<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 MARCH 31, 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 May 12, 2000, there were outstanding 121,373,186 Class A Ordinary
Shares, $0.01 par value per share, and 3,115,873 Class B 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 March 31, 2000 and
December 31, 1999 (Unaudited)............................... 3
Consolidated Statements of Income and Comprehensive Income
for the Three Months Ended March 31, 2000 and 1999
(Unaudited)................................................. 4
Consolidated Statements of Shareholders' Equity for the
Three Months Ended March 31, 2000 and 1999 (Unaudited)...... 5
Consolidated Statements of Cash Flows for the Three Months
Ended March 31, 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.......................... 12
Item 3. Quantitative and Qualitative Disclosures about Market
Risk........................................................ 20
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................... 23
Item 4. Submission of Matters to a Vote of Shareholders............. 23
Item. 6 Exhibits and Reports on Form 8-K............................ 23
Signatures............................................................ 24
</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>
MARCH 31, DECEMBER 31,
2000 1999
----------- -----------------
(UNAUDITED)
<S> <C> <C>
A S S E T S
Investments:
Fixed maturities, available for sale at fair value
(amortized cost: 2000, $7,925,178; 1999, $7,835,919).... $ 7,736,785 $ 7,581,151
Equity securities, at fair value (cost: 2000, $720,289;
1999, $863,020)......................................... 922,604 1,136,180
Short-term investments, at fair value (amortized cost:
2000, $543,590; 1999, $405,375)......................... 537,579 405,260
----------- -----------------
Total investments..................................... 9,196,968 9,122,591
Cash and cash equivalents................................... 844,296 557,749
Investments in affiliates (cost: 2000, $619,070; 1999,
$478,266)................................................. 628,266 479,911
Other investments........................................... 157,317 165,613
Accrued investment income................................... 130,974 111,590
Deferred acquisition costs.................................. 331,546 275,716
Prepaid reinsurance premiums................................ 322,727 217,314
Premiums receivable......................................... 1,387,103 1,126,397
Reinsurance balances receivable............................. 108,183 149,880
Unpaid losses and loss expenses recoverable................. 1,056,317 831,864
Intangible assets (accumulated amortization: 2000, $132,715;
1999, $118,663)........................................... 1,621,513 1,626,946
Deferred tax asset, net..................................... 103,533 97,928
Other assets................................................ 320,197 327,413
----------- -----------------
Total assets.......................................... $16,208,940 $ 15,090,912
=========== =================
L I A B I L I T I E S A N D S H A R E H O L D E R S' E Q
U I T Y
Liabilities:
Unpaid losses and loss expenses............................. $ 5,395,499 $ 5,369,402
Deposit liabilities and policy benefit reserves............. 1,076,566 837,893
Unearned premiums........................................... 1,762,022 1,497,376
Notes payable and debt...................................... 410,726 410,726
Reinsurance balances payable................................ 648,546 387,916
Net payable for investments purchased....................... 1,008,605 622,260
Other liabilities........................................... 314,177 345,738
Minority interest........................................... 17,173 42,523
----------- -----------------
Total liabilities..................................... $10,633,314 $ 9,513,834
----------- -----------------
Commitments and Contingencies
Shareholders' Equity:
Authorized, 999,990,000 ordinary shares, par value $0.01
Issued and outstanding:
Class A ordinary shares (2000, 121,333,024; 1999,
124,691,541)............................................ 1,213 1,247
Class B ordinary shares (2000, 3,115,873; 1999,
3,115,873).............................................. 31 31
Contributed surplus......................................... 2,449,861 2,520,136
Accumulated other comprehensive income...................... 9,931 19,311
Deferred compensation....................................... (24,358) (28,797)
Retained earnings........................................... 3,138,948 3,065,150
----------- -----------------
Total shareholders' equity............................ $ 5,575,626 $ 5,577,078
----------- -----------------
Total liabilities and shareholders' equity............ $16,208,940 $ 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>
THREE MONTHS ENDED
MARCH 31
-------------------
2000 1999
-------- --------
(UNAUDITED)
<S> <C> <C>
Revenues:
Net premiums earned....................................... $494,499 $386,753
Net investment income..................................... 128,527 135,680
Net realized gains on sales of investments................ 68,707 67,476
Equity in net income (loss) of affiliates................. 17,479 (7,307)
Fee and other income...................................... 4,956 10,551
-------- --------
Total revenues.......................................... 714,168 593,153
-------- --------
Expenses:
Losses and loss expenses.................................. 302,834 214,450
Acquisition costs......................................... 103,694 76,789
Operating expenses........................................ 69,276 66,368
Interest expense.......................................... 8,495 11,025
Amortization of intangible assets......................... 14,052 10,407
-------- --------
Total expenses.......................................... 498,351 379,039
-------- --------
Income before minority interest and income tax expense...... 215,817 214,114
Minority interest in net income of subsidiary............. 205 (515)
Income tax (benefit) expense.............................. (8,147) 4,817
-------- --------
Net income.................................................. $223,759 $209,812
-------- --------
Change in net unrealized appreciation of investments........ (10,216) (109,681)
Foreign currency translation adjustments.................... 836 (2,985)
-------- --------
Comprehensive Income........................................ $214,379 $ 97,146
======== ========
Weighted average ordinary shares and ordinary share
equivalents outstanding--basic............................ 125,671 128,414
======== ========
Weighted average ordinary shares and ordinary share
equivalents outstanding--diluted.......................... 126,764 132,404
======== ========
Earnings per ordinary share and ordinary share
equivalent--basic......................................... $ 1.78 $ 1.63
======== ========
Earnings per ordinary share and ordinary share
