<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 FEBRUARY 28, 1999
Commission File Number 1-10804
XL CAPITAL LTD
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
Cayman Islands 98-0058718
---------------------------- -----------------------
(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.
<TABLE>
<S> <C>
/X/ YES / / NO
- -------------------------------------------- --------------------------------------------
</TABLE>
As of April 13, 1999, there were outstanding 107,939,519 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>
2
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XL CAPITAL LTD
INDEX TO FORM 10-Q
PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Page No.
<S> <C>
Item 1. Financial Statements:
Consolidated Balance Sheets
February 28, 1999 and November 30, 1998 (unaudited) 3
Consolidated Statements of Income
Three Months Ended February 28, 1999 and 1998 (unaudited) 5
Consolidated Statements of Shareholders's Equity and
Comprehensive Income
Three Months Ended February 28, 1999 and 1998 (unaudited) 6
Consolidated Statements of Cash Flows
Three Months Ended February 28, 1999 and 1998 (unaudited) 7
Notes to Unaudited Consolidated Financial Statements 9
Item 2. Managements Discussion and Analysis of Results of Operations and
Financial Condition 10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 19
Item 4. Submission of Matters to a Vote of Shareholders 19
Item 6. Exhibits and Reports on Form 8-K 19
Signatures 21
</TABLE>
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3
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XL CAPITAL LTD
CONSOLIDATED BALANCE SHEETS
(U.S. dollars in thousands)
<TABLE>
<CAPTION>
February 28, 1999 November 30, 1998
(Unaudited)
<S> <C> <C>
ASSETS
Investments available for sale:
Fixed maturities, at market value
(amortized cost : 1999 - $5,436,523;
1998 - $5,197,246) $ 5,346,985 $5,212,581
Equity securities, at market value
(cost: 1999 - $930,827; 1998 - $995,873) 1,055,339 1,128,601
Short-term investments, at market value
(amortized cost: 1999 - $78,314; 1998 - $121,177) 77,766 121,214
------------- -------------
Total investments available for sale $ 6,480,090 $ 6,462,396
Cash and cash equivalents 524,553 443,654
Investment in affiliates
(cost: 1999 - $218,236; 1998 - $140,201) 231,314 154,044
Other investments. 48,474 41,369
Accrued investment income 66,051 59,699
Deferred acquisition costs 130,615 97,951
Prepaid reinsurance premiums 171,130 141,385
Premiums receivable 820,632 689,516
Reinsurance balances receivable 426,627 388,954
Intangible assets 1,486,794 1,500,404
Other assets 132,865 129,278
------------- ---------------
Total Assets $10,519,145 $ 10,108,650
------------- ---------------
------------- ---------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Unpaid losses and loss expenses $ 3,130,171 $ 3,121,739
Unearned premiums 1,204,733 1,010,907
Premiums received in advance 68,690 19,167
Loans payable 301,000 301,000
Accounts payable and accrued liabilities 156,277 143,529
Reinsurance premiums payable 132,855 121,291
Payable for investments purchased 672,545 526,357
Minority interest 41,485 46,780
------------- ---------------
Total Liabilities and Minority Interest $ 5,707,756 $ 5,290,770
------------- ---------------
</TABLE>
<PAGE>
4
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<TABLE>
<CAPTION>
February 28, 1999 November 30, 1998
(Unaudited)
<S> <C> <C>
Contingencies
Shareholders' Equity:
Ordinary shares (par value $0.01; issued and outstanding,
111,319,819 shares and 111,803,954 shares at February 28,
1999 and November 30, 1998, respectively. 1,113 1,118
Contributed surplus 2,285,364 2,289,456
Net unrealized appreciation of investments 47,504 159,953
Deferred compensation (23,898) (18,104)
Retained earnings 2,501,306 2,385,457
------------ ------------
Total Shareholders' Equity $ 4,811,389 $ 4,817,880
------------ ------------
Total Liabilities and Shareholders' Equity $ 10,519,145 $ 10,108,650
------------ ------------
------------ ------------
</TABLE>
See accompanying notes to Consolidated Financial Statements.
