<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999
COMMISSION FILE NUMBER 1-10804
------------------------
XL CAPITAL LTD
(Exact name of registrant as specified in its charter)
<TABLE>
<CAPTION>
CAYMAN ISLANDS 98-0191089
- ------------------------------------------------ ---------------------------------------
<S> <C>
(State or other jurisdiction of incorporation or (I.R.S. Employer Identification Number)
organization)
</TABLE>
CUMBERLAND HOUSE, 1 VICTORIA STREET, HAMILTON, BERMUDA HM 11
(Address of principal executive offices and zip code)
Registrant's telephone number, including area code (441) 292-8515
------------------------
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 for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
As of November 12, 1999, there were outstanding 124,486,701 Class A Ordinary
Shares, $0.01 par value per share, and 3,115,900 Class B Ordinary Shares, $0.01
par value per share, of the registrant.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
XL CAPITAL LTD
INDEX TO FORM 10-Q
PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C> <C>
Item 1. Financial Statements:
Consolidated Balance Sheets
as at September 30, 1999 and December 31, 1998
(unaudited)................................................. 1
Consolidated Statements of Income and Comprehensive Income
for the Three Months Ended September 30, 1999 and 1998
(unaudited) and the Nine months Ended September 30, 1999 and
1998 (unaudited)............................................ 2
Consolidated Statements of Shareholders' Equity for the Nine
Months Ended September 30, 1999 and 1998 (unaudited)........ 3
Consolidated Statements of Cash Flows for the Nine Months
Ended
September 30, 1999 and 1998 (unaudited)..................... 4
Notes to Unaudited Consolidated Financial Statements........ 6
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition.......................... 11
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................... 28
Item 4. Submission of Matters to a Vote of Shareholders............. 28
Item 6. Exhibits and Reports on Form 8-K............................ 28
Signatures.............................................................. 29
</TABLE>
<PAGE>
XL CAPITAL LTD
CONSOLIDATED BALANCE SHEETS
(U.S. DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
AS AT AS AT
SEPTEMBER 30, 1999 DECEMBER 31, 1998
------------------ -----------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Investments available for sale:
Fixed maturities, at market value (amortized cost: 1999--
$7,342,223; 1998--$7,433,724)........................... $ 7,135,503 $ 7,512,903
Equity securities, at market value (cost: 1999--$901,450;
1998--$1,127,590)....................................... 1,033,888 1,299,098
Short-term investments, at market value (amortized cost:
1999--$384,668; 1998--$246,085)......................... 384,919 245,891
----------- -----------
Total investments available for sale.................. $ 8,554,310 $ 9,057,892
Cash and cash equivalents................................... 497,576 480,874
Investment in affiliates (cost; 1999 $362,532; 1998
$141,590)................................................. 370,703 154,668
Other investments........................................... 95,245 44,085
Accrued investment income................................... 110,109 95,910
Deferred acquisition costs.................................. 257,526 204,271
Prepaid reinsurance premiums................................ 358,833 215,466
Premiums receivable......................................... 1,064,011 904,203
Reinsurance balances receivable............................. 133,852 124,771
Unpaid losses and loss expenses recoverable................. 724,194 593,960
Intangible assets........................................... 1,630,752 1,502,828
Deferred tax asset, net..................................... 74,888 37,481
Other assets................................................ 225,843 164,731
----------- -----------
Total Assets.......................................... $14,097,842 $13,581,140
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Unpaid losses and loss expenses............................. $ 5,007,812 $ 4,896,643
Unearned premiums........................................... 1,687,689 1,337,277
Premiums received in advance and deposit premiums........... 388,545 22,656
Long term debt.............................................. 410,655 613,873
Accounts payable and accrued liabilities.................... 228,753 234,206
Reinsurance balances payable................................ 179,693 183,660
Payable for investments purchased........................... 788,520 633,181
Minority interest........................................... 41,921 47,041
----------- -----------
Total Liabilities and Minority Interest............... $ 8,733,588 $ 7,968,537
----------- -----------
Contingencies
Shareholders' Equity:
Ordinary shares (par value $0.01; issued and outstanding,
127,579,774 shares and 128,745,130 shares at September 30,
1999 and December 31, 1998, respectively)................. 1,276 1,287
Contributed surplus......................................... 2,451,841 2,508,062
Accumulated other comprehensive income, net of deferred
taxes..................................................... (68,175) 235,185
Deferred compensation....................................... (26,130) (22,954)
Retained earnings........................................... 3,005,442 2,891,023
----------- -----------
Total Shareholders' Equity.................................. $ 5,364,254 $ 5,612,603
----------- -----------
Total Liabilities and Shareholders' Equity.................. $14,097,842 $13,581,140
=========== ===========
</TABLE>
See accompanying notes to Consolidated Financial Statements.
1
<PAGE>
XL CAPITAL LTD
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -----------------------
1999 1998 1999 1998
-------- -------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenues:
Net premiums earned.............................. $488,729 $384,136 $1,289,868 $ 922,853
Net investment income............................ 130,560 111,320 398,833 291,426
Net realized (losses) gains on sale of
investments.................................... (12,671) 28,476 72,389 164,225
Equity in net earnings of affiliates............. 15,372 17,451 24,707 53,673
Fee and other income............................. 28,800 8,567 43,221 14,176
-------- -------- ---------- ----------
Total revenues................................... $650,790 $549,950 $1,829,018 $1,446,353
-------- -------- ---------- ----------
Expenses:
Losses and loss expenses......................... 310,013 252,496 875,635 589,135
Acquisition costs................................ 103,736 69,946 268,754 173,642
Operating expenses............................... 68,336 63,778 229,933 133,530
Interest expense................................. 15,414 8,720 35,220 23,333
Amortization of intangible assets................ 13,864 6,128 37,049 12,685
-------- -------- ---------- ----------
Total expenses................................... 511,363 401,068 1,446,591 932,325
-------- -------- ---------- ----------
Income before income tax expenses and minority
interest....................................... 139,427 148,882 382,427 514,028
Minority interest................................ 320 (122) (220) 1,168
Income tax expense (benefit)..................... 1,705 8,733 (27,274) 20,867
-------- -------- ---------- ----------
NET INCOME....................................... $137,402 $140,271 $ 409,921 $ 491,993
-------- -------- ---------- ----------
Changes in net unrealized appreciation of
investments.................................... (88,852) (181,079) (295,926) (109,364)
Foreign currency translation adjustments......... (3,519) 2,603 (7,433) (410)
-------- -------- ---------- ----------
Comprehensive income (loss)...................... $ 45,031 $(38,205) $ 106,562 $ 382,219
======== ======== ========== ==========
Weighted average number of ordinary shares and
ordinary share equivalents outstanding
--Basic........................................ 127,544 116,935 127,580 106,415
--Diluted...................................... 129,032 121,076 130,727 110,656
Net income per ordinary share and ordinary share
equivalent
--Basic........................................ $ 1.08 $ 1.20 $ 3.21 $ 4.62
--Diluted...................................... $ 1.07 $ 1.17 $ 3.15 $ 4.47
Dividends declared per share..................... $ 0.44 $ 0.40 $ 1.32 $ 1.20
</TABLE>
See accompanying notes to Consolidated Financial Statements.
2
<PAGE>
XL CAPITAL LTD
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(U.S. DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------
1999 1998
---------- ----------
(UNAUDITED)
<S> <C> <C>
Ordinary Shares:
Balance--beginning of period.............................. $ 1,287 $ 1,013
Issue of shares........................................... 6 16
Issue of shares--Mid Ocean acquisition.................... 0 303
Exercise of stock options................................. 8 11
Repurchase of shares...................................... (25) (68)
---------- ----------
Balance--end of period.................................. 1,276 1,275
---------- ----------
Contributed Surplus:
Balance--beginning of period.............................. 2,508,062 506,453
Issue of shares........................................... 11,019 49,125
Issue of shares--Mid Ocean acquisition.................... 0 2,189,414
Exercise of stock options................................. 7,210 7,917
Net repurchase of shares.................................. (74,450) (298,956)
---------- ----------
Balance--end of period.................................. 2,451,841 2,453,953
---------- ----------
Accumulated other comprehensive income, net of deferred
taxes
Balance--beginning of period.............................. 235,185 251,471
Net change in investment portfolio........................ (291,019) (108,953)
Net change in investment portfolio of affiliate........... (4,908) (411)
Foreign currency translation adjustments.................. (7,433) (410)
---------- ----------
Balance--end of period.................................. (68,175) 141,697
---------- ----------
Deferred Compensation
Balance--beginning of period.............................. (22,954) (18,263)
Issue of restricted shares................................ (9,535) (11,331)
Amortization.............................................. 6,359 4,935
---------- ----------
Balance--end of period.................................. (26,130) (24,659)
---------- ----------
Retained Earnings
Balance--beginning of period.............................. 2,891,023 2,455,076
Net income................................................ 409,921 491,993
Dividends................................................. (211,778) (153,450)
Repurchase of shares...................................... (83,724) (63,031)
---------- ----------
Balance--end of period.................................. 3,005,442 2,730,588
---------- ----------
Total shareholders' equity.................................. $5,364,254 $5,302,854
========== ==========
</TABLE>
See accompanying notes to Consolidated Financial Statements.
