XL Capital Ltd Announces Third Quarter 2009 Results

Reuters
Source: XL Capital Ltd.
October 30, 2009


- Book value per ordinary share increased by 26% to $23.84 at September 30,
2009

HAMILTON, Bermuda, Oct. 28 /PRNewswire-FirstCall/ -- XL Capital Ltd ("XL"
or the "Company") (NYSE: XL) today reported its third quarter 2009 results.
Commenting on the Company's performance, Chief Executive Officer, Mike
McGavick, said:
    "Solid underwriting and careful expense management, combined with our
prudent reserving practices, provided a healthy combined ratio of 93.2% from
P&C operations.  For the quarter, we have recorded a 26% increase in book
value per ordinary share to $23.84 and a 30% increase in tangible book value
per ordinary share to $21.36.  Total shareholders' equity increased from
$7.5 billion to $9.2 billion in the quarter.
    "These are encouraging numbers but clearly there are areas for continued
improvement.  For instance, gross premiums written for our P&C operations were
16.6% lower than the prior year quarter.  Although on target with our current
guidance for the year, continuing this recovery means we must remain vigilant
in the face of challenging pricing conditions.
    "Pressures from the current economic environment and where we are in the
underwriting cycle have not deterred us from seeking the right price
regardless of the impact on top line.  We will continue to do so.
    "The other area for improvement remains the investment portfolio.  While
XL had strong operating income in the quarter of $306.4 million, or $0.89 per
ordinary share, that strong operating performance was offset by our
recognition of $310.8 million in after-tax net realized losses related
principally to other than temporary impairments.  Although this charge
resulted in a net loss available to ordinary shareholders of $11.4 million or
$0.03 per ordinary share, we remain committed to an investment portfolio more
properly suited to a P&C company, and have made significant strides over the
past year to de-risk our portfolio in pursuit of that goal.
    "On the positive side, our portfolio marks improved by $1.4 billion during
the third quarter, and 54% of the $34.0 billion portfolio was in cash,
government, government-related or government-supported securities at the end
of the third quarter.  Given the increased stability in the capital markets,
we have selectively redeployed some of our cash and proceeds from sales and
maturities into high quality assets, achieving new money yields of 3.9%.
    He concluded:  "Overall we are pleased with the third quarter.  Our
operating results indicate what our clients and brokers have already clearly
concluded -- XL is delivering for our customers and, on an operating basis,
for shareholders.  As we approach the January renewal season, XL is fully
focused on serving the needs of our customers, delivering value to our
shareholders and emerging as the best P&C (re)insurer wherever we choose to
compete."

    Three Months Ended September 30
    (US Dollars in thousands except per share amounts)
                                                       (Per Share - Diluted)
                          2009         2008    Change   2009     2008   Change
    Net loss available
    to ordinary
    shareholders       ($11,402)  ($1,649,024)   NM    ($0.03)  ($6.04)   NM
    Operating income(1) 306,409       107,765   184%     0.89     0.39   128%


    The Company incurred a net loss available to ordinary shareholders for the
third quarter of $11.4 million, or $0.03 per ordinary share, compared to a net
loss available to ordinary shareholders of $1,649.0 million, or $6.04 per
ordinary share for the third quarter of 2008.  Operating income was
$306.4 million, or $0.89 per ordinary share, compared to $107.8 million, or
$0.39 per ordinary share in the third quarter of 2008.
    The significant improvement in the net loss available to ordinary
shareholders from the prior year quarter is primarily due to a charge of
$1.4 billion in the prior year quarter related to the transaction closed on
August 5, 2008 with Syncora Holdings Ltd. (formerly Security Capital Assurance
Ltd) and certain of its subsidiaries.  Also contributing to the improvement
was an increase in operating income of $198.6 million primarily due to an
increase of $183.7 million from the underwriting contribution of XL's P&C
operations and an increase of $97.2 million in the net income from investment
affiliates.  These were partially offset by a decrease in investment income of
$109.1 million compared to the third quarter of 2008.
    Net investment income for the quarter was $327.1 million compared to
$436.3 million in the prior year quarter. Net investment income from P&C
operations, excluding investment income from structured products, decreased
27.7% from the prior year quarter to $211.8 million.  This decrease was
primarily due to lower investment yields, driven by both the impact of lower
US LIBOR rates on floating rate structured credit assets, and higher
allocations to lower yielding US Treasuries, Agencies and cash as a result of
continued de-risking activities.
    Pre-tax net realized investment losses for the quarter were $325.5 million
compared to a loss of $292.9 million in the third quarter of 2008. The loss
for the third quarter of 2009 included other than temporary impairments, net
of non-credit impairments, totaling $321.7 million, and realized losses on
securities sales of $3.8 million.  The other than temporary impairments in the
quarter arose primarily from impairments of corporate securities, principally
certain European medium term notes, combined with below investment grade
structured securities.
    The annualized return on ordinary shareholders' equity, based on operating
income, was 16.7% for the quarter as compared to 5.8% in the prior year
quarter.
    For the first nine months of 2009, the Company produced net income of
$246.9 million or $0.73 per ordinary share, compared to a net loss of
$1.2 billion or $5.70 loss per ordinary share, for the prior year period.
Operating income was $681.5 million or $2.00 per ordinary share, compared to
$650.8 million or $3.09 per ordinary share in the prior year period.  The
annualized return on ordinary shareholders' equity, based on operating income,
was 13.7% for the first nine months of 2009 compared to 10.8% in the prior
year period.

