The following table sets forth other revenues and expenses for the nine months ended September 30, 2002 and 2001:
Equity in net income of investment affiliates decreased in the first nine months of 2002 over the first nine months of 2001 due primarily to lower overall returns in the second and third quarter of 2002 on certain of the Company’s investment funds, compared to strong performance in the previous period.
Effective January 1, 2002, the Company acquired the majority shareholding in Le Mans Ré and it has subsequently been consolidated as a subsidiary of the Company. The Company’s share of Le Mans Ré’s net loss for the nine months ended September 30, 2001 was $7.4 million, primarily reflecting losses related to the September 11 event. These losses were offset by income in the Company’s other insurance and operating affiliates. Equity in net income of insurance and operating affiliates for the first nine months of 2002 reflected a decrease in the earnings of the remaining insurance and operating affiliates as compared to the first nine months of 2001.
The Company assessed the carrying value of goodwill as of June 30, 2002 in accordance with FAS 142 and at that time, determined that goodwill assets were unimpaired. The Company continues to review the carrying value of goodwill related to all of its investments, including Annuity & Life Re (Holdings), Ltd. As further information becomes available, the Company will adjust the carrying value of goodwill as appropriate.
Amortization of intangible assets decreased in the first nine months of 2002 compared to the first nine months of 200,1 due to the adoption of FAS 142, where the Company is no longer required to amortize goodwill. Had FAS 142 been effective January 1, 2001, the amortization expense would have been approximately $0.9 million in the nine months ended September 30, 2001. See also Item 1. Note 2 to the Consolidated Financial Statements.
Corporate operating expenses in the nine months ended September 30, 2002 have increased compared to the nine months ended September 30, 2001 primarily due to the continued integration of the Company’s global operations. The Company is developing a network of shared service organizations to support the Company’s operations in certain locations on a centralized basis to improve efficiency over the longer term. This build-up of infrastructure, along with the continued integration of the acquired Winterthur International operations, is expected to increase corporate operating expenses in 2003.
The increase in interest expense primarily reflected an increase in the level of indebtedness from September 30, 2001 to September 30, 2002. In addition, interest expense included a higher accretion charge on the deposit liabilities due to growth in these reserves. Accretion on the deposit liabilities for the nine months ended September 30, 2002 and 2001 were $55.1 million and $33.5 million, respectively. For more information on the Company’s financing structure, see “Financial Condition and Liquidity.”
The increase in minority interest in the nine months ended September 30, 2002 compared to the nine months ended September 30, 2002 primarily reflected increased profitability in the Company’s investment in XL Financial Assurance Ltd, of which 15% is owned by a third party.
The change in the Company’s income taxes arose principally from the effect of losses arising from the September 11 event during 2001. In addition, the nine months ended September 30, 2002 reflected improved profitability, mainly in the Company’s U.S. operations.
Financial Condition and Liquidity
As a holding company, the Company’s assets consist primarily of its investments in subsidiaries, and the Company’s future cash flows depend on the availability of dividends or other statutorily permissible payments from its subsidiaries. The ability to pay such dividends is limited by the applicable laws and regulations of the various countries the Company operates in including, among others, Bermuda, the United States, Ireland, Switzerland and the United Kingdom, and those of the Society of Lloyd’s. No assurance can be given that the Company or its subsidiaries will be permitted to pay dividends in the future.
XL Capital Ltd and its subsidiaries provide no guarantees or other commitments (express or implied) of financial support to XL Capital Ltd subsidiaries or affiliates, except for express financial support provided by XL Insurance (Bermuda) Ltd in connection with the Company’s financial guaranty subsidiaries and where other express guarantee or other financial support arrangements are in place.
The Company’s ability to underwrite business is dependent upon the quality of its claims paying and financial strength ratings as evaluated by independent rating agencies. As a result, in the event that the Company is downgraded, its ability to write business would be adversely affected in financial guaranty and long-tailed insurance and reinsurance lines of business. In the normal course of business, the Company evaluates its capital needs to support the volume of business written in order to maintain its claims paying and financial strength ratings. Due to the currently projected growth in business written in 2003, the Company anticipates that it may have additional capital needs. As measured by Standard & Poor’s, the Company currently has a group rating of “AA,” and its financial guaranty subsidiaries are rated “AAA.” As measured by Moody’s, the Company currently has an “Aa2” insurance financial strength rating.
