<PAGE>
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000
COMMISSION FILE NUMBER 1-10804
------------------------
XL CAPITAL LTD
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
CAYMAN ISLANDS 98-0191089
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
</TABLE>
CUMBERLAND HOUSE, 1 VICTORIA STREET, HAMILTON, BERMUDA HM11
(Address of principal executive offices and zip code)
(441) 292-8515
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes /X/ No / /
As of November 9, 2000, there were outstanding 124,364,866 Class A Ordinary
Shares, $0.01 par value per share, of the registrant.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>
XL CAPITAL LTD
INDEX TO FORM 10-Q
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheets as at September 30, 2000 and
December 31, 1999 (Unaudited)............................. 3
Consolidated Statements of Income and Comprehensive Income
for the Three Months Ended September 30, 2000 and 1999
(Unaudited) and the Nine Months Ended September 30, 2000
and 1999 (Unaudited)...................................... 4
Consolidated Statements of Shareholders' Equity for the Nine
Months Ended September 30, 2000 and 1999 (Unaudited)...... 5
Consolidated Statements of Cash Flows for the Nine Months
Ended September 30, 2000 and 1999 (Unaudited)............. 6
Notes to Unaudited Consolidated Financial Statements........ 7
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition........................ 14
Item 3. Quantitative and Qualitative Disclosures about Market
Risk...................................................... 28
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................... 31
Item 4. Submission of Matters to a Vote of Shareholders............. 31
Item 6. Exhibits and Reports on Form 8-K............................ 31
Signatures........................................................... 33
</TABLE>
2
<PAGE>
PART I--FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
XL CAPITAL LTD
CONSOLIDATED BALANCE SHEETS
(U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
(UNAUDITED)
----------------------------
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- ------------
<S> <C> <C>
ASSETS
Investments:
Fixed maturities, available for sale at fair value
(amortized cost: 2000, $8,601,100; 1999, $7,835,919).... $ 8,359,040 $ 7,581,151
Equity securities, at fair value (cost: 2000, $537,560;
1999, $863,020)......................................... 617,076 1,136,180
Short-term investments, at fair value (amortized cost:
2000, $205,696; 1999, $405,375)......................... 198,221 405,260
----------- -----------
Total investments..................................... 9,174,337 9,122,591
Cash and cash equivalents................................... 931,502 557,749
Investments in affiliates................................... 725,860 479,911
Other investments........................................... 168,840 165,613
Accrued investment income................................... 141,149 111,590
Deferred acquisition costs.................................. 325,392 275,716
Prepaid reinsurance premiums................................ 398,186 217,314
Premiums receivable......................................... 1,212,912 1,126,397
Reinsurance balances receivable............................. 135,047 149,880
Unpaid losses and loss expenses recoverable................. 1,100,796 831,864
Intangible assets (accumulated amortization: 2000, $160,072,
1999, $118,663)........................................... 1,595,132 1,626,946
Deferred tax asset, net..................................... 103,533 97,928
Other assets................................................ 356,267 327,413
----------- -----------
Total assets.......................................... $16,368,953 $15,090,912
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Unpaid losses and loss expenses............................. $ 5,369,143 $ 5,369,402
Deposit liabilities and policy benefit reserves............. 1,169,487 837,893
Unearned premiums........................................... 1,776,193 1,497,376
Notes payable and debt...................................... 450,030 410,726
Reinsurance balances payable................................ 431,804 387,916
Net payable for investments purchased....................... 1,225,484 622,260
Other liabilities........................................... 362,749 345,738
Minority interest........................................... 17,496 42,523
----------- -----------
Total liabilities..................................... $10,802,386 $ 9,513,834
----------- -----------
Commitments and Contingencies
Shareholders' Equity:
Authorized, 999,990,000 ordinary shares, par value $0.01
Issued and outstanding, ordinary shares (2000, 124,271,366;
1999, 127,807,414)........................................ 1,243 1,278
Contributed surplus......................................... 2,459,927 2,520,136
Accumulated other comprehensive (loss) income............... (138,400) 19,311
Deferred compensation....................................... (21,108) (28,797)
Retained earnings........................................... 3,264,905 3,065,150
----------- -----------
Total shareholders' equity............................ $ 5,566,567 $ 5,577,078
----------- -----------
Total liabilities and shareholders' equity............ $16,368,953 $15,090,912
=========== ===========
</TABLE>
See accompanying notes to Unaudited Consolidated Financial Statements.
3
<PAGE>
XL CAPITAL LTD
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(U.S. DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
(UNAUDITED) (UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
------------------- -----------------------
2000 1999 2000 1999
-------- -------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues:
Net premiums earned............................ $539,945 $488,729 $1,537,819 $1,289,868
Net investment income.......................... 134,624 126,560 399,591 394,833
Net realized gains (losses) on sales of
investments.................................. 1,026 (12,671) 74,808 72,389
Equity in net income of affiliates............. 18,447 15,372 61,682 24,707
Fee and other income........................... 539 28,800 8,835 43,221
-------- -------- ---------- ----------
Total revenues............................... 694,581 646,790 2,082,735 1,825,018
-------- -------- ---------- ----------
Expenses:
Losses and loss expenses....................... 338,000 310,013 969,374 875,635
Acquisition costs.............................. 130,032 103,736 349,384 268,755
Operating expenses............................. 66,809 68,336 203,883 229,932
Interest expense............................... 7,822 11,414 23,719 31,220
Amortization of intangible assets.............. 13,601 13,864 41,409 37,049
-------- -------- ---------- ----------
Total expenses............................... 556,264 507,363 1,587,769 1,442,591
-------- -------- ---------- ----------
Income before minority interest and income tax
expense........................................ 138,317 139,427 494,966 382,427
Minority interest.............................. (199) 320 528 (220)
Income tax (benefit) expense................... (945) 1,705 (11,266) (27,274)
-------- -------- ---------- ----------
Net income....................................... 139,461 137,402 505,704 409,921
-------- -------- ---------- ----------
Change in net unrealized appreciation of
investments.................................... 74 (88,852) (138,586) (295,926)
Foreign currency translation adjustments......... (8,880) 1,113 (19,195) (2,801)
-------- -------- ---------- ----------
Comprehensive income............................. $130,655 $ 49,663 $ 347,923 $ 111,194
======== ======== ========== ==========
Weighted average ordinary shares and ordinary
share equivalents outstanding--basic........... 123,821 127,544 123,962 127,580
======== ======== ========== ==========
Weighted average ordinary shares and ordinary
share equivalents outstanding--diluted......... 126,286 129,032 125,679 130,727
======== ======== ========== ==========
Earnings per ordinary share and ordinary share
equivalent--basic.............................. 1.13 1.08 4.08 3.21
======== ======== ========== ==========
Earnings per ordinary share and ordinary share
equivalent--diluted............................ 1.10 1.06 4.02 3.14
======== ======== ========== ==========
</TABLE>
See accompanying notes to Unaudited Consolidated Financial Statements.
4
<PAGE>
XL CAPITAL LTD
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(U.S. DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30
-----------------------
2000 1999
---------- ----------
<S> <C> <C>
Ordinary Shares:
Balance--beginning of year................................ $ 1,278 $ 1,287
Issue of shares........................................... -- 1
Exercise of stock options................................. 14 21
Repurchase of treasury shares............................. (49) (33)
---------- ----------
Balance--end of period................................ $ 1,243 $ 1,276
---------- ----------
Contributed Surplus:
Balance--beginning of year................................ $2,520,136 $2,508,062
Issue of shares........................................... 1,133 11,019
Exercise of stock options................................. 34,653 7,271
Repurchase of treasury shares............................. (95,995) (15,588)
---------- ----------
Balance--end of period................................ $2,459,927 $2,510,764
---------- ----------
Accumulated other comprehensive (loss) income:
Balance--beginning of year................................ $ 19,311 $ 235,185
Net change in unrealized gains on investment portfolio,
net of tax.............................................. (132,296) (291,019)
Net change in unrealized gains on investment portfolio of
affiliate............................................... (6,290) (4,907)
Currency translation adjustments.......................... (19,125) (2,802)
---------- ----------
Balance--end of period................................ $ (138,400) $ (63,543)
---------- ----------
Deferred Compensation:
Balance--beginning of year................................ $ (28,797) $ (22,954)
Forfeit (issue) of restricted shares...................... 1,676 (9,535)
Amortization.............................................. 6,013 6,359
---------- ----------
Balance--end of period................................ $ (21,108) $ (26,130)
---------- ----------
Retained Earnings:
Balance--beginning of year................................ $3,065,150 $2,891,023
Net income................................................ 505,704 409,921
Cash dividends paid....................................... (169,313) (211,778)
Repurchase of treasury shares............................. (136,636) (83,724)
---------- ----------
Balance--end of period................................ $3,264,905 $3,005,442
---------- ----------
Total shareholders' equity.................................. $5,566,567 $5,427,809
========== ==========
</TABLE>
See accompanying notes to Unaudited Consolidated Financial Statements.