equivalent--diluted....................................... $ 1.77 $ 1.58
======== ========
</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>
THREE MONTHS ENDED
MARCH 31
-----------------------
2000 1999
---------- ----------
(UNAUDITED)
<S> <C> <C>
Ordinary Shares:
Balance-beginning of year................................. $ 1,278 $ 1,287
Issue of shares........................................... -- --
Exercise of stock options................................. 3 1
Repurchase of treasury shares............................. (37) (8)
---------- ----------
Balance-end of period................................... $ 1,244 $ 1,280
---------- ----------
Contributed Surplus:
Balance-beginning of year................................. $2,520,136 $2,508,062
(Forfeit) issue of shares................................. (510) 11,571
Exercise of stock options................................. 3,190 4,006
Repurchase of treasury shares............................. (72,955) (11,530)
---------- ----------
Balance-end of period................................... $2,449,861 $2,512,109
---------- ----------
Accumulated other comprehensive income:
Balance-beginning of year................................. $ 19,311 $ 235,185
Net change in unrealized gains on investment portfolio,
net of tax.............................................. 620 (111,879)
Net change in unrealized gains on investment portfolio of
affiliate............................................... (10,836) (2,919)
Currency translation adjustments.......................... 836 (2,985)
---------- ----------
Balance-end of period................................... $ 9,931 $ 117,402
---------- ----------
Deferred Compensation:
Balance-beginning of year................................. $ (28,797) $ (22,954)
Forfeit (issue) of restricted shares...................... 2,504 (2,901)
Amortization.............................................. 1,935 1,914
---------- ----------
Balance-end of period................................... $ (24,358) $ (23,941)
---------- ----------
Retained Earnings:
Balance-beginning of year................................. $3,065,150 $2,891,023
Net income................................................ 223,759 209,812
Cash dividends paid....................................... (57,064) (49,406)
Repurchase of treasury shares............................. (92,897) (37,047)
---------- ----------
Balance-end of period................................... $3,138,948 $3,014,382
---------- ----------
Total shareholders' equity.................................. $5,575,626 $5,621,232
========== ==========
</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>
THREE MONTHS ENDED
MARCH 31,
-------------------------
2000 1999
----------- -----------
(UNAUDITED)
<S> <C> <C>
Cash flows (used in) provided by operating activities:
Net income................................................ $ 223,759 $ 209,812
Adjustments to reconcile net income to net cash provided by
operating activities:
Net realized gains on sales of investments................ (68,707) (67,476)
Amortization of discounts on fixed maturities............. (9,365) (4,150)
Equity in net (income) loss of affiliates, net of cash
received................................................ (17,479) 12,953
Amortization of deferred compensation..................... 2,896 1,914
Amortization of intangible assets......................... 14,052 10,407
Unpaid losses and loss expenses........................... (16,835) 12,079
Unearned premiums......................................... 264,646 234,183
Premiums receivable....................................... (260,706) (182,165)
Unpaid losses and loss expenses recoverable............... (222,792) (7,720)
Prepaid reinsurance premiums.............................. (105,413) (35,722)
Reinsurance balances receivable........................... 41,697 14,840
Other..................................................... 139,096 (87,098)
----------- -----------
Total adjustments..................................... (238,910) (97,955)
----------- -----------
Net cash (used in) provided by operating activities....... (15,151) 111,857
----------- -----------
Cash flows provided by (used in) investing activities:
Proceeds from sale of fixed maturities and short-term
investments............................................. 5,862,142 3,123,515
Proceeds from redemption of fixed maturities and
short-term investments.................................. 52,030 61,452
Proceeds from sale of equity securities................... 660,943 474,480
Purchases of fixed maturities and short-term
investments............................................. (5,718,001) (3,321,388)
Purchases of equity securities............................ (466,929) (377,688)
Deferred losses on forward contracts...................... 509 97
Investments in affiliates................................. (95,360) (82,500)
Acquisition of subsidiaries, net of cash acquired......... (3,094) --
Other investments......................................... (16,251) 1,495
Deposit liabilities and policy benefit reserve............ 250,826 --
Other assets.............................................. (9,617) (8,798)
----------- -----------
Net cash provided by (used) in investing activities....... 517,198 (129,335)
----------- -----------
Cash flows used in financing activities:
Issue of restricted shares................................ 1,994 8,670
Proceeds from exercise of stock options................... 3,193 4,007
Repurchase of treasury shares............................. (165,889) (48,585)
Dividends paid............................................ (57,064) (49,406)
Proceeds from loans....................................... 250,300 --
Repayment of loans........................................ (250,300) --
Minority interest......................................... -- (4,900)
----------- -----------
Net cash used in financing activities....................... (217,766) (90,214)
----------- -----------
Effects of exchange rate changes on cash on foreign currency
cash balances............................................. 2,266 24
----------- -----------
Increase (decrease) in cash and cash equivalents............ 286,547 (107,668)
Cash and cash equivalents-beginning of year................. 557,749 480,874
----------- -----------
Cash and cash equivalents-end of period..................... $ 844,296 $ 373,206
=========== ===========
</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. All material intercompany accounts and transactions have been
eliminated. The preparation of financial statements in conformity with GAAP
requires management to make estimates and assumptions that affect the reported
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. Under this agreement, in exchange for its shares in
Risk Capital and $3.6 million in cash, the Company received the effective
remaining ownership in Latin American Re and 1.4 million shares and 100,000
warrants in Annuity & Life Re, in which the Company had an existing investment.
