Carol A. Parker Trott
Media Relations
(441) 294-7290
HAMILTON, Bermuda, Oct. 14 XL Capital Ltd ("XL"
or the "Company") today reported an estimated net loss to ordinary
shareholders for the quarter ended September 30, 2008 of between $1.65 billion
to $1.67 billion, or a loss of $6.08 to $6.17 per ordinary share, compared
with net income of $328.0 million, or $1.82 per ordinary share, for the
quarter ended September 30, 2007. The results for the quarter are currently
being reviewed by the Company's independent auditors and the estimates are
subject to change. The estimated net loss for the quarter ended September 30,
2008 included the following pre-tax items in addition to the previously
announced items noted above:
1. Other than temporary impairment charges of between $250.0 million and
$275.0 million and net realized losses on investment sales of $40.3 million.
2. Foreign exchange gains of $139.5 million related to the significant
strengthening of the U.S. dollar during the quarter.
"Net income excluding net realized gains and losses"(1) is estimated to be
approximately $107.8 million or $0.40 per ordinary share as compared with
$562.8 million or $3.13 in the prior year quarter.
Commenting on the results for the quarter, Chief Executive Officer,
Michael S. McGavick said: "The third quarter has seen real progress in
relation to the strategic objectives set out earlier in the year. We
eliminated the vast majority of our exposures to Syncora. We have also made
demonstrable progress in de-risking the firm, both in our investment
portfolios and by demonstrating our attention to managing our traditional
property and casualty exposures well, as we believe our third quarter
hurricane losses show. And during all of this we also completed most of the
actions necessary to reduce the expense base of the Company and achieved
modest premium growth. Additionally, we raised capital sufficient to pay for
our Syncora solution, to withstand the historic economic turbulence and its
effects on our investment portfolio in the quarter, and to cover the demands
of our estimated third quarter hurricane losses."
(1) Defined as net income excluding net realized gains and losses on
investments, net realized and unrealized gains and losses on credit,
structured financial and investment derivatives, net of tax, for the
Company and its share of these items for Syncora and the Company's
other insurance company operating affiliates and charges in respect of
guarantees issued to cedents of Syncora Guarantee Re Ltd (formerly XL
Financial Assurance Ltd), herein referred to as "net income excluding
net realized gains and losses". "Net income excluding net realized
gains and losses" is a non-GAAP measure. See the schedule entitled
"Reconciliation" at the end of this release for a reconciliation of
net income/loss excluding net realized gains and losses to net income
available to ordinary shareholders.
P&C Operations gross premiums written for the current quarter included
$1,214.0 million from the Insurance segment and $686.0 million from the
Reinsurance segment compared with $1,169.4 million and $624.3 million,
respectively, in the prior year quarter. The loss ratio for the quarter was
79.3% with a combined ratio of 107.1% as compared to 58.1% and 85.3%,
respectively, in the prior year quarter. The results for the current quarter
were adversely affected by $209.5 million of natural catastrophe losses but
benefited from favorable prior year development of $98.9 million (see table
attached). In the prior year quarter there was $22.1 million of natural
catastrophe losses offset by favorable prior year development of $144.0
million. Consistent with the first half of this year, this was a quarter
where the insurance industry saw an above average level of large property
losses. Further details of the performance of the operating segments are set
forth below.
The Life Operations segment contributed $37.6 million and there was a
contribution of $3.7 million from the Other Financial Lines segment, compared
with contributions of $27.0 million and $16.5 million, respectively, in the
prior year quarter.
Mr. McGavick said: "During the quarter we have been conducting our
strategic review of the Company's Life Operations. We currently expect this
review process to conclude during the fourth quarter."
Net investment income from P&C operations, excluding investment income
from structured products, was $293.1 million as compared to $325.5 million in
the prior year quarter. Net investment income from P&C structured products
was $27.4 million as compared to $35.1 million in the prior year quarter. Both
reductions were caused principally by lower average yields for the period.
There was a net loss of $54.9 million from investment affiliates as compared
to a profit of $69.4 million in the prior year quarter and net income from
investment manager affiliates of $1.0 million compared to $23.2 million in the
prior year quarter. Both results reflected the extremely difficult capital
market conditions during the period.
