XL REINSURANCE SEGMENT PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2001 (Expressed in thousands of US Dollars) 2001 Technical account: non-life Gross premiums written Net premiums earned Net losses and loss expenses incurred Acquisition expenses Net underwriting result: non-life Technical account: life Gross premiums written Net premiums earned Net losses and loss expenses incurred Acquisition expenses Net underwriting result: life Total underwriting result Total investment results Other income Operational expenses Goodwill Net income before tax and minority interest Non-life ratios Loss ratio Acquisition expense ratio $ $ 710,001 714,796 711,520 8,316 (5,040) $1,954,029 1,151,699 1,550,016 328,683 $ (727,000)
$ (732,040) 306,317 22,701 92,245 11,740 $ (507,007) 134.6% 28.5%
XL CAPITAL LTD CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2001 (Extracted from Form 10-K) (Expressed in thousands of US Dollars) 2001 Gross premiums written Net premiums earned Net losses and loss expenses incurred Acquisition expenses Net underwriting result Total investment results Other income Operational expenses Goodwill Net income before tax and minority interest Tax and minority interest NET INCOME (LOSS) Ratios Loss ratio Acquisition expense ratio $5,473,302 3,475,522 3,617,573 639,046 $ (781,097) 391,843 106,560 422,673 58,569 $ (763,936) 187,801 $ (576,135) 104.1% 18.4%
XL CAPITAL LTD CONDENSED CONSOLIDATED SHAREHOLDERS’ EQUITY AS AT DECEMBER 31, 2001 (Extracted from Form 10-K) (Expressed in thousands of US Dollars) 2001 Total Shareholders’ Equity $5,437,184
The Condensed Consolidated Statement of Operations and the Condensed Consolidated Statement of Shareholders’ Equity for XL Capital Ltd have been extracted from historical audited financial information as presented in the XL Capital Ltd Form 10-K, prepared in accordance with accounting standards generally accepted in the United States of America. A copy of the XL Capital Ltd Form 10-K can be obtained on request from XL Capital Ltd’s registered office. See accompanying notes
XL REINSURANCE SEGMENT NOTES Basis of preparation The pro forma Condensed Consolidated Statement of Operations for the XL Reinsurance Segment for the year ended December 31, 2001 represents the results of the reinsurance entities owned by XL Capital Ltd. The pro forma information is comprised of the historical information of the XL Reinsurance Segment as presented in the Form 10-K of XL Capital Ltd as at December 31, 2001. Allocations to the XL Reinsurance Segment of certain items included within the historical financial information of XL Capital Ltd as presented in the Form 10-K as at December 31, 2001, together with the historical information of Le Mans Ré on the basis detailed below. The pro forma results therefore include the following entities: • • • • XL Re Ltd XL Re America Inc. XL Re Latin America Ltd 49% investment in Le Mans Ré
The pro forma Condensed Consolidated Statement of Operations for the XL Reinsurance Segment for the year ended December 31, 2001 includes twelve months of results of XL Re Ltd, including its Bermuda operations, London, Australia and Singapore branches, its contact office in Munich and its wholly owned subsidiary NAC Re International (NRI). It also includes the twelve months of results of XL Re Latin America Ltd and XL Re America Inc. The results of the Segment exclude quota share business assumed from and any other business relating to companies within the Insurance Segment of XL Capital Ltd. The results of the Segment also include certain Reinsurance Segment transactions recorded by other US subsidiaries of XL Capital Ltd. The pro forma Condensed Consolidated Statement of Operations for the XL Reinsurance Segment has been derived from historical audited financial information of the XL Reinsurance Segment, prepared in accordance with accounting standards generally accepted in the United States of America and includes all adjustments deemed necessary by management based on the assumptions noted below. The Condensed Consolidated Statement of Operations and the Condensed Consolidated Statement of Shareholders’ Equity for XL Capital Ltd have been extracted from historical audited financial information as presented in the XL Capital Ltd Form 10-K, prepared in accordance with accounting standards generally accepted in the United States of America. The pro forma Condensed Consolidated Statement of Operations should be read in conjunction with related historical financial information. The related historical financial information is incorporated by reference and is available on request from XL Capital Ltd’s registered office. Pro forma adjustments, allocations and assumptions XL Capital Ltd held a 49% interest in Le Mans Ré during the year ended December 31, 2001. However, this interest was not presented as part of the XL Reinsurance Segment in the XL Capital Ltd Form 10-K at December 31, 2001. XL Capital Ltd acquired a 67% ownership in Le Mans Ré with effect from January 1, 2002 and, since that date, the operations of Le Mans Ré have been fully integrated with those of the XL Reinsurance Segment. Pro forma adjustments have been made to the historical financial information referred to above to present that information as if the 49% economic interest in Le Mans Ré for the year ended December 31, 2001 had been part of the XL Reinsurance Segment and fully integrated with its operations with effect from January 1, 2001. This 49% interest is presented on a line-by-line basis. Total investment results for the year ended December 31, 2001 have been allocated to the XL Reinsurance Segment by management based upon the average invested assets held during the year by each legal entity included in the segment. These investment results are included in the total investment results of XL Capital Ltd as presented in the Form 10-K as at December 31, 2001. For the purposes of this pro forma financial information, management of the XL Reinsurance Segment has assumed that XL Re America’s share of the
XL America consolidated investment income and realized investment gains and losses is equal to 69% for the year ended December 31, 2001. This percentage approximates XL Re America’s share of the total consolidated XL America invested assets and cash as at December 31, 2001. XL America is the parent of XL Re America and is itself a wholly-owned subsidiary of XL Capital Ltd. Management of the XL Reinsurance Segment has allocated goodwill amortization charges relating to the purchase of Global Capital Reinsurance Ltd. by XL Capital Ltd in 1997 to the XL Reinsurance Segment for the year ending December 31, 2001. These charges were included in those of XL Capital Ltd in the Form 10K as at December 31, 2001. Operating expenses for the year ended December 31, 2001 include an allocation to the XL Reinsurance Segment of certain corporate operating expenses of XL Capital Ltd as presented in the Form 10-K as at December 31, 2001.