The total value of the transaction was $62.8 million.
(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.
7
<PAGE>
XL CAPITAL LTD
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(U.S. DOLLARS IN THOUSANDS)
2. BUSINESS COMBINATIONS AND CHANGE IN FISCAL YEAR END (CONTINUED)
The following table presents a reconciliation of consolidated total
revenues, net income and shareholders' equity 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 three months ended March 31, 1999:
<TABLE>
<CAPTION>
CONSOLIDATED CONSOLIDATED
TOTAL CONSOLIDATED SHAREHOLDERS'
REVENUES NET INCOME EQUITY
------------ ------------ -------------
<S> <C> <C> <C>
XL Capital--three months ended February 28, 1999.... $425,594 $191,733 $4,811,389
Less one month December 31, 1998.................... 202,210 29,785 --
Add one month March 31, 1999........................ 201,526 27,036 57,160
-------- -------- ----------
XL Capital--three months ended March 31, 1999....... 424,910 188,984 4,868,549
NAC Re--three months ended March 31, 1999........... 168,243 20,828 752,683
-------- -------- ----------
Combined results--three months ended March 31,
1999.............................................. $593,153 $209,812 $5,621,232
======== ======== ==========
</TABLE>
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 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 consider the allocation of
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.
8
<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 MARCH 31, 2000
<TABLE>
<CAPTION>
LLOYD'S FINANCIAL
INSURANCE REINSURANCE SYNDICATES SERVICES TOTAL
--------- ----------- ---------- --------- --------
<S> <C> <C> <C> <C> <C>
Net premiums earned....................... $146,301 $239,040 $103,062 $6,096 $494,499
Fee and other income...................... 1,272 229 (1,168) 4,623 4,956
Net losses and loss expenses.............. 85,534 135,178 80,687 1,435 302,834
Acquisition costs......................... 19,986 56,195 27,171 342 103,694
Operating expenses........................ 18,438 26,432 4,871 5,234 54,975
Exchange (gains) losses................... (10) 1,736 (304) -- 1,422
-------- -------- -------- ------ --------
Underwriting profit (loss)................ $ 23,625 $ 19,728 $(10,531) $3,708 $ 36,530
Net investment income..................... 128,527
Net realized gains on investments......... 68,707
Equity in net earnings of affiliates...... 17,479
Interest expense.......................... 8,495
Amortization of intangible assets......... 14,052
Corporate operating expenses.............. 12,879
Minority interest......................... 205
Income tax benefit........................ 8,147
--------
Net income................................ $223,759
--------
Loss and loss expense ratio............... 58.4% 56.5% 78.3% 23.5% 61.2%
Underwriting expense ratio................ 26.3% 34.6% 31.1% 91.5% 32.1%
-------- -------- -------- ------ --------
Combined ratio............................ 84.7% 91.1% 109.4% 115.0% 93.3%
======== ======== ======== ====== ========
</TABLE>
9
<PAGE>
XL CAPITAL LTD
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(U.S. DOLLARS IN THOUSANDS)
3. SEGMENT INFORMATION (CONTINUED)
QUARTER ENDED MARCH 31, 1999
<TABLE>
<CAPTION>
LLOYD'S FINANCIAL
INSURANCE REINSURANCE SYNDICATES SERVICES TOTAL
--------- ----------- ---------- --------- --------
<S> <C> <C> <C> <C> <C>
Net premiums earned....................... $102,291 $198,639 $ 81,299 $4,524 $386,753
Fee and other income...................... 663 -- 7,433 -- 8,096
Net losses and loss expenses (1).......... 47,064 108,115 58,495 776 214,450
Acquisition costs......................... 14,188 44,469 17,727 405 76,789
Operating expenses........................ 15,484 23,133 12,629 3,078 54,324
Exchange (gains) losses................... 419 1,762 (539) -- 1,642
-------- -------- -------- ------ --------
Underwriting profit....................... $ 25,799 $ 21,160 $ 420 $ 265 $ 47,644
Net investment income..................... 135,680
Net realized gains on investments......... 67,476
Other income.............................. 2,455
Equity in net losses of affiliates........ 7,307
Interest expense.......................... 11,025
Amortization of intangible assets......... 10,407
Corporate operating expenses.............. 10,402
Minority interest......................... 515
Income tax expense........................ 4,817
--------
Net income................................ $209,812
========
Loss and loss expense ratio (1)........... 46.0% 54.5% 72.0% 17.1% 55.4%
Underwriting expense ratio................ 29.0% 34.0% 37.3% 77.0% 33.9%
-------- -------- -------- ------ --------
Combined ratio............................ 75.0% 88.5% 109.3% 94.1% 89.3%
======== ======== ======== ====== ========
</TABLE>
- ------------------------
(1) Net losses incurred for the insurance segment include, and the reinsurance
segment exclude, $10.5 million relating to an intercompany stop loss
agreement. Consolidated results are not affected. The loss and loss expense
ratio would have been 35.7% and 59.7% and the underwriting profit would have
been $36.3 million and $10.6 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)
