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, 2001
COMMISSION FILE NUMBER 1-10804
XL CAPITAL LTD
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
CAYMAN ISLANDS 98-0191089
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
XL HOUSE, ONE BERMUDIANA ROAD, 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 11, 2001, there were outstanding 125,172,744 Class A Ordinary
Shares, $0.01 par value per share, of the registrant.
XL CAPITAL LTD
INDEX TO FORM 10-Q
Page No.
--------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheets as at March 31, 2001 and December
31, 2000 (Unaudited)...................................................... 3
Consolidated Statements of Income and Comprehensive Income for the Three
Months Ended March 31, 2001 and 2000 (Unaudited).......................... 4
Consolidated Statements of Shareholders' Equity for the Three Months Ended
March 31, 2001 and 2000 (Unaudited)....................................... 5
Consolidated Statements of Cash Flows for the Three Months Ended March 31,
2001 and 2000 (Unaudited)................................................. 6
Notes to Unaudited Consolidated Financial Statements...................... 7
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition....................................................... 11
Item 3. Quantitative and Qualitative Disclosure about Market Risk................. 18
PART II. OTHER INFORMATION
Item 1. Legal Proceedings......................................................... 21
Item 4. Submission of Matters to a Vote of Shareholders........................... 21
Item. 6 Exhibits and Reports on Form 8-K.......................................... 21
Signatures
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
XL CAPITAL LTD
CONSOLIDATED BALANCE SHEETS
(U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
----------------------------
MARCH 31, DECEMBER 31,
2001 2000
----------- ------------
A S S E T S
Investments:
Fixed maturities, at fair value (amortized cost: 2001, $8,853,507; 2000,
$8,714,196).................................................................... $ 8,793,234 $ 8,605,081
Equity securities, at fair value (cost: 2001, $517,752; 2000, $515,440).......... 469,957 557,460
Short-term investments, at fair value (amortized cost: 2001, $209,400; 2000,
$347,147)...................................................................... 208,304 339,007
------------ ------------
Total investments available for sale............................................. 9,471,495 9,501,548
Investments in affiliates........................................................ 860,954 792,723
Other investments................................................................ 204,581 177,651
------------ ------------
Total investments........................................................... 10,537,030 10,471,922
Cash and cash equivalents........................................................... 937,286 930,469
Accrued investment income........................................................... 140,308 143,235
Deferred acquisition costs.......................................................... 373,277 309,268
Prepaid reinsurance premiums........................................................ 448,914 391,789
Premiums receivable................................................................. 1,366,117 1,119,723
Reinsurance balances receivable..................................................... 232,308 196,002
Unpaid losses and loss expenses recoverable......................................... 1,523,605 1,339,767
Intangible assets (accumulated amortization: 2001, $191,728; 2000, $177,260)........ 1,587,467 1,591,108
Deferred tax asset, net............................................................. 158,008 152,168
Other assets........................................................................ 326,134 296,501
------------ ------------
Total assets............................................................... $ 17,630,454 $ 16,941,952
============ ============
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..................................................... $ 5,846,412 $ 5,672,062
Deposit liabilities and policy benefit reserves..................................... 1,226,551 1,209,926
Unearned premiums................................................................... 2,055,679 1,741,393
Notes payable and debt.............................................................. 500,034 450,032
Reinsurance balances payable........................................................ 553,638 441,900
Net payable for investments purchased............................................... 1,202,694 1,372,476
Other liabilities................................................................... 541,410 439,433
Minority interest................................................................... 42,230 41,062
------------ ------------
Total liabilities.......................................................... $ 11,968,648 $ 11,368,284
------------ ------------
Commitments and Contingencies
Shareholders' Equity:
Authorized, 999,990,000 ordinary shares, par value $0.01
Issued and outstanding:
Ordinary shares (2001, 125,172,419; 2000, 125,020,676)........................... $ 1,251 $ 1,250
Contributed surplus................................................................. 2,510,211 2,497,416
Accumulated other comprehensive loss................................................ (181,241) (104,712)
Deferred compensation............................................................... (16,969) (17,727)
Retained earnings................................................................... 3,348,554 3,197,441
------------ ------------
Total shareholders' equity................................................. $ 5,661,806 $ 5,573,668
------------ ------------
Total liabilities and shareholders' equity................................. $ 17,630,454 $ 16,941,952
============ ============
See accompanying notes to Unaudited Consolidated Financial Statements.
3
XL CAPITAL LTD
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(U.S. DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31
---------------------
2001 2000
--------- ---------
Revenues:
Net premiums earned............................................ $ 542,154 $ 494,499
Net investment income.......................................... 129,351 128,527
Net realized gains on sales of investments..................... 60,171 68,707
Equity in net income of affiliates............................. 28,388 17,479
Fee income and other........................................... 7,069 4,956
--------- ---------
Total revenues......................................... 767,133 714,168
--------- ---------
Expenses:
Losses and loss expenses....................................... 330,204 302,834
Acquisition costs.............................................. 125,872 103,694
Operating expenses............................................. 71,888 69,276
Interest expense............................................... 7,512 8,495
Amortization of intangible assets.............................. 14,468 14,052
--------- ---------
Total expenses............................................ 549,944 498,351
--------- ---------
Income before minority interest and income tax expense.............. 217,189 215,817
Minority interest in net income of subsidiary.................. 1,169 205
Income tax benefit............................................. (2,909) (8,147)
--------- ---------
Net income.......................................................... $ 218,929 $ 223,759
--------- ---------
Change in net unrealized depreciation of investments................ (29,407) (10,216)
Foreign currency translation adjustments............................ (47,122) 836
--------- ---------
Comprehensive Income................................................ $ 142,400 $ 214,379
========= =========
Weighted average ordinary shares and ordinary share
equivalents outstanding-basic.................................... 124,464 125,671
========= =========
Weighted average ordinary shares and ordinary share
equivalents outstanding - diluted................................ 126,782 126,764
========= =========
Earnings per ordinary share and ordinary share
equivalent-basic................................................. $ 1.76 $ 1.78
========= =========
Earnings per ordinary share and ordinary share
equivalent - diluted............................................. $ 1.73 $ 1.77
========= =========
See accompanying notes to Unaudited Consolidated Financial Statements.