    P&C Operations
    Three Months Ended September 30
    (US Dollars in thousands)
                                               2009               2008
    Gross Premiums Written                  $1,584,209         $1,899,975
    Net Premiums Written                     1,195,119          1,257,914
    Net Premiums Earned                      1,293,879          1,525,023
    Underwriting Income (Loss)                  88,279            (95,392)
    Loss Ratio                                   63.2%              79.3%
    Expense Ratio                                30.0%              27.0%
    Combined Ratio                               93.2%             106.3%


    -- P&C gross and net premiums written declined from the prior year quarter
primarily due to planned reductions in long-term agreements, strengthening of
the US dollar compared to the third quarter of 2008, lower insured values
reflecting macroeconomic conditions and planned reductions in several targeted
areas.  Also impacting the decline was XL's focus on rate achievement in a
competitive environment.
    -- P&C net premiums earned included $905.4 million from the Insurance
segment and $388.5 million from the Reinsurance segment.
    -- The loss ratio for the quarter was 63.2% compared to 79.3% for the
third quarter of 2008.  Included in the current quarter loss ratio was prior
year favorable development of $74.3 million compared to $92.8 million in the
third quarter of 2008.
    -- The third quarter 2009 loss ratio had catastrophe losses, net of
reinsurance recoveries and reinstatement premiums, of $30.8 million compared
to the $208.5 million in the third quarter of 2008, which included Hurricanes
Gustav and Ike.
    -- The expense ratio during the quarter included charges of approximately
$7.6 million related to the Company's previously announced cost reduction
efforts, of which $6.5 million and $1.1 million related to the Insurance and
Reinsurance segments, respectively.  In the prior year quarter there was also
a restructuring charge of $17.3 million.  The third quarter 2009 expense ratio
also included increased acquisition costs primarily as a result of changes in
the mix of business and higher profit-related commissions.
    -- The P&C combined ratio for the quarter was 93.2% compared to 106.3% for
the quarter ended September 30, 2008.  Excluding the charges for the cost
reduction initiatives, the current quarter combined ratio would have been
92.6%.
    Capital Position
    Book value per ordinary share was $23.84 as compared to $18.89 at
June 30, 2009.
    Net unrealized losses on investments, net of tax, were $1.5 billion at
September 30, 2009 compared with net unrealized losses, net of tax of
$3.2 billion at June 30, 2009. The decrease in net unrealized losses for the
quarter in the Company's P&C operations was substantially due to the
tightening of credit spreads on both corporate and structured credit assets,
and from the impact of decreases in US Government interest rates.  The
decrease in net unrealized losses in the Company's Life operations was a
result of tightening credit spreads in Sterling and Euro corporate securities,
particularly hybrid corporate financials, and the effect of decreases in
interest rates.
    Further details of the results for the quarter and of the Company's fixed
income investment portfolio may be found in the Company's Financial Supplement
and Fixed Income Portfolio Data Supplement, respectively.  These documents are
both dated October 28, 2009 and are available from the Investor Relations
section of the XL Capital website.
    The Company will host a conference call to discuss its Third Quarter
results on Wednesday, October 28, 2009 at 5:00 p.m. Eastern time. The
conference call can be accessed through a listen-only dial-in number or
through a live webcast. To listen to the conference call, please dial
(866) 617-1526 or (210) 795-0624, passcode: 'xl global'. The webcast will be
available at www.xlcapital.com and will be archived on XL's website from
approximately 8:00 p.m. Eastern Time on October 28, 2009, through midnight
Eastern Time on November 27, 2009. A telephone replay of the conference call
will also be available beginning at 8:00 p.m. Eastern Time on October 28,
2009, until midnight Eastern Time on November 27, 2009, by dialing
(800) 337-5619 or (402) 220-9652, passcode: 'xl global'.
    This press release contains forward-looking statements. Statements that
are not historical facts, including statements about XL's beliefs, plans or
expectations, are forward-looking statements. These statements are based on
current plans, estimates, and expectations, all of which involve risk and
uncertainty. Actual results may differ materially from those included in such
forward-looking statements and therefore you should not place undue reliance
on them. A non-exclusive list of the important factors that could cause actual
results to differ materially from those in such forward-looking statements
includes (a) changes in ratings, rating agency policies or practices; (b)
greater frequency or severity of claims and loss activity than XL's
underwriting, reserving or investment practices anticipate based on historical
experience or industry data; (c) trends in rates for property and casualty
insurance and reinsurance; (d) other changes in general economic conditions,
including the effects of inflation and changes in interest rates, credit
spreads, foreign currency exchange rates and other factors; (e) developments,
including uncertainties related to the depth and duration of the current
recession, and future volatility in the world's credit, financial and capital
markets that adversely affect the performance and valuation of XL's
investments or access to such markets; (f) the potential for changes to
methodologies, estimations and assumptions that underlie the valuation of the
Company's financial instruments that could result in changes to investment
valuations; (g) changes to the Company's assumptions as to whether it has the
ability and intent to hold available-for-sale securities to recovery; (h) the
potential effects of domestic and foreign regulatory developments, including
those which could impact the financial markets or increase XL's business costs
and required capital levels; (i) the ability of XL's subsidiaries to pay
dividends to the Company; (j) changes in the size of XL's claims relating to
natural catastrophe losses due to the preliminary nature of some reports and
estimates of loss and damage to date; and (k) the other factors set forth in
XL's reports on Form 10-K, Form 10-Q, and other documents on file with the
Securities and Exchange Commission, as well as management's response to any of
the aforementioned factors.  XL undertakes no obligation to update or revise
publicly any forward-looking statement, whether as a result of new
information, future developments or otherwise.
    Contact:
    David R. Radulski
    Investor Relations
    (441) 294-7460