Mr. McGavick said: "These have been very difficult times in the capital
markets. However, I believe that the relatively limited level of realized
investment losses that we have recorded this quarter arising from impacted
financial institutions demonstrates the effectiveness of our risk management
in avoiding outsize exposures to individual credits."
Net income from financial and operating affiliates, excluding the Syncora
related charges noted above, was $12.2 million as compared to $18.8 million in
the prior year quarter.
Operating expenses for the quarter were $319.4 million as compared with
$270.5 million in the prior year quarter, the increase due primarily to the
charge of $41.7 million noted above.
Mr. McGavick said: "We have taken decisive action to reduce the level of
our operating expenses. We remain on course to deliver the reduction of $70
million from our 2008 underlying expense base that we announced previously."
For the first nine months of 2008, net loss to ordinary shareholders is
estimated to be between $1.20 billion and $1.22 billion as compared to net
income of $1.42 billion in the prior year period. "Net income excluding net
realized gains and losses" for the same period is expected to be $650.8
million compared to $1,629.1 million in the prior year period.
The Company's ordinary shareholders' equity at September 30, 2008 is
estimated to be between $7.11 billion and $7.16 billion, as compared with
$7.77 billion at June 30, 2008. This reduction reflected (i) the net loss for
the current quarter, (ii) an increase of between $800 million and $875 million
in net unrealized losses within the investment portfolio, caused principally
by a continued widening of credit spreads on corporate investments, (iii) a
reduction in the currency translation account of $457.4 million due to the
strengthening of the U.S. dollar in the quarter, partially offset by, (iv)
proceeds of $2,341.4 million received from issue of 151.75 million new Class A
Ordinary Shares. Book value per ordinary share at September 30, 2008 is
estimated to be between $21.50 and $21.65.
The annualized return on ordinary shareholders' equity, based on "net
income excluding net realized gains and losses," is expected to be
approximately 5.8% for the quarter as compared to 22.3% in the prior year
quarter.
Mr. McGavick said: "While it was a tough quarter by any measure, we are
very pleased with the resilience of the XL franchise. Especially noteworthy
was the fact that our clients, brokers and people pulled with us through the
uncertainty of the Syncora situation, enabling us to have positive sales
momentum in the quarter, and positioning us well for the critical 1/1 renewal
period."
Segment Highlights - Third quarter 2008 versus third quarter 2007
Insurance
Gross and net premiums written increased by 3.8% and 2.6%, respectively,
during the three months ended September 30, 2008 compared with the three
months ended September 30, 2007. Gross premiums written increased primarily
due to growth from targeted new business initiatives, higher insured values in
the marine book and $23 million of favorable movements in foreign exchange
rates. Partially offsetting this increase was a continued decline in premium
rates across most lines of business as market conditions continued to soften
together with selective non-renewals. Net premiums written increased as a
result of the factors noted above affecting gross premiums written.
Net premiums earned increased by 2.9% in the three months ended September
30, 2008 compared with the three months ended September 30, 2007. The increase
resulted primarily from favorable movements in foreign exchange rates of $29
million, growth in the Excess and Surplus and marine lines of business,
partially offset by lower premiums in property and other specialty lines.
The loss ratio was 79.8% and the combined ratio was 107.9% compared to
62.7% and 87.5%, respectively, in the prior year quarter. The current quarter
results included favorable prior year development of $11.5 million (or 1.1
loss ratio points) and $67.9 million from natural catastrophe loss activity in
the quarter. The prior year quarter included $60.7 million (or 6.0 loss ratio
points) of favorable prior year development and $7.0 million from natural
catastrophe loss activity. The quarter has again seen an above average level
of large property losses for the insurance industry. The expense and combined
ratios for the segment were impacted by 1.4 points for the charges related to
the actions taken to streamline corporate functions noted above.
Reinsurance
Gross and net premiums written during the three months ended September 30,
2008 increased by 9.9% and decreased by 4.5%, respectively, as compared to the
third quarter in 2007. Gross premium written includes $16.5 million of
reinstatement premium related to the catastrophe events in the current
quarter. Excluding this, the increase in gross premium written is due mainly
to certain agricultural contracts where the premium is tied to commodities
prices and a timing difference on one proportional contract which renewed in
the current quarter but earlier in the year in 2007. Partially offsetting
this increase were premium rate decreases that resulted from softening market
conditions and the Company declining certain business where market rates were
below the Company's acceptable underwriting return levels, together with
increased retentions by clients. The decrease in net premiums written is due
mainly to higher ceded premiums related to the agricultural contracts noted
above partially offset by a decrease in cessions to Cyrus Re II.