4
XL CAPITAL LTD
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(U.S. DOLLARS IN THOUSANDS)
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31
--------------------
2001 2000
------- -------
Ordinary shares:
Balance-beginning of year................................. $ 1,250 $ 1,278
Issue of shares .......................................... -- --
Exercise of share options................................. 3 3
Repurchase of treasury shares............................. (2) (37)
---------- ----------
Balance-end of period................................ $ 1,251 $ 1,244
---------- ----------
Contributed surplus:
Balance-beginning of year................................. $2,497,416 $2,520,136
Issue (forfeit) of shares................................. 2,096 (510)
Exercise of share options................................. 14,603 3,190
Repurchase of treasury shares............................. (3,904) (72,955)
---------- ----------
Balance-end of period................................ $2,510,211 $2,449,861
---------- ----------
Accumulated other comprehensive (loss) income:
Balance-beginning of year................................. $ (104,712) $ 19,311
Net change in unrealized gains and losses on investment
portfolio, net of tax.................................. (50,407) 620
Net change in unrealized gains and losses on investment
portfolio of affiliate................................. -- (10,836)
Currency translation adjustments.......................... (26,122) 836
---------- ----------
Balance-end of period................................ $ (181,241) $ 9,931
---------- ----------
Deferred compensation:
Balance-beginning of year................................. $ (17,727) $ (28,797)
(Issue) forfeit of restricted shares...................... (1,240) 2,504
Amortization.............................................. 1,998 1,935
---------- ----------
Balance-end of period................................ $ (16,969) $ (24,358)
---------- ----------
Retained earnings:
Balance-beginning of year................................. $3,197,441 $3,065,150
Net income................................................ 218,929 223,759
Cash dividends paid....................................... (58,090) (57,064)
Repurchase of treasury shares............................. (9,726) (92,897)
---------- ----------
Balance-end of period................................ $3,348,554 $3,138,948
---------- ----------
Total shareholders' equity..................................... $5,661,806 $5,575,626
========== ==========
See accompanying notes to Unaudited Consolidated Financial Statements.
5
XL CAPITAL LTD
CONSOLIDATED STATEMENTS OF CASH FLOWS
(U.S. DOLLARS IN THOUSANDS)
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31
-----------------------
2001 2000
-----------------------
Cash flows provided by (used in) operating activities:
Net income................................................................. $ 218,929 $ 223,759
Adjustments to reconcile net income to net cash provided by (used in) operating
activities:
Net realized gains on sales of investments................................. (60,171) (68,707)
Amortization of discounts on fixed maturities.............................. (11,850) (9,365)
Equity in net income of affiliates......................................... (28,388) (17,479)
Amortization of deferred compensation...................................... 1,998 2,896
Amortization of intangible assets ......................................... 14,468 14,052
Accretion of deposit liabilities .......................................... 22,250 14,096
Unpaid losses and loss expenses............................................ 174,097 (17,149)
Unearned premiums.......................................................... 314,286 264,646
Premiums receivable........................................................ (246,394) (260,706)
Unpaid losses and loss expenses recoverable................................ (183,837) (222,792)
Prepaid reinsurance premiums............................................... (57,125) (105,413)
Reinsurance balances receivable............................................ (36,306) 41,697
Deferred acquisition costs................................................. (64,009) (54,071)
Reinsurance balances payable............................................... 111,738 252,722
Other...................................................................... 30,873 (59,555)
--------- ---------
Total adjustments..................................................... (18,370) (225,128)
--------- ---------
Net cash provided by (used in) operating activities........................ 200,559 (1,369)
Cash flows provided by (used in) investing activities:
Proceeds from sale of fixed maturities and short-term investments.......... 7,477,629 5,862,142
Proceeds from redemption of fixed maturities and short-term investments.... 167,189 52,030
Proceeds from sale of equity securities.................................... 350,307 660,943
Purchases of fixed maturities and short-term investments.................. (7,810,907) (5,718,001)
Purchases of equity securities............................................. (287,367) (466,929)
Investments in affiliates.................................................. (48,647) (95,360)
Acquisition of subsidiaries, net of cash acquired.......................... (20,586) (3,094)
Other investments.......................................................... (27,361) (16,251)
Fixed assets............................................................... (5,749) (9,108)
--------- ---------
Net cash (used in) provided by investing activities........................ (205,492) 266,372
Cash flows provided by (used in) financing activities:
Proceeds from exercise of share options.................................... 14,606 5,187
Repurchase of treasury shares.............................................. (13,632) (165,889)
Dividends paid............................................................. (58,090) (57,064)
Proceeds from loans........................................................ 50,000 250,300
Repayment of loans......................................................... -- (250,300)
Deposit liabilities and policy benefit reserves............................ 20,000 237,044
--------- ---------
Net cash provided by financing activities.................................. 12,884 19,278
Effects of exchange rate changes on foreign currency cash....................... (1,134) 2,266
--------- ---------
Increase in cash and cash equivalents........................................... 6,817 286,547
Cash and cash equivalents-beginning of year..................................... 930,469 557,749
--------- ---------
Cash and cash equivalents-end of period......................................... $937,286 $844,296
======== ========
See accompanying notes to Unaudited Consolidated Financial Statements.
