in re: xl capital ltd. securities litigation 03-cv-02001...
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UNITED STATES DISTRICT COURT
DISTRICT OF CONNECTICUT
HAROLD MALIN AND SANDRA JOAN MALIN REVOCABLE TRUST, Individually and On Behalf of All Others Similarly Situated,
Plaintiffs, vs.
XL CAPITAL LTD., et al.,
Defendants.
) ) ) ) ) ) ) ) ) ) )
Civil Action No. 3:03-CV-2001-SRU
CLASS ACTION
SECOND AMENDED CLASS ACTION COMPLAINT FOR VIOLATION OF THE FEDERAL SECURITIES LAWS
DEMAND FOR JURY TRIAL November 1, 2005
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TABLE OF CONTENTS
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I. INTRODUCTION ...............................................................................................................1
II. SUMMARY AND OVERVIEW.........................................................................................5
Individual Defendants Personal Economic Motivation to Misrepresent the Company’s Financials – Year-End Bonuses and Insider Trading ........................................................15
III. CONFIDENTIAL SOURCES ...........................................................................................18
IV. JURISDICTION AND VENUE ........................................................................................20
V. THE PARTIES...................................................................................................................20
VI. CONTROL PERSONS ......................................................................................................22
VII. FALSE AND MISLEADING STATEMENTS.................................................................24
XL’s CARZ “Put Dates” Subject the Company to $614 Million Repurchase Liability................43
NYID Issues Scathing Report on Its Examination on XL’s United States Reinsurance Operations – NAC Re ........................................................................................................43
XL’s LYONs “Put Date” Subjected the Company to $295 Million Repurchase Liability ...........49
Credit-Strapped – XL Pays $111.9 Million for a $500 Million Put Option Agreement to Get New York State Statutory Relief in Order to Bring NAC Re Reinsurance Operations Into Statutory Compliance: .............................................................................59
XL’s LYONs “Put Date” Subjected the Company to $300 Million Repurchase Liability: ..........66
XL Shocks Investors with Another Huge Reserve Shortfall in Its NAC Re Reinsurance Operations Causing Its Stock Price to Plummet:...............................................................66
XL Formally Admits Weakness of Its Financial Reporting and Reserve Analysis for NAC Re Operations: ...................................................................................................................70
VIII. LOSS CAUSATION/ECONOMIC LOSS ........................................................................72
IX. POST CLASS PERIOD EVENTS AND ADMISSIONS .................................................78
A.M. Best and Moody’s Ratings Agencies Swiftly Downgraded XL’s Financial Strength Ratings Immediately Impacting the Company’s Ability to Raise Capital and Write Policies:..............................................................................................................................79
XL Fires President of XL Re America, i.e., NAC Re and Other Senior Executives Responsible for Running the NAC Reinsurance Operations:............................................82
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XL Offers Noteholders of its CARZ $15 Million Not to Exercise Their Right to “Put” The Notes Back to the Company: ......................................................................................83
XL Files its 2003 Report on Form 10-K Admitting That Ratings Downgrades Would Hurt the Company and Loss Developments Indeed Required a Change in Reserve Methodology Assumptions: ...............................................................................................84
XL Reinsurance America’s (NAC Re) Prior Underwriting Years Still Haunting the Company ............................................................................................................................86
XL’s FALSE FINANCIAL REPORTING ....................................................................................87
XL’s Failure to Record Adequate Reinsurance Loss Reserves: ....................................................92
The First Warning:.........................................................................................................................92
The Second Warning: ....................................................................................................................92
The Third Warning: .......................................................................................................................92
The Fourth Warning:......................................................................................................................93
The Extremely Belated Admission: ...............................................................................................93
XL Knew that the Review It Conducted in 2003 Was Routine for Reinsurers and Should Have Been Conducted in 2001 and Ongoing Throughout the Class Period:.....................96
During The Class Period, XL Received a Scathing Reinsurance Examination Report from NAC Re’s Regulator, the NYID: ............................................................................102
XL’s Shareholder Equity Was Overstated Throughout the Class Period:...................................105
XL’s GAAP Violations Were Material: ......................................................................................105
XL Failed to Make Required Disclosures:...................................................................................106
XL Lacked Adequate Internal Controls:......................................................................................107
Defendants O’Hara’s and de St. Paer’s False Certifications: ......................................................111
X. APPLICABILITY OF PRESUMPTION OF RELIANCE: FRAUD-ON-THE-MARKET DOCTRINE ...................................................................................................114
XI. NO SAFE HARBOR .......................................................................................................115
XII. PLAINTIFF'S CLASS ACTION ALLEGATIONS ........................................................116
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PRAYER FOR RELIEF ..............................................................................................................122
JURY TRIAL DEMANDED.......................................................................................................122
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I. INTRODUCTION
1. This is a securities class action brought on behalf of purchasers of XL Capital Ltd.
(“XL” or the “Company”) publicly traded securities from November 1, 2001 to October 16, 20031
(the “Class Period”) against XL and several of its executive officers: Brian M. O’Hara (“O’Hara”),
Jerry de St. Paer (“de St. Paer”), Ronald L. Bornhuetter (“Bornhuetter”), Nicholas M. Brown, Jr.
(“Brown”), and Henry Charles V. Keeling (“Keeling”) (collectively, the “Individual Defendants”),
for violations of §§10(b) and 20(a) of the Securities Exchange Act of 1934 (“1934 Act” or
“Exchange Act”) and Rule 10b-5 promulgated thereunder, by making false and misleading public
statements concerning the Company’s financial results and prospects during the Class Period.
2. Specifically, plaintiff alleges that during the Class Period, XL and the Individual
Defendants devised and carried out a fraudulent scheme to misrepresent and conceal the
Company’s true financial condition. XL and the Individual Defendants issued false and misleading
statements in press releases, analyst conference calls and quarterly and fiscal year-end reports filed
with the Securities and Exchange Commission (“SEC”) regarding the Company’s financial
condition, including its earnings and shareholder equity, by failing to adequately reserve for losses
in its “NAC Re”2 reinsurance operations (see Glossary of Terms attached hereto as Ex. 1) acquired
in the summer 1999. As a result of the Company’s failure to record adequate loss reserves, XL
materially understated its expenses and liabilities and overstated the Company’s earnings,
shareholder equity and capital surplus in violation of Generally Accepted Accounting Principles
1 XL’s fiscal year is January 1 through December 31.
2 “NAC Re” means XL’s United States reinsurance operation which during the Class Period was also known as “XL Re America,” “XL Reinsurance America” and “XLRA.”
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(“GAAP”) and Statutory Accounting Practices (“SAP”).3 The Company’s failure to record
adequate loss reserves caused the Company’s financial statements during the Class Period to be
false and misleading and the stock price of XL to be artificially inflated.
3. XL and the Individual Defendants knew or deliberately disregarded that the NAC Re
reinsurance operations was inadequately reserved, as throughout the Class Period the Company
reported repeated loss reserve shortfalls from NAC Re reinsurance operations in the Company’s
financial statements. The reported reserve shortfalls required hundreds of millions of dollars in
quarterly and year-end charges to income in 2001, 2002 and the first nine months of 2003.
Throughout the Class Period, securities analysts and investors consistently inquired with XL and
the Individual Defendants about whether the NAC Re reserve deficiency had been corrected in light
of the hundreds of millions in reported reserve shortfalls. On each occasion, defendants falsely
assured investors that XL had reviewed the NAC Re reserves “with great scrutiny,” had taken the
necessary corrective measures to properly reserve for adverse loss developments at NAC Re, that
the Company’s actuarial reserve methodologies were “extremely conservative,” and “continued to
be appropriate” to reserve for losses going forward.
4. In truth, XL and the Individual Defendants knew or deliberately disregarded that the
Company’s reinsurance operations was experiencing a trend of extreme adverse loss development
and knew that reserve amounts the Company had taken for prior years were not adequate for
current reserve needs. For example, XL and the Individual Defendants knew that 1997-2000
“accident years” (the year in which a loss occurred) had developed so adversely that XL’s
methodologies to determine reserves in its reinsurance operations were no longer appropriate to
assess its existing losses.
3 SAP are rules, procedures and guidelines for financial reporting to insurance regulatory bodies in the United States.
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5. In addition, XL and the Individual Defendants knew that the accounting and record
keeping systems for NAC Re were in disarray resulting in inaccurate and incomplete claims and
premium payment records. In many instances the Company had incomplete or no records at all
pertaining to claims made by its policyholders and whether claims were paid. Indeed, in 2001, the
Company’s actuarial and reserve methodologies as applied to NAC Re had already resulted in
material reserve shortfalls and, by spring 2002, had resulted in severe admonishments from the
New York State Insurance Department (“NYID”) because XL and NAC Re had filed misstated
financial statements with the department which materially understated loss reserves, loss expenses
and overstated assets and shareholder surplus. See Ex. 2 attached hereto.
6. It was no accident that XL did not record the necessary loss reserve expenses or
correct known flaws in its internal controls to address adverse loss development trends in the NAC
Re reinsurance operations. Defendants knew that if XL properly reserved for the known adverse
loss developments at NAC Re, its reported expenses would materially increase and severely reduce
its earnings and shareholder equity and shareholder surplus, thereby causing the Company’s
financial strength and debt ratings to be downgraded by credit ratings agencies, A.M. Best,4
Moody’s, Standard & Poor’s (“S&P”)5 and Fitch Ratings. Such downgrades would have crippled
XL’s ability to secure credit, raise capital, write new business and execute its publicly stated
growth strategy.
4 A.M. Best is the self-described largest and longest established company devoted to issuing in-depth reports and financial-strength ratings about insurance organizations and offers the largest coverage of insurers and reinsurers in the United States, Canada, the United Kingdom and worldwide of any interactive rating organization.
5 Moody’s and S&P are company-rating services that issue ratings denoting the relative investment quality of corporate and municipal debt.
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7. Instead, defendants bragged that XL’s “strong balance sheet” and the content of its
book of business (types of policies written, underwritten and reinsured) insulated the Company
from the adverse loss development experiences being suffered by other insurers and reinsurers like
American Insurance Group (“AIG”) during the Class Period. In fact, XL leveraged its false
financials to rapidly grow the Company’s business, writing more policies in 2001, 2002 and 2003,
than ever before based upon the false representation that the Company had capital surplus, strong
underwriting capacity and by using the resulting favorable financial strength and debt ratings to
raise additional cash to finance its growth.
8. Indeed, the Company’s false financials and the appearance of capital and financial
strength allowed XL to increase net earned premiums from $3.5 billion in 2001 to $6.0 billion in
2002 to $7.0 billion in 2003. At the same time that defendants misrepresented the Company’s
financials, and falsely assured investors that its reinsurance operations was sufficiently reserved,
the Individual Defendants unloaded more than 400,000 shares of XL stock for illegal insider
trading proceeds of $35.6 million, and pocketed more than $8.1 million in incentive bonuses
earned as a result of the Company’s falsely reported Company earnings and stock price
performance.
9. Then, on October 17, 2003, XL announced that it had suffered yet another reserve
shortfall for the NAC Re reinsurance which would require a $184 million charge to earnings in
3Q03, at least the fifth major charge since the Company acquired NAC Re. Defendants explained,
despite earlier representations that they had reviewed their reserve practices at NAC Re with “great
scrutiny,” that only now would XL undertake a “comprehensive loss reserve review” of its
underwriting policies and its reserving methodologies at NAC Re to “finally put this issue behind
[them].” This type of review, however, which XL had falsely represented, was done on an ongoing
basis, and was in fact required by GAAP, SEC rules and state regulatory reporting agencies.
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10. Upon this revelation, investors immediately sold off XL stock causing the stock
price to fall from $79.40 per share to $73.37 per share on trading volume of 11.5 million shares,
nearly 20 times the average trading volume. Ultimately, the Company reported that even $184
million was not enough to cover the latest NAC Re reserve shortfall and that it needed to take
another $663 million charge to earnings for inadequate reserves in FY03. In total, the Company
recorded $1.46 billion in charges from 1999-2003 for NAC Re losses in accident years 1997-2001;
86%, or $1.25 billion, related to accident years 1997-1999, which were four to seven years old at
the end of 2003.
II. SUMMARY AND OVERVIEW
11. Defendant XL is a Bermuda-based financial service holding company registered in
the Cayman Islands. Through its operating subsidiaries, XL provides global insurance, reinsurance,
and financial products and services.
12. The Company’s principal executive offices are located in Hamilton, Bermuda,
HM11. Its United States headquarters is located in Stamford, Connecticut. Bermuda, however,
provides XL with tax-free status and XL generates tax-free income on profit earned in Bermuda.
XL capitalizes on this tax-free status by transferring profit to Bermuda subsidiaries through capital
management, the use of reinsurance, and intercompany retrocessions. The no-tax status allows
insurance and reinsurance companies like XL to accumulate reserves and profit more quickly than
in taxed jurisdictions like the United States. In addition, Bermuda has a more permissive
regulatory environment than the United States and only one regulatory authority, making it easier
to facilitate the introduction of new product offerings and allowing the parent (XL) to avoid the
stronger regulatory over sight of state regulators in the United States.
13. In June 1999, XL, seeking to expand its reinsurance operations in the United States,
acquired NAC Re Corp., a Delaware corporation, in a $1.2 billion transaction. NAC Re Corp. was
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a holding company that owned NAC Reinsurance Corporation, a reinsurance company. As a
reinsurer, NAC Re writes reinsurance contracts whereby it assumes all or some of the risk of
insurance policies written by other insurers, or ceding6 companies (also called “direct” or “primary”
insurance writer), in exchange for a portion of the premium written. Simply, NAC Re writes
insurance policies for direct or primary insurers. These policies allow direct insurers to spread
some or all of the insurance risks under their policies.
14. At the close of the NAC Re acquisition in 1999, XL explained that the acquisition of
NAC Re would expand the Company’s reinsurance sales and give it a larger United States
presence. Specifically, defendant O’Hara praised the Company’s acquisition of NAC Re, declaring
it as “the premier broker-market reinsurer” in the United States and promised investors that NAC
Re would be a platform for XL’s United States expansion and add to the Company’s overall
profitability.
15. In connection with the 1999 merger, XL also increased loss reserves for NAC Re by
$95 million – a recognition that NAC Re was already inadequately reserved. It was not enough. In
2000, XL needed to take another charge to income of $122 million NAC Re operations. Then, XL
took additional charges of $180 million in 4Q01, $215 million in 4Q02, $184 million in 3Q03 and
$663 million in 4Q03. Despite actual knowledge that as early as 1999 that the NAC Re reinsurance
operations was severely under-reserved, XL failed to perform a “comprehensive claims audit”
(actually, a routine and required process for reinsurers) or substantially review and correct its
internal controls, its reserve methodologies or review its cedant’s underwriting policies until after
the Class Period and investors had lost hundreds of millions of dollars.
6 A “ceding” company is defined as a company that transfers all or part of an insurance risk to another company through reinsurance (hereinafter, cedants or cedents). See Ex. 1.
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16. Moreover, on each instance that the Company took the above-referenced charges to
income for reserve shortfalls at NAC Re, investors demanded an explanation of why XL had taken
additional reserves for its NAC Re reinsurance operations, and whether this pattern would continue.
In response, XL falsely assured investors that the Company had in fact “turned the corner” on
inadequate reserve issues at NAC Re, had revisited its loss reserve methodology and process “with
great scrutiny” and was “reserved at the right levels” going forward.
17. In addition, defendants repeatedly and falsely represented that their methodologies
used to determine the amount of reserves, despite knowledge of severe adverse loss developments,
“continued to be appropriate” in public filings:
Management believes that the reserves for unpaid losses and loss expenses are sufficient to pay losses that fall within coverages assumed by the Company.
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.
18. XL and the Individual Defendants also made the following false and misleading
statements in press releases and analyst conference calls.
We have a tremendous track-record of claim-handling, having paid out almost $2bn in losses with no litigation and our reputation holds us well.
* * *
We conduct a full actuarial review of all our business units annually. . . .
We have [all NAC Re reserve issues] put [ ] behind us, and all the other actuarial reviews checked out positively. . . .
* * *
[E]fficient reserves and a double a-rated balance sheet, [puts XL] in an unencumbered position to move forward.
We looked at it, [the reserves issues at NAC Re] to say the least, with great scrutiny. And we believe, given all the facts we know today, it is at the right reserve levels. . . .
* * *
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Our reserving methodology is quite conservative.
19. In fact, however, defendants knew or deliberately disregarded that the Company’s
NAC Re reinsurance operations was experiencing an increasingly negative trend of serious and
unexpected (by investors) adverse development and knew that XL had not in fact set aside adequate
loss reserves. Indeed, defendant O’Hara admits that with regard to the various operations within
XL, and specifically NAC Re, he is “very plugged in and connected to all our units and operations.
We have a very flat organization. I get weekly reports from every unit.” See ¶186, infra. For
example, XL knew that by the end of 2001:
(a) Accident year 1997 had developed adversely for four straight years leading
the Company to add approximately $102 million to its reserves for that accident year;
(b) Accident year 1998 had developed adversely for three straight years causing
the Company to add approximately $183 million to its reserves for that year; and
(c) Accident year 1999 had developed adversely in both 2000 and 2001, causing
the Company to add approximately $113 million to its reserves for that accident year.
20. XL and the Individual Defendants also knew that the Company’s internal controls
and specifically its accounting and claims processing systems for its NAC Re reinsurance
operations was in complete disarray throughout the Class Period. The lack of sufficient accounting
procedures and record keeping practices resulted in incomplete and inaccurate records regarding
claims reported by its cedants and claim payment records which directly undermined XL’s ability
to accurately assess the Company’s loss reserves through its actuarial and/or reserving
methodologies. Indeed, actuaries project and estimate future loss reserves based on claims data. If
claims data is not accurately accounted for or tested, the actuary cannot accurately establish loss
reserves.
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21. The material weaknesses in the Company’s internal controls were known to the
Individual Defendants. In fact, former employee confidential witnesses (“CWs”) in the United
States and from the Company’s Bermuda headquarters confirm that even at the time of the
acquisition, the Company did not do a detailed review of NAC Re’s claim history or review the
claims history or underwriting policies of its cedents. In addition, CWs report that throughout the
Class Period, the accounting systems at NAC Re remained incapable of tracking claims and
payment records and in many instances told its cedents that it had paid claims when, in fact, it had
not; and also told its cedents that it didn’t owe them for submitted claims when, in fact, it did.
22. In fact, the failure to keep records tracking reported claims and claims paid resulted
in material deficiencies and inaccurate reporting of the Company’s financials to the NYID.
Specifically, in May 2002, the NYID harshly admonished the Company for its careless record
keeping and financial reporting which resulted in the understatement of liabilities and loss
expense adjustments and violated New York State Insurance Law and Regulatory requirements.
23. XL and the Individual Defendants deliberately disregarded these facts because the
Company needed to maintain the appearance of financial strength and capital surplus which was
required to write more policies and achieve positive ratings from insurance ratings agencies. In the
second half of 2001, the reinsurance industry experienced dramatic changes driven by many
reinsurers exiting property and casualty reinsurance business resulting in: (1) lower capacity (less
coverage availability for insurance and reinsurance purchasers); (2) dramatic premium rate
increases; (3) better contract terms and leverage for insurers and reinsurers; and (4) escalating flight
to quality, as insurers required reinsurers to be financially strong and able to pay future claims. The
increasingly competitive environment created substantial growth opportunities to reinsurers,
especially those with “AA” ratings and “strong balance sheets.”
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24. XL, recognizing the opportunity to take advantage of high premiums and low
capacity, embarked on a strategy to grow all of its business segments. Indeed, the appearance of
XL’s balance sheet strength was crucial to its growth strategy as XL’s capital lenders and insurance
ratings agencies used the Company’s earnings, shareholder equity, capital liquidity and capital
ratios to assess the Company’s ability to pay debts and to rate its notes and bonds. Therefore, the
Company’s ability to grow was simultaneously dependent upon its consolidated net worth and
capital surplus, and its ability to achieve and maintain an “AA” ratings or better from the major
insurance and reinsurance ratings agencies, e.g., A.M. Best, Moody’s, S&P and Fitch. An October
5, 2001 Bear, Stearns & Co., Inc. analyst report discussed the growth outlook for XL:
XL Capital’s management sees for itself a leadership role in a global insurance market in transition, with a major advantage in its strong balance sheet. The company believes that, looking beyond pricing opportunities, it will benefit from a flight to quality where ratings, capital strength and reputation will mean more to [insurance] buyers than price.
25. Indeed, as reported in the Company’s Report on Form 10-K for the year ending
December 31, 2001:
The Company’s ability to underwrite business is dependent upon the quality of its claims paying and financial strength ratings as evaluated by independent rating agencies. As a result, in the event that the Company is downgraded, its ability to write business would be adversely affected in financial guaranty and long-tailed insurance and reinsurance lines of business.
26. Despite knowledge that the Company’s financial statements were materially false
and misleading, defendants bragged that XL was worthy of high ratings and that the Company’s
credit ratings and strong balance sheets allowed XL to take advantage of the “flight to quality” in
an environment of low capacity stating the following:
XL’s AA rating placed it among a small number of large companies with top tier ratings. . . .
* * *
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[W]e have gotten larger lines on a lot of renewals, both reinsurance and insurance, that we think is because of our better rating and also I think because of our reputation as well. . .
* * *
We’re growing, we’re committed to a double A and you’re seeing substantial top line growth. We are clearly solidly in the double A range at the moment. We intend to stay there. . . . [W]e will maintain our double A capital ratio.
27. XL leveraged the false financials and the financial strength and debt ratings to
support four stock and debt securities offerings during the Class Period raising more than $1.87
billion:
Date Security Type Shares (in millions) Price Net Proceeds
(in millions)
A.M. Best
Ratings 11/01/01 Ordinary Shares (common) Equity 9.2 $89.00 $788
01/10/02 6.50% Guaranteed Senior Notes Due Debt $600 million
face amount $99.47 $589 a+
08/09/02 8% Series A Preferred Equity 9.2 $25.00 $223 a- 11/13/02 7.625% Series B Preferred Equity 11.5 $25.00 $278 a- TOTAL $1,878 (Amounts in millions, except price)
28. Indeed, prior to and during the Class Period, XL substantially financed its business
through the offering of debt securities, convertible bonds and convertible notes. Much of the risk
and value of the convertible bonds and notes were dependent on the financial performance of the
Company and ratings by S&P, Moody’s, A.M. Best and Fitch. For example, in April 2001, the
Company issued $255 million of 6.58% Guaranteed Senior Notes. On May 18, 2001 and
September 4, 2001, respectively, XL issued $1.01 billion principal amount at maturity of Zero
Coupon Convertible Debentures (“CARZ”) and $509 million principal amount at maturity of
Liquid Yield Option Notes (“LYONs”).
29. Each of the CARZ and LYONs debt securities gave bondholders the right to require
the Company to repurchase the bonds on predetermined dates (“put” dates) at predetermined values
as set forth in the relevant debenture. XL’s repurchase obligations on the CARZ and LYONs were
also subject to credit ratings assigned by S&P’s bond rating agency. For example, if the
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Company’s financial strength and credit ratings fell below the level of “BBB+,” that too would
trigger bondholder’s rights to demand conversion into shares at 5.9467 shares per CARZ and 5.277
per LYONs.7
30. During the Class Period, a put date for the CARZ was scheduled to occur on May
23, 2002. If the bondholders for the CARZ “put” their bonds to the Company on that date, XL
would be obligated to repurchase the bonds at a total price of $614 million – approximately 33% of
its then outstanding debt.
31. During the Class Period, the “put” dates for the LYONs were scheduled to occur on
September 7, 2002 and September 7, 2003, respectively. If the bondholders for the LYONs put
their shares to the Company on either date, XL would be obligated to repurchase the shares at
prices of $295 million and $305 million, respectively.
32. In addition, during the Class Period, all of the Company’s bank facilities, indentures
and other documents relating to the Company’s outstanding indebtedness, including the Company’s
credit facilities, contained cross default provisions to each other and other affirmative covenants.
The covenants provided for, among other things, minimum required ratings of the Company’s
insurance and reinsurance operating subsidiaries and the level of secured indebtedness in the future.
The Company’s credit facilities and the 6.58% Guaranteed Senior Notes (“Senior Notes”) also
contained minimum consolidated net worth covenants.
33. Thus, it was imperative that XL achieve and maintain high credit and agency
ratings. However, in order to do so, the Company falsified its quarterly and year-end financials
reported to the public in press releases and documents filed with the SEC. Specifically, XL failed
7 The CARZ and LYONs were rated “A+” by S&P at the date of issuance.
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to record adequate loss reserves for its reinsurance operations thereby understating expenses and
liabilities and overstating shareholder equity and capital surplus.
34. Each of the Company’s financial reports was false and misleading as XL failed to
record adequate loss reserves for its reinsurance operations, NAC Re. Instead, XL dribbled reserve
increases in incremental amounts so as not to risk falling below statutory capital requirements,
finance agreements, loan covenants, letter of credits, and having to repurchase its convertible debt
either from put dates or ratings downgrades.
35. The false financials also caused the Company’s stock price to be artificially inflated.
The Individual Defendants took advantage of the artificial inflation and unloaded more than
400,000 shares of XL stock for illegal insider trading proceeds of $35.6 million, and pocketed more
than $8.1 million in incentive bonuses based upon falsely reported Company earnings and stock
price performance.
36. Then, on October 17, 2003, XL announced that its 3Q03 results would be reduced
by $184 million or approximately $1.16 per share due to adverse loss developments – once again,
in its NAC Re reinsurance operations and once again, for accident years 1997-2000.
37. In conjunction with the October 17, 2003 announcement of the reserve shortfalls, the
Company also announced in a press release that it would conduct an “extensive” audit review
which it had falsely told investors was part of its regular practice or reserve review. Defendant
O’Hara stated:
I am personally leading a review of this book of business, which will include an intensive claims audit and review of the ceding company claims files that will be completed by year end. . . . I intend to fully address our exposure to the 1997 through 2000 North American casualty reinsurance book written by the former NAC Re so that it will not adversely affect our financial results in 2004 and beyond.
38. Investors were furious and sold off XL shares causing the Company’s share price to
plunge more than $6.00 per share to $73.37 per share on October 17, 2003, on trading of 11.5
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million shares. Notably, only two weeks earlier, on October 1, 2003, defendant O’Hara
suspiciously unloaded 40,000 shares of his XL stock for more than $3 million in insider trading
proceeds. On October 14, 2003, just three days before the reserves bombshell, defendant Keeling
unloaded another 5,000 shares for $400,000.
39. On January 13, 2004, the Company announced that the “claims audit review”
uncovered an additional $663 million reserve shortfall and the Company would take a charge to
earnings to increase loss reserves for accident years 1997-2001 for NAC Re reinsurance contracts.
The Company held a conference call on January 14, 2004 admitting that what was told to investors
throughout the Class Period was not credible:
We are acutely aware that this legacy adverse development and the former NAC Re has been unacceptably recurring and costly to shareholders and has damaged our credibility.
40. The XL January 14, 2004 conference call disclosures also essentially admitted that
despite its earlier representations that the:
(a) Review of its cedents’ underwriting portfolios during the Class Period was not
sufficiently comprehensive to adequately make reserve assessments;
(b) Company’s reserve review process during the Class Period did not sufficiently
look at cedants’ own claim files to assess the adequacy of their own reserves;
(c) Company’s actuarial reviews during the Class Period did not properly focus
on known “problem areas” like the Company’s NAC Re reinsurance operations which had been
under reserved for years; and
(d) Adverse development trend for accident years 1997-2000 indeed required the
Company to change its actuarial methodologies to account for these development patterns.
41. By January 15, 2004, A.M. Best, Moody’s and S&P slashed XL’s credit ratings:
• A.M. Best Co. downgraded all debt ratings of XL affecting approximately $2.4 billion of securities issued or guaranteed by XL Capital and its affiliates.