3
<PAGE>
XL CAPITAL LTD
CONSOLIDATED STATEMENTS OF CASH FLOWS
(U.S. DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
1999 1998
-------------- --------------
(UNAUDITED)
<S> <C> <C>
Cash flows from operating activities
Net income for the period before minority interest........ $ 409,701 $ 493,161
------------- -------------
Adjustments to reconcile net income before minority interest
to net cash provided by operating activities:
Net realized gains on sale of investments................. (72,389) (164,225)
Amortization of discount on fixed maturities.............. (17,007) (5,777)
Equity in net income of affiliates, net of cash
received.................................................. (23,371) (53,673)
Amortization of deferred compensation..................... 6,359 4,935
Amortization of intangible assets......................... 37,049 12,685
Unpaid losses and loss expenses........................... 111,169 266,304
Unearned premiums......................................... 350,412 158,598
Premiums received in advance and deposit premiums......... 365,889 (26,261)
Premiums receivable....................................... (159,808) (62,544)
Prepaid reinsurance premiums.............................. (143,367) (13,075)
Unpaid losses and loss expenses recoverable............... (130,234) 9,974
Reinsurance balances receivable........................... (9,081) (161,634)
Other..................................................... (165,597) (65,372)
------------- -------------
Total adjustments..................................... 150,024 (100,065)
------------- -------------
Net cash provided by operating activities................. 559,725 393,096
Cash flows used in investing activities:
Proceeds from sale of fixed maturities and short-term
investments............................................... 12,788,597 10,183,206
Proceeds from redemption of fixed maturities and
short-term investments.................................... 89,264 464,798
Proceeds from sale of equity securities................... 994,189 685,149
Purchases of fixed maturities and short-term
investments............................................... (12,651,260) (10,712,086)
Purchases of equity securities............................ (758,301) (811,702)
Deferred gains on forward contracts....................... (283) (3,656)
Investment in affiliates.................................. (202,128) (18,778)
Acquisition of subsidiaries, net of cash acquired......... (173,334) 137,483
Other investments......................................... (51,160) 3,734
Other assets.............................................. (61,111) (30,844)
------------- -------------
Net cash used in investing activities..................... (25,527) (102,696)
</TABLE>
4
<PAGE>
XL CAPITAL LTD
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(U.S. DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
1999 1998
-------------- --------------
(UNAUDITED)
<S> <C> <C>
Cash flow used in financing activities:
Dividends paid............................................ (155,668) (103,570)
Issuance of restricted shares............................. 6 16
Proceeds from exercise of options......................... 7,218 7,928
Repurchase of treasury shares............................. (158,199) (362,055)
Proceeds from loans....................................... 328,700 570,000
Repayment of loans........................................ (331,924) (350,000)
Repayment of long term debt............................... (201,737) 0
Minority interest......................................... (5,340) 166
------------- -------------
Net cash used in financing activities..................... (516,944) (237,515)
Effects of exchange rate movements on cash.................. (552) (972)
Increase in cash and cash equivalents....................... 16,702 51,913
Cash and cash equivalents--beginning of period.............. $ 480,874 $ 383,594
------------- -------------
Cash and cash equivalents--end of period.................... $ 497,576 $ 435,507
============= =============
</TABLE>
See accompanying notes to Consolidated Financial Statements
5
<PAGE>
XL CAPITAL LTD
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of XL
Capital Ltd (together with its subsidiaries, unless the context otherwise
requires, the "Company") have been prepared in accordance with U.S. generally
accepted accounting principles ("U.S. 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 U.S. GAAP for complete financial statements. The consolidated financial
statements include the merger with NAC Re Corp., which has been accounted for as
a "pooling of interests" under U.S GAAP, and they are based upon the Company's
new fiscal year end of December 31. In the opinion of management, these
unaudited financial statements reflect all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation of financial
position and results of operations as of the end of and for the periods
presented. The results of operations for any interim period are not necessarily
indicative of the results for a full year. The December 31, 1998 consolidated
balance sheet data was derived from adjusted audited financial statements based
on the Company's previous year end of November 30, 1998, but does not include
all disclosures required by U.S. GAAP. For further information, refer to the
consolidated financial statements for the fiscal year ended November 30, 1998,
and footnotes thereto, included in the Company's Annual Report on Form 10-K
(No. 1-10804) and to the consolidated financial statements for the fiscal year
ended December 31, 1998, and notes thereto, included in NAC Re Corp.'s Annual
Report on Form 10-K (No. 0-13891).
2. BUSINESS COMBINATIONS
(A) NAC RE CORP.
On June 18, 1999, the Company completed its merger with NAC Re Corp. ("NAC
Re") in an all stock transaction. Shareholders of NAC Re received 0.915 Company
share for each NAC Re share in a tax free exchange. Approximately 16.9 million
of the Company's Class A ordinary shares were issued in this transaction.
The merger transaction has been accounted for as a pooling of interests
under U.S. GAAP. Accordingly, all prior period results of operations, statement
of position and cash flows include the results of NAC Re as though it had always
been a part of the Company. Merger costs associated with the transaction include
an after tax increase of $61.7 million to the NAC Re loss reserves to align them
with the reserving methodologies and increase in loss reserve factors used by
the Company. They also include an after tax charge of $38.6 million which
primarily relates to fees for attorneys, investment bankers, accountants and
other related charges. No material adjustments were recorded to conform NAC Re's
accounting policies and certain reclassifications have been made to the NAC Re
financial statements to conform to the Company's presentations.
Following the merger, the Company changed its fiscal year end from
November 30 to December 31 as a conforming pooling adjustment. Consolidated
financial statements included herein at September 30, 1999 are based upon the
new fiscal year end. The following table presents a reconciliation of total
revenues
6
<PAGE>
XL CAPITAL LTD
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. BUSINESS COMBINATIONS (CONTINUED)
and net income of the Company as previously reported as adjusted for the change
in fiscal year end, together with the effect of the combined results with NAC Re
(U.S dollars in thousands; unaudited):
<TABLE>
<CAPTION>
CONSOLIDATED CONSOLIDATED
TOTAL REVENUES NET INCOME
-------------- ------------
<S> <C> <C>
XL Capital--six months ended May 31, 1999................... $ 872,109 $370,989
Less one month December 31, 1998............................ (202,210) (47,397)
Add one month June 30, 1999................................. 167,964 (26,652)
---------- --------
XL Capital--six months ended June 30, 1999.................. 837,863 296,940
NAC Re--six months ended June 30, 1999...................... 340,365 (24,421)
---------- --------
Combined results--six months ended June 30, 1999............ $1,178,228 $272,519
========== ========
</TABLE>
(B) INTERCARGO CORPORATION AND ECS, INC.
During the second quarter of 1999, the Company acquired Intercargo
Corporation and ECS, Inc., both of which have been accounted for under the
purchase method of accounting. The combined purchase price was $222.8 million
and the goodwill resulting from these acquisitions is being amortized over
twenty years.
3. SEGMENT INFORMATION
The Company has adopted Statement of Financial Accounting Standards
No. 131, "Disclosures about Segments of an Enterprise and Related Information".
This Statement requires that companies report certain information about their
operating segments in interim and annual financial statements, including
information about the products and services from which the revenues are derived,
geographic areas of operation and information regarding major customers. The
Statement defines operating segments based on internal management reporting and
management's decisions about assessing performance and allocating resources.
The Company is organized into four main operating segments; insurance,
reinsurance, Lloyd's syndicates and financial services and a corporate segment,
which includes the investment operations of the Company. The Company evaluates
performance of each segment based upon underwriting profit or loss. In addition,
management does not allocate assets by segment. The tables following show the
underwriting
7
<PAGE>
XL CAPITAL LTD
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. SEGMENT INFORMATION (CONTINUED)
profit or loss for each segment and a reconciliation of the total underwriting
profit or loss to the net income for the periods shown (U.S dollars in
thousands; unaudited):
QUARTER ENDED SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
LLOYD'S FINANCIAL
INSURANCE REINSURANCE SYNDICATES SERVICES CORPORATE TOTAL
--------- ----------- ---------- --------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Net premiums earned..................... $155,542 $235,159 $95,085 $ 2,943 $ 0 $488,729
Fee and other income.................... 7,586 0 6,669 14,545 0 28,800
Net losses and loss expenses............ 98,861 137,722 72,601 829 0 310,013
Acquisition costs....................... 26,775 56,235 20,726 0 0 103,736
Operating expenses...................... 26,890 22,136 8,207 2,782 8,321 68,336
-------- -------- ------- ------- -------- --------
Underwriting profit (loss).............. $ 10,602 $ 19,066 $ 220 $13,877 $ (8,321) $ 35,444
Net investment income................... 130,560 130,560
Net realized losses on investments...... (12,671) (12,671)
Equity in net earnings of affiliates.... 15,372 15,372
Interest expense........................ 15,414 15,414
Amortization of intangible assets....... 13,864 13,864
Minority interest....................... 320 320
Income tax expense...................... 1,705 1,705
-------- --------
Net Income.............................. $193,637 $137,402
======== ========
</TABLE>
QUARTER ENDED SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
LLOYD'S FINANCIAL
INSURANCE REINSURANCE SYNDICATES SERVICES CORPORATE TOTAL
--------- ----------- ---------- --------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Net premiums earned..................... $119,430 $194,166 $70,540 $ 0 $ 0 $384,136
Fee and other income.................... 0 0 6,542 0 2,025 8,567
Net losses and loss expenses............ 71,561 129,008 51,927 0 0 252,496
Acquisition costs....................... 10,252 46,517 13,177 0 0 69,946
Operating expenses (1).................. 11,891 22,878 9,408 0 2,141 46,318
-------- -------- ------- ------- -------- --------
Underwriting profit (loss).............. $ 25,726 $ (4,237) $ 2,570 $ 0 $ (116) $ 23,943
Net investment income................... 111,320 111,320
Net realized gains on investments....... 28,476 28,476
Equity in net earnings of affiliates.... 17,451 17,451
Interest expense........................ 8,720 8,720
Amortization of intangible assets....... 6,128 6,128
One time charges (1).................... 17,460 17,460
Minority interest....................... (122) (122)
Income tax expense...................... 8,733 8,733
-------- --------
Net Income.............................. $116,212 $140,271
======== ========
</TABLE>
- ------------------------
(1) Operating expenses exclude one-time charges of $ 17.5 million associated
with the merger with Mid Ocean Limited.