The Company’s liquidity depends on operating, investing and financing cash flows, discussed below. In connection therewith and depending upon market conditions, the Company, from time to time, raises additional financing or capital from sources that may then be available to it, which may include borrowings, reinsurance transactions and/or the issuance of preferred or other equity securities.
The Company’s total investments available for sale, including fixed maturities, short-term investments and equity securities, at September 30, 2002 represented approximately 90% of invested assets and were managed by several outside investment management firms. Approximately 93.8% of fixed maturity and short-term investments are investment grade, with 69.5% rated “Aa” or “AA” or better by a nationally recognized rating agency. Using the Standard & Poor’s rating scale, the average quality of the fixed income portfolio was “AA.”
At September 30, 2002, total investments available for sale and cash, net of unsettled investment trades, were $16.2 billion compared to $13.0 billion at December 31, 2001. This increase in investment assets related to additional debt and equity issued by the Company in 2002, discussed below, the inclusion of Le Mans Ré as a subsidiary, the receipt of general and life premiums and deposit liabilities. The net payable for investments purchased increased from $1.2 billion at December 31, 2001 to $1.8 billion at September 30, 2002. The increase resulted from timing differences as investments are accounted for on a trade date basis.
At September 30, 2002, the Company has premiums receivable of $3.6 billion as compared to $2.2 billion at December 31, 2001. This increase is in line with the significant growth in net premiums written for general operations for the nine months ended September 30, 2002.
For the nine months ended September 30, 2002, currency translation adjustment gains were $62.7 million. This is shown as part of accumulated other comprehensive income and primarily related to unrealized gains on foreign currency exchange rate movement at Winterthur International and Le Mans Ré, where most operations have a functional currency that is not the U.S. dollar.
The Company establishes reserves to provide for estimated claims, the general expenses of administering the claims adjustment process and for losses incurred but not reported. These reserves are calculated 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 judgment concerning sound financial practice and does not represent any admission of liability with respect to any claims made against the Company. No assurance can be given that actual claims made and payments related thereto will not be in excess of the amounts reserved.
Inflation can, among other things, potentially result in larger claims. The Company’s underwriting philosophy is to adjust premiums in response to inflation.
37
Certain business written by the Company has loss experience generally characterized as having low frequency and high severity. This may result in volatility in both the Company’s results and operational cash flows. Operational cash flows during the first nine months of 2002 increased from the same period of 2001 primarily due to the receipt of general and life premiums, in line with the significant growth in net premiums written.. In the nine months ended September 30, 2002 and 2001, the net amount of losses paid by the Company for general operations was $2.2 billion and $1.1 million, respectively. The increase in net paid losses in 2002 is due to growth in operations and the inclusion of Winterthur International and Le Mans Ré and $197.2 million of losses paid related to the September 11 event.
In the nine months ended September 30, 2002, the Company made the following investments:
(1) Effective January 2002, the Company completed the acquisition of a 67% majority shareholding in Le Mans Ré, increasing its shareholding from 49% at December 31, 2001. Cash paid, net of cash acquired, was $45.5 million.
(2) The Company invested a further $699.0 million in affiliates, the majority of which related to investments in alternative investment managers and related investment funds. This included an investment in SPhinX Ltd., a fund designed to track a newly-launched S&P Hedge Fund Index. In addition, this included an investment in Primus Guaranty, Ltd., which specializes in providing credit risk protection through credit default swaps. The mark to market effect on their derivative instruments may potentially introduce some volatility to the equity earnings in affiliates in future period.
As at September 30, 2002, the Company had bank, letter of credit and loan facilities available from a variety of sources including commercial banks totaling $4.7 billion, of which $1.9 billion in debt was outstanding. In addition, $2.0 billion of letters of credit were outstanding, 6% of which were collateralized by the Company’s investment portfolio, principally supporting U.S. non-admitted business and the Company’s Lloyd’s capital requirements.
