------------- Name: Title: By: ------------------------------------------- Name: Title: COMERICA BANK By: ------------------------------------------- Name: Title: FIRST UNION NATIONAL BANK By: ------------------------------------------- Name: Title: NATIONAL WESTMINSTER BANK PLC By: ------------------------------------------- Name: Title: STATE STREET BANK AND TRUST COMPANY By: ------------------------------------------- Name: Title: AMENDMENT NO. 2 TO LETTER OF CREDIT AND REIMBURSEMENT AGREEMENT 11 ING BANK N.V., LONDON BRANCH By: ------------------------------------------- Name: Title: AMENDMENT NO. 2 TO LETTER OF CREDIT AND REIMBURSEMENT AGREEMENT 12 EX-10.62 7 c24198_ex1062.txt AMENDMENT NO. 1 AMENDMENT NO. 1 TO LETTER OF CREDIT FACILITY AND REIMBURSEMENT AGREEMENT AMENDMENT NO. 1 dated as of March 21, 2002 between XL CAPITAL LTD, a company incorporated under the laws of the Cayman Islands, British West Indies ("THE ACCOUNT PARTY"), X.L. AMERICA, INC., a Delaware corporation ("XL AMERICA"), XL INSURANCE (BERMUDA) LTD, a Bermuda limited liability company ("XL INSURANCE"), XL EUROPE LTD, a company incorporated under the laws of Ireland ("XL EUROPE"), and XL RE LTD, a Bermuda limited liability company ("XL RE" and, together with the Account Party in its capacity as a Guarantor, XL America, XL Insurance and XL Europe, each a "GUARANTOR" and, collectively, the "GUARANTORS"; the Guarantors and the Account Party being collectively referred to as the "OBLIGORS"), and CITIBANK INTERNATIONAL PLC, as agent and trustee for the Lenders, the "AGENT" and "SECURITY TRUSTEE". The Obligors, the Lenders, the Agent and Salomon Brothers International Limited as Arranger are parties to a Letter of Credit Facility and Reimbursement Agreement dated November 20, 2001 (the "Agreement"), providing, subject to the terms and conditions thereof, for the issuance of letters of credit for the account of the Account Party in an aggregate face amount not exceeding (pound)324,000,000. The Obligors and the Agent wish to amend the Agreement in certain respects and accordingly the parties hereto hereby agree as follows: Clause 1. DEFINITIONS. Except as otherwise defined in this Amendment No. 1, terms defined in the Agreement are used herein as defined therein. Clause 2. AMENDMENTS. Effective as provided in Clause 4 below, the Agreement is hereby amended as follows: 2.01. References in the Agreement (including references to the Agreement as amended hereby) to "this Agreement" (and indirect references such as "hereunder", "hereby", "herein" and "hereof") shall be deemed to be references to the Agreement as amended hereby. 2.02. Clause 18.1 is hereby amended to read in its entirety as follows: "18.1. Each Obligor will furnish to the Agent and each Lender: (a) within 135 days after the end of each fiscal year of each Obligor except for XL America (but in the case of the Account Party, within 100 days after the end of each fiscal year of the Account Party), the audited consolidated balance sheet and related statements of operations, stockholders' equity and cash flows of such Obligor and its consolidated Subsidiaries as of the end of and for such year, setting forth in each case in comparative form the figures for the previous fis- AMENDMENT NO. 1 TO LETTER OF CREDIT AND REIMBURSEMENT AGREEMENT -2- cal year (if such figures were already produced for such corresponding period or periods) (it being understood that delivery to the Lenders of the Account Party's Report on Form 10-K filed with the SEC shall satisfy the financial statement delivery requirements of this paragraph (a) to deliver the annual financial statements of the Account Party so long as the financial information required to be contained in such Report is substantially the same as the financial information required under this paragraph (a)), all reported on by independent public accountants of recognized national standing (without a GOING CONCERN or like qualification or exception and without any qualification or exception as to the scope of such audit) to the effect that such consolidated financial statements present fairly in all material respects the financial condition and results of operations of such Obligor and its consolidated Subsidiaries on a consolidated basis in accordance with GAAP or (in the case of XL Europe, XL Insurance and XL Re) SAP, as the case may be, consistently applied; (b) by June 15 of each year, (i) an unaudited consolidating balance sheet and related statements of operations, stockholders' equity and cash flows of XL America and its consolidated Subsidiaries as of the end of and for such year, setting forth in each case in comparative form the figures for the previous fiscal year (if such figures were already produced for such corresponding period or periods), and (ii) audited statutory financial statements for each insurance subsidiary of XL America reported on by independent public accountants of recognized national standing (without a GOING CONCERN or like qualification or exception and without any qualification or exception as to the scope of such audit) to the effect that such audited consolidated financial statements present fairly in all material respects the financial condition and results of operations of such