    Carol A. Parker Trott
    Media Relations
    (441) 294-7290

    (1). Defined as net income (loss) available to ordinary shareholders
excluding net realized gains and losses on investments, goodwill impairment
charges, net realized and unrealized gains and losses on credit, structured
financial and investment derivatives, net of tax, for the Company and its
share of these items for the Company's insurance company affiliates for the
periods presented and charges in respect of guarantees relating to
subsidiaries of Syncora Holdings Ltd. ("Syncora"), as well as the gain
recognized on the repurchase of the Company's Series C preference ordinary
shares.  "Operating income" and "annualized return on ordinary shareholders'
equity based on operating income" are non-GAAP measures.  See the schedule
entitled "Reconciliation" at the end of this release for a reconciliation of
"operating income" to net income (loss) available to ordinary shareholders.



                                XL CAPITAL LTD
                     SUMMARY CONSOLIDATED FINANCIAL DATA
                         (U.S. dollars in thousands)

                                 Three Months Ended        Nine Months Ended
    Income Statement Data:          September 30             September 30
                                     (Unaudited)              (Unaudited)
                                  2009        2008         2009        2008
    Revenues:
    Gross premiums written:
       - P&C operations     $1,584,209   $1,899,975  $4,963,627   $6,387,100
       - Life operations       156,870      156,148     442,693      552,357

    Net premiums written :
       - P&C operations      1,195,119    1,257,914   3,778,708    4,753,934
       - Life operations       146,941      145,741     409,200      520,887

    Net premiums earned :
       - P&C operations      1,293,879    1,525,023   3,897,315    4,586,590
       - Life operations       151,840      169,608     429,625      502,125