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• Moody’s Investor Services lowered the ratings of XL Capital Ltd (senior unsecured debt to A2 from A1) and debt-issuing affiliates, as well as the insurance financial strength ratings of members of the XL Reinsurance America Inc intercompany pool and XL Re (to Aa3 from Aa2).
• S&P lowered its credit ratings to A from A+ and cut most of the financial strength ratings on XL’s operating units to AA- from AA.
• Fitch Ratings placed XL’s long term issuer and senior debt rating of ‘A’, and preferred stock rating of ‘A-’ on Rating Watch Negative.
42. XL also announced that it had fired several of the executives at the Company’s NAC
Re operations including: C. Fred Madsen, President of the Company’s NAC Re reinsurance
operations; Martha Bannerman, the Company’s General Counsel and Chief Administrative Officer
for its NAC Re reinsurance operations; and a week later, Brown, Chief Executive Officer of the
Company’s insurance and formerly Chief of Reinsurance Operations at NAC Re abruptly left the
Company.
Individual Defendants Personal Economic Motivation to Misrepresent the Company’s Financials – Year-End Bonuses and Insider Trading
43. In addition to maintaining financial strength and debt ratings, increase capacity to
write more premiums, and avoid paying out on repurchase demands by bondholders, XL and the
Individual Defendants were personally motivated to report false financials and earnings as a
substantial portion of their individual annual compensation was based upon XL’s financial
performance and specifically, revenues and EPS. In fact, during the Class Period, each of the
defendants’ huge earned bonuses were based upon the achievement of growth in EPS. According
to XL’s 2001 proxy statement, XL executive officers’ bonuses were based 40% on growth in cash
EPS, 30% on cash return on tangible equity, 20% on total return on tangible equity, and 10% on
growth in book value, including dividends paid, but excluding unrealized appreciation or
depreciation of investments.
44. Had XL adequately reserved for the adverse development for NAC Re reinsurance
division during the Class Period, as described in ¶¶224-260, infra, its EPS would have been
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severely and negatively impacted. In addition, XL would have failed to achieve strong credit and
debt rating, which gave the Company leverage to grow by raising capital. Nevertheless, as a result
of the false financials, the Individual Defendants earned huge year-end bonuses which range from
66% to 182% of their annual salaries and up to $1 million for some of the Individual Defendants.
45. During the Class Period, these defendants received the following massive bonuses:
(a) O’Hara received two bonuses of $1 million in 2001 and 2002 that equaled
approximately 250% and 175% of his annual salary, respectively;
(b) De St. Paer received bonuses of $850,000 and $700,000 in 2001 and 2002 that
equaled approximately 250% and 175% of his annual salary, respectively;
(c) Brown received bonuses of $450,000 and $3,050,000 in 2001 and 2002 that
equaled approximately 69% and 469% of his annual salary, respectively; and
(d) Keeling received bonuses of $300,000 and $500,000 in 2001 and 2002 that
equaled approximately 66% and 103% of his annual salary, respectively.
46. A breakdown of the defendants’ bonus and salary structure for years 2001-2003 is
provided below:
Annual Compensation
Name and Principal Position Year Salary Bonus
Other Annual Compensation(1)
2003 $1,000,000 $0 $134,428 Brian M. O’Hara 2002 $1,000,000 $1,000,000 $131,525 2001 $1,000,000 $1,000,000 $140,004
2003 $475,000 $300,000 $218,336 Jerry de St. Paer 2002 $400,000 $700,000 $361,254 2001 $344,102 $850,000 $141,571
2003 $650,000 $0 $88,776 Nicholas M.
Brown, Jr. 2002 $650,000 $3,050,000 $85,280 2001 $650,000 $450,000 $71,378
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2003 $430,295 $0 $51,872 Henry C. V. Keeling 2002 $482,910 $500,000 $195,045
2001 $450,000 $300,000 $204,443
47. Additionally, several of the Individual Defendants took advantage of XL’s
artificially inflated stock price and collectively unloaded 402,575 shares of their XL common stock
for illegal insider trading proceeds of $35,644,621 million:
Insider Date Shares Price Proceeds
Percent of Common Stock Holdings Sold
Ronald L. Bornhuetter 02/19/2002 6,000 $92.600 $555,600 02/20/2002 9,000 $93.120 $838,080 02/25/2002 5,000 $92.920 $464,600 02/27/2002 10,000 $95.880 $958,800 08/29/2002 7,500 $74.000 $555,000 09/13/2002 5,000 $74.040 $370,200 03/06/2003 320 $67.950 $21,744 03/06/2003 305 $67.950 $20,725 03/06/2003 170 $67.950 $11,552 03/06/2003 165 $67.950 $11,212 05/08/2003 14,680 $80.420 $1,180,566 05/09/2003 4,300 $80.950 $348,085 62,440 $5,336,163 54.9% Nicholas M. Brown, Jr.8 11/02/2001 20,000 $91.250 $1,825,000 12/03/2001 20,000 $93.750 $1,875,000 03/04/2002 19,500 $96.460 $1,880,970 03/04/2002 2,000 $96.460 $192,920 06/11/2003 30,000 $84.000 $2,520,000 91,500 $8,293,890 82.7% Henry (Charles Vaughan) Keeling9 03/06/2002 65,000 $96.190 $6,252,350 03/07/2002 15,000 $94.320 $1,414,800
8 During the Class Period, defendant Brown acquired 95,821 shares. Of those shares, 91,500 were acquired by exercising stock options at prices of $36.59 per share and $37.16 per share, which Brown sold the very same day at prices of $83.00 per share and $96.46 per share.
9 During the Class Period, defendant Keeling acquired 107,635 shares. Of those shares, 102,635 were acquired by exercising stock options at prices ranging from $46.01 per share to $50.00 per share, all of which Keeling sold within three days of exercising his options at prices ranging from $93.47 per share to $96.13 per share.
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Insider Date Shares Price Proceeds
Percent of Common Stock Holdings Sold
03/08/2002 22,635 $93.470 $2,115,693 06/10/2003 4,800 $82.350 $395,280 06/10/2003 200 $82.560 $16,512 07/08/2003 5,000 $83.800 $419,000 08/12/2003 5,000 $78.990 $394,950 09/09/2003 5,000 $76.760 $383,800 10/14/2003 5,000 $79.750 $398,750 127,635 $11,791,135 56.8% Brian M. O’Hara 02/19/2002 25,000 $94.360 $2,359,000 02/19/2002 2,800 $93.520 $261,856 02/20/2002 17,200 $93.510 $1,608,372 01/02/2003 12,000 $77.320 $927,840 04/14/2003 7,000 $74.120 $518,840 04/14/2003 4,300 $74.140 $318,802 04/14/2003 400 $74.110 $29,644 04/14/2003 300 $74.130 $22,239 06/02/2003 6,000 $87.050 $522,300 06/02/2003 2,000 $86.910 $173,820 06/02/2003 2,000 $86.950 $173,900 06/02/2003 1,000 $86.920 $86,920 06/02/2003 1,000 $87.100 $87,100 10/01/2003 40,000 $78.320 $3,132,800 121,000 $10,223,433 26.2% Totals: 402,575 $35,644,621
III. CONFIDENTIAL SOURCES
48. The allegations herein are based upon plaintiff’s ongoing investigation, including
interviews of CWs, former XL employees who worked for the Company during the Class Period
and who are knowledgeable about the facts occurring during the Class Period. Plaintiff also
reviewed relevant Company documents, SEC filings, press releases, analyst reports and other
reports by third parties.
49. The witnesses spoke to plaintiff on a confidential basis and are therefore referred to
herein as “CW” as follows:
(a) CW1 is a former facultative analyst in the Company’s NAC Re reinsurance
operations between 2001 and 2004 inclusive and was supporting the Company’s Vice President of
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Accounting, Claims and Underwriting based at the Company’s Stamford, Connecticut headquarters.
As a facultative analyst, CW1 served as a liaison between NAC Re’s accounting department and the
direct insurers, spending most of his/her day in communications with brokers, direct insurers and the
NAC Re/XLRA accounting department trying to resolve issues over both premium and claims
payments and trying to verify years of prior transactions that the NAC Re accounting department
was unable to determine through its accounting system. CW1 received and reviewed reports sent
from direct carriers identifying batches of claims paid and seeking reimbursement for portions of
liability assumed by NAC Re. CW1 was responsible for communicating with direct insurers to
verify claims paid on liability assumed by NAC Re and determining whether policies written in fact
covered the losses claimed. He/she was also responsible for verifying that cedant companies had
actually made their premium payments on policies ceded to NAC Re and interfacing the direct
insurers and NAC Re’s accounting department in Stamford, Connecticut, regarding claims made and
claims paid.
(b) CW2 is a former Senior Vice President of XL Insurance, at the Company’s
Bermuda headquarters, responsible for managing direct insurance business for coverage of liability,
property, and professional liability. Prior to working for XL Insurance, CW2 worked for XL for an
extended period of time over six years holding several positions in the Company’s Bermuda
headquarters.
(c) CW3 is a former Vice President of Finance of XL Insurance and XL America,
Inc. (“XL America”) at Stamford, Connecticut and other locations, responsible for writing direct
insurance policies, before leaving in 2001. Prior to working for XL Insurance, CW3 worked for
Intercargo Insurance for a few years before it was acquired by XL Insurance and had experienced
numerous disputes over claims paid with NAC Re.
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(d) CW4 is a former Assistant Vice President, Internal Consultant at NAC Re, in
the IT segment of Operations responsible for various internal IT projects and system upgrades. CW4
worked for NAC Re for over six years, leaving at the end of 2000.
IV. JURISDICTION AND VENUE
50. The claims asserted herein arise under §§10(b) and 20(a) of the Exchange Act and
Rule 10b-5 promulgated thereunder by the SEC [17 C.F.R. §240.10b-5]. Jurisdiction is conferred
by §27 of the Exchange Act.
51. Venue is proper in this District pursuant to §27 of the Exchange Act, 15 U.S.C.
§78aa and 28 U.S.C. §1391(b). Many of the acts and transactions alleged herein, including
preparation and dissemination of materially false and misleading information, occurred in
substantial part in this District. Additionally, the Company maintains principal executive offices in
this District.
V. THE PARTIES
52. Pursuant to Court Order dated April 16, 2004, lead plaintiff is Alaska Ironworkers
Pension Trust (“lead plaintiff” or the “Fund”) which purchased XL’s publicly traded securities
during the Class Period and suffered damages as a result of the wrongful acts alleged herein.
53. Plaintiffs Harold Malin and Sandra Joan Malin Revocable Trust purchased XL
securities during the Class Period, and suffered damages as a result of the wrongful acts alleged
herein.
54. Defendant XL is a corporation organized and existing under the laws of the Cayman
Islands with its principal place of business at XL House, One Bermudiana Road, Hamilton,
Bermuda HM 11. XL’s North American headquarters is located within the judicial district at
Seaview House, 70 Seaview Avenue, Stamford, Connecticut.
55. Defendant O’Hara is, and was, at all times during the Class Period, XL’s President
and Chief Executive Officer (“CEO) and has been a director of the Company since 1986. During
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the Class Period, defendant O’Hara sold 121,000 shares of XL common stock for proceeds of
$10,223,433.
56. O’Hara signed all of the Company’s public filings made with the SEC during the
Class Period, including, written certifications pursuant to §§302 and 906 of the Sarbanes-Oxley Act
of 2002 for the June 30, 2002 Report on Form 10-Q and for all subsequently filed quarterly and
annual reports. O’Hara was also the chief spokesperson for the Company as he was consistently
quoted in the Company press releases and spoke directly with investors and analysts during
investor conferences and quarterly and year-end earnings conference calls.
57. Defendant de St. Paer is and was, at all times during the Class Period raised herein,
XL’s Executive Vice President and Chief Financial Officer (“CFO”). De St. Paer signed all filings
made with the SEC including written certifications pursuant to §§302 and 906 of the Sarbanes-
Oxley Act of 2002 including all subsequently filed quarterly and annual reports. De St. Paer was
among the chief spokespersons for the Company and was present during all Company conference
calls and spoke directly to the public, including many of the false and misleading statements herein.
58. Defendant Brown was at all times relevant to the allegations raised herein XL’s
Executive Vice President of the Company and Chief Executive of Insurance Operations. Brown
served as President and CEO of NAC Re until XL’s merger in June 1999 when he was appointed
CEO of XL America. In July 2000, Brown was promoted to Chief Executive of Insurance
Operations. Brown had full management and supervisory responsibility for employees of XL
America and its subsidiaries, including NAC Re. In addition, Brown also had management, profit,
and loss responsibility for all North American property and casualty insurance and reinsurance
operations and related service businesses. Brown is an actuary and has a B.A. degree summa cum
laude in mathematics from the University of Delaware, an M.A. degree in economics from Trinity
College and is a Fellow of the Casualty Actuarial Society. During the Class Period, defendant
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Brown sold 91,500 shares of XL common stock for proceeds of $8,293,890. Brown was present
and/or directly made statements to the public, including presentations and conferences.
59. Defendant Keeling was at all times during the Class Period CEO of the Company’s
Reinsurance Operations. Keeling was present during the October 20, 2003 and January 14, 2003
Company conference calls and/or directly made statements to the public. During the Class Period,
defendant Keeling sold 127,635 shares of XL stock for proceeds of $11,791.135.
60. Defendant Bornhuetter is and was, at all relevant times during the Class Period, a
director at the Company and the former Chairman of NAC Re. Previously, Bornhuetter was an
actuary and served as Chairman of NAC Re from 1993 until 1999 and Chairman of the Board of
NAC Re reinsurance Corporation from 1990 until 1999, having served as a director of both since
August 1985. From November 1996 through December 1998, he also served as CEO of NAC Re
from August 1985 through October 1996, he also served as President of NAC Re. Bornhuetter
developed the Bornhuetter-Ferguson actuarial incurred loss method, a favored model used by
actuaries to calculate incurred losses and loss reserves. Bornhuetter signed the Registration
Statement and/or amendments pursuant to the Shelf Offering, the 2001 Report on Form 10-K and
the 2002 Report on Form 10-K. During the Class Period, defendant Bornhuetter sold 62,440 shares
of XL common stock for proceeds of $5,336,163.
VI. CONTROL PERSONS
61. During the Class Period, the Individual Defendants, as senior executive officers
and/or directors of XL, had access to the adverse undisclosed information described herein
regarding the Company’s business operations, financial condition, loss reserves, products, markets,
customer relationships and present and future business prospects. The Individual Defendants knew
or recklessly disregarded that said adverse undisclosed information had not been disclosed to, and
was being concealed from the investing public.
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62. Because they were responsible for running the Company, it is appropriate to treat the
Individual Defendants as a group for pleading purposes and to presume that the false, and
misleading and incomplete information contained in the Company’s public filings, press releases
and other publications, as alleged herein, are their collective actions. Each of the Individual
Defendants was directly involved in the day-to-day operations of the Company at the highest levels
and was privy to confidential proprietary information concerning the Company and its business,
operations, products, growth, financial statements, and financial condition, as alleged herein. Said
defendants knew of the Company’s inadequate loss reserves, were involved in the drafting,
producing, reviewing and/or disseminating the false and misleading statements and information
alleged herein, were aware of or deliberately disregarded that the false and misleading statements
were being issued regarding the Company, and approved or ratified these statements, in violation of
the federal securities laws.
63. As officers, directors and controlling persons of a publicly held company whose
securities were, and are, registered with the SEC pursuant to the 1934 Act, traded on the New York
Stock Exchange (“NYSE”), and governed by the provisions of the federal securities laws, the
Individual Defendants each had a duty to promptly disseminate accurate and truthful information
with respect to the Company’s financial condition and performance, growth, operations, financial
statements, business, products, markets, management, earnings and present and future business
prospects, and to correct any previously issued statements that had become materially misleading or
untrue, so that the market price of the Company’s securities would be based upon truthful and
accurate information. The Individual Defendants’ misrepresentations and omissions during the
Class Period violated these specific requirements and obligations.
64. Each of the defendants is liable as a direct participant in, and co-conspirator with
respect to the wrongs complained of herein. In addition, the Individual Defendants, by reason of
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their positions, are “controlling persons” within the meaning of §20 of the 1934 Act and had the
power and influence to cause the Company to engage in the unlawful conduct complained of
herein. Because of their positions of control, the Individual Defendants were able to and did,
directly or indirectly, control the conduct of the Company’s business.
65. The Individual Defendants, because of their positions with the Company, controlled
and/or possessed the authority to control the contents of the SEC filings, reports, press releases, and
presentations to securities analysts and through them, to the investing public. The Individual
Defendants were provided with copies of the Company’s reports and press releases alleged herein
to be misleading, prior to or shortly after their issuance, and had the ability and opportunity to
prevent their issuance or cause them to be corrected. Thus, each of the defendants had the
opportunity to commit the fraudulent acts alleged herein.
VII. FALSE AND MISLEADING STATEMENTS
66. False and Misleading Statements:10 On November 1, 2001, XL issued a press
release announcing that it had filed a Prospectus and Prospectus Supplement (“Prospectus”) with
the SEC dated November 1, 2001 to sell 8,000,000 ordinary shares that was pursuant to their
effective Shelf Registration Statement filed on October 22, 2001.
XL Prices Issue of Ordinary Shares
HAMILTON, Bermuda, Nov 1, 2001 /PRNewswire via COMTEX/ -- XL Capital Ltd (“XL”) (NYSE: XL) announced today that it has agreed to sell 8,000,000 ordinary shares pursuant to XL’s currently effective shelf registration statement (plus up to an additional 1,200,000 shares issuable upon exercise of the underwriters’ over allotment option). . . .
As of September 30, 2001, the Company had consolidated assets of approximately 25.7 billion and shareholder equity of approximately $4.8 billion.
10 False and misleading statements are primarily in bold type with emphasis.
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67. The ordinary shares were being issued at an initial price to the public of $89.00 per
share. The Prospectus, incorporated by reference into the October 22, 2001 Registration Statement,
December 31, 2000 Report on Form 10-K, and the April 6, 2001 proxy statement, among other
documents (“November 2001 Offering Documents”). The December 31, 2000 Report on Form 10-
K made the following false and misleading statements about the Company’s practice of estimating
“case reserves” and “IBNR” reserves:11
UNPAID LOSSES AND LOSS EXPENSES
Most of the Company’s incurred but not reported (“IBNR”) loss reserves are derived from casualty business. . . . IBNR is calculated in using several standard actuarial methodologies including paid and incurred loss development, Bornhuetter-Ferguson and frequency and severity approaches. The Company believes the methods presently adopted provide a reasonably objective result as it is based upon the Company’s loss data rather than more theoretical models often used in the low frequency high layer business the Company writes. . . .
* * *
Additionally, claims audits are conducted for specific claims and claims procedures at the offices of selected ceding companies.
* * *
SIGNIFICANT ACCOUNTING POLICIES LOSSES AND LOSS EXPENSES
The reserve for losses incurred but not reported [IBNR] has been estimated by management in consultation with independent actuaries and is based on loss development patterns determined by reference to the Company’s underwriting practices, the policy form and the experience of the relevant industries.
* * *
Management believes that the reserves for unpaid losses and loss expenses are sufficient to pay losses that fall within coverages assumed by the Company. . . . The methodology of estimating loss reserves is periodically reviewed to ensure that
11 In preparing periodic financial statements, a reinsurer must treat amounts of earned premiums as current income and amounts of incurred claims as offsets to current income. Loss reserves must be established for known claims (“case reserves”) as well as for incurred-but-not-reported claims (“IBNR reserves”). Reinsurers that underwrite casualty risks with long discovery or reporting delays often carry IBNR reserves much larger than their case reserves.
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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.
* * *
REINSURANCE OPERATIONS
Underwriting opportunities presented are evaluated based upon a number of factors including the type and layer of risk to be assumed, actuarial evaluation of premium adequacy, the cedent’s underwriting and claims experience, the cedent’s financial condition and claims paying rating, exposure and or experience with the cedent, and the line of business to be underwritten.
In addition, the Company assesses a variety of other circumstances including: the reputation of the proposed cedent and the likelihood of establishing a long-term relationship with the cedent. . . .
On-site underwriting reviews are performed where it is deemed necessary to determine the quality of a current or prospective cedent’s underwriting operation.
68. False and Misleading Statements: The Company’s proxy statement incorporated by
reference into the Registration Statement assured investors that the Company had adequate internal
controls in place to assure its accounting and reserving methodologies were appropriate to
recommend that the financials be included in the public documents filed with SEC and regulatory
agencies:
The Audit Committee of the Board of Directors meets with the Company’s independent accountants to discuss the scope and results of their audit and to review the Company’s financial reporting, accounting and control systems. The Audit Committee reviews the Company’s reserving methodology and reserves. . . . The Audit Committee met six times during fiscal 2000.
* * *
The Audit Committee shall:
Review the reserving methodology and process of the Company and the Company’s reserves, together with internal or external actuarial reports or studies.
* * *
Review and assess compliance with all applicable rules and regulations of the Securities and Exchange Commission and the New York Stock Exchange specifically applicable to the composition and responsibilities of the Audit Committee.
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69. The November 1, 2001 Shelf Offering issuance of 9.2 million Class A ordinary
shares raised $788 million in proceeds.
70. On November 2, 2001, XL’s stock price jumped 3.6% to $92.80 per share from
$89.55 per share on the previous day, a volume of over 5 million shares, nearly five times the
trading volume of the previous trading day.
Reasons Why Statements in ¶¶66-68 Were False and Misleading:
71. The statements in the November 2001 Offering Documents falsely assured investors
that: (a) the Company had in place adequate internal controls to ensure that its financials were
being reported accurately; (b) its reserves methods were based upon the Company’s actual loss data
rather than more theoretical models; (c) claims audits were being conducted at the ceding
companies; and finally (d) the Company’s methodology of estimating loss reserves were
periodically reviewed to ensure that assumptions made continued to be appropriate.
72. In truth, however, the Company’s reserve practices and methodologies for its NAC
Re reinsurance operations were severely flawed in November 2001 and throughout the Class
Period, and had been since the close of the NAC Re acquisition in June 1999 resulting in false
financial reports, inadequate reserves and disputes with its primary insurers.
73. According to CW1, a former facultative analyst for the Company’s reinsurance
operation, NAC Re, between 2001 and 2004, XL had “serious accounting problems” for the NAC
Re operations for the years prior to XL acquisition of the business in June 1999. CW1 reported that
the NAC Re accounting system was completely unreliable, and in fact, when CW1 began working
at NAC Re in 2001, there were thousands of claims which had been submitted to NAC Re (over
periods of about three to four years 1997-2001) from its direct insurers, i.e., cedant companies, but
had not yet been paid by NAC Re even though the acquisition had closed in 1999. As a facultative
analyst, CW1 served as liaison between NAC Re’s accounting department and direct carriers and
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received and reviewed reports from direct carriers identifying claims paid and seeking
reimbursement. The claims payments were largely fronted by primary insurance carriers in full,
necessitating a practice to seek reimbursement from NAC Re for its portion of risk of liability
pursuant to policy terms. According to CW1, most of his/her daily responsibilities involved
reconciling or attempting to reconcile NAC Re cedant premium payments and NAC Re’s payment
liabilities on claims for years prior to 2001 because NAC Re’s accounting department was unable
to reconcile, through its accounting system, whether claims had been paid. CW1 stated that NAC
Re’s direct insurance company customers regularly complained about not being reimbursed by
NAC Re on claims paid over periods of years. CW1 also reported that between 2001 and 2004
many of the unreconciled premium payments dated back as far as 1995-1996.
74. CW1 further reported that the Company’s accounting system for NAC Re
reinsurance operations was so disorganized, that claims submitted by cedant companies were not
paid by NAC Re even though NAC Re had represented to the cedants (erroneously) that they were
indeed paid. In fact, CW1 reported that many disputes with cedant companies were caused by
NAC Re representing that it had paid claims when in fact it had not. Because the accounting
records for NAC Re were so poorly kept, the records of payments on reported claims were often
incomplete and some of its policy holders complained of claims left unpaid over periods of years.
CW1 reported that employees in his/her office were constantly working to ascertain the details of
transactions that had occurred up to six or seven years prior as well as keeping up with transactions
that had happened since.
75. CW1 stated that the same record keeping flaws in the accounting department
impacted the Company’s ability to collect premiums from its cedant companies because the
accounting department had often “no record whatsoever” or many times simply lost track of
payments. CW1 also reported that NAC Re’s accounting system did not accurately keep track of
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when its cedant companies paid their premiums and that NAC Re often refused to pay on cedant’s
reported claims stating that the cedant company had not paid its premium. CW1 reported, however,
that most times XL was proven to be wrong and in fact did owe for these disputed claims.
76. In fact, CW1 reported that sometimes XLRA claimed that it had not received
premium payments owed by the direct insurers - and therefore did not owe its portion of these older
claims. CW1 stated that this was regularly either erroneous or even a fabricated defense, because
the carriers were able to demonstrate that premium payments had been made in the majority of
these disputes because the cedant company would actually send XL a copy of the checks which had
indeed been cashed by NAC Re and a spreadsheet of accounts to which the premiums were applied.
CW1 stated that the cedents also sent attached statements proving that premiums were ceded and
identifying the “accounts” – policies or groups of policies – covered by the payments.
77. CW1 stated that complaints about NAC Re came from direct insurer brokers that
had placed the policies with the policyholders. CW1 stated that the brokers made calls either to the
underwriters or facultative analysts (“FAs”) at NAC Re because the NAC Re accounting
department had delegated this work to the underwriting organization. CW1 was told by superiors
that “accounting wanted us [underwriters and FAs] to handle the problems because the accounting
system was messed up.” From time to time between 2001 and 2004, NAC Re’s accounting
personnel in Stamford, Connecticut reported to CW1 and his/her superiors that XL America
reserves were exhausted and there was no money to pay the claims that were owed.
78. According to CW1 the accounting problems at NAC Re were well known to XL’s
management team in Stamford, Connecticut and that information regarding claims he/she collected
and assembled from cedant companies was sent directly to XL’s Vice President of Claims for NAC
Re, David Hughes, in XL’s Stamford, Connecticut headquarters. CW1 further reported that even
outside of the Company and conversations with co-workers, direct insurers and brokers at other
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insurance companies, the NAC Re accounting department was considered a “joke and an
embarrassment.”
79. CW1’s account of NAC Re’s horrendous record-keeping and claims processing,
which rendered any reserve analysis based on it inaccurate, unreliable and inadequate, was further
corroborated by CW3. In addition to being a former Vice President of finance for XL, CW3 had
been a former Vice President of Finance of Intercargo, a direct (primary) insurance carrier that was
purchased by XL around the same time that NAC Re was purchased by XL. After the acquisition,
CW3 remained with XL America until he/she left in 2001. In his/her capacity as Vice President of
Finance for Intercargo, CW3 was familiar with NAC Re’s faulty record-keeping because Intercargo
shared liability on many policies with NAC Re and there were “always problems” in dealing with
NAC Re when attempting to get reimbursements for claim payments fronted by Intercargo.
Intercargo frequently had to retrieve old records of claims payments and information depicting the
various accounts and claims paid by it that had been billed to NAC Re in prior periods, but never
paid. CW3 recalled many disputes between Intercargo and NAC Re over whether NAC Re had
been paid (ceded) premiums that it showed no record of having received, or whether NAC Re had
reimbursed Intercargo for claims fronted by it. Intercargo, had to and did prove to XL that it had
made payments to NAC Re. CW3 stated that “any carrier who did business with them [NAC Re]”
knew of NAC Re’s accounting deficiencies.
80. CW4 a former Assistant Vice President, Internal Consultant in the IT segment of
Operations, corroborates CW1 and CW3’s accounts of NAC Re's grossly inadequate accounting
system. CW4 stated that at the time of the acquisition of NAC Re in 1999 and continuing forward,
there was no integration effort of NAC Re's accounting system into XL and that NAC Re's system
continued to operate "as is" until the time CW4 left at the end of 2000.