Net premiums earned in the third quarter of 2008 decreased by 15.4% as
compared to the third quarter of 2007. This decrease was a reflection of the
overall reduction of net premiums written over the last 24 months including
the impact of the purchase of the additional catastrophe loss protection in
the second quarter of 2008.
The loss ratio was 78.4% and the combined ratio was 105.4% in the three
months ended September 30, 2008 compared to 50.0% and 81.3%, respectively, in
the prior year quarter. The current quarter results included favorable prior
year development of $87.4 million (or 18.1 loss ratio points) and $155.2
million from natural catastrophe loss activity in the quarter. The prior year
quarter included $83.3 million (or 14.6 loss ratio points) of favorable prior
year development and $15.1 million from natural catastrophe loss activity. The
acquisition expense ratio decreased from 22.2% to 16.4% in the current quarter
due mainly to a reduction in performance related commissions and the expense
and combined ratio was impacted by 0.6 points for the charges related to the
actions taken to streamline corporate functions.
Life Operations
Gross written premiums for the Life operations was $156.1 million during
the three months ended September 30, 2008 as compared to $140.7 million in the
prior year quarter. The increase was due primarily to higher premiums on the
core regular premium portfolio as well as growth in U.S. business. The
contribution for the quarter was $37.6 million as compared to $27.0 million in
the prior year quarter, the increase arising principally from the increase in
business written together with higher net investment income.
Other Financial Lines
The Other Financial Lines segment recorded a contribution of $3.7 million
during the three months ended September 30, 2008 as compared to a contribution
of $16.5 million in the prior year quarter. The lower income in the quarter
arose from lower underlying balances and was partially offset by reduced
operating expenses.
The Company will host a conference call to discuss the preliminary
estimates of its third quarter results on October 14, 2008 at 8:30 a.m.
Eastern time. The conference call can be accessed through a listen-only dial
in number or though a live webcast. To listen to the conference call, please
dial (877) 422-4657 or (706) 679-0474, Conference ID# 67852140. The webcast
will be available at the Company's website located at www.xlcapital.com and
will be archived there from approximately 11:30 a.m. Eastern time on October
14,2008, through midnight Eastern time on November 14, 2008. A telephone
replay of the conference call will also be available beginning at 11:30 a.m.
Eastern time on October 14, 2008, until midnight Eastern time on November 4,
2008 by dialing (800) 642-1687 or (706) 645-9291, Conference ID# 67852140.
This press release contains forward-looking statements. Statements that
are not historical facts, including statements about XL's beliefs, plans or
expectations, are forward-looking statements. These statements are based on
current plans, estimates, and expectations. Actual results may differ
materially from those included in such forward-looking statements and
therefore you should not place undue reliance on them. A non-exclusive list of
the important factors that could cause actual results to differ materially
from those in such forward-looking statements includes (a) the preliminary
nature of the financial estimates contained herein; (b) greater risk of loss
in connection with obligations guaranteed by certain of our insurance company
operating affiliates due to recent deterioration in the credit markets
stemming from the poor performance of sub-prime residential mortgage loans;
(c) greater frequency or severity of claims and loss activity than XL's
underwriting, reserving or investment practices anticipate based on historical
experience or industry data; (d) trends in rates for property and casualty
insurance and reinsurance; (e) developments in the world's financial and
capital markets that adversely affect the performance of XL's investments or
access to such markets including, but not limited to, further market
developments relating to sub-prime and residential mortgages; (f) changes in
general economic conditions, including foreign currency exchange rates,
inflation and other factors; (g) changes in the size of XL's claims relating
to natural catastrophe losses due to the preliminary nature of some reports
and estimates of loss and damage to date and (h) the other factors set forth
in XL's most recent reports on Form 10-K, Form 10-Q, and other documents on
file with the Securities and Exchange Commission, as well as management's
response to any of the aforementioned factors. XL undertakes no obligation to
update or revise publicly any forward-looking statement, whether as a result
of new information, future developments or otherwise.
