<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 JUNE 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 (I.R.S. 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 August 11, 2000, there were outstanding 123,910,368 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 June 30, 2000 and December
31, 1999 (Unaudited)...................................... 3
Consolidated Statements of Income and Comprehensive Income
for the Three Months Ended June 30, 2000 and 1999
(Unaudited) and the Six Months Ended June 30, 2000 and
1999 (Unaudited).......................................... 4
Consolidated Statements of Shareholders' Equity for the Six
Months Ended June 30, 2000 and 1999 (Unaudited)........... 5
Consolidated Statements of Cash Flows for the Six Months
Ended June 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........................................................... 32
</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)
--------------------------
JUNE 30, DECEMBER 31,
2000 1999
----------- ------------
<S> <C> <C>
ASSETS
Investments:
Fixed maturities, available for sale at fair value
(amortized cost: 2000, $8,185,496; 1999, $7,835,919).... $ 7,914,585 $ 7,581,151
Equity securities, at fair value (cost: 2000, $695,329;
1999, $863,020)......................................... 817,787 1,136,180
Short-term investments, at fair value (amortized cost:
2000, $169,832; 1999, $405,375)......................... 160,656 405,260
----------- -----------
Total investments..................................... 8,893,028 9,122,591
Cash and cash equivalents................................... 874,147 557,749
Investments in affiliates................................... 702,549 479,911
Other investments........................................... 171,114 165,613
Accrued investment income................................... 128,023 111,590
Deferred acquisition costs.................................. 334,933 275,716
Prepaid reinsurance premiums................................ 332,950 217,314
Premiums receivable......................................... 1,471,853 1,126,397
Reinsurance balances receivable............................. 132,544 149,880
Unpaid losses and loss expenses recoverable................. 1,051,705 831,864
Intangible assets (accumulated amortization: 2000, $146,471;
1999, $118,663)........................................... 1,609,037 1,626,946
Deferred tax asset, net..................................... 103,533 97,928
Other assets................................................ 333,956 327,413
----------- -----------
Total assets.......................................... $16,139,372 $15,090,912
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Unpaid losses and loss expenses............................. $ 5,295,597 $ 5,369,402
Deposit liabilities and policy benefit reserves............. 1,048,170 837,893
Unearned premiums........................................... 1,758,014 1,497,376
Notes payable and debt...................................... 461,029 410,726
Reinsurance balances payable................................ 619,945 387,916
Net payable for investments purchased....................... 1,128,003 622,260
Other liabilities........................................... 337,773 345,738
Minority interest........................................... 17,696 42,523
----------- -----------
Total liabilities..................................... $10,666,227 $ 9,513,834
----------- -----------
Commitments and Contingencies
Shareholders' Equity:
Authorized, 999,990,000 ordinary shares, par value $0.01
Issued and outstanding, ordinary shares (2000, 123,806,236;
1999, 127,807,414)........................................ 1,238 1,278
Contributed surplus......................................... 2,443,357 2,520,136
Accumulated other comprehensive (loss) income............... (129,664) 19,311
Deferred compensation....................................... (23,184) (28,797)
Retained earnings........................................... 3,181,398 3,065,150
----------- -----------
Total shareholders' equity............................ $ 5,473,145 $ 5,577,078
----------- -----------
Total liabilities and shareholders' equity............ $16,139,372 $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 SIX MONTHS ENDED
JUNE 30 JUNE 30
-------------------- -----------------------
2000 1999 2000 1999
--------- -------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues:
Net premiums earned........................... $ 503,375 $414,386 $ 997,874 $ 801,139
Net investment income......................... 136,440 132,593 264,967 268,273
Net realized gains on sales of investments.... 5,075 17,584 73,782 85,060
Equity in net income of affiliates............ 25,756 16,642 43,235 9,335
Fee and other income.......................... 3,340 3,870 8,296 14,421
--------- -------- ---------- ----------
Total revenues............................ 673,986 585,075 1,388,154 1,178,228
--------- -------- ---------- ----------
Expenses:
Losses and loss expenses...................... 328,540 351,172 631,374 565,623
Acquisition costs............................. 115,658 88,229 219,352 165,018
Operating expenses............................ 67,798 95,229 137,074 161,597
Interest expense.............................. 7,402 8,781 15,897 19,806
Amortization of intangible assets............. 13,756 12,778 27,808 23,185
--------- -------- ---------- ----------
Total expenses............................ 533,154 556,189 1,031,505 935,229
--------- -------- ---------- ----------
Income before minority interest and income tax
expense....................................... 140,832 28,886 356,649 242,999
Minority interest in net income of
subsidiary.................................. 522 (26) 727 (541)
Income tax benefit............................ (2,174) (33,796) (10,321) (28,979)
--------- -------- ---------- ----------
Net income...................................... 142,484 62,708 366,243 272,519
--------- -------- ---------- ----------
Change in net unrealized appreciation of
investments................................... (132,990) (92,276) (138,660) (207,074)
Foreign currency translation adjustments........ (6,605) (929) (10,315) (3,914)
--------- -------- ---------- ----------
Comprehensive income (loss)..................... $ 2,889 $(30,497) $ 217,268 $ 61,531
========= ======== ========== ==========
Weighted average ordinary shares and ordinary
share equivalents outstanding--basic.......... 124,431 126,785 124,948 127,599
========= ======== ========== ==========
Weighted average ordinary shares and ordinary
share equivalents outstanding--diluted........ 125,680 129,876 125,878 131,359
========= ======== ========== ==========
Earnings per ordinary share and ordinary share
equivalent--basic............................. $ 1.15 $ 0.49 $ 2.93 $ 2.14
========= ======== ========== ==========
Earnings per ordinary share and ordinary share
equivalent--diluted........................... $ 1.13 $ 0.48 $ 2.91 $ 2.07
========= ======== ========== ==========
</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)
SIX MONTHS ENDED
JUNE 30
-----------------------
2000 1999
---------- ----------
<S> <C> <C>
Ordinary Shares:
Balance-beginning of year................................. $ 1,278 $ 1,287
Issue of shares........................................... -- --
Exercise of stock options................................. 9 2
Repurchase of treasury shares............................. (49) (20)
---------- ----------
Balance-end of period................................. $ 1,238 $ 1,269
---------- ----------
Contributed Surplus:
Balance-beginning of year................................. $2,520,136 $2,508,062
Issue of shares........................................... 345 10,463
Exercise of stock options................................. 18,872 4,504
Repurchase of treasury shares............................. (95,996) (15,588)
---------- ----------
Balance-end of period................................. $2,443,357 $2,507,441
---------- ----------
Accumulated other comprehensive (loss) income:
Balance-beginning of year................................. $ 19,311 $ 235,185
Net change in unrealized gains on investment portfolio,
net of tax.............................................. (132,370) (204,155)
Net change in unrealized gains on investment portfolio of
affiliate............................................... (6,290) (2,919)
Currency translation adjustments.......................... (10,315) (3,914)
---------- ----------
Balance-end of period................................. $ (129,664) $ 24,197
---------- ----------
Deferred Compensation:
Balance-beginning of year................................. $ (28,797) $ (22,954)
Forfeit (issue) of restricted shares...................... 1,676 (8,472)
Amortization.............................................. 3,937 3,829
---------- ----------
Balance-end of period................................. $ (23,184) $ (27,597)
---------- ----------
Retained Earnings:
Balance-beginning of year................................. $3,065,150 $2,891,023
Net income................................................ 366,243 272,519
Cash dividends paid....................................... (113,358) (99,578)
Repurchase of treasury shares............................. (136,637) (83,724)