8
<PAGE>
XL CAPITAL LTD
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. SEGMENT INFORMATION (CONTINUED)
NINE MONTHS ENDED SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
LLOYD'S FINANCIAL
INSURANCE REINSURANCE SYNDICATES SERVICES CORPORATE TOTAL
--------- ----------- ---------- --------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Net premiums earned................... $352,026 $653,254 $269,275 $15,313 $ 0 $1,289,868
Fee and other income.................. 7,587 0 20,495 15,139 0 43,221
Net losses and loss expenses (1)...... 196,374 369,767 210,733 3,761 0 780,635
Acquisition costs..................... 56,905 149,860 61,989 0 0 268,754
Operating expenses (2)................ 48,985 69,460 25,847 8,910 31,459 184,661
-------- -------- -------- ------- -------- ----------
Underwriting profit (loss)............ $ 57,349 $ 64,167 $ (8,799) $17,781 $(31,459) $ 99,039
Net investment income................. 398,833 398,833
Net realized gains on investments..... 72,389 72,389
Equity in net earnings of
affiliates.......................... 24,707 24,707
Interest expense...................... 35,220 35,220
Amortization of intangible assets..... 37,049 37,049
One time charges (1) (2).............. 140,272 140,272
Minority interest..................... (220) (220)
Income tax benefit.................... (27,274) (27,274)
-------- ----------
Net Income............................ $279,425 $ 409,921
======== ==========
</TABLE>
- ------------------------
(1) Net losses and loss expenses exclude an increase to unpaid losses of
$95.0 million relating to NAC Re.
(2) Operating expenses exclude a one-time charge of $45.3 million relating to
expenses incurred in the NAC Re, Intercargo, Highfields, ECS and MKP
transactions, as discussed further herein.
NINE MONTHS ENDED SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
LLOYD'S FINANCIAL
INSURANCE REINSURANCE SYNDICATES SERVICES CORPORATE TOTAL
--------- ----------- ---------- --------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Net premiums earned..................... $319,276 $533,037 $70,540 $ 0 $ 0 $922,853
Fee and other income.................... 0 0 6,542 0 7,634 14,176
Net losses and loss expenses............ 224,875 312,333 51,927 0 0 589,135
Acquisition costs....................... 38,003 122,462 13,177 0 0 173,642
Operating expenses (1).................. 33,063 58,956 9,408 0 14,643 116,070
-------- -------- ------- ---- -------- --------
Underwriting profit (loss).............. $ 23,335 $ 39,286 $ 2,570 $ 0 $ (7,009) $ 58,182
Net investment income................... 291,426 291,426
Net realized gains on investments....... 164,225 164,225
Equity in net earnings of affiliates.... 53,673 53,673
Interest expense........................ 23,333 23,333
Amortization of intangible assets....... 12,685 12,685
One time charges (1).................... 17,460 17,460
Minority interest....................... 1,168 1,168
Income tax expense...................... 20,867 20,867
-------- --------
Net Income.............................. $426,802 $491,993
======== ========
</TABLE>
- ------------------------
(1) Administration expenses exclude a one time charge of $ 17.5 million relating
to the merger with Mid Ocean.
9
<PAGE>
XL CAPITAL LTD
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. SEGMENT INFORMATION (CONTINUED)
The following tables provides an analysis of the Company's premium revenues
by line of business for the periods presented (U.S. dollars in thousands;
unaudited):
QUARTER ENDED SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
GROSS PREMIUMS WRITTEN NET PREMIUMS WRITTEN NET PREMIUMS EARNED
---------------------- -------------------- -------------------
<S> <C> <C> <C>
Casualty insurance..................... $ 93,812 $ 79,704 $ 82,869
Casualty reinsurance................... 131,530 103,226 82,579
Property catastrophe................... 27,964 23,416 32,335
Other property......................... 94,814 67,809 88,556
Marine, energy, aviation and
satellite............................ 44,231 25,698 48,848
Lloyd's syndicates..................... 146,864 120,911 95,085
Other.................................. 90,401 74,053 58,457
-------- -------- --------
Total.................................. $629,616 $494,817 $488,729
======== ======== ========
</TABLE>
QUARTER ENDED SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
GROSS PREMIUMS WRITTEN NET PREMIUMS WRITTEN NET PREMIUMS EARNED
---------------------- -------------------- -------------------
<S> <C> <C> <C>
Casualty insurance..................... $132,753 $120,980 $ 80,012
Casualty reinsurance................... 84,309 71,567 73,958
Property catastrophe................... 9,723 7,991 41,850
Other property......................... 70,069 41,304 41,758
Marine, energy, aviation and
satellite............................ 20,686 13,318 22,932
Lloyd's syndicates..................... 88,276 77,367 70,540
Other.................................. 88,587 77,784 53,086
-------- -------- --------
Total.................................. $494,403 $410,311 $384,136
======== ======== ========
</TABLE>
NINE MONTHS ENDED SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
GROSS PREMIUMS WRITTEN NET PREMIUMS WRITTEN NET PREMIUMS EARNED
---------------------- -------------------- -------------------
<S> <C> <C> <C>
Casualty insurance..................... $ 225,644 $ 187,739 $ 211,173
Casualty reinsurance................... 299,628 252,716 223,011
Property catastrophe................... 138,674 124,215 99,216
Other property......................... 303,875 222,900 229,820
Marine, energy, aviation and
satellite............................ 183,773 137,298 118,709
Lloyd's syndicates..................... 480,236 355,227 269,275
Other.................................. 231,083 186,728 138,664
---------- ---------- ----------
Total.................................. $1,862,913 $1,466,823 $1,289,868
========== ========== ==========
</TABLE>
NINE MONTHS ENDED SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
GROSS PREMIUMS WRITTEN NET PREMIUMS WRITTEN NET PREMIUMS EARNED
---------------------- -------------------- -------------------
<S> <C> <C> <C>
Casualty insurance..................... $ 305,333 $ 266,315 $225,122
Casualty reinsurance................... 232,325 203,756 212,276
Property catastrophe................... 72,396 66,494 85,815
Other property......................... 224,050 161,843 138,875
Marine, energy, aviation and
satellite............................ 84,756 66,073 52,540
Lloyd's syndicates..................... 88,276 77,367 70,540
Other.................................. 230,823 195,007 137,685
---------- ---------- --------
Total.................................. $1,237,959 $1,036,855 $922,853
========== ========== ========
</TABLE>
10
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999
COMPARED TO THE THREE MONTHS ENDED SEPTEMBER 30, 1998
This "Management's Discussion and Analysis of Results of Operations and
Financial Condition" contains forward-looking statements which involve inherent
risks and uncertainties. Statements that are not historical facts, including
statements about our beliefs or expectations, are forward-looking statements.
These statements are based on current plans, estimates and expectations. Actual
results may differ materially from those projected in such forward-looking
statements, and therefore you should not place undue reliance on them. See
"--Cautionary Note Regarding Forward-Looking Statements" for a list of factors
that could cause actual results to differ materially from those contained in any
forward-looking statement.
The following table presents an analysis of the Company's net income for the
three months ended September 30, 1999 and 1998 reflecting the effect of realized
investment (losses) gains on net income and one-time costs related to the
mergers with NAC Re in 1999 and Mid Ocean Limited in 1998 (U.S. dollars in
thousands):
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED
SEPTEMBER 30,
---------------------
1999 1998 % CHANGE
--------- --------- --------
(UNAUDITED)
<S> <C> <C> <C>
Net operating income (excluding net realized gains and
losses on investments and merger related charges)......... $150,673 $132,834 13.4%
Net realized (losses) gains on investments, after tax....... (12,252) 24,897 N/M
One-time merger related costs, after tax (1)................ (1,019) (17,460) N/M
-------- --------
Net income.................................................. $137,402 $140,271 (2.0%)
======== ========
Earnings per share--basic................................... $ 1.08 $ 1.20
Earnings per share--fully diluted........................... $ 1.07 $ 1.17
* N/M--Not Meaningful
</TABLE>
- ------------------------
(1) During the third quarter of 1998 XL merged with Mid Ocean Limited. Certain
costs were incurred in relation to the realignment of the Company's
reinsurance systems and operations.
SEGMENTATION
The Company is effectively organized into four main operating
segments:--insurance, reinsurance, Lloyd's syndicates and financial
services--and a corporate segment, which includes the investment operations of
the Company. The results of each segment are discussed below. The reconciliation
of each segment to net income together with a summary of the Company's product
mix can be found in note 3 to the unaudited consolidated financial statements.
INSURANCE OPERATIONS
The insurance business is written primarily by the following; XL Insurance,
XL Europe Insurance, XL Insurance Company of New York, Intercargo Insurance,
Greenwich Insurance, and Indian Harbor Insurance. This segment writes business
in general liability, other liability (including directors and officers,
professional and employment practices liability), property, marine aviation,
satellite and other product
11
<PAGE>
lines (including customs, bond, surety, political risk and specialty lines).
This segment also includes the results of ECS Inc., a managing general
underwiter that currently writes environmental pollution liability and other
coverages on behalf of a third party insurer.