The following tables present the Company’s indebtedness under outstanding securities and lenders’ commitments as at September 30, 2002:
| | | | | | | | Payments Due By Period | |
| | | | | | | |
| |
| Notes Payable And Debt | | Commitment | | In Use | | Year Of
Expiry | | Less Than
1 Year | | 1 To 3
Years | | 4 To 5
Years | | After 6
Years | |
| |
| |
| |
| |
| |
| |
| |
| |
| 364-day revolver | | $ | 500,000 | | $ | — | | | 2002 | | $ | — | | $ | — | | $ | — | | $ | — | |
| 7.15% Senior Notes | | | 100,000 | | | 99,976 | | | 2005 | | | — | | | 100,000 | | | — | | | — | |
| 6.58% Guaranteed Senior Notes | | | 255,000 | | | 255,000 | | | 2011 | | | — | | | — | | | — | | | 255,000 | |
| 6.50% Guaranteed Senior Notes (1).. | | | 597,043 | | | 597,043 | | | 2012 | | | — | | | — | | | — | | | 600,000 | |
Zero Coupon Convertible
Debentures (1) | | | 621,703 | | | 621,703 | | | 2021 | | | — | | | — | | | — | | | 1,010,833 | |
Liquid Yield Option
Notes( (1) | | | 296,488 | | | 296,488 | | | 2021 | | | — | | | — | | | — | | | 508,842 | |
| |
| |
| | | | |
| |
| |
| |
| |
| Total | | $ | 2,370,234 | | $ | 1,870,210 | | | | | $ | | | $ | 100,000 | | $ | — | | $ | 2,374,675 | |
| |
| |
| | | | |
| |
| |
| |
| |
______________
| | (1) | | “Commitment” and “In Use” data represent September 30, 2002 accreted values. “Payments due by period” represents ultimate redemption values. The convertibles may be “put” or converted by the bondholders at various times prior to the 2021 redemption date. The next “put” date is September 7, 2003 for the Liquid Yield Option Notes(, as described below, and May 23, 2004 for the Zero Coupon Convertible Debentures. The Company may also choose to “call” the debt from May and September 2004 onwards for the Zero Coupon Convertible Debentures and Liquid Yield Option Notes(, respectively. |
In January 2002, the Company issued $600.0 million par value 6.50% Guaranteed Senior Notes due January 2012. The notes were issued at $99.469 and gross proceeds were $596.8 million. Related expenses of the offering amounted to $7.9 million. Proceeds of the Notes were used to pay down two 5-year revolving credit facilities of $350.0 million and for general corporate purposes. These credit facilities were subsequently canceled.
In August 2002, the Company issued 9.2 million 8.00% Series A Preference Ordinary Shares at $25 per share. Gross proceeds were $230.0 million and related expenses were $7.2 million. Upon dissolution of the Company, the holders of the Preference Shares would be entitled to receive a liquidation preference of $25 per share, plus accrued dividends. Dividends on the Preference Shares are cumulative from the date of original issuance and are payable
38
when declared. The Company may redeem the Preference Shares on or after August 14, 2007, at a redemption price of $25 per share. The Company may, under certain circumstances, redeem the Preference Shares before August 14, 2007 at specified redemption prices, plus accrued dividends. These circumstance include an amalgamation, consolidation or other similar transaction involving the Company in which the Preferred Shares are entitled to a class vote ($26 per share redemption price), or a change in tax laws that requires the Company to pay additional amounts with respect to the Preference Shares ($25 per share redemption price). The proceeds were used for general corporate purposes.
The decline in the Company’s ordinary share price in the period prior to the first “put” date for the Liquid Yield Option Notes( (“LYONs”) of September 7, 2002 resulted in an increase in the accretion rate on the Notes for the subsequent twelve month period of 50 basis points, for a total rate of 3.375%. The additional cost was approximately $1.5 million. None of these securities were “put” to the Company on September 7, 2002 and all of these Notes remain fully outstanding.
The Company borrowed $250.0 million under the 364-day revolver for approximately two months during the quarter ended September 30, 2002, at an interest rate of 2.19%. The funds were used for general corporate purposes.