insurance subsidiaries in accordance with SAP, consistently applied; (c) within 60 days after the end of each of the first three fiscal quarters of each fiscal year of such Obligor, the consolidated balance sheet and related statements of operations, stockholders' equity and cash flows of such Obligor and its consolidated Subsidiaries as of the end of and for such fiscal quarter and the then elapsed portion of the fiscal year, setting forth in each case in comparative form the figures for (or, in the case of the balance sheet, as of the end of) the corresponding period or periods of the previous fiscal year (if such figures were already produced for such corresponding period or periods), all certified by a Financial Officer of such Obligor as presenting fairly in all material respects the financial condition and results of operations of such Obligor and its consolidated Subsidiaries on a consolidated basis in accordance with GAAP or (in the case of XL Europe, XL Insurance and XL Re) SAP, as the case may be, consistently applied, subject to normal year-end audit adjustments and the absence of footnotes (it being understood that delivery to the Lenders of the Account Party's Report on Form 10-Q filed with the SEC shall satisfy the financial statement delivery requirements of this paragraph (c) to deliver the quarterly financial statements of the Account Party so long as the financial information required to be contained in such Report is substantially the same as the financial information required under this paragraph (c)); AMENDMENT NO. 1 TO LETTER OF CREDIT AND REIMBURSEMENT AGREEMENT -3- (d) concurrently with any delivery of financial statements under Clause 18.1 (a), (b) or (c), a certificate signed on behalf of each Obligor by a Financial Officer (i) certifying as to whether a Default has occurred and, if a Default has occurred, specifying the details thereof and any action taken or proposed to be taken with respect thereto, (ii) setting forth reasonably detailed calculations demonstrating compliance with Clauses 19.3 (LIENS), 19.5 (RATIO OF TOTAL FUNDED DEBT TO TOTAL CAPITALIZATION), 19.6 (CONSOLIDATED NET WORTH) and 19.7 (INDEBTEDNESS) and (iii) stating whether any change in GAAP or (in the case of XL Europe, XL Insurance and XL Re) SAP or in the application thereof has occurred since the date of the audited financial statements referred to in Clause 17.5 (a) and, if any such change has occurred, specifying the effect of such change on the financial statements accompanying such certificate; (e) concurrently with any delivery of financial statements under Clause 18.1 (a), a certificate of the accounting firm that reported on such financial statements stating whether they obtained knowledge during the course of their examination of such financial statements of any Default (which certificate may be limited to the extent required by accounting rules or guidelines); (f) promptly after the same become publicly available, copies of all periodic and other reports, proxy statements and other materials filed by such Obligor or any of its respective Subsidiaries with the SEC, or any Governmental Authority succeeding to any or all of the functions of said Commission, or with any U.S. or other securities exchange, or distributed by such Obligor to its shareholders generally, as the case may be; (g) concurrently with any delivery of financial statements under Clause 18.1 (a), (b) or (c), a certificate of a Financial Officer of the Account Party, setting forth on a consolidated basis for the Account Party and its consolidated Subsidiaries as of the end of the fiscal year or quarter to which such certificate relates (i) the aggregate book value of assets which are subject to Liens permitted under Clause 19.3(g) (LIENS) and the aggregate book value of liabilities which are subject to Liens permitted under Clause 19.3(g)(it being understood that the reports required by paragraphs (a), (b) and (c) of this Clause shall satisfy the requirement of this clause (i) of this Clause 18.1(g) if such reports set forth separately, in accordance with GAAP, line items corresponding to such aggregate book values) and (ii) a calculation showing the portion of each of such aggregate amounts which portion is attributable to transactions among wholly-owned Subsidiaries of the Account Party; and (h) promptly following any request therefor, such other information regarding the operations, business affairs and financial condition of the Account Party or any of its Subsidiaries, or compliance with the terms of this Agreement, as the Agent or any Lender may reasonably request." Clause 3. REPRESENTATIONS AND WARRANTIES. Each Obligor hereby represents and warrants to the Agent and the Lenders that (i) the representations and warranties set forth in Clause 17 of the Agreement are, on the date hereof, true and complete as if made on the date hereof (and after AMENDMENT NO. 1 TO LETTER OF CREDIT AND REIMBURSEMENT AGREEMENT -4- giving effect to this Amendment No. 1) and as if each reference in said Clause 17 to "this Agreement" includes reference to this Amendment No. 1 and (ii) both immediately prior to and as of the date hereof, no Default has occurred and is continuing. Clause 4. CONDITIONS PRECEDENT. The