The following table summarizes the underwriting profit for this segment (U.S
dollars in thousands):
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED
SEPTEMBER 30,
---------------------
UNDERWRITING PROFIT 1999 1998 % CHANGE
- ------------------- --------- --------- --------
(UNAUDITED)
<S> <C> <C> <C>
Net premiums earned........................... $155,542 $119,430 30.2%
Fee and other income.......................... 7,586 -- --
Net losses and loss expenses.................. 98,861 71,561 38.1%
Acquisition costs............................. 26,775 10,252 161.2%
Operating expenses............................ 26,890 11,891 126.1%
-------- -------- -----
Underwriting profit........................... $ 10,602 $ 25,726 (58.8%)
======== ======== =====
</TABLE>
The Insurance segment has experienced growth in net premiums earned
primarily as a result of increased premiums written in the US primary business
and growth in the other property line worldwide. In addition late in the second
quarter the Company purchased Intercargo Insurance which contributed
approximately $16 million of net premiums earned in the quarter. There is no
comparative figure included in 1998 results.
Fee and other income represents the net fees generated by ECS Inc. for
underwriting business on behalf of third parties. This income will decline in
the future as ECS Inc. commences underwriting business on behalf of the Company.
From time to time the Company will also assist in structuring transactions that
will result in fee income. Such transactions require an investment of company
resources which are included in operating expenses and can be irregular.
The decrease in this segment's underwriting profit is reflected in its
underwriting ratios set forth below. The combined ratio is the sum of the loss
and loss expense ratio and the underwriting expense ratio. The loss ratio is
calculated by dividing net losses and loss expenses by net premiums earned and
the underwriting expense ratio by dividing the sum of acquisition costs and
operating expenses by net premiums earned. It is a measure of underwriting
profitability, with a combined ratio of under 100% representing an underwriting
profit and over 100% an underwriting loss.
The following table presents the combined ratios for the insurance segment:
<TABLE>
<CAPTION>
FOR THE THREE
MONTHS ENDED
SEPTEMBER 30,
-----------------------
COMBINED RATIO 1999 1998
- -------------- -------- --------
(UNAUDITED)
<S> <C> <C>
Loss and loss expense ratio................................. 63.6% 59.9%
Underwriting expense ratio.................................. 34.5% 18.5%
---- ----
Combined ratio.............................................. 98.1% 78.4%
==== ====
</TABLE>
The increase in the combined ratio is mainly due to an increase in the
underwriting expense ratio. There has been a relatively moderate increase in the
loss and loss expense ratio due to losses on the property, marine, energy,
aviation and satellite lines
The increase in underwriting expense ratio compared to the previous year is
a result of a number of factors including (i) start up operations in the U.S.,
(ii) an increase in premiums written and earned in the specialty and other
property lines described previously, which typically have higher acquisition
costs
12
<PAGE>
associated with them and (iii) the addition for the first time of Intercargo
Insurance's core business, particularly customs, bond and surety which has a
relatively high expense ratio but tends to be a lower loss ratio business.
REINSURANCE OPERATIONS
The reinsurance business is written by XL Mid Ocean Reinsurance, which
writes primarily property lines that are short tail in nature and NAC Re, which
primarily writes long tail casualty business. Businesses written in this segment
includes casualty, property catastrophe, other property, marine, energy,
aviation, satellite and other lines (including political risk and specialty
lines). The following table summarizes the underwriting profit for this segment
(U.S. dollars in thousands):
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED
SEPTEMBER 30,
---------------------
UNDERWRITING PROFIT 1999 1998 % CHANGE
- ------------------- --------- --------- --------
(UNAUDITED)
<S> <C> <C> <C>
Net premiums earned........................... $235,159 $194,166 21.1%
Net losses and loss expenses.................. 137,722 129,008 6.8%
Acquisition costs............................. 56,235 46,517 20.9%
Operating expenses............................ 22,136 22,878 (3.2%)
-------- --------
Underwriting profit (loss).................... $ 19,066 $ (4,237) N/M
======== ========
</TABLE>
The increase in net premiums earned is principally due to acquisition of Mid
Ocean in August 1998. As a result, the 1998 quarter only reflects two months of
net earned premiums as compared to a full quarter in 1999. The increase in
underwriting profit is due to a lower loss ratio over the comparable period
which is set forth below.
The following table presents the combined ratios for the reinsurance
segment:
<TABLE>
<CAPTION>
FOR THE THREE
MONTHS ENDED
SEPTEMBER 30,
-------------------
COMBINED RATIO 1999 1998
- -------------- -------- --------
(UNAUDITED)
<S> <C> <C>
Loss and loss expense ratio................................. 58.6% 66.5%
Underwriting expense ratio.................................. 33.3% 35.7%
---- -----
Combined ratio.............................................. 91.9% 102.2%
==== =====
</TABLE>
The decrease in the loss ratio reflects less catastrophe experience during
the quarter compared to 1998. During 1998 the Company was affected by Hurricane
Georges and the Swiss Air disaster. The nature of property catastrophe loss
experience is generally characterized as low frequency high severity in nature
and may result in volatility in the Company's financial results in any given
quarter.
The decrease in the expense ratio is a result of increased net premiums
earned while maintaining operating expenses at comparable levels to 1998.
LLOYD'S SYNDICATES
The Lloyd's operations comprise The Brockbank Group plc ("Brockbank") and
Denham Syndicate Management Limited ("Denham"). Brockbank provides underwriting
and other services to five Lloyd's syndicates, two of which are dedicated
corporate syndicates whose capital is provided by the Company. These syndicates
write property, marine and energy, aviation and satellite, professional
indemnity, motor and other specialty lines of mainly insurance, but also
reinsurance. Denham provides similar services to
13
<PAGE>
one corporate syndicate whose capital is provided by the Company. It specializes
in liability coverages. The following table summarizes the underwriting profit
for this segment (U.S dollars in thousands):
<TABLE>
<CAPTION>
FOR THE THREE
MONTHS ENDED
SEPTEMBER 30,
-------------------
UNDERWRITING PROFIT 1999 1998 % CHANGE
- ------------------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C>
Net premiums earned............................. $95,085 $70,540 34.8%
Fee and other income............................ 6,669 6,542 1.9%
Net losses and loss expenses.................... 72,601 51,927 39.8%
Acquisition costs............................... 20,726 13,177 57.3%
Operating expenses.............................. 8,207 9,408 (12.8%)
------- -------
Net underwriting profit......................... $ 220 $ 2,570 (91.4%)
======= =======
</TABLE>
Net premiums earned reflect the growth in business written by Denham in the
1999 quarter over 1998 of approximately $8 million. In addition, the Company's
capital participation in syndicates managed by Brockbank increased from 38% to
43% for the 1999 underwriting year. Offsetting some of this revenue increase,
additional reinsurance was purchased in September 1999 to take advantage of
lower costs. The increase in capital participation reflects a reduction in third
party business on which fee and other income is generated.
The decrease in this segments's underwriting profit is reflected in its
underwriting ratios set forth below:
<TABLE>
<CAPTION>
FOR THE THREE
MONTHS ENDED
SEPTEMBER 30,
-------------------
COMBINED RATIO 1999 1998
- -------------- -------- --------
(UNAUDITED)
<S> <C> <C>
Loss and loss expense ratio................................. 76.4% 73.6%
Underwriting expense ratio.................................. 30.4% 32.0%
----- -----
Combined ratio.............................................. 106.8% 105.6%
===== =====
</TABLE>
The increase in the loss ratio is in line with the results of the Lloyd's
marketplace where underwriting results are generally worse in 1999 over 1998.
The reduction of operating expenses is due to certain expenses being
reclassified and deferred over the life of the premiums being earned.
In the third quarter of 1999, Brockbank entered into agreements to sell its
two motor insurance businesses, Admiral Insurance Services Limited and Zenith
Insurance Policies at Lloyd's. The sales are subject to certain conditions. Upon
the completion of the sales, the Company expects there to be decreases in
premiums, fee income and certain costs. The Company does not expect the overall
profitability of its Lloyd's operations to be materially affected by such sales.
FINANCIAL SERVICES
Financial services and activities are written by XL Capital Products Ltd and
include financial guaranty insurance and reinsurance, and certain transactions
which are primarily financial in nature which may be accounted for on a deposit
basis. Specifically, this business includes financial guaranty insurance and
14
<PAGE>
reinsurance in respect of asset-backed, future flow and municipal obligations.
The following table summarizes the underwriting profit for this segment (U.S
dollars in thousands):
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED
SEPTEMBER 30,
-----------------------
UNDERWRITING PROFIT 1999 1998
- ------------------- -------- --------
(UNAUDITED)
<S> <C> <C>
Net premiums earned.................................... $ 2,943 $ --
Fee and other income................................... 14,545 --
Net losses and loss expenses........................... 829 --
Operating expenses..................................... 2,782 --
------- -------
Underwriting profit.................................... $13,877 --
======= =======
</TABLE>
The Financial Services segment commenced operations late in 1998. Financial
guaranty premiums are earned over the life of the exposure and certain insurance
transactions which receive installment premiums are not recognized as premiums
written until the premiums are due.
From time to time the company will assist in structuring transactions that
will result in fee income. These transactions tend to be irregular in nature.
Such transactions require an investment of company resources which are included
in operating expenses. During the quarter the Company wrote a significant loss
portfolio transfer contract (which was accounted for on a deposit basis). The
Company received a fee of approximately $10 million on this transaction.