The total pre-tax interest expense on the borrowings described above was $133.6 million and $75.8 million for the nine months ended September 30, 2002 and 2001, respectively.
| | | | | | | | Amount Of Commitment
Expiration Per Period | |
| | | | | | | |
| |
| Other Commercial Commitments | | Commitment | | In Use | | Year Of Expiry | | Less Than
1 Year | | 1 To 3 Years | | 4 To 5 Years | | After 6 Years | |
| |
| |
| |
| |
| |
| |
| |
| |
| Letter of Credit Facilities | | $ | 417,000 | | $ | 417,000 | | | 2002 | | $ | 417,000 | | $ | — | | $ | — | | $ | — | |
| Letter of Credit Facilities | | $ | 1,897,000 | | $ | 1,568,000 | | | 2003 | | $ | 1,897,000 | | $ | — | | $ | — | | $ | — | |
| |
| |
| | | | |
| |
| |
| |
| |
| Total | | $ | 2,314,000 | | $ | 1,985,000 | | | | | $ | 2,314,000 | | $ | — | | $ | — | | $ | — | |
| |
| |
| | | | |
| |
| |
| |
| |
The Company has several letter of credit facilities provided on a syndicated and bilateral basis from commercial banks. These facilities are principally utilized to support non-admitted insurance and reinsurance operations in the U.S. and capital requirements at Lloyd’s. All of these commercial facilities are scheduled for renewal during the remainder of 2002 and 2003. It is anticipated that the commercial facilities will be renewed on expiry but such renewals are subject to the availability of credit from banks utilized by the Company. In the event that such credit support is insufficient, the Company could be required to provide alternative security to cedants. This could take the form of additional insurance trusts supported by the Company’s investment portfolio or funds withheld using the Company’s cash resources. The value of letters of credit required is driven by, among other things, loss development of existing reserves, the payment pattern of such reserves, the expansion of business written by the Company and the loss experience of such business.
On July 24, 2002, the Company replaced letter of credit facilities provided by the previous owner of the Winterthur International operations with letters of credit issued from its 364-day facility. In addition, Le Mans Ré has a secured letter of credit facility, included in the table above, under which letters of credit amounting to $31.0 million were issued.
During September 2002, the Company cancelled a secured $150.0 million secured letter of credit facility that had been unutilized.
For information regarding cross-default and certain other provisions in the Company’s debt and convertible securities documents, see Item 7 of the Company’s Form 10-K for the year ended December 31, 2001.
The Company has had several share repurchase programs in the past as part of its capital management strategy. On January 9, 2000, the Board of Directors authorized a program for the repurchase of shares up to $500.0 million. Under this plan, the Company has purchased 6.6 million shares at an aggregate cost of $364.6 million or an average cost of $55.24 per share. The Company has $135.4 million remaining in its share repurchase authorization. During the nine months ended September 30, 2002, no shares were repurchased in the open market. The Company has repurchased shares from employees and directors in relation to share swaps on option exercises and withholding tax on restricted stock.
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Current Outlook
The Company believes that premium rate increases and favorable terms and conditions will remain for at least the next two years for most lines of property and casualty business that the Company writes. This is based on a number of factors including: continued large loss activity in the insurance industry; reduced capacity for major insurers and reinsurers due to the decline in world equity markets and lower interest rates; legacy losses such as asbestos that continue to affect the industry; and rating agency downgrades of competitors.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company is exposed to potential loss from various market risks, including changes in credit ratings, interest rates, foreign currency exchange rates, equity prices and commodity values (as it relates to the Company’s participation in the weather risk and energy management market). The Company manages its market risks based on guidelines established by senior management. The Company sells certain products in derivative form and enters into derivatives and other financial instruments for trading. These derivative instruments are carried at fair market value with the resulting gains and losses recognized in income in the period in which they occur.
This risk management discussion and the estimated amounts generated from the sensitivity and value-at-risk (“VaR”) analyses presented in this document are forward-looking statements of market risk assuming certain adverse market conditions occur. Actual results in the future may differ materially from these estimated results due to, among other things, actual developments in the global financial markets. The results of analysis used by the Company to assess and mitigate risk should not be considered projections of future events of losses. See generally “Cautionary Note Regarding Forward-Looking Statements.”