XL CAPITAL LTD
SUMMARY CONSOLIDATED FINANCIAL DATA
(U.S. dollars in thousands)
Three Months Ended
Income Statement Data: September 30
(Unaudited)
2008 - Estimated 2007
Revenues:
Gross premiums written :
- P&C operations $1,899,975 $1,793,738
- Life operations 156,148 140,694
- Financial operations - -
Net premiums written :
- P&C operations 1,257,914 1,256,118
- Life operations 145,741 129,353
- Financial operations - -
Net premiums earned :
- P&C operations 1,525,023 1,583,343
- Life operations 169,608 147,239
- Financial operations - -
Net investment income 436,281 567,987
Net realized (losses) on
investments - estimated (290,300) - (315,300) (160,208)
Net realized and
unrealized (losses) gains
on derivative instruments (58,454) (58,162)
Net (loss) income from
investment affiliates (54,886) 69,435
Fee and other income 19,132 3,653
Total revenues $1,746,404 $1,721,404 $2,153,287
Expenses:
Net losses and loss
expenses incurred $1,209,565 $920,564
Claims and policy benefits 199,861 195,440
Acquisition costs 216,879 253,077
Operating expenses 319,432 270,540
Exchange (gains) losses (139,467) (26,204)
Debt extinguishment costs 22,527 -
Interest expense 78,000 151,018
Amortization of intangible
assets 1,386 420
Total expenses $1,908,183 $1,908,183 $1,764,855
Net (loss) income before
minority interest, income
tax and net income from
operating affiliates $(161,779) $(186,779) $388,432
Minority interest in net
income of subsidiary - -
Income tax 47,843 58,715
Net loss (income) from
operating affiliates 1,404,299 (41,919)
Net (loss) income $(1,613,921) $(1,638,921) $371,636
Preference share dividends (32,500) (43,661)
Net (loss) income
available to ordinary
shareholders $(1,646,421) $(1,671,421) $327,975
XL CAPITAL LTD
SUMMARY CONSOLIDATED FINANCIAL DATA
(U.S. dollars in thousands)
Nine Months Ended
Income Statement Data: September 30
(Unaudited)
2008 Estimated 2007
Revenues:
Gross premiums written :
- P&C operations $6,387,100 $6,692,216
- Life operations 552,357 588,930
- Financial operations - 156,983
Net premiums written :
- P&C operations 4,753,934 5,158,658
- Life operations 520,887 556,778
- Financial operations - 130,445
Net premiums earned :
- P&C operations 4,586,590 4,832,163
- Life operations 502,125 534,086
- Financial operations - 85,682
Net investment income 1,375,862 1,688,294
Net realized (losses) on
investments (390,511) - (415,511) (132,620)
Net realized and
unrealized (losses) gains
on derivative instruments (5,648) (41,233)
Net (loss) income from
investment affiliates (63,522) 255,414
Fee and other income 40,219 11,639
Total revenues $6,045,115 $6,020,115 $7,233,425
Expenses:
Net losses and loss
expenses incurred $3,149,043 $2,857,299
Claims and policy benefits 605,885 662,883
Acquisition costs 729,413 811,049
Operating expenses 881,554 857,595
Exchange (gains) losses (63,786) 19,965
Debt extinguishment costs 22,527 -
Interest expense 267,553 458,504
Amortization of intangible
assets 2,226 1,260
Total expenses $5,594,415 $5,594,415 $5,668,555
Net income before minority
interest, income tax
