In 1997, the Company acquired commercial real estate in Bermuda for the purpose of securing long-term office space for its worldwide headquarters. The development was completed in April 2001. The total cost of this development, including the land, was approximately $125.0 million. The Company also rents space at its other worldwide locations. Total rent expense for the years ended December 31, 2001, 2000 and 1999 was approximately $18.9 million, $18.3 million and $13.0 million, respectively. See Item 8, Note 15(e) to the Consolidated Financial Statements for discussion of the Company's lease commitments.
The selected consolidated financial data below is based upon the Company's fiscal year end of December 31. The selected consolidated financial data should be read in conjunction with the Consolidated Financial Statements and the Notes thereto presented under Item 8.
(2) Net income per share is based on the basic and diluted weighted average number of ordinary shares and ordinary share equivalents outstanding for each period. Net loss per share is based on the basic weighted average number of ordinary shares outstanding.
(3) Cash dividends per share for 1999 and prior years have not been adjusted for the pooling effect of NAC.
(4) The loss and loss expense ratio is calculated by dividing the losses and loss expenses incurred by the net premiums earned for general operations.
(5) The underwriting expense ratio is the sum of acquisition expenses and operating expenses divided by net premiums earned on general operations. Operating expenses relating to the corporate segment and foreign exchange gains and losses have not been included for purposes of calculating the underwriting expense ratio. See Item 8, Note 3 to the Consolidated Financial Statements for further information.
(6) The combined ratio is the sum of the loss and loss expense ratio and the underwriting expense ratio. A combined ratio under 100% represents an underwriting profit and over 100% represents an underwriting loss.
The following is a discussion of the Company's results of operations and financial condition. Certain aspects of the Company's business have loss experience characterized as low frequency and high severity. This may result in volatility in both the Company's results of operations and financial condition.
The Company's results for the year ended December 31, 2001 include the results of Winterthur International with effect from July 1, 2001. The audited financial statements of Winterthur International as at June 30, 2001, on which the final purchase price will be based, are not expected to be completed until later in 2002, at which time any final adjustments will be made. See Item 8, Note 5 to the Consolidated Financial Statements for further information.
Information presented for 1999 is the combination of the results formerly presented by the Company and NAC, as required for a business combination accounted for by the pooling of interests method, which assumes NAC had always been a part of the Company. See Item 8, Note 5 to the Consolidated Financial Statements for further information.
As part of the Company's strategy to expand its life business, the Company assumed a large portfolio of long duration annuity reserves in the fourth quarter of 2001. Life premiums earned are presented separately in the Company's segment results. Life business currently includes life and annuity business that transfers significant mortality and morbidity risks.
As a result of the above, period to period comparisons may not be meaningful.
This discussion and analysis should be read in conjunction with the audited Consolidated Financial Statements and Notes thereto presented under Item 8.
Other significant accounting policies are nevertheless important to an understanding of the Company's Consolidated Financial Statements. Policies such as those related to revenue recognition, financial instruments and consolidation require difficult judgments on complex matters that are often subject to multiple sources of authoritative guidance. Certain of these matters are among topics currently under reexamination by accounting standard setters and regulators. See Item 8, Note 2 to the Consolidated Financial Statements.
The methodology of estimating loss reserves is periodically reviewed to ensure that the assumptions made continue to be appropriate and any adjustments resulting therefrom are reflected in income of the year in which the adjustments are made.
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, financial futures, options and forward currency contracts are carried at fair value, with the corresponding realized and unrealized gains and losses included in net realized gains and losses on derivative instruments.
Intangible assets are carried at estimated fair value, which is typically less than the value based on undiscounted operating earnings. There are many assumptions and estimates underlying fair value. Other assumptions could produce a significantly different result.
Net operating (loss) income (1) ............... $(465,186) $442,932 $370,809 Net realized (losses) gains on investments .... (98,773) 57,939 72,144 Net realized and unrealized (losses) and gains on derivative instruments ............ (12,176) 5,481 27,556 ------------------------------ Net (loss) income ............................. $(576,135) $506,352 $470,509 ============================== (Loss) Earnings per share - basic ............. $ (4.55) $ 4.07 $ 3.69 (Loss) Earnings per share - diluted (2) ....... $ (4.55) $ 4.03 $ 3.62 Weighted average number of ordinary shares and ordinary share equivalents - Basic ..... 126,676 124,503 127,601 Weighted average number of ordinary shares and ordinary share equivalents - Diluted (2) ................................ 126,676 125,697 130,304
(2) Average stock options outstanding have been excluded where anti-dilutive to earnings per share.
Net operating income decreased significantly in 2001 primarily due to net losses arising from the September 11 event. Losses were mainly incurred on the property, aviation, personal accident and business interruption lines. Both the insurance and reinsurance segments were affected by this event. The Company's results for 2001 also
include the effects of terrorist attacks at the World Trade Center in New York City, in Washington, D.C. and in Pennsylvania on September 11, 2001 (collectively, the "September 11 event"). While this loss has been provided for, it is management's best estimate at this time and could change significantly as more information becomes available. See Item 8, Note 4 to the Consolidated Financial Statements.
The following is an analysis of the underwriting profit or loss by segment for the year ended December 31, 2001, first including the effects of the September 11 event and then excluding the effect of the September 11 event (U.S. dollars in thousands):
YEAR ENDED DECEMBER 31, 2001 INCLUDING THE EFFECTS OF THE SEPTEMBER 11 EVENT:
YEAR ENDED DECEMBER 31, 2001 EXCLUDING THE EFFECTS OF THE SEPTEMBER 11 EVENT:
Net loss in 2001 was also affected by significant amount of investment and derivative losses. This is discussed further under " - Investment Activities".
Net income increased in 2000 compared to 1999 due to an increase in net investment income, equity in net income of affiliates and exchange gains and losses. This increase was partially offset by an increase in the underwriting loss. In 2000, the Company incurred after-tax charges of $124.6 million, or $0.98 per share, which included certain reserve adjustments together with employee severance charges and other costs associated with the realignment of the Company's operations and the discontinuation of certain business lines. These charges affected the underwriting results across the Company's insurance and reinsurance segments. In 1999, the Company incurred losses of $125.0 million after-tax, or $0.97 per share, as a result of two major European windstorms in December 1999. In addition, 1999 included an increase to reserves of $95.0 million associated with the merger with NAC.
Basic and diluted earnings per share increased in 2000 as compared to 1999 due to both an increase in net income and a reduction in the weighted average number of shares outstanding. The decrease in the weighted average number of shares outstanding in 2000 is a result of the Company repurchasing 5.1 million shares during the year.