---------- ----------
Balance-end of period................................. $3,181,398 $2,980,240
---------- ----------
Total shareholders' equity.................................. $5,473,145 $5,485,550
========== ==========
</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)
SIX MONTHS ENDED
JUNE 30
--------------------------
2000 1999
------------ -----------
<S> <C> <C>
Cash flows (used in) provided by operating activities:
Net income................................................ $ 366,243 $ 272,519
Adjustments to reconcile net income to net cash provided by
operating activities:
Net realized gains on sales of investments................ (73,782) (85,060)
Amortization of discounts on fixed maturities............. (18,327) (4,096)
Equity in net income of affiliates........................ (43,235) (9,335)
Amortization of deferred compensation..................... 4,898 3,726
Amortization of intangible assets......................... 27,808 23,185
Unpaid losses and loss expenses........................... (116,737) 88,297
Unearned premiums......................................... 260,638 197,203
Premiums receivable....................................... (345,456) (134,305)
Reinsurance balances receivable........................... 17,336 (220,213)
Unpaid losses and loss expenses recoverable............... (218,180) 139,670
Prepaid reinsurance premiums.............................. (115,636) (27,529)
Reinsurance balances payable.............................. 224,121 (29,041)
Other..................................................... (101,189) 35,555
------------ -----------
Total adjustments....................................... (497,741) (21,943)
------------ -----------
Net cash (used in) provided by operating activities....... (131,498) 250,576
------------ -----------
Cash flows provided by (used in) investing activities:
Proceeds from sale of fixed maturities and short-term
investments............................................. 11,969,453 8,012,746
Proceeds from redemption of fixed maturities and
short-term investments.................................. 252,794 75,817
Proceeds from sale of equity securities................... 910,895 763,929
Purchases of fixed maturities and short-term
investments............................................. (11,793,330) (7,889,648)
Purchases of equity securities............................ (687,876) (518,671)
Deferred (gains) losses on forward contracts.............. (1,747) 691
Investments in affiliates................................. (131,005) (185,585)
Acquisition of subsidiaries, net of cash acquired......... (3,094) (173,206)
Other investments......................................... (29,659) (38,409)
Deposit liabilities and policy benefit reserve............ 253,373 --
Other assets.............................................. (18,525) (14,840)
------------ -----------
Net cash provided by investing activities................. 721,279 32,824
------------ -----------
Cash flows used in financing activities:
Issue of restricted shares................................ 2,021 1,988
Proceeds from exercise of stock options................... 18,881 4,506
Repurchase of treasury shares............................. (232,682) (99,331)
Dividends paid............................................ (113,358) (99,578)
Proceeds from loans....................................... 50,300 234,079
Repayment of notes........................................ -- (100,000)
Repayment of debentures................................... -- (101,737)
Minority interest......................................... -- (4,900)
------------ -----------
Net cash used in financing activities....................... (274,838) (164,973)
------------ -----------
Effects of exchange rate changes on cash on foreign currency
cash balances............................................. 1,455 1,280
------------ -----------
Increase in cash and cash equivalents....................... 316,398 119,707
Cash and cash equivalents-beginning of year................. 557,749 480,874
------------ -----------
Cash and cash equivalents-end of period..................... $ 874,147 $ 600,581
============ ===========
</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.
The following table presents a reconciliation of consolidated total revenues
and net income of the Company as previously reported, as adjusted for the
Company's change in fiscal year end, and combined with the results of NAC for
the six months ended June 30, 1999:
<TABLE>
<CAPTION>
CONSOLIDATED CONSOLIDATED
TOTAL REVENUES NET INCOME
-------------- ------------
<S> <C> <C>
XL Capital--six months ended May 31, 1999.......... $ 872,109 $370,989
Less one month December 31, 1998................... 202,210 29,785
Add one month June 30, 1999........................ 167,964 (44,264)
---------- --------
XL Capital--six months ended June 30, 1999......... $ 837,863 $296,940
NAC Re--six months ended June 30, 1999............. 340,365 (24,421)
---------- --------
Combined results--six months ended June 30, 1999... $1,178,228 $272,519
========== ========
</TABLE>
7
<PAGE>
XL CAPITAL LTD
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(U.S. DOLLARS IN THOUSANDS)
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 both the Company's results and operational cash flows.
The following is an analysis of the underwriting profit or loss by segment
together with a reconciliation of underwriting profit or loss to net income:
QUARTER ENDED JUNE 30, 2000
<TABLE>
<CAPTION>
LLOYD'S FINANCIAL
INSURANCE REINSURANCE SYNDICATES SERVICES TOTAL
--------- ----------- ---------- --------- --------
<S> <C> <C> <C> <C> <C>
Net premiums earned....................... $151,279 $250,110 $95,158 $6,828 $503,375
Fee and other income...................... 3,934 3 (2,565) 1,968 3,340
Net losses and loss expenses (1).......... 92,058 171,671 63,003 1,808 328,540
Acquisition costs......................... 22,726 60,678 31,883 371 115,658
Operating expenses........................ 19,724 26,220 3,072 6,414 55,430
Exchange losses (gains)................... 480 (95) (2,090) -- (1,705)
-------- -------- ------- ------ --------
Underwriting profit (loss)................ $ 20,225 $ (8,361) $(3,275) $ 203 $ 8,792
Net investment income..................... 136,440
Net realized gains on investments......... 5,075
Equity in net earnings of affiliates...... 25,756
Interest expense.......................... 7,402
Amortization of intangible assets......... 13,756
Corporate operating expenses.............. 14,073
Minority interest......................... 522
Income tax benefit........................ (2,174)
--------
Net income................................ $142,484
========
Loss and loss expense ratio (1)........... 60.8% 68.6% 66.2% 26.5% 65.3%
Underwriting expense ratio................ 28.1% 34.8% 36.7% 99.4% 34.0%
-------- -------- ------- ------ --------
Combined ratio............................ 88.9% 103.4% 102.9% 125.9% 99.3%
======== ======== ======= ====== ========
</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 53.4% and 73.1% and the underwriting
profit (loss) would have been $31.4 million and $(19.6) million in the
insurance and reinsurance segments, respectively, had this stop loss
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 JUNE 30, 1999
<TABLE>
<CAPTION>
LLOYD'S FINANCIAL
INSURANCE REINSURANCE SYNDICATES SERVICES TOTAL
--------- ----------- ---------- --------- --------
<S> <C> <C> <C> <C> <C>
Net premiums earned....................... $ 94,194 $219,456 $92,890 $7,846 $414,386
Fee and other income...................... (665) -- 6,393 597 6,325
Net losses and loss expenses (1) (2)...... 65,450 108,929 79,637 2,156 256,172
Acquisition costs......................... 15,965 49,156 23,536 (427) 88,230
Operating expenses (3).................... 10,482 20,040 7,343 3,072 40,937
Exchange losses (gains)................... 688 2,389 (1,793) -- 1,284
-------- -------- ------- ------ --------
Underwriting profit (loss)................ $ 944 $ 38,942 $(9,440) $3,642 $ 34,088
Net investment income..................... 132,593
Net realized gains on investments......... 17,584
Equity in net earnings of affiliates...... 16,642
Other income.............................. (2,455)
Interest expense.......................... 8,781
Amortization of intangible assets......... 12,778
Corporate operating expenses.............. 7,735
Loss reserve adjustment (2)............... 95,000
One-time charges (3)...................... 45,272
Minority interest......................... (26)
Income tax benefit........................ (33,796)
--------
Net income................................ $ 62,708
========
Loss and loss expense ratio (1)........... 69.5% 49.7% 85.7% 27.5% 61.8%
Underwriting expense ratio................ 28.1% 31.5% 33.3% 33.7% 31.2%
-------- -------- ------- ------ --------
Combined ratio............................ 97.6% 81.2% 119.0% 61.2% 93.0%
======== ======== ======= ====== ========
</TABLE>
------------------------
(1) Net losses incurred for the insurance segment include, and the reinsurance
segment exclude, $62.0 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 3.7% and 77.9% and the underwriting
profit (loss) would have been $62.9 million and $(23.1) 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.