and net income from
operating affiliates $450,700 $425,700 $1,564,870
Minority interest in net
income of subsidiary - 23,994
Income tax 129,750 192,758
Net loss (income) from
operating affiliates 1,452,647 (140,640)
Net (loss) income $(1,131,697) $(1,156,697) $1,488,758
Preference share dividends (65,000) (66,530)
Net (loss) income
available to ordinary
shareholders $(1,196,697) $(1,221,697) $1,422,228
XL CAPITAL LTD
SUMMARY CONSOLIDATED FINANCIAL DATA
(Shares in thousands, except per share amounts)
Three Months Nine Months
Income Statement Data Ended Ended
(continued) : September 30 September 30
(Unaudited) (Unaudited)
2008 2008
Estimate 2007 Estimate 2007
Weighted
average number
of ordinary
shares and
ordinary share
equivalents :
Basic 270,844 178,788 208,437 178,886
Diluted 270,844 179,781 208,437 180,340
Per Share Data:
Net (loss)
income
available to
ordinary
shareholders $(6.08)-$(6.17) $1.82 ($5.74)-($5.86) $7.89
Ratios - P&C
operations :
Loss ratio 79.3% 58.1% 68.7% 59.1%
Expense ratio 27.8% 27.2% 29.0% 28.1%
Combined ratio 107.1% 85.3% 97.7% 87.2%
XL CAPITAL LTD
IMPACT OF PRIOR YEAR DEVELOPMENT AND NATURAL CATASTROPHE LOSSES
For the quarter ended September 30, 2008
(U.S. Dollars in thousands)
Excluding
prior
year
As Prior Excluding development
Reported year prior year Natural and Natural
develop- develop- Cata- Cata-
ment ment strophes(1) strophes
INSURANCE
Gross premium
written $1,213,991 $- $1,213,991 $- $1,213,991
Net premium
written 839,788 - 839,788 (1,000) 840,788
Net premium
earned 1,041,740 - 1,041,740 (1,000) 1,042,740
Fees and
other income 11,451 - 11,451 - 11,451
Net losses
incurred 830,789 (11,468) 842,257 67,896 774,361
Acquisition
expenses 112,175 - 112,175 - 112,175
Operating
expenses 181,478 - 181,478 - 181,478
Underwriting
profit/(loss) $(71,251) $11,468 $(82,719) $(68,896) $(13,823)
Loss Ratio 79.8% 80.9% 74.3%
Combined Ratio 107.9% 109.0% 102.4%
REINSURANCE
Gross premium
written $685,984 $- $685,984 $16,525 $669,459
Net premium
written 418,126 - 418,126 14,594 403,532
Net premium
earned 483,283 - 483,283 14,594 468,689
Fees and
other income 7,606 - 7,606 - 7,606
Net losses
incurred 378,776 (87,450) 466,226 155,158 311,068
Acquisition
expenses 79,205 - 79,205 - 79,205
Operating
expenses 51,423 - 51,423 - 51,423
Underwriting
profit/(loss) $(18,515) $87,450 $(105,965) (140,564) $34,599
Loss Ratio 78.4% 96.5% 66.4%
Combined Ratio 105.4% 123.5% 94.2%
TOTAL
Gross premium
written $1,899,975 $- $1,899,975 $16,525 $1,883,450
Net premium
written 1,257,914 - 1,257,914 13,594 1,244,320
Net premium
earned 1,525,023 - 1,525,023 13,594 1,511,429
Fees and
other income 19,057 - 19,057 - 19,057
Net losses
incurred 1,209,565 (98,918) 1,308,483 223,054 1,085,429
Acquisition
expenses 191,380 - 191,380 - 191,380
Operating
expenses 232,901 - 232,901 - 232,901
Underwriting
profit/(loss) $(89,766) $98,918 $(188,684) (209,460) $20,776
Loss Ratio 79.3% 85.8% 71.8%
Combined Ratio 107.1% 113.6% 99.9%
(1) Natural Catastrophes includes Hurricanes Ike, Gustav, Mid West Floods,
Greece and China Earthquake and Hailstorm Detmold.