Commodity Risk
The Company offers weather and energy risk management products in insurance or derivative form to end-users, while hedging the risks in the over-the-counter and exchange traded derivatives markets. In addition to entering into transactions with end-users, the Company also maintains a weather and energy derivatives trading portfolio, with the majority of contracts outstanding for less than twelve months. The fair values of these transactions are determined using quantitative analysis in a manner that is consistent with the models used to estimate the Company’s VaR exposure to weather and energy risk.
The Company’s aggregate average, low and high seasonal VaR amounts for all seasons during the period ended September 30, 2002 were $81.7 million, $25.8 million and $201.3 million, respectively, calculated at a 99% confidence level. The Company calculates its aggregate VaR by summing the VaR amounts for each of its seasonal holding portfolios. The Company has established a seasonal VaR limit of $60.0 million for weather products. Since VaR statistics are estimates based on historical position and market data, VaR should not be viewed as an absolute, predictive gauge of future financial performance or as a way for the Company to predict risk. There can be no assurance that the Company’s actual future losses will not exceed its VaR amounts.
VaR is calculated using a one-day holding period for the energy portfolio, and has established a daily VaR limit of $3.5 million. The Company’s average, low and high daily VaR amounts for the energy portfolio are $0.4 million, nil and $1.5 million, respectively, calculated at a 99% confidence level.
The following table summarizes the movement in the fair value of weather and energy contracts outstanding during the nine months ended September 30, 2002:
| | Nine Months
Ended
September 30, 2002 | |
| |
| |
| Fair value of contracts outstanding, beginning of the year | | $ | (1,104 | ) |
| Contracts realized or otherwise settled | | | (5,433 | ) |
| Fair value of new contracts | | | 27,520 | |
| Changes in fair value | | | 2,192 | |
| |
| |
| Fair value of contracts outstanding, end of period | | $ | 23,175 | |
| |
| |
40
The following table summarizes the maturity of contracts outstanding as at September 30, 2002:
| Source Of Fair Value | | Less Than
1 Year | | 1-3 Years | | 4-5 Years | | Greater Than
5 Years | | Total Fair
Value | |
| |
| |
| |
| |
| |
| |
| Prices actively quoted | | $ | (8,556 | ) | $ | — | | $ | — | | $ | — | | $ | (8,556 | ) |
Prices based on models and other
valuation methods | | | 12,498 | | | 11,867 | | | 7,366 | | | — | | | 31,731 | |
| |
| |
| |
| |
| |
| |
Total fair value of contracts
outstanding | | $ | 3,942 | | $ | 11,867 | | $ | 7,366 | | $ | — | | $ | 23,175 | |
| |
| |
| |
| |
| |
| |
In managing its weather and energy risk management business, the Company seeks to identify, assess, monitor and manage, in accordance with defined policies and procedures its market, credit, operational and legal risks. The Company’s senior management takes an active role in the risk management process and has developed and implemented policies and procedures that require specific administrative and business functions to assist in the identification, assessment and control of various risks. Due to the changing nature of the global marketplace, the Company’s risk management policies, procedures and methodologies are evolving and are subject to ongoing review and adjustment. Market, credit, operational, legal and other risks are inherent in the Company’s weather risk management business and cannot be wholly eliminated or reduced despite the Company’s risk management policies, procedures and me thodologies, which are subject to limitations and assumptions.
Investment Market Risk
The Company’s investment portfolio consists of fixed income and equity securities, denominated in both U.S. and foreign currencies. Accordingly, earnings will be affected by, among other things, changes in interest rates, credit quality, equity prices and foreign currency exchange rates. External investment professionals manage the Company’s portfolio under the direction of the Company’s management in accordance with detailed investment guidelines provided by the Company. These guidelines encompass investments in derivatives. Derivatives can only be utilized for purposes of managing interest rate risk, foreign exchange risk and credit risk, provided the use of such instruments are incorporated in the overall portfolio duration, spread, convexity and other relevant portfolio metrics. The use of derivatives is not permitted to economically leverage the portfolio outside of the stated guidelines.