    Net investment income      327,145      436,281   1,003,459    1,375,862
    Net realized (losses)
     gains on investments     (325,520)    (292,903)   (657,887)    (393,114)
    Net realized and
     unrealized (losses)
     gains on derivative
     instruments                (9,133)     (58,454)     (9,571)      (5,648)
    Net income (loss) from
     investment affiliates      42,288      (54,886)     52,481      (63,522)
    Fee income and other         5,331       19,132      27,285       40,219
           Total revenues   $1,485,830   $1,743,801  $4,742,707   $6,042,512
    Expenses:
    Net losses and loss
     expenses incurred        $818,238   $1,209,565  $2,388,149   $3,149,043
    Claims and policy
     benefits                  185,067      199,861     517,614      605,885
    Acquisition costs          212,846      216,879     654,337      729,413
    Operating expenses         230,908      319,432     763,514      881,554
    Exchange (gains) losses    (16,843)    (139,467)    103,754      (63,786)
    Extinguishment of debt           -       22,527           -       22,527
    Interest expense            53,469       78,000     169,008      267,553
    Amortization of
     intangible assets             465        1,386       1,394        2,226
           Total expenses   $1,484,150   $1,908,183  $4,597,770   $5,594,415

    Net income (loss)
     before non-controlling
     interest, income tax
     and net income from
     operating affiliates       $1,680    $(164,382)   $144,937     $448,097

    Non-controlling interest
     in net loss of subsidiary      (7)           -         (47)           -
    Income tax                   3,616       47,843      65,614      129,750
    Net loss (income) from
     operating affiliates      (23,027)   1,404,299     (30,366)   1,452,647

    Net income (loss)          $21,098  $(1,616,524)   $109,736  $(1,134,300)
    Preference share
     dividends                 (32,500)     (32,500)    (74,626)     (65,000)
    Gain on repurchase of
     Series C preference
     ordinary shares                 -            -     211,816            -
    Net (loss) income
     available to
     ordinary shareholders    $(11,402) $(1,649,024)   $246,926  $(1,199,300)



                       SUMMARY CONSOLIDATED FINANCIAL DATA
              (U.S. dollars in thousands, except per share amounts)


    Balance Sheet Data:                           As at             As at
                                               September 30      December 31,
                                                   2009              2008
                                               (Unaudited)         (Note 1)



    Total investments available for sale       $30,010,739       $27,464,510

    Cash and cash equivalents                    3,906,277         4,353,826

    Investments in affiliates                    1,193,917         1,552,789

    Unpaid losses and loss expenses
     recoverable                                 3,827,343         3,997,722

    Total assets                                47,221,241        45,622,278


    Unpaid losses and loss expenses             21,202,343        21,650,315

    Deposit liabilities                          2,442,800         2,710,987

    Future policy benefit reserves               5,754,176         5,452,865

    Unearned premiums                            4,185,151         4,217,931

    Notes payable and debt                       2,452,373         3,189,734

    Redeemable series C preference
     ordinary shares                               182,673           500,000

    Total shareholders' equity                   9,173,517         6,116,831

    Diluted book value per ordinary share           $23.84            $15.46

    Basic book value per ordinary share             $23.88            $15.46

    Note 1: Certain items have been reclassified to conform with the current
period presentation



                                XL CAPITAL LTD
                                RECONCILIATION

    The following is a reconciliation of the Company's (i) net income (loss)
available to ordinary shareholders to operating income (loss) (Note 1) and
(ii) annualized return on ordinary shareholders' equity (based on operating
income (loss)) to average ordinary shareholders' equity for the three months
ended September 30, 2009 and 2008.
             (U.S. dollars in thousands except per share amounts)

                                                 Three Months Ended
                                                     September 30
                                                      (Unaudited)
                                                 2009             2008
                                                                (Note 3)
    Net (loss) income available to
      ordinary shareholders                   $(11,402)      $(1,649,024)

    Net realized losses on investments,
      net of tax                               310,815           286,421

    Net realized and unrealized losses
      (gains) on investment derivatives,
      net of tax                                 3,762            56,334

    Net realized and unrealized losses
      (gains) on credit and structured
      financial derivatives, net of tax          5,541                77

    Net realized and unrealized (gains)
      losses on investments and derivatives
      of the Company's insurance company
      affiliates                                (2,307)           (1,775)

    Charge in respect of guarantees issued
      to subsidiaries of Syncora                     -         1,415,732

    Operating income (Note 1)                 $306,409          $107,765

    Per ordinary share results: (Note 2)
    Net (loss) income attributable
      to ordinary shareholders                  $(0.03)           $(6.04)

    Operating Income (Note 1)                    $0.89             $0.39

    Weighted average ordinary shares
      outstanding:

    Basic                                  342,118,289       273,083,538
    Diluted                                342,620,454       273,083,538

    Return on Ordinary Shareholders'
      Equity:
    Average ordinary shareholders'
      equity                                $7,321,000        $7,464,868

