-- Book value per ordinary share increased by 26% to $18.89 at June 30, 2009

-- P&C operations Combined Ratio of 93.0%

-- Total Shareholders' Equity of $7.5 billion, up from $6.1 billion

-- Net income available to ordinary shareholders of $79.9 million or $0.23 per ordinary share

-- Operating income(1) of $162.6 million or $0.47 per ordinary share, or $0.86 per ordinary share, excluding foreign exchange losses

HAMILTON, Bermuda, July 28 /PRNewswire-FirstCall/ -- XL Capital Ltd ("XL" or the "Company") (NYSE: XL) today reported its second quarter 2009 results.

Commenting on the Company's performance, Chief Executive Officer, Michael S. McGavick, said: "Finally! We are pleased to report a quarter in which the strength of the XL franchise shines through clearly, despite challenging market conditions in the sector.

"It is also pleasing to be able to prove that investment portfolio accounting marks can go up as well as down. For the quarter, we are reporting a 26% increase in XL's book value per ordinary share to $18.89 and a 31% increase in tangible book value per ordinary share to $16.41.

"This was another turbulent quarter for foreign exchange markets with the US Dollar reversing some of its strengthening of recent quarters and the overall impact on XL, inclusive of the income statement impact, was a net increase in Shareholders' Equity of $143.7 million after tax. The income statement impact of foreign exchange movements was an after tax loss of $132.6 million and this was the principal contributor to the reduction of net income and operating income from the prior year quarter. Excluding this item, operating income increased from the prior year quarter reflecting the strength of our core business.

"Gross Premiums Written for our P&C operations is down 16% for the quarter year on year, a significant improvement on the trend last quarter and reflecting the month on month improvement that we noted during our first quarter earnings call. This reflects both increased selected new business generation this quarter as well as continued improvements in retention and pricing. Going forward, our recently announced agreement with National Indemnity Company relating to our 'Side A' professional book should further contribute to our new business production.

"Our P&C operations' combined ratio of 93.0% in the second quarter is an improvement over the full year 2008 and only slightly higher than the same quarter last year. This strong result reflects the consistent strength of our underwriting discipline and strong reserve position.

"During the second quarter we continued de-risking our investment portfolio. We have essentially completed the asset sales associated with our fourth quarter restructuring charge and continue transitioning the portfolio to one that is more typical of a P&C focused operation. On a year-to-date basis we have reduced our exposure to more volatile asset classes by $3.5 billion. At June 30, 2009, XL had $17.2 billion of its $32.0 billion fixed income portfolio in cash, government, government related and agency or agency-guaranteed securities.

"XL continues to attract new talent including significant additions to our underwriting teams around the world. We have done this while remaining on track in terms of reducing our underlying operating expense base. Our two previously announced programs in this regard are both on target in terms of cost, savings and timing. We recorded costs of $9.1 million in the quarter in connection with these programs.

"This quarter for XL marks a return to positive growth in shareholder value while we continue to deliver solid operating performance. We are on track with everything we set out to do and the benefits are showing as expected. XL is back to competing from the front foot."

He concluded: "As our results indicate, XL is stable with strong capital, but we are not yet satisfied. We now have the ability to make the franchise great once again by remaining focused on delivering value to shareholders and clients."

    2009 Second Quarter Summary Financial Results
    Three Months Ended June 30
    (US Dollars in thousands except per share amounts)
                                                 (Per Share-Diluted)
                        2009     2008  Change   2009    2008   Change
    Net income       $79,949 $237,851    -66%  $0.23   $1.33      -83%
    Operating income 162,648  266,205    -39%   0.47    1.49      -68%

The Company produced net income for the second quarter of $79.9 million or $0.23 per ordinary share, compared to $237.9 million or $1.33 per ordinary share for the second quarter of 2008. Operating income was $162.6 million, or $0.47 per ordinary share, compared to $266.2 million, or $1.49 per ordinary share in the second quarter of 2008.