amendments to the Agreement set forth in Clause 2 above shall become effective, as of the date hereof, upon the satisfaction of the following conditions precedent: 4.01. EXECUTION BY ALL PARTIES. This Amendment No. 1 shall have been executed and delivered by each of the Obligors and the Agent in accordance with Clause 23.3 of the Agreement. Clause 5. MISCELLANEOUS. Except as herein provided, the Agreement shall remain unchanged and in full force and effect. Nothing in this Amendment No. 1 shall constitute a waiver of any rights and/or remedies that the Lenders and/or the Agent may have under the Agreement and nothing contained herein shall obligate the Lenders to grant any future waiver of any provision of the Agreement. The Account Party shall pay all reasonable expenses incurred by the Agent, including the reasonable fees, charges and disbursements of Freshfields, Bruckhaus Deringer, special English counsel to the Agent, in connection with the preparation, negotiation, execution and delivery of this Amendment No. 1. This Amendment No. 1 may be executed in any number of counterparts, all of which taken together shall constitute one and the same amendatory instrument and any of the parties hereto may execute this Amendment No. 1 by signing any such counterpart. This Amendment No. 1 shall be governed by, and construed in accordance with, the laws of England and Wales. Clause 29.2 (JURISDICTION) and Clause 31 (THIRD PARTY RIGHTS) of the Agreement shall be deemed incorporated in this Amendment No. 1 (with such conforming changes as the context requires) as if set out herein. AMENDMENT NO. 1 TO LETTER OF CREDIT AND REIMBURSEMENT AGREEMENT -5- IN WITNESS WHEREOF, the parties hereto have caused this Amendment No. 1 to be duly executed and delivered as of the day and year first above written. ACCOUNT PARTY EXECUTED as a DEED by XL CAPITAL LTD By: JERRY DE ST. PAER In the presence of: PAMELA PAYNTER GUARANTORS EXECUTED as a DEED by XL CAPITAL LTD By: JERRY DE ST. PAER In the presence of: PAMELA PAYNTER SIGNED for and on behalf of X.L. AMERICA, INC. By: NICHOLAS M. BROWN, JR Title: PRESIDENT AND CEO SIGNED for and on behalf of XL INSURANCE (BERMUDA) LTD By: CRISTOPHER COELHO Title: SVP, CHIEF FINANCIAL OFFICER AMENDMENT NO. 1 TO LETTER OF CREDIT AND REIMBURSEMENT AGREEMENT -6- SIGNED for and on behalf of XL EUROPE LTD By: FIONA MULDOON Title: CFO AND COMPANY SECRETARY SIGNED for and on behalf of XL RE LTD By: HENRY KEELING Title: PRESIDENT AND CEO AGENT SIGNED for and on behalf of CITIBANK INTERNATIONAL PLC By: PAUL GIBBS Address: 335 STRAND LONDON WC2R 1LS Fax: +44 207 500 4482/4484 Tel: +44 207 500 4712 Attention: SONIA GOSPARINI, LOANS AGENCY AMENDMENT NO. 1 TO LETTER OF CREDIT AND REIMBURSEMENT AGREEMENT -7- SECURITY TRUSTEE SIGNED for and on behalf of CITIBANK INTERNATIONAL PLC By: PAUL GIBBS Address: 335 STRAND LONDON WC2R 1LS Fax: +44 207 500 4482/4484 Tel: +44 207 500 4712 Attention: SONIA GOSPARINI, LOANS AGENCY AMENDMENT NO. 1 TO LETTER OF CREDIT AND REIMBURSEMENT AGREEMENT EX-99.7 8 c24198_ex997.txt FINANCIAL STATEMENTS (UNAUDITED) XL CAPITAL ASSURANCE INC. CONDENSED FINANCIAL STATEMENTS (UNAUDITED) FOR THE THREE MONTH PERIODS ENDED MARCH 31, 2002 AND 2001 XL CAPITAL ASSURANCE INC. BALANCE SHEETS MARCH 31, 2002 AND DECEMBER 31, 2001 (U.S. DOLLARS IN THOUSANDS)
(UNAUDITED) - ------------------------------------------------------------------------------------------- AS OF AS OF MARCH 31, DECEMBER 31, 2002 2001 ----------- ------------ ASSETS Investments: Fixed maturities available for sale, at fair value (amortized cost: 2002 - $91,499; 2001 - $76,940) $ 92,295 $ 78,586 Short-term investments, at fair value, which approximates cost 12,971 38,681 --------- --------- TOTAL INVESTMENTS 105,266 117,267 --------- --------- Cash and cash equivalents 20,029 39,204 Premiums receivable 1,452 1,070 Accrued investment income 950 897 Reinsurance balances recoverable on unpaid losses 3,321 1,786 Deferred acquisition costs, net (1,321) (1,118) Prepaid reinsurance premium 50,149 41,727 Current Federal income tax recoverable 1,651 1,651 Deferred Federal income tax asset 5,026 3,495 Intangible assets - acquired licenses 11,529 11,529 Other assets 528 922 --------- --------- TOTAL ASSETS $ 198,580 $ 218,430 --------- --------- LIABILITIES AND SHAREHOLDER'S EQUITY Liabilities: Deferred premium revenue $ 54,616 $ 44,933 Unpaid losses and loss adjustment expenses 3,552 1,846 Reinsurance premiums payable 9,277 17,648 Payable for securities purchased -- 12,974 Accounts payable and accrued expenses 4,380 3,767 Intercompany payable to affiliates 3,878 11,309 --------- --------- TOTAL LIABILITIES 75,703 92,477 --------- --------- Shareholder's Equity: Common stock (par value $7,500 for March 31, 2002 and December 31, 2001, 2,000 shares authorized, issued and outstanding for March 31, 2002 and December 31, 2001) 15,000 15,000 Additional paid-in capital 119,154 119,154 Accumulated other comprehensive income (Net of deferred Federal income taxes of: 2002 - $298; 2001 - $592) 498 1,054 Accumulated deficit (11,775) (9,255) --------- --------- TOTAL SHAREHOLDER'S EQUITY 122,877 125,953 --------- --------- TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY $ 198,580 $ 218,430 --------- ---------