<PAGE>
5
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XL CAPITAL LTD
CONSOLIDATED STATEMENTS OF INCOME
(U.S. dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended
February 28
1999 1998
(Unaudited)
<S> <C> <C>
Revenues:
Net premiums earned $263,503 $139,882
Net investment income 97,074 57,528
Net realized gains on sale of investments 64,650 62,951
Equity in net earnings of affiliates 1,019 15,207
Fee and other income 8,077 -
------------ ---------
Total revenues $ 434,323 $ 275,568
------------ ---------
Expenses:
Losses and loss expenses 143,482 81,772
Acquisition costs 42,096 15,939
Administration expenses 39,428 15,540
Interest expense 3,924 1,788
Amortization of intangible assets 11,138 3,338
------------- ------------
Total expenses $ 240,068 $ 118,377
------------ ---------
Income before income tax
expenses and minority interest 194,255 157,191
Minority interest (395) 1,081
Income tax expense 2,917 700
------------ -------------
Net income $ 191,733 $ 155,410
------------ ---------
------------ ---------
Weighted average number of ordinary shares and
ordinary share equivalents outstanding
- Basic 111,827 84,544
- Diluted 113,763 86,004
Net income per ordinary share and ordinary share equivalent.
- Basic $ 1.71 $ 1.84
- Diluted $ 1.69 $ 1.81
Dividends declared per share $ 0.44 $ 0.40
</TABLE>
See accompanying notes to Consolidated Financial Statements.
<PAGE>
6
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XL CAPITAL LTD
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND
COMPREHENSIVE INCOME
(U.S. dollars in thousands)
<TABLE>
<CAPTION>
Three Months Ended
February 28
1999 1998
(Unaudited)
<S> <C> <C>
Ordinary Shares:
Balance - beginning of period $ 1,118 $ 844
Issue of shares 1 -
Exercise of stock options - 2
Repurchase of shares (6) -
--------- -----------
Balance - end of period 1,113 846
--------- -----------
Contributed Surplus:
Balance - beginning of period 2,289,456 290,085
Issue of shares 8,429 908
Exercise of stock options 457 7,660
Repurchase of shares (12,978) -
--------- -----------
Balance - end of period 2,285,364 298,653
--------- -----------
Net Unrealized Appreciation on Investments
Balance - beginning of period 159,953 188,444
Net change in investment portfoilio (111,685) 55,727
Net change in investment portfoilio of affiliate (764) 778
--------- -----------
Balance - end of period 47,504 244,949
--------- -----------
Deferred Compensation
Balance - beginning of period (18,104) (11,362)
Issue of restricted shares (7,757) (4,747)
Amortization 1,963 1,017
--------- -----------
Balance - end of period (23,898) (15,092)
--------- -----------
Retained Earnings
Balance - beginning of period 2,385,457 2,011,119
Net income 191,733 155,410
Cash dividends paid (49,249) (33,829)
Repurchase of treasury shares (26,635) -
--------- -----------
Balance - end of period 2,501,306 2,132,700
--------- -----------
Total shareholders' equity $ 4,811,389 $ 2,662,056
--------- -----------
--------- -----------
Comprehensive Income
Net income $ 191,733 $ 155,410
Changes in net unrealized appreciation of
investments (112,449) 56,505
--------- -----------
Comprehensive income $ 79,284 $ 211,915
--------- -----------
--------- -----------
</TABLE>
See accompanying notes to Consolidated Financial Statements.
<PAGE>
7
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XL CAPITAL LTD
CONSOLIDATED STATEMENTS OF CASH FLOWS
(U.S. dollars in thousands)
<TABLE>
<CAPTION>
Three Months Ended February 28,
1999 1998
---- ----
(Unaudited)
<S> <C> <C>
Cash flows from operating activities
Net income for the period before minority interest $191,338 $ 156,491
----------- -----------
Adjustments to reconcile net income
to net cash provided by operating activities:
Net realized gains on sale of investments (64,650) (62,951)
Amortization of discount on fixed maturities (6,388) (1,424)
Amortization of deferred compensation 1,963 1,017
Amortization of intangible assets 14,363 3,338
Equity in earnings of affiliates net of dividends
received and consolidation adjustments (2,022) (8,179)
Unpaid losses and loss expenses 8,432 67,001
Unearned premiums 193,826 85,578
Premiums received in advance 49,523 (4,209)
Deferred acquisition costs (32,664) (18,694)
Prepaid reinsurance premiums (29,745) (8,330)
Premiums receivable (131,116) (78,648)
Reinsurance balances receivable (37,673) (20,594)
Reinsurance premiums payable 11,564 (3,109)
Accrued investment income (6,352) 7,685
Accounts payable and accrued liabilities 12,748 (16,702)
----------- -----------
Total adjustments (18,191) (58,221)
----------- -----------
Net cash provided by operating activities 173,147 98,270
----------- -----------
Cash flows provided by (used in) investing activities:
Proceeds from sale of fixed maturities
and short-term investments 3,559,420 2,707,219
Proceeds from redemption of fixed
maturities and short-term investments 43,005 230,061
Proceeds from sale
of equity securities 389,524 233,607
Purchases of fixed maturities and short-term investments (3,608,020) (2,938,126)
Purchases of equity securities (297,683) (226,701)
Deferred losses on forward hedge contracts 1,603 (727)
Investment in affiliates (76,857) (12,517)
Other investments (7,105) (4,201)
Other assets (3,495) (3,943)
----------- -----------
Net cash provided by (used in) investing activities 392 (15,328)
----------- -----------
</TABLE>
<PAGE>
8
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<TABLE>
<CAPTION>
Three Months Ended February 28,
1999 1998
---- ----
(Unaudited)
<S> <C> <C>
Cash flow used in financing activities:
Dividends paid (49,249) (33,829)
Issuance of shares 672 479
Proceeds from exercise of options 458 3,344
Repurchase of shares (39,620) -
Proceeds from loans - 60,000
Repayment of loans - (100,000)
Minority interest (4,901) -
-------------- --------------
Net cash used in financing activities (92,640) (70,006)
-------------- --------------
Increase in cash and cash equivalents 80,899 12,936
Cash and cash equivalents - beginning of period $ 443,654 $ 394,599
-------------- --------------
Cash and cash equivalents - end of period $ 524,553 $ 407,535
-------------- --------------
</TABLE>
See accompanying notes to Consolidated Financial Statements
<PAGE>
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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 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.