6
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 significant 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. ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board issued Statement No. 133,
"Accounting for Derivative Instruments and Hedging Activities" (FAS 133) in
June 1998. FAS 133 establishes accounting and reporting standards for
derivative instruments, including those embedded in other contracts
(collectively referred to as derivatives), and for hedging activity. It
requires an entity to recognize all derivatives as either assets or
liabilities in the balance sheet and measure those instruments at fair value.
The Company adopted FAS 133, as amended, as of January 1, 2001.
The Company established a committee and completed an implementation plan
to identify all derivatives, evaluate risk management hedging strategies and
determine appropriate valuation methodologies in order to assess the
continuing impact that adoption of this statement will have on its financial
position and results of operation. As a result of this review, the Company
has estimated that FAS 133, as amended, did not have a significant impact on
the results of operations, financial condition or liquidity in the current
period.
The Company uses investment derivatives to manage duration and currency
exposure for its investment portfolio. None of these investment derivatives
are designated hedges, and accordingly, the fair value adjustments are
recognized in income and included in net realized gains on sales of
investments. Historically, it has been the Company's policy to record these
derivatives at fair value with the resulting gains and losses included in net
realized gains on sales of investments. The fair value adjustment amounted to
$21.6 million for the three months ended March 31, 2001. Further discussion
of the Company's use of derivative instruments is provided in Item 3
"Quantitative and Qualitative Disclosure about Market Risk".
Credit default swaps issued by the Company meet the definition of a
derivative under FAS 133. Effective January 1, 2001, the Company has recorded
these products at fair value. Fair value adjustments are recognized in
earnings in each period and recorded in fee income and other, along with all
other credit default swap activity. The level of such adjustments is
dependent upon a number of factors including changes in interest rates,
credit spreads and other market factors. The fair value adjustment for the
quarter ended March 31, 2001 was a loss of $2.1 million.
The Company commenced trading in weather derivatives in 2001, which are
recorded at fair value. Net realized and unrealized gains related to this
trading activity amounted to $0.7 million for the quarter ended March 31,
2001, and are included in fee income and other.
7
XL CAPITAL LTD
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(U.S. DOLLARS IN THOUSANDS)
3. SEGMENT INFORMATION
The Company is organized into three underwriting segments - insurance,
reinsurance and financial products and services - in addition to a corporate
segment that includes the investment operations of the Company. Lloyd's
syndicates are part of the insurance segment but are described separately as
the nature of the business written and the market in which the Lloyd's
syndicates underwrite are significantly different to the Company's other
insurance operations. The Company evaluates performance of each segment based
on underwriting profit or loss. 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 and an individual
segment's results and operational cash flows. See "Cautionary Note Regarding
Forward - Looking Statements'' in Item 3.
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.
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, 2001
LLOYD'S FINANCIAL
INSURANCE SYNDICATES REINSURANCE SERVICES TOTAL
--------- ---------- ----------- --------- ---------
Net premiums earned $ 177,314 $ 92,159 $ 266,860 $ 5,821 $ 542,154
Fee income and other 2,023 602 (563) 5,007 7,069
Net losses and loss expenses 94,205 65,926 168,458 1,615 330,204
Acquisition costs 24,803 31,148 69,600 321 125,872
Operating expenses 25,975 6,812 16,706 11,357 60,850
Exchange (gains) losses (547) (835) 212 -- (1,170)
--------- ---------- ----------- --------- ---------
Underwriting profit (loss) $ 34,901 $ (10,290) $ 11,321 $ (2,465) $ 33,467
Net investment income 129,351
Net realized gains on investments 60,171
Equity in net income of affiliates 28,388
Interest expense 7,512
Amortization of intangible assets 14,468
Corporate operating expenses 12,208
Minority interest 1,169
Income tax benefit 2,909
---------
Net income $ 218,929
=========
Loss and loss expense ratio 53.2% 71.5% 63.1% 27.7% 60.9%
Underwriting expense ratio 28.6% 41.2% 32.4% 200.6% 34.4%
----- ------- ----- ------ -----
Combined ratio 81.8% 112.7% 95.5% 228.3% 95.3%
===== ====== ===== ====== =====
8
XL CAPITAL LTD
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(U.S. DOLLARS IN THOUSANDS)
3. SEGMENT INFORMATION (CONTINUED)
QUARTER ENDED MARCH 31, 2000
LLOYD'S FINANCIAL
INSURANCE SYNDICATES REINSURANCE SERVICES TOTAL
--------- ---------- ----------- --------- ---------
Net premiums earned $ 146,301 $ 103,062 $ 239,040 $ 6,096 $ 494,499
Fee income and other 1,272 (1,168) 229 4,623 4,956
Net losses and loss expenses 85,534 80,687 135,178 1,435 302,834
Acquisition costs 19,986 27,171 56,195 342 103,694
Operating expenses 18,438 4,871 26,432 5,234 54,975
Exchange (gains) losses (10) (304) 1,736 -- 1,422
--------- ---------- ----------- --------- ---------
Underwriting profit (loss) $ 23,625 $ (10,531) $ 19,728 $ 3,708 $ 36,530
Net investment income 128,527
Net realized gains on investments 68,707
Equity in net income 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% 78.3% 56.5% 23.5% 61.2%
Underwriting expense ratio 26.3% 31.1% 34.6% 91.5% 32.1%
----- ----- ----- ----- -----
Combined ratio 84.7% 109.4% 91.1% 115.0% 93.3%
===== ====== ===== ====== =====
The following tables summarize the Company's gross premiums written, net
premiums written and net premiums earned by line of business:
QUARTER ENDED MARCH 31, 2001
GROSS PREMIUMS NET PREMIUMS NET PREMIUMS
WRITTEN WRITTEN EARNED
-------------- ------------ ------------
Casualty insurance $ 189,187 $ 111,709 $ 85,008
Casualty reinsurance 171,390 123,045 71,389
Property catastrophe 102,158 97,842 36,822
Other property 177,546 126,893 94,331
Marine, energy, aviation and satellite 177,577 115,408 61,822
Lloyd's syndicates 216,996 134,540 92,159
Other 115,991 102,817 100,623
-------------- ------------ ------------
Total $ 1,150,845 $ 812,254 $ 542,154
============== ============ ============
9
XL CAPITAL LTD
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(U.S. DOLLARS IN THOUSANDS)
3. SEGMENT INFORMATION (CONTINUED)
QUARTER ENDED MARCH 31, 2000
GROSS PREMIUMS NET PREMIUMS NET PREMIUMS
WRITTEN WRITTEN EARNED
-------------- ------------ ------------
Casualty insurance $ 97,497 $ 73,537 $ 78,228
Casualty reinsurance 155,166 113,754 87,937
Property catastrophe 77,836 77,220 29,278
Other property 165,301 122,015 82,606
Marine, energy, aviation and satellite 155,641 119,910 44,516
Lloyd's syndicates 163,739 59,677 103,062
Other 103,757 85,986 68,872
-------------- ------------ ------------
Total $ 918,937 $ 652,099 $ 494,499
============== ============ ============
The Company's Lloyd's syndicates write a variety of coverages
encompassing most of the above lines of business. Other premiums written and
earned include political risk, surety, bonding and warranty.