See notes to condensed financial statements. XL CAPITAL ASSURANCE INC. STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME FOR THE THREE MONTH PERIODS ENDED MARCH 31, 2002 AND 2001 (U.S. DOLLARS IN THOUSANDS)
(UNAUDITED) - ------------------------------------------------------------------------------------------ MARCH 31, MARCH 31, 2002 2001 -------- ----------- REVENUES Gross premiums written $ 16,515 $ 1,625 Ceded premiums written (14,568) (1,495) -------- -------- Net premiums written 1,947 130 Change in net deferred premium revenue (1,261) (120) -------- -------- Net premiums earned (Net of ceded earned premium of 686 10 $6,146 in 2002 and $415 in 2001) Net investment income 1,599 941 Net realized capital gains 236 446 -------- -------- Total revenues 2,521 1,397 -------- -------- EXPENSES Losses and loss adjustment expenses (Net of ceded losses and loss adjustment expenses of $1,536 in 2002 and $104 in 2001) 172 3 Operating expenses 6,106 6,382 -------- -------- Total expenses 6,278 6,385 -------- -------- Loss before Federal income tax benefit (3,757) (4,988) -------- -------- Deferred Federal income tax benefit (1,237) (1,544) -------- -------- NET LOSS (2,520) (3,444) -------- -------- Other comprehensive (loss) income (556) 122 -------- -------- $ (3,076) $ (3,322) COMPREHENSIVE LOSS -- -- -------- --------
See notes to condensed financial statements. XL CAPITAL ASSURANCE INC. STATEMENTS OF CHANGES IN SHAREHOLDER'S EQUITY FOR THE THREE MONTH PERIOD ENDED MARCH 31, 2002 AND THE YEAR ENDED DECEMBER 31, 2001 (U.S. DOLLARS IN THOUSANDS)
(UNAUDITED) - ---------------------------------------------------------------------------------------------------- MARCH 31, DECEMBER 31, 2002 2001 ----------- ------------ COMMON SHARES Number of shares, beginning of year 2,000 2,500 Shell acquisition - retirement of XL Capital Assurance Inc. shares -- (2,500) Shell acquisition - issue new XL Capital Assurance Inc. shares -- 2,000 --------- --------- Number of shares, end of period 2,000 2,000 --------- --------- COMMON STOCK $ 15,000 $ 15,000 Balance - beginning of year -- -- Balance-end of period 15,000 15,000 --------- --------- ADDITIONAL PAID-IN CAPITAL Balance - beginning of year 119,154 70,000 Contribution of The London Assurance of America Inc. -- 24,154 Capital contribution -- 25,000 --------- --------- Balance-end of period 119,154 119,154 --------- --------- ACCUMULATED OTHER COMPREHENSIVE INCOME Balance - beginning of year 1,054 951 Net change in unrealized (depreciation) appreciation of investments, net of deferred Federal tax benefit of $294 in 2002 and expense of $80 in 2001 (556) 103 --------- --------- Balance-end of period 498 1,054 --------- --------- ACCUMULATED DEFICIT Balance - beginning of year (9,255) (3,067) Net loss (2,520) (6,188) --------- --------- Balance-end of period (11,775) (9,255) --------- --------- TOTAL SHAREHOLDER'S EQUITY $ 122,877 $ 125,953 --------- ---------
See notes to condensed financial statements. XL CAPITAL ASSURANCE INC. STATEMENTS OF CASH FLOWS FOR THE THREE MONTH PERIODS ENDED MARCH 31, 2002 AND 2001 (U.S. DOLLARS IN THOUSANDS)
(UNAUDITED) - --------------------------------------------------------------------------------------------------- MARCH 31, MARCH 31, 2002 2001 CASH PROVIDED BY OPERATING ACTIVITIES: Net loss $ (2,520) $ (3,444) -------- -------- Adjustments to reconcile net loss to net cash used in operating activities Net realized gains on sale of investments (236) (446) Amortization of premium on bonds 43 31 Amortization of fair value of acquired licenses -- 23 Increase in unpaid losses and loss adjustment expenses, net 172 3 Increase in deferred premium revenue, net 1,261 120 Decrease in deferred acquisition costs 203 -- (Decrease) increase in reinsurance premiums payable (8,371) 963 Increase in premiums receivable (382) (148) (Increase) decrease in accrued investment income (53) 128 Increase in deferred Federal income tax asset (1,237) (1,689) Increase in accounts payable and accrued expenses 613 815 Decrease in intercompany payable to affiliates (7,431) (1,604) Other 495 (98) -------- -------- Total adjustments (14,923) (1,902) -------- -------- Net cash used in operating activities (17,443) (5,346) -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sale of fixed maturities and short term investments 5,386 9,652 Proceeds from maturity of fixed maturities and short term investments 75,449 34,273 Purchase of fixed maturities and short term investments (69,593) (30,080) Payable for securities purchased (12,974) -- -------- -------- Net cash (used in) provided by investing activities (1,732) 13,845 -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Cash of contributed company -- 11,279 -------- -------- Net cash provided by financing activities -- 11,279 -------- -------- (Decrease) increase in cash and cash equivalents (19,175) 19,778 Cash and cash equivalents-beginning of year 39,204 5,004 -------- -------- Cash and cash equivalents-end of period $ 20,029 $ 24,782 -------- -------- Taxes paid $ -- $ 143 -------- --------