5
<PAGE>
XL CAPITAL LTD
CONSOLIDATED STATEMENTS OF CASH FLOWS
(U.S. DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30
-------------------------
2000 1999
----------- -----------
<S> <C> <C>
Cash flows provided by (used in) operating activities:
Net income................................................ $ 505,704 $ 409,921
Adjustments to reconcile net income to net cash provided by
operating activities:
Net realized gains on sales of investments................ (74,808) (72,389)
Amortization of discounts on fixed maturities............. (35,801) (17,007)
Equity in net income of affiliates........................ (61,682) (24,707)
Amortization of deferred compensation..................... 6,974 6,359
Amortization of intangible assets......................... 41,409 37,049
Unpaid losses and loss expenses........................... (43,191) 111,169
Unearned premiums......................................... 278,817 350,412
Premiums receivable....................................... (86,515) (159,808)
Reinsurance balances receivable........................... 14,833 (9,081)
Unpaid losses and loss expenses recoverable............... (267,271) (130,234)
Prepaid reinsurance premiums.............................. (180,872) (143,367)
Other..................................................... (52,936) 197,109
----------- -----------
Total adjustments....................................... (461,043) 145,505
----------- -----------
Net cash provided by operating activities................. 44,661 555,426
----------- -----------
Cash flows provided by (used in) investing activities:
Proceeds from sale of fixed maturities and short-term
investments............................................. 17,942,935 12,788,599
Proceeds from redemption of fixed maturities and
short-term investments.................................. 430,274 89,264
Proceeds from sale of equity securities................... 1,136,214 994,189
Purchases of fixed maturities and short-term
investments............................................. (18,207,937) (12,651,260)
Purchases of equity securities............................ (837,356) (758,301)
Deferred gains on forward contracts....................... (1,231) (283)
Net acquisitions of affiliates............................ (135,407) (202,128)
Acquisition of subsidiaries, net of cash acquired......... (3,094) (173,334)
Other investments......................................... (26,683) (51,160)
Deposit liabilities and policy benefit reserves........... 386,318 --
Other assets.............................................. (28,276) (61,112)
----------- -----------
Net cash provided by (used in) investing activities....... 655,757 (25,526)
----------- -----------
Cash flows provided by (used in) financing activities:
Proceeds from exercise of stock options................... 34,667 8,777
Repurchase of treasury shares............................. (232,680) (99,344)
Dividends paid............................................ (169,313) (211,778)
Proceeds from loans....................................... 50,304 328,700
Repayment of notes........................................ (11,000) (331,924)
Repayment of long term debt............................... -- (201,737)
Minority interest......................................... -- (5,340)
----------- -----------
Net cash used in financing activities....................... (328,022) (512,646)
----------- -----------
Effects of exchange rate changes on foreign currency cash
balances.................................................. 1,357 (552)
----------- -----------
Increase in cash and cash equivalents....................... 373,753 16,702
Cash and cash equivalents-beginning of year................. 557,749 480,874
----------- -----------
Cash and cash equivalents-end of period..................... $ 931,502 $ 497,576
=========== ===========
</TABLE>
See accompanying notes to Unaudited Consolidated Financial Statements.
6
<PAGE>
XL CAPITAL LTD
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(U.S. DOLLARS IN THOUSANDS)
1. BASIS OF PRESENTATION
These unaudited consolidated financial statements include the accounts of XL
Capital Ltd and its subsidiaries (collectively referred to as the "Company") and
have been prepared in accordance with U.S. generally accepted accounting
principles ("GAAP") for interim financial information and with the instructions
to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include
all of the information and footnotes required by GAAP for complete financial
statements. In the opinion of management, these unaudited financial statements
reflect all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation of financial position and results of
operations as of the end of and for the periods presented. The results of
operations for any interim period are not necessarily indicative of the results
for a full year. The preparation of financial statements in conformity with GAAP
requires management to make estimates and assumptions that affect the reported
amount of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
2. BUSINESS COMBINATIONS AND CHANGE IN FISCAL YEAR END
(A) LATIN AMERICAN RE
On January 17, 2000, the Company entered into a stock repurchase agreement
with Risk Capital Holdings. As part of this agreement, the Company received the
remaining ownership (other than management shares) in Latin American Re.
(B) NAC RE CORP
In June 1999, the Company completed its merger with NAC Re Corp in an
all-stock transaction. Following the merger, the Company changed its fiscal year
end from November 30 to December 31 as a conforming pooling adjustment. All
prior period information includes NAC as though it had always been a part of the
Company. No adjustments were necessary to conform NAC's accounting policies
although certain reclassifications were made to the NAC financial statements to
conform to the Company's presentations.
3. SEGMENT INFORMATION
The Company is organized into four underwriting segments--insurance,
reinsurance, Lloyd's syndicates and financial services--in addition to a
corporate segment that includes the investment operations of the Company. The
Company evaluates the performance of each segment based on underwriting profit
or loss. Other items of revenue and expenditure of the Company are not evaluated
at the segment level. In addition, management does not allocate assets by
segment.
Certain business written by the Company has loss experience generally
characterized as low frequency and high severity. This may result in volatility
in the Company's results, the segment results and operational cash flows.
7
<PAGE>
XL CAPITAL LTD
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(U.S. DOLLARS IN THOUSANDS)
3. SEGMENT INFORMATION (CONTINUED)
The following is an analysis of the underwriting profit or loss by segment
together with a reconciliation of underwriting profit or loss to net income:
QUARTER ENDED SEPTEMBER 30, 2000
<TABLE>
<CAPTION>
LLOYD'S FINANCIAL
INSURANCE REINSURANCE SYNDICATES SERVICES TOTAL
--------- ----------- ---------- --------- --------
<S> <C> <C> <C> <C> <C>
Net premiums earned....................... $177,992 $263,033 $93,378 $5,542 $539,945
Fee and other income...................... 147 (1,461) 79 1,774 539
Net losses and loss expenses (1).......... 125,965 149,649 60,924 1,462 338,000
Acquisition costs......................... 31,402 68,412 29,109 1,109 130,032
Operating expenses........................ 21,134 17,802 8,528 5,261 52,725
Exchange gains............................ (2,555) (377) (803) -- (3,735)
-------- -------- ------- ------ --------
Underwriting profit (loss)................ $ 2,193 $ 26,086 $(4,301) $ (516) $ 23,462
Net investment income..................... 134,624
Net realized gains on investments......... 1,026
Equity in net income of affiliates........ 18,447
Interest expense.......................... 7,822
Amortization of intangible assets......... 13,601
Corporate operating expenses.............. 17,819
Minority interest......................... (199)
Income tax benefit........................ (945)
--------
Net income................................ $139,461
========
Loss and loss expense ratio (1)........... 70.8% 56.9% 65.3% 26.4% 62.6%
Underwriting expense ratio................ 29.5% 32.8% 40.3% 114.9% 33.8%
-------- -------- ------- ------ --------
Combined ratio............................ 100.3% 89.7% 105.6% 141.3% 96.4%
======== ======== ======= ====== ========
</TABLE>
------------------------
(1) Net losses incurred for the insurance segment include, and the reinsurance
segment exclude, $11.2 million relating to an intercompany stop loss
agreement. Consolidated results are not affected by this agreement. The loss
and loss expense ratio would have been 64.5% and 61.1% and the underwriting
profit would have been $13.4 million and $14.9 million in the insurance and
reinsurance segments, respectively, had this stop loss agreement not been in
place.
8
<PAGE>
XL CAPITAL LTD
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(U.S. DOLLARS IN THOUSANDS)
3. SEGMENT INFORMATION (CONTINUED)
QUARTER ENDED SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
LLOYD'S FINANCIAL
INSURANCE REINSURANCE SYNDICATES SERVICES TOTAL
--------- ----------- ---------- --------- --------
<S> <C> <C> <C> <C> <C>
Net premiums earned....................... $155,542 $235,159 $95,085 $ 2,943 $488,729
Fee and other income...................... 7,586 -- 6,669 14,545 28,800
Net losses and loss expenses.............. 98,861 137,722 72,601 829 310,013
Acquisition costs......................... 20,593 62,395 20,726 22 103,736
Operating expenses........................ 22,636 24,554 8,729 2,760 58,679
Exchange gains............................ (724) (2,418) (523) -- (3,665)
-------- -------- ------- ------- --------
Underwriting profit....................... $ 21,762 $ 12,906 $ 221 $13,877 $ 48,766
Net investment income..................... 126,560
Net realized losses on investments........ (12,671)
Equity in net income of affiliates........ 15,372
Interest expense.......................... 11,414
Amortization of intangible assets......... 13,864
Corporate operating expenses.............. 13,322
Minority interest......................... 320
Income tax expense........................ 1,705
--------
Net income................................ $137,402
========
Loss and loss expense ratio............... 63.6% 58.5% 76.3% 28.2% 63.4%
Underwriting expense ratio................ 27.8% 37.0% 31.0% 94.5% 33.2%
-------- -------- ------- ------- --------
Combined ratio............................ 91.4% 95.5% 107.3% 122.7% 96.6%
======== ======== ======= ======= ========
</TABLE>
9
<PAGE>
XL CAPITAL LTD
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(U.S. DOLLARS IN THOUSANDS)
3. SEGMENT INFORMATION (CONTINUED)
NINE MONTHS ENDED SEPTEMBER 30, 2000
<TABLE>
<CAPTION>
LLOYD'S FINANCIAL
INSURANCE REINSURANCE SYNDICATES SERVICES TOTAL
--------- ----------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C>
Net premiums earned...................... $475,572 $752,183 $291,598 $18,466 $1,537,819
Fee and other income..................... 5,353 (1,229) (3,654) 8,365 8,835
Net losses and loss expenses (1)......... 303,557 456,498 204,614 4,705 969,374
Acquisition costs........................ 74,114 185,285 88,163 1,822 349,384
Operating expenses....................... 59,296 70,454 16,471 16,909 163,130
Exchange (gains) losses.................. (2,085) 1,264 (3,197) -- (4,018)
-------- -------- -------- ------- ----------
Underwriting profit (loss)............... $ 46,043 $ 37,453 $(18,107) $ 3,395 $ 68,784
Net investment income.................... 399,591
Net realized gains on investments........ 74,808
Equity in net income of affiliates....... 61,682
Interest expense......................... 23,719
Amortization of intangible assets........ 41,409
Corporate operating expenses............. 44,771
Minority interest........................ 528
Income tax benefit....................... (11,266)
----------
Net income............................... $ 505,704
==========
Loss and loss expense ratio (1).......... 63.8% 60.7% 70.2% 25.5% 63.1%
Underwriting expense ratio............... 28.1% 34.0% 35.9% 101.4% 33.3%
-------- -------- -------- ------- ----------
Combined ratio........................... 91.9% 94.7% 106.1% 126.9% 96.4%
======== ======== ======== ======= ==========
</TABLE>
------------------------
(1) Net losses incurred for the insurance segment include, and the reinsurance
segment exclude, $22.3 million relating to an intercompany stop loss
agreement. Consolidated results are not affected by this agreement. The loss
and loss expense ratio would have been 59.1% and 63.7% and the underwriting
profit would have been $68.4 million and $15.1 million in the insurance and
reinsurance segments, respectively, had this stop loss agreement not been in
place.