Excluding Winterthur International, net premiums earned increased in the year ended December 31, 2001 over 2000 due to new business written and price increases. This resulted in an increase in net premiums earned from environmental business of $85.0 million, professional lines of $50.0 million and aviation and satellite business of $60.0 million. This was partially offset by decreases in net premiums earned from business discontinued in 2000. Net premiums earned by Winterthur International totaled $353.1 million. Net premiums earned are expected to increase on all lines in 2002 mainly due to the growth in gross premiums written subsequent to September 11 and a full year's results of Winterthur International.
Fee income and other for the year ended December 31, 2001 includes $9.1 million related to Winterthur International for the provision of consulting and administration services for employee benefit plans of unrelated companies. In 2000, fee income and other related primarily to the provision of risk management and other consulting services provided by ECS.
The loss and loss expense ratio in 2000 and 1999 includes the effects of an intercompany stop loss arrangement with a subsidiary in the reinsurance segment. There was no such arrangement in place in 2001. Losses incurred related to this arrangement were $33.5 million and $100.0 million in 2000 and 1999, respectively. Had this arrangement not been in place, the loss and loss expense ratio would have been 64.6% and 45.2% in 2000 and 1999, respectively. The increase in the loss ratio in 2000 over 1999 is due to several factors. In 2000, the Company applied higher loss ratios to certain of its casualty lines written in 2000. These loss ratios have been actuarially estimated and reflect the continued negative impact that competitive market conditions have had on rates for these lines of business written in 2000. There was a reduction of loss reserves in 1999 established on the Company's liability lines due to updated actuarially determined reserve estimates that reflected the favorable development of these lines relating to prior years. Loss reserve adjustments were made in 2000 as discussed previously. Partially offsetting the increases in 2000 were additional reductions in loss reserves related to liability lines written in prior years.
The underwriting expense ratio increased slightly in the year ended December 31, 2001 compared to 2000 due to the reallocation of certain operating expenses from the reinsurance segment to insurance segment and a general expansion of operations. Winterthur International acquisition costs and operating expenses were $47.8 million and $69.8 million, respectively, representing an expense ratio of 33.3%. The expense ratio was reduced by the effect of purchase accounting treatment on the acquisition costs of Winterthur International. Had an historical level of deferred acquisition costs been amortized, the expense ratio for the segment would have been 31.4% in the year ended December 31, 2001. The expense ratio will continue to be affected by this purchase accounting adjustment through the second quarter of 2002.
The net decrease in the underwriting expense ratio in 2000 compared to 1999 was mainly due to the significant increase in net premiums earned year over year and, unlike acquisition costs, operational expenses do not change as a direct cost of net premiums earned. Partially offsetting this decrease is the inclusion of expense charges of $13.9 million related to employee severance and other costs in 2000 associated with the realignment of operations and the discontinuation of certain business lines. Excluding these costs, the underwriting expense ratio in 2000 would have been 27.2%.
The Company also began to write credit default swaps at primary layers in 2001 in this segment. See Item 8, Note 14(a) to the Consolidated Financial Statements.
The following table summarizes the underwriting results for the Lloyd's syndicates (U.S. dollars in thousands):
The small increase in net premiums earned in 2000 over 1999 reflected the growth in business written due principally to an increase in syndicate capacity provided by the Company from approximately 43% to 53%. Partially offsetting this increase is the reduction in net premiums earned related to the motor business that was sold effective December 31, 1999. The Company retains the residual liability on this business. In the years ended December 31, 2000 and 1999, net premiums earned on the motor business were $82.8 million and $135.9 million respectively. In addition, net premiums earned were reduced in 2000 as a result of additional reinsurance costs related to an outwards stop loss reinsurance policy as losses developed for certain lines of business. Coverage provided by this stop loss reinsurance policy was significantly reduced for 2001.
Fee income was generated by the Company's Lloyd's managing agencies and may, depending upon underwriting results, earn profit commissions from third party capital providers for syndicates they manage. This income was offset by managing agency operating expenses allocated to these capital providers. Although nominal commissions were received in the year ended December 31, 2001, managing agency expenses exceeded fee income and commissions for 2001 and 2000 due to loss deterioration, consistent with the Lloyd's market. As a result of the change in capacity as previously noted, less expense will be allocated to the third party capital providers in 2002.
The exchange loss in 2001 was due to the decrease in the U.K. sterling exchange rate against the U.S. dollar applied to net monetary assets denominated in U.K. sterling. Conversely, in 2000 and 1999, the exchange rate moved in the opposite direction.
Underwriting results for the year ended December 31, 2001 were significantly affected by the September 11 event. Net premiums earned in 2001 increased over 2000 due to additional premiums earned in 2001, primarily on property lines, from increased premium rates and new business written. This was partially offset by approximately $120.4 million of net reinstatement premiums resulting from the September 11 event. Net premiums earned are expected to grow in 2002 due to continuing premium rate increases and the consolidation of the results of Le Mans Re, in which the Company increased its ownership to 67% effective January 1, 2002.
The increase in net premiums earned in 2000 as compared to 1999 was mainly a result of an increase in net premiums written across most lines of business. In 2000, the Company had experienced some premium rate increases in the other property, marine, aviation and satellite lines of business. Pricing remained generally unchanged in the international property, excluding property catastrophe, and liability lines of business written by the Company. Partially offsetting this increase in net premiums earned was an increase in reinsurance costs incurred in 2000 over 1999, primarily relating to stop loss reinsurance policies where additional premiums became due once losses exceed certain levels.
Life premiums earned included $549.3 million related to a large contract consisting of long duration annuity reserves assumed in the fourth quarter of 2001. While the Company expects to write more of these contracts, the frequency of these transactions will likely be irregular. The remaining life premiums earned related to smaller contracts of a similar nature.
The vast majority of financial guaranty coverage that is written in swap form pertains to tranches of collateralized debt obligations and asset backed securities, particularly the higher rated tranches with 91% covering A to AAA
tranches. As at December 31, 2001, the financial guaranty operations executed credit default swaps with a par insured of $7.9 billion. Since most of the transactions tend to be unique and there is no traded market or any intention to sell such exposures, the Company marks such transactions to market by modeling its exposures and creating indices by using proxies of the spreads on similar categories of exposures. In the third and fourth quarters of 2001, spreads widened considerably causing a mark to market net unrealized loss of $41.6 million, included in net realized and unrealized gains and losses on derivative instruments. Credit downgrades or upgrades are included in the calculation of fair value. The model requires significant judgments to be made by management and is sensitive to changes in market conditions, particularly credit spreads.
