Bermuda’s XL Capital Ltd. has completed its reserve review, begun last October, and confirmed that it will take some substantial charges, affecting both fourth quarter and annual results. It plans to raise at least $750 million in new capital to fill the hole.
The company said it expects that its fourth quarter 2003 results will be adversely affected by a pre-tax reserve charge of $694 million, or $647 million after tax, $4.73 per ordinary share after tax. It plans to officially announce the results on February 10, 2004.
The majority of the charge, $663 million pre-tax, is primarily related to adverse development in the Company’s North American reinsurance operations, mostly stemming from its acquisition of NAC Re, for casualty business written during the 1997 through 2001 underwriting years.
President and CEO Brian M. O’Hara explained that the review included an extraordinary claims audit of XL’s North American reinsurance operations “going well beyond our long established processes.” The review was “driven by an acceleration in claims in the third quarter relating to business underwritten during the 1997 to 2001 years.” XL’s third quarter results were impacted by a pretax charge of $184 million.
O’Hara noted that the trend “continued in the fourth quarter, in response to which we have changed the actuarial development patterns that normally would have applied to the expected loss development of this business.”
The bulletin described the following “key components” of the extraordinary claims audit process:
* A special Claims Audit Review (CAR) Task Force was established under Mr. O’Hara’s leadership and included senior management, actuarial and claims operations, global services, treasury, legal and financial reporting resources;
* External resources utilized included project consultants, an international actuarial firm and various third party claims auditors;
* The CAR objectives focused on claims arising from specific treaties covering defined business lines at certain cedents, in order to determine if claims had been adequately reserved, processed and reported;
* In order to make the review as comprehensive as possible, the period under review was extended through 2001;
* The CAR selection process was based upon several criteria designed to promote an appropriate degree of audit coverage where 17 separate cedent audit selections were made representing 28 separate contracts, each with over $1 million of cumulative premium and representing approximately 85 percent of the total premium in the problem classes being reviewed, and 90 percent of the September 30, 2003 year-to-date loss for those underwriting years;
* A small number of cedents accounted for almost 78 percent of the Additional Case Reserves (“ACR”) in the more problematic business lines (D&O and Medical Malpractice), where these cedents had considerable exposure to claims severity; and
* The CAR process produced $124 million in ACR. It also identified other potential additional exposures which, along with information gathered from the ACR process, were incorporated into the actuarial loss development factors in calculating incurred but not reported reserves (“IBNR”). IBNR was increased by $539 million which is included in the fourth quarter charge.
“While we are extremely disappointed by the continued adverse development of losses at XL Reinsurance America Inc. and the financial impact on 2003 results, I firmly believe that we have now put this issue behind us so that we do not expect any adverse affect on our financial results in 2004 and beyond,” O’Hara continued.
The Company also completed its regularly scheduled year-end reserve review resulting in a further net increase to its pre-tax property and casualty reserves of approximately $31 million in the fourth quarter. It noted that the additional increase had three primary components:
1) an increase of $62 million in reserves in XL’s reinsurance segment for losses in the Bermuda and London operations;
2) an increase of $150 million of reserves in its insurance segment primarily related to Bermuda-based professional and liability lines in accident years 1996 through 2001.
3) These were partially offset by the net reduction of $181 million from the Company’s reserves in the reinsurance segment relating to the September 11, 2001 event, primarily due to the high degree of participation by claimants in the statutory Victim Compensation Fund in respect of which the deadline for filing claims was December 22, 2003.
O’Hara also announced: “In order to sustain the appropriate levels of capital for our business, we expect to raise additional capital of at least $750 million in the first half of 2004, principally in the form of mandatory convertible securities.”
Further details will be discussed in detail on a webcast conference call scheduled for 9:00 a.m. EST on Wednesday, January 14, 2004 at www.xlcapital.com.
This call will be archived on XL’s website from approximately 1:00 p.m. EST on January 14, 2004 through midnight EST on February 13, 2004. A telephone replay of the conference call will be available beginning at 1:00 p.m. EST on January 14, 2004 until 8:00 p.m. EST on January 21, 2004 by dialing (201) 612-7415 (account number: 7716 and conference I.D. number: 89172).
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