10
<PAGE>
XL CAPITAL LTD
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(U.S. DOLLARS IN THOUSANDS)
3. SEGMENT INFORMATION (CONTINUED)
NINE MONTHS ENDED SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
LLOYD'S FINANCIAL
INSURANCE REINSURANCE SYNDICATES SERVICES TOTAL
--------- ----------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C>
Net premiums earned...................... $352,027 $653,254 $269,274 $15,313 $1,289,868
Fee and other income..................... 7,584 -- 20,495 15,142 43,221
Net losses and loss expenses (1) (2)..... 211,375 354,766 210,733 3,761 780,635
Acquisition costs........................ 50,746 156,020 61,989 -- 268,755
Operating expenses (3)................... 48,602 67,727 28,701 8,910 153,940
Exchange (gains) losses.................. 383 1,733 (2,855) -- (739)
-------- -------- -------- ------- ----------
Underwriting profit (loss)............... $ 48,505 $ 73,008 $ (8,799) $17,784 $ 130,498
Net investment income.................... 394,833
Net realized gains on investments........ 72,389
Equity in net income of affiliates....... 24,707
Interest expense......................... 31,220
Amortization of intangible assets........ 37,049
Corporate operating expenses............. 31,459
Loss reserve adjustment (2).............. 95,000
One-time charges (3)..................... 45,272
Minority interest........................ (220)
Income tax benefit....................... (27,274)
----------
Net income............................... $ 409,921
==========
Loss and loss expense ratio (1).......... 60.1% 54.3% 78.2% 24.6% 60.5%
Underwriting expense ratio............... 28.2% 34.3% 33.7% 58.2% 32.8%
-------- -------- -------- ------- ----------
Combined ratio........................... 88.3% 88.6% 111.9% 82.8% 93.3%
======== ======== ======== ======= ==========
</TABLE>
------------------------
(1) Net losses incurred for the insurance segment include, and the reinsurance
segment exclude, $72.5 million relating to an intercompany stop loss
agreement. Consolidated results are not affected by this agreement. The loss
and loss expense ratio would have been 39.5% and 65.4% and the underwriting
profit would have been $121.0 million and $0.5 million in the insurance and
reinsurance segments, respectively, had this stop loss agreement not been in
place.
(2) Net losses and loss expenses exclude an increase to loss reserves of
$95.0 million associated with the merger with NAC.
(3) Operating expenses exclude one-time charges of $45.3 million associated with
the merger with NAC.
11
<PAGE>
XL CAPITAL LTD
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(U.S. DOLLARS IN THOUSANDS)
3. SEGMENT INFORMATION (CONTINUED)
The following table is an analysis of the Company's gross premiums written,
net premiums written and net premiums earned by line of business:
QUARTER ENDED SEPTEMBER 30, 2000
<TABLE>
<CAPTION>
GROSS PREMIUMS NET PREMIUMS NET PREMIUMS
WRITTEN WRITTEN EARNED
-------------- ------------ ------------
<S> <C> <C> <C>
Casualty insurance................................... $190,337 $ 97,772 $ 87,945
Casualty reinsurance................................. 84,972 67,037 104,781
Property catastrophe................................. 30,997 15,422 35,328
Other property....................................... 157,211 113,825 105,797
Marine, energy, aviation and satellite............... 72,709 60,643 78,552
Lloyd's syndicates................................... 104,339 90,398 93,378
Other................................................ 95,992 55,005 34,164
-------- -------- --------
Total................................................ $736,557 $500,102 $539,945
======== ======== ========
</TABLE>
QUARTER ENDED SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
GROSS PREMIUMS NET PREMIUMS NET PREMIUMS
WRITTEN WRITTEN 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................................................ 90,402 74,053 58,457
-------- -------- --------
Total................................................ $629,617 $494,817 $488,729
======== ======== ========
</TABLE>
12
<PAGE>
XL CAPITAL LTD
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(U.S. DOLLARS IN THOUSANDS)
3. SEGMENT INFORMATION (CONTINUED) (CONTINUED)
NINE MONTHS ENDED SEPTEMBER 30, 2000
<TABLE>
<CAPTION>
GROSS PREMIUMS NET PREMIUMS NET PREMIUMS
WRITTEN WRITTEN EARNED
-------------- ------------ ------------
<S> <C> <C> <C>
Casualty insurance................................... $ 424,875 $ 267,338 $ 245,847
Casualty reinsurance................................. 342,765 246,153 297,007
Property catastrophe................................. 155,828 134,039 100,964
Other property....................................... 443,897 330,681 279,980
Marine, energy, aviation and satellite............... 307,160 216,118 164,168
Lloyd's syndicates................................... 399,945 260,379 291,598
Other................................................ 277,577 197,402 158,255
---------- ---------- ----------
Total................................................ $2,352,047 $1,652,110 $1,537,819
========== ========== ==========
</TABLE>
NINE MONTHS ENDED SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
GROSS PREMIUMS NET PREMIUMS NET PREMIUMS
WRITTEN WRITTEN EARNED
-------------- ------------ ------------
<S> <C> <C> <C>
Casualty insurance................................... $ 241,831 $ 192,608 $ 214,096
Casualty reinsurance................................. 299,628 252,716 223,011
Property catastrophe................................. 138,674 124,215 99,216
Other property....................................... 308,373 226,953 233,711
Marine, energy, aviation and satellite............... 183,774 137,299 118,709
Lloyd's syndicates................................... 480,236 355,227 269,274
Other................................................ 210,397 177,805 131,851
---------- ---------- ----------
Total................................................ $1,862,913 $1,466,823 $1,289,868
========== ========== ==========
</TABLE>
4. SHARE CAPITAL
In June 2000, the Company's Class B ordinary shares were converted into
Class A ordinary shares on a one-for-one basis.
5. SUBSEQUENT EVENT
In connection with the Company's decision in the fourth quarter of 2000 to
realign its business focus, the Company expects to incur a one-time charge in
the fourth quarter of 2000 of approximately $100.0 million to $125.0 million.
This cost relates to the realignment, including the exit from certain
unprofitable lines of business and employee severance charges. The Company is in
the process of finalizing this cost and accordingly, no assurance can be
provided that this charge will not be larger than anticipated.
XL Specialty, Lloyd's and NAC Re are most affected by these actions.
Business lines that will be exited include Illinois-based transportation and
marine cargo and onshore energy at Lloyd's. NAC Re will exit the pooled aviation
and medical stop loss reinsurance businesses. Approximately $200.0 million of
annual gross premium written is associated with the exited lines of business.
13
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2000
COMPARED TO THE THREE MONTHS SEPTEMBER 30, 1999
(U.S. DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
The following is a discussion of the Company's results of operations and
financial condition. Prior period information presented is the combination of
the results of the Company and NAC.
This "Management's Discussion and Analysis of Results of Operations and
Financial Condition" contains forward-looking statements that involve inherent
risks and uncertainties. Statements that are not historical facts, including
statements about our beliefs and expectations, are forward looking-statements.
These statements are based upon current plans, estimates and expectations.
Actual results may differ significantly from those projected in such
forward-looking statements, and therefore you should not place undue reliance on
them. See "--Cautionary Note Regarding Forward-Looking Statements" for a list of
factors that could cause actual results to differ significantly from those
contained in any forward-looking statement.
This discussion and analysis should be read in conjunction with the audited
Consolidated Financial Statements and notes thereto presented under Item 8 on
Form 10-K for the year ended December 31, 1999.
RESULTS OF OPERATIONS
The following table presents an after-tax analysis of the Company's net
income and earnings per share for the three months ended September 30, 2000 and
1999:
<TABLE>
<CAPTION>
(UNAUDITED)
THREE MONTHS ENDED
SEPTEMBER 30
-------------------
2000 1999
-------- --------
<S> <C> <C>
Net operating income (excluding net realized gains on
investments).......................................... $138,333 $149,654
Net realized gains (losses) on investments.............. 1,128 (12,252)
-------- --------
Net income.............................................. $139,461 $137,402
======== ========
Earnings per share--basic............................... $ 1.13 $ 1.08
Earnings per share--diluted............................. $ 1.10 $ 1.06
</TABLE>
Net operating income decreased in the third quarter 2000 compared to the
same period in 1999 primarily due to lower underwriting profit. In the third
quarter 1999, higher fee and other income was recorded relating to the Company's
insurance, reinsurance and Lloyd's segment operations as compared to the third
quarter 2000. These are discussed below.