9
<PAGE>
XL CAPITAL LTD
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(U.S. DOLLARS IN THOUSANDS)
3. SEGMENT INFORMATION (CONTINUED)
SIX MONTHS ENDED JUNE 30, 2000
<TABLE>
<CAPTION>
LLOYD'S FINANCIAL
INSURANCE REINSURANCE SYNDICATES SERVICES TOTAL
--------- ----------- ---------- --------- --------
<S> <C> <C> <C> <C> <C>
Net premiums earned....................... $297,580 $489,150 $198,220 $12,924 $997,874
Fee and other income...................... 5,206 232 (3,733) 6,591 8,296
Net losses and loss expenses (1).......... 177,592 306,849 143,690 3,243 631,374
Acquisition costs......................... 42,712 116,873 59,054 713 219,352
Operating expenses........................ 38,162 52,652 7,943 11,648 110,405
Exchange (gains) losses................... 470 1,641 (2,394) -- (283)
-------- -------- -------- ------- --------
Underwriting profit (loss)................ $ 43,850 $ 11,367 $(13,806) $ 3,911 $ 45,322
Net investment income..................... 264,967
Net realized gains on investments......... 73,782
Equity in net earnings of affiliates...... 43,235
Interest expense.......................... 15,897
Amortization of intangible assets......... 27,808
Corporate operating expenses.............. 26,952
Minority interest......................... 727
Income tax benefit........................ (10,321)
--------
Net income................................ $366,243
========
Loss and loss expense ratio (1)........... 59.7% 62.7% 72.5% 25.1% 63.3%
Underwriting expense ratio................ 27.2% 34.7% 33.8% 95.6% 33.0%
-------- -------- -------- ------- --------
Combined ratio............................ 86.9% 97.4% 106.3% 120.7% 96.3%
======== ======== ======== ======= ========
</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 55.9% and 65.0% and the underwriting
profit would have been $55.1 million and $0.2 million in the insurance and
reinsurance segments, respectively, had this stop loss 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)
SIX MONTHS ENDED JUNE 30, 1999
<TABLE>
<CAPTION>
LLOYD'S FINANCIAL
INSURANCE REINSURANCE SYNDICATES SERVICES TOTAL
--------- ----------- ---------- --------- --------
<S> <C> <C> <C> <C> <C>
Net premiums earned....................... $196,485 $418,095 $174,189 $12,370 $801,139
Fee and other income...................... (2) -- 13,826 597 14,421
Net losses and loss expenses (1) (2)...... 112,514 217,044 138,132 2,932 470,622
Acquisition costs......................... 30,153 93,625 41,263 (22) 165,019
Operating expenses (3).................... 25,966 43,173 19,972 6,150 95,261
Exchange (gains) losses................... 1,107 4,151 (2,332) -- 2,926
-------- -------- -------- ------- --------
Underwriting profit (loss)................ $ 26,743 $ 60,102 $ (9,020) $ 3,907 $ 81,732
Net investment income..................... 268,273
Net realized gains on investments......... 85,060
Equity in net earnings of affiliates...... 9,335
Interest expense.......................... 19,806
Amortization of intangible assets......... 23,185
Corporate operating expenses.............. 18,138
Loss reserve adjustment (2)............... 95,000
One-time charges (3)...................... 45,272
Minority interest......................... (541)
Income tax benefit........................ (28,979)
--------
Net income................................ $272,519
========
Loss and loss expense ratio (1)........... 57.3% 51.9% 79.3% 23.7% 58.7%
Underwriting expense ratio................ 28.5% 32.7% 35.2% 49.5% 32.5%
-------- -------- -------- ------- --------
Combined ratio............................ 85.8% 84.6% 114.5% 73.2% 91.2%
======== ======== ======== ======= ========
</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 20.4% and 69.3% and the underwriting
profit (loss) would have been $99.2 million and $(12.4) 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 JUNE 30, 2000
<TABLE>
<CAPTION>
GROSS PREMIUMS NET PREMIUMS NET PREMIUMS
WRITTEN WRITTEN EARNED
-------------- ------------ ------------
<S> <C> <C> <C>
Casualty insurance................................... $137,041 $ 96,029 $ 79,674
Casualty reinsurance................................. 102,627 65,362 104,289
Property catastrophe................................. 46,995 41,397 36,358
Other property....................................... 121,385 94,841 91,577
Marine, energy, aviation and satellite............... 78,810 35,565 41,100
Lloyd's syndicates................................... 131,867 110,304 95,158
Other................................................ 77,828 56,411 55,219
-------- -------- --------
Total................................................ $696,553 $499,909 $503,375
======== ======== ========
</TABLE>
QUARTER ENDED JUNE 30, 1999
<TABLE>
<CAPTION>
GROSS PREMIUMS NET PREMIUMS NET PREMIUMS
WRITTEN WRITTEN EARNED
-------------- ------------ ------------
<S> <C> <C> <C>
Casualty insurance................................... $ 68,263 $ 53,234 $ 65,597
Casualty reinsurance................................. 83,368 69,382 72,397
Property catastrophe................................. 28,864 19,867 37,910
Other property....................................... 77,634 48,336 66,831
Marine, energy, aviation and satellite............... 36,374 27,191 33,571
Lloyd's syndicates................................... 149,552 125,919 92,890
Other................................................ 57,250 44,156 45,190
-------- -------- --------
Total................................................ $501,305 $388,085 $414,386
======== ======== ========
</TABLE>
12
<PAGE>
XL CAPITAL LTD
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(U.S. DOLLARS IN THOUSANDS)
3. SEGMENT INFORMATION (CONTINUED)
SIX MONTHS ENDED JUNE 30, 2000
<TABLE>
<CAPTION>
GROSS PREMIUMS NET PREMIUMS NET PREMIUMS
WRITTEN WRITTEN EARNED
-------------- ------------ ------------
<S> <C> <C> <C>
Casualty insurance................................... $ 234,538 $ 169,566 $157,902
Casualty reinsurance................................. 257,793 179,116 192,226
Property catastrophe................................. 124,831 118,617 65,636
Other property....................................... 286,686 216,856 174,183
Marine, energy, aviation and satellite............... 234,451 155,475 85,616
Lloyd's syndicates................................... 295,606 169,981 198,220
Other................................................ 181,585 142,397 124,091
---------- ---------- --------
Total................................................ $1,615,490 $1,152,008 $997,874
========== ========== ========
</TABLE>
SIX MONTHS ENDED JUNE 30, 1999
<TABLE>
<CAPTION>
GROSS PREMIUMS NET PREMIUMS NET PREMIUMS
WRITTEN WRITTEN EARNED
-------------- ------------ ------------
<S> <C> <C> <C>
Casualty insurance................................. $ 148,019 $112,904 $131,227
Casualty reinsurance............................... 168,098 149,490 140,432
Property catastrophe............................... 110,710 100,799 66,881
Other property..................................... 213,559 159,144 145,155
Marine, energy, aviation and satellite............. 139,543 111,601 69,861
Lloyd's syndicates................................. 333,372 234,316 174,189
Other.............................................. 119,995 103,752 73,394
---------- -------- --------
Total.............................................. $1,233,296 $972,006 $801,139
========== ======== ========
</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 July 2000, the Company sold its investment in FSA Holdings, Inc, which is
included in equity securities at June 30, 2000. Proceeds of the sale were
$159.1 million, and based on the cost of $105.0 million, gains of $54.1 million
were realized.