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81. Further confirming the false and misleading nature of XL’s claim that its reserves
were based upon actual loss data and development patterns, etc., is the account of CW2, a former
senior vice president in the Company’s Bermuda headquarters during the Class Period. CW2
reported that when XL acquired NAC Re, XL “did not do the due diligence that needed to be done”
on NAC Re and that XL “did not look a heck of a lot” at NAC Re’s claims history.
82. More specifically, CW2 reported that XL’s due diligence process for the NAC Re
acquisition did not consist of a detailed review of claims within NAC Re or communications with
the direct insurers (cedents) from which NAC Re assumed liabilities. According to CW2, XL’s
actuaries used NAC Re’s loss data or “loss runs” at the time of the acquisition but that claims data
was not fully tested, i.e., reviewed at the claims level from the cedant companies. Nevertheless,
according to CW2, XL’s actuarial computations for setting reserves were based upon the data
provided by NAC Re. CW2 further described that in the reinsurance industry, especially in
acquisitions, it is known that many times loss data is incomplete resulting in a “bad base” upon
which actuarial analysis can be performed in order to set reserves for future losses.
Indeed, the methods that XL purports to have used, the Bornhuetter-Ferguson methods are well
known within the insurance industry depend upon reliable historical data as to loss reporting patterns
to estimate loss reserves.
83. XL’s failure to test NAC Re’s underlying claims data and failure to later maintain
internal controls regarding accurate record keeping or reported claims and claims payments were in
direct contradiction of the method it reportedly applied and the assurances given to investors
including compliances with GAAP and the American Institute of Certified Public Accountants
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(“AICPA”)12 rules. Moreover, in light of its knowledge that claims tracking and record keeping
systems were unreliable, the statement that it had reviewed its reserve methodologies to ensure that
the assumptions made “continue to be appropriate” was false and misleading.
84. The reports of CW1, CW2, CW3, and CW4 and the impact of the Company’s lack
of internal controls are further confirmed by a Report on Examination of the NAC Reinsurance
Corporation as of December 31, 1999 (“Examination Report”) by the NYID, NAC Re’s New York
State Regulator, published in May 2002 covering the December 31, 1999 annual statement and
transactions, and submissions through 2001. As discussed in detail below at ¶¶118-124 and 261-
264, the Company’s inadequate accounting systems described by CW1 resulted in NAC Re
reporting materially inaccurate financial statements and related data with NYID including balance
sheet entries for which the Company could provide “no documentary support.” Specifically, line
items “reinsurance payable of paid losses and loss adjustment expenses.” The Report outlined the
Company’s repeated failures to keep accurate accounting records and its failure to submit accurate
financial statements, in violation of New York State Insurance Laws.
85. As evidenced by the Company’s repeated loss reserve shortfalls throughout the
Class Period for NAC Re, summarized at ¶231, XL failed to update its methodology as required
due to huge shortfalls in the loss reserves and obtain sufficient data from its cedents to record
adequate loss reserves.
86. On January 7, 2002, the Company announced that it had agreed to sell $600 million
of its 6.5% Senior Notes due 2012 through XL Finance (Europe) pic, a wholly owned subsidiary of
XL. The senior notes would be guaranteed by XL. The senior notes would be sold pursuant to
12 For the court’s convenience plaintiff has attached hereto as Ex. 1 to the Consolidated Class Action Complaint, excerpts of the AICPA Audit and Accounting Guide: Audits of Property and Liability Insurance Companies – Glossary.
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XL’s currently effective shelf registration statement. XL also stated that the net proceeds from the
sale of senior notes would be used to repay XL’s outstanding five-year revolving credit facilities
and for general corporate purposes, which may include share repurchases and acquisitions.
87. False and Misleading Statements: On January 9, 2002, the Company filed its Form
424b Prospectus for the issuance of 6.5% Senior Notes. The Prospectus incorporated by reference
the Company’s Report on Form 10-K for the FY00, and the Company’s Report on Form 10-Q for
the period ending September 30, 2001 (“January 2002 Offering Documents”). Pursuant to the
offering, the Company raised net proceeds of $588.9 million.
88. The January 2002 Offering Documents contained the false and misleading
statements discussed above in ¶¶87, 88. Based upon the Company’s false financials, however,
A.M. Best rated the debt security at “a-.” The Company raised $589 million in the offering.
89. On January 28, 2002, the Company pre-announced that its 4Q01 earnings would be
negatively impacted by reserve shortfalls in the Company’s NAC Re operations:
XL Announces Fourth Quarter Charges
HAMILTON, Bermuda, Jan 28, 2002 PRNewswire – FirstCall via COMTEX/ --XL Capital Ltd (NYSE: XL) (“XL”) XL Capital Ltd announced today that fourth quarter results will include charges primarily for increased prior period casualty reinsurance loss reserves and several large loss events occurring in the fourth quarter of 2001.
Mr. Brian M. O’Hara, XL’s President and Chief Executive Officer, stated: “Following our regular year-end reserve review, we are increasing the reserves of our North American casualty reinsurance book due to adverse development from underwriting years predating our acquisition of NAC Re Corporation.
90. False and Misleading Statements: Between January 29, 2002 and February 13, 2002,
XL and the Individual Defendants issued a series of false and misleading statements about the
Company’s 4Q01 results and the “adverse developments” resulting in a huge $180 million charge
to earnings and what XL had done to address inadequate reserves in its NAC Re reinsurance
operations.
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91. False and Misleading Statements: On January 29, 2002, the Company and
specifically, defendant O’Hara, presented at the Salomon Smith Barney conference, with analysts,
during which the Company falsely assured investors that it had taken the necessary corrective
action to address reserve deficiencies at XL’s reinsurance operations– NAC Re: the Company also
falsely stated that its claims handling process had a tremendous track record and reported that its
reputation was supported by full actuarial reviews done on all lines of the business every year:
Our core casualty business, which has been in the doldrums for some time, is experiencing very robust growth, and that’s where my heart is. Now we can play pretty well, down to the bottom. We have a tremendous track-record of claim-handling, having paid out almost $2bn in losses with no litigation and our reputation holds us well.
We conduct a full actuarial review of all our business units annually. The actuaries only came to me 1.5 weeks ago with their concerns about developments at NAK* [sic] in 1996-1999. The first thing we did when we purchased NAK was cut out renewal business ($100m). Going forward from that, we’re in very good shape. We have taken corrective action on 2000, and our problems reflect what every re-insurer faced. We have put it behind us, and all the other actuarial reviews checked out positively.
92. By February 1, 2002, based upon the Company’s false assurances, the Company’s
stock price spiked from $86.91 per share to $88.12 per share on January 29, 2002.
Reasons Why Statements in ¶¶91-92 Were False and Misleading:
93. The statement that the Company had a tremendous track record for claims handling
was false and misleading when made. In truth, as reported by CW1 and CW3, the Company’s
department did not have the controls in place to ensure that its claim payment and premium records
were complete and accurate. Indeed, according to CW1, XL’s NAC Re reinsurance operations
could not keep track of when or whether it had paid claims made by direct insurers and in many
instances did not have records evidencing certain transactions. The Company’s claim handling
process at its reinsurance operations throughout the Class Period was totally unreliable, causing
direct insurers to consistently complain about the poor handling of their premium payments and
XL’s failure to reimburse for reported claims. See ¶¶73-79.
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94. In addition, the statements that the Company conducts a “full actuarial review” of all
its business, that XL had “put this [NAC Re] issue behind [them],” and “all other actuarial review
checked out positively,” and that going forward the NAC Re business was in “good shape” were all
false and misleading statements when made. In truth, XL knew or deliberately disregarded that
what it called a “full actuarial review” did not include standard reviews of its cedent claims files; it
did not include a detailed review of the claim assumptions which it had previously told investors
was done on a regular basis to ensure that such assumptions continued to be appropriate. In fact,
GAAP and AICPA Audit and Accounting Guide for Audits of Property and Liability Insurance
Companies outlines the requirements of detailed reviews of cedent companies’ claims processing
and an assessment of the accuracy and reliability of data received:
Internal Control of the Assuming Company
6.47 A significant component of an assuming company’s internal control that is related to assumed reinsurance is the assessment of the accuracy and reliability of data received from the ceding companies. Principal control activities of the assuming company may include –
● Maintaining underwriting files with information relating to the business reasons for entering the reinsurance contracts and anticipated results of the contracts. . . .
● Monitoring the actual results reported by the ceding companies and investigating the reasons for and the effects of significant deviations from anticipated results.
● Visiting the ceding companies to review and to evaluate their under-writing, claims processing, loss reserving, and loss-reserve-development-monitoring procedures.
● Obtaining the report of the ceding companies’ independent accountants on controls (relating to ceding reinsurance) placed in operation (and tests of operating effectiveness). See SAS No. 70, Service Organizations.
95. Defendants admitted in October 2003, after the Company suffered its fifth
consecutive year of significant reserve shortfalls for NAC Re business, their failure to maintain
proper internal controls as required by GAAP and set forth below. ¶¶249, 250, 272-279. Further,
as reported by CW1, XL did not even maintain the accuracy of its own records used to make
reserve judgments, much less its cedents.
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96. False and Misleading Statements: On February 12, 2002, XL formally announced
its financial results for the 4Q01. The Company also reported that in 4Q01, it had taken a $180
million before tax charge for “adverse developments in loss reserve of United States casualty
reinsurance operations, in the former NAC Re book, representing deficiencies in underwriting years
1997-99.”
XL Capital Ltd Reports Fourth Quarter 2001 Results
HAMILTON, Bermuda, Feb 12, 2002 /PRNewsWire – FirstCall via COMTEX/-- XL Capital Ltd (‘“XL” or the “Company”‘) (NYSE: XL) today reported a net loss of $83.6 million, or a loss of $0.64 per share in the fourth quarter of 2001, compared with net income of $0.6 million, or income of $0.01 per share, in 2000’s fourth quarter. The net operating loss for the fourth quarter ended December 31, 2001 was $6.1 million, or a loss of $0.05 per share, compared to net operating income of $143.0 million, or income of $1.13 per share in the fourth quarter a year ago.
The Company’s 2001 fourth quarter results primarily reflect previously announced adverse prior period loss development on its U.S. casualty reinsurance book, [NAC Re] losses related to the bankruptcy of Enron Corp., American Airlines Flight 587 and several large European property losses.
97. On February 13, 2002, the Company held a conference call for investors and
analysts conducted by defendants O’Hara and de St. Paer. During the call, defendants discussed
the charge to income resulting from materially insufficient loss reserves in the NAC Re book of
business. In addition, the Company announced that there was a $180 million reserve shortfall for
the NAC Re business. Commenting on the Company’s 4Q01 results and $180 million reserve
shortfall in NAC Re’s casualty reinsurance operation, defendant O’Hara stated:
In Q4, incurred charge for adverse development in loss reserves of US casualty reinsurance operations, in the former NAC Re book, representing deficiencies in underwriting years 1997-99. Increase in net losses for these years pre-tax: $180m. Net impact on XL’s results in Q4 after tax: $140m. . . . Other large loss events, including bankruptcy of Enron and crash of American Airlines flight 587: $96m pre-tax.
98. False and Misleading Statements: During the February 13, 2002 conference call,
defendant O’Hara acknowledged that the Company knew of materially insufficient loss reserves at
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NAC Re. Securities analysts specifically probed defendants whether the Company had finally
taken the necessary steps to ensure that the NAC Re’s financial reporting and inadequate loss
reserves had been adequately addressed. Indeed, XL had taken a $95 million reserve charge at the
close of the merger in 1999 and $122 million more in 2000 and now an additional $180 million for
2001. Moreover, the Company had previously told investors that its reserves methods were based
on loss data and that the audit committee regularly reviewed the Company’s reserving
methodology, it was sound and the assumptions made to take the revenues “continued to be
appropriate.” See ¶¶66-68, supra. During the call, Charles Gates of Credit Suisse First Boston
asked O’Hara to provide more information on the $180 million reserve shortfall:
Q. Elaborate on additional reserve that used to be NAC Re?
[O’Hara:] A. That was for 1997, 1998, 1999. When we bought NAC Re we re-underwrote the book and let $100m of business go, which was a good move. We saw the market was in serious decline.
* * *
Q. On NAC Re – is this issue over?
A. We think we’ve turned a corner now.
99. False and Misleading Statements: During the same call, analysts also asked why it
was necessary to take additional reserve charges related to the NAC Re business when it took such
a big reserve increase in 2000 and whether it was because the Company had not taken enough in
2000. XL responded that:
It was development this year that we didn’t pick up until our year-end reserve review.
100. False and Misleading Statements: Finally, with regard to whether the Company had
the assets and capital to support the expansion of the business planned for 2002, O’Hara stated:
We brought extra capital on board at the end of the year and with long-term debt in order to create room for expansion of business. We have sufficient assets to support operating leverage in AA range . . . . If more capital is required, we can respond with non-equity, non-common stock capital.
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101. On February 13, 2002, after defendants’ false assurance that problems with reserves
at NAC Re had been resolved, XL stock price skyrocketed by 6% from $91.25 per share to $97.11
per share. The trading volume on that day was 2.8 million, which was over four times the trading
volume of the previous day.
Reasons Why Statements in ¶¶97-101 Were False and Misleading:
102. The statement that the Company had “turned a corner now” with regard to
materially insufficient reserves at NAC Re was false and misleading. In fact, XL and the
Individual Defendants knew at the end of 2001 that the adverse loss developments in its
reinsurance operations described in ¶¶98-99, 94 had occurred three years in a row and were
continuing and would require additional charges going forward. Further, XL knew that it had not
adjusted its reinsurance actuarial methodologies for these current trends and other factors that
would modify past experience, such as subsequent charges for inadequate loss reserves in prior
accident years. As noted in ¶¶244-245, according to Financial Accounting Standard No. 60 (“FAS
60”) the “liability for unpaid claims shall be based on the estimated ultimate cost of settling the
claims (including the effects of inflation and other societal and economic factors), using past
experience adjusted for current trends, and any other factors that would modify past experience.”
103. XL and the Individual Defendants also knew that because its internal controls and
claims paying and reviewing process was in such disarray and that because of the disorganization it
could not accurately track premium payment claims made by its ceding companies, or track
whether NAC Re had paid such claims. Further, XL knew that it maintained wholly inaccurate or
incomplete records, rendering the Company unable to produce reliable loss reserve amounts. The
weakness of the Company’s internal controls filtered into its preparation of financial statements
filed with the SEC and with state regulators, in particular, the NYID, causing NAC Re’s GAAP and
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statutory financial statements to be false and misleading and specifically understated its loss
reserves and loss expenses.
104. The statement in ¶100 that it was a “development this year” was also false and
misleading. In fact, defendants knew that accident years 1997-1999 in the NAC Re reinsurance
operations had been developing adversely which, as of 2002, had occurred for three consecutive
years requiring XL to add to its reserve $95 million, $122 million and $180 million for 1999, 2000
and 2001, respectively. Moreover, even if the statement had been true, that the Company did not
pick it up until what it called a “year-end reserve review,” it was because its internal controls and
specifically, its accounting department systems were inadequate to provide accurate claims
reporting and payment information records to actuaries for proper reserve analyses. Finally, the
Company admits it had not done a “comprehensive review” of the cedent companies’ underwriting,
reserves processes and claims processing required by GAAP and AICPA rules described herein at
¶249.
105. With regard to O’Hara’s statement that the Company had “sufficient assets to
support operating leverage in AA range,” that too was false and misleading. Defendants knew or
deliberately disregarded that XL’s financial statements representing its reserves, shareholder equity
and expenses were false and misleading. As discussed in detail in ¶¶224-237, the Company’s
FY01 financial statements materially understated the Company’s reserves and expenses, and
overstated the Company’s earnings, shareholder equity and shareholder surplus. Defendants were
motivated, however, to understate the Company’s expenses and liability for reserves because XL’s
debt ratings, which supported its debt and securities offerings, were critically important to XL and
more importantly, its ability to write new business was dependent upon the appearance of capital
strength and surplus. See Report on Form 10-K for the FY01:
The Company’s ability to underwrite business is dependent upon the quality of its claims paying and financial strength ratings as evaluated by independent
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rating agencies. As a result, in the event that the Company is downgraded, its ability to write business would be adversely affected in financial guaranty and long-tailed insurance and reinsurance lines of business.
106. Had the Company taken adequate reserves in 2001 ($622 million after tax) for
accident years 1997-1999, the Company’s debt and financial strength ratings would have dropped –
as they did even upon the October 17, 2003 announcement of a $184 million shortfall and
immediately upon the announcement of a $663 million reserve shortfall in January 2004. See
¶¶178-179, 208-210. Indeed, a rating decrease or a stock drop could have force XL to immediately
pay its CARZ and LYONs bondholders approximately $909 million. See ¶¶28-31. Such an
increase in immediately payable debt would have crippled its ability to write new business and
crushed the Company’s ability to raise capital.
107. False and Misleading Statements: On March 26, 2002, XL filed its annual Report on
Form 10-K for the FY01. The Company’s Form 10-K was signed by defendants O’Hara, de St.
Paer and Bornhuetter. The Form 10-K falsely reported the Company’s net income, loss and
reserves, shareholder equity for the year ended December 31, 2001, as detailed in ¶¶224-237, infra.
With regard to the Company’s methodology for reserving for losses, the Company represented that
its methods were based upon actual loss data rather than merely theoretical models subject to
more uncertainty:
CLAIMS ADMINISTRATION
Claims management for the reinsurance operations includes the receipt of loss notifications, the establishment of loss reserves and approval of loss payments. Additionally, claims audits are conducted for specific claims and claims procedures at the offices of selected ceding companies.
* * *
Most of the Company’s incurred but not reported (“IBNR”) loss reserves are derived from casualty business. Casualty business generally has a longer tail than the Company’s other lines of business. IBNR is calculated using several standard actuarial methodologies including paid and incurred loss development, Bornhuetter-Ferguson and frequency and severity approaches. The Company believes the methods presently adopted provide a reasonably objective result as it is based upon
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the Company’s loss data rather than more theoretical models often used in the low frequency high layer business the Company writes.
108. The Form 10-K for the period ending December 31, 2001 also discussed the
Company’s reserve methodologies and made the following false and misleading statement
concerning the Company’s reserve reviews:
Underwriting and loss experience is reviewed regularly for loss trends, emerging exposures, changes in the regulatory or legal environment as well as the efficacy of policy terms and conditions.
Reasons Why Statements in ¶¶108, 109 are False and Misleading:
109. The statement that the Company’s reserve methods were based upon loss data rather
than more theoretical models was false and misleading. In fact, XL and the Individual Defendants
knew the “loss data” it had from its NAC Re reinsurance operations were incomplete and
inaccurate as reported by CW1 above.
110. CW1’s account is consistent with the Company’s failure to accurately assess and
record loss reserves necessary to account for known adverse loss development trends in the NAC
Re reinsurance operations throughout the Class Period.
111. XL’s failure to test NAC Re’s underlying claims data even during the due diligence
phase of the acquisition, as reported by CW2, and failure to maintain internal controls regarding
accurate record keeping or reported claims and claims payments reported by CW1 was in direct
contradiction of the assurances given to investors and in violation of GAAP and AICPA rules.
Moreover, had the Company reviewed its “loss experience regularly for loss trends” as it
represented to investors, it would have recognized that accident years 1997-2000 had experienced
three consecutive years of adverse loss development (recorded in calendar years 1999-2001) and
that for each of those years XL’s assumptions and methodologies had missed the mark by $95-$180
million. See ¶¶235-237. Instead, XL deliberately disregarded those known trends and instead
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failed to record adequate reserve and thus misrepresented the Company’s financial condition in
order to maintain favorable financial strength and debt ratings to the detriment of investors.
112. In fact, the reports of both CW1 and CW2 regarding the impact of the Company’s
lack of internal controls was confirmed by the Examination Report by the NYID, NAC Re’s New
York State Regulator, published in May 2002 and discussed in detail below.
113. False and Misleading Statements: On April 29, 2002, the Company reported its
financial results for 1Q02 in a press release:
XL Capital Ltd Reports First Quarter 2002 Results; Net Operating Income Per Share $1.53 in 2002 Compared With $1.24 in 2001
HAMILTON, Bermuda, Apr 29, 2002 /PRNewsWire – FirstCall via COMTEX/-- XL Capital Ltd (“XL” or the “Company”) (NYSE: XL) today reported that net income for the first quarter ended March 31, 2002 was $89.5 million, or $0.65 per share, compared with $218.9 million, or $1.73 per share, in the first quarter of 2001. Net operating income for the first quarter of 2002 was $210.4 million, or $1.53 per share, compared with $156.7 million, or $1.24 per share, for the quarter ended March 31, 2001.
* * *
Commenting on the first quarter results, Brian M. O’Hara, President and Chief Executive Officer of XL, stated, “Our first quarter results reflect the strong growth and improved market conditions that we continue to see in all segments of the Company. Additionally, we have benefited from a flight to quality and from new premiums from the inclusion of XL Winterthur International and Le Mans Re in the first quarter.”
114. False and Misleading Statements: On May 14, 2002, XL filed its quarterly report
with the SEC reiterating the false financials on Form 10-Q for the quarter ending March 31, 2002.
The Company’s Form 10-Q was signed by defendants O’Hara and de St. Paer.
For all or the reasons set forth in ¶¶224-282, XL’s false financial reporting was in violation of
GAAP, and defendants statements concerning the Company’s first quarter financials were false and
misleading.
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XL’s CARZ “Put Dates” Subject the Company to $614 Million Repurchase Liability
115. On May 23, 2002, the Company faced the risk of having to pay $614 million to
repurchase its outstanding CARZ pursuant to “put” agreements contained in the debentures as
discussed at ¶¶28-31. Had all the bondholders chosen to exercise their put rights, the Company
would immediately be forced to pay $614 million to repurchase the bonds using cash or shares –
approximately 33% of its outstanding debt. Because the bonds are primarily held by sophisticated
investors, repurchase of the bonds was likely if the stock price fell or XL’s balance sheet
deteriorated because it would reduce the value and attractiveness of the CARZ securities.
116. In addition, if the Company’s debt ratings from S&P at anytime fell below BBB+,
the noteholders had the right to put their notes to the Company and to demand repurchase.
However, because the Company had materially understated its liabilities and overstated its net
income and shareholder equity, XL was able to fraudulently maintain strong ratings from rating
agencies, thus staving of bondholder repurchase demands during the Class Period, which would
have crippled the Company as set forth herein.
NYID Issues Scathing Report on Its Examination on XL’s United States Reinsurance Operations – NAC Re
117. On May 31, 2002, the NYID filed its Examination Report of the NAC Re
Reinsurance Corporation, as of December 31, 1999. The Examination Report also included a
review of transactions subsequent to 1999 through at least 2001. According to the NYID, the
report was “confined to financial statements and comments on those matters that involve
departures from laws, regulations or rules, of which are deemed to require explanation or
description.” First, NYID found that the XL’s NAC Re reinsurance operations was in violation of
§310 of New York State Insurance Code requiring insurers to “facilitate such examination.”
118. The Examination Report further suggested that the Company did not comply with
Section 310, demonstrated among other things by the fact that:
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• Documentation provided was often inaccurate and incomplete.
119. The Examination Report made additional factual findings directly addressing NAC
Re’s financial statements and inaccuracies in its accounts and records as follows:
i. Annual Statement Balances
During the examination ... It was discovered that the Company did not have support for several of the annual statement balances as follows:
• Reinsurance payable of paid losses & loss adjustment expenses – In examination testing of this account, it was revealed the Company set up a payable based only on an e-mail from an affiliate. Also, the Company failed to provide information on a timely basis and when provided, it did not tie to the annual statement.
* * *
It is recommended that the Company maintain support for all annual statement balances.
120. The NYID Examination Report also outlined NAC Re violations of §1505(b) of the
New York Insurance Law, specifically, regarding the Company’s failure to accurately record
reinsurance payable on paid losses and loss adjustment expense and failure to maintain records
to support entries on its balance sheet:
ii. Reinsurance Payable on Paid Losses & Loss Adjustment Expenses
During the review of Reinsurance payable on paid losses & loss adjustment expenses, discrepancies were found in two of the four balances tested. These discrepancies resulted in a $988,000 understatement of the reinsurance payable account. Due to the immateriality of this amount, no examination change was made. However, it is recommended that the Company report accurate amounts in its filed annual statements.
121. The report also discussed “open items” on the NAC Re’s balance sheet:
The open items report balance for NAC Re International, an affiliate, was $18,786,870, however, the Company reported $26,231,000 in Schedule F, Part 1. No support could be provided for this difference.
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122. Finally, the Examination Report discussed the section of the Company’s financial
statements called “other expenses” stating “the company was unable to provide support for three
of the five balances requested.”
123. The NYID Examination Report seriously criticized the Company’s financial reports
because they were inaccurate or incomplete and because the Company could not supply supporting
documents for balance sheet entries. The Examination Report corroborated facts disclosed by CW1
as detailed above that the Company’s accounting systems were so disorganized that the Company
itself could not keep track of claims reports or claims payment transactions and in many instances
had no records of certain transactions. Nevertheless, despite actual knowledge that its internal
controls were insufficient to ensure that its financials were reported accurately with regulatory
agencies and the public, defendants failed to perform a comprehensive analysis of its internal
controls, reserving methodologies and cedents’ claims files until investors were damaged by
hundreds of millions of dollars. Instead, the Company falsely confirmed that its reserves were
“efficient” [sufficient] for the Company to move forward in an unencumbered position.
124. False and Misleading Statement: On July 30, 2002, the Company reported its
financial results for 2Q02 in a press release:
XL Capital Ltd Reports Second Quarter 2002 Results
Net Operating Income Per Share $0.18 in 2002 Compared With $1.25 in 2001
HAMILTON, Bermuda, Jul 30, 2002 /PRNewsWire – FirstCall via COMTEX/-- XL Capital Ltd (“XL” or the “Company”) (NYSE: XL) today reported a net loss for the quarter ended June 30, 2002 of $91.7 million, or a loss of $0.68 per share, compared with net income of $128.6 million, or income of $1.01 per share, in the second quarter of 2001. Net operating income for the second quarter of 2002 was $25.0 million, or $0.18 per share, compared with $160.1 million, or $1.25 per share, for the quarter ended June 30, 2001.
125. False and Misleading Statement: On July 31, 2002, the Company hosted a
conference call for analysts during which the Company assured investors of the sufficiency of the
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Company reserves and that its “double a” rated balance sheet would drive revenue and earnings
growth for the remainder of 2002 and 2003:
Now to address the outlook. I would like to offer some guidance for the balance of 2002 and our initial thoughts on 2003 earnings. The adjustment for losses on WTC behind us, diminished exposure to asbestos, efficient [sufficient] reserves and a double a-rated balance sheet, I believe we are in an unencumbered position to move forward.
Looking at the second half of 2002 for XL, barring unusual events, I see nothing standing in the way of a strong performance. . . . [W]e currently expect growth of $8 per share, perhaps in the $8.10 to $8.20 range per share as initial guidance.
Reasons Why Statements in ¶¶125, 126 Were False and Misleading:
126. The July 31, 2002 statement that the Company had “efficient” reserves with a “AA”
rated balance sheet, in an unencumbered position to move forward, was false and misleading when
made. In fact, as a result of the Company’s failure to record adequate reserves for losses in its
NAC Re reinsurance operations, the Company’s balance sheet materially understated the
Company’s expenses and liabilities and overstated shareholder equity and capital surplus as
discussed in detail in ¶¶224-282. Defendants knew that material charges in its reinsurance
operations had been required for three consecutive years to account for serious loss reserve
shortfalls. Defendants also knew or deliberately disregarded that its NAC Re reinsurance
accounting systems, record keeping and financial reporting was woefully deficient as described by
NYID, CW1, and CW3, and that its reserving methodologies did not include a detailed or
comprehensive review of its reinsurance ceding companies underlying policies or claims records.