4. BUSINESS COMBINATION
During the quarter ended March 31, 2001, the Company acquired The London
Assurance of America, Inc., a company licensed in forty five U.S. States, for
the purpose of obtaining licenses for the financial guaranty operations of
the Company. The cost of the acquisition less cash acquired was $20.6
million. Goodwill arising from the acquisition amounted to $11.3 million.
5. COMPUTATION OF EARNINGS PER ORDINARY SHARE AND ORDINARY SHARE EQUIVALENT
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31
-----------------------------
2001 2000
---------- ----------
BASIC EARNINGS PER SHARE:
Net income...................................................... $218,929 $223,759
Weighted average ordinary shares outstanding.................... 124,464 125,671
Basic earnings per share........................................ $ 1.76 $ 1.78
---------- ----------
DILUTED EARNINGS PER SHARE:
Net income...................................................... 218,929 $223,759
Weighted average ordinary shares outstanding-basic.............. 124,464 125,671
Average share options outstanding (1)........................... 2,318 1,093
---------- ----------
Weighted average ordinary shares outstanding-diluted............ 126,782 126,764
---------- ----------
Diluted earnings per share...................................... $ 1.73 $ 1.77
========== ==========
DIVIDENDS PER SHARE $ 0.46 $ 0.45
========== ==========
- ------------------
(1) Net of shares repurchased under the treasury stock method.
6. SUBSEQUENT EVENT
In April 2001, the Company issued at par $255.0 million of 6.58%
Guaranteed Senior Notes due April 2011 through a private placement to
institutional investors.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2001
COMPARED TO THE THREE MONTHS ENDED MARCH 31, 2000
(U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
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 the Company's beliefs and expectations, are forward
looking-statements. These statements are based upon current plans, estimates and
expectations. Actual results may differ materially from those projected in such
forward-looking statements, and therefore you should not place undue reliance on
them. See "--Cautionary Note Regarding Forward-Looking Statements" for a list of
factors that could cause actual results to differ materially from those
contained in any forward-looking statement.
This discussion and analysis should be read in conjunction with the
Management's Discussion and Analysis of Results of Operations and Financial
Condition, and the audited Consolidated Financial Statements and notes
thereto presented under Item 7 and Item 8, respectively, on Form 10-K for the
year ended December 31, 2000.
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, 2001 and
2000:
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31
-------------------------------
2001 2000 % CHANGE
-------------- ------------ -------------
Net operating income (excluding net realized gains on
investments) $ 156,734 $ 150,801 3.9%
Net realized gains on investments 62,195 72,958 (14.8%)
----------- ----------- -------
Net income $ 218,929 $ 223,759 (2.2%)
========= ========= ========
Earnings per share - basic $1.76 $ 1.78
Earnings per share - fully diluted $1.73 $ 1.77
Net operating income increased in the first quarter of 2001 compared to
the first quarter of 2000 primarily due to an increase in equity in net
income of affiliates. This was partially offset by a marginal reduction in
underwriting profit as discussed below.
SEGMENTS
The Company is organized into three underwriting segments - insurance,
reinsurance and financial products and services - in addition to a corporate
segment, which includes the investment operations of the Company. Lloyd's
syndicates are part of the insurance segment but are described separately as
the nature of the business written and the market in which the Lloyd's
syndicates underwrite are significantly different to the Company's other
insurance operations. 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.
11
INSURANCE OPERATIONS - EXCLUDING LLOYD'S SYNDICATES
Insurance business written includes general liability, other liability
including directors and officers, professional and employment practices
liability, environmental liability, property, program business, marine,
aviation, satellite and other product lines including U.S. Customs bonds,
surety, political risk and specialty lines.
