XL Capital Notes $288M Q4 Profit

Bermuda-based XL Capital Ltd. reported net income available to ordinary shareholders for the quarter ended Dec. 31, 2004 of $288.0 million, or $2.07 per ordinary share, compared with a net loss of $314.8 million, or a loss of $2.29 per ordinary share for the quarter ended Dec. 31, 2003.

Net income excluding net realized gains and losses(1) for the 2004 fourth quarter was $194.4 million, or $1.40 per ordinary share, compared with a net loss of $349.3 million, or a loss of $2.54 per ordinary share, for the year ago quarter. Net income and net income excluding net realized gains and losses for the 2004 fourth quarter included a previously announced charge related to the Indian Ocean tsunami and an increase in expected losses from the third quarter 2004 hurricanes of $138.0 million, after-tax, or $0.99 per ordinary share.

For the 12 months to Dec. 31, 2004, net income available to ordinary shareholders was a record $1,126 million, or $8.13 per ordinary share, compared with $371.7 million, or $2.69 per ordinary share for the prior year. Net income excluding net realized gains and losses for the full year 2004 was also a record at $816.7 million, or $5.89 per ordinary share, compared with $293.6 million, or $2.12 per ordinary share for the full year 2003.

Commenting on XL’s results, President and Chief Executive Officer Brian O’Hara said, “XL’s fourth quarter results continued the solid underlying performance we delivered throughout the year, with a combined ratio, excluding the impact of the Indian Ocean tsunami and an increase in expected losses from the third quarter 2004 hurricanes, of 87.0% and healthy year-over-year increases in net invested assets, cash flow from operations, net investment income and book value per ordinary share.

“Full year 2004 net income of $1,126 million and net income excluding realized gains and losses of $816.7 million were both records. Taking into consideration the fact that we incurred over $550 million, after tax, in catastrophe-related losses during the year, these results are a testament to the underlying earnings strength of XL.

“During 2004, we introduced a number of important strategic initiatives, including the launching of both our global whole account commercial property program and our primary Directors and Officers liability product in Europe and the start-up of our US primary casualty operation. I believe these initiatives, together with our core competitive advantages of global presence, leading product expertise and financial strength, will enable us to further differentiate our performance for our customers and shareholders going forward.”

With respect to the post-closing seasoning process with Winterthur Swiss Insurance Company (“Winterthur”), as contemplated in the amended sale and purchase agreement relating to XL’s acquisition of Winterthur International, on Feb. 3, 2005, both XL and Winterthur submitted their amounts for the independent valuation determination process.

XL’s submission would result in a net payable to XL of approximately $1.45 billion in aggregate and Winterthur’s submission would result in a net payable to XL of approximately $541 million in aggregate. The independent valuation determination process is a “baseball-type” process, whereby either XL’s submitted number or Winterthur’s submitted number will be the actual final seasoned amount, depending upon which number is closest to the number developed by the independent actuarial valuation.

O’Hara further commented that “XL’s submission was developed with the support of various leading, third-party actuarial and claims advisors and we are confident in our submission. We look forward to discussing this process further on our earnings call tomorrow.”

Highlights – (versus the equivalent prior year period, unless noted):

Q4 2004
* Net premiums written from general operations increased 6% to $1.3 billion

* Combined ratio from general operations was 95.8%. Excluding hurricane and tsunami losses, the combined ratio was 87.0%

* Net investment income increased 35% to $278.4 million

* Cash flow from operations was $1.3 billion. Including structured and spread transactions, cash flow was $1.85 billion.

* Annualized net income excluding net realized gains and losses return on ordinary shareholders’ equity was 11.0%

Full year 2004

* Net premiums written from general operations increased 11% to $7.3 billion

* Combined ratio from general operations was 96.0%. Excluding hurricane and tsunami losses, the combined ratio was 87.6%

* Net investment income increased 28% to $995.0 million

* Cash flow from operations was $4.37 billion. Including structured and spread transactions, cash flow was $5.9 billion

* Net income excluding net realized gains and losses return on ordinary shareholders’ equity was 12.0%

* Total net invested assets at Dec. 31, 2004 were $32.4 billion, up 28% from Dec. 31, 2003

* Total assets at Dec. 31, 2004 were $49.0 billion, up 19% from Dec. 31, 2003

* Book value per ordinary share was $51.98, up 11% from Dec. 31, 2003

Underwriting profit for the quarter was $51.4 million, compared with an underwriting loss of $1.9 million for the prior year quarter, and included a $110.5 million pre-tax charge related to the impact of the Indian Ocean tsunami and an increase in expected losses from the third quarter 2004 hurricanes.

Net premiums written increased 17%, compared with the 2003 fourth quarter, to $1,031 million and the loss ratio for the quarter was 71.4%, a decrease of 6.4 points from the prior year quarter. The underwriting expense ratio of 24.5% increased 1 point compared with the prior year quarter, as a 2.6 point increase in the operating expense ratio was partially offset by a 1.6 point decrease in the acquisition expense ratio.

Reinsurance operations

General Operations – Underwriting profit for the quarter was $48.7 million, compared with an underwriting loss of $483.6 million in the prior year quarter. The current quarter included a $39.5 million pre-tax charge related to the impact of the Indian Ocean tsunami and an increase in expected losses from the third quarter 2004 hurricanes. Net premium written decreased 19%, compared with the 2003 fourth quarter, to $303.5 million, primarily due to decreased participation on certain contracts, in addition to the impact of ceded reinstatement premiums related to the increase in expected losses for the third quarter 2004 hurricanes. The loss ratio for the quarter was 65.5% compared with 146.4% in the prior year quarter and the underwriting expense ratio decreased 2.5 points compared with the prior year quarter to 30.1%.

Total operating expenses were $288.3 million in the quarter, an increase of 44% from the fourth quarter of 2003. This increase was driven primarily by costs associated with continued growth in the company’s operations globally, work related to complying with Sarbanes-Oxley requirements, the impact of foreign exchange movement and costs associated with the Winterthur seasoning process.

(1) Defined as “net income excluding net realized gains and losses on investments and net realized gains and losses on credit and investment derivatives, net of tax” (herein referred to as “net income excluding net realized gains and losses”). Net income excluding net realized gains and losses is a non-GAAP measure. See the schedule entitled “Reconciliation” at the end of this release for a reconciliation of net income excluding net realized gains and losses to net income available to ordinary shareholders.