See notes to condensed financial statements. XL CAPITAL ASSURANCE INC.. NOTES TO CONDENSED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31, 2002 AND 2001 1. ORGANIZATION AND OWNERSHIP XL Capital Assurance Inc. (the Company) is a wholly owned subsidiary of XL Reinsurance Company of America Inc. ("XL RE AM"), formerly known as NAC Reinsurance Corporation, which is an indirect wholly owned subsidiary of XL America Inc. ("XLA"). XLA is an indirect wholly owned subsidiary of XL Insurance (Bermuda) Ltd. ("XL Insurance"). XL Insurance is an indirect wholly owned subsidiary of XL Capital Ltd. ("XL Capital"), a financial service holding company registered in the Cayman Islands. XLA is XL Capital's U.S. holding company. XL Capital Assurance Inc. is an insurance company domiciled in the State of New York. The Company is engaged in the business of providing credit enhancements primarily through the sale of financial guaranty insurance contracts on asset-backed structured finance, essential infrastructure project finance, future flows and public finance transactions. The Company issued its first insurance contract in December 2000. 2. BASIS OF PRESENTATION The accompanying condensed financial statements have been prepared by the Company and are unaudited. In the opinion of management, all adjustments, which include normal recurring adjustments necessary to present fairly the financial position, results of operations and cash flows at March 31, 2002 and for all periods presented, have been made. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. These statements should be read in conjunction with the Company's December 31, 2001 financial statements and notes thereto. The accompanying condensed balance sheet as of December 31, 2001 was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America. The results of operations for the periods ended March 31, 2002 and 2001 are not necessarily indicative of the operating results for the full year. 3. CREDIT DEFAULT SWAPS The Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standard (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activity", in June 1998. SFAS No. 133 establishes accounting and reporting standards for derivative instruments embedded in other contracts (collectively referred to as derivatives), and for hedging activity. It requires that an entity recognize all derivatives as either other assets or other liabilities in the balance sheet and measure those instruments at fair value. The Company adopted SFAS No. 133, as amended, as of January 1, 2001. Credit Default Swaps meet the definition of a derivative under FAS 133. The Company has recorded these products at management's estimate of fair value. Credit Default Swaps are considered, in substance, financial guaranty contracts as the Company has the intent to hold them to maturity. Therefore, the change in fair value is split between premiums, losses and loss adjustment expenses, and adjustments to fair value, which are reported in "net realized gains/(losses)". The level of fair value adjustments is dependent upon a number of factors including changes in interest rates, credit spreads and other market factors. The fair value adjustment for the period ended March 31, 2002 was a gain of $186,000, which was recorded as follows: XL CAPITAL ASSURANCE INC.. NOTES TO CONDENSED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31, 2002 AND 2001 (CONTINUED) (Dollars in thousands-Unaudited) Earned premiums (net of ceded premiums of $1,873) $ 113 Losses and loss adjustment expenses (net of ceded losses of $468) (28) Change in fair value of credit derivatives 101 ------- Total fair value adjustment $ 186 ======= 4. NEW ACCOUNTING PRONOUNCEMENTS In June 2001, the FASB issued SFAS No. 141, "Business Combinations", which states that all business combinations are to be accounted for using one method - the purchase method. It requires that business combinations be accounted for the same way as asset acquisitions are accounted for, based on values exchanged. The adoption of SFAS No. 141 on July 1, 2001 had no impact on the Company's financial position or results of operations. The merger with The London Assurance of America, Inc. on February 22, 2001 had previously been accounted for using the purchase method of accounting. In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible Assets", which changes the accounting for goodwill and other intangible assets in business combinations from an amortization approach to an impairment-only approach. The adoption of SFAS No. 142 on January 1, 2002 resulted in the Company's discontinuation of amortization of its intangible asset. The Company tested its intangible asset for impairment under the new standard and determined that no adjustment to recorded balances was necessary. Amortization expense for the year ended December 31, 2001 was $244,000. 