13
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2000
COMPARED TO THE THREE MONTHS ENDED JUNE 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 which 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 materially from those projected in such
forward-looking statements, and therefore you should not place undue reliance on
them. See "--Cautionary Note Regarding Forward-Looking Statements" for a list of
factors that could cause actual results to differ materially from those
contained in any forward-looking statement.
This discussion and analysis should be read in conjunction with the 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 June 30, 2000 and 1999:
<TABLE>
<CAPTION>
(UNAUDITED)
THREE MONTHS ENDED
JUNE 30
-------------------
2000 1999
-------- --------
<S> <C> <C>
Net operating income (excluding net realized gains on
investments and one time merger related
adjustments).......................................... $135,491 $147,137
Net realized gains on investments....................... 6,993 17,159
Increase to loss reserves for NAC Re (1)................ -- (61,750)
One-time related merger charges (1)..................... -- (39,838)
-------- --------
Net income.............................................. $142,484 $ 62,708
======== ========
Earnings per share--basic............................... $ 1.15 $ 0.49
Earnings per share--fully diluted....................... $ 1.13 $ 0.48
</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. The pre-tax amounts are
$95.0 million and $45.3 million, respectively.
Net operating income decreased in the second quarter of 2000 compared to the
same period in 1999 primarily due to lower underwriting profit experienced in
the Company's casualty lines of business in both the insurance and reinsurance
segments. Further discussion is provided within the following segment analysis.
14
<PAGE>
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.
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 (formerly, Intercargo Corporation). Insurance
business written includes general 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
JUNE 30
-------------------
2000 1999 % CHANGE
-------- -------- --------
<S> <C> <C> <C>
Net premiums earned........................... $151,279 $94,194 60.6%
Fee and other income.......................... 3,934 (665) NM
Net losses and loss expenses.................. 92,058 65,450 40.7%
Acquisition costs............................. 22,726 15,965 42.3%
Operating expenses............................ 19,724 10,482 88.2%
Exchange losses............................... 480 688 NM
-------- ------- -------
Net underwriting profit....................... $ 20,225 $ 944 NM
======== ======= =======
</TABLE>
------------------------
* NM--Not Meaningful
Growth in the insurance segment is mainly due to the acquisition of both
Intercargo (now known as XL Specialty Insurance) and ECS in the second quarter
of 1999. There were no significant earnings from these companies in the second
quarter of 1999.
ECS and XL Specialty Insurance contributed approximately $116.0 million in
gross premiums written and $45.0 million in net premiums earned during the
second quarter of 2000. ECS commenced writing business on behalf of the Company
with effect from January 1, 2000. As the lag of the premium earning catches up
to the premium written, net premium earned by ECS is expected to increase
through 2000. Price increases have been experienced in the property lines which
has contributed to the growth of net premiums earned, but pricing generally has
remained unchanged on the liability lines of business.
Fee and other income is earned primarily from ECS by providing risk
management consulting services.
The increases in net losses and loss expenses, acquisition costs and
operating expenses are also primarily attributable to the acquisition of
Intercargo and ECS.
15
<PAGE>
The following table presents the ratios for the insurance segment:
<TABLE>
<CAPTION>
(UNAUDITED)
THREE MONTHS ENDED
JUNE 30
-------------------
2000 1999
-------- --------
<S> <C> <C>
Loss and loss expense ratio............................. 60.8% 69.5%
Underwriting expense ratio.............................. 28.1% 28.1%
----- -----
Combined ratio.......................................... 88.9% 97.6%
===== =====
</TABLE>
The loss and loss expense ratio was affected by an intercompany stop loss
agreement with a subsidiary in the reinsurance segment. In the quarters ended
June 30, 2000 and 1999, $11.2 million and $62.0 million, respectively, of losses
were included in the insurance segment and excluded from the reinsurance
segment. The loss ratio would have been 53.4% and 3.7% and the underwriting
profit would have been $31.4 million and $62.9 million in 2000 and 1999,
respectively, had this agreement not been in place.
In addition, the Company has continued to apply higher actuarially estimated
loss ratios established in the first quarter of 2000 to the casualty lines
written in 2000 as competitive market conditions continued to negatively affect
premium rates for these lines of business. In the second quarter 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 had developed more favorably than expected.
REINSURANCE OPERATIONS
The reinsurance business is written by XL Mid Ocean Re and Latin American
Re, which primarily write property lines that are short-tail in nature, and NAC
Re, which primarily writes 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 (loss) profit for this
segment:
<TABLE>
<CAPTION>
(UNAUDITED)
THREE MONTHS ENDED
JUNE 30
-------------------
2000 1999 % CHANGE
-------- -------- --------
<S> <C> <C> <C>
Net premiums earned........................... $250,110 $219,456 14.0%
Fee and other income.......................... 3 -- NM
Net losses and loss expenses.................. 171,671 108,929 57.6%
Acquisition costs............................. 60,678 49,156 23.4%
Operating expenses............................ 26,220 20,040 30.8%
Exchange (gains) losses....................... (95) 2,389 NM
-------- -------- -----
Net underwriting (loss) profit................ $ (8,361) $ 38,942 NM
======== ======== =====
</TABLE>
The increase in net premiums earned reflects additional net premiums written
in prior quarters. Net premiums written for the second quarter are similar in
2000 and 1999. The Company has experienced some price increases on property and
other short-tail lines of business. As in the insurance segment, pricing has not
yet improved for the liability business. The Company has seen indications of
improved pricing in the retrocession market, but the timing of the effect of
this on lines written by the Company is not certain.
The increase in operating expenses is primarily due to an expansion in
infrastructure necessary to support additional business written.
16
<PAGE>
The following table presents the ratios for the reinsurance segment:
<TABLE>
<CAPTION>
(UNAUDITED)
THREE MONTHS ENDED
JUNE 30
-------------------
2000 1999
-------- --------
<S> <C> <C>
Loss and loss expense ratio............................. 68.6% 49.7%
Underwriting expense ratio.............................. 34.8% 31.5%
------ -----
Combined ratio.......................................... 103.4% 81.2%
====== =====
</TABLE>
The increase in the combined ratio is primarily due to the effect of an
intercompany stop loss agreement with a subsidiary in the insurance segment. Net
losses and loss expenses incurred in this segment in 2000 and 1999 reflect a
recovery of $11.2 million and $62.0 million, respectively, under this agreement.
The loss and loss expense ratio in 2000 and 1999 would have been 73.1% and 77.9%
and the underwriting loss would have been $19.6 million and $23.1 million,
respectively, had this agreement not been in place. The 1999 ratio does not
include an adjustment to reserves of $95.0 million at the time of the merger
with NAC Re.