    Operating income (Note 1)                 $306,409          $107,765

    Annualized operating income (Note 1)    $1,225,636          $431,060

    Annualized Return on Ordinary
     Shareholders' Equity -
     Operating income (Note 1)                    16.7%              5.8%

    Note 1: Operating income is defined as net income (loss) available to
ordinary shareholders excluding net realized gains and losses on investments,
goodwill impairment charges, net realized and unrealized gains and losses on
credit, structured financial and investment derivatives, net of tax for the
Company and its share of these items for the Company's insurance company
affiliates for the periods presented and charges in respect of guarantees
relating to subsidiaries of Syncora, as well as the gain recognized on the
repurchase of the Company's Series C preference ordinary shares. Operating
income and annualized return on ordinary shareholders' equity based on
operating income are non-GAAP measures. See comments on regulation G.
    Note 2:  Diluted weighted average number of ordinary shares outstanding
are used to calculate per share data except where they are anti-dilutive to
earnings per share or where there is a net loss.  When they are anti-dilutive
or when a net loss occurs, basic weighted average ordinary shares outstanding
are utilized in the calculation of net loss per share and net operating loss
per share.
    Note 3: Certain amounts have been reclassified to conform with the current
period presentation.



                                XL CAPITAL LTD
                                RECONCILIATION

    The following is a reconciliation of the Company's (i) net income (loss)
available to ordinary shareholders to operating income (loss) (Note 1) and
(ii) annualized return on ordinary shareholders' equity (based on operating
income (loss)) to average ordinary shareholders' equity for the nine months
ended September 30, 2009 and 2008.
             (U.S. dollars in thousands except per share amounts)


                                                  Nine Months Ended
                                                     September 30
                                                     (Unaudited)
                                                2009              2008
                                                               (Note 4)
    Net income (loss) available to
      ordinary shareholders                  $246,926       $(1,199,300)

    Net realized losses on
      investments, net of tax                 636,538           382,208

    Net realized and unrealized
      losses (gains) on investment
      derivatives, net of tax                   5,112            16,519

    Net realized and unrealized
      losses (gains) on credit and
      structured financial
      derivatives, net of tax                   7,055               135

    Net realized and unrealized
      (gains) losses on investments
      and derivatives of the Company's
      insurance company affiliates             (2,316)           (2,511)

    Gain on repurchase of Series C
      preference ordinary shares             (211,816)                -

    Charge in respect of guarantees
      issued to subsidiaries of Syncora             -         1,453,786
    Operating income (Note 1)                $681,499          $650,837

    Per ordinary share results: (Notes 2
     and 3)
      Net income (loss) attributable to
       ordinary shareholders                    $0.73            $(5.70)

      Operating Income (Note 1)                 $2.00             $3.09

    Weighted average ordinary shares
      outstanding:

      Basic                               339,094,588       210,386,823
      Diluted - Net income                339,348,679       210,386,823
      Diluted - Operating income          342,371,381       210,386,823

    Return on Ordinary Shareholders'
      Equity:
      Average ordinary shareholders'
       equity                              $6,643,194        $8,054,343

    Operating income (Note 1)                $681,499          $650,837

    Annualized operating income (Note 1)     $908,665          $867,783

    Annualized Return on Ordinary
     Shareholders' Equity -
     Operating income (Note 1)                   13.7%             10.8%