The following table presents the combined ratios for the Financial Services
segment:
<TABLE>
<CAPTION>
FOR THE THREE
MONTHS ENDED
SEPTEMBER 30,
-----------------------
COMBINED RATIO 1999 1998
- -------------- -------- --------
(UNAUDITED)
<S> <C> <C>
Loss and loss expense ratio................................ 28.2% --
Underwriting expense ratio................................. 94.5% --
----- -----
Combined ratio............................................. 122.7% --
===== =====
</TABLE>
This segment generally writes business to an expected loss ratio of between
25% to 30%. The high expense ratio is a result of the start up nature of this
segment with the Company having hired a number of highly experienced
professionals.
15
<PAGE>
CORPORATE
INVESTMENT OPERATIONS
The following table illustrates the change in investment income and realized
losses and gains for the quarters ended September 30, 1999 and 1998 (U.S.
dollars in thousands):
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
SEPTEMBER 30,
---------------------------
1999 1998 % CHANGE
------------ ------------ --------
(UNAUDITED)
<S> <C> <C> <C>
Net investment income..................... $130,560 $111,320 17.3%
Net realized (losses) gains............... $(12,671) $ 28,476 N/M
</TABLE>
The increase in net investment income in the third quarter of 1999 over the
1998 third quarter is due to a number of factors. The average asset base
increased primarily due to the merger with Mid Ocean and the Company's positive
operational cash flow. However, the merger with Mid Ocean occurred in early
August 1998 resulting in only two months of investment income in 1998 compared
to a full quarter in 1999. In addition, the average yield on the portfolio was
higher in 1999. The portfolio duration has extended slightly to 5.6 years. The
Company also held a greater proportion of fixed income securities in the 1999
quarter compared to 1998 which held a higher proportion of equity securities.
The Company's investment managers sold fixed income investments during the
1999 quarter to take advantage of higher yields which resulted in realized
losses.
OTHER REVENUES AND EXPENSES
The following table sets forth other revenues and expenses for the quarters
ended September 30, 1999 and 1998 (U.S. dollars in thousands):
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
SEPTEMBER 30,
---------------------------
1999 1998 % CHANGE
------------ ------------ --------
(UNAUDITED)
<S> <C> <C> <C>
Equity in net earnings of affiliates...... $15,372 $17,451 (11.9%)
Amortization of intangible assets......... 13,864 6,128 126.2%
Operating expenses........................ 8,321 2,141 N/M
Interest expense.......................... 15,414 8,720 76.8%
Minority interest......................... 320 (122) N/M
Income taxes.............................. 1,705 8,733 80.5%
</TABLE>
The equity in net earnings of affiliates in the third quarter of 1999
primarily relates to the Company's investments in Risk Capital Holdings Inc.,
Financial Security Assurance International Ltd., Pareto Partners and other
investment managers. During the comparable period in 1998, contributing
affiliates included Risk Capital Holdings Inc., Pareto Partners and Mid Ocean
Limited with the latter being the main contributor. One month of Mid Ocean
Limited was included in the 1998 quarter.
The increase in amortization of intangible assets reflects a full quarter
charge relating to the goodwill on acquisition of Mid Ocean Limited compared to
only two months in 1998. In addition, there is additional goodwill from recent
U.S. acquisitions including, ECS, Inc. and Intercargo Corporation
The change in operating expenses, excluding one time charges, is a result of
the increase in corporate infrastructure necessary to support the expanding
worldwide operations of the Company.
Interest expense reflects the additional indebtedness carried by the Company
in 1999 compared to 1998. The addition of the debt used to finance the Mid Ocean
merger was outstanding from the first week of August only. In addition during
1999 the Company partially financed the acquisition of Intercargo Corporation
and ECS, Inc.
16
<PAGE>
The decrease in income taxes relates primarily to lower income earned by
certain subsidiaries of the Company during 1999.
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
COMPARED TO THE NINE MONTHS ENDED SEPTEMBER 30, 1998
The following table presents an analysis of the Company's net income for the
nine months ended September 30, 1999 and 1998 reflecting the effect of realized
investment gains and merger related costs on net income (U.S. Dollars in
thousands):
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------
1999 1998 % CHANGE
----------- ----------- --------
(UNAUDITED)
<S> <C> <C> <C>
Net operating income (excluding net
realized gains on investments and one
time merger related adjustments)......... $440,204 $353,382 24.6%
Net realized gains on investments, after
tax...................................... 71,448 156,071 N/M
Increase to loss reserves, after tax for
NAC
Re (1)................................... (61,750) -- N/M
One time related merger charges, after tax
(1)...................................... (39,981) (17,460) N/M
-------- -------- ------
Net income................................. $409,921 $491,993 (16.7%)
======== ======== ======
Earnings per share--basic.................. $ 3.21 $ 4.62
Earnings per share--fully diluted.......... $ 3.14 $ 4.45
- N/M--Not Meaningful
</TABLE>
- ------------------------
(1) NAC Re loss reserves were increased to align them with the Company's
reserving methodologies and higher loss reserve factors. Other charges
relate to a variety of legal, accounting, banking and similar fees
associated with the various acquisitions, severance and relocation payments
and systems alignment costs.
INSURANCE OPERATIONS
The following table summarizes the underwriting profit for this segment (U.S
dollars in thousands):
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------
UNDERWRITING PROFIT 1999 1998 % CHANGE
- ------------------- ----------- ----------- --------
(UNAUDITED)
<S> <C> <C> <C>
Net premiums earned........................ $352,026 $319,276 10.3%
Fee and other income....................... 7,587 -- N/M
Net losses and loss expenses............... 196,374 224,875 (12.7%)
Acquisition costs.......................... 56,905 38,003 49.7%
Operating expenses......................... 48,985 33,063 48.2%
-------- --------
Net underwriting profit.................... $ 57,349 $ 23,335 145.8%
======== ========
</TABLE>
The Insurance segment has experienced growth in net premiums earned mainly
as a result of growth in the U.S. primary business and growth in the property
and other liability lines. In addition, late in the second quarter the Company
purchased Intercargo Insurance which contributed approximately $16 million in
the third quarter of 1999. There is no comparative figure included in 1998.
The growth was offset by decreases net premiums earned in the general
liability book of business. While retentions of 82% are relatively consistent
with the prior year, the level of new business is lower. In addition, the
Company continues to write business at higher levels of attachment resulting in
lower
17
<PAGE>
premiums. Average attachment levels have increased from approximately
$153 million for the nine months ended September 30, 1998 to $168 million for
the nine months ended September 30, 1999.
The increase in this segment's underwriting profit is reflected in its
underwriting ratios set forth below:
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------
COMBINED RATIO 1999 1998
- -------------- ----------- -----------
(UNAUDITED)
<S> <C> <C>
Loss and loss expense ratio.......................... 55.8% 70.4%
Underwriting expense ratio........................... 30.1% 22.3%
----- -----
Combined ratio....................................... 85.9% 92.7%
===== =====
</TABLE>
The decrease in the combined ratio is mainly due to a decrease in the loss
and loss expense ratio. The Company's business mix has changed relative to the
comparable period. The growth lines typically carry lower loss ratios but have
higher costs associated with the origination of business. Specifically,
Intercargo Insurance's core business, particularly customs bond and surety
insurance has a relatively high expense ratio but tends to be a lower loss ratio
business. The increase in the underwriting expense ratio is also a result of the
Company's start up operations in the U.S.
REINSURANCE OPERATIONS
The following table summarizes the underwriting profit for this segment (U.S
dollars in thousands):
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------
UNDERWRITING PROFIT 1999 1998 % CHANGE
- ------------------- ----------- ----------- --------
(UNAUDITED)
<S> <C> <C> <C>
Net premiums earned........................ $653,254 $533,037 22.6%
Net losses and loss expenses............... 369,767 312,333 18.4%
Acquisition costs.......................... 149,860 122,462 22.4%
Operating expenses......................... 69,460 58,956 17.8%
-------- --------
Net underwriting profit.................... $ 64,167 $ 39,286 63.3%
======== ========
</TABLE>
The increase in net earned premiums is principally due to the acquisition of
Mid Ocean in August 1998. As a result, the 1998 period only reflects two months
of net earned premiums as compared to nine months in 1999. The increase in
underwriting profit is due to a lower combined ratio over the comparable period
which is set forth below.
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------
COMBINED RATIO 1999 1998
- -------------- ----------- -----------
(UNAUDITED)
<S> <C> <C>
Loss and loss expense ratio.......................... 56.6% 58.6%
Underwriting expense ratio........................... 33.6% 34.0%
----- -----
Combined ratio....................................... 90.2% 92.6%
===== =====
</TABLE>
The loss and loss expense ratio decreased principally due to limited
catastrophe experience in 1999 as compared to 1998. During 1998, the Company
incurred losses relating to Hurricane Georges and Swiss Air. Underwriting
expenses were comparable.
18
<PAGE>
LLOYD'S SYNDICATES
The following table summarizes the underwriting profit for this segment (U.S
dollars in thousands):
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------
UNDERWRITING PROFIT 1999 1998 % CHANGE
- ------------------- ----------- ----------- --------
(UNAUDITED)
<S> <C> <C> <C>
Net premiums earned........................ $269,275 $70,540 N/M
Fee and other income....................... 20,495 6,542 N/M
Net losses and loss expenses............... 210,733 51,927 N/M
Acquisition costs.......................... 61,989 13,177 N/M
Operating expenses......................... 25,847 9,408 N/M
-------- -------
Underwriting (loss) profit................. ($ 8,799) $ 2,570 N/M
======== =======
</TABLE>
The significant change period over period reflects a full nine months of
Brockbank's results during 1999 compared to only three months in 1998. Brockbank
was acquired during 1998 as part of the merger with Mid Ocean Limited. In
addition, Denham's underwriting activities were not significant in 1998.