XL CAPITAL LTD
RECONCILIATION
The following is a reconciliation of the Company's (i) estimated net
income (loss) available to ordinary shareholders to 'net income (loss)
excluding net realized gains and losses on investments and net realized and
unrealized gains and losses on credit, structured financial and investment
derivatives, net of tax, for the Company and its share of these items for
Syncora and the Company's other insurance company operating affiliates and
charges in respect of guarantees issued to cedents of Syncora Guarantee Re Ltd
(formerly XL Financial Assurance Ltd), (which is a non-GAAP measure, the
"Exclusions") and (ii) annualized return on ordinary shareholders' equity
(based on net income (loss) minus the Exclusions) to estimated average
ordinary shareholders' equity for the three months ended September 30, 2008
and 2007 (U.S. dollars in thousands, except per share amounts):
Three Months Ended
September 30
(Unaudited)
2008 Estimated 2007
Net (loss) income
available to ordinary
shareholders $(1,646,421) $- $(1,671,421) $327,975
Net realized (gains)
losses on investments,
net of tax 283,818 - 308,818 153,144
Net realized and
unrealized (gains)
losses on investment
derivatives, net of
tax 56,334 55,957
Net realized and
unrealized losses
(gains) on credit and
structured financial
derivatives, net of
tax 77 4,106
Net realized and
unrealized (gains)
losses on investments
and derivatives of the
Company's insurance
company operating
affiliates (1,775) 21,652
Charges in respect of
settlement with
Syncora 1,415,732 -
Net (loss) income
excluding net realized
gains and losses
(Note 1) $107,765 $107,765 $562,834
Per ordinary share
results:
Net (loss) income
available to ordinary
shareholders $(6.08) $- $(6.17) $1.82
Net (loss) income
excluding net realized
gains and losses (Note
1) $0.40 $- $0.40 $3.13
Weighted average
ordinary shares
outstanding:
Basic 270,843,525 178,787,848
Diluted 270,843,525 179,780,989
Return on Ordinary
Shareholders' Equity:
Average ordinary
shareholders' equity $7,465,000 $7,440,000 $10,074,419
Net income excluding
net realized gains and
losses (Note 1) $107,765 $107,765 $562,834
Annualized net income
excluding net realized
gains and losses
(Note 1) $431,060 $431,060 $2,251,336
Annualized Return on
Ordinary Shareholders'
Equity - Net income
excluding net realized
gains and losses
(Note 1) 5.8% 5.8% 22.3%
Note 1 : Defined as "net income excluding net realized gains and losses on
investments and net realized and unrealized gains and losses on credit,
structured financial and investment derivatives, net of tax".
XL CAPITAL LTD
RECONCILIATION
The following is a reconciliation of the Company's (i) estimated net
income (loss) available to ordinary shareholders to 'net income (loss)
excluding net realized gains and losses on investments and net realized and
unrealized gains and losses on credit, structured financial and investment
derivatives, net of tax, for the Company and its share of these items for
Syncora and the Company's other insurance company operating affiliates and
charges in respect of guarantees issued to cedents of Syncora Guarantee Re Ltd
(formerly XL Financial Assurance Ltd), (which is a non-GAAP measure, the
"Exclusions") and (ii) annualized return on ordinary shareholders' equity
(based on net income (loss) minus the Exclusions) to estimated average
ordinary shareholders' equity for the nine months ended September 30, 2008 and
2007 (U.S. dollars in thousands, except per share amounts):
Nine Months Ended
September 30
(Unaudited)
2008 Estimated 2007
Net (loss) income
available to ordinary
shareholders $(1,196,697) $- $(1,221,697) $1,422,228
Net realized (gains)
losses on investments,
net of tax 379,605 - 404,605 118,577
Net realized and
unrealized (gains)
losses on investment
derivatives, net of
tax 16,519 31,608
Net realized and
unrealized losses
(gains) on credit and
structured financial
derivatives, net of
tax 135 28,401
Net realized and
unrealized (gains)
losses on investments
and derivatives of the
Company's insurance
company operating
affiliates (2,511) 28,318
Charges related to
Syncora 1,453,786 -
Net (loss) income
excluding net realized
gains and losses
(Note 1) $650,837 $650,837 $1,629,132
Per ordinary share
results:
Net (loss) income
available to ordinary
shareholders $(5.74) $- $(5.86) $7.89
Net (loss) income
excluding net realized
gains and losses
(Note 1) $3.12 $- $3.12 $9.03
Weighted average
ordinary shares
outstanding:
Basic 208,436,642 178,886,485
Diluted 208,436,642 180,340,299
Return on Ordinary
Shareholders' Equity:
Average ordinary
shareholders' equity $8,050,000 $8,025,000 $9,878,979
Net income excluding
net realized gains and
losses (Note 1) $650,837 $650,837 $1,629,132
Annualized net income
excluding net realized
gains and losses
(Note 1) $867,783 $867,783 $2,172,176
Annualized Return on
Ordinary Shareholders'
Equity - Net income
excluding net realized
gains and losses
(Note 1) 10.8% 10.8% 22.0%
Note 1 : Defined as "net income excluding net realized gains and losses on
investments and net realized and unrealized gains and losses on credit,
structured financial and investment derivatives, net of tax".