Business written on the casualty lines, primarily in 1999, has continued to
experience a deterioration in losses in 2000. However, the loss ratio, excluding
the stop loss agreement, was lower in 2000 compared to 1999 principally due to a
larger number of catastrophic events in 1999, including the Sydney hailstorms,
the Oklahoma tornadoes and satellite losses.
The increase in the underwriting expense ratio is mainly due to an increase
in the acquisition expense ratio. The reinsurance segment is highly dependent on
broker intermediaries and thus is subject to the costs charged on specific lines
of business, including commissions paid to ceding companies. Higher acquisition
costs in the second quarter of 2000 compared to 1999 reflect an increase in net
premiums earned on lines of business where costs are higher.
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 of
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 for this segment:
<TABLE>
<CAPTION>
(UNAUDITED)
THREE MONTHS ENDED
JUNE 30
-------------------
2000 1999 % CHANGE
-------- -------- --------
<S> <C> <C> <C>
Net premiums earned........................... $95,158 $92,890 2.4%
Fee and other income.......................... (2,565) 6,393 NM
Net losses and loss expenses.................. 63,003 79,637 (20.9)%
Acquisition costs............................. 31,883 23,536 35.5%
Operating expenses............................ 3,072 7,343 (58.2)%
Exchange gains................................ (2,090) (1,793) 16.6%
------- ------- -------
Net underwriting loss......................... $(3,275) $(9,440) (65.3)%
======= ======= =======
</TABLE>
17
<PAGE>
Net premiums earned reflect the growth in business written by Brockbank and
Denham due to an increase in corporate capacity in 2000 over 1999. The corporate
syndicates increased capacity from approximately 43% to 50% at Brockbank and
from 43% to 75% at Denham. Net premiums earned in 2000 was also affected by
premium written in 1999 from the motor business at Brockbank, which was sold
with effect from January 1, 2000. $19.9 million in net premiums earned are
attributable to the motor business in the 2000 quarter compared to
$33.7 million in 1999. The Company retains the run-off experience of this
business. Lower earned premiums relating to the motor business will result in
subsequent quarters.
Fee and other income includes $4.5 million generated from the motor business
in 1999. No such income was earned in 2000. Brockbank's managing agencies also
earn profit commissions from the syndicates they manage. The second quarter of
1999 included $1.0 million in profit commissions but due to the loss
deterioration in the Lloyd's market, no commissions were earned in the second
quarter of 2000. Managing agency expenses are offset against this income which
has resulted in negative fee and other income in the quarter ended June 30,
2000.
The following table presents the ratios for this segment:
<TABLE>
<CAPTION>
(UNAUDITED)
THREE MONTHS ENDED
JUNE 30
-------------------
2000 1999
-------- --------
<S> <C> <C>
Loss and loss expense ratio............................. 66.2% 85.7%
Underwriting expense ratio.............................. 36.7% 33.3%
------ ------
Combined ratio.......................................... 102.9% 119.0%
====== ======
</TABLE>
The decrease in the loss ratio and increase in expense ratio includes the
effect of the sale of the motor business. During the second quarter of 2000, the
motor business had a loss ratio of 94.3% and an expense ratio of 21.3%. This
compares to a 108.2% loss ratio and 17.8% expense ratio for the same period in
1999. In addition, there was some favorable loss development on certain lines of
business written by Brockbank.
FINANCIAL SERVICES
The financial services business includes credit enhancements by 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 profit for this segment:
<TABLE>
<CAPTION>
(UNAUDITED)
THREE MONTHS ENDED
JUNE 30
-------------------
2000 1999 % CHANGE
-------- -------- --------
<S> <C> <C> <C>
Net premiums earned........................... $6,828 $7,846 (13.0)%
Fee and other income.......................... 1,968 597 NM
Net losses and loss expenses.................. 1,808 2,156 (16.1)%
Acquisition costs............................. 371 (427) NM
Operating expenses............................ 6,414 3,072 108.8%
Exchange gains................................ -- -- --
------ ------ -------
Net underwriting profit....................... $ 203 $3,642 (94.4)%
====== ====== =======
</TABLE>
Financial guaranty premiums are earned over the life of the exposure.
Certain premiums, such as those received on an installment basis, are not earned
until the premium is reported. More of these premiums were written in 1999 which
resulted in a higher net premiums earned.
18
<PAGE>
Premiums received in respect of credit default swap transactions are
included as fee income and earned over the life of the policies.
The following table presents the ratios for this segment:
<TABLE>
<CAPTION>
(UNAUDITED)
THREE MONTHS ENDED
JUNE 30
-------------------
2000 1999
-------- --------
<S> <C> <C>
Loss and loss expense ratio............................. 26.5% 27.5%
Underwriting expense ratio.............................. 99.4% 33.7%
------ -----
Combined ratio.......................................... 125.9% 61.2%
====== =====
</TABLE>
This segment generally writes business to an estimated loss ratio of
approximately 25%. The calculation of the expense ratio excludes fee income
derived from credit default swap transactions. If this income were included, the
expense ratio and the combined ratio would be 77.1% and 103.6%, respectively.
The high expense ratio reflects the start up nature of this segment.
INVESTMENT OPERATIONS
The following table illustrates the change in net investment income and net
realized gains for the three-month periods ended June 30, 2000 and 1999:
<TABLE>
<CAPTION>
(UNAUDITED)
THREE MONTHS ENDED
JUNE 30
-------------------
2000 1999 % CHANGE
-------- -------- --------
<S> <C> <C> <C>
Net investment income......................... $136,440 $132,593 2.9%
Net realized gains............................ $ 5,075 $ 17,584 (71.1)%
Equity in net income of affiliates............ $ 25,756 $ 16,642 54.8%
</TABLE>
Net investment income has increased in the quarter primarily due to improved
yields. This has been achieved despite an investment base that declined 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 earnings of affiliates. The decline of the
investment base is offset by the inclusion of assets corresponding to the
deposit liabilities assumed late in 1999. Investment income earned on these
assets is reduced by the investment expense created by the accretion of these
deposit liabilities.
Equity in net income of affiliates has increased in the quarter primarily
due to an increase in investment affiliates of approximately $300.0 million from
June 30, 1999.
19
<PAGE>
OTHER REVENUES AND EXPENSES
The following table sets forth other revenues and expenses for the quarters
ended June 30, 2000 and 1999:
<TABLE>
<CAPTION>
(UNAUDITED)
THREE MONTHS ENDED
JUNE 30
-------------------
2000 1999 % CHANGE
-------- -------- --------
<S> <C> <C> <C>
Other income.................................. -- (2,455) NM
Amortization of intangible assets............. 13,756 12,778 7.6%
Corporate operating expenses.................. 14,073 7,736 81.9%
Interest expense.............................. 7,402 8,781 (15.7)%
Minority interest............................. 522 (26) NM
Income tax benefit............................ (2,174) (33,796) NM
</TABLE>
Other income represents a reclassification of a distribution of earnings
from the Company's other investments to investment income.
The increase in amortization of intangible assets reflects additional
goodwill generated from the acquisition of ECS, Inc and Intercargo Corporation
late in the second quarter of 1999.
The increase in corporate operating expenses is mainly a result of the
increase in corporate infrastructure necessary to support the expanding
worldwide operations of the Company.
The decrease in interest expense reflects a reduction in indebtedness
carried by the Company through the quarter in 2000 compared to 1999. The Company
extinguished convertible debt assumed in connection with the NAC merger in the
second quarter of 1999. 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 quarter ended June 30, 2000.