SEGMENTS
The Company is organized into four underwriting segments--insurance,
reinsurance, Lloyd's syndicates and financial services--in addition to a
corporate segment, which includes the investment operations of the Company. The
results of each segment are discussed below.
The calculation of the underwriting ratios for all segments is as follows:
the combined ratio is the sum of the loss and loss expense ratio and the
underwriting expense ratio. The loss and loss expense ratio is calculated by
dividing net losses and loss expenses by net premiums earned, and the
underwriting expense ratio is calculated by dividing the total of acquisition
costs and operating expenses by net premiums earned.
14
<PAGE>
INSURANCE OPERATIONS
The insurance business is written primarily by XL Insurance, XL Europe, XL
Insurance Company of New York, Greenwich Insurance, Indian Harbor Insurance, ECS
and XL Specialty Insurance. Insurance business written includes general
liability, environmental liability, other liability (including directors and
officers, professional and employment practices liability), property, program
business, marine, aviation, satellite and other product lines (including U.S.
customs bond, surety, political risk and specialty lines).
The following table summarizes the underwriting profit for this segment:
<TABLE>
<CAPTION>
(UNAUDITED)
THREE MONTHS ENDED
SEPTEMBER 30
-------------------
2000 1999 % CHANGE
-------- -------- --------
<S> <C> <C> <C>
Net premiums earned........................... $177,992 $155,542 14.4%
Fee and other income.......................... 147 7,586 NM
Net losses and loss expenses.................. 125,965 98,861 27.4%
Acquisition costs............................. 31,402 20,593 52.5%
Operating expenses............................ 21,134 22,636 (6.6)%
Exchange gains................................ (2,555) (724) NM
-------- -------- -------
Underwriting profit........................... $ 2,193 $ 21,762 (89.9)%
======== ======== =======
</TABLE>
------------------------
* NM--Not Meaningful
Growth in net premiums earned is mainly due to the inclusion of new
business, primarily environmental liability, written by ECS. ECS contributed
approximately $80.0 million in gross premiums written and $30.0 million in net
premiums earned during the third quarter of 2000. No premiums were written or
earned in this segment in the third quarter of 1999 as ECS commenced writing
business on behalf of the Company with effect from January 1, 2000. Prior to
this date, ECS had agency agreements in place with other companies.
Price increases have been experienced in the property lines which have
contributed to the growth of net premiums earned. However, pricing generally has
remained relatively unchanged on the liability lines of business.
Net premiums earned in the quarter ended September 30, 2000 have been
reduced by approximately $9.0 million relating to additional reinsurance
purchased effective June 1, 2000.
In 1999, fee and other income was earned primarily from ECS by providing
agency and risk management consulting services. As ECS now generates premiums on
behalf of the Company, fee income has declined in the quarter ended
September 30, 2000 compared to the same period in 1999.
The increases in net losses and loss expenses, acquisition costs and
operating expenses are also primarily attributable to the new business generated
by ECS. In addition, $4.1 million of the increase in acquisition costs in the
third quarter of 2000 is due to a reallocation of certain costs from the
reinsurance segment to the insurance segment to more appropriately match costs
with revenues by segment.
15
<PAGE>
The following table presents the ratios for the insurance segment:
<TABLE>
<CAPTION>
(UNAUDITED)
THREE MONTHS ENDED
SEPTEMBER 30
-------------------
2000 1999
-------- --------
<S> <C> <C>
Loss and loss expense ratio............................. 70.8% 63.6%
Underwriting expense ratio.............................. 29.5% 27.8%
------ -----
Combined ratio.......................................... 100.3% 91.4%
====== =====
</TABLE>
In the quarter ended September 30, 2000, $11.2 million of losses were
included in the insurance segment and excluded from the reinsurance segment due
to an intercompany stop loss agreement with a company in the reinsurance
segment. The loss and loss expense ratio would have been 64.5% and the
underwriting profit would have been $13.4 million in 2000 had this agreement not
been in place. There were no losses under this agreement in the third quarter of
1999.
In addition, since the first quarter of 2000, the Company has applied higher
loss ratios to certain of its casualty lines written in the current year. These
loss ratios have been actuarially estimated and reflect the continued negative
impact that competitive market conditions have had on premium rates for these
lines of business. The loss ratio also reflects the change in mix of business in
net premiums earned in the quarter ended September 30, 2000 compared to the
third quarter of 1999.
The increase in the underwriting expense ratio is primarily due to the
reallocation of certain costs from the reinsurance segment to the insurance
segment as described above.
REINSURANCE OPERATIONS
The reinsurance business written by XL Mid Ocean Re and Latin American Re is
primarily short-tail in nature, while that written by NAC Re is primarily
long-tail casualty business. Business written in this segment includes casualty,
property catastrophe, other property, marine, energy, aviation, satellite and
other lines, including political risk and specialty lines.
The following table summarizes the underwriting profit for this segment:
<TABLE>
<CAPTION>
(UNAUDITED)
THREE MONTHS ENDED
SEPTEMBER 30
-------------------
2000 1999 % CHANGE
-------- -------- --------
<S> <C> <C> <C>
Net premiums earned........................... $263,033 $235,159 11.9%
Fee and other income.......................... (1,461) -- NM
Net losses and loss expenses.................. 149,649 137,722 8.7%
Acquisition costs............................. 68,412 62,395 9.6%
Operating expenses............................ 17,802 24,554 (27.5)%
Exchange gains................................ (377) (2,418) NM
-------- -------- -------
Underwriting profit........................... $ 26,086 $ 12,906 102.1%
======== ======== =======
</TABLE>
The increase in net premiums earned reflects additional net premiums written
in prior quarters, particularly on the property and other short-tail lines of
business, partially offset by decreases in casualty reinsurance written. The
Company has experienced some price increases in the other property, marine,
aviation and satellite lines of business. However, pricing has remained
generally unchanged in the international property (excluding property
catastrophe) and liability lines of business written by the Company.
16
<PAGE>
Negative fee and other income in the third quarter of 2000 represents
administrative costs relating to an outward reinsurance contract.
The decrease in operating expenses is due mainly to a $4.1 million
reallocation of costs in the third quarter of 2000 from the reinsurance segment
to the insurance segment to more appropriately match costs with revenues by
segment.
The following table presents the ratios for the reinsurance segment:
<TABLE>
<CAPTION>
(UNAUDITED)
THREE MONTHS ENDED
SEPTEMBER 30
-------------------
2000 1999
-------- --------
<S> <C> <C>
Loss and loss expense ratio............................. 56.9% 58.5%
Underwriting expense ratio.............................. 32.8% 37.0%
----- -----
Combined ratio.......................................... 89.7% 95.5%
===== =====
</TABLE>
In the quarter ended September 30, 2000, $11.2 million of losses were
included in the insurance segment and excluded from the reinsurance segment due
to an intercompany stop loss agreement with a company in the insurance segment.
The loss and loss expense ratio in the third quarter of 2000 would have been
61.1% and the underwriting profit would have been $14.9 million had this
agreement not been in place. There were no losses under this agreement in the
third quarter 1999.
The increase in the loss ratio, excluding the effect of the stop loss,
relates mainly to an increase in the loss ratios booked on selected casualty
lines.
The Company has recently purchased additional catastrophe reinsurance that
is expected to reduce the Company's overall exposure to certain catastrophic
events.
The reduction in the underwriting expense ratio is mainly due to the
decrease in operating expenses described above.
LLOYD'S SYNDICATES
The Lloyd's operations comprise Brockbank and Denham. Brockbank provides
underwriting and other services to five Lloyd's syndicates, two of which are
dedicated corporate syndicates whose capital is provided by the Company. These
dedicated corporate syndicates write a range of specialty lines, primarily
insurance but also reinsurance, in parallel with other syndicates managed by
Brockbank. Denham provides similar services to one corporate syndicate whose
capital is primarily provided by the Company and which specializes in liability
coverages.
The following table summarizes the underwriting (loss) profit for this
segment:
<TABLE>
<CAPTION>
(UNAUDITED)
THREE MONTHS ENDED
SEPTEMBER 30
-------------------
2000 1999 % CHANGE
-------- -------- --------
<S> <C> <C> <C>
Net premiums earned............................. $93,378 $95,085 (1.8)%
Fee and other income............................ 79 6,669 NM
Net losses and loss expenses.................... 60,924 72,601 (16.1)%
Acquisition costs............................... 29,109 20,726 40.4%
Operating expenses.............................. 8,528 8,729 (2.3)%
Exchange gains.................................. (803) (523) NM
------- ------- -------
Underwriting (loss) profit...................... $(4,301) $ 221 NM
======= ======= =======
</TABLE>
17
<PAGE>
The decline in net premiums earned reflects the decrease in premiums written
and earned by Brockbank, primarily due to the sale of the motor business with
effect from January 1, 2000. Net premiums earned on the motor business of
$43.3 million were included in the third quarter of 1999 compared to
$8.1 million in the third quarter of 2000. The Company retains the run-off
experience of this business and lower earned premiums relating to the motor
business will result in subsequent quarters. Partially offsetting the reduction
in net premiums earned was an increase in premiums written and earned at Denham
and at Brockbank on the remaining book of business. These increases are mainly
due to increases in total syndicate capacity provided by the Company for 2000
from approximately 43% to 50% at Brockbank and from approximately 43% to 75% at
Denham. The Company expects to provide 100% of the capacity at Denham with
effect from 2001.