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 MARCH 31, 2000
<TABLE>
<CAPTION>
GROSS PREMIUMS NET PREMIUMS NET PREMIUMS
WRITTEN WRITTEN EARNED
-------------- ------------ ------------
<S> <C> <C> <C>
Casualty insurance................... $ 97,497 $ 73,537 $ 78,228
Casualty reinsurance................. 246,713 189,997 141,682
Property catastrophe................. 77,836 77,220 29,278
Other property....................... 95,888 66,645 44,682
Marine, energy, aviation and
satellite.......................... 155,641 119,910 44,516
Lloyd's syndicates................... 163,739 59,677 103,062
Other................................ 81,623 65,113 53,051
-------- -------- --------
Total................................ $918,937 $652,099 $494,499
======== ======== ========
</TABLE>
QUARTER ENDED MARCH 31, 1999
<TABLE>
<CAPTION>
GROSS PREMIUMS NET PREMIUMS NET PREMIUMS
WRITTEN WRITTEN EARNED
-------------- ------------ ------------
<S> <C> <C> <C>
Casualty insurance................... $ 79,756 $ 59,670 $ 65,630
Casualty reinsurance................. 131,288 109,218 106,426
Property catastrophe................. 81,846 80,932 28,971
Other property....................... 97,590 85,243 48,713
Marine, energy, aviation and
satellite.......................... 103,169 84,410 36,290
Lloyd's syndicates................... 183,820 108,397 81,299
Other................................ 54,522 56,051 19,424
-------- -------- --------
Total................................ $731,991 $583,921 $386,753
======== ======== ========
</TABLE>
11
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2000
COMPARED TO THE THREE MONTHS ENDED MARCH 31, 1999
(U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND 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 previously reported by 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" below 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 March 31, 2000 and
1999:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31
-------------------
2000 1999 % CHANGE
-------- -------- ---------
(UNAUDITED)
<S> <C> <C> <C>
Net operating income (excluding net realized
gains on investments)........................ 150,801 143,272 5.3%
Net realized gains on investments.............. 72,958 66,540 9.6%
------- ------- ----
Net income..................................... 223,759 209,812 6.6%
======= ======= ====
Earnings per share--basic...................... $ 1.78 $ 1.63
Earnings per share--fully diluted.............. $ 1.77 $ 1.58
</TABLE>
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,
12
<PAGE>
INSURANCE OPERATIONS (CONTINUED)
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>
THREE MONTHS ENDED
MARCH 31
-------------------
2000 1999 % CHANGE
-------- -------- --------
(UNAUDITED)
<S> <C> <C> <C>
Net premiums earned........................... $146,301 $102,291 43.0%
Fee and other income.......................... 1,272 663 NM
Net losses and loss expenses.................. 85,534 47,064 81.7%
Acquisition costs............................. 19,986 14,188 40.9%
Operating expenses............................ 18,438 15,484 19.1%
Exchange (gains) losses....................... (10) 419 NM
-------- -------- -----
Net underwriting profit....................... $ 23,625 $ 25,799 (8.4%)
======== ======== =====
</TABLE>
* NM--Not Meaningful
The insurance segment has experienced growth in net premiums earned
primarily as a result of increased premiums written in the U.S. primary other
liability business, and growth in the other property line worldwide. The growth
in the U.S. business was mainly due to the acquisition of Intercargo (now known
as XL Specialty Insurance) and ECS in the second quarter of 1999. These
companies contributed approximately $60.0 million in gross premiums written and
$15.0 million in net premiums earned during the quarter. There is no comparative
figure included in the 1999 results.
The following table presents the ratios for the insurance segment:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
MARCH 31
-------------------
2000 1999
-------- --------
(UNAUDITED)
<S> <C> <C>
Loss and loss expense ratio................................. 58.4% 46.0%
Underwriting expense ratio.................................. 26.3% 29.0%
----- -----
Combined ratio.............................................. 84.7% 75.0%
===== =====
</TABLE>
The increase in the combined ratio is due to the increase in the loss and
loss expense ratio which in 2000, reflects the application of higher actuarially
determined loss ratios to the casualty business lines written in 2000 as
competitive market conditions continued to affect premium rates. 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 had developed more favorably than expected. In
addition, the 1999 loss ratio was affected by an intercompany stop loss
agreement under which a subsidiary in the reinsurance segment was covered for
losses exceeding a specified loss ratio up to $100.0 million. In the quarter
ended March 31, 1999, $10.5 million of losses were included in the insurance
segment losses and excluded from the reinsurance segment. The loss ratio in 1999
would have been 35.7% and the underwriting profit would have been $36.3 million
had this agreement not been in place.