The following table presents the underwriting ratios for the financial products and services segment:
Loss and loss expense ratio .............. 41.6% 25.8% 25.2% Underwriting expense ratio ............... 98.6% 131.9% 88.4% ------------------------------ Combined ratio ........................... 140.2% 157.7% 113.6% ==============================
In 2002, the Company expects to begin underwriting business-owned life insurance and funding agreements as well as issuing municipal guaranteed investment contracts as part of the Company's strategy to expand its life business.
(1) Excludes unrealized losses from changes in fair value of credit default swaps, discussed in the insurance operations excluding Lloyd's syndicates and financial products and services segments. For a summary of realized and unrealized gains and losses on derivative instruments and weather risk management products, see Item 8, Note 14 to the Consolidated Financial Statements.
External investment professionals manage the Company's portfolio under the direction of the Company's management in accordance with detailed investment guidelines provided by the Company.
Company also acquired the net assets of Winterthur International from July 1, 2001, increasing the Company's investment assets by $1.4 billion. In addition, in November 2001, the Company issued 9.2 million shares for net proceeds of $787.7 million. The effect of the higher investment base was offset by decreases in the general interest rate levels as a result of the lowering of rates by the Federal Reserve Bank through 2001. Investment income is not expected to increase significantly in 2002 from the increased premium flows, due to payments expected to be made with respect to the September 11 event and to the continued low level of investment rates. See further discussion in " - Financial Condition and Liquidity".
Assets related to deposit liabilities are included in investments available for sale. Interest earned on deposit liability assets is reduced by the investment expense related to the accretion of deposit liabilities. See further discussion in Item 8, Note 6 and Note 11 to the Consolidated Financial Statements.
The investment base for 2000 declined as compared to 1999 as a result of claims payments, the repurchase of the Company's shares and the reallocation of assets to other strategic investments. The balance at December 31, 2000 included the reinvestment of investment income and realized gains, and the receipt of assets related to the loss portfolio transfers. These receipts were also offset by the transfer of assets to limited partnerships and affiliate investments. However, investment yields were higher in 2000 compared to 1999, which together with additional income derived from the asset accumulation business, resulted in higher net investment income.
Net realized losses on investments in 2001 included losses related to a write-down of certain of the Company's fixed income and equity securities available for sale of $66.4 million and certain other investments of $49.1 million, in circumstances where the Company believed there was an other than temporary decline in the value of those investments. To determine whether an investment has experienced an other than temporary decline, the Company applies the methodology as described in Item 8, Note 2(f) to the Consolidated Financial Statements. As at December 31, 2001 and 2000, total investments available for sale and cash, net of the payable for investments purchased, were $13.0 billion and $9.1 billion, respectively.
Consolidated Balance Sheets as at December 31, 2001 and 2000 ................ 46 Consolidated Statements of Income and Comprehensive income for the years ended December 31, 2001, 2000 and 1999 ..................... 47 Consolidated Statements of Shareholders' Equity for the years ended December 31, 2001, 2000 and 1999 ......................................... 48 Consolidated Statements of Cash Flows for the years ended December 31, 2001, 2000 and 1999 ......................................... 49 Notes to Consolidated Financial Statements for the years ended December 31, 2001, 2000 and 1999 ......................................... 50
XL CAPITAL LTD CONSOLIDATED BALANCE SHEETS AS AT DECEMBER 31, 2001 AND 2000 (U.S. dollars in thousands, except share amounts)
Shareholders' Equity: Authorized, 999,990,000 Class A ordinary shares, par value $0.01 Issued and outstanding: (2001, 134,734,491; 2000, 125,020,676) ............................. $ 1,347 $ 1,250 Contributed surplus .................................. 3,378,549 2,497,416 Accumulated other comprehensive loss ................. (213,013) (104,712) Deferred compensation ................................ (27,177) (17,727) Retained earnings .................................... 2,297,478 3,197,441 ------------ ----------- Total shareholders' equity ..................... $5,437,184 $5,573,668 ------------ ----------- Total liabilities and shareholders' equity ..... $27,963,075 $16,941,952 ============ ===========
XL CAPITAL LTD CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 (U.S. dollars in thousands, except per share amounts)
2001 2000 1999 ------------------------------------ ORDINARY SHARES: Balance - beginning of year ............ $ 1,250 $ 1,278 $ 1,287 Issue of shares ........................ 94 -- 1 Exercise of stock options .............. 18 23 5 Repurchase of shares ................... (15) (51) (15) ------------------------------------ Balance - end of year .............. 1,347 1,250 1,278 ------------------------------------ CONTRIBUTED SURPLUS: Balance - beginning of year ............ 2,497,416 2,520,136 2,508,062 Issue of shares ........................ 808,916 2,652 15,951 Exercise of stock options .............. 103,135 74,538 11,711 Repurchase of shares ................... (30,918) (99,910) (15,588) ------------------------------------ Balance - end of year .............. 3,378,549 2,497,416 2,520,136 ------------------------------------
ACCUMULATED OTHER COMPREHENSIVE (LOSS) INCOME: Balance - beginning of year ............ (104,712) 19,311 235,185 Net change in unrealized gains on investment portfolio, net of tax ..... (72,272) (112,031) (213,482) Net change in unrealized gains on investment portfolio of affiliate .... 1,268 (6,290) 1,640 Currency translation adjustments ....... (37,297) (5,702) (4,032) ------------------------------------ Balance - end of year .............. (213,013) (104,712) 19,311 ------------------------------------
XL CAPITAL LTD CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 (U.S. dollars in thousands)
XL Re Ltd, formerly XL Mid Ocean Re, was organized under the laws of Bermuda in 1992 initially to write property catastrophe reinsurance following a reduction in market capacity due to the effects of severe hurricanes that struck the southeastern United States in the late 1980s and early 1990s.
XL London Market, formerly XL Brockbank which comprised both Brockbank and Denham Syndicate Management Limited, is organized under the laws of the U.K. and is a leading Lloyd's managing agency that provides underwriting and similar services to four Lloyd's syndicates. The Company provides 100% of the capacity for two of these syndicates. These syndicates underwrite property, marine and energy, aviation, satellite, professional indemnity and other specialty lines of insurance and reinsurance to a global client base.