VaR is one of the tools used by management to estimate potential losses in fair values using historical rates, market movements and credit spreads to estimate the volatility and correlation of these factors to calculate the potential loss that could occur over a defined period of time given a certain probability. The VaR of the investment portfolio, including all investment related derivatives, at September 30, 2002 was approximately $291.7 million. In certain circumstances where insufficient data or time series is available to calculate accurate VaRs, the Company uses data from similar instruments as proxies for portfolio VaR calculation purposes. Since VaR statistics are estimates based on historical position and market data, VaR should not be viewed as an absolute, predictive gauge of future financial performance or as a way for the Company to predict risk. There can be no assurance that the Company’ s actual future losses will not exceed its VaR amounts.
The Company also uses derivative investments to add value to the investment portfolio where market inefficiencies are believed to exist, to equitize cash holdings of equity managers and to adjust the duration of a portfolio of fixed income securities to match the duration of related deposit liabilities.
At September 30, 2002, bond and stock index futures outstanding were $271.6 million with underlying investments having a market value of $736.9 million. Gains of $8.0 million were realized on these contracts for the nine months ended September 30, 2002. The Company reduces its exposure to these futures through offsetting transactions, including options and forwards. The VaR of all investment related derivatives at September 30, 2002 was approximately $6.5 million.
The Company holds warrants in conjunction with certain of its other investments. These warrants are recorded at fair value based on quoted market prices.
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ITEM 4. CONTROLS AND PROCEDURES
Within the 90 days prior to the date of filing this Form 10-Q, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and the Company’s Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Exchange Act Rule 13a-14. Based upon that evaluation, the Company’s Chief Executive Officer and the Company’s Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective in timely alerting them to material information relating to the Company required to be included in the Company’s periodic SEC filings.
There have been no significant changes in the Company’s internal controls or in other factors which could significantly affect internal controls subsequent to the date the Company carried out its evaluation.
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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 (“PSLRA”) provides a “safe harbor” for forward-looking statements. Any prospectus, prospectus supplement, the Company’s Annual Report to Shareholders, any proxy statement, any Form 10-K, Form 10-Q or Form 8-K of the Company or any other written or oral statements made by or on behalf of the Company may include forward-looking statements which reflect the Company’s current views with respect to future events and financial performance. 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) rate increases and improvements in terms and conditions may not be as large or significant, or as long in duration, as the Company is currently projec ting; (ii) the size of the Company's claims may change due to the preliminary nature of reports and estimates of loss and damage, particularly in relation to the attacks in the United States on September 11, 2001; (iii) the timely and full recoverability from third parties of reinsurance (or other credit protection) placed by or for the benefit of, the Company including indemnities or other contractual protections available to the Company with respect to the Winterthur acquisition; (iv) the projected amount of ceded reinsurance recoverables and the ratings and creditworthiness of reinsurance may change; (v) the timing of claims payments being faster or the receipt of reinsurance recoverables being slower than anticipated by the Company; (vi) ineffectiveness or obsolescence of the Company's business strategy due to changes in current or future market conditions; (vii) increased claims and loss activity, including as a result of natural or man-made catastrophic events, than the Company's underwriting, reservin g or investment practices anticipate based on historical experience or industry data; (viii) developments in the world's financial and capital markets which adversely affect the performance of the Company's investments and the Company's access to such markets; (ix) the potential impact of U.S. solutions to make available insurance coverage for acts of terrorism; (x) availability of borrowings and letters of credit under the Company's credit facilities and the ability to refinance or replace those facilities; (xi) changes in regulation or tax laws applicable to the Company and it subsidiaries, brokers or customers; (xii) acceptance of the Company's products and services, including new products and services; (xiii) changes in the availability, cost or quality of reinsurance; (xiv) changes in the distribution or placement of risks due to increased consolidation of insurance and reinsurance brokers; (xv) loss of key personnel; (xvi) the effects of mergers, acquisitions and divestitures, including, without limita tion, the Winterthur International acquisition and the completion of the necessary audits (and related reviews) to determine the final purchase price for the Winterthur acquisition; (xvii) changes in rating agency policies or practices and the Company's ability to maintain its ratings; (xiii) changes in accounting policies or practices; (xix) legislative or regulatory developments; (xx) changes in general economic conditions, including inflation, foreign currency exchange rates and other factors; (xxi) the effects of business disruption or economic contraction due to terrorism or other hostilities; (xxii) the Company's continued ability to fund its liquidity needs, including through continued access to capital and reinsurance markets; and (xxiii) the other factors set forth in the Company's other documents on file with the SEC. The foregoing review of important factors should not be construed as exhaustive and should be read in conjunction with the other cautionary statements that are included herein or els ewhere. 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.