The following table summarizes the underwriting profit for this segment:
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31
--------------------------------
2001 2000 % CHANGE
-------------- -------------- --------------
Net premiums earned $177,314 $ 146,301 21.2%
Fee income and other 2,023 1,272 NM
Net losses and loss expenses 94,205 85,534 10.1%
Acquisition costs 24,803 19,986 24.1%
Operating expenses 25,975 18,438 40.9%
Exchange gains (547) (10) NM
-------------- -------------- --------------
Net underwriting profit $ 34,901 $ 23,625 47.7%
============== ============== ==============
* NM - Not Meaningful
The insurance segment experienced growth in net premiums earned
primarily as a result of an increase in gross premiums written. Gross
premiums written increased in the quarter ended March 31, 2001 compared to
the quarter ended March 31, 2000 principally due to premium rate increases in
most lines of business, ranging from 5% to 8% on excess casualty lines to
approximately 20% on large property risks assumed. New business was written
in both environmental and professional liability lines, contributing
approximately $30.0 million in the quarter. In addition, XL Aerospace wrote
approximately $60.0 million and earned approximately $30.0 million in
aviation and satellite business in the first quarter of 2001. XL Aerospace
premiums were included in the reinsurance segment until December 31, 2000,
when the Company realigned its operations. Net premiums earned have also
increased due to premiums earned relating to environmental liability
business written in the prior year for which there was no corresponding
premium earned in the first quarter of 2000. These increases were partially
offset by the reduction of net premiums earned from business lines
discontinued in connection with the realignment of operations in the last
quarter of 2000.
The following table presents the ratios for the insurance segment:
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31
---------------------------------
2001 2000
---------------- -------------
Loss and loss expense ratio 53.2% 58.4%
Underwriting expense ratio 28.6% 26.3%
---------------- -------------
Combined ratio 81.8% 84.7%
================ =============
The loss and loss expense ratio improved in the first quarter of 2001
from the first quarter of 2000 primarily reflecting the emergence of a lower
level of reported losses in the quarter for prior underwriting years. The
underwriting expense ratio increased slightly in 2001 over 2000 primarily due
to changes in the allocation of operating expenses between segments.
12
INSURANCE OPERATIONS - LLOYD'S SYNDICATES
The Lloyd's syndicates write property, marine and energy, aviation and
satellite, professional indemnity, liability coverage and other specialty
lines, primarily of insurance but also reinsurance.
The following table summarizes the underwriting loss for the Lloyd's
syndicates:
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31
--------------------------------
2001 2000 % CHANGE
-------------- -------------- --------------
Net premiums earned $ 92,159 $ 103,062 (10.6%)
Fee income and other 602 (1,168) NM
Net losses and loss expenses 65,926 80,687 (18.3%)
Acquisition costs 31,148 27,171 14.6%
Operating expenses 6,812 4,871 39.8%
Exchange gains (835) (304) NM
-------------- -------------- --------------
Net underwriting loss $ (10,290) $ (10,531) 2.3%
============== ============== ==============
Gross premiums written in the first quarter of 2001 increased by
approximately $53.3 million from the first quarter of 2000 due primarily
to a higher proportion of the total syndicates' capacity provided by the
Company, currently at 63% compared to 53% in the prior year. However, net
premiums earned for the same period were lower due to the reduction in net
premiums earned relating to the motor business sold at the end of 1999. The
Company retained the residual liability on this business, and the related net
premiums earned in the three months ended March 31, 2001 and 2000 were $2.1
million and $46.7 million, respectively. Net premiums earned were also
affected by a decrease in reinsurance costs relating to a stop loss policy
under which coverage was significantly reduced in 2001 as compared to 2000.
While this has reduced reinsurance costs, it exposes the Company's Lloyd's
syndicates to potentially higher net losses. Although premium rates have
improved slightly from the first quarter of 2000 to the first quarter of
2001, rates have not improved to the extent the Company believes necessary.
XL Brockbank's managing agencies earn fees and may, dependent upon
underwriting results, earn profit commissions from syndicates they manage in
order to offset their operating expenses. Fee income and other increased in
the quarter ended March 31, 2001 compared to the quarter ended March 31, 2000
due to profit commissions received from the 1998 underwriting year that was
recently closed per Lloyd's rules. No commissions were earned in the first
quarter of 2000 due to loss deterioration in the Lloyd's market, resulting in
expenses in excess of fee income.
The following table presents the combined ratios for the Lloyd's
syndicates:
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31
---------------------------------
2001 2000
---------------- -------------
Loss and loss expense ratio 71.5% 78.3%
Underwriting expense ratio 41.2% 31.1%
---------------- -------------
Combined ratio 112.7% 109.4%
================ =============
Changes in the loss and loss expense ratio and underwriting expense
ratio primarily reflect the effect of the sale of the motor business. At
March 31, 2000, the residual motor business had a loss and loss expense ratio
of 87.3% and an underwriting expense ratio of 19.6%. Other business written
typically has lower loss ratios and higher commissions than the motor
business. The reduction in the loss and loss expense ratio was partially
offset by losses arising from the sinking of the Petrobras oil rig in the
first quarter of 2001 and unfavorable loss development from prior years. The
increase in operating expenses also reflects the increase in the syndicates'
capacity provided by the Company and therefore, a greater proportion of the
expenses are allocated to the Company.
13
REINSURANCE OPERATIONS
Reinsurance business written includes treaty and facultative reinsurance
to primary insurers of casualty risks, principally general liability,
professional liability, automobile and workers' compensation; commercial and
personal property risk, specialty risks, including fidelity and surety and
ocean marine; property catastrophe; property excess of loss; property
pro-rata; marine and energy; aviation and satellite; and various other
reinsurance to insurers on a worldwide basis. The Company endeavors to manage
its exposures to catastrophic events by limiting the amount of its exposure
in each geographic zone worldwide and requiring that its property catastrophe
contracts provide for aggregate limits and varying attachment points.