13
<PAGE>
INSURANCE OPERATIONS (CONTINUED)
The decrease in the expense ratio in the first quarter of 2000 is primarily
the result of an increase in earned premiums. Acquisition costs as a percentage
of earned premium are relatively the same year over year for this segment.
Although operating costs are higher in 2000 due to the acquisition of Intercargo
and ECS in the second quarter of 1999, the growth in net premiums earned was
proportionately greater, which resulted in a lower expense ratio.
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, 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 profit for this segment:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31
-------------------
2000 1999 % CHANGE
-------- -------- --------
(UNAUDITED)
<S> <C> <C> <C>
Net premiums earned........................... $239,040 $198,639 20.3%
Fee and other income.......................... 229 -- NM
Net losses and loss expenses.................. 135,178 108,115 25.0%
Acquisition costs............................. 56,195 44,469 26.4%
Operating expenses............................ 26,432 23,133 14.3%
Exchange losses............................... 1,736 1,762 (1.5)%
-------- -------- ------
Net underwriting profit....................... $ 19,728 $ 21,160 (6.8)%
======== ======== ======
</TABLE>
The increase in net premiums earned reflects price increases in marine and
other liability markets, with increased writings in accident and health
liability. This business was written both in the U.S. and internationally. The
increase in earned premium also reflects a large treaty assumed by NAC Re in the
fourth quarter of 1999 which resulted in a full quarter of earned premium in
2000.
The following table presents the ratios for the reinsurance segment:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31
-------------------
2000 1999
-------- --------
(UNAUDITED)
<S> <C> <C>
Loss and loss expense ratio............................. 56.5% 54.5%
Underwriting expense ratio.............................. 34.6% 34.0%
----- -----
Combined ratio.......................................... 91.1% 88.5%
===== =====
</TABLE>
The increase in the combined ratio is primarily due to the effect of an
intercompany reinsurance agreement with one of the Company's subsidiaries in the
insurance segment in 1999. Net losses and loss expenses incurred in this segment
in 1999 reflect a recovery of $10.5 million with respect to this agreement. The
loss and loss expense ratio would have been 59.7% and the underwriting profit
would have been $10.6 million had this agreement not been in place.
The underwriting expense ratio is relatively unchanged compared to the first
quarter of 1999. The small increase in this ratio reflects an increase in
acquisition costs as a percentage of premiums earned.
14
<PAGE>
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 wrote 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 profit (loss) for this
segment:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31
-------------------
2000 1999 % CHANGE
-------- -------- --------
(UNAUDITED)
<S> <C> <C> <C>
Net premiums earned............................ $103,062 $81,299 26.8%
Fee and other income........................... (1,168) 7,433 NM
Net losses and loss expenses................... 80,687 58,495 37.9%
Acquisition costs.............................. 27,171 17,727 53.3%
Operating expenses............................. 4,871 12,629 (61.4)%
Exchange gains................................. (304) (539) NM
-------- ------- -------
Net underwriting profit (loss)................. $(10,531) $ 420 NM
======== ======= =======
</TABLE>
Net premiums earned reflect the growth in business written by Brockbank and
Denham due to an increase in corporate capacity in the 2000 quarter over 1999.
The corporate syndicates increased capacity from approximately 43% to 50% at
Brockbank and from 43% to 75% at Denham. Net earned premium 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. 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 was also generated from the motor business on behalf of
third parties resulting in $6.0 million of income in 1999. No such income was
earned in 2000. The Company's Lloyd's managing agency also earns profit
commissions from the syndicates it manages. The first quarter of 1999 included
$2.0 million in profit commissions but due to the loss deterioration in the
Lloyd's market place, no commissions were recorded in the first quarter of 2000.
Managing agency expenses are offset against this income which has resulted in
negative fee and other income in the quarter ended March 31, 2000.
The following table presents the combined ratios for this segment:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31
-------------------
2000 1999
-------- --------
(UNAUDITED)
<S> <C> <C>
Loss and loss expense ratio............................... 78.3% 72.0%
Underwriting expense ratio................................ 31.1% 37.3%
------ ------
Combined ratio............................................ 109.4% 109.3%
====== ======
</TABLE>
The increase in the loss ratio is primarily the result of the increased
capacity of Denham which underwrites casualty business. This business tends to
have a higher loss ratio than the short-tail business that is part of the
business Brockbank underwrites. The loss ratio was also affected by the run-off
of the Company's motor business on which the loss ratio had deteriorated. The
reduction in the underwriting expense ratio reflects a reduction in operating
expenses due to the sale of the Company's motor business.
15
<PAGE>
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>
THREE MONTHS
ENDED
MARCH 31
-------------------
2000 1999 % CHANGE
-------- -------- --------
(UNAUDITED)
<S> <C> <C> <C>
Net premiums earned............................... $6,096 $4,524 34.7%
Fee and other income.............................. 4,623 -- NM
Net losses and loss expenses...................... 1,435 776 84.9%
Acquisition costs................................. 342 405 (15.6)%
Operating expenses................................ 5,234 3,078 70.0%
------ ------ -------
Net underwriting profit........................... $3,708 $ 265 NM
====== ====== =======
</TABLE>
Financial guaranty premiums are earned over the life of the exposure and
certain transactions such as installment premiums are not recognized as premiums
written until the premium is received.