5. SPECIAL PURPOSE VEHICLES The Company utilizes special purpose vehicles to a limited extent both directly and indirectly in the normal course of the Company's business. The Company provides financial guaranty insurance of structured transactions backed by pools of assets of specified types, municipal obligations supported by the issuers' ability to charge fees for specified services or projects, and corporate risk obligations including essential infrastructure projects and obligations backed by receivables from future sales of commodities and other specified services. The obligations related to these transactions are often securitized through off-balance sheet vehicles. In synthetic transactions, the Company guarantees payment obligations of counterparties, including special purpose vehicles, through credit default swaps referencing asset portfolios. The Company only provides financial guaranty insurance of these vehicles for fixed premiums at market rates but does not hold any equity positions or subordinated debt in these off-balance sheet arrangements. Accordingly, these vehicles are not consolidated. The FASB is in the process of adopting a new accounting pronouncement as it relates to consolidation of special purpose vehicles. The FASB expects a proposal to be available in the second quarter, 2002. A finalized pronouncement containing accounting guidance and implementation dates is expected in the third quarter, 2002. XL CAPITAL ASSURANCE INC.. NOTES TO CONDENSED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31, 2002 AND 2001 (CONTINUED) 6. TAX SHARING AGREEMENT The Company's Federal income tax return is consolidated with XLA and its subsidiaries. Under a tax sharing agreement with XLA, tax charges and refunds to the Company are based on a separate return basis. At March 31, 2002 and December 31, 2001 the Company had a current Federal income tax receivable of $1,651,000 from XLA. At March 31, 2002 and December 31, 2001 the Company had a deferred Federal income tax asset of $5,026,000 and $3,495,000, respectively. The Company believes that a valuation allowance is unnecessary in connection with the deferred tax asset. 7. FACULTATIVE QUOTA SHARE REINSURANCE TREATY On October 6, 1999 the Company entered into a Facultative Quota Share Reinsurance Treaty ("Treaty") with XL Financial Assurance Ltd. ("XLFA"), a Bermuda financial guaranty insurer, which is 86.8% owned by XL Insurance Ltd. The remaining 13.2% is owned by Financial Security Assurance Holdings Ltd., an unrelated company. The Treaty was amended and restated on June 22, 2001. Under the terms of this agreement, XLFA agrees to reinsure up to 90% of the Company's acceptable risks. The Company is allowed a 30% ceding commission on premiums written ceded under the terms of this agreement. EX-99.8 9 c24198_ex998.txt FINANCIAL STATEMENTS XL FINANCIAL ASSURANCE LTD. (Incorporated in Bermuda) Condensed Financial Statements (Unaudited) FOR THE THREE MONTH PERIODS ENDED MARCH 31, 2002 AND 2001 (expressed in U.S. dollars) XL FINANCIAL ASSURANCE LTD. Balance Sheet (Unaudited) AS AT MARCH 31, 2002 AND DECEMBER 31, 2001 AND 2000 - -------------------------------------------------------------------------------- (expressed in U.S. dollars)
2002 2001 $ $ ---------------------------------------- ASSETS: Investments : Fixed maturities, at fair value (amortized cost: 2002 - $431,802,493; 2001 - $418,904,214) 428,769,725 420,914,072 Short-term investments, at fair value (amortized cost: 2002 - $19,265,859; 2001 - $18,780,468) 19,258,828 18,768,561 ---------------------------------------- Total investments available for sale 448,028,553 439,682,633 Cash and cash equivalents 64,643,346 50,242,839 Accrued investment income 3,343,171 3,088,280 Reinsurance balances receivable 10,212,331 22,170,762 Deferred acquisition costs 16,432,776 15,184,237 Prepaid reinsurance premiums 13,822,201 10,965,592 Unpaid losses & loss expenses recoverable 1,160,099 593,725 Amounts due from parent and affiliates 9,482,050 1,523,216 Other assets 107,427 87,275 ---------------------------------------- TOTAL ASSETS 567,231,954 543,538,559 ---------------------------------------- LIABILITIES, REDEEMABLE PREFERRED SHARES AND SHAREHOLDERS' EQUITY LIABILITIES: Accounts payable and accrued liabilities 1,377,146 1,767,661 Derivative liabilities 11,415,962 17,939,200 Deferred premium revenue 91,573,655 83,755,805 Unpaid losses and loss expenses 14,884,551 11,831,159 Reinsurance premiums payable 2,818,916 4,863,196 Net payable for investments purchased 132,794,690 122,314,835 Dividend payable on preferred shares 2,412,542 1,931,720 ---------------------------------------- TOTAL LIABILITIES 257,277,462 244,403,576 ---------------------------------------- REDEEMABLE PREFERRED SHARES: Redeemable preferred shares (par value of $120 per share; 10,000 shares authorized; 363 issued and outstanding as at March 31, 2002 and December 31, 2001, respectively) 43,560 43,560 Additional paid-in capital 38,956,440 38,956,440 ---------------------------------------- TOTAL REDEEMABLE PREFERRED SHARES 39,000,000 39,000,000 ---------------------------------------- SHAREHOLDERS' EQUITY: Common shares (par value of $120 per share; 10,000 shares authorized; 2,057 issued and outstanding as at March 31, 2002 and December 31, 2001, respectively) 246,840 246,840 Additional paid-in capital 220,653,160 220,653,160 Accumulated other comprehensive (loss) income (3,039,799) 1,997,951 Retained earnings 53,094,291 37,237,032 ---------------------------------------- TOTAL SHAREHOLDERS' EQUITY 270,954,492 260,134,983 ---------------------------------------- TOTAL LIABILITIES, REDEEMABLE PREFERRED SHARES AND SHAREHOLDERS' EQUITY 567,231,954 543,538,559 ---------------------------------------- The accompanying notes are an integral part of these condensed financial statements.