These consolidated financial statements include the accounts of the Company and all of its subsidiaries and have been prepared in accordance with U.S. GAAP ("GAAP"). Effective July 1, 2001, they include the acquired Winterthur International operations under the purchase method of accounting, described in Note 5. The consolidated financial statements also include the merger with NAC, which occurred in June 1999, and which has been accounted for as a pooling of interests. Results of operations, statements of position and cash flows include NAC as though it had always been a part of the Company. 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. These estimates and assumptions include the loss events of September 11, 2001, described in Note 4. Actual results could differ from these estimates.
Premiums written are recorded in accordance with the terms of the underlying policies. Reinsurance premiums written are recorded at the inception of the policy and are estimated based upon information received from ceding companies and any subsequent differences arising on such estimates are recorded in the period they are determined. Financial guaranty installment premiums are recorded as premiums written when reported. Premiums are earned on a monthly pro-rata basis over the period the coverage is provided. Financial guaranty insurance premiums are earned over the life of the exposure. Unearned premiums represent the portion of premiums written applicable to the unexpired terms of policies in force. Net premiums earned are presented after deductions for reinsurance ceded to other insurance companies.
Fee income and other includes fees earned for insurance related services provided and is earned over the service period of the contract. Any adjustments to fees earned or the service period are reflected in income in the period when determined. Fee income and other also includes changes in the fair value of weather risk management products, as discussed in Note 2(e).
The Financial Accounting Standards Board issued FAS 133, "Accounting for Derivative Instruments and Hedging Activities" 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. Non-exchange traded weather products are not covered by FAS 133, however they are also recorded at fair value. The Company adopted FAS 133, as amended, as of January 1, 2001. The Company conducts activities in three main types of instruments: credit default swap derivatives, weather risk management products and investment related derivative instruments. There was no significant impact from the adoption of FAS 133. See Note 14 for further information on these derivative instruments.
The Company considers credit default swaps to be, in substance, financial guaranty contracts as the Company intends to hold them to maturity. Fair value is determined using a model developed by the Company and is dependent upon a number of factors including changes in interest rates, credit spreads, changes in credit quality and other market factors. The change in fair value in a period is split between premiums, net losses and loss expenses, and net realized and unrealized gains and losses on derivative instruments. The change resulting from movements in credit and quality spreads is unrealized as the credit default swaps are not traded to realize this value and is included in net realized and unrealized gains and losses on derivative instruments. Other elements of the change in fair value are based upon pricing established at the inception of the contract. Prior to the adoption of FAS 133, the net premiums earned and loss and loss expenses were included in fee income and other.
Weather risk management products are recorded at fair value with the changes in fair value included in fee income and other. Fair value is determined using a quantitative analytical model developed by the Company and is dependent upon a number of factors including, among others, realized weather results, forecasted weather conditions, changes in interest rates and other market factors.
XL CAPITAL LTD NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (U.S. dollars in thousands, except per share amounts)
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, financial futures, options and forward currency contracts are carried at fair value, with the corresponding realized and unrealized gains and losses included in net realized and unrealized gains and losses on derivative instruments.
Short-term investments comprise investments with a maturity equal to or greater than 90 days but less than one year. Equity securities include investments in open end mutual funds. All investment transactions are recorded on a trade date basis. Realized gains and losses on sales of equities and fixed income investments are determined on the basis of average cost and amortized cost, respectively. Investment income is recognized when earned and includes interest and dividend income together with the amortization of premium and discount on fixed maturities and short-term investments.
Assets and liabilities of foreign operations whose functional currency is not the U.S. dollar are translated at year end exchange rates. Revenue and expenses of such foreign operations are translated at average exchange rates during the year. The effect of the translation adjustments for foreign operations, net of applicable deferred income taxes, is included in accumulated other comprehensive loss.
Intangible assets primarily represent goodwill recorded in connection with the Company's business combinations and are amortized on a straight-line basis over the expected life of the related operations acquired, not exceeding 40 years. The Company evaluates the recoverability of its intangible assets whenever changes in circumstances warrant. If it is determined that an impairment exists, the excess of the unamortized balance over the fair value of the intangible asset will be charged to income at that time. See Note 2(t) for further information.
The Company utilizes the asset and liability method of accounting for income taxes. Under this method, deferred income taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. A valuation allowance is established for any portion of a deferred tax asset that management believes will not be realized.
The Company accounts for its investments in and relationships with special purpose vehicles in accordance with GAAP. The Company considers several factors to determine whether effective control exists. These factors include, but are not limited to, the initial equity investment made in the vehicle, the degree of exposure to the risks of the underlying assets and liabilities of the vehicle and the potential to benefit from the rewards. Those special purpose vehicles that the Company deems necessary to consolidate are accounted for in accordance with the accounting policy for subsidiaries in Note 2(a). Those which the Company does not consider should be consolidated are accounted for in accordance with the terms of the transactions and contractual agreements in place.
GAAP is potentially subject to change during 2002 and this accounting policy will be amended if necessary. See Note 15(a) to the Consolidated Financial Statements for further discussion.
Fair values of certain assets and liabilities are based on published market values, if available, or estimates of fair values of similar issues.
The Financial Accounting Standards Board issued FAS 141, "Business Combinations," and FAS 142, "Goodwill and Other Intangible Assets," in July 2001. The Company has adopted these standards for the acquisition of Winterthur International. FAS 141 addresses financial accounting and reporting for the acquisition of other companies and is applicable for new transactions effective after June 30, 2001. For previous transactions, this standard is effective for fiscal years beginning after December 15, 2001. FAS 142 addresses financial accounting and reporting for goodwill and other intangible assets both upon acquisition and after these assets have initially been recognized in the financial statements. The Company has commenced an initial assessment of the effect of the adoption of FAS 142 for goodwill, excluding Winterthur International, and will continue this assessment in accordance with the standard. Amortization expense may reduce in 2002 and future periods, however the assessment of any required impairment charge has not yet been completed.
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 customs bonds, surety, political risk and specialty lines.
(1) Ratios are based on net premiums earned, excluding fee income and other. The underwriting expense ratio excludes exchange gains and losses.
(4) Corporate operating expenses include charges of $45.3 million related to the merger with NAC.