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 will
result in fee income. These transactions tend to be irregular in nature. Such
transactions require an investment of Company resources which are included in
operating expenses. During the first quarter of 2000, the Company wrote a loss
portfolio transfer contract which was accounted for on a deposit basis. The
Company received a fee of approximately $1.7 million on this transaction.
The following table presents the combined ratios for this segment:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
MARCH 31
-------------------
2000 1999
-------- --------
(UNAUDITED)
<S> <C> <C>
Loss and loss expense ratio................................ 23.5% 17.1%
Underwriting expense ratio................................. 91.5% 77.0%
------ -----
Combined ratio............................................. 115.0% 94.1%
====== =====
</TABLE>
This segment generally writes business to a loss ratio of approximately 25%.
The high expense ratio reflects the start up nature of this segment.
16
<PAGE>
INVESTMENT OPERATIONS
The following table illustrates the change in net investment income and net
realized gains for the three month periods ended March 31, 2000 and 1999:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31
-------------------
2000 1999 % CHANGE
-------- -------- --------
(UNAUDITED)
<S> <C> <C> <C>
Net investment income......................... $128,527 $135,680 (5.3)%
Net realized gains............................ $ 68,707 $ 67,476 1.8%
</TABLE>
Net investment income decreased in the first quarter of 2000 compared to the
same period in 1999 due to relatively higher returns generated in 1999 and a
decrease in the Company's investment asset base, (excluding investments relating
to the Company's asset accumulation business) in the first quarter of 2000. The
Company wrote two structured products transactions in 1999 and one in the first
quarter of 2000, all of which are accounted for on a deposit basis.
Consequently, while the Company generates investment income on the assets, it
must also provide for the accretion of the liability through a charge against
investment income.
The relative decline in the investment asset base is a result of the claim
payments, the repurchase of the Company's shares and the reallocation of such
assets to other strategic investments, from which income is accounted for as
equity in net earnings of affiliates.
OTHER REVENUES AND EXPENSES
The following table sets forth other revenues and expenses for the quarters
ended March 31, 2000 and 1999:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31
-------------------
2000 1999 % CHANGE
-------- -------- --------
(UNAUDITED)
<S> <C> <C> <C>
Equity in net earnings (loss) of affiliates...... $17,479 $(7,307) NM
Other income..................................... -- 2,455 NM
Amortization of intangible assets................ 14,052 10,407 35.0%
Corporate operating expenses..................... 12,879 10,402 23.8%
Interest expense................................. 8,495 11,025 (22.9)%
Minority interest................................ 205 (515) NM
Income tax (benefit) expenses.................... (8,147) 4,817 NM
</TABLE>
Equity in net earnings of affiliates in 2000 results from returns on the
Company's strategic investments in investment management companies and the funds
managed by these companies. Offsetting these returns was a $3.4 million loss
from the Company's equity position in Le Mans Re. The Company did not have these
investments at March 31, 1999. The loss experienced in 1999 reflects the
Company's share of Risk Capital's net loss for the fourth quarter of 1998. The
Company sold its investment in Risk Capital in January 2000.
Other income includes a distribution of earnings from the Company's other
investments in the first quarter of 1999. No such distribution was received in
the equivalent 2000 period.
The increase in amortization of intangible assets reflects additional
goodwill generated from the acquisition of ECS, Inc. and Intercargo Corporation
in the second quarter of 1999.
17
<PAGE>
OTHER REVENUES AND EXPENSES (CONTINUED)
The increase in 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 quarter in 2000 compared to 1999. The Company
extinguished convertible debt assumed in connection with the NAC acquisition 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. Offsetting
this decrease was interest expense relating to interim borrowings used to
finance the repurchase of shares in the quarter ended March 31, 2000.
The decrease in income taxes results primarily from lower income earned by
certain subsidiaries of the Company during 2000.
FINANCIAL CONDITION AND LIQUIDITY
As a holding company, XL Capital's assets consist primarily of its
investments in subsidiaries and the XL Capital's future cash flows depend on the
availability of dividends or other statutorily permissible payments from its
subsidiaries. The ability to pay such dividends is limited by the applicable
laws and regulations of Bermuda, the United States, Ireland and the United
Kingdom, including those of the Society of Lloyd's. No assurance can be given
that the XL Capital or its subsidiaries will be permitted to pay dividends in
the future. The Company's shareholders' equity at March 31, 2000 was
$5.6 billion of which $3.1 billion was retained earnings.
At March 31, 2000, total investments available for sale and cash net of
unsettled investment trades were $9.0 billion, compared to $9.1 billion at
December 31, 1999. This includes investments relating to Company's asset
accumulation business. During the quarter, the Company sold investments
categorized as available for sale to fund two 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 March 31, 2000 represented approximately 90% of invested
assets and were managed by several outside investment management firms.