Fee and other income in 1999 includes approximately $6.3 million generated
from the motor business. No such income was earned in 2000. Although Brockbank's
managing agencies can also earn profit commissions from the syndicates they
manage, no commissions were earned in either the third quarter of 2000 or 1999
due to expected lower underwriting profitability of the syndicates.
The following table presents the ratios for this segment:
<TABLE>
<CAPTION>
(UNAUDITED)
THREE MONTHS ENDED
SEPTEMBER 30
-------------------
2000 1999
-------- --------
<S> <C> <C>
Loss and loss expense ratio............................... 65.3% 76.3%
Underwriting expense ratio................................ 40.3% 31.0%
------ ------
Combined ratio............................................ 105.6% 107.3%
====== ======
</TABLE>
The decrease in the loss ratio and increase in the expense ratio primarily
reflects the effect of the sale of the motor business. During the third quarter
of 1999, the motor business had a loss ratio of 89.2% and an expense ratio of
20.0%. Other business written by Brockbank and Denham typically has lower loss
ratios and higher commission expenses than the motor business.
FINANCIAL SERVICES
The financial services business includes credit enhancements provided under
financial guaranty insurance and reinsurance policies and credit default swaps
written in respect of asset-backed, municipal and corporate risk obligation
transactions.
The following table summarizes the underwriting (loss) profit for this
segment:
<TABLE>
<CAPTION>
(UNAUDITED)
THREE MONTHS ENDED
SEPTEMBER 30
-------------------
2000 1999 % CHANGE
-------- -------- --------
<S> <C> <C> <C>
Net premiums earned........................... $5,542 $ 2,943 88.3%
Fee and other income.......................... 1,774 14,545 NM
Net losses and loss expenses.................. 1,462 829 76.4%
Acquisition costs............................. 1,109 22 NM
Operating expenses............................ 5,261 2,760 90.6%
Exchange gains................................ -- -- --
------ ------- -----
Underwriting (loss) profit.................... $ (516) $13,877 NM
====== ======= =====
</TABLE>
Financial guaranty premiums are earned over the life of the exposure, which
is generally longer than that in the Company's other operating segments. Certain
premiums, such as those received on an
18
<PAGE>
installment basis, are not earned until the premium is reported. The increase in
net premiums earned primarily reflects new business written in 2000.
Premiums received in respect of credit default swaps are included as fee
income and earned over the life of the policies. From time to time, the Company
will assist in structuring transactions that may result in fee income. These
transactions tend to be irregular in nature. During the quarter ended
September 30, 1999, the Company wrote a significant loss portfolio transfer
contract, which was accounted for on a deposit basis. The Company realized a fee
of approximately $10.0 million on this transaction.
The following table presents the ratios for this segment:
<TABLE>
<CAPTION>
(UNAUDITED)
THREE MONTHS ENDED
SEPTEMBER 30
-------------------
2000 1999
-------- --------
<S> <C> <C>
Loss and loss expense ratio............................. 26.4% 28.2%
Underwriting expense ratio.............................. 114.9% 94.5%
------ ------
Combined ratio.......................................... 141.3% 122.7%
====== ======
</TABLE>
This segment generally writes business to an estimated loss ratio of
approximately 25%. The calculation of the expense ratio excludes fee and other
income derived from credit default swap transactions. If this income were
included, the expense ratio and the combined ratio in 2000 would have been 87.1%
and 113.5%, respectively. The high expense ratio reflects the start up nature of
this segment, which commenced towards the end of 1998 and has continued to build
its infrastructure through 2000. The nature of this business is such that it
writes contracts that extend over several years. Accordingly, as this book of
business builds, it is anticipated that the expense ratio will decrease.
INVESTMENT OPERATIONS
The following table illustrates the changes in net investment income, net
realized gains and losses and equity in net income of affiliates for the
three-month periods ended September 30, 2000 and 1999:
<TABLE>
<CAPTION>
(UNAUDITED)
THREE MONTHS ENDED
SEPTEMBER 30
-------------------
2000 1999 % CHANGE
-------- -------- --------
<S> <C> <C> <C>
Net investment income......................... $134,624 $126,560 6.4%
Net realized gains (losses)................... $ 1,026 $(12,671) NM
Equity in net income of affiliates............ $ 18,447 $ 15,372 20.0%
</TABLE>
Net investment income has increased in the third quarter 2000 compared to
the third quarter 1999 primarily due to an increase in the investment yields on
fixed income investments.
The investment base at September 30, 2000 includes assets relating to the
deposit liabilities assumed late in 1999 and early 2000. Investment income
earned on these assets is reduced by the investment expense created by the
accretion of these deposit liabilities.
In July 2000, the Company sold its investment in FSA Holdings, Inc. Proceeds
of the sale were $159.1 million and a gain of $54.1 million was realized in the
quarter. Almost entirely offsetting this and other realized investment gains
were realized capital losses of approximately $66.2 million on certain other
investments where the Company has determined there to be an other than temporary
decline in value.
Equity in net income of affiliates has increased in the quarter primarily
due to an increase in investment in affiliates from September 30, 1999 to
September 30, 2000.
19
<PAGE>
OTHER REVENUES AND EXPENSES
The following table sets forth other revenues and expenses for the quarters
ended September 30, 2000 and 1999:
<TABLE>
<CAPTION>
(UNAUDITED)
THREE MONTHS ENDED
SEPTEMBER 30
-------------------
2000 1999 % CHANGE
-------- -------- --------
<S> <C> <C> <C>
Amortization of intangible assets............... $13,601 $13,864 (1.9)%
Corporate operating expenses.................... $17,819 $13,322 33.8%
Interest expense................................ $ 7,822 $11,414 (31.5)%
Minority interest............................... $ (199) $ 320 NM
Income tax (benefit) expense.................... $ (945) $ 1,705 NM
</TABLE>
The increase in corporate operating expenses is mainly the result of the
increase in the corporate infrastructure from September 30, 1999 to
September 30, 2000.
The decrease in interest expense reflects a reduction in debt carried by the
Company through the quarter in 2000 compared to 1999. The Company's U.S.
operations pooled capital following acquisitions in the U.S. in 1999, which
facilitated the repayment of debt during the third quarter 1999.
The change in the income tax from an expense in 1999 to a benefit in 2000
principally reflects a reduction in taxable income due to declines in operating
results worldwide.
20
<PAGE>
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000
COMPARED TO THE NINE MONTHS ENDED SEPTEMBER 30, 1999
(U.S. DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
RESULTS OF OPERATIONS
The following table presents an after-tax analysis of the Company's net
income and earnings per share for the nine months ended September 30, 2000 and
1999:
<TABLE>
<CAPTION>
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30
--------------------
2000 1999
-------- ---------
<S> <C> <C>
Net operating income (excluding net realized gains on
investments and one-time merger related
adjustments)......................................... $424,625 $ 440,204
Net realized gains on investments...................... 81,079 71,448
Increase to loss reserves for NAC Re (1)............... -- (61,750)
One-time merger related charges (1).................... -- (39,981)
-------- ---------
Net income............................................. $505,704 $ 409,921
======== =========
Earnings per share--basic.............................. $ 4.08 $ 3.21
Earnings per share--diluted............................ $ 4.02 $ 3.14
</TABLE>
------------------------
(1) NAC Re loss reserves were increased to align them with the Company's
reserving methodologies and higher loss reserve factors. One-time charges
relate to costs associated with the NAC merger.
Net operating income decreased in the nine months ended September 30, 2000
compared to the nine months ended September 30, 1999 primarily due to lower
underwriting profits in 2000. Partially offsetting this decrease is an increase
in equity in net income of affiliates.
INSURANCE OPERATIONS
The following table summarizes the underwriting profit for this segment:
<TABLE>
<CAPTION>
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30
-------------------
2000 1999 % CHANGE
-------- -------- --------
<S> <C> <C> <C>
Net premiums earned........................... $475,572 $352,027 35.1%
Fee and other income.......................... 5,353 7,584 (29.4)%
Net losses and loss expenses.................. 303,557 211,375 43.6%
Acquisition costs............................. 74,114 50,746 46.0%
Operating expenses............................ 59,296 48,602 22.0%
Exchange (gains) losses....................... (2,085) 383 NM
-------- -------- -------
Underwriting profit........................... $ 46,043 $ 48,505 (5.1)%
======== ======== =======
</TABLE>
Growth in the insurance segment in the first nine months of 2000 compared to
1999 is mainly due to the acquisition of Intercargo (now known as XL Specialty)
and ECS in the second quarter of 1999.
ECS contributed approximately $180.0 million in gross premiums written and
$70.0 million in net premiums earned during the first nine months of 2000. ECS
commenced writing business on behalf of the Company with effect from January 1,
2000. Net premiums earned generated by ECS are expected to increase through the
remainder of 2000 as net premiums earned catch up to the premium written.
21
<PAGE>
In the first nine months of 1999, fee and other income was earned primarily
by ECS by providing risk management consulting services. As ECS now generates
premium on behalf of the Company in 2000, fee income has declined compared to
1999.
The increase in net losses and loss expenses, acquisition costs and
operating expenses is primarily attributable to the new business generated by
ECS.