Casualty ................................. $1,699,460 $1,127,551 $ 779,291 Property ................................. 1,276,075 728,212 572,038 Marine, energy, aviation and satellite ... 510,291 365,850 212,452 Lloyd's syndicates (1) ................... 693,016 486,640 591,520 Other (2) ................................ 604,880 420,778 287,619 ------------------------------------ Total .................................... $4,783,722 $3,129,031 $2,442,920 ====================================
Casualty ................................. $1,073,474 $ 723,062 $ 651,614 Property ................................. 546,575 537,037 440,175 Marine, energy, aviation and satellite ... 310,197 230,356 152,783 Lloyd's syndicates (1) ................... 537,614 311,814 423,880 Other (2) ................................ 460,566 313,971 233,431 ------------------------------------ Total .................................... $2,928,426 $2,116,240 $1,901,883 ====================================
Casualty ................................. $1,017,565 $ 749,105 $ 604,455 Property ................................. 624,644 467,165 457,991 Marine, energy, aviation and satellite ... 287,387 212,273 163,112 Lloyd's syndicates (1) ................... 481,307 357,824 355,769 Other (2) ................................ 369,024 248,873 168,679 ------------------------------------ Total .................................... $2,779,927 $2,035,240 $1,750,006 ====================================
Bermuda .................................. $ 667,760 $ 609,609 $ 561,750 United States ............................ 1,277,668 934,110 684,468 Europe and other ......................... 982,998 572,521 655,665 ------------------------------------ Total .................................... $2,928,426 $2,116,240 $1,901,883 ====================================
Terrorist attacks at the World Trade Center in New York City, in Washington, D.C. and in Pennsylvania on September 11, 2001 (collectively, "the September 11 event") are estimated to have caused the largest ever man-made insured losses for the property and casualty insurance industry. The Company has exposure to this event with claims expected to arise mainly from its aviation, property, personal accident and business interruption insurance and reinsurance coverages.
This process was complicated in the reinsurance operations where the Company is not a direct insurer. Potential losses on certain business lines were easily estimated, such as aviation and direct property catastrophe. Estimates related to the retrocessional book of business were more difficult to ascertain due to the inherent nature of determining the effect from losses arising on the underlying contracts.
The amount of reinsurance recoveries was calculated in accordance with underlying reinsurance contract terms and management believes that the credit rating of the relevant reinsurers continues to provide confidence in ultimate recoverability of these balances.
The Company estimates losses incurred of approximately $760.0 million, net of reinsurance recoveries, based on preliminary reports and estimates of loss and damage. This is management's best estimate at this time, however, it could change as more information becomes available. The following is an analysis of the impact on the Company's segments and total results of operations from the September 11 event for the year ended December 31, 2001:
Premiums written, ceded and earned related to reinstatement and adjustment premiums that are typically received and paid when a catastrophic event occurs. The premium is paid to reinstate coverage for the remaining life of the contract. Net losses and loss expenses comprise gross claims of $1.9 billion with estimated reinsurance recoveries of $1.1 billion, both excluding Winterthur International, discussed below. Approximately 96% of the relevant reinsurers currently fall into Standard & Poor's financial strength rating categories or equivalent of A or better, with approximately 65% rated AA or better.
Winterthur International incurred gross losses of $321.0 million related to the September 11 event, which the Company expects to recover from third-party reinsurers or under the net loss reserve seasoning mechanism in the Sale and Purchase Agreement (defined in Note 5), or a combination of the two. These losses related to business written by Winterthur International prior to July 1, 2001.
The fair value adjustment estimate consists of two components: (i) discounting the net loss reserves and unearned premium reserves to present value using a risk-free rate of return, net of deferred taxes, and (ii) developing an expense, profit and risk margin for the acquired reserves based on management's estimate of current market pricing and the terms in the Sale and Purchase Agreement.
The fair value of significant assets and liabilities acquired by the Company include $0.2 billion of cash, $1.2 billion of invested assets, $1.1 billion of premiums receivable, $1.3 billion of unpaid losses and loss expenses recoverable, $2.6 billion of unpaid losses and loss expenses, $513.0 million of unearned premiums and $391.9 million of reinsurance balances payable.
The Company has made a preliminary estimate of the value of intangible assets acquired and estimates that $14.7 million relates to insurance licenses and sales force, which have an indefinite life and are not therefore subject to amortization. The remaining $15.1 million relates to the value of business in force, which is estimated to have a finite life of up to five years and is being amortized over that period.
The pro forma financial information is based upon information currently available and certain assumptions that the Company's management believes are reasonable. The financial information of Winterthur International for both periods presented is taken from the financial statements of the seller and were prepared on a GAAP basis for the first time. The pro forma financial information does not purport to represent what the Company's results of operations or financial condition would have been had the transaction occurred on such dates or to project the Company's results of operations or financial condition for any future period or date. The pro forma financial information necessarily does not give effect to any changes in underwriting, reinsurance, investment policies or other practices that are or may be instituted post-closing. In addition, they also do not give effect to any integration of the Winterthur International operations with certain insurance operations of the Company. As a result of the above, the pro forma financial information should be reviewed with caution and undue reliance should not be placed on such information.
On June 18, 1999, the Company merged with NAC in an all-stock transaction. Shareholders of NAC received 0.915 Company shares for each NAC share in a tax-free exchange. Approximately 16.9 million of the Company's ordinary shares were issued in this transaction. The merger transaction was accounted for as a pooling of interests under GAAP.
Following the merger, the Company changed its fiscal year end from November 30 to December 31 as a conforming pooling adjustment. No adjustments were necessary to conform NAC's accounting policies, although certain reclassifications were made to the NAC financial statements to conform to the Company's presentation. NAC was renamed XL America Inc.
In 1999, the Company acquired ECS, an underwriting manager that specializes in environmental insurance coverages and risk management services. ECS commenced underwriting policies on behalf of the Company's insurance and reinsurance subsidiaries effective January 1, 2000.
In 1999, the Company acquired Intercargo, which underwrites specialty insurance products for companies engaged in international trade, including customs bonds and marine cargo insurance. The Intercargo and ECS acquisitions were accounted for under the purchase method of accounting. The combined purchase price was $222.8 million and the resulting goodwill of $159.6 million is being amortized over 20 years. Net cash acquired as a result of the acquisition was $49.6 million. Intercargo was renamed XL Specialty during 2000.
YEAR ENDED DECEMBER 31 -------------------------------- 2001 2000 1999 -------------------------------- Fixed maturities, short-term investments and cash equivalents ...................... $657,163 $622,826 $552,333 Equity securities ........................... 9,646 10,661 11,835 -------------------------------- Total gross investment income ............ 666,809 633,487 564,168 Accretion charge for deposit liabilities .... 81,686 71,509 14,164 Investment expenses ......................... 22,517 19,478 24,686 -------------------------------- Net investment income ....................... $562,606 $542,500 $525,318 ================================
Included in cash and invested assets at December 31, 2001 and 2000 are approximately $14.8 million and $18.0 million, respectively, of assets held in an escrow account in accordance with Internal Revenue Service regulations.