Approximately 88% of fixed income securities are of investment grade, with 59.4%
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 $1.0 billion as at March 31, 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 low frequency and high severity. This may result in volatility
in both the Company's results and operational cash flows. For the quarters ended
March 31, 2000 and 1999, the net amount of losses due to claims activity paid by
the Company was $444.7 million and $223.4 million, respectively. Included in
paid losses for the quarter ended March 31, 2000 was an amount of $74 million
relating to a commutation payment where unpaid losses have been reduced by the
same amount. 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
by using actuarial and other reserving techniques to project the estimated
ultimate net liability for losses and loss expenses. The Company's reserving
practices and the establishment of any particular reserve reflect management's
judgement concerning sound financial practice and does not represent any
admission of liability with respect to any claims made against the Company. No
assurance
18
<PAGE>
FINANCIAL CONDITION AND LIQUIDITY (CONTINUED)
can be given that actual claims made and payments related thereto will not be in
excess of the amounts reserved. The Company's reserving process includes a
supplemental evaluation of the potential impact on claims liabilities from
exposure to asbestos and environmental claims, including related loss adjustment
expenses. The Company's claims and claim expense reserves for such exposures is
less than 1% of the Company's total reserves.
The Company has had several stock repurchase programs in the past as part of
its capital management. On January 9, 2000, the Board of Directors authorized a
new program for the repurchase of shares up to $500 million. The repurchase of
shares was announced in conjunction with a small dividend increase of $0.04 per
share per annum as part of the Company's capital management strategy. The
Company has purchased 3.7 million shares up to May 12, 2000 at a cost of
$165.8 million or $44.76 per share.
As of March 31, 2000, the Company had bank, letter of credit and loan
facilities available from a variety of sources including commercial banks
totaling $2.36 billion of which $410.7 million in debt outstanding. In addition,
$886.0 million of letters of credit were outstanding, 65% 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 March 31, 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 364 day Revolvers--total............. 650,000 --
2 facilities of 5 year Revolvers--total.............. 350,000 299,700
NAC Re 7.15% Notes due 2005.......................... 100,000 100,000
---------- --------
$1,111,000 $410,700
========== ========
LETTERS OF CREDIT:
7 facilities--total $1,246,500 $886,000
========== ========
</TABLE>
The 364-day facilities are provided by a syndicate of banks where the
borrowings are unsecured, and by a U.S. bank where the borrowings are
collateralized and guaranteed. During the three months ended March 31, 2000, up
to $200.0 million was outstanding under the 364-day revolvers as interim funding
of share buybacks. There were no borrowings outstanding at March 31, 2000. The
weighted average interest rate on the funds borrowed during 2000 was
approximately 6.3%. On March 31, 2000, the 364-day collateralized revolver
provided by a U.S. bank in the amount of $150.0 million expired and was not
renewed.
Two syndicates of banks provide the two five-year facilities and borrowings
are unsecured. Under these facilities, $299.7 million outstanding at March 31,
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 2000 was
approximately 6.3%.
At March 31, 2000 and March 31, 1999, the Company had $100.0 million of
7.15% Senior Notes due November 15, 2005 outstanding.
19
<PAGE>
FINANCIAL CONDITION AND LIQUIDITY (CONTINUED)
In addition, at March 31, 1999, the following debt was outstanding:
(1) $100.0 million of 5.25% Convertible Subordinated Debentures due
December 15, 2002. The Debentures were called in June 1999 and converted to
approximately 1.8 million of the Company's shares.
(2) $100.0 million of 8% Senior Notes due June 15, 1999. These notes were repaid
in June 1999 through additional borrowings and internal funds.
Total pre-tax interest expense on the borrowings described above was
$8.5 million and $11.0 million for the three months ended March 31, 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
three month periods.
The Company has seven letter of credit facilities available at March 31,
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
March 31, 2000, approximately $580.0 million were collateralized against the
Company's investment portfolio and $306.0 million were unsecured.
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. In view of the apparent lack of
significant Year 2000-related losses, 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
The Company believes competition in the property casualty insurance and
reinsurance industry will continue in 2000, and in particular in the liability
lines. Although the Company believes some opportunities will exist in 2001 for
growth in selected product lines, no assurances can be made that growth in these
lines will be sufficient to offset the competitive pressures affecting the
majority of the Company's product lines.
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.
20
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK (CONTINUED)
This risk management discussion and the estimated amounts generated from the
sensitivity analyses are forward-looking statements of market risk assuming
certain adverse market conditions occur. Actual results in the future may differ
materially from these projected results due to actual developments in the global
financial markets. The 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 March 31, 2000, forward foreign exchange contracts
with notional principal amounts totaling $232.0 million were outstanding. The
fair value of these contracts as at March 31, 2000 was $241.6 million with
unrealized gains of $9.6 million. Gains of $10.2 million were realized during
the quarter. 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 March 31,
2000 would have resulted in approximately $20.6 million in unrealized losses and
$27.5 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 March 31, 2000, forward foreign exchange contracts with
notional principal amounts totaling $64.6 million were outstanding. The fair
value of these contracts as at March 31, 2000 was $61.9 million with unrealized
losses of $2.7 million. No losses have been realized to date. 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 March 31, 2000 would have resulted
in approximately $6.1 million in unrealized losses and $6.9 million in
unrealized gains.
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 March 31, 2000, the value of such contracts outstanding was not
significant.