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XL CAPITAL LTD
PART II — OTHER INFORMATION
Item 1. Legal Proceedings
The Company is a party to various legal proceedings, including arbitrations, 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, reinsurance and financial products and services 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
| 4.17 | | Excerpts from the Authorizing Resolutions of the Special Finance Committee of XL Capital Ltd, dated July 29, 2002, incorporated by reference to the Company’s Current Report on Form 8-K filed on August 14, 2002. | |
| 99.11 | | XL Capital Assurance Inc. unaudited condensed financial statements for the three month and nine month periods ended September 30, 2002 and 2001. | |
| 99.12 | | XL Financial Assurance Ltd. unaudited condensed financial statements for the three month and nine month periods ended September 30, 2002 and 2001. | |
Current Report on Form 8-K filed on July 18, 2002, under Item 5 thereof.
Current Report on Form 8-K filed on August 8, 2002, under Item 5 thereof.
Current Report on Form 8-K filed on August 9, 2002, under Item 5 thereof.
Current Report on Form 8-K filed on August 14, 2002, under Item 5 thereof.
Current Report on Form 8-K filed on September 5, 2002, under Item 5 thereof.
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SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
| | | XL CAPITAL LTD | |
| | | (Registrant) | |
| | | | |
| Dated: November 8, 2002 | | /S/ BRIAN M. O’HARA | |
| | |
| |
| | | Brian M. O’Hara | |
| | | President and Chief Executive Officer | |
| | | | |
| Dated: November 8, 2002 | | /S/ JERRY DE ST. PAER | |
| | |
| |
| | | Jerry de St. Paer | |
| | | Executive Vice President and Chief Financial Officer | |
45
CERTIFICATION
OF CHIEF EXECUTIVE OFFICER
XL CAPITAL LTD
Pursuant to section 302 of the Sarbanes-Oxley Act of 2002
(Chapter 63, Title 18 U.S.C.SS.1350(A) and (B))
I, Brian M. O’Hara, certify that:
1. I have reviewed this quarterly report on Form 10-Q of XL Capital Ltd;
2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and
c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and
6. The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
| Dated: November 8, 2002 | | /S/ BRIAN M. O’HARA | |
| | | Brian M. O’Hara | |
| | | President and Chief Executive Officer | |
| | | | |
46
CERTIFICATION
OF CHIEF FINANCIAL OFFICER
XL CAPITAL LTD
Pursuant to section 302 of the Sarbanes-Oxley Act of 2002
(Chapter 63, Title 18 U.S.C.SS.1350(A) and (B))
I, Jerry de St. Paer, certify that:
1 I have reviewed this quarterly report on Form 10-Q of XL Capital Ltd;
2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and
c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and
6. The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
| Dated: November 8, 2002 | | /S/ JERRY DE ST. PAER | |
| | | Jerry de St. Paer | |
| | | Executive Vice President and Chief Financial Officer | |
47
CERTIFICATION
ACCOMPANYING FORM 10-Q REPORT
of
XL CAPITAL LTD
Pursuant to section 906 of the Sarbanes-Oxley Act of 2002
(Chapter 63, Title 18 U.S.C.SS.1350(A) and (B))
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Chapter 63, Title 18 U.S.C. ss.1350(a) and (b)), each of the undersigned hereby certifies that the Quarterly Report on Form 10-Q for the period ended September 30, 2002 of XL Capital Ltd (“Company”) fully complies with the requirements of Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934 and that the information contained in such Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
| Dated: November 8, 2002 | | /s/ BRIAN M. O’HARA | |
| | |
| |
| | | Brian M. O’Hara | |
| | | President and Chief Executive Officer | |
| | | XL Capital Ltd | |
| | | | |
| Dated: November 8, 2002 | | /s/ JERRY DE ST. PAER | |
| | |
| |
| | | Jerry de St. Paer | |
| | | Executive Vice President and Chief | |
| | | Financial Officer | |
| | | XL Capital Ltd | |