generally accepted accounting principles for complete financial statements.
In the opinion of management, these unaudited financial statements reflect
all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation of financial position and results of
operations as of the end of and for the periods presented. The results of
operations for any interim period are not necessarily indicative of the
results for a full year. The November 30, 1998 consolidated balance sheet
data was derived from audited financial statements, but does not include all
disclosures required by generally accepted accounting principles. 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) for the year ended
November 30, 1998, as filed March 1, 1999, and amended by its Form 10-K/A
filed on March 4, 1999.
<PAGE>
10
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED FEBRUARY 28, 1999
COMPARED TO THE THREE MONTHS ENDED FEBRUARY 28, 1998
The following table presents an analysis of the Company's revenues for
the three months ended February 28, 1999 and 1998 (U.S. dollars in thousands):
<TABLE>
<CAPTION>
For the Three Months Ended
February 28,
(unaudited)
1999 1998 % Change
--------------- -------------- --------------
<S> <C> <C> <C>
Net earned premiums $263,503 $139,882 88.4%
Net investment income 97,074 57,528 68.7%
Realized (losses) gains 64,650 62,951 N/M
Equity in net earnings of affiliates 1,019 15,207 (93.3%)
Fee and other income 8,077 - N/M
</TABLE>
Both net earned premiums and net investment income increased
significantly in 1999 over 1998 primarily due to the Company's merger with
Mid Ocean Limited ("Mid Ocean") in August 1998. Mid Ocean, through its
operating subsidiaries, Mid Ocean Reinsurance Company, Ltd. ("MORe") and The
Brockbank Group plc ("Brockbank") was engaged in reinsurance and Lloyd's
business. As a result of the merger, the growth in net earned premiums and
net investment income in the first quarter of 1999 compared to the same
quarter in 1998 is not indicative for future periods.
Mid Ocean prior to the acquisition was an affiliate of the Company.
Consequently, the equity in net earnings of affiliates in 1998 reflects the
Company's share of Mid Ocean's earnings for the first three months of that
year. Since the merger in August 1998, the results for Mid Ocean have been
consolidated. At that time, XL Mid Ocean Reinsurance Ltd ("XLMORe") was
formed through the merger of MORe and the Company's wholly-owned reinsurance
subsidiary, X.L. Global Reinsurance Company, Ltd. ("XLGRe").
<PAGE>
11
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The following table reflects the underwriting revenues by line of
business for the periods indicated (U.S. dollars in thousands):
<TABLE>
<CAPTION>
For the Three Months Ended February 28,
Gross Net Net
Premiums Written Premiums Written Premiums Earned
1999 1998 1999 1998 1999 1998
(unaudited)
<S> <C> <C> <C> <C> <C> <C>
Insurance Operations
General liability $64,204 $54,418 $29,097 $40,468 $33,598 $50,602
Other liability 14,244 16,446 11,992 14,734 25,408 21,248
Property 16,109 5,548 11,095 3,990 6,100 5,289
Other 33,668 9,019 25,439 8,064 5,536 345
Reinsurance Operations
Property Catastrophe 86,192 58,257 85,017 53,491 32,700 31,309
Other Property 74,091 23,888 71,044 23,255 29,660 7,207
Marine & Energy 47,386 11,382 42,415 10,421 12,498 2,377
Aviation & Satellite 56,734 36,490 50,774 36,490 24,222 11,532
Other 32,942 24,546 30,879 24,546 8,937 9,757
Lloyds' Syndicates 74,208 10,334 68,130 1,945 84,844 216
----------- ----------- ------------- -------------- ------------- --------------
$499,778 $250,328 $425,882 $217,404 $263,503 $139,882
----------- ----------- ------------- -------------- ------------- --------------
----------- ----------- ------------- -------------- ------------- --------------
</TABLE>
The increase in gross and net premiums written and net premiums
earned is primarily due to the Company's merger with Mid Ocean, the development
of new product lines and the ability to maintain a relatively high level of
policy retention despite the highly competitive environment that the Company
and its subsidiaries operate in. In addition, the level of multi-year
premiums written increased in 1999 compared to a decline in such business in
1998.