The Company's investment in affiliates and equity in net income from such affiliates are summarized below:
The Company's significant insurance affiliate investments at December 31, 2001 and 2000 include Le Mans Re, Annuity & Life Re and FSA International, with ownership in those entities at 49%, 12% and 20%, respectively. Insurance affiliates included Risk Capital Holdings at December 31, 1999. See Note 25 for further discussion of the Company's investment in Le Mans Re.
In certain investments, the carrying value is different from the underlying share of the investee's net assets. The difference represents goodwill on acquisition that is being amortized over a period not exceeding 30 years.
Other investments include strategic investments over which the Company does not have significant influence and whose fair value is generally unquoted. This includes investments in limited partnerships where the Company does not participate in the management of the partnerships. The Company received income from its limited partnership investments of $5.8 million and $4.0 million for the years ended December 31, 2001 and 2000, respectively. See Note 15(d) for further information.
The Company continually reviews the performance of these other investments. The Company recorded losses of $49.1 million and $66.2 million in 2001 and 2000, respectively, due to other than temporary declines in values of these investments. Included in the Company's other investments at December 31, 2001 is a convertible debenture issued by Mutual Risk Management Ltd carried at $63.2 million. Although the market value of Mutual Risk Management has declined significantly, the Company has assessed the value of the debenture and, due to underlying security features, believes there is no impairment.
Certain aspects of the Company's business has loss experience characterized as low frequency but high severity in nature. This may result in volatility in the Company's results of operations and financial condition and liquidity. Actuarial assumptions used to establish the liability for losses and loss expenses are periodically adjusted to reflect comparisons to actual loss and loss expense development, inflation and other considerations.
1999 incurred losses also included an increase to casualty reinsurance loss reserves of $95.0 million related to an alignment of reserving methodologies at the time of the merger with NAC in June 1999.
Net loss reserves acquired in 2001 related primarily to the acquisition of Winterthur International. The Company has contractual post-closing protection with respect to adverse development of reserves, including unearned premium reserves, resulting from Winterthur International business written prior to July 1, 2001. Business in force at June 30, 2001 carries a maximum exposure to a combined ratio of 105%. Exchange rate effects on net loss reserves in 2001 also related primarily to Winterthur International which has several operations where the functional currency is not the U.S dollar. Translation of loss reserves into U.S. dollars and movements in the exchange rates, particularly the Swiss franc, have given rise to the increase in the exchange rate effects in 2001.
Higher paid losses in 2000 as compared to 1999 was due to the settlement of previously established reserves, particularly catastrophe losses as noted above.
The Company's reserving process includes a continuing evaluation of the potential impact on unpaid liabilities from exposure to asbestos and environmental claims, including related loss adjustment expenses. Liabilities are established to cover both known and incurred but not reported claims.
The Company utilizes reinsurance and retrocession agreements principally to increase aggregate capacity and to reduce the risk of loss on business assumed. The Company's reinsurance and retrocession agreements provide for recovery of a portion of losses and loss expenses from reinsurers and reinsurance recoverables are recorded as assets. The Company is liable if the reinsurers are unable to satisfy their obligations under the agreements. Under the Company's reinsurance security policy, reinsurers are generally required to be rated A or better by Standard & Poor's ("S&P") or, in the case of Lloyd's syndicates, S&P "Four Bells" and/or B+ from Moody's Investor Service. The Company's Chief Credit Officer will consider reinsurers that are not rated or do not fall within the above rating categories on a case-by-case basis.
The Company recorded reinsurance recoveries on losses and loss expenses incurred of $3.0 billion, $1.1 billion and $390.9 million for the years ended December 31, 2001, 2000 and 1999, respectively. The Company is the beneficiary of letters of credit, trust accounts and funds withheld in the aggregate amount of $1.3 billion at December 31, 2001, collateralizing reinsurance recoverables with respect to certain retrocessionnaires.
Unpaid losses and loss expenses recoverable increased significantly during 2001 primarily due to the acquisition of Winterthur International and the September 11 event. See Notes 4 and 5 for further information. No reinsurer accounted for 10% or more of the outstanding reinsurance recoverable balance at December 31, 2001. At December 31, 2001, the largest reinsurance balance receivable and unpaid loss recoverable from a single reinsurer was $355.2 million due from Hannover Re (Ireland) Ltd, and $79.1 million from their affiliate, E+S Reinsurance (Ireland), Ltd, which are both rated A+ by A.M. Best.
The Company has entered into certain contracts that transfer insufficient risk to be accounted for as insurance or reinsurance. These contracts have been recorded as deposit liabilities and are matched by an equivalent amount of investments. At December 31, 2001 and 2000, total deposit liabilities were $1.7 billion and $1.2 million, respectively.
IN USE/ FACILITY COMMITMENT OUTSTANDING ----------------------- DEBT: 364-day Revolver ................................. $ 500,000 $ -- 2 facilities of 5 year Revolvers - total ......... 350,000 350,000 7.15% Senior Notes due 2005 ...................... 100,000 99,964 Other operating debt ............................. 68 68 ----------------------- $ 950,068 $ 450,032 ======================= LETTERS OF CREDIT: 5 facilities - total $1,679,000 $1,109,000 =======================
The Company entered into a $500.0 million 364-day revolving credit facility effective June 29, 2001, to replace a facility of $500.0 million that expired during 2001. A syndicate of banks provides this facility and borrowings are unsecured. The Company borrowed and repaid $200.0 million under a prior facility during the first quarter of 2000. The Company borrowed $50.0 million under the expired facility in March 2001 and repaid the borrowing in April 2001. There were no other borrowings under the facilities during the remainder of 2001. The weighted average interest rate on the funds borrowed during 2001 and 2000 was approximately 5.4% and 6.3%, respectively.
In September 2001, the Company also issued $508.8 million principal amount at maturity (subject to adjustment in the event there is an upward interest adjustment) of Liquid Yield Option Notes(TM) ("LYONs") at an initial price of $565.01 per bond. The LYONs will also be repaid at $1,000 each, unless converted or repaid before their due date of September 2021, at a total cost of $508.8 million. The accretion rate on the LYONs is 2.875% per annum on a semi-annual basis or 2.89566% per annum on an annual basis.
Although both the CARZ and LYONs are due to be repaid in 2021, there are several features that may result in the bonds being repaid or converted into the Company's Class A Ordinary Shares before the redemption date. As these features include market-driven features and options available to the Company and bondholders, it is not possible to determine if the bonds will remain outstanding until their scheduled maturity in 2021
These bonds also provide for interest rates to be adjusted in the event that the Company's stock price falls below levels specified in the relevant indenture relative to the conversion price.