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 March 31, 2000, the portfolio held
$83.0 million in exposure to S&P 500 Index futures and underlying assets of
$81.7 million. Based on this value, a 10% increase or decrease in the price of
these futures would have resulted in exposure of $91.3 million and
$74.7 million, respectively. The value of the futures is updated daily with the
change recorded in income as a realized gain or loss. For the three months ended
March 31,
21
<PAGE>
FINANCIAL MARKET EXPOSURE (CONTINUED)
2000, net realized gains from index futures totaled $10.2 million as a result of
the 2% increase in the S&P Index.
FINANCIAL MARKET EXPOSURE (CONTINUED)
Derivative investments are also utilized to add value to the portfolio where
market inefficiencies are believed to exist. At March 31, 2000, bond and stock
index futures outstanding were $157.4 million with underlying investments having
a market value of $4.4 billion. A 10% appreciation or depreciation of these
derivative instruments would have resulted in unrealized gains of $15.7 million
and losses of $15.7 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 and the insurance, reinsurance and financial services sectors in general
(both as to underwriting and investment matters). Statements that are not
historical facts or that include the words "expect", "intend", "plan, "believe",
"project", "anticipate", "will", or similar statements of a future or
forward-looking nature identify forward-looking statements for purposes of the
PSLRA.
All forward-looking statements address matters that involve risks and
uncertainties. Accordingly, there are or will be important factors that could
cause actual results to differ materially from those indicated in such
statements. The Company believes that these factors include but are not limited
to the following: (i) ineffectiveness or obsolescence of the Company's business
strategy due to changes in current or future market conditions; (ii) increased
competition on the basis of pricing, capacity, coverage terms or other factors;
(iii) greater frequency or severity of claims and loss activity, including as a
result of natural or man-made catastrophic events, than the Company's
underwriting, reserving or investment practices anticipate based on historical
experience or industry data; (iv) developments in the world's financial and
capital markets which adversely affect the performance of the Company's
investments or reduce fees earned by the Company's investment management
affiliates; (v) changes in regulations or tax laws applicable to the Company,
its subsidiaries, brokers or customers; (vi) acceptance of the Company's
products and services, including new products and services; (vii) changes in the
availability, cost or quality of reinsurance or retrocessional coverage;
(viii) changes in the distribution or placement of risks due to increased
consolidation of insurance and reinsurance brokers; (ix) the impact of Year
2000-related issues on the Company's 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.
22
<PAGE>
XL CAPITAL LTD
PART II--OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company 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
EXHIBITS
Exhibit 11--Statement Regarding Computation of Per Share Earnings.
REPORTS ON FORM 8-K
Current Report on Form 8-K filed on February 1, 2000, under Item 8 thereof.
23
<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> <C>
XL CAPITAL LTD
---------------------------------------------
(Registrant)
May 15, 2000 By: /s/ BRIAN M. O'HARA
-----------------------------------------
Brian M. O'Hara
President and Chief Executive Officer
May 15, 2000 By: /s/ ROBERT R. LUSARDI
-----------------------------------------
Robert R. Lusardi
Executive Vice President and Chief
Financial Officer
</TABLE>
24
<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>
THREE MONTHS ENDED
MARCH 31
-------------------
2000 1999
-------- --------
(UNAUDITED)
<S> <C> <C>
BASIC EARNINGS PER SHARE:
Net income.................................................. $223,759 $209,812
Weighted average ordinary shares outstanding................ 125,671 128,414
Basic earnings per share.................................... $ 1.78 $ 1.63
======== ========
DILUTED EARNINGS PER SHARE:
Net income.................................................. $223,759 $209,812
Add back after-tax interest on convertible debentures....... -- 876
-------- --------
Adjusted net income......................................... 223,759 210,688
-------- --------
Weighted average ordinary shares outstanding-basic.......... 125,671 128,414
Average stock options outstanding (1)....................... 1,093 1,970
Assumed conversion of convertible debentures (2)............ -- 2,020
-------- --------
Weighted average ordinary shares outstanding-diluted........ 126,764 132,404
-------- --------
Diluted earnings per share.................................. $ 1.77 $ 1.58
======== ========
DIVIDENDS PER SHARE......................................... $ 0.45 $ 0.44
======== ========
</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.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<DEBT-HELD-FOR-SALE> 8,274,364
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 922,604
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 9,196,968
<CASH> 844,296
<RECOVER-REINSURE> 108,183
<DEFERRED-ACQUISITION> 331,546
<TOTAL-ASSETS> 16,208,940
<POLICY-LOSSES> 5,395,499
<UNEARNED-PREMIUMS> 1,762,022
<POLICY-OTHER> 1,076,566
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 410,726
0
0
<COMMON> 1,244
<OTHER-SE> 5,574,382
<TOTAL-LIABILITY-AND-EQUITY> 16,208,940
494,499
<INVESTMENT-INCOME> 128,527
<INVESTMENT-GAINS> 68,707
<OTHER-INCOME> 4,956
<BENEFITS> 302,834
<UNDERWRITING-AMORTIZATION> 103,694
<UNDERWRITING-OTHER> 91,823
<INCOME-PRETAX> 215,612
<INCOME-TAX> (8,147)
<INCOME-CONTINUING> 223,759
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 223,759
<EPS-BASIC> 1.78
<EPS-DILUTED> 1.77
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