The following table presents the ratios for the insurance segment:
<TABLE>
<CAPTION>
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30
-------------------
2000 1999
-------- --------
<S> <C> <C>
Loss and loss expense ratio.............................. 63.8% 60.1%
Underwriting expense ratio............................... 28.1% 28.2%
----- -----
Combined ratio........................................... 91.9% 88.3%
===== =====
</TABLE>
The loss and loss expense ratio was affected by an intercompany stop loss
agreement with a company in the reinsurance segment. In the nine months ended
September 30, 2000 and 1999, $22.3 million and $72.5 million, respectively, of
losses were included in the insurance segment and excluded from the reinsurance
segment. The loss ratio would have been 59.1% and 39.5% and the underwriting
profit would have been $68.4 million and $121.0 million in 2000 and 1999,
respectively, had this agreement not been in place.
Excluding the effects of the intercompany stop loss agreement, since the
first quarter 2000, the Company has applied higher loss ratios to certain of its
casualty lines written in the current year. These loss ratios have been
actuarially estimated and reflect the continued negative impact that competitive
market conditions have had on premium rates for these lines of business. In
addition, in the first nine months of 1999, there was a reduction in loss
reserves established on the Company's other liability lines written in prior
years due to updated actuarially determined reserve estimates, where loss
experience developed more favorably than expected.
REINSURANCE OPERATIONS
The following table summarizes the underwriting profit for this segment:
<TABLE>
<CAPTION>
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30
-------------------
2000 1999 % CHANGE
-------- -------- --------
<S> <C> <C> <C>
Net premiums earned........................... $752,183 $653,254 15.1%
Fee and other income.......................... (1,229) -- NM
Net losses and loss expenses.................. 456,498 354,766 28.7%
Acquisition costs............................. 185,285 156,020 18.8%
Operating expenses............................ 70,454 67,727 4.0%
Exchange losses............................... 1,264 1,733 (27.1)%
-------- -------- -------
Underwriting profit........................... $ 37,453 $ 73,008 (48.7)%
======== ======== =======
</TABLE>
The increase in net premiums earned is mainly a result of an increase in net
premiums written across most lines of business. The Company has experienced some
price increases in the other property, marine, aviation and satellite lines of
business. However, pricing has remained generally unchanged in the international
property (excluding property catastrophe) and liability lines of business
written by the Company.
22
<PAGE>
Negative fee and other income represents administrative costs relating to an
outward reinsurance contract.
The following table presents the ratios for the reinsurance segment:
<TABLE>
<CAPTION>
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30
-------------------
2000 1999
-------- --------
<S> <C> <C>
Loss and loss expense ratio.............................. 60.7% 54.3%
Underwriting expense ratio............................... 34.0% 34.3%
----- -----
Combined ratio........................................... 94.7% 88.6%
===== =====
</TABLE>
The increase in the combined ratio is primarily due to the effect of an
intercompany stop loss agreement with a company in the insurance segment. Net
losses and loss expenses incurred in this segment in 2000 and 1999 reflect a
recovery of $22.3 million and $72.5 million, respectively, under this agreement.
The loss and loss expense ratio in 2000 and 1999 would have been 63.7% and
65.4%, respectively, and the underwriting profit would have been $15.1 million
and $0.5 million, respectively, had this agreement not been in place. The 1999
loss ratio does not include an adjustment to reserves for $95.0 million
associated with the merger with NAC and is not included as part of the segment
information.
Excluding the effect of the stop loss agreement, loss ratios for this
segment were lower in 2000 compared to 1999 as the first half of 1999 included
several property catastrophe loss events, principally the Sydney hailstorms and
the Oaklahoma tornadoes. Partially offsetting this reduction in the first nine
months of 2000 has been the deterioration of loss ratios relating to casualty
business written.
LLOYD'S SYNDICATES
The following table summarizes the underwriting loss for this segment:
<TABLE>
<CAPTION>
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30
-------------------
2000 1999 % CHANGE
-------- -------- --------
<S> <C> <C> <C>
Net premiums earned........................... $291,598 $269,274 8.3%
Fee and other income.......................... (3,654) 20,495 NM
Net losses and loss expenses.................. 204,614 210,733 (2.9)%
Acquisition costs............................. 88,163 61,989 42.2%
Operating expenses............................ 16,471 28,701 (42.6)%
Exchange gains................................ (3,197) (2,855) 12.0%
-------- -------- -------
Underwriting loss............................. $(18,107) $ (8,799) NM
======== ======== =======
</TABLE>
Net premiums earned reflect the growth in business written by Brockbank and
Denham due principally to an increase in syndicate capacity provided by the
Company from approximately 43% to 50% at Brockbank and from approximately 43% to
75% at Denham. Partially offsetting this increase is the reduction in net
premiums earned relating to the motor business. In the nine months ended
September 30, 2000 and 1999, net premiums earned on the motor business were
$74.7 million and $108.7 million, respectively. Lower net premiums earned
relating to the motor business will continue in subsequent quarters.
Fee and other income in the first nine months of 1999 includes
$17.3 million generated from the motor business. No such income was earned in
the first nine months of 2000. Brockbank's managing agencies can also earn
profit commissions from the syndicates they manage, which are offset by the
related managing agency expenses. The first nine months of 1999 included
$2.0 million in profit commissions. Due
23
<PAGE>
to the loss deterioration in the Lloyd's market, no commissions were earned in
the first nine months of 2000, resulting in negative fee and other income.
The following table presents the ratios for this segment:
<TABLE>
<CAPTION>
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30
-------------------
2000 1999
-------- --------
<S> <C> <C>
Loss and loss expense ratio.............................. 70.2% 78.2%
Underwriting expense ratio............................... 35.9% 33.7%
------ ------
Combined ratio........................................... 106.1% 111.9%
====== ======
</TABLE>
The decrease in the loss ratio primarily reflects the sale of the motor
business. Loss ratios on the motor business were 95.4% for the nine months ended
September 30, 1999 based on net premiums earned of $108.7 million and 89.0% on
net premiums earned of $74.7 million in the nine months of 2000. Other business
written by Brockbank and Denham typically has lower loss ratios and higher
commission expenses than the motor business.
FINANCIAL SERVICES
The following table summarizes the underwriting profit for this segment:
<TABLE>
<CAPTION>
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30
-------------------
2000 1999 % CHANGE
-------- -------- --------
<S> <C> <C> <C>
Net premiums earned............................. $18,466 $15,313 20.6%
Fee and other income............................ 8,365 15,142 (44.8)%
Net losses and loss expenses.................... 4,705 3,761 25.1%
Acquisition costs............................... 1,822 -- NM
Operating expenses.............................. 16,909 8,910 89.8%
Exchange gains.................................. -- -- NM
------- ------- -------
Underwriting profit............................. $ 3,395 $17,784 (80.9)%
======= ======= =======
</TABLE>
Financial guaranty premiums are earned over the life of the exposure, which
is generally longer than that in the Company's other operating segments. Certain
premiums, such as those received on an installment basis, are not earned until
the premium is reported.
Premiums received in respect of credit default swaps are included as fee
income and earned over the life of the policies. In addition, from time to time
the Company will assist in structuring transactions that may result in fee
income. These transactions tend to be irregular in nature. During the third
quarter 1999, the Company wrote a significant loss portfolio transfer contract,
which was accounted for on a deposit basis. The Company recognized a fee of
approximately $10.0 million on this transaction.
The following table presents the ratios for this segment:
<TABLE>
<CAPTION>
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30
-------------------
2000 1999
-------- --------
<S> <C> <C>
Loss and loss expense ratio.............................. 25.5% 24.6%
Underwriting expense ratio............................... 101.4% 58.2%
------ -----
Combined ratio........................................... 126.9% 82.8%
====== =====
</TABLE>
24
<PAGE>
This segment generally writes business to a loss ratio of approximately 25%.
The calculation of the expense ratio excludes fee and other income, which
includes $6.7 million in income from credit default swaps in 2000. If this
income were included, the expense ratio and the combined ratio would have been
74.4% and 99.9%, respectively. The high expense ratio reflects the start up
nature of this segment. This business commenced towards the end of 1998 and has
continued to build out its infrastructure though 2000. Accordingly, as this book
of business builds, it is anticipated the expense ratio will decrease.
INVESTMENT OPERATIONS
The following table illustrates changes in net investment income, net
realized gains and equity in net income of affiliates for the nine-month periods
ended September 30, 2000 and 1999:
<TABLE>
<CAPTION>
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30
-------------------
2000 1999 % CHANGE
-------- -------- --------
<S> <C> <C> <C>
Net investment income......................... $399,591 $394,833 1.2%
Net realized gains............................ $ 74,808 $ 72,389 3.3%
Equity in net income of affiliates............ $ 61,682 $ 24,707 NM
</TABLE>
The Company's investment base at September 30, 2000 includes assets relating
to deposit liabilities assumed in late 1999 and early 2000. Investment income
earned on these assets is reduced by the investment expense created by the
accretion of these deposit liabilities. Excluding these assets, the Company's
investment base has declined in the first nine months of 2000 compared to the
first nine months of 1999 as a result of claims payments, the repurchase of the
Company's shares and the reallocation of assets to other strategic investments,
from which income is accounted for as equity in net income of affiliates.
Offsetting the decline in the investment base, investment yields have been
slightly higher for the nine months of 2000 compared to 1999, which together
with the additional income derived from the asset accumulation business, has
resulted in higher net investment income as shown above.
Equity in net income of affiliates in the first nine months of 2000
increased significantly over the first nine months of 1999. This is primarily
attributable to new affiliate investments made in 2000 and returns on the
Company's strategic investments in investment management companies, including
funds managed by these companies. 1999 also included a loss of $2.5 million
relating to Risk Capital. This investment was sold in January 2000.