    Note 1: Operating income is defined as net income (loss) available to
ordinary shareholders excluding net realized gains and losses on investments,
goodwill impairment charges, net realized and unrealized gains and losses on
credit, structured financial and investment derivatives, net of tax for the
Company and its share of these items for the Company's insurance company
affiliates for the periods presented and charges in respect of guarantees
relating to subsidiaries of Syncora, as well as the gain recognized on the
repurchase of the Company's Series C preference ordinary shares. Operating
income and annualized return on ordinary shareholders' equity based on
operating income are non-GAAP measures.  See comments on regulation G.
    Note 2:  Diluted weighted average number of ordinary shares outstanding
are used to calculate per share data except where they are anti-dilutive to
earnings per share or where there is a net loss.  When they are anti-dilutive
or when a net loss occurs, basic weighted average ordinary shares outstanding
are utilized in the calculation of net loss per share and net operating loss
per share.
    Note 3: Diluted weighted average ordinary shares outstanding for year to
date ended September 30, 2009 include the impact of the Company's 2005 Equity
Security units ("ESU") on an "if converted" basis for the period January 1,
2009 to February 17, 2009 when they were converted into class A ordinary
shares. Net income and Operating income per share for year to date ended
September 30, 2009 have been adjusted to exclude $4,829 of ESU interest from
January 1, 2009 to February 17, 2009.
    Note 4: Certain amounts have been reclassified to conform with the current
period presentation.
    Comment on Regulation G
    This press release contains the presentation of (i) operating income
(loss), which is defined as net income (loss) excluding net realized gains and
losses on investments, goodwill impairment charges, net realized and
unrealized gains and losses on credit, structured financial and investment
derivatives, net of tax, for the Company and its share of these items for the
Company's insurance company affiliates for the periods presented and charges
in respect of guarantees relating to subsidiaries of Syncora, as well as the
gain recognized on the repurchase of the Company's Series C preference
ordinary shares and (ii) annualized return on ordinary shareholders' equity
(based on operating income (loss)).  These items are "non-GAAP financial
measures" as defined in Regulation G.  The reconciliation of such measures to
the most directly comparable GAAP financial measures in accordance with
Regulation G is included above.
    XL presents its operations in the way it believes will be most meaningful
and useful to investors, analysts, rating agencies and others who use XL's
financial information in evaluating XL's performance.  This presentation
includes the use of "operating income (loss)" and annualized return on
ordinary shareholders' equity based on operating income (loss). Investment
derivatives include all derivatives entered into by XL other than weather and
energy and credit derivatives (discussed further below).
    Although the investment of premiums to generate income (or loss) and
realized capital gains (or losses) is an integral part of XL's operations and
the Company's insurance company operating affiliates, the determination to
realize capital gains (or losses) is independent of the underwriting process.
In addition, under applicable GAAP accounting requirements, losses can be
created as the result of other than temporary declines in value and from
goodwill impairment charges without actual realization.  In this regard,
certain users of XL's financial information, including certain rating
agencies, evaluate earnings before tax and capital gains to understand the
profitability of the recurring sources of income without the effects of these
two variables. Furthermore, these users believe that, for many companies, the
timing of the realization of capital gains and the recognition of goodwill
impairment charges are largely opportunistic and are a function of economic
and interest rate conditions.
    In addition, with respect to credit derivatives, because XL and its
insurance company operating affiliates generally hold financial guaranty
contracts written in credit default derivative form to maturity, the net
effects of the changes in fair value of these credit derivatives are excluded
(similar with other companies' treatment of such contracts) as the changes in
fair value each quarter are not indicative of underlying business performance.
Unlike these credit derivatives, XL's weather and energy derivatives are
actively traded (i.e., they are not held to maturity) and are, therefore, not
excluded from net income as any gains or losses from this business are
considered by management when evaluating and managing the underlying business.
    Charges in respect of guarantees issued by XL Insurance (Bermuda) Ltd, in
respect of subsidiaries of Syncora, as well as the gain recognized on the
repurchase of the Company's Series C preference ordinary shares, are excluded
as these transactions were capital in nature and outside the scope of the
Company's underlying business.
    In summary, XL evaluates the performance of and manages its business to
produce an underwriting profit. In addition to presenting net income (loss),
XL believes that showing operating income (loss) enables investors and other
users of XL's financial information to analyze XL's performance in a manner
similar to how management of XL analyzes performance. In this regard, XL
believes that providing only a GAAP presentation of net income (loss) makes it
much more difficult for users of XL's financial information to evaluate XL's
underlying business. Also, as stated above, XL believes that the equity
analysts and certain rating agencies that follow XL (and the insurance
industry as a whole) exclude these items from their analyses for the same
reasons and they request that XL provide this non-GAAP financial information
on a regular basis.
    Return on average ordinary shareholder's equity ("ROE") excluding net
realized gains and losses on investments, goodwill impairment charges and net
realized and unrealized gains and losses on credit and investment derivative
instruments, net of tax, for the Company and its share of these items for
Syncora and the Company's other insurance company operating affiliates (the
"Exclusions"), is a widely used measure of any company's profitability.
Annualized return on average ordinary shareholders' equity (minus the
Exclusions) is calculated by dividing annualized net income minus the
Exclusions for any period by the average of the opening and closing ordinary
shareholders' equity. The Company establishes target ROEs (minus the
Exclusions) for its total operations, segments and lines of business. If the
Company's ROE (minus the Exclusions) return targets are not met with respect
to any line of business over time, the Company seeks to re-evaluate these
lines. In addition, the Company's compensation of its senior officers is
dependant upon, among other things, the achievement of the Company's
performance goals to enhance shareholder value which include ROE (minus the
Exclusions) and its P&C combined ratio.

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