Defendants also knew NAC Re’s accounting department deficiencies also resulted in false financial
documents filed with the NYID. Indeed, the Company’s so-called “AA” rating was also wholly
dependent upon the false financials and the appearance of capital surplus.
127. False and Misleading Statement: On August 6, 2002, XL filed its quarterly Report
on Form 10-Q for the period ending June 30, 2002 with the SEC, reiterating the false financials for
the quarter ending June 30, 2002. The Company’s Form 10-Q was signed by defendants O’Hara
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and de St. Paer. In addition, defendants O’Hara and de St. Paer signed written certifications
pursuant to §§302 and 906 of the Sarbanes-Oxley Act of 2002. For all of the reasons set forth in
¶¶224-282, the financials reported in the Company’s Form 10-Q for the period ending June 30,
2002 were false and misleading.
128. False and Misleading Statement: On August 9, 2002, the Company announced that
it had agreed to sell 8,000,000 8% Series A preference ordinary shares pursuant to XL’s currently
effective shelf registration statement (plus up to an additional 1,200,000 preference shares issuable
upon exercise of the underwriters’ over allotment option). The capital raised would pay for
investors who “put” their CARZ to the Company:
XL Prices Issue of Preference Ordinary Shares
HAMILTON, Bermuda, Aug. 9 /PRNewswire-FirstCall/ -- XL Capital Ltd (“XL”) (NYSE: XL) announced today that it has agreed to sell 8,000,000 Series A preference ordinary shares pursuant to XL’s currently effective shelf registration statement (plus up to an additional 1,200,000 preference shares issuable upon exercise of the underwriters’ overallotment option). The preference shares are being issued at an initial price to the public of $25.00 per share and will not be exchangeable for or convertible into ordinary shares of XL. The managing underwriters for XL’s preference share offering are Merrill Lynch, Pierce, Fenner & Smith Incorporated and Salomon Smith Barney Inc., as joint book-runners.
The net proceeds from the sale of the preference shares will be used for general corporate purposes, including, without limitation, payment for any Liquid Yield Option(TM) Notes put to XL on September 7, 2002 by the holders thereof.
* * *
As of June 30, 2002, XL Capital Ltd had consolidated assets of approximately $31.2 billion and consolidated shareholders’ equity of approximately $5.4 billion.
129. Based on the Company’s false and misleading financial statements, AM Best
assigned the debt securities rating of “a-.”
130. False and Misleading Statements: On August 9, 2002, XL filed its Report on Form
424b Prospectus with the SEC in connection with its sale of eight million series A preference
ordinary shares. The Prospectus incorporated by reference XL’s Report on Form 10-K for the year
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ending December 31, 2001 and the Company’s April 5, 2002 proxy statement. The Form 10-K for
the period ending December 31, 2001 included the following false and misleading statements:
CLAIMS ADMINISTRATION
Claims management for the reinsurance operations includes the receipt of loss notifications, the establishment of loss reserves and approval of loss payments. Additionally, claims audits are conducted for specific claims and claims procedures at the offices of selected ceding companies.
131. The Company’s April 5, 2002 proxy statement stated:
AUDIT COMMITTEE
The Audit Committee of the Board of Directors meets with the Company’s independent auditors to discuss the scope and results of their audit and to review the Company’s financial reporting, accounting and control systems. The Audit Committee also reviews the Company’s reserving methodology and reserves. . . . The Audit Committee met five times during fiscal 2001.
RESPONSIBILITIES
The Audit Committee shall:
Review with Company management and the independent auditors the proposed overall plan and scope of the Company’s annual audit, the adequacy of the Company’s system of internal controls, and the Company’s audited financial statements and related disclosures.
* * *
Review the reserving methodology and process of the Company and the Company’s reserves, together with internal or external actuarial reports or studies.
* * *
Review and assess compliance with all applicable rules and regulations of the Securities and Exchange Commission and the New York Stock Exchange specifically applicable to the composition and responsibilities of the Audit Committee.
132. Pursuant to the August 9, 2002 offering, the Company raised net proceeds of $222.8
million.
133. Between August 29, 2002 and September 13, 2002 defendant Bornhuetter sold
12,500 shares of his stock for proceeds of $1 million.
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XL’s LYONs “Put Date” Subjected the Company to $295 Million Repurchase Liability
134. The Company faced the risk of having to pay $295 million on September 7, 2002 to
repurchase its outstanding LYONs pursuant to “put” agreements contained in the debentures. The
LYONs gave the bondholders the option to “put” their bonds back to the Company i.e., force the
Company to repurchase the bonds. Had all the bondholders chosen to exercise their puts, the
Company would immediately be forced to pay $295 million to repurchase the bonds using cash or
shares – approximately 16% of its outstanding debt. Because the bonds are primarily held by
sophisticated institutional investors, repurchase of the bonds was likely if the stock price fell or
XL’s balance sheet deteriorated because it would reduce the value and attractiveness of the LYONs
securities.
135. In addition, if the Company’s debt ratings from S&P at anytime fell below BBB+,
the noteholders had the right to put their notes to the Company and to demand repurchase.
However, because the Company had materially understated its liabilities and overstated its net
income and shareholder equity, XL was able to fraudulently maintain strong ratings from rating
agencies, thus staving of bondholder repurchase demands during the Class Period, which would
have crippled the Company as set forth herein.
136. False and Misleading Statement: On October 30, 2002, XL announced its financial
results for the 3Q02.
XL Reports Third Quarter 2002 Results
Net Operating Income $221.0 million, per share $1.61 Net Income $184.0 million, per share $1.34
HAMILTON, Bermuda, Oct. 30, 2002 /PRNewswire – FirstCall via COMTEX/ – XL Capital Ltd (NYSE: XL) (“XL” or the “Company”) today reported net income available to ordinary shareholders for the quarter ended September 30, 2002 of $184.0 million, or income of $1.34 per share, compared with a net loss of $840.0 million, or a loss of $6.70 per share, in the third quarter of 2001. Net operating income for the third quarter of 2002 was $221.0 million, or $1.61 per share, compared with a net operating loss of $761.8 million, or a loss of $6.07.
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137. False and Misleading Statement: On the same day, the Company held a conference
call with securities analysts to discuss its 3Q02 results. During the call, the Company forecasted
EPS of at least $8.00 for 2003 and bragged in its conference call with analysts about its balance
sheet growth, that ratings downgrades of other organizations had narrowed “high quality” insurers
and reinsurers and that XL was the leader in the industry poised to take advantage of the hard
market for the next two years.
Looking at our balance sheet, we have increased our shareholder’s equity from $5.4 billion at the end of June to $5.9 billion in September 30th which is attributable to this quarter’s net income, improvement is net unrealized gains on investment and the $230 million in preference (ph) shares issued in August. At (ph) book value for ordinary share has increased to $42.10 from $39.60 at June 30th.
Last but not least, the impact of rating agency downgrades on several organizations has reduced the number of high-quality insurers and reinsurers and has underscored the need to increase the rate of earnings growth and ROEs in the industry. All of this reinforces our belief that the hard market has at least two years of momentum. We are already in the strategic businesses that we want to be in the P&C area. XL is the leader in this industry with all the important ingredients in place to build on our leadership position.
Reasons Why Statements in ¶¶137, 138 Were False and Misleading:
138. The statement that the Company had increased its shareholder equity was false and
misleading as the Company failed to disclose that its reported shareholder equity was materially
overstated because it knowingly failed to record reserves for known shortfalls in its NAC Re
reinsurance operations as discussed below in ¶¶224-282.
139. False and Misleading Statement: On November 8, 2002, XL filed its quarterly report
with the SEC reiterating the previously released false financials in its Form 10-Q for the quarter
ending September 30, 2002. The Company’s Form 10-Q was signed by defendants O’Hara and de
St. Paer. In addition, defendants O’Hara and de St. Paer signed written certifications pursuant to
§§302 and 906 of the Sarbanes-Oxley Act of 2002 for all of the reasons stated in ¶¶224-282 below.
The financial results reported in the Company’s 3Q02 Form 10-Q were false and misleading.
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140. False and Misleading Statements: On November 12, 2002, the Company announced
in a press release that it has agreed to sell 10,000,000 7-5/8% Series B preference ordinary shares
pursuant to XL’s currently effective shelf registration statement (plus up to an additional 1,500,000
preference shares issuable upon exercise of the underwriters’ over allotment option). The
preference shares were issued at an initial price to the public of $25.00 per share and would not be
exchangeable for or convertible into ordinary shares of XL. The net proceeds from the sale of the
preference shares would be used for general corporate purposes. The Company also falsely stated
that as of September 30, 2002, XL had consolidated shareholders equity of approximately $5.9
billion.
141. On November 15, 2002, the Company filed its Form 424B Prospectus for the
issuance of its $10 million worth of 7-5/8% series B preference ordinary shares. The Prospectus
incorporated by reference the Company’s annual Report on Form 10-K for the year ending
December 31, 2001; the Company’s proxy statement filed with the SEC on April 5, 2002; and the
Company’s most recent quarterly report for the period ending September 30, 2002 (“November
2002 Offering Documents”). Collectively, the Prospectus and the documents incorporated therein
made the same false and misleading statements regarding the audit committee and their
responsibilities as discussed in ¶¶131, 132.
142. As a result of the Company’s false and misleading financial statements, A.M. Best
assigned the debt securities a rating of “a-.”
143. Pursuant to the November 15, 2002 offering, and the false and misleading
statements within the November 2002 Offerings Documents, the Company raised net proceeds of
$278.4 million.
144. False and Misleading Statement: On January 3, 2003, Mark Lane of William, Blair
& Co., Inc. issued a report reiterating XL and the Individual Defendants’ comments in the
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Company’s conference call regarding their 3Q02 revenue and earnings results and specifically
reiterating that defendants had assured investors that reserve inadequacies at NAC Re had been
addressed:
Although certain reinsurers continued to experience adverse reserve development in the casualty reinsurance business in 2002, XL’s management states that the major reserve inadequacies within its casualty reinsurance book related to the NAC Reinsurance acquisition in 1999 have been addressed.
145. False and Misleading Statement: On February 11, 2003, XL announced its financial
results for 4Q02 in a press release. The reported results beat First Call analyst EPS projections
reporting $1.82 per share compared with analyst estimates of $1.79 per share. The Company,
however, reported that it once again had a reserve shortfall in United States casualty reinsurance,
i.e., NAC Re for accident years between 1997 and 2000 and would increase reserves by $215
million. The Company again reassured investors of its forecasted earnings for 2003 of at least
$8.00 per share despite continuing historical additional charges for reserve strengthening at NAC
Re:
XL Capital Ltd Reports Fourth Quarter and Full Year 2002 Results Announces Expensing of Stock Options Granted in 2003
HAMILTON, Bermuda, Feb 11, 2003 /PRNewswire-FirstCall via-COMTEX/--
Fourth Quarter Net Income $214.1 Million, or $1.56 Per Ordinary Share Fourth Quarter Net Operating Income $250.2 Million, or $1.82 Per Ordinary Share
XL Capital Ltd (“XL” or the “Company”) (NYSE: XL) today reported net income available to ordinary shareholders for the quarter ended December 31, 2002 of $214.1 million, or net income of $1.56 per ordinary share, compared with a net loss of $83.6 million, or a net loss of $0.64 per ordinary share, in the fourth quarter of 2001. Net operating income for the fourth quarter of 2002 was $250.2 million, or ordinary share, compared with a net operating loss of $2.6 million, or a loss of $0.02. . . .
* * *
Commenting on the fourth quarter 2002 results, Brian M. O’Hara, President and Chief Executive Officer of XL, stated: “We had a very good quarter with strong underwriting results, delivering an operating return on common equity of 17% and
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increasing our book value ordinary share to $44.48. This was achieved while strengthening reserves during the quarter for prior years.”
“The reserve strengthening primarily occurred in our U.S. casualty reinsurance business, reflecting deterioration in the underwriting results for the 1997 to 2000 accident years.”
146. False and Misleading Statement: On February 12, 2003, XL hosted a conference call
with analysts during which defendants attempted to explain why, once again the Company had
another huge reserve shortfall related to the NAC Re’s business. Analysts sought answers to
whether in hindsight the Company had overpaid for NAC Re which had, based upon reserve
shortfalls to date, obviously had been under-reserved by at least $500 million and whether it was
finally reserved adequately. XL again falsely assured investors that it had substantively reviewed
reserves at NAC Re, indeed, had done so with “great scrutiny” and that it was now adequately
reserved.
RON FRANK: ... Couple of things if I could, Brian, on the reinsurance operations, you know, clearly with respect to Charlie’s questions those have nicked you a few times now and I was wondering if you could put your earnings guidance for 2003, if you could put that in the context of how you’ve gotten comfortable at long last with the reserves for that operation, since this is -- this has been a recurring thorn for you. . . .
BRIAN O HARA: Okay, Ron. We looked at it, to say the least, with great scrutiny. And we believe, given all the facts we know today, it is at the right reserve levels.
Reasons Why Statements in ¶¶134-136 Are False and Misleading:
147. The statement that the Company had reviewed NAC Re reserves with "great
scrutiny" and that the reserves were at the right reserve levels were false and misleading when
made as defendant knew that the Company had not in fact done a comprehensive review of its
assumptions and reserve methodologies made to set reserves for the NAC Re operations. XL and
the Individual Defendants were in possession of “all the facts” regarding adverse loss developments
and trends in its reinsurance operations which had allegedly required hundreds of millions in
reserve charges but failed to change the assumption or methodologies used to set its reserves. In
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addition, XL was also in possession of the facts reported by CW1 that during the entire Class
Period XL’s record keeping practices for claims reports and payments was in complete disarray
such that it could not accurately assess loss data to set reserves and the inaccuracy and
incompleteness of its records had already resulted in a scathing report from the NYID. These facts
are corroborated by Examination Report of the NYID. Defendants own admissions on October 17,
2003 and January 2004 confirm that the Company had not done a detailed claims audit or
substantially reviewed the underlying claims assumptions used to set reserves, had not audited its
material cedents and had not made the necessary adjustments to its assumptions and methodologies
to accurately set loss reserves. See ¶¶178-186, 207. All of these steps are required by GAAP and
AICPA standards and the Company falsely represented that it had been done on an ongoing basis
and on February 12, 2003, done with "great scrutiny."
148. On February 12, 2003, Wachovia Securities analyst Susan P. Spivak issued a report
“XL Q4 Earnings Modestly Above But Lots Of Noise.” The report criticized XL again for taking
hundreds of million in reserves related to NAC Re only months after the Company told investors
that it had “turned the corner” on reserve issues at NAC Re:
XL: Q4 Earnings Modestly Above But Lots Of “Noise” (Part 1 of 2)
* * *
“Noise” in Q4 related to reserve strengthening in the reinsurance line (NAC Re business) and a loss from equity in insurance affiliates . . . .
We are disappointed with the need for the reinsurance reserve charge. Since XL purchased NAC Re in 1999, the company has continually needed to add to reserves on this business. . . .
* * *
Financial Highlights
In Q4 2002, XL strengthened reserves by $215 million pretax, or $170 million after-tax ($1.24 per share), mainly relating to U.S. casualty reinsurance business written during the years of 1997-2000.
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149. False and Misleading Statements: On March 31, 2003, XL filed its annual Report on
Form 10-K with the SEC reiterating the false financials for the FY02. The Company’s Form 10-K
was signed by defendants O’Hara, de St. Paer and Bornhuetter. In addition, defendants O’Hara and
de St. Paer signed written certifications pursuant to §§302 and 906 of the Sarbanes-Oxley Act of
2002. The Form 10-K also reported the Company’s explosive growth of the Company’s net
premiums written from $3.47 billion in 2001 to $5.97 billion in 2002. The Company’s explosive
growth in premiums written, however, was based upon artificially inflated earnings and shareholder
equity, resulting in phony financial strength and debt ratings assigned to the Company based upon
false financial statements. Specifically, XL failed to record adequate loss reserves for known
adverse loss trends and reserve shortfalls in its reinsurance book of business. For all of the reasons
set forth below in ¶¶224-282, the financial results in its March 31, 2003 Form 10-K were false and
misleading.
150. False and Misleading Statements: The March 31, 2003 Form 10-K admitted,
however, that despite actual knowledge that its NAC Re reinsurance division had severe and
repeated loss reserve shortfalls and that its accounting department was suffering from a lack of
internal controls for which it had already been admonished by NYID, the Company had not
changed any of its reserve methodologies or the key assumptions for reserving. The Company
stated, with respect to loss reverses, the following:
The increase in estimate for all other reinsurance reserves in 2002 of $258 million related principally to losses on business written in 1997 through (and including) 2000 in the Company’s U.S. casualty reinsurance business and for asbestos losses in years prior to 1985. . . .
* * *
The Company did not change its methodology or key assumptions in 2001 or 2000. This adverse development was due to an increase in the size and frequency of the reported claims for these lines that was greater than previously expected in the underlying loss reporting patterns used to estimate ultimate losses.
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151. False and Misleading Statement: On April 28, 2003, the Company announced its
financial results for 1Q03 in a press release:
XL Capital Ltd Reports First Quarter 2003 Results
– Net Income $239.9 million, or $1.74 per ordinary share – Net Operating Income $250.1 million, or $1.82 per ordinary share HAMILTON, Bermuda, April 28, 2003 /PRNewswire – FirstCall via COMTEX/ – XL Capital Ltd (NYSE: XL) (“XL” or the “Company”) today reported net income available to ordinary shareholders for the quarter ended March 31, 2003 of $239.9 million, or net income of $1.74 per ordinary share, compared with net income of $89.5 million, or a net income of $0.65 per ordinary share, in the first quarter of 2002. Net operating income for the first quarter of 2003 was $250.1 million, or $1.82 per ordinary share, compared with net operating income of $207.6 million, or $1.51 per ordinary share, for the quarter ended March 31, 2002 (see below for a reconciliation to net income).
Commenting on the first quarter 2003 results, Brian M. O’Hara, President and Chief Executive Officer of XL, stated: “We had a very strong first quarter with excellent underwriting results reflected in our combined ratio of 86.1% and net earned premium growth of 42% in our general insurance and reinsurance operations. Our net operating income return on ordinary shareholders’ equity exceeded 16% and book value per ordinary share increased to $46.09, a record level for XL.
“Our general insurance and reinsurance businesses continue to see very strong pricing, most notably in casualty, professional lines and marine worldwide,” said Mr. O’Hara.
152. False and Misleading Statements: On April 29, 2003, the Company hosted a
conference call for analysts during which defendants boasted that its double and triple “A” rating
was one of the factors differentiating XL from other insurance companies who were looking to do
business with only “higher quality organizations “of which XL was one. The Company further
bragged about the fact that its “Triple A” reinsurer was of the few remaining “Triple A rated”
reinsurers in the world:
Industry financial strength ratings continue to be under pressure from the rating agencies. The flight-to-quality has been another factor in our growth. Both the insured and the insurance companies that we reinsure are seeking to deal with higher quality organizations of which there is a smaller number. Increasingly differentiating XL. As a result, our double-A and Triple-A ratings are important factors to our ongoing success. . . .
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* * *
In our financial products and services segment, earned premiums doubled from the Q1 2002, reflecting the continued steady growth of our financial guarantee insurance and reinsurance businesses. XL financial assurance, our Triple-A reinsurer is one of the few remaining Triple-A-rated financial guarantee, reinsured in the world. We continue to focus on plain vanilla financial guarantee transactions with an emphasis on ROE. . . .
* * *
BRIAN O’HARA: Thanks, Jerry. I would like to provide a few comments on the outlook for XL for the balance of the year. The market continues strong. I see no reason for this environment to change any time soon. And we expect the current hard market to continue throughout 2004. Turning to guidance for 2003, our underwriting results in the Q1 were excellent. . . . Our guidance for the fall under 2003 remains at $8.00 per share.
153. During the same call, O’Hara also specifically discussed how XL was different than
newer reinsurers and that XL would not suffer from competition because it was in a better “reserve
position” and had financial strength ratings that could support capital raising efforts:
The investment markets are going to be a challenge for quite a while. The new players, while they don’t have the old problems, don’t have the reserves built up, they don’t have the treaty support. They don’t have the ratings. So they are limited in what impact they can have on the market. And they just aren’t in a position to take gambles. . . . Everybody still has to look very seriously at margin, and they too have similar constraints that the new capital have in terms of reserve positioning, the ratings, and treaty support, and the cost of reinsurance. The cost of reinsurance isn’t going down any time soon.
* * *
[W]e are very committed to maintaining capital to support our double-A insurance and reinsurance and our Triple-A financial products and services ratings. And we monitor that on a regular basis. The thing that I can tell you is that we are not contemplating any equity financing. And -- but I can also assure you we monitor carefully and will protect our credit ratings. They are strategically important to us.
Reasons Why Statements in ¶¶150-154 Are False and Misleading:
154. The statement regarding the Company’s ratings differentiating XL from other
reinsurers specifically because its competitors “don’t have the reserves built up” and “don’t have
the ratings” was false and misleading when made. Defendants knew or deliberately disregarded
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that XL’s financial strength and debt ratings were only the result of the Company’s false financial
statements and its failure to record loss reserves for known loss development trends in its NAC Re
operations. Indeed, but for the Company’s failure to address known weaknesses in its internal
controls and to timely record hundreds of millions in reserves, the Company would not “have the
ratings” or reserve positioning allowing defendants to represent XL as a “higher quality
organization.”
155. False and Misleading Statement: On April 30, 2003, Deutsch Bank-North America
issued a report rating XL a strong buy repeating XL management statements in the April 28, 2003
conference call and reiterating the Company’s FY03 guidance of $8.00 per share. The report also
noted that the Company was benefiting from flight to quality because of its “AA” and “AAA”
rating comments regarding “prior year reserve” movement strongly suggested that XL’s “balance
sheet fixing” was finally over:
HIGHLIGHTS:
Building reserve redundancies. On the first quarter earnings conference call, XL Capital’s management stated the underwriting conditions remain strong, with casualty prices rising and players focusing on margin improvement rather than market share growth. Management also stated that there was very little prior-year reserve movement, and the company is building redundancies. This suggests that the balance sheet fixing appears to be over and future earnings will be stronger. . . .
* * *
Management reiterated its 2003 EPS guidance of $8.00 per share . . . .
* * *
DETAILS:
On XL Capital’s first quarter earnings conference all, management maintained their 2003 EPS guidance of $8.00. They highlighted that the underwriting environment continues to be strong, so they expect the company’s combined ratio to be below 90%. . . .
* * *
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Management stated that casualty prices continue to rise, and it expects that trend to continue through 2004. Furthermore, XL Capital is benefiting from a flight to quality given its AA and AAA ratings.
156. False and Misleading Statement: On the same day, April 30, 2003, William, Blair &
Co., Inc. issued a report based upon XL’s comments during the conference call and reiterated the
Company’s FY03 forecast of $8.00 per share and specifically committed upon the strength of the
Company’s balance sheet:
XL Capital: Impressive Underwriting Margins; Reiterate Outperform Rating
* * *
The balance sheet remains in good shape and XL does not need any equity capital to support current growth expectations, in our opinion. Total debt to total capitalization was 21.7% as of March 31, 2003, 27.6% including all preferred securities as debt. Management stated that it is experiencing no issues with collecting from its reinsurers and we do not have any major concerns among XL’s top reinsurance recoverable exposures - - in excess of 3% of its exposure. . . .
Management reiterated its 2003 EPS guidance of $8.00 per share, which includes a $0.30 per share loss for Annuity and Life Re, although it continues to provide minimal guidance regarding premium growth targets.
157. False and Misleading Statement: On May 15, 2003, XL filed its quarterly report
with the SEC reiterating the false financials on Form 10-Q for the quarter ending March 31, 2003.
The Company’s Form 10-Q was signed by defendants O’Hara and de St. Paer. In addition,
defendants O’Hara and de St. Paer signed written certifications pursuant to §§302 and 906 of the
Sarbanes-Oxley Act of 2002, as discussed in ¶¶224-282, the financial results reported in the Form
10-Q were false and misleading when made.
Credit-Strapped – XL Pays $111.9 Million for a $500 Million Put Option Agreement to Get New York State Statutory Relief in Order to Bring NAC Re Reinsurance Operations Into Statutory Compliance:
158. By 2Q03, XL and the Individual Defendants knew that the Company was strapped
for credit and that it had exhausted its available letters of credit from bank lenders. In addition,
defendants knew that NYID, which had only one year earlier issued a scathing report on the
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Company’s NAC Re reinsurance operation citing specifically that its reported statutory surplus (the
statutory equivalent to shareholder equity) and assets on its annual statement were materially
overstated and that its financial books and records were not kept accurately and in compliance with
New York State Law, would require additional collateral for items on NAC Re’s balance sheet
including a receivable of approximately $3 billion from XL Re Bermuda, an alien (non-admitted)
company.
159. The Company’s NAC Re reinsurance operations writes reinsurance policies and
retrocedes 75% of its reinsurance liability to another XL subsidiary, XL Re in Bermuda. To satisfy
the state’s requirements, insurers, especially those like NAC Re who cede or retrocede reinsurance
risk to non-admitted, or “alien” reinsurance companies, must provide collateral for receivables or
write the asset down to $0, which reduces surplus by the amount of the writedown dollar for dollar.
160. In February, 2003, NAC Re reported to NYID that it had 2.3 billion in receivables
on its balance sheet from reinsurance it had retroceded to XL Re. However, unless NAC Re
provided collateral for the receivable, pursuant to SAP and New York State Law, NAC Re would
have to write off 100% of the receivables from XL Re. Put simply, NYID demanded NAC Re
provide collateral for its XL Re receivables so they could be assured that NAC Re would be able to
pay its claims if XL Re was unable to pay or elected to default on NAC Re’s receivable.
161. XL had secured $2 billion in letters of credit from its syndicated bank lenders but
needed over $500 million more to satisfy New York State regulatory requirements for its NAC Re
reinsurance division. XL knew it had exhausted its ability to obtain additional collateral using
letters of credit and was forced to set up an alternative form of collateral and provide an additional
insurance trust in order to satisfy statutory requirements.
162. Thus, in May 2003, XL began preparations to provide another $500 million in
collateral security for NAC Re by entering into a complex “put” option agreement to provide the
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Company with statutory relief” through a New York State Regulation 114 Trust. Regulation 114
governs the manner in which insurers must establish trust accounts that provide ceding companies
with credit for reinsurance from non-admitted reinsurers. A Regulation 114 trust establishes a
segregated trust account into which assets are deposited, (in this case by XL) in the form of
securities or cash in which the cedent is the beneficiary (in this case NAC Re). The United States
cedent, in this case NAC Re, then includes information about the trust in its own financial reports
to state regulators in order to avoid write downs of receivables and surplus, for the amount of
uncollateralized receivables from the non-admitted, alien reinsurer.
163. In sum, because XL was fully extended on letters of credit, XL had to spend $111.9
million to provide statutory relief to NAC Re by entering into a complex $500 million insurance
trust put transaction. Thus, in the event of default by XL Re, NAC Re could withdraw assets from
the Regulation 114 Trust fund to fulfill its United States reinsurance obligations. This complex
transaction was 6.6% of XL’s June 30, 2003 shareholder equity, and 40% of NAC Re’s June 30,
2003 shareholder surplus.