The changes in the income tax benefit of the Company principally reflect
improving results for the U.S. operations in 2000 compared to 1999. In 1999, a
deterioration of the casualty reinsurance book for business underwritten prior
to the merger with NAC resulted in a pre-tax net loss for the Company's U.S.
operations.
20
<PAGE>
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2000
COMPARED TO THE SIX MONTHS ENDED JUNE 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 six months ended June 30, 2000 and 1999:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30
-------------------
2000 1999
-------- --------
(UNAUDITED)
<S> <C> <C>
Net operating income (excluding net realized gains on
investments and one time merger related
adjustments).......................................... $286,292 $291,283
Net realized gains on investments....................... 79,951 83,700
Increase to loss reserves for NAC Re (1)................ -- (61,750)
One-time related merger charges (1)..................... -- (40,714)
-------- --------
Net income.............................................. $366,243 $272,519
======== ========
Earnings per share--basic............................... $ 2.93 $ 2.14
Earnings per share--fully diluted....................... $ 2.91 $ 2.07
</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. The pre-tax amounts are
$95.0 million and $45.3 million, respectively.
INSURANCE OPERATIONS
The following table summarizes the underwriting profit for this segment:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30
-------------------
2000 1999 % CHANGE
-------- -------- --------
(UNAUDITED)
<S> <C> <C> <C>
Net premiums earned........................... $297,580 $196,485 51.5%
Fee and other income.......................... 5,206 (2) NM
Net losses and loss expenses.................. 177,592 112,514 57.8%
Acquisition costs............................. 42,712 30,153 41.7%
Operating expenses............................ 38,162 25,966 47.0%
Exchange losses............................... 470 1,107 NM
-------- -------- -----
Net underwriting profit....................... $ 43,850 $ 26,743 64.0%
======== ======== =====
</TABLE>
Growth in the insurance segment is mainly due to the acquisition of
Intercargo (now known as XL Specialty Insurance) and ECS in the second quarter
of 1999. There were no significant earnings by these companies in the first six
months of 1999.
ECS and XL Specialty Insurance contributed approximately $179.0 million in
gross premiums written and $61.0 million in net premiums earned during the first
six months of 2000. ECS commenced writing business on behalf of the Company with
effect from January 1, 2000. As the lag of the premium earning catches up to the
premium written, net premium earned by ECS is expected to increase through 2000.
Fee and other income is earned primarily by ECS by providing risk management
consulting services.
The increase in net losses and loss expenses, acquisition costs and
operating expenses is primarily attributable to the acquisition of Intercargo
and ECS.
21
<PAGE>
The following table presents the ratios for the insurance segment:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30
-------------------
2000 1999
-------- --------
(UNAUDITED)
<S> <C> <C>
Loss and loss expense ratio............................... 59.7% 57.3%
Underwriting expense ratio................................ 27.2% 28.5%
----- -----
Combined ratio............................................ 86.9% 85.8%
===== =====
</TABLE>
The loss and loss expense ratio was affected by an intercompany stop loss
agreement with a subsidiary in the reinsurance segment. In the six months ended
June 30, 2000 and 1999, $11.2 million and $72.5 million, respectively, of losses
were included in the insurance segment and excluded from the reinsurance
segment. The loss ratio in 2000 would have been 55.9% and in 1999 it would have
been 20.4% and the underwriting profit would have been $55.1 million and
$99.2 million, respectively, had this agreement not been in place.
Excluding the effects of the intercompany stop loss agreement, the increase
in the loss ratio reflects the application of higher actuarially estimated loss
ratios to the casualty lines written in 2000 as competitive market conditions
continued to affect premium rates. In addition, in 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.
The decrease in the expense ratio is primarily the result of higher earned
premiums where the growth was proportionately greater than the increase in
operating expenses and acquisition costs.
REINSURANCE OPERATIONS
The following table summarizes the underwriting profit for this segment:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30
-------------------
2000 1999 % CHANGE
-------- -------- --------
(UNAUDITED)
<S> <C> <C> <C>
Net premiums earned........................... $489,150 $418,095 17.0%
Fee and other income.......................... 232 -- NM
Net losses and loss expenses.................. 306,849 217,044 41.4%
Acquisition costs............................. 116,873 93,625 24.8%
Operating expenses............................ 52,652 43,173 22.0%
Exchange losses............................... 1,641 4,151 NM
-------- -------- -----
Net underwriting profit....................... $ 11,367 $ 60,102 NM
======== ======== =====
</TABLE>
The increase in net premiums earned is mainly a result of an increase in net
premiums written across most lines of business. This segment has experienced
price increases for most product lines with the exception of the liability
lines, which remain effectively unchanged.
22
<PAGE>
The following table presents the ratios for the reinsurance segment:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30
-------------------
2000 1999
-------- --------
(UNAUDITED)
<S> <C> <C>
Loss and loss expense ratio............................... 62.7% 51.9%
Underwriting expense ratio................................ 34.7% 32.7%
----- -----
Combined ratio............................................ 97.4% 84.6%
===== =====
</TABLE>
The increase in the combined ratio is primarily due to the effect of an
intercompany stop loss agreement with a subsidiary in the insurance segment. Net
losses and loss expenses incurred in this segment in 2000 and 1999 reflect a
recovery of $11.2 million and $72.5 million, respectively, under this agreement.
The loss and loss expense ratio in 2000 and 1999 would have been 65.0% and
69.3%, respectively, and the underwriting results would have been a profit of
$0.2 million and a loss of $12.4 million, respectively, had this agreement not
been in place. The 1999 loss ratio does not include an adjustment to reserves
for $95.0 million at the time of the merger with NAC.
Business written on the casualty lines primarily in 1999 has continued to
experience a deterioration in losses in 2000. However, the loss ratio excluding
the stop loss agreement was lower in 2000 compared to 1999 principally due to a
larger number of catastrophic events in 1999 including the Sydney hailstorms,
the Oklahoma tornadoes and satellite losses.
The increase in the underwriting expense ratio is mainly due to an increase
in the acquisition expense ratio. The reinsurance segment is highly dependent on
broker intermediaries and thus, is subject to the costs charged on specific
lines of business including commissions paid to ceding companies. Higher
acquisitions costs in the second quarter of 2000 compared to 1999 reflect an
increase in net premiums earned on lines of business where costs are higher.
LLOYD'S SYNDICATES
The following table summarizes the underwriting loss for this segment:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30
-------------------
2000 1999 % CHANGE
-------- -------- --------
(UNAUDITED)
<S> <C> <C> <C>
Net premiums earned........................... $198,220 $174,189 13.8%
Fee and other income.......................... (3,733) 13,826 NM
Net losses and loss expenses.................. 143,690 138,132 4.0%
Acquisition costs............................. 59,054 41,263 43.1%
Operating expenses............................ 7,943 19,972 (60.2)%
Exchange gains................................ (2,394) (2,332) 2.7%
-------- -------- -------
Net underwriting loss......................... $(13,806) $ (9,020) (53.1)%
======== ======== =======
</TABLE>
Net premiums earned reflect the growth in business written by Brockbank and
Denham due principally to an increase in corporate capacity in 2000 over 1999.
The corporate syndicates increased capacity from approximately 43% to 50% at
Brockbank and from 43% to 75% at Denham. Although the Company has not written
any motor business in 2000, net premiums earned were effectively flat due to
increased premiums written during the third and fourth quarter of 1999. The
Company retains the run-off experience of this business after it was sold with
effect from January 1, 2000. Lower earned premiums relating to the motor
business will result in subsequent quarters.