In general liability insurance, the increase in gross premiums
written is due to an increase in multi year premiums written as evidenced by
the decline in net premiums earned. The Company continues to experience high
levels of competition, particularly on a price basis and coverage terms.
Policy retention for general liability insurance was 85.0% in 1999 compared
to 83.7% in 1998. As at February 28, 1999, the average limits for general
liability insurance was $89.8 million in excess of $150.1 million attachment
point, as compared to average limits of $88.6 million in excess of a $151.1
million attachment point for the comparable date in 1998.
Other liability insurance (comprising mostly professional lines)
decreased primarily as a result of competitive pressures from other suppliers of
these coverages in both terms and pricing.
Property insurance premiums increased in the first quarter of 1999
compared to the comparable quarter in 1998 as the Company continues to
benefit from a decision made in 1998 to write on a primary quota share basis
in addition to excess of loss and an increased emphasis on attempting to
cross sell other coverages to the Company's liability customers.
Other insurance premiums include political risk insurance
underwritten through an affiliated company, Sovereign Risk Insurance Limited.
In addition, in late 1998 the Company started providing financial guaranty
insurance in respect of asset-backed, future flow and municipal obligations.
There was no premium written for this type of business in the comparable
quarter of 1998.
Additionally, as previously mentioned, the growth in gross premiums
written was affected by the acquisition of Mid Ocean. The first three months of
1999 includes a full quarter of XLMORe and Brockbank premiums while
<PAGE>
12
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the comparable period in 1998 only included XLGRe's results. The XLMORe and
XLGRe premiums are included under Reinsurance Operations and the Brockbank
premiums are included under Lloyd's Syndicates.
Other reinsurance represents specialty liability reinsurance related
primarily to tailored programs written by XL Insurance Ltd.
Premiums written by Lloyd's syndicates for the first three months of
1998 relate solely to the Company's interest in the Venton managing agency
group at Lloyd's which was sold in October 1998.
The growth in net premiums written (gross premiums net of
reinsurance ceded) in the first quarter of 1999 over the same period in 1998
was likewise affected by the above mentioned factors. In addition, the
Insurance Operations renewed its excess of loss reinsurance contract for the
Company's general liability business at the beginning of the Company's 1999
fiscal year resulting in a reduction of net premiums written.
The increase in net premiums earned reflects the corresponding growth in
net premiums written. Unlike net premiums written, the timing differences
created by the writing of multi-year premiums are smoothed as net premiums are
earned over the lives of the policies. Thus net earned premiums earned may give
a better indication of the trends in the Company's underlying business.
<TABLE>
<CAPTION>
For the Three Months Ended
February 28,
(U.S. dollars in thousands)
(unaudited)
1999 1998 % Change
--------------- -------------- --------------
<S> <C> <C> <C>
Net investment income $97,074 $57,528 68.7%
Net realized gains $64,650 $62,951 N/M
</TABLE>
The increase in net investment income in 1999 over 1998 is due to a
number of factors. The average asset base increased primarily due to the merger
with Mid Ocean during the third quarter of 1998 and the Company's positive
operational cash flow. In addition, the average yield of the portfolio was
higher due to a widening of interest spreads and a decrease in the proportionate
amount of equity securities held as a percentage of the total investment
portfolio.
Gains realized in 1999 primarily reflected the strong performance of
the Company's equity managers and secondarily certain sectors of the fixed
income markets early in 1999. Regarding the latter, generally declining
interest rates and sector volatility have resulted in spreads widening in the
corporate and mortgage markets, thereby providing the Company with
opportunities to increase yield on its investments despite the general
decline in interest rates. Also, volatile markets may promote opportunities
for the Company's investment managers to pursue their total return objectives
with a goal of generating investment gains in the process.