OTHER REVENUES AND EXPENSES
The following table sets forth other revenues and expenses for the nine
months ended September 30, 2000 and 1999:
<TABLE>
<CAPTION>
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30
---------------------
2000 1999 % CHANGE
--------- --------- --------
<S> <C> <C> <C>
Amortization of intangible assets............ $ 41,409 $ 37,049 11.8%
Corporate operating expenses................. $ 44,771 $ 31,459 29.7%
Interest expense............................. $ 23,719 $ 31,220 (24.0)%
Minority interest............................ $ 528 $ (220) NM
Income tax benefit........................... $(11,266) $(27,274) (58.7)%
</TABLE>
The increase in amortization of intangible assets is primarily a result of
additional goodwill generated from the acquisition of ECS and XL Specialty late
in the second quarter of 1999.
The increase in corporate operating expenses is mainly a result of the
increase in corporate infrastructure from September 30, 1999 to September 30,
2000.
25
<PAGE>
The decrease in interest expense reflects a reduction in debt carried by the
Company through the nine months of 2000 compared to 1999. The Company
extinguished convertible debt assumed in connection with the NAC merger. In
addition, the Company pooled capital with its existing operations as a result of
acquisitions in the U.S. in 1999, which facilitated the repayment of debt during
the third quarter of 1999. This decrease was partially offset by interest
expense relating to interim borrowings used to finance the repurchase of shares
in the six months ended June 30, 2000.
The reduction in the income tax benefit of the Company in the first nine
months of 2000 compared to the first nine months of 1999 principally reflects a
reduction in pre-tax net losses. In 1999, the pre-tax net loss related primarily
to a deterioration of the casualty reinsurance book of business underwritten
prior to the merger with NAC.
FINANCIAL CONDITION AND LIQUIDITY
As a holding company, XL Capital's assets consist primarily of its
investments in subsidiaries and future cash flows depend on the availability of
dividends or other statutorily permissible payments from its subsidiaries. The
ability to pay such dividends is limited by the applicable laws and regulations
of Bermuda, the United States, Ireland and the United Kingdom, including those
of the Society of Lloyd's. No assurance can be given that the Company or its
subsidiaries will be permitted to pay dividends in the future. The Company's
shareholders' equity at September 30, 2000 was $5.6 billion, of which
$3.3 billion was retained earnings.
At September 30, 2000, total investments available for sale and cash net of
unsettled investment trades were $8.9 billion, compared to $9.1 billion at
December 31, 1999. This includes investments relating to the Company's asset
accumulation business. During the first nine months of 2000, the Company sold
investments categorized as available for sale to fund the purchase of strategic
investments, the payment of claims and the repurchase of shares.
The Company's fixed income investments, including short-term investments and
cash equivalents, at September 30, 2000 represented approximately 93.0% of
invested assets and were managed by several independent investment management
firms. Approximately 87.0% of fixed income securities are of investment grade,
with 59.9% rated Aa or AA or better by a nationally recognized rating agency.
The average quality of the fixed income portfolio was AA-.
The net payable for investments purchased relates to timing differences as
investments are accounted for on a trade date basis. This increased from $622.3
million at December 31, 1999 to $1.2 billion at September 30, 2000 primarily due
to higher investment in certain mortgage-backed securities where the settlement
period is generally longer than most other fixed income investments.
Certain business written by the Company has loss experience generally
characterized as having low frequency and high severity. This may result in
volatility in both the Company's results and operational cash flows. For the
nine months ended September 30, 2000 and 1999, the net amount of losses due to
claims activity paid by the Company was $1.3 billion and $911.0 million,
respectively. Paid losses for the nine months ended September 30, 2000 includes
$74.0 million relating to a commutation payment. The higher amount of paid
claims in the first nine months of 2000 compared to the first nine months of
1999 has contributed to the lower operational cash flow in 2000 as compared to
1999.
The Company establishes reserves to provide for the estimated expenses of
settling claims, the general expenses of administering the claims adjustment
process and for losses incurred but not reported. These reserves are determined
using actuarial and other reserving techniques to project the estimated ultimate
net liability for losses and loss expenses. The Company's reserving practices
and the establishment of any particular reserve reflect management's judgement
concerning sound financial practice and does not represent any admission of
liability with respect to any claims made against the Company. No assurance can
be given that actual claims made and payments related thereto will not be in
excess of the amounts reserved. The Company's reserving process includes a
supplemental evaluation of the potential impact on claims liabilities from
exposure to asbestos and environmental claims, including related loss adjustment
expenses. The Company's claims and claim expense reserves for such exposures is
less than 1% of the Company's reserves.
26
<PAGE>
The Company has had several stock repurchase programs in the past as part of
its capital management strategy. In June 1999, the Board of Directors rescinded
the Company's share repurchase program. On January 9, 2000, the Board of
Directors authorized a new program for the repurchase of shares up to
$500.0 million. The new share repurchase program was announced in conjunction
with a dividend increase of $0.04 per share per annum. Under the current
program, the Company has purchased 4.9 million shares up to November 9, 2000 at
a cost of $231.9 million or an average of $47.56 per share.
As of September 30, 2000, the Company had bank, letter of credit and loan
facilities available from a variety of sources including commercial banks
totaling $2.6 billion of which $450.0 million in debt was outstanding. In
addition, $1.1 billion of letters of credit were outstanding, 26% of which were
collateralized by the Company's investment portfolio, supporting U.S.
non-admitted business and the Company's Lloyd's capital requirements.
Approximately one half of these letters of credit outstanding were issued in
connection with intercompany reinsurance agreements.
The financing structure as of September 30, 2000 was as follows:
<TABLE>
<CAPTION>
IN USE/
FACILITY COMMITMENT OUTSTANDING
-------- ---------- -----------
<S> <C> <C>
DEBT:
364-day Revolver................................... $ 500,000 $ --
2 facilities of 5-year Revolvers--total............ 350,000 350,000
7.15% Notes due 2005............................... 100,000 100,000
---------- ----------
$ 950,000 $ 450,000
========== ==========
LETTERS OF CREDIT:
5 facilities--total................................ $1,631,000 $1,086,000
========== ==========
</TABLE>
The Company entered a $500.0 million 364-day revolving credit facility
effective July 5, 2000 to replace the previous facility in the same amount that
expired on June 28, 2000. A syndicate of banks provides the new facility and
borrowings are unsecured. There were no borrowings under either the expired or
new facility during the nine months ended September 30, 2000.
The Company repaid an $11.0 million term note on September 29, 2000.
Two syndicates of banks provide the two five-year facilities and borrowings
are unsecured. Under these facilities, $350.0 million outstanding at
September 30, 2000 related primarily to the remaining outstanding balance from
the $300.0 million borrowed to finance the cash option election available to
shareholders in connection with the Mid Ocean acquisition in August 1998, and
$109.7 million borrowed to finance the acquisition of ECS and XL Specialty
Insurance during 1999. The weighted average interest rate on funds borrowed
during the nine months ended September 30, 2000 was approximately 6.5%.
At September 30, 2000 and 1999, the Company had $100.0 million of 7.15%
Senior Notes due November 15, 2005 outstanding.
Total pre-tax interest expense on the borrowings described above was
$23.7 million and $31.2 million for the nine months ended September 30, 2000 and
1999, respectively. Associated with the Company's bank and loan commitments are
various loan covenants with which the Company was in compliance throughout both
nine-month periods.
The Company had five letter of credit facilities available at September 30,
2000, one from a syndicate of banks, three from U.K. banks and one from a U.S.
bank. These facilities include a new $1.0 billion unsecured syndicated letter of
credit facility that became available on July 5, 2000, replacing two syndicated
facilities. These facilities are used to collateralize certain reinsureds'
premium and unpaid loss reserves with the Company and for Lloyd's capital
requirements of the Company's corporate syndicates. Of the letters of credit
outstanding at September 30, 2000, approximately $280.0 million were
collateralized
27
<PAGE>
against the Company's investment portfolio and $806.0 million were unsecured. On
November 3, 2000, the Company entered into a new $325.0 million unsecured
facility with a group of banks. This new facility will be used to support the
Company's Lloyd's capital requirements and will replace several existing
facilities. The Company is currently in the process of transferring letters of
credit issued out of the replaced facilities into the new syndicated facilities.
YEAR 2000 CONSIDERATIONS
There was no significant impact from Year 2000 issues on the Company's
technology systems. The Company did not experience any significant disruption
due to the impact of Year 2000 issues on its service providers.
The Company is subject to risks associated with Year 2000 issues based upon
the underwriting exposures that it assumes. All insurance and reinsurance
subsidiaries of the Company examined the potential exposure to Year 2000-related
risks associated with the coverages that they provided. In some instances, Year
2000-related risks were expressly excluded from or included in certain
coverages, and in other instances, coverage in respect of such risks is neither
expressly excluded nor included. To the extent that Year 2000-related risks
materialize, participants in the property and casualty insurance and reinsurance
industry, including the Company, could pay or incur significant claims, losses
or defense costs which could have a material adverse effect on the Company's
results of operations and financial condition. The Company has been notified of
certain Year 2000-related claims. In view of the apparent lack of significant
Year 2000-related losses, however, the Company does not expect to have a
material exposure to Year 2000-related coverage claims. See generally
"--Cautionary Note Regarding Forward-Looking Statements".