Cautionary Note Regarding Forward-Looking Statements The “XL Re” companies are subsidiaries of XL Capital Ltd which is subject to the reporting requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934. For purposes of this section, XL Capital Ltd and its subsidiaries (including XL Re Ltd, XL Reinsurance America Inc., XL Re Latin America Ltd and Le Mans Ré) are collectively referred to as the “Company”. The Private Securities Litigation Reform Act of 1995 (“PSLRA”) provides a “safe harbor” for forward-looking statements. Any propsectus, prospectus supplement, annual report to Stockholders, proxy statement, Form 10-K, Form 10-Q or Form 8-K of the Company, including any amendments thereto, 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 that are not historical facts or that include the words “expect”, “intend”, “plan”, “believe”, “project”, “anticipate”, “will”, or similar statements of a future or forward-looking nature identify forward-looking statements for purposes of the PSLRA. All forward-looking statements address matters that involve risks and uncertainties. Accordingly, there are or will be important factors that could cause actual results to differ materially from those indicated in such statements. The Company believes that these factors include, but are not limited to, the following: (i) rate increases and improvements in terms and conditions may not be as large or significant as the Company is currently projecting; (ii) the size of the Company's claims may change due to the preliminary nature of reports and estimates of loss and damage, particularly in relation to the attacks in the United States on September 11, 2001; (iii) the timely and full recoverability of reinsurance placed by the Company with third parties; (iv) the projected amount of ceded reinsurance recoverables and the ratings and creditworthiness of reinsurers may change; (v) the timing of claims payments being faster or the receipt of reinsurance recoverables being slower than anticipated by the Company; (vi) ineffectiveness or obsolescence of the Company's business strategy due to changes in current or future market conditions; (vii) increased competition on the basis of pricing, capacity, coverage terms or other factors; (viii) 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; (ix) developments in the world's financial and capital markets which adversely affect the performance of the Company's investments and the Company's access to such markets; (x) the potential impact of U.S. solutions to make available insurance coverage for acts of terrorism; (xi) developments in the Enron Corp. bankruptcy proceedings or other developments related to Enron Corp. insofar as they affect property and casualty insurance and reinsurance coverages; (xii) availability of borrowings and letters of credit under the Company's credit facilities; (xiii) changes in regulation or tax laws applicable to the Company and its subsidiaries, brokers or customers; (xiv) acceptance of the Company's products and services, including new products and services; (xv) changes in the availability, cost or quality of reinsurance; (xvi) changes in the distribution or placement of risks due to increased consolidation of insurance and reinsurance brokers; (xvii) loss of key personnel; (xviii) the effects of mergers, acquisitions and divestitures, including, without limitation, the Winterthur International acquisition; (xix) changes in rating agency policies or practices; (xx) changes in accounting policies or practices; (xxi) legislative or regulatory developments; (xxii) changes in general economic conditions, including inflation, foreign currency exchange rates and other factors; (xxiii) the effects of business disruption or economic contraction due to terrorism or other hostilities; and (xxiv) the other factors set forth in the Company's other documents on file with the SEC. The foregoing review of important factors should not be construed as exhaustive and should be read in conjunction with the other cautionary statements that are included herein or 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
PricewaterhouseCoopers Chartered Accountants Dorchester House 7 Church Street Hamilton Bermuda HM 11 Telephone +1 (441) 295 2000 Facsimile +1 (441) 295 1242
May 6, 2002 Report on examination of pro forma condensed consolidated financial information To the shareholder of XL Re Ltd We have examined the pro forma adjustments reflecting the transactions and assumptions described in the notes and the application of those adjustments to the historical amounts in the assembly of the accompanying pro forma condensed consolidated statement of operations for the XL Reinsurance Segment for the year ended December 31, 2001. The historical amounts were derived from the audited financial information of the XL Reinsurance Segment as included in the Form 10-K of XL Capital Ltd as at December 31, 2001. The historical condensed consolidated statement of shareholders’ equity of XL Capital Ltd as at December 31, 2001 and the historical condensed consolidated statement of operations for the year then ended as presented in the Form 10-K are included herein for reference purposes. The pro forma adjustments and allocations are based upon management’s assumptions described in the notes. Our examination was made in accordance with standards established by the American Institute of Certified Public Accountants and, accordingly, included such procedures as we considered necessary in the circumstances. The objective of this pro forma financial information is to show what the historical financial information of the XL Reinsurance Segment might have been had the transactions and allocations described in the notes occurred at the dates indicated. However, the pro forma financial information is not necessarily indicative of the results of operations or related effects on financial position that would have been attained had the transactions and assumptions described in the notes actually occurred on those dates and for those periods. In our opinion, management’s assumptions provide a reasonable basis for presenting the transactions and allocations described in the notes and the related adjustments give appropriate effect to those assumptions in the pro forma condensed consolidated statement of operations for the year ended December 31, 2001.
Chartered Accountants Hamilton, Bermuda
MAILING ADDRESS: PO BOX HM 1171, Hamilton, Bermuda HM EX. A list of partners can be obtained from the above address