The decrease in net and operating income in the quarter was in part driven by a foreign exchange loss of $145.2 million which results from the weakening of the US dollar against other major currencies, primarily Sterling. Also impacting the reduction in net and operating income during the quarter was a decline in net investment income of $112.0 million compared to the second quarter of 2008. Partially offsetting these impacts, the Company recorded a profit of $41.5 million from the investment fund and investment management affiliates compared to a loss of $18.7 million in the prior year quarter.

Net investment income for the quarter was $328.3 million compared to $440.4 million in the prior year quarter. Net investment income from P&C operations, excluding investment income from structured products, decreased 26.7% from the prior year quarter to $218.5 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 $80.4 million compared to a gain of $2.0 million in the second quarter of 2008. The loss for the second quarter of 2009 included other than temporary impairments, net of non-credit impairments, totaling $84.9 million, partially offset by realized gains on securities sales of $4.5 million. The realized gain in the second quarter of 2008 included other than temporary impairments of $47.7 million. As a result of new accounting guidance that became effective this quarter, the Company recorded $30.7 million of non-credit related Other than Temporary Impairment ("OTTI") in shareholders' equity and recorded a transitional adjustment on the implementation of this guidance of $229.7 million that increased both unrealized losses on investments and retained earnings.

The annualized return on ordinary shareholders' equity, based on operating income, was 11.2% for the quarter as compared to 13.3% in the prior year quarter.

For the first half of 2009, the Company produced net income of $258.3 million or $0.76 per ordinary share, compared to $449.7 million or $2.52 per ordinary share, for the prior year period. Operating income was $375.1 million or $1.11 per ordinary share, compared to $543.1 million or $3.04 per ordinary share in the prior year period. The annualized return on ordinary shareholders' equity, based on operating income, was 12.9% for the first half of 2009 compared to 13.0% in the prior year period.

    P&C Operations
    Three Months Ended June 30
    (US Dollars in thousands)
                                     2009        2008
    Gross Premiums Written     $1,501,190  $1,786,231
    Net Premiums Written        1,078,278   1,359,467
    Net Premiums Earned         1,281,749   1,508,787
    Underwriting Income            89,439     126,356
    Loss Ratio                       60.8%       62.2%
    Expense Ratio                    32.2%       29.4%
    Combined Ratio                   93.0%       91.6%

• 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 second quarter of 2008 and planned reductions in our financial lines business units. Also impacting the decline is continued competitive pricing in certain lines.
• P&C Net Premiums Earned included $881.5 million from the Insurance segment and $400.3 million from the Reinsurance segment.
• The loss ratio for the quarter was 60.8% compared to 62.2% for the second quarter of 2008. Included in the current quarter loss ratio was prior period favorable development of $89.6 million compared to $182.5 million in the second quarter of 2008.
• The second quarter 2009 loss ratio was not impacted by any new natural peril catastrophe losses compared to the second quarter of 2008, which had catastrophe losses, net of reinstatement premiums, of $98.1 million.
• The expense ratio during the quarter includes charges of approximately $9.1 million related to the Company's previously announced cost reduction efforts, of which $4.1 million and $3.0 million relate to the Insurance and Reinsurance segments, respectively.
• The P&C combined ratio for the quarter was 93.0% compared to 91.6% for the quarter ended June 30, 2008. Excluding the charges for the cost reduction initiatives, the current quarter combined ratio would have been 92.4%.
  

Capital Position

Book value per ordinary share was $18.89 as compared to $15.02 at March 31, 2009.

Net unrealized losses on investments, net of tax, were $3.2 billion at June 30, 2009 compared with net unrealized losses, net of tax of $4.0 billion at March 31, 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, offset by the impact of increases 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 credit spreads, and particularly hybrid corporate financials, offset by the effect of increases in interest rates. The reported decrease of $0.8 billion in unrealized losses during the quarter comprises an increase of $1.0 billion in the value of the investment portfolio offset in part by the transitional adjustment of $229.7 million referred to above.

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 July 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 Second Quarter results on Wednesday, July 29, 2009 at 10.00 a.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 (877) 422-4657 or (706) 679-0474, Conference ID# 1916647. The webcast will be available at www.xlcapital.com and will be archived on XL's website from approximately 1:00 p.m.