The following table summarizes the underwriting profit for this segment:
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31
--------------------------------
2001 2000 % CHANGE
-------------- -------------- --------------
Net premiums earned $ 266,860 $ 239,040 11.6%
Fee income and other (563) 229 NM
Net losses and loss expenses 168,458 135,178 24.6%
Acquisition costs 69,600 56,195 23.9%
Operating expenses 16,706 26,432 (36.8%)
Exchange losses 212 1,736 NM
-------------- -------------- --------------
Net underwriting profit $ 11,321 $ 19,728 (42.6%)
============== ============== ==============
The increase in net premiums earned reflects price increases in gross
premiums written across most lines of business in the first quarter of 2001
compared to the first quarter of 2000. These price increases included
approximately 15% on property catastrophe, approximately 20% on casualty
treaty reinsurance and approximately 20% to 30% on other property
reinsurance. The effect of the rate increases was reduced by $30.0 million of
premiums earned by XL Aerospace in the first quarter of 2001, now included in
the insurance segment. XL Aerospace premiums were included in the reinsurance
segment until December 31, 2000.
The following table presents the ratios for the reinsurance segment:
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31
---------------------------------
2001 2000
---------------- -------------
Loss and loss expense ratio 63.1% 56.5%
Underwriting expense ratio 32.4% 34.6%
---------------- -------------
Combined ratio 95.5% 91.1%
================ =============
The increase in the loss and loss expense ratio is primarily the result
of losses arising from the Petrobras oil rig and the Seattle earthquake in
the first quarter of 2001. There were no significant losses in the first
quarter of 2000. The underwriting expense ratio as at March 31, 2001 is
slightly lower as compared with the ratio as at March 31, 2000. While
acquisition costs have increased due to profit commissions on prior year
business assumed, this was offset by a reduction in operating expenses
caused by a reduction in certain accrued compensation expenses of approximately
$5.0 million.
14
FINANCIAL PRODUCTS AND SERVICES
Financial products and services business written includes insurance and
reinsurance solutions for complex financial risks. These include financial
guaranty insurance and reinsurance, credit default swaps and other
collateralized transactions. While each of these is unique and is tailored
for the specific needs of the insured, they are typically multi-year
transactions. Due to the nature of these types of policies, premium volume as
well as any profit margin can vary significantly from period to period. The
Company has approached this market primarily on a "net-line" basis, but may
cede a portion of some risks to third parties from time to time. In 1999, the
Company began assuming large loss portfolios as part of its asset
accumulation strategy. The investment spread on these assets is included in
the discussion of investment operations below.
Financial guaranties are conditional commitments that guarantee the
performance of a customer to a third party. The Company's potential liability
in the event of non-performance by the issuer of the insured obligation is
represented by its proportionate share of the aggregate outstanding principal
and interest payable ("insurance in force") on such insured obligation. At
March 31, 2001, the Company's aggregate insurance in force was approximately
$16.5 billion.
The following table summarizes the underwriting results for this segment:
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31
--------------------------------
2001 2000 % CHANGE
-------------- -------------- --------------
Net premiums earned $ 5,821 $ 6,096 (4.5%)
Fee income and other 5,007 4,623 8.3%
Net losses and loss expenses 1,615 1,435 12.5%
Acquisition costs 321 342 (6.1%)
Operating expenses 11,357 5,234 117.0%
-------------- -------------- --------------
Net underwriting (loss) profit $ (2,465) $ 3,708 NM
============== ============== ==============
Financial guaranty premiums are earned over the life of the exposure
which is generally longer than that in the Company's other operating
segments. Certain premiums, such as those received on an installment basis,
are not earned until the premium is reported. Gross premiums written
increased from $7.7 million in the first quarter of 2000 to $12.0 million in
the first quarter of 2001 principally due to new business. However, net
premiums earned decreased for the same period due to a change in the mix of
business with longer earning periods.
The Company provides credit protection in credit default swap form, in
addition to financial guaranty insurance form. Revenues received in respect
of credit default swaps, net of estimated losses, are included as fee income
and earned over the life of the policies. Fee income as at March 31, 2001 and
2000 relates primarily to credit default swaps. As a result of the Company
adopting FAS 133 effective January 1, 2001, fee income and other at March 31,
2001 also includes a loss of $2.1 million relating to the fair value
adjustment on credit default swaps and a gain of $0.7 million relating to
weather derivatives.
The following table presents the combined ratios for this segment:
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31
---------------------------------
2001 2000
---------------- -------------
Loss and loss expense ratio 27.7% 23.5%
Underwriting expense ratio 200.6% 91.5%
---------------- -------------
Combined ratio 228.3% 115.0%
================ =============
15
The Company's financial guaranty operations write business with an
expected loss ratio of approximately 25%. The calculation of the underwriting
expense ratio excludes fee income and other derived from credit default swap
transactions. If this income were included, the expense ratio and the
combined ratio would have been 107.6% and 135.6%, respectively, as at March
31, 2001 and 61.7% and 85.2%, respectively, as at March 31, 2000. The high
underwriting expense principally reflects the continued investment in
infrastructure for this segment.
INVESTMENT OPERATIONS
The following table illustrates the change in net investment income and
net realized gains on sales of investments for the quarters ended March 31,
2001 and 2000:
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31
--------------------------------
2001 2000 % CHANGE
-------------- -------------- --------------
Net investment income $ 129,351 $ 128,527 0.6%
Net realized gains on sales of investments $ 60,171 $ 68,707 (12.4%)
Net investment income increased marginally from the first quarter of
2000 as compared to the first quarter of 2001. Investments and cash
equivalents net of payables for investments purchased, excluding assets
relating to deposit liabilities, increased while investment yields at March
31, 2001 and 2000 remained comparable at approximately 6.6%. The Company
anticipates that investment income will be negatively affected by the easing
of interest rates by Federal Reserve.