The decrease in this segment's underwriting profit is reflected in its
underwriting ratios set forth below:
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------
COMBINED RATIO 1999 1998
- -------------- ----------- -----------
(UNAUDITED)
<S> <C> <C>
Loss and loss expense ratio.......................... 78.3% 73.6%
Underwriting expense ratio........................... 32.6% 32.0%
------ ------
Combined ratio....................................... 110.9% 105.6%
====== ======
</TABLE>
The increase in the loss ratio is in line with the results of the Lloyd's
marketplace results where underwriting are generally worse in 1999 over 1998.
The expense ratio is comparable.
For reasons already noted in the discussion of the quarterly results, the
future results of this segment will change if and when the sale of Admiral
Insurance Services Limited and Zenith Insurance Policies at Lloyd's occur.
FINANCIAL SERVICES
The following table summarizes the underwriting profit for this segment
(U.S. dollars in thousands):
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------
UNDERWRITING PROFIT 1999 1998
- ------------------- ----------- -----------
(UNAUDITED)
<S> <C> <C>
Net premiums earned.................................. $15,313 $ --
Fee and other income................................. 15,139 --
Net losses and loss expenses......................... 3,761 --
Operating expenses................................... 8,910 --
------- ----
Underwriting profit.................................. $17,781 $ --
======= ====
</TABLE>
As noted in the discussion of the quarterly results, the Company commenced
writing financial guaranty business during the latter part of 1998. Due to the
immateriality of the business written during 1998, all such business was
included in the results of the insurance segment.
19
<PAGE>
Financial guaranty premiums are earned over the life of the exposure and
certain insurance transactions which receive installment premiums are not
recognized as premiums written until the premiums are due. This industry also
typically discloses the present value of unrecorded future installment premiums.
This represents future premiums that will be received from transactions already
closed and bound but not recognized under U.S. GAAP. For the Company, the
year-to-date present value premiums written is approximately $70 million.
From time to time the company will assist in structuring transactions that
will result in fee income. These transactions tend to be irregular in nature.
Such transactions require an investment of company resources which are included
in operating expenses. During the third quarter, the Company wrote a significant
loss portfolio transfer contract (which was accounted for on a deposit basis).
The Company received a fee of approximately $10 million on this transaction.
The following table presents the combined ratios for the Financial Services
segment:
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------
COMBINED RATIO 1999 1998
- -------------- ----------- -----------
(UNAUDITED)
<S> <C> <C>
Loss and loss expense ratio.......................... 24.5% --
Underwriting expense ratio........................... 58.2% --
----- ----
Combined ratio....................................... 82.7% --
===== ====
</TABLE>
This segment generally writes business to an expected loss ratio of between
25% to 30%. The high expense ratio reflects the start up nature of this segment.
CORPORATE
The following table illustrates the change in investment income and realized
gains for the nine months ended September 30, 1999 and 1998 (U.S. dollars in
thousands):
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
(U.S. DOLLARS IN THOUSANDS)
---------------------------
INVESTMENT OPERATIONS 1999 1998 % CHANGE
- --------------------- ------------ ------------ --------
(UNAUDITED)
<S> <C> <C> <C>
Net investment income...................... $398,833 $291,426 36.9%
Net realized gains......................... $ 72,389 $164,225 N/M
</TABLE>
The increase in net investment income in the first nine months of 1999 over
the same period in 1998 is mainly due to an increased average asset base during
1999. As a result of the merger with Mid Ocean, only two months of their assets
were included in 1998 compared to nine months in 1999. In addition, the average
yield on the portfolio was higher due to increases in rates and a portfolio
duration that has extended slightly to 5.6 years. The Company also held a
greater proportion of fixed income securities in the 1999 period compared to
1998.
The Company realized fewer gains in 1999, in part due to investment losses
realized in the third qarter. (See previous discussion). During 1998 the Company
realized significant gains due to the strength of the equity market at that
time.
20
<PAGE>
OTHER REVENUES AND EXPENSES
The following table sets forth other revenues and expenses for the nine
months ended September 30, 1999 and 1998 (U.S. dollars in thousands):
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
ENDED
SEPTEMBER 30,
----------------------
1999 1998 % CHANGE
-------- -------- --------
(UNAUDITED)
<S> <C> <C> <C>
Equity in net earnings of affiliates........................ $ 24,707 $53,673 (54.0%)
Amortization of intangible assets........................... 37,049 12,685 192.%
Operating expenses.......................................... 31,459 14,643 N/M
Interest expense............................................ 35,220 23,333 50.9%
Minority interest........................................... (220) 1,168 N/M
Income tax (benefit) expense................................ (27,274) 20,867 N/M
</TABLE>
The change in equity in net earnings of affiliates is primarily due to the
Company's merger with Mid Ocean Limited. Prior to the merger, the Company
maintained a 25% equity position in Mid Ocean Limited. As a result, the nine
month period in 1998 included seven months of earnings from this affiliate with
no equivalent in the comparable period in 1999. Earnings in 1999 primarily
relate to the Company's investments in Risk Capital Holdings Inc., Financial
Security Assurance International Ltd., Pareto Partners and other investment
managers.
The increase in amortization of intangible assets reflects a nine months
charge relating to the goodwill on acquisition of Mid Ocean Limited compared to
only two months in 1998. In addition, there is goodwill resulting from recent
U.S. acquisitions including ECS, Inc. and Intercargo Corporation.
The change in operating expenses, excluding one-time charges, is a result of
the increase in corporate infrastructure necessary to support the expanding
worldwide operations of the Company.
Interest expense reflects the additional indebtedness the Company carried
through the period compared to 1998. This is mainly due to the increase in debt
as a result of the Mid Ocean Limited merger, which was only outstanding from
August 1998 compared to the full nine period in 1999.
The decrease in income taxes relates to the increase to NAC Re loss reserves
and merger related costs in June 1999 which resulted in the operations of NAC Re
realizing a net loss.
FINANCIAL CONDITION AND LIQUIDITY
As a holding company, the Company has assets which consist primarily of its
investments in the stock of its 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
applicable laws, rules and regulations of Bermuda, various states of the United
States, the Republic of Ireland and the United Kingdom, including those
promulgated by the Society of Lloyd's. No assurance, however, can be given that
the Company or its subsidiaries will be permitted to pay dividends in the
future. the Company's consolidated shareholders' equity at September 30, 1999
was $5.4 billion, of which $3.0 billion was retained earnings.
At September 30, 1999, total investments and cash net of unsettled
investment trades were $8.3 billion, compared to $8.9 billion at December 31,
1998. During the quarter, the Company sold investments categorized as available
for sale to fund its investments in Highfields Capital Management and MKP
Capital Management. In addition, the Company purchased Intercargo Corporation on
May 7, 1999 and ECS, Inc. on June 1, 1999. These transactions were financed in
part through bank borrowings and internal funds.
21
<PAGE>
The Company's fixed income investments (including short-term investments and
cash equivalents) at September 30, 1999 represented approximately 87% of
invested assets and were managed by several outside investment management firms
with different strategies. Approximately 84% of fixed income securities are of
investment grade, with 57% rated Aa or AA or better by a nationally recognized
rating agency. The average quality of the fixed income portfolio was AA -.
The payable for investments purchased increased from $633.2 million at
December 31, 1998 to $788.5 million as at September 30, 1999. This increase
results from timing differences as investments are accounted for on a trade
basis.
In fiscal 1998 and in 1999 for the nine months through September 30, the net
amount of losses due to claims activity paid by the Company was $731 million and
$911.0 million respectively. This increase is primarily due to the acquisition
of Mid Ocean Limited.
The Company establishes reserves to provide for the estimated expenses of
settling claims, the general expenses of administering the claims adjustment
process and for losses incurred but not reported. These reserves are determined
by using actuarial and other reserving techniques to project the estimated
ultimate net liability for losses and loss expenses. The Company's reserving
practices and the establishment of any particular reserve reflect management's
judgement concerning sound financial practice and does not represent any
admission of liability with respect to any claims made against the Company's
subsidiaries. No assurance can be given that actual claims made and payments
related thereto will not be in excess of the amounts reserved. The Company's
reserving process includes a supplemental evaluation of the potential impact on
claims liabilities from exposure to asbestos and environmental claims, including
related loss adjustment expenses. The Company's claims and claim expense
reserves for such exposures is less than 1% of the Company's total reserves.
The Company has had several stock repurchase programs in the past as part of
its capital management. On January 22, 1999, the Board of Directors discontinued
the Company's existing program with $148.8 million remaining and replaced it
with an authorization to repurchase $500 million. During the first six months of
1999, the Company purchased 1.2 million shares at a cost of $158.2 million. In
June 1999, the Board of Directors rescinded the Company's share repurchase
program.
As of September 30, 1999, the Company had bank commitments totaling
$1.9 billion of which $411 million was outstanding. In addition, $429 million in
collateralized letters of credit were outstanding, most of which are
collateralized by the Company's investment portfolio, primarily supporting U.S.
non-admitted business and the Company's Lloyd's capital requirements. The
financing structure as of September 30, 1999 was as follows:
<TABLE>
<CAPTION>
FACILITY COMMITMENT IN USE / OUTSTANDING
- -------- ---------- --------------------
(U.S. DOLLARS IN MILLIONS)
<S> <C> <C>
Debt:
Company Term Note........................................... $ 11.0 $ 11.0
XL Insurance 364-day Revolver............................... 500.0 0.0
XL Insurance 5-year Revolver................................ 250.0 212.0
Mid Ocean 5-year Revolver................................... 100.0 87.7
XL America, Inc. 364-day Revolver........................... 150.0 0.0
NAC Re 7.15% Notes due 2005................................. 100.0 100.0
------ ------
$961.0 $410.7
====== ======
Letters of Credit
XL Insurance................................................ $300.0 $166.0
XL Mid Ocean Reinsurance.................................... 500.0 263.0
------ ------
$800.0 $429.0
====== ======
</TABLE>
22
<PAGE>
In June 1996, the Company borrowed $11.0 million from a Bermudian bank to
fund its investment in Pareto Partners, an investment management company. The
maturity date is June 27, 2001. The weighted average interest rate on funds
borrowed during the period was 5.63%.