<PAGE>
13
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<TABLE>
<CAPTION>
For the Three Months Ended
February 28,
(U.S. dollars in thousands)
(unaudited)
1999 1998 % Change
--------------- -------------- --------------
<S> <C> <C> <C>
Equity in net earnings of affiliates $1,019 $15,207 (93.3%)
Fee and other income $8,077 - N/M
</TABLE>
Previously, equity in net income from affiliates was derived mostly
from the Company's equity position in Mid Ocean, which ended in August 1998
upon the acquisition of the balance of the outstanding Mid Ocean shares. As a
result, three months of earnings were accounted for on this basis in 1998,
compared to none in the first quarter of 1999.
The equity in net income of affiliates in the first quarter of 1999
primarily relates to the Company's equity positions in Risk Capital Holdings
Inc. and certain limited partnerships. No positive contributions were recorded
from these affiliates in the comparable period of 1998.
Fee income primarily represents net managing agency income for fees
and profit commissions earned by Brockbank. These fees are received from the
management of Lloyd's syndicates, and profit commissions are earned under
GAAP based upon estimated results of the syndicates managed. Profit
commissions are settled and paid to the managing agent after an underwriting
year has been closed under Lloyd's rules, which is normally three years after
its inception.
COMBINED RATIO
<TABLE>
<CAPTION>
Three Months Ended February 28,
(unaudited)
1999 1998
-------------------- ------------------------
<S> <C> <C>
Loss and loss expense ratio 54.5% 58.5%
Underwriting expense ratio 30.9% 22.5%
Combined ratio 85.4% 81.0%
</TABLE>
The decrease in the loss ratio primarily reflects the diversification of
the Company's business over the past two years to include a lower proportion of
liability business, which tends to be long-tail in nature. Loss ratios for this
longer tail business can be higher but usually pay out claims over several
years. The Company experienced lower losses in shorter tail lines resulting in
an overall lower loss ratio. The decrease in the proportion of longer tail
business will cause overall Company loss ratios to decrease in periods of low
catastrophic activity. It should also be noted that the converse may also occur.
The 1999 loss ratio was also affected by the reduction of insurance
reserves previously established for the Company's other liability lines to
bring them in line with updated actuarially determined reserve estimates as
loss development becomes better established.
The increase in the expense ratio reflects the change in the Company's
business mix. The reinsurance and Lloyd's syndicate businesses typically have
higher acquisition costs that the Company's insurance business.
<PAGE>
14
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<TABLE>
<CAPTION>
Three Months Ended February 28,
(U.S. dollars in thousands, except per share amounts)
(unaudited)
1999 1998
---------------- ------------------
<S> <C> <C>
Income excluding net realized gains on investments and
amortization of intangible assets $138,221 $95,797
Net realized gains 64,650 62,951
Amortization of intangible assets (11,138) (3,338)
---------------- ------------------
Net income $191,733 $155,410
---------------- ------------------
---------------- ------------------
Earnings per share - basic $1.71 $1.84
---------------- ------------------
---------------- ------------------
Earnings per share - diluted $1.69 $1.81
---------------- ------------------
---------------- ------------------
</TABLE>
Net income for the first three months of 1999 increased over the
comparable period in 1998 due to the aforementioned items. Earnings per share
were also affected by the weighted average number of shares outstanding. On a
diluted basis, these were 113,763,000 shares and 86,004,000 shares as at
February 28, 1999 and 1998, respectively. The increase in the number of
shares for 1999 is primarily due to the issue of shares in exchange for Mid
Ocean Limited shares in August 1998.
FINANCIAL CONDITION AND LIQUIDITY
As a holding company, the Company's assets 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 the applicable laws, rules and regulation of Bermuda, the
United States, the Republic of Ireland and the United Kingdom insurance law
and regulations, including those promulgated by the Society of Lloyd's. In
order to pay dividends, the amount of which is limited to accumulated net
realized profits, XLI and XLMORe must maintain certain minimum levels of
share capital, solvency and liquidity pursuant to Bermuda statutes and
regulations. At February 28, 1999, XLI and XLMORe could have paid dividends
in the amount of approximately $1.9 billion and $1.3 billion respectively.
The Company did not have any other restrictions preventing it from paying
dividends. No assurance, however, can be given that the Company or its
subsidiaries will not be prevented from paying dividends in the future. The
Company's shareholders' equity at February 28, 1999 was $4.8 billion, of
which $2.5 billion was retained earnings.
At February 28, 1999, total investments and cash net of the
unsettled investments trades were $6.3 billion, compared to $6.4 billion at
November 30, 1998. During the quarter, the Company reallocated capital from
investments available for sale to investment in affiliates to fund its
investment in Highfields Capital Management LP. The Company's fixed income
investments (including short-term investments and cash equivalents) at
February 28, 1999 represented approximately 85% of invested assets and were
managed by several outside investment management firms with different
strategies. Approximately 83% of fixed income securities are of investment
grade, with 61% 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 has increased from $526.4 million
at November 30,1998 to $672.5 million as at February 28, 1999. This increase
results from timing differences as it is the Company's policy to account for its
investments on a trade basis.