Comment on Regulation G
This press release contains the presentation of (i) net income (loss)
excluding net realized gains and losses on investments, net realized and
unrealized gains and losses on credit, structured financial and investment
derivatives, net of tax, for the Company and its share of these items for
Syncora and the Company's other insurance company operating affiliates and
charges in respect of guarantees issued to cedents of Syncora Guarantee Re Ltd
(formerly XL Financial Assurance Ltd), and (ii) annualized return on ordinary
shareholders' equity (based on net income minus the Exclusions) to average
ordinary shareholders' equity. These items are "non-GAAP financial measures"
as defined in Regulation G. The reconciliation of such measures to the most
directly comparable GAAP financial measures in accordance with Regulation G is
included above.
XL presents its operations in the way it believes will be most meaningful
and useful to investors, analysts, rating agencies and others who use XL's
financial information in evaluating XL's performance. This presentation
includes the use of 'net income excluding net realized gains and losses on
investments, net realized and unrealized gains and losses on credit,
structured financial and investment derivatives, net of tax'. Investment
derivatives include all derivatives entered into by XL other than weather and
energy and credit derivatives (discussed further below).
Although the investment of premiums to generate income (or loss) and
realized capital gains (or losses) is an integral part of XL's operations and
those of Syncora and the Company's other insurance company operating
affiliates, the determination to realize capital gains (or losses) is
independent of the underwriting process. In addition, under applicable GAAP
accounting requirements, losses can be created as the result of other than
temporary declines in value without actual realization. In this regard,
certain users of XL's financial information, including certain rating
agencies, evaluate earnings before tax and capital gains to understand the
profitability of the recurring sources of income without the effects of these
two variables. Furthermore, these users believe that, for many companies, the
timing of the realization of capital gains is largely opportunistic and are a
function of economic and interest rate conditions.
In addition, with respect to credit derivatives, because XL and its
insurance company operating affiliates generally hold financial guaranty
contracts written in credit default derivative form to maturity, the net
effects of the changes in fair value of these credit derivatives are excluded
(similar with other companies in the financial guarantee business) as the
changes in fair value each quarter are not indicative of underlying business
performance. Unlike these credit derivatives, XL's weather and energy
derivatives are actively traded (i.e., they are not held to maturity) and are,
therefore, not excluded from net income as any gains or losses from this
business are considered by management when evaluating and managing the
underlying business.
Charges in respect of guarantees issued by XL Insurance (Bermuda) Ltd to
cedents of Syncora Guarantee Re Ltd, a subsidiary of Syncora, are excluded as
these contracts were capital in nature and outside the scope of the Company's
underlying business.
In summary, XL evaluates the performance of and manages its business to
produce an underwriting profit. In addition to presenting net income (loss),
XL believes that showing net income (loss) exclusive of the items mentioned
above enables investors and other users of XL's financial information to
analyze XL's performance in a manner similar to how management of XL analyzes
performance. In this regard, XL believes that providing only a GAAP
presentation of net income (loss) makes it much more difficult for users of
XL's financial information to evaluate XL's underlying business. Also, as
stated above, XL believes that the equity analysts and certain rating agencies
that follow XL (and the insurance industry as a whole) exclude these items
from their analyses for the same reasons and they request that XL provide this
non-GAAP financial information on a regular basis.
Return on average ordinary shareholder's equity ("ROE") excluding net
realized gains and losses on investments and net realized and unrealized gains
and losses on credit and investment derivative instruments, net of tax, for
the Company and its share of these items for Syncora and the Company's other
insurance company operating affiliates (the "Exclusions"), is a widely used
measure of any company's profitability. Annualized return on average ordinary
shareholders' equity (minus the Exclusions) is calculated by dividing
annualized net income minus the Exclusions for any period by the average of
the opening and closing ordinary shareholders' equity. The Company establishes
target ROEs (minus the Exclusions) for its total operations, segments and
lines of business. If the Company's ROE (minus the Exclusions) return targets
are not met with respect to any line of business over time, the Company seeks
to re-evaluate these lines. In addition, the Company's compensation of its
senior officers is dependant upon, among other things, the achievement of the
Company's performance goals to enhance shareholder value which include ROE
(minus the Exclusions).