Assets relating to the deposit liabilities are included in investments
available for sale. Interest earned on these assets is reduced by the
investment expense relating to the accretion of the deposit liabilities.
Net realized gains on sales of investments in the first quarter of 2000
were realized primarily from the sale of equity securities as the stock
markets reached record levels at that time. In the first quarter of 2001,
gains were realized primarily from the sale of fixed maturities due to
declining interest rates. Partially offsetting these gains was a realized
capital loss of $4.0 million where the Company determined there to be an
other than temporary decline in the value of an other investment.
OTHER REVENUES AND EXPENSES
The following table sets forth other revenues and expenses for the
quarters ended March 31, 2001 and 2000:
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31
--------------------------------
2001 2000 % CHANGE
-------------- -------------- --------------
Equity in net earnings of affiliates $ 28,388 $ 17,479 62.4%
Amortization of intangible assets 14,468 14,052 3.0%
Corporate operating expenses 12,208 12,879 (5.2%)
Interest expense 7,512 8,495 (11.6%)
Minority interest 1,169 205 NM
Income tax benefit 2,909 8,147 (64.3%)
The increase in equity in net earnings of affiliates as at March 31,
2001 compared to March 31, 2000 is primarily attributable to the Company's
insurance and reinsurance affiliates, notably Le Mans Re, which was
negatively affected by European storm losses in the first quarter of 2000.
Earnings from investment affiliates remained relatively unchanged at
approximately $20.0 million for each quarter.
The decrease in interest expense reflects a reduction in indebtedness
carried by the Company through the quarter in 2001 compared to 2000. The
Company anticipates the interest expense incurred will increase in future
periods due to the Company issuing at par $255.0 million of 6.58% Guaranteed
Senior Notes in April 2001.
16
The change in the income taxes of the Company reflects the effects of an
adjustment to the Company's deferred taxes for its London operations in the
quarter ended March 31, 2001, partially offset by an improvement in the
profitability of the Company's U.S. operations as compared to the quarter
ended March 31, 2000.
FINANCIAL CONDITION AND LIQUIDITY
As a holding company, the Company's assets consist primarily of its
investments in subsidiaries, and future cash flows depend on the availability
of dividends or other statutorily permissible payments from its subsidiaries.
The ability to pay such dividends is limited by the applicable laws and
regulations of Bermuda, the United States, Ireland and the United Kingdom,
including those of the Society of Lloyd's. No assurance can be given that the
Company or its subsidiaries will be permitted to pay dividends in the future.
The Company's shareholders' equity at March 31, 2001 was $5.7 billion of
which $3.3 billion was retained earnings.
At March 31, 2001, total investments available for sale and cash net of
unsettled investment trades were $9.2 billion compared to $9.1 billion at
December 31, 2000. This includes investments relating to Company's asset
accumulation business, which together with operational cash flows, have
increased during the quarter.
The Company's fixed income investments including short-term investments
and cash equivalents at March 31, 2001 represented approximately 90% of
invested assets and were managed by several outside investment management
firms. Approximately 89.1% of fixed income securities are investment grade,
with 59.1% 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 decreased from $1.4 billion at
December 31, 2000 to $1.2 billion as at March 31, 2001. This decrease results
from timing differences as investments are accounted for on a trade basis.
Operational cash flows during the first quarter of 2001 improved from
the same period of 2000 primarily due to a lower level of losses paid in
2001. Certain business written by the Company has loss experience generally
characterized as having low frequency and high severity. This may result in
volatility in both the Company's results and operational cash flows. For the
quarters ended March 31, 2001 and 2000, the net amount of losses due to
claims activity paid by the Company was $334.6 million and $444.7 million,
respectively. Included in paid losses for the quarter ended March 31, 2000
was an amount of $74.0 million relating to a commutation payment where unpaid
losses were reduced by the same amount.
During the quarter ended March 31, 2001, negative currency translation
adjustments were $26.1 million. This is shown as part of accumulated other
comprehensive income and primarily relates to unrealized losses on foreign
currency exchange rate movements in the quarter on the Company's investment in
Le Mans Re and certain subsidiaries where the functional currency 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.
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. The repurchase of shares was announced in conjunction with a small
dividend increase of $0.04 per share per annum. Under this plan, the Company
has purchased 5.3 million shares up to May 11, 2001 at an aggregate cost of
$261.3 million or an average cost of $49.60 per share.
As of March 31, 2001, the Company had bank, letter of credit and loan
facilities available from a variety of sources including commercial banks
totaling $2.4 billion of which $500.0 million in debt was outstanding. In
addition, $1.2 million of letters of credit were outstanding, 7.0% of which
were collateralized by the Company's investment portfolio, supporting U.S.
non-admitted business and the Company's Lloyd's capital requirements.
17
FINANCIAL CONDITION AND LIQUIDITY (CONTINUED)
The financing structure as of March 31, 2001 was as follows:
IN USE/
FACILITY COMMITMENT OUTSTANDING
- -------- ---------- -----------
DEBT:
364 day Revolver 500,000 50,000
2 facilities of 5 year Revolvers - total 350,000 350,000
7.15% Notes due 2005 100,000 100,000
----------- -----------
$ 950,000 $ 500,000
=========== ===========
LETTERS OF CREDIT:
5 facilities - total $ 1,438,000 $ 1,213,000
=========== ===========
In the quarter ended March 31, 2001, the Company borrowed $50.0 million
under its $500.0 million 364-day revolving credit facility to finance its
share buyback program. The interest rate on funds borrowed was approximately
5.4%. A syndicate of banks provides the facility and borrowings are unsecured.