In fiscal 1998 and in fiscal 1999 through February 28, the total amount
of losses paid by the Company was $366.5 million and $146.9 million
respectively.
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 calculated
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.
<PAGE>
15
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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
quarter of 1999, the Company had purchased 630,000 shares at a cost of $39.6
million. In addition, the Company had purchased a further 264,000 shares at a
cost of $15.9 million subsequent to the end of the quarter.
On June 11, 1997, subsidiaries of the Company obtained two revolving
lines of credit each for $250 million, one for 364 days and the other for 5
years. The one year facility has been extended for another year. These
facilities are provided by a syndicate of banks in order to facilitate strategic
acquisitions and to supplement operational cash flow. The weighted average
interest rate on the funds borrowed during the period was 5.39%. The balance of
the loans outstanding under the facilities as at February 28, 1999 was $190
million, which was extended for an additional three months at its due date on
December 16, 1998. This amount represents the balance remaining of $250 million
that was borrowed to fund the cash election option available to shareholders in
connection with the Mid Ocean merger.
Mid Ocean had obtained multi-currency committed lines of credit
provided by a syndicate of banks which provides for unsecured borrowing up to an
aggregate amount of $200 million subject to certain conditions in August 1997.
The Mid Ocean facility is split evenly between a 364-day and a 5-year facility.
These facilities remained in place following the merger with Mid Ocean. No funds
were borrowed under either of these facilities during the first quarter of 1999.
In 1998, X.L. America, Inc., ("XLA") obtained an unsecured revolving
line of credit of $100 million for 364 days from a U.S. bank. During the year
the full amount of this facility was borrowed and used to fund the Company's
U.S. operations. This line of credit was replaced in December 1998 with a $150
million commercial paper funding facility of which $100 million has been drawn.
XLI guarantees the indebtedness of XLA under this facility.
On February 27, 1998 the Company obtained a $500 million letter of
credit facility from a syndicate of banks, which is secured against the
Company's investment portfolio. This facility is used to collateralize certain
reinsured's technical reserves with the Company. The Company has committed to
letters of credit of approximately $168.0 million as at February 28, 1999.
Mid Ocean had a $325 million letter of credit facility with a London
Bank, which is secured against its investment portfolio. Letters
of credit totalling approximately $279.1 million under this facility were
outstanding as at February 28, 1999.
On December 2, 1998, the Company signed a definitive agreement to
acquire all of the outstanding shares of Intercargo Corporation, a Delaware
corporation ("Intercargo"), for $12.00 per share, or approximately $88
million. Intercargo, through its subsidiaries, underwrites specialty
insurance products for companies engaged in international trade, including
U.S. customs bonds and marine cargo insurance. The transaction is subject to
approval by Intercargo's shareholders, regulatory approvals and customary
closing conditions. The Company anticipates this transaction will be financed
on an interim basis through bank borrowings.
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. Software and other
systems vendors continue to send or promise to send 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 Year 2000 compliant. 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 June 1999. The Company
estimates that through February 28, 1999 the remediation and validation
efforts are approximately 65% complete, with the costs through such date
aggregating approximately $3.8 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.
<PAGE>
16
- --------------------------------------------------------------------------------
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 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 issues.
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. 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. and non-U.S. dollars. Accordingly, earnings
will be affected by 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 will not be entered into.
The Company may also bear foreign exchange risk through insurance or
direct contracts as part of its ongoing business activities. The Company
generally attempts to manage its exposures via currency overlay and other
hedging practices. At February 28, 1999, total forward foreign exchange
contracts with notional principal amounts totaling $313.5 million were
outstanding. The fair value of these contracts as at February 28, 1999, was
$317.2 million with unrealized gains of $3.7 million. Losses 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 February 28, 1999 would have resulted in approximately
$27.2 million in unrealized gains and $25.3 million in unrealized losses.