Total pre-tax interest expense on the borrowings described above was $65.4 million, $32.1 million and $37.4 million for the years ended December 31, 2001, 2000 and 1999, respectively. Associated with the Company's bank and loan commitments are various covenants that include, among other things, the requirement to maintain a minimum credit and financial strength rating and a minimum amount of consolidated shareholders' equity. The Company was in compliance with these covenants throughout the three years ended December 31, 2001.
The Company had six letter of credit facilities available at December 31, 2001, two from two syndicates of banks, one from a U.K. bank, two from U.S. banks and one from the seller of Winterthur International. These facilities include a $1.0 billion unsecured syndicated letter of credit facility that replaced a syndicated facility that expired during the year. In addition, the Company entered into a new $390.0 million unsecured syndicated facility that replaced an expired syndicate facility that supports the Company's Lloyd's capital requirements. These facilities are utilized to support non-admitted insurance and reinsurance operations in the U.S. and capital requirements at Lloyd's. All of these facilities are scheduled for renewal during 2002, and the Winterthur International arrangement will also terminate during 2002. Of the letters of credit outstanding at December 31, 2001, $110.0 million (2000: $160.0 million) were collateralized against the Company's investment portfolio and $1.9 billion (2000: $949.0 million) were unsecured. The letters of credit outstanding increased during 2001 due to the effects of the September 11 event.
The Company enters into derivative instruments for both risk management and trading purposes. The Company is exposed to potential loss from various market risks, including changes in interest rates, foreign currency exchange rates and commodity values, as it relates to the Company's participation in the weather risk management market. The Company manages its market risks based on guidelines established by management. These derivative instruments are carried at fair value with the resulting gains and losses recognized in income in the period in which they occur.
The following table summarizes these instruments and the effect on net income in income in the years ended December 31, 2001, 2000 and 1999:
The Company fair values transactions related to the primary layers of credit default swaps using a model that calculates the net present value of the premiums and expected losses. The change in fair value recorded for transactions pertaining to primary layers as of December 31, 2001 was a gain of $8.1 million.
Credit default swaps where the Company participates in the rated tranche are considered, in substance, financial guaranty transactions as the Company intends to hold them to maturity. Since the Company underwrites all financial guaranty transactions in the expectation of not incurring a loss, the net present value method described above is not considered appropriate. The rated tranches are therefore fair valued using changes in credit spreads to reflect current market conditions. The Company will also consider the characteristics and credit ratings of the
underlying portfolio in order to apply the model to obtain an estimate of fair value. The change in fair value recorded for the rated tranches as of December 31, 2001 was a loss of $27.5 million. In accordance with FAS 133, the Company recorded a transition adjustment to recognize the difference between the carrying values and the fair values of the credit default swaps at January 1, 2001. This adjustment was not significant.
The Company maintains a weather related derivatives trading portfolio. The fair value of these transactions is determined using internally developed models. The models used to determine these fair values are consistent with the models used to estimate the Company's Value-at-Risk ("VaR") exposure to weather risk. The VaR methodology is a comprehensive statistical measure that uses historical weather results to calculate the potential losses that could occur over a defined period of time given a certain probability. Currently, the Company believes that the methodology utilized is appropriate based upon a comparison with the VaR approaches used in other markets.
The Company uses foreign exchange contracts to manage its exposure to the effects of fluctuating foreign currencies on the value of certain of its foreign currency fixed maturities and equity investments. These contracts are not designated as specific 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 December 31, 2001 and 2000, forward foreign exchange contracts with notional principal amounts totaling $45.5 million and $166.8 million, respectively were outstanding. The fair value of these contracts as at December 31, 2001 and 2000 was $45.7 million and $164.5 million, respectively, with unrealized gains of $0.1 million in 2001 and unrealized losses of $2.3 million in 2000. For the years ended December 31, 2001 and 2000, realized gains of $5.3 million and $48.3 million, respectively, and unrealized gains of $2.3 million and unrealized losses of $4.3 million, respectively, were recorded in net realized and unrealized gains and losses on derivative instruments.
Until 2001, the Company attempted to hedge directly the foreign currency exposure of a portion of its foreign currency fixed maturity investments using forward foreign exchange contracts that generally had maturities of three months or less, and which were rolled over to provide continuing coverage for as long as the investments were held. Where an investment was sold, the related foreign exchange sale contract was closed by entering in to an offsetting purchase contract. At December 31, 2000, the Company had, as hedges, foreign exchange contracts for the sale of $121.0 million and the purchase of $25.7 million of foreign currencies at fixed rates, primarily Euros. The notional value of fixed maturities denominated in foreign currencies that were hedged and held by the Company as at December 31, 2000 was $100.6 million. In connection with these foreign exchange contracts directly hedging foreign currency fixed maturity investments, unrealized foreign exchange gains or losses were deferred and included in accumulated other comprehensive loss. As at December 31, 2000, unrealized losses amounted to $10.2 million and realized losses totaled $0.7 million. Since 2000, contracts the Company enters into are not designated as specific hedges, and consequently all realized and unrealized gains and losses are recorded in income in the period in which they occur.
The Company entered into a treasury rate lock agreement with the underwriters of the 6.58% Guaranteed Senior Notes due 2011. The Notes were priced using a margin over the yield of a U.S. Treasury note with a similar maturity. The treasury rate lock agreement was designed to eliminate underlying pricing risk of the Company's debt that would have resulted from an increase in the yield of the comparable U.S. Treasury issue between the initiation of the transaction and the pricing of the transaction. A loss of $5.6 million was realized and recorded in net realized and unrealized gains and losses on derivative instruments in the year ended December 31, 2001 related to this treasury rate lock agreement.
The Company created XL Capital Finance (Europe) plc to facilitate the January 2002 issue of 6.5% Guaranteed Senior Notes in January 2002. This special purpose vehicle is wholly-owned and will be consolidated in the Company's consolidated financial statements.
terparties under credit default swaps. At December 31, 2001, the Company's net aggregate insurance in force was $29.0 billion. The range of maturity of the insured obligations is one to thirty five years.
The Company does not record a carrying value for future installment premiums as they are recognized over the term of the contract. The present value of future installment premiums discounted at 7% is $205.9 million at December 31, 2001.