164. False and Misleading Statement: On June 18, 2003, XL filed an amended quarterly
Report on Form 10-Q with the SEC reiterating the false financials for the quarter ending March 31,
2003. See ¶¶224-282. The Company’s Form 10-Q was signed by defendants O’Hara and de St.
Paer. Defendants O’Hara and de St. Paer also signed written certifications pursuant to §§302 and
906 of the Sarbanes-Oxley Act of 2002. The amended Form 10-Q made the following false
statement regarding the Company’s ability to meet its statutory obligations using its commercial
facilities from banks:
The Company has several letter of credit facilities provided on a syndicated and bilateral basis from commercial banks. . . . All of the commercial facilities are scheduled for renewal during the remainder of 2003. In addition to letters of credit, the Company has established insurance trusts in the U.S. that provide cedants with statutory relief under state insurance regulations in the U.S. It is anticipated that the commercial facilities will be renewed on expiry but such renewals are subject to
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the availability of credit from banks utilized by the Company. In the event that such credit support is insufficient, the Company could be required to provide alternative security to cedant. This could take the form of additional insurance trusts supported by the Company’s investment portfolio or funds withheld using the Company’s cash resources. The value of letters of credit required is driven by, among other things, loss development of existing reserves, the payment pattern of such reserves, the expansion of business written by the Company and the loss experience of such business.
Reasons Why Statements in ¶165 Were False and Misleading:
165. The statement that “in the event credit support is insufficient, the Company would
be required to provide alternative security” was false and misleading when made. In truth, on June
18, 2003 defendants already knew its credit support was in fact insufficient and their commercial
facilities could not be relied upon, and that as early as May 22, 2003, XL had already set up a trust
with the stated purpose of affecting a $500 million put transaction agreement to provide NAC Re
with statutory relief from state regulators. See ¶¶159-164.
166. Between May 29, 2003 and July 11, 2003, defendants O’Hara, Keeling and Brown
sold a total of 52,000 shares of their XL stock for illegal insider trading proceeds of $2.5 million.
167. On July 14, 2003, XL issued a press release announcing it had entered into a Capital
Markets Transaction to increase capital resources:
XL Capital Ltd Completes $500 Million Capital Markets Transaction
HAMILTON, Bermuda, Jul 14, 2003 /PRNewswire-FirstCall via COMTEX/ -- XL Capital Ltd (NYSE: XL) (“XL”) announced today that it has entered into a capital markets transaction to increase its capital resources and capacity to provide reinsurance financial statement credit to its U.S. property and casualty insurance operations. Through the transaction, XL obtained an unconditional right to put up to $500 million of its preference ordinary shares to a high quality asset-backed trust for a period of up to 30 years. The securities issued by the trust were rated “A-” by Standard and Poor’s Ratings Group and “A3” by Moody’s Investor Services, Inc. The transaction was privately placed.
168. False and Misleading Statement: On July 31, 2003, the Company announced its
financial results for 2Q03 in a press release:
XL Reports Second Quarter 2003 Results
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Record Net Income $347.7 million, or $2.51 per ordinary share
HAMILTON, Bermuda, July 31, 2003 /PRNewswire-FirstCall -- XL Capital Ltd (NYSE: XL) (“XL” or the “Company”) (NYSE: XL) today reported net income available to ordinary shareholders for the quarter ended June 30, 2003 of $347.7 million, or $2.51 per ordinary share, compared with a net loss of $91.7 million, or $0.68 per ordinary share, in the second quarter of 2002. . . .
* * *
Total assets as of June 30, 2003 were $39.2 billion compared with $35.6 billion as of December 31, 2002. Book value per ordinary share as at June 30, 2003 increased to $51.40 compared with $44.48 as at December 31, 2002.
169. False and Misleading Statement: On August 1, 2003, XL held a conference call
during which defendants made the following false and misleading statements bragging about the
Company’s debt to capital ratios and debt ratings. The Company also reiterated its 2003 EPS
guidance of $8.00 per share:
We continue to benefit from our AA level financial strength ratings from the major rating agencies, and we are able to better leverage terms and conditions as a result of our financial strength relative to most of our competition. . . .
* * *
Our debt to total capital ratio is a healthy 20 percent, down from 22 present [sic] at year-end due to the increase in our total equity base. . . .
* * *
[T]he rating agencies are still very concerned about the industry’s capital adequacy. Our strong results for the first half of 2003 have bolstered our AA capital position. . . .
Based on recent discussions with the rating agencies, we do not anticipate having to raise common equity or common equity linked capital over the near to medium-term. . . . I don’t believe any change in our previous guidance for 2003 is warranted.
170. False and Misleading Statement: During the same August 1, 2003 call, analysts also
asked defendants why the amount the Company had recorded in IBNR reserves had actually gone
down considering that the Company was reporting strong growth in its casualty business.
Defendants O’Hara and de St. Paer again falsely told investors that the Company’s reserving
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methodologies were extremely conservative – meaning that current reserves were more than
enough to cover potential losses.
BRIAN O’HARA: Yes, ... in terms of our overall actuarial reserve, which I think this hits directly at the point you are raising, have consistently been and continue to be a pretty conservative house in terms of the way we provide. So I think it is just a mix of those various numbers flowing through rather than any trend.
BRIAN O’HARA: ... You can see that the reserving process continues to be pretty conservative, and, of course, that supports very strong cash flow as well.
* * *
RON FRANK, ANALYST, SMITH BARNEY: A couple of things. One, I just want to clarify on the unchanged guidance, the guidance that I recall is about $8.00 this year; is that correct?
JERRY DE ST. PAER: That is right.
171. XL was asked once again about the reserves at its reinsurance operations and once
again falsely assured investors that its reinsurance business was reserved at very conservative
levels:
BRIAN O’HARA: Good morning, Ron. You have heard Brian in the past talk about financial conservative bias in the actuarial and (inaudible) technology, and no where more does that apply than here.
* * *
RON FRANK: On that subject, can I infer from the comments you just made that you are still feeling pretty confident you are done with North American Casualties as far the prior year issues are concerned?
BRIAN O’HARA: Yes. Things look very good.
* * *
MARK LANE: In your response to Ron’s question, do you feel better about your reserve position now than just in mid-May, or are we going to have to wait until the end of the year before we have a real good sense if there is anymore reserve development that may continue to trickle in?
BRIAN O’HARA: What I recall saying was that if we had any, it would be easily absorbed in the growing profit run-rate that we have on casualty lines. But we don’t do a reserve analysis until later in the third quarter.
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172. Finally, defendants again took the opportunity to boast about the Company’s
competitive advantage in the marketplace because it had better ratings and credit than the newer
entries into the marketplace commenting that it would be in the best interest of larger insurers like
AIG to do business with XL:
ADAM KLAUBER: Okay. And finally, the casualty markets are obviously very robust right now. Have you seen more competitors move into the market?
BRIAN O’HARA: I think there are a lot of people who would like to get into it. In the casualty market, credit ratings are increasingly important, particularly in the reinsurance area. Our AA has increasing competitive advantage vis-a-vis others who have ambitions, but they are only going to have limited acceptance . . . .
* * *
With our AA rating, we think that we have so few competitors at that range, that it would behoove them to want to do business with us.
Reasons Why Statements in ¶¶168-173 Were False and Misleading:
173. The statements that the Company’s overall actuarial reserve and reserving process
was “pretty conservative,” and its comments regarding XL’s financial strength and debt ratings
were false and misleading when made. XL and the Individual Defendants knew that the Company
had inadequate accounting controls at NAC Re, which made any estimate of loss reserves
unreliable. In fact, defendants knew that material charges in its reinsurance operations had been
required for three consecutive years to account for serious loss reserve shortfalls and that its
reserving methodologies did not include a detailed or comprehensive review of its reinsurance
ceding companies underlying policies or claims records or account for known negative trends
affecting the financial results. Moreover, as a result of the Company’s failure to record adequate
reserves for losses in its NAC Re reinsurance operations, the Company’s balance sheet materially
understated the Company’s expenses and liabilities and overstated shareholder equity and capital
surplus as discussed in detail in ¶¶224-282. Indeed, the Company’s so-called “AA” rating was
purely a result of the false financials and the appearance of capital surplus.
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174. False and Misleading Statement: On August 15, 2003, XL filed its quarterly Report
on Form 10-Q with the SEC reiterating the false financials for the quarter ending June 30, 2003.
The Company’s Form 10-Q was signed by defendants O’Hara and de St. Paer. In addition,
defendants O’Hara and de St. Paer signed written certifications pursuant to §§302 and 906 of the
Sarbanes-Oxley Act of 2002.
XL’s LYONs “Put Date” Subjected the Company to $300 Million Repurchase Liability:
175. The Company faced the risk of having to pay $305 million to repurchase their
outstanding LYONs on September 7, 2003 pursuant to “put” agreements contained in the
debentures. The LYONs debentures, as described above in ¶¶28-31, 124, 125, gave the
bondholders the option to “put” their bonds back to the Company, i.e., force the Company to
repurchase the bonds on specified dates, one being September 7, 2003 or upon the occasion of
certain events affecting the credit ratings assigned to the bonds. For example, if the Company’s
financial strength and/or debt ratings at anytime dropped below BBB+ the bondholders had the
right to put their bonds to the Company and to demand repurchase. Had all the bondholders chosen
to exercise their puts, the Company would immediately be forced to pay $305 million to repurchase
the notes using cash or shares – approximately 16% of its outstanding debt.
176. On October 1, 2003, defendant O’Hara sold a massive 40,000 shares for proceeds
of more than of $3.1 million and on October 14, 2003 defendant Keeling sold 5,000 shares for
proceeds of $398,500.
XL Shocks Investors with Another Huge Reserve Shortfall in Its NAC Re Reinsurance Operations Causing Its Stock Price to Plummet:
177. On October 17, 2003, at 5:49 a.m., XL issued a press release announcing yet another
huge loss reserve shortfall in its NAC Re Reinsurance business and a corresponding $184 million
reserve charge for its reinsurance operations:
XL Capital Ltd. Announces That Third Quarter Results Will Be Impacted by Prior Period Losses in North American Casualty Reinsurance Operations
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HAMILTON, Bermuda, Oct. 17 /PRNewswire-FirstCall/ -- XL Capital Ltd (“XL” or the “Company”) (NYSE: XL) announced today that third quarter results will be lower than anticipated due to higher than expected losses in its North American reinsurance operations primarily from new casualty claims for the 1997 to 2000 underwriting years. As a result of these losses, the Company expects its third quarter 2003 net income to be reduced by approximately $184 million pre-tax or $160 million after-tax, or approximately $1.16 per ordinary share, compared to analysts’ current expectations. The Company will report third quarter results after the close of market trading on October 29, 2003.
Brian M. O’Hara, President and Chief Executive Officer of XL, stated; “As we have previously noted, the underwriting years in the late 1990’s were among the worst in the industry’s history for North American casualty business. ... The claims stem from the former NAC Re book, primarily from general liability, medical malpractice, professional lines and surety.”
“I am personally leading a review of this book of business, which will include an intensive claims audit and review of the ceding company claims files that will be completed by year end,” Mr. O’Hara noted. “I intend to fully address our exposure to the 1997 through 2000 North American casualty reinsurance book written by the former NAC Re so that it will not adversely affect our financial results in 2004 and beyond.
178. Immediately, at 8:27 a.m., on October 17, 2003, Bloomberg reported S&P’s ratings
services placed ratings on XL and its other core holdings on CreditWatch with negative
implications.
179. On October 17, 2003 at 9:23 a.m., Wachovia Securities issued a report stating that
after XL finishes its process of reviewing its reserves at NAC Re it “could lead to additional
strengthening,” i.e. more charges.
180. On October 17, 2003, at 12:25 p.m., Wachovia Securities issued a report lowering
3Q03 earnings estimates for XL from $2.08 per share to $0.92 per share based upon the Company
revelation of yet another reserve shortfall and was in the process of a review that would likely lead
to additional reserve charges:
XL: Additional Reserve Strengthening – Lowering 2003 Estimates (Part 1 of 2)
* * *
Additional Reserve Strengthening--Lowering 2003 Estimates: Undergoing Further Reserve Review Of NAC Re Portfolio Earnings Estimate Revised Down
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* * *
We are lowering our Q3 2003 EPS estimate to $0.92 per share from $2.08 to incorporate the company’s announced reserve strengthening in its North American casualty reinsurance operations (NAC Re book) of $160 million after-tax, or $1.16 per share. The increase in reserves relates to business written during 1997 through 2000 primarily in the lines of general liability, medical malpractice, professional, and surety. Our adjusted 2003 EPS estimate is $6.83 per share.
We calculated that XL has strengthened reserves for just NAC Re business by $644 million pretax since the merger was completed in June 1999 (at a price of $1.19 billion). In addition, XL is in the process of further reviewing its reserves at NAC Re, a process which should be completed by year-end 2003 and could lead to additional strengthening.
181. The October 17, 2003 announcement caused investors to sell off shares of XL stock
and question management’s credibility concerning its prior comments that loss reserves for its
reinsurance operations were at the right levels, the processes by which the Company reviewed and
assessed its loss reserves and whether the review of cedent Company claims files meant that
another charge to income was imminent.
182. Indeed, trading volume of XL on October 16, 2003 was a mere 653,000 shares. On
October 17, 2003 after the announcement investors traded 11.5 million shares of XL stock. As a
result, XL’s share price plunged nearly 8% or $6.03 per share to close at $73.37 per share on
October 17, 2003.
183. Following news of this, securities analysts following the Company lambasted XL for
its failure to assess reserves needs at its NAC Re. For example, William Yankus of Fox-Kelton
Inc. stated the following:
BALANCE SHEET AND MANAGEMENT CREDIBILITY NOW IN QUESTION: This is the THIRD year of significant reserve charges for XL and related earnings disappointments. From 2001-2003 XL has had to address lingering balance sheet issues. As mentioned earlier, the 3Q hit of $184 million is the fourth prior year charge related to NAC Re reinsurance operation since the 1999 acquisition. This type of balance sheet weakness is surprising, given XL’s status and reputation a one of the industry’s most diligent setters of loss reserves. Clearly, XL management has failed in assessing the reserve needs of its NAC Re acquisition over a fairly extended time frame (1999-2003).
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The magnitude of the NAC Re loss development also brings into question XL’s assessment of the remainder of its loss reserves for the more difficult 1997-2000 period.
184. On October 17, 2003, William, Blair & Co., Inc. also issued a report on XL’s latest
reserve shortfall for the NAC Re business, indicating that the Company’s ongoing review would
likely result in an additional reserve charge:
XL: Third-quarter Loss Reserve Charge; Issue Is Potential Fourth-quarter Charge
* * *
XL this morning announced that it expects to take a third-quarter charge of $1.16 per share to increase loss reserves for casualty reinsurance business written by the former NAC Re between 1997 and 2000. This charge is highly disappointing and reduces management’s credibility further, in our opinion. Loss reserve adequacy within casualty reinsurance has been the key risk for XL the past few years. . . .
* * *
Management expects to complete a comprehensive loss reserve review in the fourth quarter to address loss reserve adequacy definitively, which likely will result in another charge, in our opinion. The size of the charge this quarter should not affect XL’s capital position, but a charge in the fourth quarter would put further pressure on capital depending on the size. . . .
We reduced our third-quarter EPS estimate to $0.92 from $2.08 and our 2003 EPS estimate to $6.84 from $8.00. . . .
* * *
We believe the company could reasonably absorb another $200 million to $300 million pretax charge given the completion of its contingent capital transaction in July. In July, XL announced a unique capital markets transactions that effectively allows XL Re America (XL’s U.S. domiciled reinsurer) to access $500 million of capital directly through the issuance of preferred securities in the event of any capital impairment at XL Re America. . . . Following the announcement this morning, S&P placed XL America’s double-A financial strength rating on CreditWatch negative, along with the parent company’s debt ratings. S&P cited the $214 million of adverse reserve development in 2003--$184 million in the third quarter--along with the outstanding fourth-quarter loss reserve study as reason for the change in outlook. S&P expects XL to “replenish the reserve losses through capital markets activity following the completion of the (fourth quarter reserve) study.” We are not certain if S&P is referring to the exercising of XL’s contingent capital markets transaction or the anticipation of an additional capital markets
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transactions. S&P stated it is reviewing whether it believes XL America is “core” to the overall operations of XL. If S&P views the business as noncore, it does not expect a downgrade to exceed two notches.
XL Formally Admits Weakness of Its Financial Reporting and Reserve Analysis for NAC Re Operations:
185. On October 20, 2003, the Company hosted a conference call with analysts to discuss
the October 17, 2003 announcement of a huge $184 million reserve charge to income related to its
reinsurance division XL Reinsurance America, formerly NAC Re. During the call defendants
admitted that the reserve practices had been inadequate and that it was embarking upon a reserve
review that would uncover any and all information about the underwriting years 1997-2000 of
NAC Re’s book to make sure the Company was properly reserved going forward. Indeed, such a
reserve review should have been conducted earlier as XL had represented throughout the Class
Period that, “estimating loss reserves is periodically reviewed to ensure that the assumptions
made continue to be appropriate.” Notwithstanding bold statements throughout the Class Period
that its reserve methods were conservative and problems at NAC Re were over, defendant could not
provide answers:
Now, I would like to try and address some of the questions that may already be on your minds. Firstly, you might ask, if these are unexpected claims, how come they have only just now materialized? I would answer by saying that it appears to be a combination of factors, including, most importantly, increasing loss costs. Our cedents may have reserved at historical appropriate levels, which do not hold up in the current environment. Our cedents may also have been overly optimistic. We may have attached at a level that would not historically have been breached, but in the current environment, has been so. It is also possible that some carriers may have under-reserved on a case spaces, due to fears of the discoverability of their reserve during claims litigation.
Next, you might ask whether they are new claims to the cedents. In answer, some are and some are not. If they’re not new, you might ask whether they didn’t have a duty to disclose this information to us earlier. Many treaties have a reporting trigger set at 50 percent of the retention or deductible under the treaty. If the cedents put up a normal precautionary reserve only, then under the terms of the treaty, they generally would not have to report this to us. The more detailed claims audit that we have initiated is, in part, designed to enable us to better understand this dynamic.
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* * *
However, the process we’ve now initiated is very focused, particularly on the major problem areas that actually come from a relatively small number of cedents. It will be broader; it will take a much larger section of the cedent’s portfolio of claims and it will be deeper; it will look in much greater detail at the underlying claim assumptions, but also at claims that may not yet have reached our attachment point or been advised to us by the cedents.
* * *
At the risk of some duplication of Henry’s comments, our action plan has four major components. First, we are undertaking, as Henry said, a comprehensive claims audits of all material cedents, looking at their own claims files and reviewing the current status of these claims and independently estimating likely outcomes.
* * *
The reviews pursuant to our action plan will go beyond the claims on which we’ve been noticed and will look exposures on which claims may have a possibility of reaching our layers. We will draw our own conclusions on the likelihood of penetrating our layers; we will be going further and deeper. We will establish additional case reserves wherever we feel appropriate.
Second, we intend to review all key loss picks and reserve analysis procedures, and we will make adjustments to these if necessary also before year-end.
Third, we are undertaking a thorough investigation of future loss mitigation initiatives, including commutation of policies. This will be an ongoing part of the review process to settle fully any claims we can during this process.
Fourth, we have already committed to the rating agencies and the regulators that we will replenish any capital lost to maintain our risk-based capital ratios for year-end and to demonstrate our commitment to our obligations at the highest level. We will complete this action plan before year-end. We believe this action plan will give us the granular level of information to dimension the new and unusual aspects of the development we’ve seen, and to establish the reserves and management measures to ensure this problem is not coming back. I’m adding my commitment to Brian’s to seeing this through this year.
* * *
Indeed, again in the third quarter, more than $500 million of new operating cash flow is expected. Our fundamental business model is intact and performing. As we noted at the outset, we plan to report fully our third-quarter results on October 29, and we will have another conference call to review those results on Thursday, October 30th.
* * *
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RON FRANK, ANALYST, SALOMON SMITH BARNEY: [T]his operation has been your source of greatest frustration and uncertainty going back a while now, is it unfair to expect that you might have become, for lack of a better term, a bit more paranoid a bit sooner and undertaken something like what you’re about to undertake in regard to the study sooner?
Second, are you at all concerned at the management level that any part of this may relate to disconnects within the organization in terms of the quality or volume of reporting that you’ve been getting from the various levels of the organization, vis-a-vis the old NAC Re?
BRIAN O’HARA: Let me actually work from the back to the front. No, I’m very plugged-in and connected to all of our units and operations. We have a very flat organization. I get weekly reports from every unit.
186. XL’s October 17, 2003 and October 20, 2003 promises to conduct a comprehensive
loss review was in fact a stark admission that it had failed to do what it had represented to investors
was done throughout the Class Period. It was only in February 2002 that XL told investors after
recording $180 million reserve shortfall for NAC Re that it “conducted a full actuarial review,”
and everything checked out positively. Then, on February 11, 2003 XL stated that it had reviewed
the NAC Re reserves with “great scrutiny.” The review purportedly begun in the 4Q03 was not
extraordinary at all but in fact was required on an ongoing basis by GAAP and AICPA 6.47 and
6.48 as part of maintaining the Company’s internal controls. See detailed rules at ¶221. XL and
the Individual Defendants knew and deliberately disregarded that its reserve review, record
keeping, and claim investigation process was unreliable as evidenced by three consecutive years of
hundreds of millions of dollars in reserve shortfalls in one in its NAC Re book of business resulting
as of October 17, 2003 huge damages to XL investors.
VIII. LOSS CAUSATION/ECONOMIC LOSS
187. During the Class Period, as detailed herein, defendants devised a scheme to deceive
investors and the market about XL’s true financial condition by issuing false financial statements
and knowingly misrepresenting the adequacy of XL’s loss reserves, the soundness of the
Company’s methodology for determining reserves, the strength of its balance sheet and forecast of
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future earnings. Defendants knew, however, that XL’s claims processing was in disarray, its
reserves had been repeatedly deficient and its balance sheet materially overstated the Company’s
earnings. By failing to record adequate loss reserves, defendants presented a misleading picture of
XL’s financial results, overstating shareholder equity and income and understating expenses and
liabilities for reserves. ¶¶97, 114, 115, 125, 128, 129, 137, 138, 140-142, 146, 150, 152, 158, 169,
175.
188. Defendants’ false and misleading statements had the intended effect of and caused
XL’s stock to trade at artificially inflated prices throughout the Class Period and to reach a Class
Period high of $97.38 per share on April 10, 2002. Later, when the true state of the Company’s
operations concealed by defendants’ fraudulent scheme reached the market, XL’s stock price
plunged as the prior artificial inflation came out of XL’s stock price. As a result, lead plaintiff and
other members of the class suffered economic losses, i.e., damages under the federal securities
laws.
189. For example, throughout the Class Period, it was part of defendants’ scheme to
present a misleading picture of XL’s financial strength and prospects by failing to truthfully
disclose that XL’s NAC Re reinsurance operations was experiencing an increasingly negative trend
of serious and adverse loss development. Instead, defendants specifically and falsely told investors
that XL’s loss reserves in its NAC Re reinsurance operations were sufficient and adequate to pay
losses and loss expenses for the 1997-2000 accident years. See ¶¶67, 126. Thus, defendants
claimed that “the reserves for unpaid losses and loss expenses are sufficient to pay losses that fall
within coverages assumed by the Company” and that XL had reviewed NAC Re reserves with
“great scrutiny,” and that “it is at the right reserve levels.” See ¶¶67, 147.
190. In addition, each time analysts and investors probed defendants about large reserve
shortfalls that took place during the Class Period, defendants falsely assured the market that the
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problems had been resolved, stating that “[w]e think we’ve turned the corner,” “the major reserve
inadequacies . . . have been addressed,” and that “[g]oing forward from that, we’re in very good
shape.” See ¶¶92, 99, 145.
191. As part of their scheme, defendants also hid the fact that NAC Re’s claims
processing was in such disarray that any reserve analysis was inaccurate, unreliable and inadequate.
But instead of disclosing to investors that the assumptions and methodology used for calculating
the loss reserves were inappropriate, defendants repeatedly told the market that the Company’s
reserving methodologies were conservative and that the “methods presently adopted provide a
reasonably objective results.” See ¶¶67, 108, 171. Moreover, defendants falsely assured investors
that they had conducted “comprehensive” claims audits at its cedent companies stating, for instance
that “[w]e conduct a full actuarial review of all our business units annually.” See ¶¶67, 92, 97, 131.
192. Despite defendants’ knowledge that XL’s balance sheet materially overstated XL’s
true earnings and shareholder equity, defendants used these false financial results to brag about
XL’s strong ratings proclaiming, for instances, that “we have sufficient assets to support operating
leverage in AA range,” and “our double-A and Triple-A ratings are important factors to our
ongoing success.” See ¶¶101, 126, 138, 153, 170, 173.
193. On October 17, 2003, the true state of XL’s operations and financial condition
reached the market when XL announced that it had experienced yet another huge loss reserve
shortfall for accident years 1997-2000 and that it was taking a $184 million charge to earnings.
Furthermore, although defendants had, throughout the Class Period, consistently and repeatedly
told investors that they had conducted full actuarial reviews and claims audits of ceding companies
resulting in XL’s reserves being adequate, defendants said that the Company would conduct “an
intensive claims audit” and a “review of the ceding company claims files.” ¶178.
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194. In a conference call three days later, defendants admitted that its reserve practices
were inadequate and that defendants would “look in much greater detail at the underlying claim
assumptions,” undertake “a comprehensive claims audits (sic) of all material cedents,” and “review
all key loss picks and reserve analysis procedures” to fix reserve deficiencies, suggesting future
additional reserve charges. ¶186. On this announcement, XL’s stock price fell even further,
closing at $70.35 per share, down from its $73.37 per share closing price on the previous trading
day. Indeed, XL took two additional reserve charges on January 13, 2004 in the amount of $663
million and on July 7, 2005 in the amount of $191 million.
195. When the true facts about XL’s operations and financial conditions reached the
market, investors immediately sold off XL stock as the information indicated that previous
statements concerning the Company’s financial condition were false, that there were much deeper
problems with the loss reserves at Nac Re and that additional loss reserve charges were
forthcoming. On October 17, 2003, the stock price plummeted $6.03 per share (or 7.6%) to $73.37
per share on trading volume of over 11.5 million shares, 17.5 times the previous day’s trading
volume of only 653,000 as prior artificial inflation came out of XL’s stock price.
196. The decline in XL’s stock price as the market learned the bad news about the true
state of XL’s financial results and operations was directly related to defendants’ prior
misrepresentations and fraudulent conduct pursuant to their scheme to misrepresent and conceal
XL’s true financial problems.
197. Like other members of the class of purchasers of XL stock who purchased at
artificially inflated prices during the Class Period, lead plaintiff suffered an economic loss, i.e.,
damages, when XL’s stock prices plummeted upon defendants’ October 17, 2003 announcement.
198. During the Class Period, lead plaintiff made the following purchases of XL stock at
artificially inflated price:
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Purchase Date Shares Purchased Purchase Price Total Price
04/10/2003 - SD 1,050 $77.38 $81,248.06 04/11/2003 - SD 200 $75.00 $15,000.00 05/02/2003 - SD 300 $82.46 $24,737.97 05/14/2003 - SD 500 $80.99 $40,497.40 07/17/2003 - SD 3,848 $82.28 $316,628.06 08/06/2003 - SD 600 $76.05 $45,632.04 08/29/2003 - SD 600 $75.56 $45,333.90 09/10/2003 - SD 2,284 $76.20 $174,040.57
Total 9,382 $743,118.00
199. During the Class Period, lead plaintiff sold XL securities as follows:
Sales Date Shares Sold Sale Price Total Proceeds
08/07/2003 - SD 2,758 $76.14 $210,003.50 08/21/2003 - SD 55 $77.00 $4,235.00 10/14/2003 - SD 1,138 $79.72 $90,724.66
200. Within the 90 days following the Class Period, lead plaintiff sold XL securities as
follows:
Sales Date Shares Sold Sale Price Total Proceeds
11/14/2003 – SD 2,181 $70.35 $153,440.33 11/20/2003 - SD 150 $74.26 $11,138.51 11/21/2003 - SD 350 $74.28 $25,997.44 12/08/2003 - SD 350 $75.55 $26,441.45 12/22/2003 - SD 725 $73.42 $53,227.54 12/26/2003 - SD 1,675 $74.53 $124,845.62
Total 5,431 $395,090.89
201. The PSLRA’s damage limitations provision states: “the award of damages to the
plaintiff shall not exceed the difference between the purchase . . . price paid . . . by the plaintiff for
the subject security and the mean trading price of that security during the 90-day period . . . .” 15
U.S.C. §78u-4(e)(1). The mean trading price during the 90-day period following the Class Period
(the so-called “90-day look-back period”) was $73.65 per share, which is below each of the lead
plaintiff’s purchase prices. Attached hereto as Ex. 3 is a list of published XL stock prices for the
90-day period following the end of the Class Period.