In addition, the Company also enters into foreign exchange contracts to
buy and sell foreign currencies in the course of trading its non-U.S. dollar
investments. These contracts are not designated as specific hedges for financial
reporting purposes, and generally have maturities of weeks or less. As such, any
realized or unrealized gains or losses are recorded in income in the period in
which they occur. At February 28, 1999, the Company had $10.1 million of such
contracts outstanding, and had recognized a total of $0.1 million in realized
and unrealized losses for the three-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 February 28, 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. When an investment is sold, the related foreign
exchange sale contract is closed by entering into an offsetting purchase
contract. At February 28, 1999 the Company had, as hedges, foreign exchange
contracts for the sale of $41.5 million of foreign currencies at fixed rates,
primarily New Zealand Dollars (29% of net contract value), Norwegian Kroner
<PAGE>
17
- --------------------------------------------------------------------------------
(28%), British Pounds (16%) and Danish Kroner (16%). The market value of
non-U.S. Dollar fixed maturities held by the Company as at February 28, 1999 was
$39.8 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 February 28, 1999, unrealized deferred
gains amounted to $0.6 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 deferred and included in shareholders'
equity until the corresponding investment is sold. As at February 28, 1999,
realized deferred losses amounted to $0.4 million.
In January 1999, eleven member states of the European Union ("EU")
began their participation in the EU's Economic and Monetary Union pursuant to
which participating Member States currencies were converted into the Euro,
the common currency for the EU. The Company has begun to provide insurance
policies denominated in the Euro. The Company is uncertain as to the impact
of the conversion on its business and financial condition and the Company has
not yet initiated a detailed analysis and plan with respect to the Euro.
Although the Company does not anticipate costs associated with the conversion
to be material, such costs are not known with precision at this time.
Financial Market Exposure
The Company also invests in a synthetic equity portfolio of S&P Index
futures with an exposure approximately equal in amount to the market value of
underlying assets held in this fund. As at February 28, 1999 the portfolio held
$112.1 million in exposure to S&P 500 Index futures together with fixed
maturities, short-term investments and cash amounting to $131.0 million. Based
on this value, by definition a 10% increase or decrease in the price of these
futures would have resulted in exposure of $123.4 million and $101.0 million,
respectively. The value of the futures is updated daily with the change recorded
in income as a realized gain or loss. For the quarter ended February 28, 1999,
net realized gains from index futures totaled $6.9 million as a result of the
6.42% increase in the S&P Index during the three-month period.
Derivative investments are also utilized to add value to the portfolio
where market inefficiencies are believed to exist. At February 28, 1999, bond
and stock index futures outstanding were $159.1 million, with underlying
investments having a market value of $2.1 billion (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 this time would have resulted in unrealized gains and losses of $15.9
million, respectively.
CURRENT OUTLOOK
The Company believes competition in the property casualty insurance and
reinsurance industry will continue to be strong and may intensify in 1999,
exerting pressure on rates in general across virtually all property and casualty
product lines. Although the Company believes some opportunities will exist in
1999 for growth in certain product lines, no assurances can be made that growth
in such other product lines will be sufficient to offset the competitive
pressures affecting the Company's original product lines.
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 stock holders, any proxy statement, any Form 10-K or Form 8-K
of the Company or any other written or oral statements made by or on behalf of
the Company may include forward-looking statements which reflect the Company's
current views with respect to future events and financial performance.
Such statements include forward-looking statements both with respect to
the Company and the insurance and reinsurance sectors in general (both as to
underwriting and investment matters). Statements that include the words
"expect", "intend", "plan" , "believe", "project", "anticipate", "will", and
similar statements of a future or forward-looking nature identify
forward-looking statements for purposes of the PSLRA.
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
<PAGE>
18
- --------------------------------------------------------------------------------
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; (v)
developments in the worlds financial and capital markets which adversely
affect the performance of the Company's investments; (vi) changes in
regulation or tax laws applicable to the Company, its subsidiaries, brokers
or customers; (vii) acceptance of the Company's products and services,
including new products and services; (viii) changes in the availability, cost
or quality of reinsurance; (ix) changes in the distribution or placement of
risks due to increased consolidation of insurance and reinsurance brokers;
(x) the impact of Year 2000-related issues on the Company's technology
systems and underwriting exposures; (xi) loss of key personnel; (xii) the
effects of mergers, acquisitions and divestitures; (xiii) changes in rating
agency policies or practices; (xiv) changes in accounting policies or
practices; and (xv) changes in general economic conditions, including
inflation, foreign, exchange rates, the introduction of the Euro 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.
<PAGE>
19
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XL CAPITAL LTD
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
The Company, through its subsidiaries, in common with the insurance and
reinsurance industry in general, is subject to litigation in the normal
course of its business. Although most of its policies provide for resolution
of disputes by arbitration in London, X.L. has been sued several times in the
Unites States courts and is defending each suit vigorously, both on
procedural grounds and the merits. As of February 28, 1999, the Company was
not a party to any material litigation other than as routinely encountered in
claims activity.