On July 10, 1999, the Company and its wholly owned subsidiaries, XL
Insurance Ltd and XL Mid Ocean Reinsurance Ltd, obtained a $500.0 million,
364-day revolving credit facility which expires on June 21, 2000. The Company
and its subsidiaries are named borrowers and guarantors under this facility.
This facility replaces the two previous 364-day credit facilities that totaled
$350.0 million. This facility is provided by a syndicate of banks for general
corporate purposes, including working capital requirements, and as a liquidity
support for the issuance of commercial paper if the Company establishes such a
program. There are no borrowings under this facility.
XL Insurance Ltd has a $250.0 million, 5-year revolving credit facility
provided by a syndicate of banks that expires on June 5, 2002. XL Mid Ocean
Reinsurance Ltd is also a named borrower under this facility which is guaranteed
by XL Insurance Ltd. The outstanding balance of $ 212.0 million as at
September 30, 1999 represents borrowing to fund the cash election option
available to shareholders in connection with the Mid Ocean Limited merger and to
partially fund the acquisition of ECS, Inc. The weighted average interest rate
on funds borrowed during the period was 5.3%.
Mid Ocean Limited has a $100.0 million, 5-year revolving credit facility
provided by a syndicate of banks with a maturity date of September 2, 2002. The
outstanding balance of $87.7 million as at September 30, 1999 represents
borrowing to partially fund the acquisition of Intercargo Corporation on May 7,
1999. The weighted average interest rate on funds borrowed during the period was
6.34%.
XL America Inc. has a $150.0 million 364-day secured commercial paper
funding facility that is guaranteed by XL Insurance Ltd which expires on
December 31, 1999. This facility has been used to partially fund the
establishment of the Company's U.S. operations and in connection with U.S.
capital activities with amounts up to the full balance being utilized at certain
times. The facility was repaid on September 30, 1999. The weighted average
interest rate on funds borrowed during the nine-month period was 5.41%.
NAC Re Corp. 7.15% Senior Notes of $100 million maturing November 15, 2005
were inherited as part of the acquisition. These notes will remain outstanding
under the NAC Re name.
On July 10, 1999, the Company obtained a $300.0 million letter of credit
facility provided by a syndicate of banks. This facility includes XL
Insurance Ltd, XL Mid Ocean Reinsurance Ltd, XL Europe Insurance and Brockbank
plc as account parties and is guaranteed by the Company. This facility is
secured against the Company's investment portfolio and is used to collateralize
certain reinsured's technical reserves with the Company supporting U.S.
non-admitted business. This facility replaces the previously noted
$500.0 million letter of credit facility. Letters of credit outstanding under
this facility as at September 30, 1999 total approximately $166 million.
On July 10, 1999, Mid Ocean Limited increased its letter of credit facility
provided by a London bank from $325.0 million to $500.0 million. All other terms
and conditions remain the same. This facility is secured against the Company's
investment portfolio and is used to collateralize certain reinsured's technical
reserves with the Company supporting U.S. non-admitted business and Lloyd's
capital requirements. Letters of credit outstanding under this facility as at
September 30, 1999 total approximately $263 million.
During June, 1999, the Company completed its acquisition of ECS, Inc. which
was financed in part through borrowings and internal funds. In addition, with
its merger with NAC Re Corp., the Company inherited debt totaling approximately
$247.0 million: (1) $100.0 million 7.15% senior notes maturing November 15, 2005
that will remain outstanding under the NAC Re Corp.name; (2) $114.0 million
outstanding from a $200.0 million 364-day revolving credit facility provided by
a syndicate of banks for general corporate purposes; and (3) $43.0 million
outstanding from a $50.0 million 364-day revolving credit
23
<PAGE>
facility provided by a U.S. bank for general corporate purposes. The latter two
were repaid by September 30, 1999.
Following receipt of the necessary U.S. regulatory approvals on
September 30, 1999, the Company restructured its U.S. operations for a number of
business purposes, including repayment of selected U.S. debt. To effectively
utilize excess surplus that resided in a variety of XL Insurance Ltd and NAC Re
subsidiaries, NAC Re purchased a number of subsidiaries from XL America
resulting in XL America having funds of $384 million available for use. These
funds were used to: (1) repay the XL America $150.0 million 364-day secured
commercial paper funding facility, (2) repay the NAC Re Corp $114.0 million
outstanding from a $200.0 million 364-day revolving credit facility, (3) repay
the NAC Re Corp $43.0 million outstanding from a $50.0 million 364-day revolving
credit facility, and (4) fund the financing costs of the 7.15% Senior Notes
outstanding on NAC Re's balance sheet and to be available for XL America's
near-term cash flow requirements.
YEAR 2000 CONSIDERATIONS
The Company is exposed to risks associated with Year 2000 issues in terms of
both the technology systems on which it depends and the underwriting exposures
which it assumes.
In 1997, the Company initiated a project to address Year 2000 issues with
respect to the Company's computer software and information technology systems as
well as its non-information technology systems. The project has two distinct
areas of focus--assessment of the Year 2000 compliance of the Company's
software, systems and technology platforms, and the evaluation of the Year 2000
preparedness of significant third parties with whom the Company conducts
business, including vendors and customers.
The Company has substantially completed its assessment of Company software
and systems and has adopted a plan to implement compliant components, targeted
to be substantially complete by October 1999. Software and other systems vendors
continue to make available new programs, upgrades and patches to address the
results from final testing of their products. None of the vendors have, to date,
indicated any serious difficulties or delays in becoming Y2K compliant. The
Company estimates that through October 31, 1999 the remediation and validation
efforts are almost complete, with the costs through such date aggregating to
less than $10 million. Future costs of remediation are not expected to have a
material impact on the Company's financial position, results of operation or
cash flows.
The Company recognizes the potential impact of Year 2000 issues from its
service providers and customers. The Company is currently communicating with its
significant service providers to assess their readiness and will address
compliance risks with each new significant vendor. In addition, the Company's
potential exposure to its customers' Year 2000 issues is being reviewed. Formal
contingency plans will not be formulated until the Company has identified
specific areas where there is a substantial risk of Year 2000 problems
occurring, and no such areas are identified as of this date.
All insurance and reinsurance subsidiaries of the Company examine the
potential exposure to Year 2000-related risks associated with the coverages that
they provide. In some instances, Year 2000-related risks are expressly excluded
from or included in certain coverages, and in other instances, coverage in
respect of such risks is neither expressly excluded nor included. To the extent
that Year 2000-related risks materialize, participants in the property and
casualty insurance and reinsurance industry, including the Company, could pay or
incur significant claims, losses or defense costs which could have a material
adverse effect on the Company's results of operations and financial condition.
In the third quarter of 1999, certain subsidiaries of the Company received
notices of potential claims for Year 2000-related losses, including claims
notices in respect of "sue and labor" clauses in property insurance policies. In
view of the inherent uncertainties surrounding the likelihood that Year
2000-related risks will materialize and the extent to which such risks will
result in insurance and reinsurance losses, it is not possible at this time to
estimate the Company's potential exposure, if any, to claims associated with
Year 2000-related coverage issues.
24
<PAGE>
FINANCIAL RISK MANAGEMENT
This risk management discussion and the estimated amounts generated from the
sensitivity analyses are forward-looking statements of market risk assuming
certain adverse market conditions occur. Actual results in the future may differ
materially from these projected results due to actual developments in the global
financial markets. See generally "--Cautionary Note Regarding Forward-Looking
Statements". The methods used by the Company to assess and mitigate risk should
not be considered projections of future events of losses or lack of losses.
The Company's investment portfolio consists of fixed income and equity
securities, denominated in both U.S. dollars and non-U.S. Currencies.
Accordingly, earnings will be affected by, among other factors, changes in
interest rates, equity prices and foreign currency exchange rates.
FOREIGN CURRENCY EXPOSURE MANAGEMENT
The Company uses foreign exchange contracts to manage its exposure to the
effects of fluctuating foreign currencies on the value of its non-U.S. dollar
fixed maturities and its non-U.S. dollar equity investments on an overlay basis.
These contracts are not designed as specific hedges for financial reporting
purposes, and therefore realized and unrealized gains and losses recognized on
them are recorded as a component of net realized gains and losses in the period
in which they occur. These contracts generally have maturities of three months
or less. In addition, where the Company's investment managers are of the opinion
that potential gains exist in a particular currency, a forward contract may not
be entered into. The Company may also bear foreign exchange risk through
insurance or other contracts as part of its ongoing business activities. The
Company generally attempts to manage its exposures via currency overlay and
other hedging practices. At September 30, 1999, total forward foreign exchange
contracts with notional principal amounts totaling $384.1 million were
outstanding. The fair value of these contracts as at September 30, 1999, was
$372.6 million with unrealized losses of $11.5 million. Gains of $1.0 million
were realized during the period. Based on this value, a 10% appreciation or
depreciation of the U.S. dollar as compared to the level of other currencies
under contract at September 30, 1999 would have resulted in approximately
$24.8 million in unrealized gains and $52.8 million in unrealized losses,
respectively.