Fee and other income includes $8.9 million generated from the motor business
in 1999. No such income was earned in 2000. Brockbank's managing agencies also
earn profit commissions from the
23
<PAGE>
syndicates they manage. The first six months of 1999 included $2.0 million in
profit commissions but due to the loss deterioration in the Lloyd's market, no
commissions were earned in the first six months of 2000. Managing agency
expenses are offset against this income which has resulted in negative fee and
other income in the six months ended June 30, 2000.
The following table presents the ratios for this segment:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30
-------------------
2000 1999
-------- --------
(UNAUDITED)
<S> <C> <C>
Loss and loss expense ratio............................... 72.5% 79.3%
Underwriting expense ratio................................ 33.8% 35.2%
------ ------
Combined ratio............................................ 106.3% 114.5%
====== ======
</TABLE>
The decrease in the loss ratio includes the effect of the sale of the motor
business. Loss ratios on this business were 89.4% and 99.5% for the first six
months of 2000 and 1999, respectively. The decrease in the underwriting expense
ratio is mainly a result of an increase in net premiums earned by Denham, which
writes casualty lines which typically have lower acquisition costs than the
business written at Brockbank.
FINANCIAL SERVICES
The following table summarizes the underwriting profit for this segment:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30
-------------------
2000 1999 % CHANGE
-------- -------- --------
(UNAUDITED)
<S> <C> <C> <C>
Net premiums earned............................. $12,924 $12,370 4.5%
Fee and other income............................ 6,591 597 NM
Net losses and loss expenses.................... 3,243 2,932 10.6%
Acquisition costs............................... 713 (22) NM
Operating expenses.............................. 11,648 6,150 89.4%
Exchange gains.................................. -- -- --
------- ------- -----
Net underwriting profit......................... $ 3,911 $ 3,907 0.1%
======= ======= =====
</TABLE>
Financial guaranty premiums are earned over the life of the exposure.
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 swap transactions 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. Such
transactions require an investment of Company resources, which are included in
operating expenses.
The following table presents the ratios for this segment:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30
-------------------
2000 1999
-------- --------
(UNAUDITED)
<S> <C> <C>
Loss and loss expense ratio............................... 25.1% 23.7%
Underwriting expense ratio................................ 95.6% 49.5%
------ -----
Combined ratio............................................ 120.7% 73.2%
====== =====
</TABLE>
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 $4.9 million in income from credit default
24
<PAGE>
swaps. If this income were included, the expense ratio and the combined ratio
would be 69.3% and 94.4%, respectively. The high expense ratio reflects the
start up nature of this segment.
INVESTMENT OPERATIONS
The following table illustrates the change in net investment income and net
realized gains for the six-month periods ended June 30, 2000 and 1999:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30
-------------------
2000 1999 % CHANGE
-------- -------- --------
(UNAUDITED)
<S> <C> <C> <C>
Net investment income......................... $264,967 $268,273 (1.2)%
Net realized gains............................ $ 73,782 $ 85,060 NM
Equity in net income of affiliates............ $ 43,235 $ 9,335 NM
</TABLE>
Although yields have improved in the second quarter of 2000, net investment
income has decreased marginally in the first six months of 2000 compared to
1999. This is primarily due to lower returns in the first quarter of 2000. There
has been a decline in the investment base 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
earnings of affiliates. The decline of the investment base is offset by the
inclusion of assets corresponding to the deposit liabilities assumed late in
1999. Investment income earned on these assets is reduced by the investment
expense created by the accretion of these deposit liabilities.
Equity in net income of affiliates in 2000 increased significantly over 1999
as a result of returns on the Company's strategic investments in investment
management companies and the funds managed by these companies. 1999 also
included a loss of $7.0 million relating to Risk Capital, which was sold in
January 2000.
OTHER REVENUES AND EXPENSES
The following table sets forth other revenues and expenses for the six
months ended June 30, 2000 and 1999:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30
-------------------
2000 1999 % CHANGE
-------- -------- --------
(UNAUDITED)
<S> <C> <C> <C>
Amortization of intangible assets.............. 27,808 23,185 19.9%
Corporate operating expenses................... 26,952 18,138 48.6%
Interest expense............................... 15,897 19,806 (19.7)%
Minority interest.............................. 727 (541) NM
Income tax benefit............................. (10,321) (28,979) NM
</TABLE>
The increase in amortization of intangible assets is primarily a result of
additional goodwill generated from the acquisition of ECS and Intercargo late in
the second quarter of 1999.
The increase in corporate operating expenses is a result of the increase in
corporate infrastructure necessary to support the expanding worldwide operations
of the Company.
The decrease in interest expense reflects a reduction in indebtedness
carried by the Company through the six months in 2000 compared to 1999. The
Company extinguished convertible debt assumed in connection with the NAC merger
in the second quarter of 1999. 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.
25
<PAGE>
The changes in the income tax benefit of the Company principally reflects
improving results for the U.S. operations in 2000 compared to 1999. In 1999, a
deterioration of the casualty reinsurance book for business underwritten prior
to the merger with NAC resulted in a pre-tax net loss for the Company's U.S.
operations.
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 June 30, 2000 was $5.5 billion of which $3.2 billion was
retained earnings.
At June 30, 2000, total investments available for sale and cash net of
unsettled investment trades were $8.6 billion, compared to $9.1 billion at
December 31, 1999. This includes investments relating to the Company's asset
accumulation business. During the first six months of 2000, the Company sold
investments categorized as available for sale to fund 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 June 30, 2000 represented approximately 91% of invested
assets and were managed by several outside investment management firms.
Approximately 88% of fixed income securities are of investment grade, with 61%
rated Aa or AA or better by a nationally recognized rating agency. The average
quality of the fixed income portfolio was AA-.
The net payable for investments purchased increased from $622.3 million at
December 31, 1999 to $1.1 billion as at June 30, 2000. This increase results
from timing differences as investments are accounted for on a trade basis.
Certain business written by the Company has loss experience generally
characterized as having low frequency and high severity. This may result in
volatility in both the Company's results and operational cash flows. For the six
months ended June 30, 2000 and 1999, the net amount of losses due to claims
activity paid by the Company was $976.3 million and $536.0 million,
respectively. Paid losses for the six months ended June 30, 2000 includes
$74.0 million relating to a commutation payment. The higher amount of paid
claims in 2000 over 1999 has contributed to the negative operational cash flow
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.
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 this new program,
the Company has purchased 4.9 million shares up to August 11, 2000 at a cost of
$231.9 million or $47.56 per share.
26
<PAGE>
As of June 30, 2000, the Company had bank, letter of credit and loan
facilities available from a variety of sources including commercial banks
totaling $1.7 billion of which $461.0 million in debt was outstanding. In
addition, $1.0 million of letters of credit were outstanding, 60.2% of which
were collateralized by the Company's investment portfolio, primarily supporting
U.S. non-admitted business, and the Company's Lloyd's capital requirements.
The financing structure as of June 30, 2000 was as follows:
<TABLE>
<CAPTION>
IN USE/
FACILITY COMMITMENT OUTSTANDING
-------- ---------- -----------
<S> <C> <C>
DEBT:
Company Term Note.................................. $ 11,000 $ 11,000
2 facilities of 5 year Revolvers--total............ 350,000 350,000
7.15% Notes due 2005............................... 100,000 100,000
---------- ----------
$ 461,000 $ 461,000
========== ==========
LETTERS OF CREDIT:
7 facilities--total.............................. $1,246,500 $1,033,000
========== ==========
</TABLE>
The Company's $500.0 million 364-day revolving credit facility expired on
June 28, 2000 and was replaced with a new facility in the same amount effective
July 5, 2000. A syndicate of banks provides the new facility and borrowings are
unsecured. There were no borrowings under the expired facility during the six
months ended June 30, 2000. The Company's $150.0 million 364-day revolving
credit facility expired on March 31, 2000 and was not replaced.