XL FINANCIAL ASSURANCE LTD. Statement of Income and Comprehensive Income (Unaudited) FOR THE THREE MONTHS ENDED MARCH 31, 2002 AND 2001 - -------------------------------------------------------------------------------- (expressed in U.S. dollars)
2002 2001 $ $ -------------------------------------- REVENUES : Net premiums earned 9,879,673 5,557,230 Net investment income 4,656,352 4,785,643 Net realized gains on investments 1,796,590 5,366,301 Net realized and unrealized gains (losses) on derivative instruments 6,523,238 (354,520) -------------------------------------- Total revenues 22,855,853 15,354,654 -------------------------------------- EXPENSES : Losses and loss expenses 2,487,018 219,151 Acquisition costs 2,269,227 722,452 Operating expenses 1,761,527 1,143,154 -------------------------------------- Total expenses 6,517,772 2,084,757 -------------------------------------- Net income before cumulative effect of accounting change 16,338,081 13,269,897 Cumulative effect of accounting change - (1,349,998) -------------------------------------- Net income before dividends on preferred shares 16,338,081 11,919,899 Dividends on preferred shares (480,822) (480,822) -------------------------------------- NET INCOME FOR COMMON SHAREHOLDERS 15,857,259 11,439,077 -------------------------------------- COMPREHENSIVE INCOME Net income for common shareholders 15,857,259 11,439,077 Unrealized gains (losses) (3,241,160) 4,382,826 Less: reclassification for gains realized in income 1,796,590 5,366,301 -------------------------------------- Change in net unrealized depreciation of investments (5,037,750) (983,475) -------------------------------------- COMPREHENSIVE INCOME 10,819,509 10,455,602 -------------------------------------- The accompanying notes are an integral part of these condensed financial statements.
XL FINANCIAL ASSURANCE LTD. Statements of Changes in Shareholders' Equity (Unaudited) FOR THE PERIOD ENDED MARCH 31, 2002 AND FOR THE YEAR ENDED DECEMBER 31, 2001 - -------------------------------------------------------------------------------- (expressed in U.S. dollars)
ADDITIONAL PAID-IN CAPITAL - ACCUMULATED OTHER COMMON COMMON COMPREHENSIVE RETAINED SHARES SHAREHOLDERS INCOME (LOSS) EARNINGS TOTAL $ $ $ $ $ ------------------------------------------------------------------------------------------- BALANCE, JANUARY 1, 2001 246,840 220,653,160 3,931,665 17,603,489 242,435,154 Net income for common 19,633,543 19,633,543 shareholders for the year Other comprehensive loss (1,933,714) (1,933,714) ------------------------------------------------------------------------------------------- BALANCE, DECEMBER 31, 2001 246,840 220,653,160 1,997,951 37,237,032 260,134,983 Net income for common 15,857,259 15,857,259 shareholders for the period Other comprehensive loss (5,037,750) (5,037,750) ------------------------------------------------------------------------------------------- BALANCE, MARCH 31, 2002 246,840 220,653,160 (3,039,799) 53,094,291 270,954,492 ------------------------------------------------------------------------------------------- The accompanying notes are an integral part of these condensed financial statements.
XL FINANCIAL ASSURANCE LTD. Statements of Cash Flows (Unaudited) FOR THE THREE MONTH PERIODS ENDED MARCH 31, 2002 AND 2001 - -------------------------------------------------------------------------------- (expressed in U.S. dollars)
2002 2001 $ $ ----------------------------------- CASH FLOWS PROVIDED BY OPERATING ACTIVITIES: Net income for the period 16,338,081 13,269,897 Adjustments to reconcile net income to net cash provided by operating activities Realized (gains) losses on investments (1,796,590) (5,366,301) Net realized and unrealized losses (gains) on derivative instruments (6,523,238) 354,520 Amortization of discount on fixed maturities (319,429) (231,174) Accrued investment income (254,891) 740,584 Reinsurance premiums receivable 11,958,431 (8,172,979) Deferred acquisition costs (1,248,539) (997,858) Prepaid reinsurance premiums (2,856,609) 127,500 Unpaid losses & loss expenses recoverable (566,374) - Amounts due from parent and affiliates - 12,944 Accounts payable and accrued liabilities (390,515) 172,538 Reinsurance premiums payable (2,044,280) (125,000) Deferred premium revenue 7,817,850 5,238,145 Unpaid losses and loss expenses 3,053,392 219,151 Other assets and liabilities (20,152) 2,245 ----------------------------------- Total adjustments 6,809,056 (8,025,685) ----------------------------------- Net cash provided by operating activities 23,147,137 5,244,212 ----------------------------------- CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES : Proceeds from sale of fixed maturities and short-term investments 568,669,424 606,071,404 Proceeds from redemption of fixed maturities and short-term 15,511,517 3,155,506 investments Purchase of fixed maturities and short-term investments (584,968,737) (604,443,559) ----------------------------------- Net cash provided by (used in) investing activities (787,796) 4,783,351 ----------------------------------- CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES Amounts due from parent and affiliates (7,958,834) - ----------------------------------- Net cash provided by (used in) financing activities (7,958,834) - ----------------------------------- INCREASE IN CASH AND CASH EQUIVALENTS 14,400,507 10,027,563 CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD 50,242,839 17,154,237 ----------------------------------- CASH AND CASH EQUIVALENTS - END OF PERIOD 64,643,346 27,181,800 ----------------------------------- The accompanying notes are an integral part of these condensed financial statements.