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202. Pursuant to the statutory damage calculation set forth by the PSLRA, because the
lead plaintiff sold shares during the 90-day look-back period, the plaintiff’s damages shall not
exceed the difference between the purchase price paid by the plaintiff for the security and the mean
trading price of the security during the period beginning immediately after dissemination of true
facts concerning the misstatement or omission and ending on the date on which the plaintiff sells
the security. See 15 U.S.C. §78u-4(e)(2).
203. The mean trading prices of XL securities sold by the lead plaintiff during the 90-day
look-back period between October 17, 2003 and the settlement dates of each sale were between
$69.53 per share and $72.28 per share. Using the mean trading price for each of the lead plaintiff’s
sales, the lead plaintiff sold shares as follows:
Sales Date Shares Sold Mean Price Total Proceeds
11/14/2003 – SD 2,181 $69.531 $151,647.35 11/20/2003 – SD 150 $70.835 $10,625.28 11/21/2003 – SD 350 $70.853 $24,798.71 12/08/2003 – SD 350 $71.722 $25,102.74 12/22/2003 – SD 725 $72.081 $52,259.01 12/26/2003 – SD 1,675 $72.280 $121,069.00
Total 5,431 $385,502.09
204. As a result of the lead plaintiff’s purchases at artificially inflated prices during the
Class Period and the subsequent revelation of the Company’s true financial condition causing the
stock price to drop, lead plaintiff and other members of the class suffered economic losses, i.e.,
damages, under the federal securities laws. Particularly, because the lead plaintiff purchased shares
at $75.00 per share to $82.46 per share during the Class Period and all the relevant mean trading
prices during the 90-day look-back period were below the lead plaintiff’s purchase prices, lead
plaintiff suffered a loss.
205. The timing and magnitude of XL’s stock price decline negates any inference that the
loss suffered by lead plaintiff and other class members was caused by changed market conditions,
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macroeconomic or industry factors or Company-specific facts unrelated to the defendants’
fraudulent conduct. On October 17, 2003, the day XL’s revelations caused the stock to drop by
7.6%, the S&P’s 500 securities index lost only 1.0%. The economic loss, i.e., damages, suffered by
lead plaintiff and other members of the class, was a direct result of defendants’ fraudulent scheme
to artificially inflate XL’s stock price and the subsequent significant decline in the value of XL’s
stock when the true state of the Company’s operations was revealed to the market.
IX. POST CLASS PERIOD EVENTS AND ADMISSIONS
206. On January 13, 2004, XL announced that as a result of its year-end audit and reserve
review described to investors on October 20, 2003 the Company would take a $663 million pre-tax
charge to income for its 4Q03 financial results, on top of the previously announced third quarter
charge of $184 million. The charge would also reduce reported fiscal 2003 earnings by $4.73 per
share and the Company would report only $2.69 per share a far cry from the $18.00 the Company
had projected during 2003. Again the $663 million charge to income was related to what the
Company called adverse developments in the North American reinsurance operations – NAC Re.
In other words, even after charges of $95 million, $122 million, $180 million, $215 million and
$184 million in 1999, 2000, 2001, 2002 and 2003, respectively, the Company had still inadequately
reserved for the division to the tune of $663 million:
XL Capital Ltd Completes Previously Announced Claims Audit Review and Year-End Reserve Review
Announces Fourth Quarter Charge of $647 Million After Tax
Company to Raise at Least $750 Million of New Capital
HAMILTON, Bermuda, Jan 13 /PRNewswire-FirstCall -- XL Capital Ltd (NYSE: XL) (“XL” or the “Company”) announced today that it has completed its previously announced claims audit and regularly scheduled year-end reserve reviews. As a result, the Company 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,
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$4.73 per ordinary share after tax, in the fourth quarter of 2003. Fourth quarter 2003 results are expected to be announced on February 10, 2004.
The majority of the charge, $663 million pre-tax, primarily related to adverse development in the Company’s North American reinsurance operations for casualty business written during the 1997 through 2001 underwriting years.
XL’s President and Chief Executive Officer, Brian M. O’Hara stated, “The review that we have undertaken included an extraordinary claims audit review of our North American reinsurance operations going well beyond our long established processes. This was driven by an acceleration in claims in the third quarter relating to business underwritten during the 1997 to 2001 years. This 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.”
* * *
Mr. O’Hara also noted, “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.”
A.M. Best and Moody’s Ratings Agencies Swiftly Downgraded XL’s Financial Strength Ratings Immediately Impacting the Company’s Ability to Raise Capital and Write Policies:
207. On January 14, 2004, the following news article discussed insurance ratings
agencies, including Moody’s and S&P, lowering their ratings and downgrading XL in response to
the huge increase in reserves to XL Re America’s book of business. Moody’s specifically indicated
that the reserve additions call into question whether the Company has in place adequate
underwriting and actuarial controls:
Rating Agencies Respond To XL’s Reserve Strengthening
Rating agency S&P downgraded the financial strength ratings of XL’s core operating subsidiaries to ‘AA-’ from ‘AA’ and removed them for CreditWatch. The outlook is stable.
* * *
Rating agency A.M. Best placed XL’s ‘A+’ (Superior) financial strength rating under review with negative implications (A.M. Best downgraded the debt ratings). The magnitude of reserve charges was larger than A.M. Best expected and XL’s risk-adjusted capital has fallen below levels required for its current ‘A+’ rating.
* * *
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Rating agency Moody’s downgraded XL Re’s financial strength rating to ‘Aa3’ from ‘Aa2,’ with a stable outlook.
* * *
The charges also call into question XL’s underwriting and actuarial controls, according to Moody’s.
Rating agency Fitch put XL’s ‘AA’ financial strength rating on Rating Watch Negative mainly due to uncertainty relating to capital raising.
XL’s ratings would most likely be lowered by one notch if its capital raising efforts are not executed as planned (or would be affirmed with stable outlook if successful).
In the long-run, XL will have to return to historical profit performance to maintain its current ratings (earnings have been below expectations for the last 3 years due to adverse reserve development in 2002 and 2003 and losses from the September 11 event in 2001).
208. On January 15, 2004, Dow Jones published the following news article:
XL Takes $647M Reserve Hit.
The new year is still in its infancy, but one familiar scene from previous years is already being played out in the insurance industry – a big reserve charge quickly followed by rating agency reactions.
* * *
It was larger than we had anticipated, cumulatively for the year, said Robert DeRose, analyst at the Oldwick, N.J.-based A.M. Best Company. The Agency has downgraded all debt ratings of XL Capital, and also placed its –plus financial strength ratings for XL Capital and its affiliated companies under review with negative implications.
We have taken a rating action on XL group because charges were higher than we had anticipated, added Karole Barkley, analyst at the New York-based Standard & Poor’s Ratings Services, which also cut its XL ratings. S&Ps ratings actions include cutting its counterparty-credit and financial-strength ratings on core operating companies to double-A-minus from double-A, as well as lowering its counterparty-credit rating on XL Capital to from-plus and removing it from the CreditWatch status.
Moody’s Investors Service in New York cut ratings of XL Capitals senior unsecured debt to 2 from 1, as well as insurance financial strength ratings for members of the XL Reinsurance Americas intercompany pool and XL Re, to a3 from a2. The outlooks for all rated members of the XL Capital group are now stable.
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209. On January 16, 2004, Lloyds List Business and Insurance Journal issued an article
discussing Moody’s ratings downgrade of XL:
XL Hit by Reduced Ratings.
MOODY’s Investors Service has lowered ratings on some units of XL Capital, the Bermudian insurance group that has announced higher-than-expected reserve strengthening amounting to $694m. The insurer plans to raise $750m by issuing new securities, writes James Brewer.
* * *
Moody’s said the charges, together with others taken in 2002 and at the time of the acquisition of XL Reinsurance America in 1999, called into question the quality of underwriting and actuarial controls under the operation’s former NAC Re control.
210. On January 15, 2004, Deutsch Bank-North America issued a report discussing
managements corrective actions to assure that further revenue shortfalls would not occur:
XL: Management Upbeat on Outlook for 2004 and Beyond-Buy – Part 1/2
* * *
HIGHLIGHTS:
* * *
Reserve review appears to be comprehensive. We believe the company conducted an extremely detailed and conservative review of reserves at XL America. Approximately 64% of the 3Q and 4Q reserve charges were on an incurred but not reported (IBNR) basis. XL had non-renewed most of the NAC Rebusiness acquired in 1999, and has re-underwritten the renewed business during the past two years.
* * *
DETAILS:
* * *
Reserve charge appears extremely conservative. The company completed a thorough review of casualty reserves at XL America, going over 85% of the total premiums in the affected lines of business. The majority of adverse reserve development was for accident years 1997-2001, and related to problem lines such as D&O, E&O, medical malpractice, general liability, and umbrella. Management stated that the spurt in reported claims in the third and fourth quarters was a result of claims filings by approximately 17 cedant insurers, whose policies XL management thoroughly reviewed as part of the reserve study. . . .
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* * *
Underwriting Year
Level of Reserve Addition ($ in mm)
Ultimate Loss Ratio
1997 $58 127% 1998 $108 162% 1999 $141 203% 2000 $163 201% 2001 $153 151%
Source: Company data
* * *
The company appears to be taking a number of steps in its reserving process to reduce the possibility of reserving errors in the future. Management stated that the company will increase communication with its cedants to avoid claims surprise filings, adhere to stricter underwriting guidelines, and proactively manage the business that it writes.
211. XL America: The company appears to have taken meaningful action to prevent
further adverse reserve development in its North American casualty business. Following the
acquisition of NAC Re in 1999, XL non-renewed approximately 63% of the business it bought.
XL Fires President of XL Re America, i.e., NAC Re and Other Senior Executives Responsible for Running the NAC Reinsurance Operations:
212. On January 14, 2004, the Company also announced that it had fired several of its
senior officers at its reinsurance operations and its insurance operations. Specifically, the Company
fired (a) C. Fred Madsen, the Company’s President of its reinsurance operations, XL Re America
(formerly NAC Re); and (b) Martha Bannerman, the Company’s General Counsel for reinsurance
operations at the former NAC Re. Both individuals had been senior executives at NAC Re prior to
its acquisition by XL in 1999.
213. During the January 14, 2004 conference call, XL defendants were specifically asked
if there was any management accountability with regard to the Company’s failure to adequately
reserve for losses within the Company’s Casualty Reinsurance division:
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FELICE GELMAN, ANALYST, SUNOVA CORP.: So far there really hasn’t been any discussion of whether there is any management accountability here. . . .
HENRY KEELING: Perhaps I can address that for you. The President and General Counsel and Chief Administrative Officer of XL Re America are no longer with the company.
214. On January 22, 2004, only one week after the Company announced that its 4Q03
charge in connection with the claims audit review would be a whopping $663 million, in addition
to the $184 million which had previously been announced for 3Q03, the Company reported that
defendant Brown, CEO of the Company’s insurance operations and Chief of XL Re America, i.e.,
NAC Re would abruptly retire. Brown was President and CEO of NAC Re prior to the acquisition
by XL in 1999. Brown is also an actuary and oversaw underwriting reviews and reserve
methodologies of the Company’s insurance division during the Class Period.
XL Capital Ltd Announces Retirement of Insurance Operations Chief Executive
HAMILTON, Bermuda, Jan 22 /PRNewswire-FirstCall/ -- XL Capital Ltd (NYSE: XL) (“XL” or the “Company”) today announced the retirement of Mr. Nicholas Brown, Chief Executive of the Company’s Insurance Operations.
XL Offers Noteholders of its CARZ $15 Million Not to Exercise Their Right to “Put” The Notes Back to the Company:
215. On May 18, 2004 XL faced another looming CARZ put obligation on May 23,
200413 that potentially exposed them to a gigantic $649 million payment. After already
experiencing a $663 million reserve charge and having received downgrades from the major credit
agencies, XL offered noteholders of its CARZ an aggregate of $15 million not to exercise their
right to put their notes back to the Company to avoid paying $649 million dollars repurchasing their
notes:
13 See ¶105 for similar CARZ put date that occurred on May 23, 2002.
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XL Announces Its Intention to Make a One-Time Cash Payment to Holders of Its Zero-Coupon Convertible Debentures Due May 2021 for Not Exercising Put Rights
HAMILTON, Bermuda, May 18 /PRNewswire-FirstCall/ -- XL Capital Ltd (NYSE: XL) (“XL” or “the Company”) announced today that it intends to make a one-time cash payment to holders of its Zero-Coupon Convertible Debentures due 2021 (the “Debentures”) who do not exercise their rights to put the Debentures to XL.
Pursuant to the terms of the indenture governing the Debentures, XL is obligated to purchase for cash Debentures tendered and not withdrawn before the close of business on May 21, 2004, at their accreted value of $641.88 per $1,000 principal amount at maturity on May 24, 2004. XL intends to pay a one-time cash payment of $14.84 for every $1,000 aggregate principal amount at maturity of the Debentures held to each Debenture holder not exercising its put right. This payment is approximately equal to 2.31% of each Debenture’s accreted value and 1.48% of each Debenture’s principal amount at maturity. XL will make this payment to holders of record as of the close of business on May 26, 2004, as promptly as possible following that date. In the event all of the Debentures remain outstanding on that date, the aggregate payment by XL would be $15 million.
216. In sum, XL knew that as announced on January 13, 2004 the Company needed to
and would go to capital markets to raise $750 million in the form of mandatory convertible
securities. See ¶207. Thus, XL could not spend $649 million in capital or issuing shares to the
CARZ bondholders. An additional $649 million capital expenditure would severely impact the
Company’s financial strength and debt ratings, and compress the Company’s capital surplus even
further than the additional loss reserves of $663 million recorded in 4Q03.
217. Likewise, had the Company taken the necessary reserve charges for NAC Re
totaling $622 million net of tax in its 2001 financial statements, XL would have likely been “put”
and had to repurchase $614 million of the CARZ on the May 23, 2002 put date.
XL Files its 2003 Report on Form 10-K Admitting That Ratings Downgrades Would Hurt the Company and Loss Developments Indeed Required a Change in Reserve Methodology Assumptions:
218. On March 15, 2004, the Company filed its Report on Form 10-K for the period
ending December 31, 2003. The Report on Form 10-K discussed recent ratings agency downgrades
resulting from the October 2003 and January 2004 reserve shortfall announcements. The Report on
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Form 10-K also made the following admissions, including, the importance of the Company to
maintain strong ratings from ratings agencies in order to write business and avoid violation of the
Company’s capital and credit facilities:
Ratings and Capital Management
Management continues to focus heavily on the Company’s financial strength and claims paying ratings because the Company’s ability to write business is dependent on the quality of these ratings ... the Company’s results were significantly impacted in the second half of 2003 by prior period adverse development mainly from its North American Casualty reinsurance business written in the 1997 through 2001 underwriting years and, accordingly, some of the Company’s ratings have been downgraded. The Company currently anticipates it will raise additional capital of approximately $750 million in the first half of 2004 in the form of mandatory convertible securities. The Company currently anticipates that it will be able to successfully raise this capital, however, if the Company does not achieve this, it is likely that the Company’s ratings could be lowered further which could trigger downgrade provisions contained in the Company’s various capital and credit facility documents as well as impact the ability of the Company to write new business.
219. The Report on Form 10-K also discussed in detail the impact of its “reserve review”
which resulted in the $663 million additional reserve shortfall and charge to income. The Company
admitted that it “changed its actuarial methodology and key assumptions” as plaintiff alleges
could have and should have been done based upon recent loss experience and information known
and/or available to the Company as early as the end of 2001:
In the third quarter of 2003, the Company received a significant increase in reported claims that were in excess of the Company’s expected claims development. In addition, the Company completed an actuarial review for the longer tail lines of this book of business, using data evaluated at March 31, 2003. As a result, the Company recorded an increase in loss reserves of $184.0 million in the third quarter of 2003. . . .
The claims audit review included both internal and external resources, a comprehensive claims audit of the largest and most significant ceding companies, and a review of loss ratios and reserve analysis procedures. . . .
As a result of the new information obtained in the claims audit review, the Company changed its actuarial methodology and key assumptions for determining ultimate loss reserves. The Company separately reviewed the historical loss development of its major cedents using several actuarial methodologies; where the analysis of a cedent’s experience concluded that the experience was worse than the
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Company’s historical loss development experience, the Company projected that cedent’s ultimate loss based on the cedent’s own experience. In addition, the Company assumed that the more recent experience was more indicative of future loss development by selecting development patterns that were based on the most recent experience rather than on the Company’s longer term historical experience.
XL Reinsurance America’s (NAC Re) Prior Underwriting Years Still Haunting the Company
220. On July 7, 2005, XL issued a press release announcing a $191 million charge to
increase XL Reinsurance America’s loss reserves. The press release stated that the majority of the
claims making up the loss reserve increase were between 3.5 and 7.5 years – with some ranging over
7.5 years:
XL Capital Ltd Announces That Second Quarter 2005 Results Will Be Adversely Impacted by an Increase in Reserves in Its North American Reinsurance Operations
* * *
HAMILTON, Bermuda, July 7, 2005 /PRNewswire-FirstCall via COMTEX/ -- XL Capital Ltd (NYSE: XL) (“XL” or the “Company”) announced today that its second quarter 2005 results will be adversely impacted by an increase in net reserves in its North American reinsurance operations of $191 million pre-tax. The after tax charge is $183 million or $1.31 per ordinary share. This increase resulted from XL’s scheduled semi-annual reserve review, which is substantially complete. . . .
* * *
Approximately 90% of the Workers’ Compensation reserve increase is related to an XL Reinsurance America Inc. (“XLRA”) working layer program written across multiple underwriting years with a single cedent. This program was not renewed at the end of 2001. Other than this program, XLRA has not written significant working layer Workers’ Compensation business.
The reserve increase related to the 1997-2001 underwriting years, excluding Workers’ Compensation, was principally driven by recently reported claims in Umbrella Liability, Errors & Omissions and Directors & Officers lines of business in those underwriting years. The professional lines claims activity arises largely from a limited number of cedents. . . .
The reserve increase related to the pre-1997 underwriting years, excluding Workers’ Compensation, was primarily driven by a small number of increased reported claims in the Other Liability and Errors & Omissions lines of business in those underwriting years.
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The reserve increase related to the post-2001 underwriting years, was primarily due to certain large individual claims affecting a number of lines including; Surety, Umbrella Liability and Errors & Omissions.
Brian M. O’Hara, President and Chief Executive Officer, of XL, stated: “This reserve strengthening is extremely disappointing.”
* * *
“[I]n my judgement, the recent claims reporting activity reflects cedents having to recognize losses on their books with greater transparency and timeliness. Finally, I believe that we are benefiting from the changes we implemented in the North American reinsurance book since 2003, with respect to cedent communication and an increased number of on site claims audits.”
221. The press release disclosed that the reserve increases were made up of:
Source Revenue Increase (in $000) % of Total 1997-2001 underwriting years excluding WC $76,011 40%
Workers’ Compensation (“WC”) $64,719 34%
Post-2001 underwriting years excluding WC $34,306 18%
Pre-1997 underwriting years excluding WC $15,603 8%
Net Reserve Increase Pre Tax $190,639 100%
222. After XL’s disclosure of another $191 million increase to XLRA’s loss reserves, the
total for all loss reserves taken since the Company’s acquisition of Nac Re is now over $1.6 billion,
only $400 million over the $1.2 billion dollar acquisition price.
XL’S FALSE FINANCIAL REPORTING
223. In order to artificially inflate XL’s stock price, avoid ratings downgrades and
artificially inflate their policy writing capacity, the Individual Defendants caused XL to issue false
financial reports that improperly understated XL’s loss expenses as well as its loss and loss expense
reserves (“loss reserves”), thereby materially overstating its net income, EPS, shareholder equity
and surplus.
224. XL’s publicly reported financial results during the Class Period included the
following (amounts in millions, except EPS):
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Year end 12/31/0114
Reported shareholder net loss $576 Minimum understatement of shareholder net loss $622 Actual shareholder net loss
$1,198
Reported loss per share $4.55
Minimum understatement of loss per share $4.91 Actual loss per share
$9.46
Reported shareholder equity $5,437
Minimum overstatement of shareholder equity $622 Actual shareholder equity $4,815 225. The Class Period reported results were included in the quarterly Reports on Form
10-Q and the annual Reports on Form 10-K filed with the SEC, as well as in Company press
releases and analyst conference calls. But, the reported results and the representations made by
defendants about the Company’s financials, were false and misleading when made because XL’s
annual and quarterly financial statements during the Class Period were not fair presentations of its
results and were presented in violation of GAAP and SEC rules.
226. GAAP are those principles recognized by the accounting profession as the
conventions, rules and guidelines that define acceptable accounting practices. SEC Regulation S-X
(17 C.F.R. §210.4-01(a)(1)) states that financial statements filed with the SEC that are not prepared
in compliance with GAAP are presumed to be misleading and inaccurate, despite footnote or other
disclosure. Regulation S-X requires that interim financial statements must also comply with
GAAP, with the exception that interim financial statements need not include disclosures that would
be duplicative of disclosures accompanying annual financial statements. 17 C.F.R. §210.10-01(a).
227. Defendants caused XL to falsify its reported financial results for 2001 through its
improper accounting for reinsurance loss reserves, which resulted in materially and artificially
14 Plaintiffs believe the 2001 misstatement amounts reflected in this table are conservative, and that XL’s actual 2001 financial statement errors are likely even greater.
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inflated income, EPS, shareholder equity and subsidiaries’ statutory surplus. XL’s failure to correct
its woefully inadequate loss reserves caused its 2002 and 2003 financial statements to be similarly
misstated. Absent the Company’s improper accounting, XL would have reported materially lower
earnings, EPS and shareholder equity. XL’s improper financial reporting enabled XL and the
Individual Defendants to conceal from investors, creditors, guarantors and regulators, the true
financial condition of the Company throughout the Class Period. As a result, XL avoided ratings
downgrades likely to have occurred, but for the false financials, and artificially inflated XL’s policy
writing capacity, which is determined based on reported surplus.15
228. On October 17, 2003, after having already surprised the investment community with
material charges for inadequate reinsurance loss reserves every year from 1999 through 2002
(which totaled $612 million), XL announced yet another loss reserve shortfall requiring a
whopping $184 million charge to income. XL also explained that it would finally conduct
necessary on-site “claims audit review” of the insurance companies that it reinsured (“cedents”)
and that these review could result in even more charges for unrecorded loss reserves. Ultimately,
XL announced that this review revealed another $663 million in charges, for a total of $1.46
billion in belated charges for inadequate loss reserves. As alleged herein, this review should have
been completed prior to March 2002 when it filed its 2001 financial statements.
229. All $1.46 billion in charges were for inadequate reinsurance loss reserves related to
reinsurance coverage assumed by the Company’s NAC Re reinsurance operations16 during 1997-
15 The impact on net income from charges for inadequate reserves reduce both shareholder equity and shareholder surplus dollar for dollar.
16 NAC Re transferred (“retroceded”) 75% of its reinsurance business (premiums and loss expenses) to XL Re, which was XL’s reinsurance subsidiary in Bermuda. XL, as the parent company of both reinsurers, was responsible for reporting all reserves in the total NAC Re book of business in which either NAC Re or another XL subsidiary was responsible for paying the claims.
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2001 (“accident years”). 86%, or $1.25 billion, of these total charges were for incurred claims
assumed by NAC Re that occurred during the earlier 1997-1999 accident years. In accounting for
insurance, “accident years” refers to the dates policyholder losses were incurred, while “calendar
years” refers to the accounting period in which the losses were recorded. Insurance companies are
responsible for setting sufficient loss reserves for each accident year, including losses for “incurred
but not reported” claims. Thus, the continual charges recorded by XL between 1999 and 2003
shows a consistent pattern of failing to record sufficient loss reserves for the same accident years
1997-2001 (overwhelmingly for 1997-1999). Recording sufficient loss reserves is required by
GAAP, the SEC and the National Association of Insurance Commissioners (“NAIC”), which
provides uniform rules and standards to state regulatory bodies in the United States.
230. While XL claims to have eventually recorded enough loss reserves, subsequently
recording belated loss reserves and loss expenses that should have been recorded years earlier does
not correct prior GAAP violations, because, for example, 1) the income from earlier calendar years
remains inflated; and 2) losses and loss ratios are understated in the periods that loss reserves were
improperly recorded. Accordingly, XL’s delinquent charges for inadequate loss reserves did not
cure the financial statement errors and did not prevent the Company’s earlier financial statements
from being materially false and misleading. Following are the amount of charges recorded by XL
for what it refers to as “adverse development”17 for calendar years 1999 through 2003:
17 Adverse development is a term used for additions to accident year losses in subsequent calendar years (reserve deficiency). Favorable development is a term used for reductions to accident year losses in subsequent calendar years (reserve redundancy). When insurance companies properly estimate reserves, adverse development and favorable development are generally expected to offset one another over a multi-year period. For the five accident years 1997-2001, NAC Re has never had any favorable development in any calendar year – 19 out of 19 recorded developments were adverse developments, totaling $1.46 billion.
1999 4Q00 4Q01 4Q02 4Q03 4Q04 TOTAL
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231. In accounting for insurance, reasonable fluctuations in reserves for prior accident
years are expected. However, when actuaries use “point estimates” loss reserve methodologies,
each estimate is supposed to have an equal chance to develop favorably or adversely. As stated by
XL in their 2003 Report on Form 10-K:
The single point reserve estimate is generally management’s best estimate which the Company considers to be one that has an equal likelihood of developing a redundancy or deficiency as the loss experience matures.
Clearly, that methodology was not followed by XL with respect to its reinsurance loss reserves
during the Class Period.
232. Defendants’ statements putting forth purported excuses for the belated charges in
3Q03 and 4Q03 relating to accident years 1997-2001 were astounding:
We are acting on new information that developed in our third quarter and especially late in the third quarter. This new information is in the form of new claims and by that, we mean new claims from older years that defy expected reporting patterns. I said earlier in the year that we expected to be able to absorb, in our current improving run-rate, any claims from this period in NAC Re book that might exceed expected levels. This was the case until this upsurge in Q3. . . .
* * *
[T]he claims pattern was hugely skewed towards September and even through the last three weeks of September. So no, the pattern it was not smooth over the course of the quarter.
233. If defendants are to be believed, despite recording additional, extraordinary charges
in 1999, 2000, 2001 and 2002 for previously unrecorded loss reserves for accident years 1997-
2000, totaling $612 million, suddenly, the claims received for the same accident years 1997-2000
in the last three weeks of 3Q03 was a surprise and represented “new information” with respect to
the latest charges. In addition, of the total NAC Re related charges of $1.46 billion through
December 31, 2003, 86%, or $1.25 billion, were related to the 1997-1999 accident years, which
were four to seven years old by that time.