The Company manages its exposures to underwriting risk on these transactions through a structured process which includes but is not limited to detailed credit analysis, review of and adherence to underwriting guidelines and the use of reinsurance. The Company has also implemented surveillance policies and procedures to monitor its exposure throughout the life of the transactions. In addition, the structure of the transactions are such that the insured obligation is backed by a stream of cash flows, pools of assets or some other form of collateral. This collateral would typically become the Company's upon the payment of a claim by the Company.
The areas where significant concentrations of credit risk may exist include unpaid losses and loss expenses recoverable and reinsurance balances receivable (collectively "reinsurance assets"), investments and cash and cash equivalent balances. The Company's reinsurance assets at December 31, 2001 amounted to $6.3 billion and resulted from reinsurance arrangements in the course of its operations. A credit exposure exists with respect to reinsurance assets as they may be uncollectible. The Company manages its credit risk in its reinsurance relationships by transacting with reinsurers that it considers financially sound, and if necessary, the Company may hold collateral in the form of funds, trust accounts and/or irrevocable letters of credit. This collateral can be drawn on for amounts that remain unpaid beyond specified time periods on an individual reinsurer basis. See Note 10 for further information.
In addition, the Company underwrites a significant amount of its business through brokers and a credit risk exists should any of these brokers be unable to fulfill their contractual obligations with respect to the payments of insurance and reinsurance balances to the Company. During 2001, 2000 and 1999, approximately 23%, 22% and 21%, respectively, of the Company's consolidated gross written premiums from general operations were generated from or placed by Marsh & McLennan Companies. During 2001, 2000 and 1999, approximately 16%, 16% and 13%, respectively, of the Company's consolidated gross written premiums from general operations were generated from or placed by AON Corporation and its subsidiaries. Both of these companies are large, well established companies and there are no indications that either of them is financially troubled. No other broker and no one insured or reinsured accounted for more than 10% of gross premiums written from general operations in each of the three years ended December 31, 2001.
The Company has committed to invest in several limited partnerships as part of its overall corporate strategy. The primary purpose of these partnerships is to invest capital provided by the partners in various insurance and reinsurance ventures. The Company had invested $163.3 million and $103.0 million as at December 31, 2001 and 2000, respectively, with commitments to invest a further $144.8 million over the next ten years. The Company does not actively participate in the management of the partnerships.
The authorized share capital is 999,990,000 ordinary shares of a par value of $0.01 each. Holders of Class A ordinary shares are entitled to one vote for each share. In June 2000, the Company's Class B ordinary shares were converted into Class A ordinary shares on a one-for-one basis. All shares in issue at December 31, 2001 are Class A ordinary shares.
Balance - beginning of year ................ 125,020 127,807 128,745 Exercise of options ........................ 1,812 2,247 443 Issue of restricted shares ................. 235 40 107 Repurchase of shares ....................... (1,533) (5,074) (1,488) Issue of shares ............................ 9,200 -- -- ------------------------------- Balance - end of year ...................... 134,734 125,020 127,807 ===============================
The Company has had several stock repurchase plans in the past as part of its capital management program. In June 1999, the Board of Directors rescinded the Company's share repurchase plans. On January 9, 2000, the Board of Directors authorized the repurchase of shares up to $500.0 million. During 2001, the Company repurchased 1.5 million shares at a total cost of $116.9 million, or an average cost of $76.40 per share. During 2000, the Company repurchased 5.1 million shares at a total cost of $247.7 million, or an average cost of $48.82 per share.
The Company has adopted the disclosure-only provisions of Statement of Financial Accounting Standard 123, "Accounting for Stock-Based Compensation." Had the Company adopted the accounting provisions of FAS 123, compensation costs would have been determined based on the fair value of the stock option awards granted in 2001, 2000 and 1999, and net income and earnings per share would have been reduced to the pro-forma amounts indicated below:
Total stock based compensation expensed, which related to amortization of restricted stock, was $10.4 million, $9.5 million and $7.7 million in 2001, 2000 and 1999, respectively.
Rights to purchase Class A ordinary shares ("the Rights") were distributed as a dividend at the rate of one Right for each Class A ordinary share held of record as of the close of business on October 31, 1998. Each Right entitles holders of Class A ordinary shares to buy one ordinary share at an exercise price of $350. The Rights would be exercisable, and would detach from the Class A ordinary shares, only if a person or group were to acquire 20% or more of the Company's outstanding Class A ordinary shares, or were to announce a tender or exchange offer that, if
The Company is not subject to any taxes in the Cayman Islands on either income or capital gains under current Caymans law. The Company has received an undertaking that the Company will be exempted from Cayman Islands income or capital gains taxes until June 2018 in the event of any such taxes being imposed.
The Company's ability to pay dividends is subject to certain regulatory restrictions on the payment of dividends by its subsidiaries. The payment of such dividends is limited by applicable laws and statutory requirements of the jurisdictions the Company operates in, including Bermuda, the U.S. and the U.K., among others. Statutory capital and surplus as reported to relevant regulatory authorities for the principal operating subsidiaries of the Company was as follows:
With the exception of XL Re America, there are no statutory restrictions on the payment of dividends from retained earnings by any of the Company's subsidiaries as applicable minimum levels of solvency and liquidity have been met and all regulatory requirements and licensing rules complied with. At December 31, 2001 and 2000, XL Re America had a statutory earned deficit and is restricted from making a dividend distribution at this time by the New York Insurance Department.
(3) The 5.25% Convertible Subordinated Debentures due 2000 were called in June 1999 and the actual conversion is reflected in 1999.
The aggregate capital commitment of the Partnership is $49.1 million, of which $8.7 million was invested at December 31, 2001. The capital commitment of the general partner is $39.3 million and the capital commitments of the limited partners in the aggregate is $9.8 million.
Effective January 2002, the Company completed the acquisition of a 67% majority shareholding in Le Mans Re, increasing its shareholding from 49% at December 31, 2001. Les Mutuelles du Mans Assurances Group, which previously held 51% of the French reinsurer, will retain a 33% stake in Le Mans Re.
In January 2002, the Company issued $600.0 million par value Guaranteed Senior Notes due January 2012. The Notes were issued at $99.469 and gross proceeds were $596.8 million. The Guaranteed Senior Notes have a coupon of 6.5%. Related expenses of the offering amounted to $7.9 million. Proceeds of the Notes were used to pay down $350.0 million of outstanding revolving credit in February 2002 that would have expired in June 2002, and for general corporate purposes.
In the third quarter of 2001, the Company recorded net losses of approximately $795.9 million after tax due to the September 11 event. In addition, the effect of other loss events, including the Sri Lanka airport attack, Toulouse plant explosion, satellite losses and adverse development in the Company's Lloyd's operations, were $103.7 million after taxes.