XL FINANCIAL ASSURANCE LTD. Notes to Condensed Financial Statements (Unaudited) FOR THE THREE MONTH PERIODS ENDED MARCH 31, 2002 AND 2001 - -------------------------------------------------------------------------------- (expressed in U.S. dollars) 1. ORGANIZATION AND BUSINESS XL Financial Assurance Ltd. (the "Company") was incorporated with limited liability under the Bermuda Companies Act 1981 on October 14, 1998 and is registered as a Class 3 insurer under The Insurance Act 1978, amendments thereto and related regulations ("The Act"). At March 31, 2002 and 2001, the Company was approximately 85% owned by XL Insurance (Bermuda) Ltd (a wholly-owned subsidiary of XL Capital Ltd); 6% by FSA Insurance Company (a wholly-owned subsidiary of Financial Security Assurance Holdings Ltd) and 9% by Financial Security Assurance International Ltd. (owned 20% by XL Insurance (Bermuda) Ltd and 80% by FSA Insurance Company). The Company is an integral part of a joint venture agreement between XL Capital Ltd and Financial Security Assurance Holdings Ltd. The Company is primarily engaged in the business of providing reinsurance of financial guaranties on asset-backed and municipal obligations underwritten by XL Insurance (Bermuda) Ltd, FSA Insurance Company and XL Capital Assurance Inc. (a wholly-owned subsidiary of XL Capital Ltd) and other monoline and multiline insurance companies. This may be in the form of traditional financial guaranty insurance or via a credit default swap execution. The Company's underwriting policy is to provide reinsurance of asset-backed and municipal obligations that would be of a lower investment-grade quality without the benefit of the Company's reinsurance. The asset-backed obligations reinsured by the Company are generally issued in structured transactions and are backed by pools of assets such as residential mortgages loans, consumer or trade receivables, securities or other assets having ascertainable cash flows or market value. The municipal obligations reinsured by the Company consist primarily of general obligation bonds that are supported by the issuers' taxing power and of special revenue bonds and other special obligations of states and local governments that are supported by the issuers' ability to impose and collect fees and charges for public services or specific projects. Reinsurance written by the Company guarantees payment when due of scheduled payments on an issuers' obligation. In the case of a payment default on an insured obligation, the Company is generally required to pay the principal, interest or other such amounts due in accordance with the obligations' original payment schedule or, at its option, to pay such amounts on an accelerated basis. The Company conducts surveillance on its exposures to try and ensure early identification of any loss events. In addition, in the normal course of business, the Company seeks to reduce the loss that may arise from such events by reinsuring certain levels of risks in various areas of exposure with other insurance enterprises or reinsurers. 2. SIGNIFICANT ACCOUNTING POLICIES BASIS OF PREPARATION The accompanying condensed financial statements have been prepared by the Company and are unaudited. In the opinion of management, all adjustments, which include only normal recurring adjustments necessary to present fairly the financial position, results of operations and cash flows at March 31, 2002 and for all periods presented, have been made. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. These statements should be read in conjunction with the Company's December 31, 2001 financial statements and notes thereto. The year-end balance sheet was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America. The results of operations for the periods ended March 31, 2002 and 2001 are not necessarily indicative of the operating results for the full year. XL FINANCIAL ASSURANCE LTD. Notes to Condensed Financial Statements (Unaudited) FOR THE THREE MONTH PERIODS ENDED MARCH 31, 2002 AND 2001 - -------------------------------------------------------------------------------- (expressed in U.S. dollars) The preparation of condensed financial statements requires management to make estimates and assumptions that affect the reported amounts 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. Any such adjustments are reflected in income in the period in which the adjustments are made. The financial statement estimates subject to most uncertainty are estimates for loss reserves and calculation of the fair value of credit default swap instruments. Certain comparative figures have been reclassified to conform with the current year's presentation. 3. DERIVATIVE INSTRUMENTS The following table summarizes the change in fair value of the Company's credit default swaps recognized in income for the period ended March 31, 2002. Net premiums earned 1,669,107 Losses and loss expenses (417,277) Net realized and unrealized (losses) gains on derivative instruments 6,523,238 ---------------- Total fair value adjustment 7,775,068 ---------------- -----END PRIVACY-ENHANCED MESSAGE-----