The Company, Mid Ocean and the directors of Mid Ocean have been named as
defendants in a purported class action lawsuit (the "Shareholder Action")
filed in connection with the merger with Mid Ocean in the Supreme Court,
County of New York, State of New York (the "Supreme Court") HARBOR FINANCE
PARTNERS V. NEWHOUSE, et al, C.A. No. 1998/601266. The Shareholder Action
alleges that the defendants breached their fiduciary duties to the Mid Ocean
shareholders by failing to exercise independent business judgment (due to
their alleged conflict of interest) and by agreeing to sell Mid Ocean at an
unfair and inadequate price. The Shareholder Action is brought on behalf of a
purported class of persons consisting of Mid Ocean shareholders other than
the defendants. As relief, the Shareholder Action seeks, amoung other things,
an order enjoining consummation of the merger, recission of the merger, and
an award of compensatory damages in an unspecified amount, as well as costs,
including fees for plaintiff's counsel and experts' fees and expenses. On
January 25, 1999, the Supreme Court granted the defendants' motion to dismiss
the Shareholder Action on the grounds that the Shareholder Action (i) failed
to state a claim upon which relief may be granted under Cayman Islands law
and (ii) was not brought in an appropriate forum (FORUM NON CONVENIENS). The
Supreme Court's decision is subject to appeal.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS
At a Special General Meeting of Shareholders held on February 1, 1999 at the
offices of the Company, Cumberland House, One Victoria Street, Hamilton,
Bermuda, the shareholders approved the following:
1. To approve a special resolution to change the name of the Company to
XL Capital Ltd.
<TABLE>
<CAPTION>
Votes in Favor Votes Against Abstentions
-------------- ------------- -----------
<S> <C> <C>
69,467,375 59,886 38,358
---------- ---------- ----------
</TABLE>
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 February 17, 1999 under Item 5 thereof.
<PAGE>
20
- --------------------------------------------------------------------------------
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 thereunto duly authorized.
XL CAPITAL LTD
-------------------------------------------------------
(Registrant)
April 14, 1998 /s/ Brian M. O'Hara
-------------------------------------------------------
Brian M. O'Hara
President and Chief Executive Officer
April 14, 1998 /s/ Robert R. Lusardi
-------------------------------------------------------
Robert R. Lusardi
Executive Vice President and Chief Financial Officer
- --------------------------------------------------------------------------------
<PAGE>
Exhibit 11
COMPUTATION OF EARNINGS PER ORDINARY SHARE
AND ORDINARY SHARE EQUIVALENT
<TABLE>
<CAPTION>
Three Months Ended
February 28,
1999 1998
(Unaudited)
<S> <C> <C>
(A) Earnings per ordinary share and ordinary share equivalent - basic:
Weighted average ordinary shares and
ordinary share equivalents outstanding 111,827 84,544
------------ ------------
------------ ------------
Net income $191,733 $155,410
------------ ------------
------------ ------------
Earnings per ordinary share and ordinary
share equivalent $1.71 $1.84
------------ ------------
------------ ------------
(B) Earnings per ordinary share and ordinary share equivalent - assuming
full dilution:
Weighted average ordinary shares
outstanding 111,805 84,486
Average stock options outstanding (net of
repurchased shares under the treasury
stock method) 1,958 1,518
------------ ------------
Weighted average ordinary shares and
ordinary share equivalents outstanding 113,763 86,004
------------ ------------
------------ ------------
Net income $191,733 $155,410
------------ ------------
------------ ------------
Earnings per ordinary share and ordinary
share equivalent $1.69 $1.81
------------ ------------
------------ ------------
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF INCOME AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> NOV-30-1999
<PERIOD-START> DEC-01-1998
<PERIOD-END> FEB-28-1999
<DEBT-HELD-FOR-SALE> 5,424,751
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 1,055,339
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 6,480,090
<CASH> 524,553
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 130,615
<TOTAL-ASSETS> 10,519,145
<POLICY-LOSSES> 3,130,171
<UNEARNED-PREMIUMS> 1,204,733
<POLICY-OTHER> 68,690
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 301,000
0
0
<COMMON> 1,113
<OTHER-SE> 4,810,276
<TOTAL-LIABILITY-AND-EQUITY> 10,519,145
263,503
<INVESTMENT-INCOME> 97,074
<INVESTMENT-GAINS> 64,650
<OTHER-INCOME> 9,096
<BENEFITS> 143,482
<UNDERWRITING-AMORTIZATION> 42,096
<UNDERWRITING-OTHER> 54,490
<INCOME-PRETAX> 194,650
<INCOME-TAX> 2,917
<INCOME-CONTINUING> 191,733
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 191,733
<EPS-PRIMARY> 1.71
<EPS-DILUTED> 1.69
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