$95 million $122 million $180 million $215 million $184 million $663 million $1.46 billion
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XL’s Failure to Record Adequate Reinsurance Loss Reserves:
The First Warning:
234. Shortly after XL acquired NAC Re in June 1999, XL was forced to record a $95
million charge for previously unrecorded loss reserves, an acknowledgement that NAC Re had
failed to record sufficient loss reserves in accordance with GAAP and SAP. The additional loss
reserves were almost entirely related to claims from accident years 1997 and 1998. Although XL
later tried to excuse this $95 million charge by attributing it to a “difference in reserve
methodologies,” NAC Re and XL were both required to comply with GAAP and SAP with respect
to loss reserves (and other account balances) at all times. As such, notwithstanding the fact that
even though the $95 million charge was still not enough, the fact that XL needed to record such a
substantial increase in loss reserves outside of the initial reserve setting process was a clear red flag
and an indication that even before 1999 ended, XL was already aware of problems in accounting
for the NAC Re book of business, specifically with respect to recording sufficient reinsurance loss
reserves in the proper year.
The Second Warning:
235. At the end of 4Q00, XL reported that, in addition to the $95 million charge taken in
the summer of 1999, the Company needed to record an additional $122 million charge to make up
for the still inadequate NAC Re reinsurance loss reserves, again for accident years 1997 and 1998,
as well as 1999.
The Third Warning:
236. By no later than November 1, 2001, XL knew that for the third year in a row, it
would again need to record a significant charge in the fourth quarter to account for inadequate
reinsurance loss reserves for the 1997-1999 accident years, in connection with the NAC Re book of
business. This time, the belated charge ballooned to $180 million – demonstrating that the problem
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of unrecorded loss reserves for accident years 1997-1999 in NAC Re operations was actually
getting worse each year. Clearly by then, the “red flags” had been raised and were flapping wildly.
The Fourth Warning:
237. In the face of these red flags, XL still did not conduct a basic review of cedent
claims or take other steps to properly estimate and record required loss reserves based upon the
information known at the time. To make matters worse, XL was forced to announce yet another
year-end charge for 2002, much larger than each of the three previous charges: $215 million.
The Extremely Belated Admission:
238. Finally, following the $184 million charge in 3Q03, XL finally admitted what it
should have done in 2001. According to defendant Keeling on XL’s January 14, 2004 conference
call:
As you know, in the third quarter of 2003, XL Re America experienced exceptional adverse development. And based on that development, XL Capital decided to conduct an in-depth examination of XL Re America cedent reserve and claim reporting process, forming the Claims Audit Review task force to carry out this activity.
239. However, the “exceptional adverse development” had been a known and ongoing
occurrence since 1999, and XL had told investors on several occasions before and during the Class
Period that it had already taken steps to address the problem of not recording sufficient loss
reserves. Such steps, at a minimum, would have included an examination of the cedent claims
reporting process and cedent loss reserves. Throughout the Class Period, investors relied upon
representations that XL had already taken such steps.
240. Nevertheless, XL failed to take the necessary steps to properly record loss reserves
in accordance with GAAP and SAP – that is, the Company failed to follow its own stated internal
controls, check the cedents’ claims records and perform the necessary procedures to ensure that XL
set up sufficient loss reserves, in the correct year, as required by GAAP and SAP. XL’s attempts to
blame its failure to properly account for its loss expenses and its loss reserves on cedents’ poor
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controls or failure to properly report to XL is completely improper and not acceptable under GAAP
or SAP. Every reinsurer faces the same reporting challenges with respect to cedent data, and this in
no way absolves XL from responsibility for setting materially correct loss reserves. The FASB,
AICPA, NAIC, NYID and ratings agencies all expect and presume that reinsurance companies will
comply with the accounting and reporting requirements and set appropriate loss reserves – as is
required by the relevant accounting standards. According to GAAP, SAP and SEC Regulations,
XL, not XL’s cedents, was responsible for setting adequate loss reserves on its books.
241. According to the most basic accounting principles, companies are required to record
loss reserves on an accrual basis – meaning that expenses must be recorded in the period in which
they are incurred, rather than the period in which they are paid. Financial Accounting Standard No.
5, Accounting for Contingencies. For insurance companies, this is required in order to properly
record loss expenses that require reserves and the premium revenue related to those expenses in the
same period. FASB Statement of Concepts No. 6, ¶¶144-146. This is critical for insurance
companies, because investors, analysts, regulators and guarantors rely on the accuracy of reported
loss ratios (insurance losses and claims expenses divided by the related earned policy premiums)
and underwriting profit or loss (earned policy premiums minus losses, claims expense,
commissions and operating expenses). When companies improperly set their loss reserves too low,
their loss ratios are artificially understated and underwriting profit is artificially overstated.
242. GAAP, the SEC and insurance regulatory bodies including the NYID require that
companies set up adequate loss reserves for each accident year so that loss ratios and underwriting
profit or loss are not materially misstated or misleading. However, XL knew that its loss reserves
for reinsurance were consistently much lower than they should have been. For example, as of
December 31, 2001, XL knew that its historical pattern of setting up inadequate loss reserves for
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accident years 1997-1999 had already resulted in $397 million in delinquent charges for inadequate
loss reserves (during calendar years 1999-2001) as discussed above.
243. Statement of Financial Accounting Standards No. 60 (“FAS 60”), Accounting and
Reporting by Insurance Enterprises, states that loss reserves at the end of an accounting period must
be sufficient to account for all claims and costs of settling claims, taking into account changes in
current trends, societal and economic factors and any other factors that would modify past
experience. According to FAS 60:
Claim Cost Recognition
A liability for unpaid claim costs relating to insurance contracts other than title insurance contracts, including estimates of costs relating to incurred but not reported claims, shall be accrued when insured events occur. . . .
The liability for unpaid claims shall be based on the estimated future cost of settling the claims (including the effects of inflation and other societal and economic factors), using past experience adjusted for current trends, and any other factors that would modify past experience. . . .
* * *
A liability for all costs expected to be incurred in connection with the settlement of unpaid claims (claim adjustment expenses) shall be accrued when the related liability for unpaid claims is accrued. Claim adjustment expenses include costs associated directly with specific claims paid or in the process of settlement, such as legal and adjusters’ fees. Claim adjustment expenses also include other costs that cannot be associated with specific claims but are related to claims paid or in the process of settlement, such as internal costs of the claims function.
FAS 60, ¶¶17-20 (emphasis in original, footnotes omitted)
244. XL violated GAAP by failing to comply with the terms of FAS 60 because it did not
record loss reserves adequate to cover its known and estimated claims liabilities for the costs of
NAC Re reinsurance as described above. Further, XL knew this by November 2001, at the latest,
as demonstrated by its repeated failure to set up sufficient loss reserves for its reinsurance
liabilities, which by that time had already required two consecutive years of charges to income
totaling $217 million for accident years 1997-1999 as alleged herein and reflected in the table in
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¶231. Nevertheless, XL waited another two years before it took the steps necessary to determine
what the loss reserves should actually be, i.e., the “comprehensive reserve review” XL disclosed it
would undertake in its October 17, 2003 press release.
245. On October 17, 2003, XL issued a press release announcing a $184 million charge
for inadequate reinsurance loss reserves and also quoted defendant O’Hara saying:
“I am personally leading a review of this book of business [reinsurance] ... and review of the ceding company claims files that will be completed by year end,” Mr. O’Hara noted. “I intend to fully address our exposure to the 1997 through 2000 North American casualty reinsurance book written by the former NAC Re so that it will not adversely affect our financial results in 2004 and beyond.”
246. It was conspicuously apparent by the last sentence, and explicitly admitted by
defendants during XL’s October 20, 2003 conference call, that the review of cedent claims records
would likely result in additional charges in 4Q03:
Because of the unusual nature of the recent adverse development in the XL Re America book, it was not possible for us to estimate with any level of confidence the amount of reserves required, if any, beyond what we have already established.
247. Indeed, on January 14, 2004, XL announced that the 4Q03 charges resulting from
O’Hara’s review was an astounding $663 million.
XL Knew that the Review It Conducted in 2003 Was Routine for Reinsurers and Should Have Been Conducted in 2001 and Ongoing Throughout the Class Period:
248. A reinsurer assumes responsibility for certain losses under insurance policies written
by other insurance companies, called cedents, or primary or direct writers, in exchange for a portion
of the policy premium from the primary insurance contract. XL, as the reinsurer, is responsible
for properly accounting for premiums, losses and loss reserves related to its reinsurance contracts.
The AICPA Audit and Accounting Guide for Audits of Property and Liability Insurance Companies
instructs reinsurers on how to fulfill their responsibility for the accuracy, reliability and
completeness of data received from the ceding companies related to the assumed reinsurance:
Internal Control of the Assuming Company
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6.47 A significant component of an assuming company’s internal control that is related to assumed reinsurance is the assessment of the accuracy and reliability of data received from the ceding companies. Principal control activities of the assuming company may include –
● Maintaining underwriting files with information relating to the business reasons for entering the reinsurance contracts and anticipated results of the contracts. The underwriting files may include – – Historical loss ratios and combined ratios of the ceding companies. – Anticipated loss ratios under the contracts. – Indications of the frequency and content of reports for the ceding companies. – Prior business experience with the ceding companies. – The assuming company’s experience on similar risks. – Information regarding pricing and ceding commissions.
● Monitoring the actual results reported by the ceding companies and investigating the reasons for and the effects of significant deviations from anticipated results.
● Visiting the ceding companies to review and to evaluate their underwriting, claims processing, loss reserving, and loss-reserve-development-monitoring procedures
● Obtaining the report of the ceding companies’ independent accountants on controls (relating to ceding reinsurance) placed in operation (and tests of operating effectiveness). See SAS No. 70, Service Organizations.
6.48 Additional control activities of the assuming company may include – ● Obtaining and analyzing recent financial information of the ceding
companies, such as – – Financial statements and, if audited, the independent auditor’s
report. – Financial reports filed with the SEC (United States), Department of
Trade (United Kingdom), or similar authorities in other countries. – Financial statements filed with insurance regulatory authorities,
with particular attention to loss reserve development. ● Obtaining and reviewing available sources of information on the ceding
companies, such as– – Insurance industry reporting and rating services. – Insurance department examination reports. – Loss reserve certifications filed with regulatory authorities. – Letters relating to the design and operation of controls filed with
regulatory authorities. ● Inquiries about the general business reputation of the ceding companies
and the background of their owners and managements.
AICPA Audit and Accounting Guide for Audits of Property and Liability Insurance Companies,
Chapter 6, “Reinsurance,” ¶6.47-48.
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249. Because of the above requirements for adequate reinsurance controls, it is an
industry practice that almost all reinsurance contracts or treaties provide that the reinsurer may
review and audit all reinsured policy and claims-related records of the cedent at any time, with
reasonable notice. Thus, although XL admittedly waited until 4Q03 to conduct a “comprehensive”
claims audit review of its cedents, XL had the ability and should have performed such a review two
years earlier particularly given the fact that it had incurred three consecutive years of prior adverse
loss development for which the Company was required to belatedly increase its prior accident year
reserves. In fact XL falsely represented that it actually conducted a “full actuarial review ...
annually.” See ¶92.
250. Indeed, by November 1, 2001, XL already knew it would need to take a material
charge for previously unrecorded loss reserves for the NAC Re reinsurance operations for the third
year in a row. Such adverse experience was a red flag and clearly put XL on notice that the
Company was required to conduct a claims audit review of its cedents as indicated by AICPA
Audit and Accounting Guide §§6.47 and 6.48. However, they did not do this despite statements
made by defendants each time the Company announced the charges (during the Class Period), that
assured investors that XL was taking the necessary steps to properly account for reinsurance losses,
and that the problems were behind them. See ¶92. Investors relied on XL’s representations that it
had in fact, reviewed and confirmed the adequacy of its internal controls and “fixed” whatever
other circumstances had led to the delinquent charges. Unfortunately for investors, creditors,
regulators and guarantors of XL, the Company failed to implement the above basic, but required,
internal controls and failed to exercise its duty to thoroughly audit the cedents’ claims pursuant to
GAAP and SEC rules until 4Q03.
251. According to defendant Keeling, on XL’s January 14, 2004 conference call:
The treaties that were selected for review under the CAR [Claims Audit Review] process encompassed 85 percent of the total premium written for these
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problem classes during the [accident] years in question. The action plan that we announced earlier included four components. Firstly, a comprehensive claims audit of the largest and most significant cedents for the years in question. Second, we reviewed our selected loss ratio picks (ph) and our reserve analysis procedures. Third was a consideration of future loss mitigation initiatives. And lastly was maintaining appropriate risk-based capital ratios for year-end at XL Re America for rating and regulatory purposes.
252. However, these steps were neither complicated nor unusual. In fact, reinsurers are
required to perform procedures such as these on an ongoing basis in order to comply with GAAP
and SAP requirements for proper internal controls and setting appropriate loss reserves. XL was at
the very least deliberately reckless in refusing to perform these basic and required steps by the end
of FY01, because by that time, defendants knew that the Company’s internal controls and reserve
setting processes consistently (three consecutive years) failed to produce reliable estimates of loss
expenses and loss reserves by wide margins.
253. If XL had indeed conducted an appropriate claims audit review in 2001, as was
required under the circumstances, it would have obtained and/or reviewed and acknowledged all
the data required to set materially correct loss reserves for accident years 1997-1999, just as the
claims audit review that they finally performed in 4Q03 should have resulted in materially correct
loss reserves for accident years 1997-2001, as the Company claimed.
254. Further, given the changed circumstance indicated by the unprecedented levels of
ongoing material adverse loss development from 1999-2001, especially for accident years 1997-
1999, XL was required to adjust its actuarial models to account for the increasing costs of
providing insurance, and indeed, falsely told the public that it made such adjustments. See ¶¶16-
17. As set forth in FAS 60: “The liability for unpaid claims shall be based on the estimated future
cost of settling the claims (including the effects of inflation and other societal and economic
factors), using past experience adjusted for current trends, and any other factors that would
modify past experience.” Nevertheless, despite knowledge of three consecutive years of materially
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adverse loss development because XL repeatedly failed to set sufficient loss reserves for accident
years 1997-1999, the Company failed to make the necessary modifications and adjustments to their
actuarial models and reserve setting process for reinsurance until 4Q03.
255. According to AICPA Statement of Position 92-4 (“SOP 92-4”), Auditing Insurance
Entities’ Loss Reserves:
Changes in the Environment
* * *
Because many variables can affect past and future loss projections, the effect of changes in such variables on the results of loss projections should be carefully considered.
Identification of changes in variables and consideration of their effect on loss reserve projections are critical steps in the loss reserving process. . . .
* * *
If changes in variables have occurred, mechanical application of loss projection methods may result in unreasonable estimates of ultimate claim costs.
SOP 92-4, ¶¶40-42.
Risk Factors and Developing a Range
* * *
Some risk factors existing within the company that may affect the variability of the company’s loss reserves are –
• The frequency and severity of claims associated with a line of business. Medical malpractice, directors’ and officers’ liability, and other lines of business that typically produce few claims with large settlement amounts tend to have a high degree of variability.
* * *
Some external factors that may affect the variability of loss reserves are—
• Catastrophes or major civil disorders.
• Jury awards and social inflation arising from the legal environment in principal states in which a company’s risks are underwritten.
SOP 92-4, ¶¶84-85.
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256. XL violated SOP 92-4 because it did not properly consider changes in the
environment or variability in estimating reinsurance loss reserves, as set forth herein.
257. XL also violated GAAP by failing to properly record loss expenses and loss reserves
in its interim financial statements as indicated by APB Opinion No. 28, ¶17:
Interim Financial Reporting:
* * *
The amounts of certain costs and expenses are frequently subjected to year-end adjustments even though they can be reasonably approximated at interim dates. To the extent possible such adjustments should be estimated and the estimated costs and expenses assigned to interim periods so that the interim periods bear a reasonable portion of the anticipated annual amount.
258. In a striking coincidence, XL’s quarterly loss ratios for its reinsurance segment
during 2001, 2002 and 2003 were remarkably stable, considering that the reinsurance business
cycle is notoriously volatile. Shown below are XL’s reinsurance loss and loss expense ratios on a
quarterly basis:
1Q01 2Q01 3Q01 4Q01 1Q02 2Q02 3Q02 4Q02 1Q03 2Q03 3Q03 4Q04 Loss and loss expense ratio
63.1% 62.7% 326.8% 170.4% 62.8% 86.3% 62.5% 85.2% 63.7% 62.9% 83.6% 146.4%
259. Implausibly, six of the quarters’ loss and loss expense ratios fell in a narrow range of
62.5% to 63.7%. Of the other six quarters, four of them were higher than this range because of
delinquent charges by XL for inadequate loss reserves (4Q01, 4Q02, 3Q03 and 4Q03) and the other
two quarters were higher than this range due to losses in connection with the September 11, 2001
terrorist attacks (3Q01 and 2Q02). The stability of the quarters where the loss and loss expense
ratio were between 62.5% and 63.7% is simply unbelievable for a reinsurance segment with a
substantial amount of casualty business, where loss ratios are notoriously unstable, because losses
are “low frequency, high severity,” which should cause troughs and spikes over time (from ongoing
operations, not from delinquent charges for previous accident years). In fact, the appearance of
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stability in a business segment with expected erratic results suggests that the recorded losses were
based on targets or actuarial models that were designed to reach predetermined results.
During The Class Period, XL Received a Scathing Reinsurance Examination Report from NAC Re’s Regulator, the NYID:
260. XL’s largest United States subsidiary, NAC Re, was required to file annual
statements18 with the NYID in conformity with SAP. SAP are insurance industry accounting rules
promulgated by the NAIC and various state regulatory authorities. Accounting for insurance
premiums, expenses and loss reserves is substantially similar under GAAP and SAP. NAC Re’s
most recent Examination Report by NYID was completed in May 2002 and severely criticized
NAC Re for numerous reporting deficiencies, violations of New York State Insurance Law, lack of
cooperation with the examiner and numerous other breaches.
261. The May 2002 Examination Report from NYID was as of December 31, 1999 and
included a review of certain transactions and reports in 2000 and 2001. Information in the Report
confirms that XL knew no later than May 2002 (and probably much earlier), that the NYID had
concluded that XL lacked adequate internal controls over its NAC Re reinsurance operations, and
that NYID found it necessary to make a $189 million adjustment to increase loss reserves beyond
what NAC Re reported to NYID as of December 31, 1999, based on additional loss reserves taken
by the Company in 2000 and 2001.
262. Among the NYID Examination Report findings were the following:
(a) Due to numerous adjustments by NYID to amounts NAC Re reported in its
annual statement, NAC Re’s policyholder surplus was reduced to $175,542,194 from $440,103,494,
reflecting a reported overstatement of 150%.
18 The annual statement is a set of financial statements, footnotes, and numerous supporting schedules that insurance companies are required to file with insurance regulators every year. The regulator typically conducts a formal examination of the annual statement every three to five years.
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(b) The examination calculation of liability for loss reserves, which was
conducted in accordance with generally accepted actuarial principles and practices and based on
statistical information contained in NAC Re’s internal records and filed annual statements, was
$1,175,734,849, which was $189,000,000 higher than NAC Re’s reported reserve balance of
$986,734,849, reflecting a reported understatement of 19%.
(c) The Company did not comply with provisions of New York Insurance Law
that require facilitation of the examination and aid to the examiners. As stated in the examiner’s
report:
“The designated contact person did not have the authority, knowledge and experience to effectively facilitate the examination;
“Requests for information were not responded to in a timely manner;
“Documentation provided was often inaccurate and incomplete.”
* * *
“The above significantly increased the length of the examination, increased the cost of the examination to the Company and put a strain on [NYID’s] resources.”
(d) The open items report balance for an affiliate of NAC Re was $18,786,870,
however, NAC Re reported $26,231,000, an overstatement of $7,444,130. NAC Re was unable to
provide support for the reported amounts, and the NYID found this to be a violation of New York
Insurance Law §1505(b), which states:
The books, accounts and records of each party to all such transactions shall be maintained as to clearly and accurately disclose the nature and details of the transactions including such accounting information as is necessary to support the reasonableness of the charges or fees to the respective parties.
The above finding by NYID put XL on notice that their accounting and record-keeping at NAC Re,
their largest U.S. reinsurance subsidiary, was in violation of state law. This was a highly
significant finding, because the SEC has substantially similar rules for maintaining adequate books
and records.
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(e) The examination calculation of the common stock balance (an asset) was
reduced to $148,324,133 from $222,516,133, reflecting a reported overstatement of 50%. Eighty
percent of the reduction was due to understated loss reserves of NAC Re subsidiaries.
(f) The Company did not have support for several annual statement balances,
including reinsurance payable on paid losses and loss adjustment expenses. In fact, a payable was
set up based solely on an email from an affiliate, which is improper because that is not sufficient
documentation to support such a payable.
(g) For the reinsurance payable on paid losses and loss adjustment expenses,
discrepancies were found in half of the balances tested, resulting in a $988,000 understatement of the
reinsurance payable account.
(h) After adjustments recorded by NYID, NAC Re’s ratios for liabilities to liquid
assets and premiums in the course of collection to policyholders’ surplus violated benchmarks used
by the Insurance Regulatory Information System of the NAIC.
(i) Several of NAC Re’s ceded reinsurance contracts were not signed within nine
months of their effective dates, a violation of NAIC Accounting Practices and Procedures. This was
also a finding by NYID in their previous Examination Report, but NAC Re failed to correct the
problem, even though NYID told NAC Re to discontinue the practice.
(j) Some contracts did not have executed liability and interest pages, and others
were not even in writing.
(k) Several amounts NAC Re reported on Schedule F (reinsurance schedules)
could not be supported by internal records. The Company was either unable to provide
documentation or the documentation provided did not agree with the reported amounts.
(l) The Company did not comply with any of its five affiliate service agreements,
and did not properly allocate expenses to certain members of the holding company system.
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263. Because of this highly critical Examination Report from NYID in May 2002, the
Company clearly knew of the problems with accounting systems for its NAC Re reinsurance
operations, particularly with respect to setting adequate loss reserves and having appropriate
internal controls.
XL’s Shareholder Equity Was Overstated Throughout the Class Period:
264. Because of XL’s failure to record adequate loss reserves and loss expenses during
the Class Period, its shareholder equity as reported in its press releases and SEC filings was
overstated by the following amounts ($ in millions):
December 31, 2001 December 31, 2002 June 30, 2003
Reported shareholder equity $5,437 $6,570 $7,565
Minimum overstatement of shareholder equity
$ 622 $ 557 $ 557
Actual shareholder equity $4,815 $6,013 $7,008 XL’s GAAP Violations Were Material:
265. XL’s unrecorded reinsurance loss reserves and loss expenses and resulting
overstatement of stockholder equity alleged herein were material. As an initial matter, XL’s
financial misstatements were clearly material solely from a numerical (quantitative) standpoint,
because the Company’s earnings and shareholder equity were so inflated – by hundreds of millions
of dollars – that XL averted ratings downgrades and artificially inflated XL’s policy writing
capacity.
266. However, definitions of materiality are not limited to numbers and amounts. SEC
Staff Accounting Bulletin No. 99 (“SAB 99”), Materiality, summarizes GAAP definitions of
materiality. Among other items, SAB 99 says: “A matter is ‘material’ if there is a substantial
likelihood that a reasonable person would consider it important.” It also stresses that materiality
requires qualitative, as well as quantitative, considerations. For example, if a known misstatement
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would cause a significant market reaction, that reaction should be taken into account in determining
the materiality of the misstatement. SAB 99 further states:
Among the considerations that may well render material a quantitatively small misstatement of a financial statement item are –
* * *
• whether the misstatement masks a change in earnings or other trends
• whether the misstatement hides a failure to meet analysts’ consensus expectations for the enterprise
* * *
• whether the misstatement concerns a segment or other portion of the registrant’s business that has been identified as playing a significant role in the registrant’s operations or profitability
* * *
• whether the misstatement affects the registrant’s compliance with loan covenants or other contractual requirements
SAB 99 also says that an intentional misstatement of even immaterial items may be illegal and
constitute fraudulent financial reporting.
267. XL’s misstatements satisfy each of these criteria and thus were material from both a
quantitative and qualitative perspective.
XL Failed to Make Required Disclosures:
268. The SEC requires that, as to annual and interim financial statements filed with the
SEC, registrants include a management’s discussion and analysis section which provides
information with respect to the results of operations and “also shall provide such other information
that the registrant believes to be necessary to an understanding of its financial condition, changes in
financial condition and results of operations.” See Regulation S-K, 17 C.F.R. §229.303.
Regulation S-K states that, as to annual results, the management’s discussion and analysis section
shall:
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Describe any unusual or infrequent events or transactions or any significant economic changes that materially affected the amount of reported income from continuing operations, and in each case, indicate the extent to which income was so affected. In addition, describe any other significant components of revenues or expenses that, in the registrant’s judgment, should be described in order to understand the registrant’s results of operations.
Describe any known trends or uncertainties that have had or that the registrant reasonably expects will have a material favorable or unfavorable impact on net sales or revenues or income from continuing operations. If the registrant knows of events that will cause material change in the relationship between costs and revenues (such as known future increases in costs of labor or materials or price increases or inventory adjustments), the change in the relationship shall be disclosed.
17 C.F.R. §229.303(a)(3)(i)(ii).
269. In addition, the SEC, in its May 18, 1989 Interpretive Release No. 34-26831, has
indicated that registrants should employ the following two-step analysis in determining when a
known trend or uncertainty is required to be included in the MD&A disclosure pursuant to Item 303
of Regulation S-K: “A disclosure duty exists where a trend, demand, commitment, event or
uncertainty is both presently known to management and is reasonably likely to have a material
effect on the registrant’s financial condition or results of operations.”
270. During the Class Period, XL repeatedly told the market that it had taken the
necessary steps to properly set up reserves for losses and loss expenses. In fact, XL failed to
disclose to the market that it had not performed a sufficient review of cedents and related claims
information necessary to properly set loss reserves. Thus, XL violated Regulation S-K, set forth
above.
XL Lacked Adequate Internal Controls:
271. Section 13(b)(2) of the Exchange Act states, in pertinent part, that every reporting
company must: “(A) make and keep books, records and accounts which, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of the issuer;” and “(B)
devise and maintain a system of internal accounting controls sufficient to provide reasonable
assurances that – (i) transactions are executed in accordance with management’s general and
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specific authorization; (ii) transactions are recorded as necessary (I) to permit the preparation of
financial statements in conformity with generally accepted accounting principles.” 15 U.S.C.
§78m(b)(2)(A)(ii)-(iii).
272. These provisions require an issuer to employ and supervise reliable personnel, to
maintain reasonable assurances that transactions are executed as authorized, to properly record
transactions on an issuer’s books and, at reasonable intervals, to compare accounting records with
physical assets. SEC v. World-Wide Coin Investments, Ltd., 567 F. Supp. 724, 746 (N.D. Ga.
1983).
273. CW1 worked in NAC Re’s reinsurance operations from before the Class Period
started until after the Class Period ended. According to CW1, NAC Re’s claims record keeping,
claims processing systems, accounting records and internal controls were in disarray and the
available data was consequently inaccurate and unreliable.
274. The extent of NAC Re’s unreliable claims data and disorganized claims processing
systems rendered the accounting system incapable of producing accurate financial statements with
respect to loss expenses, loss reserves and shareholder equity. Even worse, without reliable claims
data, XL’s actuaries would not be able to generate loss reserve projections or estimates with any
amount of confidence. The fact that the submitted claims were frequently missing or incomplete
meant that actuarial models based on the claims data would necessarily produce reserves that were
materially insufficient, and would increase as XL’s NAC Re’s reinsurance operations grew.
275. XL’s management was aware of the unreliable claims data and deliberately failed to
implement proper internal controls or take other steps that were necessary to correct and complete
NAC Re’s claims data because they knew if accurate claims data was provided to the actuaries, loss
reserve estimates would soar and XL would consequently face ratings downgrades and premium
capacity reductions.
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276. Defendants caused XL to violate §13(b)(2)(A) of the Exchange Act by failing to
maintain accurate records concerning, inter alia, its claims, premiums, reserves, equity and surplus.