Two syndicates of banks provide the two five-year facilities and
borrowings are unsecured. Under these facilities, the amount of $350.0
million outstanding at March 31, 2001 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 certain
acquisitions in 1999. The weighted average interest rate on funds borrowed
during the three months ended March 31, 2001 was approximately 6.0%.
In 1995, NAC Re Corp, with which the Company merged in 1999, issued
$100.0 million of 7.15% Senior Notes due November 15, 2005 through a public
offering at a price of $99.9 million.
Total pre-tax interest expense on the borrowings described above was
$7.5 million and $8.5 million for the three months ended March 31, 2001 and
2000, 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.
In April 2001, the Company issued at par $255.0 million of 6.58%
Guaranteed Senior Notes due April 2011 through a private placement to
institutional investors.
CURRENT OUTLOOK
Most of the property and casualty markets in which the Company operates
have seen improvements in pricing and policy terms and conditions for
renewals of contracts the Company has underwritten thus far for 2001.
However, premium rates have not yet improved to the extent the Company
believes to be necessary in certain lines of business. In addition, it is
anticipated that underwriting results for the Lloyd's markets may not improve
at the expected rate.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company is exposed to potential loss from various market risks,
including changes in interest rates and foreign currency exchange rates. The
Company manages its market risks based on guidelines established by
management. The Company enters into derivatives and other financial
instruments primarily for risk management purposes.
This risk management discussion and the estimated amounts generated from
the sensitivity analyses are forward-looking statements of market risk
assuming certain adverse market conditions occur. Actual results in the
future may differ materially from these projected results due to 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
18
future events 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. 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 RISK 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 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
believe potential gains exist in a particular currency, a forward contract
may not be entered into. At March 31, 2001, forward foreign exchange
contracts with notional principal amounts totaling $247.0 million were
outstanding. The fair value of these contracts as at March 31, 2001 was
$260.7 million with unrealized gains of $13.7 million. Losses of $5.9 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, 2001 would have resulted in approximately $2.6
million and $17.5 million in unrealized gains, respectively.
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 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,
2001, the Company had $53.9 million of such contracts outstanding and had
recognized $0.2 million in realized and unrealized losses for the quarter.
Based on this value, a 10% appreciation or depreciation of U.S. dollar as
compared to the level of other currencies under contract at March 31, 2001
would have resulted in approximately $5.4 million in unrealized losses and
$6.0 million in realized gains, respectively.
The Company also uses foreign exchange forward contracts to reduce its
exposure to premiums receivable denominated in foreign currencies. The
forward contract is closely matched with the receivable maturity date. Both
the foreign currency receivable and the offsetting forward contract are
marked to market on each balance sheet date, with any gains and losses
recognized in the income statement. As at March 31, 2001, the Company had
forward contracts outstanding for the sale of $14.1 million of foreign
currencies at fixed rates, primarily U.K. Sterling. Gains of $0.1 million
were realized during the first quarter of 2001.
The Company attempts to manage the exchange volatility arising on
certain administration costs denominated in foreign currencies. Throughout
the year, forward contracts are entered into to acquire the foreign currency
at an agreed rate in the future. At March 31, 2001, the Company had forward
contracts outstanding for the purchase of $8.7 million of Euros and U.K.
Sterling at fixed rates. Activity was insignificant in the first quarter of
2001.
FINANCIAL MARKET EXPOSURE
The Company also uses derivative investments to add value to the
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 March 31, 2001, bond and stock index futures outstanding were $185.0
million with underlying
19
investments having a market value of $3.2 billion. Gains of $1.1 million
were realized during the quarter. A 10% appreciation or depreciation of these
derivative instruments would have resulted in unrealized gains and unrealized
losses of $18.5 million, respectively.
The Company provides credit protection in credit default swap form, in
addition to financial guaranty insurance form. The Company also trades in
weather derivatives. These types of transactions may expose the Company to
financial market risk through changes in interest rates, credit spreads and
other market factors. Further discussion of these contracts is provided in
Note 2 to the Consolidated Financial Statements.
ACCOUNTING PRONOUNCEMENTS
See Note 2 to the Consolidated Financial Statements.
SUBSEQUENT EVENTS
See Note 4 to the Consolidated Financial Statements.
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 Shareholders, any proxy statement, any other Form 10-Q,
Form 10-K 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. Such statements include forward-looking statements
both with respect to the Company and the insurance and reinsurance sectors in
general (both as to underwriting and investment matters). Statements which
include the words "expect", "intend", "plan", "believe", "project",
"anticipate", "will", and similar statements of a future or forward-looking
nature identify forward-looking statements for purposes of the PSLRA or
otherwise.
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; (v) changes in
regulation 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; (viii) changes in the distribution or placement of
risks due to increased consolidation of insurance and reinsurance brokers;
(ix) loss of key personnel; (x) the effects of mergers, acquisitions and
divestitures, including, without limitation, the Winterthur International
acquisition; (xi) changes in rating agency policies or practices; (xii)
changes in accounting policies or practices; and (xiii) changes in general
economic conditions, including inflation, foreign currency exchange rates and
other factors. 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 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.
20
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 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
None.
REPORTS ON FORM 8-K
Current Report on Form 8-K filed on February 23, 2001, under Item 5
thereof.
21
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.
XL CAPITAL LTD
----------------------------------------------------
(Registrant)
May 15, 2001 /s/ Brian M. O'Hara
----------------------------------------------------
Brian M. O'Hara
President and Chief Executive Officer
May 15, 2001 /s/ Jerry De St. Paer
----------------------------------------------------
Jerry De St. Paer
Executive Vice President and Chief Financial Officer
22