Two syndicates of banks provide the two five-year facilities and borrowings
are unsecured. Under these facilities, $350.0 million outstanding at June 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 Intercargo during
1999. The weighted average interest rate on funds borrowed during the six months
ended June 30, 2000 was approximately 6.4%.
At June 30, 2000 and June 30, 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
$15.9 million and $19.8 million for the six months ended June 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
six month periods.
The Company had seven letter of credit facilities available at June 30,
2000, two from two syndicates of banks, three from U.K. banks and two from U.S.
banks. 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
June 30, 2000, approximately $622.0 million were collateralized against the
Company's investment portfolio and $411.0 million were unsecured. On July 6,
2000, $300.0 million of the syndicated secured facilities expired and was
replaced with a syndicated unsecured facility of $1.0 billion effective July 5,
2000. This new facility will replace existing facilities during the remainder of
2000.
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
27
<PAGE>
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 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 price increases in the liability retrocession market, but to date no price
improvements have been experienced in the casualty 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 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 June 30, 2000, forward foreign exchange contracts
with notional principal amounts totaling $179.2 million were outstanding. The
fair value of these contracts as at June 30, 2000 was $177.8 million with
unrealized losses of $1.4 million. Gains of $27.9 million were realized during
the six months ended June 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 June 30, 2000 would have resulted in approximately
$11.9 million in unrealized losses and $2.3 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 June 30, 2000, forward foreign exchange contracts with
notional principal amounts totaling $37.1 million were outstanding. The fair
value of these contracts as at June 30, 2000 was $39.4 million with unrealized
gains of
28
<PAGE>
$2.3 million. Gains of $7.3 million were realized during the six months ended
June 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
June 30, 2000 would have resulted in approximately $5.8 million in unrealized
gains and $4.7 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 June 30, 2000, the Company had $19.0 million of such contracts
outstanding, and had recognized $1.8 million in realized and unrealized losses
for the six month period. Based on this value, a 10% appreciation or
depreciation of the U.S. dollar as compared to the level of other currencies
under contract at June 30, 2000 would have resulted in approximately
$2.2 million in unrealized gains and $1.9 million in unrealized losses.
FINANCIAL MARKET EXPOSURE
The Company also invests in a synthetic equity portfolio of S&P Index
futures with an exposure approximately equal in amount to the market value of
underlying assets held in this fund. As at June 30, 2000, the portfolio held
$68.6 million in exposure to S&P 500 Index futures and underlying assets of
$74.2 million. Based on this value, a 10% increase or decrease in the price of
these futures would have resulted in exposure of $75.5 million and
$61.8 million, respectively. The value of the futures is updated daily with the
change recorded in income as a realized gain or loss. For the six months ended
June 30, 2000, net realized gains from index futures totaled $1.5 million as a
result of the 1% decrease in the S&P Index.
Derivative investments are also utilized to add value to the portfolio where
market inefficiencies are believed to exist. At June 30, 2000, bond and stock
index futures outstanding were $19.9 million with underlying investments having
a market value of $4.1 billion. A 10% appreciation or depreciation of these
derivative instruments would have resulted in unrealized gains of $2.0 million
and unrealized losses of $2.0 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.
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) greater frequency or severity of claims and loss activity, including as a
result of natural or man-made catastrophic events, than the Company's
underwriting, reserving or investment practices anticipate based on historical
experience or industry data; (iv) developments in the world's financial and
capital markets which adversely affect the performance of the Company's
investments or reduce fees earned by the Company's investment management
affiliates; (v) changes in regulations or tax laws applicable to the Company,
its subsidiaries, brokers or customers; (vi) acceptance of the Company's
29
<PAGE>
products and services, including new products and services; (vii) changes in the
availability, cost or quality of reinsurance or retrocessional coverage;
(viii) changes in the distribution or placement of risks due to increased
consolidation of insurance and reinsurance brokers; (ix) the impact of Year
2000-related issues on the Company's underwriting exposures; (x) loss of key
personnel; (xi) the effects of mergers, acquisitions and divestitures;
(xii) changes in rating agency policies or practices that may adversely affect
the Company's claims paying ratings; (xiii) changes in accounting policies or
practices; and (xiv) changes in general economic conditions, including
inflation, foreign, exchange rates, and other factors. The foregoing review of
important factors should not be construed as exhaustive and should be read in
conjunction with other cautionary statements that are included herein or
elsewhere. The Company undertakes no obligation to publicly update or revise any
forward-looking statement, whether as a result of new information, future
developments or otherwise.
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
At the Annual General Meeting of Class A shareholders held on May 12, 2000
at the executive offices of the Company, Cumberland House, One Victoria Street,
Hamilton, Bermuda, the shareholders approved the following:
1. To elect four Class II directors to hold office until 2003--F.B. Corby, J.T.
Thornton, B.M. O'Hara and J.W. Weiser.
<TABLE>
<S> <C> <C>
VOTES IN FAVOR VOTES WITHHELD
--------------- ----------------
101,277,613 203,029
</TABLE>
2. To appoint PricewaterhouseCoopers LLP, New York, New York, to act as the
independent auditors of the Company for the fiscal year ending December 31,
2001.
<TABLE>
<S> <C> <C>
VOTES IN FAVOR VOTES AGAINST ABSTENTIONS
--------------- ---------------- -------------
101,354,444, 50,074 76,123
</TABLE>
3. To approve the amendment and restatement of the Company's 1991 Incentive
Program.
<TABLE>
<S> <C> <C>
VOTES IN FAVOR VOTES AGAINST ABSTENTIONS
--------------- ---------------- -------------
69,074,647 23,770,021 389,154
</TABLE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
<TABLE>
<S> <C>
10.14.31. 364-day Credit Agreement, dated as of July 5, 2000, between
XL Capital Ltd, X.L. America, Inc., XL Insurance Ltd, XL
Europe Ltd and XL Mid Ocean Reinsurance Ltd, as borrowers
and guarantors, the lenders named therein, The Chase
Manhattan Bank, as administrative agent, Chase
Securities Inc., as advisor, lead arranger and book manager,
Deutsche Bank AG, as syndication agent, and Mellon Bank,
N.A. and Citibank, N.A., as co-documentation agents.
10.14.32. Letter of Credit and Reiumbursement Agreement, dated as of
July 5, 2000, between XL Capital Ltd, X.L. America, Inc., XL
Insurance Ltd, XL Europe Ltd and XL Mid Ocean
Reinsurance Ltd, as account parties and guarantors, the
lenders party thereto, The Chase Manhattan Bank, as
administrative agent, Chase Securities Inc., as advisor,
lead arranger and book manager, Deutsche Bank AG, as
syndication agent, and Mellon Bank, N.A. and Citibank, N.A.,
as co-documentation agents.
11. Statement Regarding Computation of Per Share Earnings.
</TABLE>
(B) REPORTS ON FORM 8-K
None.
31
<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
August 14, 2000 President and Chief Executive Officer
/s/ ROBERT R. LUSARDI
------------------------------------------------
Robert R. Lusardi
Executive Vice President and Chief Financial
August 14, 2000 Officer
</TABLE>
32