In addition, the Company also enters into foreign exchange contracts to buy
and sell foreign currencies in the course of trading its non-U.S. dollar
investments. These contracts are not designated as specific hedges for financial
reporting purposes and generally have maturities of two weeks or less. As such,
any realized or unrealized gains or losses are recorded in income in the period
in which they occur. At September 30, 1999, the Company had $3.8 million of such
contracts outstanding, and had recognized an immaterial amount of realized and
unrealized losses for the nine-month period. Based on this value, a 10%
appreciation or depreciation of the U.S. dollar as compared to the level of
other currencies under contract at September 30, 1999, would have had no
material effect on income.
The Company attempts to hedge directly the foreign currency exposure of a
portion of its non-U.S. dollar fixed maturity investments using forward foreign
exchange contracts that generally have maturities of three months or less, and
which are rolled over to provide continuing coverage for as long as the
investments are held. Where an investment is sold, the related foreign exchange
sale contract is closed by entering into an offsetting purchase contract. At
September 30, 1999, the Company had, as hedges, foreign exchange contracts for
the sale of $66.5 million of foreign currencies at fixed rates, primarily Euros
(31% of net contract value), British Pounds (25%), New Zealand Dollars (20%) and
Danish Kroner (10%). The market value of non-U.S. Dollar fixed maturities held
by the Company as at September 30, 1999 was $66.7 million.
Unrealized foreign exchange gains or losses on foreign exchange contracts
hedging non-U.S. Dollar fixed maturity investments are deferred and included in
shareholders' equity. As at September 30, 1999, unrealized deferred losses
amounted to $0.2 million, and were offset by corresponding decreases in the U.S.
dollar value of the investments. Realized gains and losses on the maturity of
these contracts are also
25
<PAGE>
deferred and included in shareholders' equity until the corresponding investment
is sold. As at September 30, 1999, realized deferred losses amounted to
$0.3 million.
FINANCIAL MARKET EXPOSURE
The Company also invests in a synthetic equity portfolio of S&P Index
futures with an exposure approximately equal in amount to the market value of
underlying assets held in this portfolio. As at September 30, 1999, the
portfolio held $108.9 million in exposure to S&P 500 Index futures, together
with fixed maturities, short-term investments and cash amounting to
$110.0 million. Based on this value, by definition a 10% increase or decrease in
the price of these futures would have resulted in exposure of $119.5 million and
$97.8 million, respectively. The value of the futures is updated daily with the
change recorded in income as a realized gain or loss. For the nine months ended
September 30, 1999, net realized losses from index futures totaled
$2.6 million.
Derivative investments are utilized within the portfolio on a selected
basis. At September 30, 1999, bond and stock index futures outstanding were
$127.3 million. All portfolio managers are prohibited by the Company's
investment guidelines from leveraging their positions. A 10% appreciation or
depreciation of these derivative instruments at September 30, 1999 would have
resulted in unrealized gains and losses of $12.7 million, respectively.
CURRENT OUTLOOK
The Company believes competition in the property casualty insurance and
reinsurance industry will continue to be strong for at least the near term,
exerting pressure on rates in general across many property and casualty product
lines. Certain product lines are experiencing stabilization in rates. Although
the Company believes opportunities will exist in 2000 for growth in selected
product lines and in the financial services segment, no assurances can be made
that growth will be sufficient to offset the competitive pressures affecting the
Company's other product lines.
26
<PAGE>
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 ("PSLRA") provides a
safe harbor for forward-looking statements. This Form 10-Q, the Company's annual
report to stockholders, any proxy statement, any Form 10-K or Form 8-K of the
Company, including any amendments thereto, or any other written or oral
statements made by or on behalf of the Company may include forward-looking
statements which reflect the Company's current views with respect to future
events and financial performance.
Such statements include forward-looking statements both with respect to the
Company and the insurance, reinsurance and financial services sectors in general
(both as to underwriting and investment matters). Statements that are not
historical facts or that include the words "expect", "intend", "plan",
"believe", "project", "anticipate", "will", or similar statements of a future or
forward-looking nature identify forward-looking statements for purposes of the
PSLRA.
All forward-looking statements address matters that involve risks and
uncertainties. Accordingly, there are or will be important factors that could
cause actual results to differ materially from those indicated in such
statements. The Company believes that these factors include but are not limited
to the following: (i) ineffectiveness or obsolescence of the Company's business
strategy due to changes in current or future market conditions; (ii) increased
competition on the basis of pricing, capacity, coverage terms or other factors;
(iii) greater frequency or severity of claims and loss activity, including as a
result of natural or man-made catastrophic events, than the Company's
underwriting, reserving or investment practices anticipate based on historical
experience or industry data; (iv) developments in the world's financial and
capital markets which adversely affect the performance of the Company's
investments or reduce fees earned by the Company's investment management
affiliates; (v) changes in regulations or tax laws applicable to the Company,
its subsidiaries, brokers or customers; (vi) acceptance of the Company's
products and services, including new products and services; (vii) changes in the
availability, cost or quality of reinsurance or retrocessional coverage;
(viii) changes in the distribution or placement of risks due to increased
consolidation of insurance and reinsurance brokers; (ix) the impact of Year
2000-related issues on the Company's technology systems and underwriting
exposures; (x) loss of key personnel; (xi) the effects of mergers, acquisitions
and divestitures; (xii) changes in rating agency policies or practices that may
adversely affect the Company's claims paying ratings; (xiii) changes in
accounting policies or practices; and (xiv) changes in general economic
conditions, including inflation, foreign, exchange rates and other factors. The
foregoing review of important factors should not be construed as exhaustive and
should be read in conjunction with other cautionary statements that are included
herein or elsewhere. The Company undertakes no obligation to publicly update or
revise any forward-looking statement, whether as a result of new information,
future developments or otherwise.
27
<PAGE>
XL CAPITAL LTD
PART II--OTHER INFORMATION
ITEM 1--LEGAL PROCEEDINGS
The Company, through its insurance and reinsurance subsidiaries, 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 such subsidiaries in the ordinary course of their respective
insurance and reinsurance operations. The Company does not believe that the
eventual resolution of any of the legal proceedings to which it or its
subsidiaries is a party will result in a material adverse effect on its
financial condition or results of operations.
ITEM 4--SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS
None
ITEM 6--EXHIBITS AND REPORTS ON FORM 8-K
EXHIBITS
Exhibit 11--Statement regarding Computation Per Share Earnings.
REPORTS ON FORM 8-K
Current Report on Form 8-K filed on September 8, 1999, under Item 8 thereof.
28
<PAGE>
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.
<TABLE>
<S> <C>
XL CAPITAL LTD
--------------------------------------------
(Registrant)
November 15, 1999 /s/ BRIAN M. O'HARA
--------------------------------------------
Brian M. O'Hara
PRESIDENT AND CHIEF EXECUTIVE OFFICER
November 15, 1999 /s/ ROBERT R. LUSARDI
--------------------------------------------
Robert R. Lusardi
EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL
OFFICER
</TABLE>
29
<PAGE>
COMPUTATION OF EARNINGS PER ORDINARY SHARE
AND ORDINARY SHARE EQUIVALENT
(U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -------------------
1999 1998 1999 1998
-------- -------- -------- --------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
(A) Earnings per ordinary share and ordinary share
equivalent--basic:
Weighted average ordinary shares and ordinary
share equivalents outstanding................. 127,544 116,935 127,580 106,415
-------- -------- -------- --------
Net income.................................... $137,402 $140,271 $409,921 $491,993
-------- -------- -------- --------
Earnings per ordinary share and ordinary share
equivalent.................................... $ 1.08 $ 1.20 $ 3.21 $ 4.62
======== ======== ======== ========
(B) Earnings per ordinary share and ordinary share
equivalent--assuming full dilution:
Weighted average ordinary shares and ordinary
share equivalents outstanding................. 125,449 116,700 126,691 106,263
Average stock options outstanding (net of
repurchased shares under the treasury stock
method)....................................... 1,746 2,539 2,199 2,556
Assumed conversion of convertible
debentures.................................... 1,837 1,837 1,837 1.837
-------- -------- -------- --------
Weighted average ordinary shares and ordinary
share equivalents outstanding................. 129,032 121,076 130,727 110,656
======== ======== ======== ========
Net income.................................... $137,402 $140,271 $409,921 $491,993
Add back after-tax interest on convertible
debentures.................................... 876 846 1,752 2,638
-------- -------- -------- --------
Adjusted net income........................... $138,278 $141,117 $411,673 $494,621
-------- -------- -------- --------
Earnings per ordinary share and ordinary share
equivalent.................................... $ 1.07 $ 1.17 $ 3.15 $ 4.47
======== ======== ======== ========
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1999
<DEBT-HELD-FOR-SALE> 7,520,422
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 1,033,888
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 8,554,310
<CASH> 497,576
<RECOVER-REINSURE> 794,194
<DEFERRED-ACQUISITION> 257,526
<TOTAL-ASSETS> 14,097,842
<POLICY-LOSSES> 5,007,812
<UNEARNED-PREMIUMS> 1,687,689
<POLICY-OTHER> 388,545
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 410,655
0
0
<COMMON> 1,276
<OTHER-SE> 5,362,978
<TOTAL-LIABILITY-AND-EQUITY> 14,097,842
1,289,868
<INVESTMENT-INCOME> 398,833
<INVESTMENT-GAINS> 72,389
<OTHER-INCOME> 67,928
<BENEFITS> 875,635
<UNDERWRITING-AMORTIZATION> 268,754
<UNDERWRITING-OTHER> 302,202
<INCOME-PRETAX> 382,427
<INCOME-TAX> (27,274)
<INCOME-CONTINUING> 409,921
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 409,921
<EPS-BASIC> 3.21
<EPS-DILUTED> 3.15
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