CURRENT OUTLOOK
Pricing continues to improve on the Company's short-tail business, namely
property, property catastrophe, marine and aviation. There have been some signs
of recent price increases in selected liability markets. However, to date,
little or no price improvements have been experienced in the international
property (excluding property catastrophe) and directors and officers liability
lines written by the Company.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to various market risks, including changes in
interest rates and foreign currency exchange rates. The Company manages its
market risks based on guidelines established by management. The Company enters
into derivatives and other financial instruments primarily for risk management
purposes.
This risk management discussion and the estimated amounts generated from the
sensitivity analyses are forward-looking statements of market risk assuming
certain adverse market conditions occur. Actual results in the future may differ
materially from these projected results due to, among other things, actual
developments in the global financial markets. The analysis methods used by the
Company to assess and mitigate risk should not be considered projections of
future events of losses or lack of losses. See generally "--Cautionary Note
Regarding Forward-Looking Statements."
The Company's investment portfolio consists of fixed income and equity
securities, denominated in both U.S. dollars and foreign currencies.
Accordingly, earnings will be affected by, among other things, changes in
interest rates, equity prices and foreign currency exchange rates.
FOREIGN CURRENCY EXPOSURE MANAGEMENT
The Company uses foreign exchange contracts to manage its exposure to the
effects of fluctuating foreign currencies on the value of its foreign currency
fixed maturities and equity investments. These
28
<PAGE>
contracts are not designated as specific hedges for financial reporting purposes
and therefore, realized and unrealized gains and losses on these contracts are
recorded in income in the period in which they occur. These contracts generally
have maturities of three months or less. In addition, where the Company's
investment managers are of the opinion that potential gains exist in a
particular currency, a forward contract may not be entered into. At
September 30, 2000, forward foreign exchange contracts with notional principal
amounts totaling $198.7 million were outstanding. The fair value of these
contracts as at September 30, 2000 was $199.9 million with unrealized gains of
$1.2 million. Gains of $37.6 million were realized during the nine months ended
September 30, 2000. Based on this value, a 10% appreciation or depreciation of
the U.S. dollar as compared to the level of other currencies under contract at
September 30, 2000 would have resulted in approximately $16.3 million in
unrealized losses and $12.6 million in unrealized gains.
The Company also uses foreign exchange contracts to manage its exposure to
the effects of fluctuating foreign currencies on the amount of its known claims
payable in foreign currencies. These contracts are not designated as specific
hedges for financial reporting purposes and therefore, realized and unrealized
gains and losses on these contracts are recorded in income in the period in
which they occur. At September 30, 2000, forward foreign exchange contracts with
notional principal amounts totaling $22.8 million were outstanding. The fair
value of these contracts as at September 30, 2000 was $22.0 million with
unrealized losses of $0.8 million. Gains of $5.9 million were realized during
the nine months ended September 30, 2000. Based on this value, a 10%
appreciation or depreciation of the U.S. dollar as compared to the level of
other currencies under contract at September 30, 2000 would have resulted in
approximately $2.5 million in unrealized gains and $2.1 million in unrealized
losses.
In addition, the Company also enters into foreign exchange contracts to buy
and sell foreign currencies in the course of trading its foreign currency
investments. These contracts are not designated as specific hedges, and
generally have maturities of two weeks or less. As such, any realized or
unrealized gains or losses are recorded in income in the period in which they
occur. At September 30, 2000, the value of such contracts was not significant.
FINANCIAL MARKET EXPOSURE
The Company invests in a synthetic equity portfolio of S&P 500 Index futures
with an exposure approximately equal in amount to the market value of underlying
assets held in this fund. As at September 30, 2000, the portfolio held
$69.1 million in exposure to S&P 500 Index futures and underlying assets of
$69.0 million. Based on this value, a 10% increase or decrease in the price of
these futures would have resulted in exposure of $76.0 million and
$62.1 million, respectively. The value of the futures is updated daily with the
change recorded in income as a realized gain or loss. For the nine months ended
September 30, 2000, net realized losses from index futures totaled $4.1 million
as a result of the 2% decrease in the S&P 500 Index.
Derivative investments are also used to add value to the portfolio where
market inefficiencies are believed to exist. At September 30, 2000, bond and
stock index futures outstanding were $130.0 million with underlying investments
having a market value of $4.5 billion. A 10% appreciation or depreciation of
these derivative instruments would have resulted in unrealized gains of
$13.0 million and unrealized losses of $13.0 million.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 ("PSLRA") provides a
safe harbor for forward-looking statements. This Form 10-Q, the Company's annual
report to stockholders, any proxy statement, any Form 10-K or Form 8-K of the
Company, including any amendments thereto, or any other written or oral
statements made by or on behalf of the Company may include forward-looking
statements which reflect the Company's current views with respect to future
events and financial performance.
29
<PAGE>
Such statements include forward-looking statements both with respect to the
Company generally, as well as its four underwriting sectors and its corporate
segment (both as to underwriting and investment matters) specifically.
Statements that are not historical facts or that include the words "expect",
"intend", "plan, "believe", "project", "anticipate", "will", or similar
statements of a future or forward-looking nature identify forward-looking
statements for purposes of the PSLRA.
All forward-looking statements address matters that involve risks and
uncertainties. Accordingly, there are or will be important factors that could
cause actual results to differ materially from those indicated in such
statements. The Company believes that these factors include but are not limited
to the following: (i) ineffectiveness or obsolescence of the Company's business
strategy due to changes in current or future market conditions; (ii) increased
competition on the basis of pricing, capacity, coverage terms or other factors;
(iii) actual charges of costs associated with the Company's realignment being
larger than currently anticipated; (iv) greater frequency or severity of claims
and loss activity, including as a result of natural or man-made catastrophic
events, than the Company's underwriting, reserving or investment practices
anticipate based on historical experience or industry data; (v) developments in
the world's financial and capital markets which adversely affect the performance
of the Company's investments or reduce fees earned by the Company's investment
management affiliates; (vi) changes in regulations or tax laws applicable to the
Company, its subsidiaries, brokers or customers; (vii) acceptance of the
Company's products and services, including new products and services;
(viii) changes in the availability, cost or quality of reinsurance or
retrocessional coverage; (ix) changes in the distribution or placement of risks
due to increased consolidation of insurance and reinsurance brokers; (x) the
impact of Year 2000-related issues on the Company's underwriting exposures;
(xi) loss of key personnel; (xii) the effects of mergers, acquisitions and
divestitures; (xiii) changes in rating agency policies or practices that may
adversely affect the Company's claims paying ratings; (xiv) changes in
accounting policies or practices; and (xv) changes in general economic
conditions, including inflation, foreign, exchange rates, and other factors. The
foregoing review of important factors should not be construed as exhaustive and
should be read in conjunction with other cautionary statements that are included
herein or elsewhere. The Company undertakes no obligation to publicly update or
revise any forward-looking statement, whether as a result of new information,
future developments or otherwise.
30
<PAGE>
XL CAPITAL LTD
PART II--OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company, in common with the insurance and reinsurance industry in
general, is a party to various legal proceedings, including arbitration, arising
in the ordinary course of business. Such legal proceedings generally relate to
claims asserted by or against the Company's subsidiaries in the ordinary course
of their respective insurance and reinsurance operations. The Company does not
believe that the eventual resolution of any of the legal proceedings to which it
is a party will result in a material adverse effect on its financial condition
or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
11. Statement Regarding Computation of Per Share Earnings.
(B) REPORTS ON FORM 8-K
None.
31
<PAGE>
XL CAPITAL LTD
COMPUTATION OF EARNINGS PER ORDINARY SHARE
AND ORDINARY SHARE EQUIVALENT
(U.S. DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
(UNAUDITED) (UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
------------------- -------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Basic earnings per share:
Net income.......................................... $139,461 $137,402 $505,704 $409,921
Weighted average ordinary shares outstanding........ 123,821 127,544 123,962 127,580
Basic earnings per share............................ $ 1.13 $ 1.08 $ 4.08 $ 3.21
======== ======== ======== ========
Diluted earnings per share:
Net income.......................................... $139,461 $137,402 $505,704 $409,921
Add back after-tax interest on convertible
debentures........................................ -- 876 -- 1,752
-------- -------- -------- --------
Adjusted net income................................. $139,461 138,278 $505,704 411,673
-------- -------- -------- --------
Weighted average ordinary shares
outstanding-basic................................. 124,008 125,449 124,563 126,691
Average stock options outstanding (1)............... 2,278 1,746 1,116 2,199
Assumed conversion of convertible debentures (2).... -- 1,837 -- 1,837
-------- -------- -------- --------
Weighted average ordinary shares
outstanding-diluted............................... 126,286 129,032 125,679 130,727
-------- -------- -------- --------
Diluted earnings per share.......................... $ 1.10 $ 1.06 $ 4.02 $ 3.14
======== ======== ======== ========
Dividends per share................................. $ 0.45 $ 0.44 $ 1.35 $ 1.32
======== ======== ======== ========
</TABLE>
------------------------
(1) Net of shares repurchased under the treasury stock method.
(2) 1999 reflects the assumed conversion of the 5.25% Convertible Subordinated
Debentures due 2000, formerly issued by NAC Re. These debentures were called
in June 1999 and the actual conversion is reflected in 1999.
32
<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>
/S/ XL CAPITAL LTD
------------------------------------------------
(Registrant)
/s/ BRIAN M. O'HARA
------------------------------------------------
Brian M. O'Hara
November 14, 2000 President and Chief Executive Officer
/s/ ROBERT R. LUSARDI
------------------------------------------------
Robert R. Lusardi
Executive Vice President and Chief Financial
November 14, 2000 Officer
</TABLE>
33