Defendants knew of XL’s failure to record reinsurance loss reserves and expenses in the proper
accounting periods. XL’s inaccurate and false records were not isolated or unique instances
because they were improperly maintained for multiple reporting periods, from at least fiscal 2001
through the end of the Class Period. Accordingly, XL violated §13(b)(2)(A) of the Exchange Act.
277. In addition, defendants caused XL to violate §13(b)(2)(B) of the Exchange Act by
failing to implement procedures reasonably designed to prevent accounting irregularities. XL
failed to ensure that proper review and checks were in place to ensure that it was properly recording
and reporting reinsurance-related balances. In fact, despite knowing of the Company’s lack of
adequate controls, as confirmed by the May 2002 NYID Examination Report, defendants regularly
issued quarterly and annual financial statements throughout the Class Period without ever
disclosing the deficiencies in XL’s internal accounting controls and falsely asserted that XL’s
financial statements complied with GAAP.
278. XL’s management was responsible for preparing financial statements that
conformed with GAAP. As noted by the AICPA professional standards:
[F]inancial statements are management’s responsibility. . . . Management is responsible for adopting sound accounting policies and for establishing and maintaining internal control that will, among other things, record, process, summarize, and report transactions (as well as events and conditions) consistent with management’s assertions embodied in the financial statements. The entity’s transactions and the related assets, liabilities and equity are within the direct knowledge and control of management. . . . Thus, the fair presentation of financial statements in conformity with generally accepted accounting principles is an implicit and integral part of management’s responsibility.
Statements on Auditing Standards, AU §110.03.
279. “Financial reporting includes not only financial statements, but also other means of
communicating information that relates directly or indirectly, to the information” in the financial
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statements. See FASB Statement of Concepts (“FASCON”) No. 1, ¶7. For this reason, in addition
to XL’s failure to make the required disclosures in its financial statements and in its SEC filings,
XL also shirked its duty to make such disclosures in its conference calls, its press releases and its
annual reports.
280. Due to these accounting improprieties, the Company presented its financial results
and statements in a manner that violated GAAP, including the following fundamental accounting
principles:
(a) The principle that interim financial reporting should be based upon the same
accounting principles and practices used to prepare annual financial statements (APB No. 28, ¶10);
(b) The principle that “[f]inancial reporting should provide information that is
useful to present and potential investors and creditors and other users in making rational investment,
credit and similar decisions” (FASCON No. 1, ¶34);
(c) The principle that “[f]inancial reporting should provide information about the
economic resources of an enterprise, the claims to those resources ... and the effects of transactions,
events and circumstances that change resources and claims to those resources” (FASCON No. 1,
¶40);
(d) The principle that “[f]inancial reporting should provide information about how
management of an enterprise has discharged its stewardship responsibility to owners (stockholders)
for the use of enterprise resources entrusted to it.” And “[t]o the extent that management offers
securities of the enterprise to the public, it voluntarily accepts wider responsibilities for
accountability to prospective investors and to the public in general” (FASCON No. 1, ¶50);
(e) The principle that “[f]inancial reporting should provide information about an
enterprise’s financial performance during a period. Investors and creditors often use information
about the past to help in assessing the prospects of an enterprise. Thus, although investment and
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credit decisions reflect investors’ ... expectations about future enterprise performance, those
expectations are commonly based, at least partly, on evaluations of past enterprise performance”
(FASCON No. 1, ¶42);
(f) The principle that financial reporting should be reliable in that it represents
what it purports to represent. That information should be reliable as well as relevant is a notion that
is central to accounting (FASCON No. 2, ¶¶58-59);
(g) The principle of completeness, which means that nothing is left out of the
information that may be necessary to insure that it validly represents underlying events and
conditions (FASCON No. 2, ¶79); and
(h) The principle that conservatism be used as a prudent reaction to uncertainty to
try to ensure that uncertainties and risks inherent in business situations are adequately considered.
The best way to avoid injury to investors is to try to ensure that what is reported represents what it
purports to represent (FASCON No. 2, ¶¶95, 97).
281. Moreover, defendants’ undisclosed, adverse, material information during the Class
Period is the type of information that, because of SEC regulations, national stock-exchange
regulations, and customary business practice, investors and securities analysts expect to be
disclosed and corporate officials and their legal and financial advisors know to be the type of
information that must be disclosed.
Defendants O’Hara’s and de St. Paer’s False Certifications:
282. On August 5, 2002, defendants O’Hara and de St. Paer signed and filed with the
SEC the following Certification under §906 of the Sarbanes-Oxley Act of 2002:
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CERTIFICATION ACCOMPANYING FORM 10-Q REPORT
OF XL CAPITAL LTD
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 (CHAPTER 63, TITLE 18 U.S.C.SS.1350(A) AND (B))
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Chapter 63, Title 18 U.S.C. ss.1350(a) and (b)), each of the undersigned hereby certifies that the Quarterly Report on Form 10-Q for the period ended June 30, 2002 of XL Capital Ltd (“Company”) fully complies with the requirements of Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934 and that the information contained in such Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Dated: August 5, 2002 / s / Brian M. O’Hara ---------------------------------------------------- Brian M. O’Hara President and Chief Executive Officer XL Capital Ltd
Dated: August 5, 2002 / s / Jerry de St. Paer
---------------------------------------------------- Jerry de St. Paer Executive Vice President and Chief Financial Officer XL Capital Ltd
O’Hara and de St. Paer signed substantially similar Certifications on November 8, 2002, March 28,
2003, May 15, 2003, June 18, 2003, and August 14, 2003 in connection with the Company’s false
Report on Form 10-K for the year ended December 31, 2002 and false Reports on Form 10-Q for the
quarters ended September 30, 2002, March 31, 2003, and June 30, 2003. At the time O’Hara and de
St. Paer signed these Certifications, they knew they were false.
283. On November 8, 2002, O’Hara signed and filed with the SEC the following
Certification under §302 of the Sarbanes-Oxley Act of 2002:
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CERTIFICATION OF CHIEF EXECUTIVE OFFICER
XL CAPITAL LTD
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Chapter 63, Title 18 U.S.C.SS.1350(A) and (B))
I, Brian M. O’Hara, certify that:
1. I have reviewed this quarterly report on Form 10-Q of XL Capital Ltd; 2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly represent in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
4. The registrant’s other certifying officers and I are responsible for establishing
and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant’s disclosure controls and
procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5. The registrant’s other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function);
a) all significant deficiencies in the design or operation of internal control
which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and
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b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and
6. The registrant’s other certifying officers and I have indicated in this quarterly
report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Dated: November 8, 2002
/S/ BRIAN M. O’HARA Brian M. O’Hara President and Chief Executive Officer
O’Hara signed substantially similar Certifications on March 28, 2003, May 15, 2003, June 18, 2003,
and August 14, 2003 in connection with the Company’s false Report on Form 10-K for the year
ended December 31, 2002 and false Reports on Form 10-Q for the quarters ended March 30, 2003
and June 30, 2003. CFO de St. Paer signed substantially similar certifications with the same dates in
connection with the Company’s false Report on Form 10-K and false Reports on Form 10-Q for the
same periods. At the time O’Hara and de St. Paer signed these Certifications, they knew they were
false.
X. APPLICABILITY OF PRESUMPTION OF RELIANCE: FRAUD-ON-THE-MARKET DOCTRINE
284. At all relevant times, the market for XL’s common stock was an efficient market for
the following reasons, among others:
(a) XL’s common stock met the requirements for listing, and was listed and
actively traded on the NYSE, a highly efficient and automated market;
(b) As a regulated issuer, XL filed periodic public reports with the SEC and the
NYSE;
(c) XL regularly communicated with public investors via established market
communication mechanisms, including through regular dissemination of press releases on the
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national circuits of major newswire services and through other wide-ranging public disclosures, such
as communications with the financial press and other similar reporting services; and
(d) XL was followed by several securities analysts employed by major brokerage
firms who wrote reports which were distributed to the sales force and certain customers of their
respective brokerage firms. Each of these reports was publicly available and entered the public
marketplace.
285. As a result of the foregoing, the market for XL’s common stock promptly digested
current information regarding XL from all publicly available sources and reflected such
information in XL’s stock price. Under these circumstances, all purchasers of XL’s common stock
during the Class Period suffered similar injury through their purchase of XL’s common stock at
artificially inflated prices and a presumption of reliance applies.
XI. NO SAFE HARBOR
286. The statutory safe harbor provided for forward-looking statements under certain
circumstances does not apply to any of the allegedly false statements pleaded in this Complaint.
Many of the specific statements pleaded herein were not identified as “forward-looking statements”
when made. To the extent there were any forward-looking statements, there were no meaningful
cautionary statements identifying important factors that could cause actual results to differ
materially from those in the purportedly forward-looking statements. Alternatively, to the extent
that the statutory safe harbor does apply to any forward-looking statements pleaded herein,
defendants are liable for those false forward-looking statements because at the time each of those
forward-looking statements was made, the particular speaker knew that the particular forward-
looking statement was false, and/or the forward-looking statement was authorized and/or approved
by an executive officer of XL who knew that those statements were false when made.
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XII. PLAINTIFF’S CLASS ACTION ALLEGATIONS
287. Plaintiff brings this action as a class action pursuant to Fed. R. Civ. P. 23(a) and
(b)(3) on behalf of a class, consisting of all those who purchased or otherwise acquired the common
stock of XL between November 1, 2001 and October 16, 2003, inclusive and who were damaged
thereby. Excluded from the class are defendants, the officers and directors of the Company, at all
relevant times, members of their immediate families and their legal representatives, heirs,
successors or assigns and any entity in which defendants have or had a controlling interest.
288. The members of the class are so numerous that joinder of all members is
impracticable. Throughout the Class Period, XL common shares were actively traded on the
NYSE, under the ticker symbol (“XL”). While the exact number of class members is unknown to
plaintiff at this time and can only be ascertained through appropriate discovery, plaintiff believes
that there are hundreds or thousands of members in the proposed class. Record owners and other
members of the class may be identified from records maintained by XL or its transfer agent and
may be notified of the pendency of this action by mail, using the form of notice similar to that
customarily used in securities class actions.
289. Plaintiff’s claims are typical of the claims of the members of the class as all
members of the class are similarly affected by defendants’ wrongful conduct in violation of federal
law that is complained of herein.
290. Plaintiff’s will fairly and adequately protect the interests of the members of the class
and have retained counsel competent and experienced in class and securities litigation.
291. Common questions of law and fact exist as to all members of the class and
predominate over any questions solely affecting individual members of the class. Among the
questions of law and fact common to the class are:
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(a) Whether the federal securities laws were violated by defendants’ acts as
alleged herein;
(b) Whether the Company’s publicly disseminated press releases and statements
during the Class Period omitted and/or misrepresented material facts;
(c) Whether defendants breached any duty to convey material facts or to correct
material acts previously disseminated;
(d) Whether defendants participated in and pursued the fraudulent scheme to
artificially inflate stock prices;
(e) Whether the defendants acted willfully, with knowledge or recklessly, in
omitting and/or misrepresenting material facts;
(f) Whether the market prices of XL’s common stock during the Class Period
were artificially inflated due to material non-disclosures and/or misrepresentations complained of
herein; and
(g) Whether the members of the class have sustained damages and, if so, what is
the appropriate measure of damages.
292. A class action is superior to all other available methods for the fair and efficient
adjudication of this controversy since joinder of all members is impracticable. Furthermore, as the
damages suffered by individual class members may be relatively small, the expense and burden of
individual litigation make it impossible for members of the class to individually redress the wrongs
done to them. There will be no difficulty in the management of this action as a class action.
COUNT I
(Violation of Section 10(b) of the Exchange Act and Rule 10b-5 Promulgated Thereunder Against All Defendants)
293. Plaintiff repeats and realleges each and every allegation contained above as if fully
set forth herein.
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294. During the Class Period, defendants carried out a plan, scheme and course of
conduct which was intended to and, throughout the Class Period, did: (1) deceive the investing
public, including plaintiff and other class members, as alleged herein; and (2) cause plaintiff and
other class members to purchase XL’s common stock at artificially inflated prices. In furtherance of
this unlawful scheme, plan and course of conduct, defendants, and each of them, took the actions
set forth herein.
295. Defendants (a) employed devices, schemes, and artifices to defraud; (b) made untrue
statements of material fact and/or omitted to state material facts necessary to make the statements
made not misleading; and (c) engaged in acts, practices, and a course of business which operated as
a fraud and deceit upon the purchasers of the Company’s common stock in an effort to maintain
artificially high market prices for XL’s common stock in violation of §10(b) of the Exchange Act
and Rule 10b-5. All defendants are sued either as primary participants in the wrongful and illegal
conduct charged herein or as controlling persons as alleged below.
296. Defendants, individually and in concert, directly and indirectly, by the use, means or
instrumentalities of interstate commerce and/or of the mails, engaged and participated in a
continuous course of conduct to conceal adverse material information about the business,
operations and future prospects of XL as specified herein.
297. These defendants employed devices, schemes and artifices to defraud, while in
possession of material adverse non-public information and engaged in acts, practices, and the
course of conduct as alleged herein in an effort to assure investors of XL’s value and performance
and continued substantial growth, which included the making of, or the participation in the making
of, untrue statements of material fact and omitting to state material facts necessary in order to make
the statements made about XL and its business operations and future prospects in the light of the
circumstances under which they were made, not misleading, as set forth more particularly herein,
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and engaged in transactions, practices and a course of business which operated as a fraud and deceit
upon the purchasers of XL common stock during the Class Period.
298. Each of the Individual Defendants’ primary liability, and controlling person liability,
arises from the following facts: (1) the Individual Defendants were high-level executives and/or
directors at the Company during the Class Period and members of the Company’s management
team or had control thereof; (2) each of these defendants, by virtue of his responsibilities and
activities as a senior officer and/or director of the Company was privy to and participated in the
creation, development and reporting of the Company’s internal budgets, plans, projections and/or
reports; (3) each of these defendants enjoyed significant personal contact and familiarity with the
other defendants and was advised of and had access to other members of the Company’s
management team, internal reports and other data and information about the Company’s finances,
operations, and sales at all relevant times; and (4) each of these defendants was aware of the
Company’s dissemination of information to the investing public which they knew or recklessly
disregarded was materially false and misleading.
299. The defendants had actual knowledge of the misrepresentations and omissions of
material facts set forth herein, or acted with reckless disregard for the truth in that they failed to
ascertain and to disclose such facts, even though such facts were available to them. Such
defendants’ material misrepresentations and/or omissions were done knowingly or recklessly and
for the purpose and effect of concealing XL’s operating condition and future business prospects
from the investing public and supporting the artificially inflated price of its common stock. As
demonstrated by defendants’ overstatements and misstatements of the Company’s business,
operations and earnings throughout the Class Period, defendants, if they did not have actual
knowledge of the misrepresentations and omissions alleged, were reckless in failing to obtain such
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knowledge by deliberately refraining from taking those steps necessary to discover whether those
statements were false or misleading.
300. As a result of the dissemination of the materially false and misleading information
and failure to disclose material facts, as set forth above, the market price of XL’s common stock
was artificially inflated during the Class Period. In ignorance of the fact that market prices of XL’s
common stock were artificially inflated, and relying directly or indirectly on the false and
misleading statements made by defendants, or upon the integrity of the market in which the
common stock trades, and/or on the absence of material adverse information that was known to or
recklessly disregarded by defendants but not disclosed in public statements by defendants during
the Class Period, plaintiff and the other members of the class acquired XL common stock during
the Class Period at artificially high prices and were damaged thereby.
301. At the time of said misrepresentations and omissions, plaintiff and other members of
the class were ignorant of their falsity, and believed them to be true. Had plaintiff and the other
members of the class and the marketplace known the truth regarding XL’s financial results, which
were not disclosed by defendants, plaintiff and other members of the class would not have
purchased or otherwise acquired their XL common stock, or, if they had acquired such common
stock during the Class Period, they would not have done so at the artificially inflated prices which
they paid.
302. By virtue of the foregoing, defendants have violated §10(b) of the Exchange Act,
and Rule 10b-5 promulgated thereunder.
303. As a direct and proximate result of defendants’ wrongful conduct, plaintiff and the
other members of the class suffered damages in connection with their respective purchases and
sales of the Company’s common stock during the Class Period.
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COUNT II
(Violation of Section 20(a) of the Exchange Act Against the Individual Defendants)
304. Plaintiff repeats and realleges each and every allegation contained above as if fully
set forth herein.
305. The Individual Defendants acted as controlling persons of XL within the meaning of
§20(a) of the Exchange Act as alleged herein. By virtue of their high-level positions, and their
ownership and contractual rights, participation in and/or awareness of the Company’s operations
and/or intimate knowledge of the false financial statements filed by the Company with the SEC and
disseminated to the investing public, the Individual Defendants had the power to influence and
control and did influence and control, directly or indirectly, the decision making of the Company,
including the content and dissemination of the various statements which plaintiff contends are false
and misleading. The Individual Defendants were provided with or had unlimited access to copies
of the Company’s reports, press releases, public filings and other statements alleged by plaintiff to
be misleading prior to and/or shortly after these statements were issued and had the ability to
prevent the issuance of the statements or cause the statements to be corrected.
306. In particular, each of these defendants had direct and supervisory involvement in the
day-to-day operations of the Company and, therefore, is presumed to have had the power to control
or influence the particular transactions giving rise to the securities violations as alleged herein, and
exercised the same.
307. As set forth above, the defendants each violated §10(b) and Rule 10b-5 by their acts
and omissions as alleged in this Complaint. By virtue of their positions as controlling persons, the
Individual Defendants are liable pursuant to §20(a) of the Exchange Act. As a direct and proximate
result of defendants’ wrongful conduct, plaintiff and other members of the class suffered damages
in connection with their purchases of the Company’s common stock during the Class Period.
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PRAYER FOR RELIEF
WHEREFORE, plaintiff prays for relief and judgment, as follows:
Determining that this action is a proper class action, designating plaintiff as lead plaintiff and
certifying plaintiff as class representative under Rule 23 of the Federal Rules of Civil Procedure and
plaintiff’s counsel as Lead Counsel.
A. Awarding compensatory damages in favor of plaintiff and the other class members
against all defendants, jointly and severally, for all damages sustained as a result of defendants’
wrongdoing, in an amount to be proven at trial, including interest thereon;
B. Awarding plaintiff and the class their reasonable costs and expenses incurred in this
action, including attorneys’ fees and expert fees; and
C. Such other and further relief as the Court may deem just and proper.
JURY TRIAL DEMANDED
Plaintiff hereby demands a trial by jury.
DATED: November 1, 2005 LERACH COUGHLIN STOIA GELLER RUDMAN & ROBBINS LLP SHAWN A. WILLIAMS (CT 25867) SYLVIA SUM JAMES W. OLIVER (CT 26021)
/s/ Shawn A. Williams SHAWN A. WILLIAMS
100 Pine Street, Suite 2600 San Francisco, CA 94111 Telephone: 415/288-4545 415/288-4534 (fax)
LERACH COUGHLIN STOIA GELLER RUDMAN & ROBBINS LLP SAMUEL H. RUDMAN 200 Broadhollow Road, Suite 406 Melville, NY 11747 Telephone: 631/367-7100 631/367-1173 (fax)
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BARRETT, JOHNSTON & PARSLEY GEORGE E. BARRETT 217 Second Avenue, North Nashville, TN 37201-1601 Telephone: 615/244-2202 615/252-3798 (fax)
BARRETT, JOHNSTON & PARSLEY GEORGE E. BARRETT 217 Second Avenue, North Nashville, TN 37201-1601 Telephone: 615/244-2202 615/252-3798 (fax)
Co-Lead Counsel for Plaintiffs
SCOTT + SCOTT, LLC DAVID R. SCOTT (CT 16080) ERIN GREEN COMITE (CT 24886) 108 Norwich Avenue Colchester, CT 06415 Telephone: 860/537-3818 860/537-4432 (fax)
Liaison Counsel T:\CasesSF\XL Capital\CPT00025669.doc
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DECLARATION OF SERVICE BY UPS DELIVERY
I, the undersigned, declare:
1. That declarant is and was, at all times herein mentioned, a citizen of the United States
and employed in the City and County of San Francisco, over the age of 18 years, and not a party to
or interested party in the within action; that declarant’s business address is 100 Pine Street,
Suite 2600, San Francisco, California 94111.
2. That on November 1, 2005, declarant served by UPS, next day delivery, the
SECOND AMENDED CLASS ACTION COMPLAINT FOR VIOLATION OF THE FEDERAL
SECURITIES LAWS to the parties listed on the attached Service List.
I declare under penalty of perjury that the foregoing is true and correct. Executed this 1st day
of November, 2005, at San Francisco, California.
/s/ Juvily P. Catig JUVILY P. CATIG
Case 3:03-cv-02001-PCD Document 114-1 Filed 11/01/2005 Page 128 of 128
Exhibit 1
AICPA AUDIT AND ACCOUNTING GUIDE
1c P
AUDITS ofPROPERTY ANDLIABILITYINSURANCECOMPANIES
With Conforming Changes as ofMay 1, 2000
GLOSSARY - Excerpted from the American Institute of Certi fied PublicAccountants Audit and Accounting Guid e
for Audits of Property and Liabili ty Insurance Companies
Accident year . The year in which an accident occurred .
Admitted asset . An asset recognized and accepted by state insurance regulatory authoritiesin determining the financial condition of an insurance company .
Alien company . Insurance company domiciled in a foreign country .
Annual statement (convention statement or convention form) . A statement furnishingthe complete information regarding the company's condition and affairs at December31 of each year required by insurance departments of the various states in which acompany is authorized to transact business . This annual statement must be filed onthe form prescribed by the NAIC with the various insurance departments by March 1of the following year.
Assets, nonadmitted . Assets, or portions thereof, that are not permitted to be reported asadmitted assets in the annual statement filed with various insurance departments .Nonadmitted assets are defined by the insurance laws of various states . Majornonadmitted assets include: an excess of book value over statement value, ofinvestments, agents' balances or uncollected premiums over three months due, andfurniture, fixtures, supplies, equipment, and automobiles .
Assuming company . A company that accepts all or part of an insurance risk from anothercompany through reinsurance .
Case reserve . A liability for loss estimated to be paid in the future on an outstanding claim .
Ceding company . A company that transfers all or part of an insurance risk to anothercompany through reinsurance . Also called a primary company.
Claim. A demand for payment of a policy benefit because of the occurrence of an insuredevent, such as the death or disability of the insured, the maturity of an endowment,the incurrence of hospital or medical bills, the destruction or damage of property, andrelated deaths or injuries; defects in, liens on, or challenges to the title to real estate,or the occurrence of a surety loss .
Claim adjusting. The process of investigating, appraising, negotiating and, sometimes,settling claims .
Claim frequency . The relative incidence of claims in relation to an exposure base .
Claim severity . The relative magnitude of the dollar amount of claims .
Claim or loss files . All data relating to each loss or claim together in a folder or stapledtogether, or the like, and referred to as the loss or claim file .
Combined ratios. The sure of both the loss ratio and expense ratio used to measureunderwriting performance.
Direct writing company . An insurance company whose business is produced by companyemployees, as distinguished from an agency company whose business is produced byagents .
Earned premiums. Pro rata portions of premiums applicable to the expired period of apolicy .
Incurred-but-not-reported (IBNR) claims . Claims relating to insured events that haveoccurred but have not yet been reported to the insurer or reinsurer as of the date of thefinancial statements .
Incurred losses (claims) . Losses paid or unpaid for which the company has become liableduring a period. Incurred losses for a period are calculated by adding unpaid losses atthe end of the period to losses paid during the period and subtracting unpaid losses atthe beginning of the period .
Liability for (claim) adjustment expenses. The amount needed to provide for theestimated ultimate cost required to investigate and settle losses relating to insuredevents that have occurred on or before a particular date (ordinarily, the balance sheetdate), whether or not reported to the insurer at that date .
Liability for unpaid claims . The amount needed to provide for the estimated ultimate costof settling claims relating to insured events that have occurred on or before aparticular date (ordinarily, the balance sheet date) ., The estimated liability includesthe amount of money that will be required for future payments on both (1) claims thathave been reported to the insurer and (2) claims relating to insured events that haveoccurred but have not been reported to the insurer as of the date the liability isestimated .
Loss (claim)-adjustment expenses . Expenses incurred in' the course of investigating andsettling claims . Loss-adjustment expenses include any legal and adjusters' fees andthe costs of paying claims and all related expenses .
Loss ratios. Expression in terms of ratios of the relationship of losses to premiums . Tworatios in common usage are (1) paid loss ratio - paid losses divided by writtenpremiums or earned premiums, and (2) incurred loss ratio - incurred losses dividedby earned premiums .
Loss reserves . A term used in statutory accounting for the liability for unpaid losses .
Losses . Claims .
NAIC (National Association of Insurance Commissioners) . An association of theInsurance Commissioners of various states in the United States .
Premium. The consideration paid for an insurance contract .
Premiums written . The premiums on all policies a company has issued in a period of time,as opposed to Earned premiums .
Property and liability insurance enterprise . An enterprise that issues insurance contractsproviding protection against (1) damage to, or loss of, property caused by variousperils, such as fire and theft, or (2) legal liability resulting from injuries to otherpersons or damage to their property. Property and liability insurance enterprises alsocan issue accident and health insurance contracts . The term property and liabilityinsurance enterprise is the current terminology used to describe a fire and casualtyinsurance enterprise. Property and liability insurance enterprises maybe either stockor mutual organizations .
Quota-share reinsurance. A form of pro rata reinsurance . A reinsurance of a certainpercentage of all the business or certain classes of or parts of the business of thereinsured . For example, a• company may reinsure under a quota-share treaty 50percent of all of its business or 50 percent of its automobile business .
Reinsurance . A transaction in which a reinsurer (assuming enterprise), for a consideration(premium), assumes all or part of a risk undertaken originally by another insurer(ceding enterprise) . However, the legal rights of the insured are not affected by thereinsurance transaction, and the insurance enterprise issuing the insurance contractremains liable to the insured for payment of policy benefits .
Reinsurance ceded premiums . All premiums (less return premiums) arising from policiesor coverage purchased from another insurance company for the purpose oftransferring a liability, in whole or in part, assumed from direct or reinsuranceassumed policies .
Reported claims . Claims relating to insured events that have occurred and have beenreported to the insurer and reinsurer as of the date of the financial statements, asopposed to incurred-but-not-reported (IBNR) claims .
Retrocession . A reinsurance of reinsurance assumed. For example, B accepts reinsurancefrom A, and B in turn reinsures with C the whole or a part of the reinsurance Bassumed from A. The reinsurance ceded to C by B is called a retrocession .
Statutory accounting practices . Accounting principles required by statute, regulation, orrule, or permitted by specific approval that an insurance enterprise is required to
follow in preparing its annual statement for submission to state insurancedepartments .
Treaty. A contract of reinsurance .
T :\CasesSF\XL Capital\NonPldgs\Exhbit to CPT -olossary.doc
Exhibit 2
REPORT ON EXAMINATION
OF THE
NAC REINSURANCE CORPORATION
AS OF
DECEMBER 31, 199 9
DATE OF REPORT MAY 31, 2002
EXAMINER MARY MEANEY, CFE
TABLE OF CONTENT S
ITEM NO . PAGE NO .
1 . Scope of examination 2
2 . Description of Company 3
A. Management 4B. Territory and plan of operation 6C. Reinsurance 8
D. Holding company system 1 4E. Significant operating ratios 1 6F. Abandoned Property Law 1 7G . Section 310 of the New York Insurance Law 1 7H . Accounts and records 1 8
3 . Financial statements 2 1
A. Balance sheet 2 1B. Underwriting and investment exhibit 23
4 . Common stocks 24
5 . Premiums in course of collection 25
6 . Federal income tax recoverable 25
7 . Losses and loss adjustment expenses 25
8 . Provision for reinsurance 2 6
9 . Market conduct activities 26
10 . Subsequent events 26
1 I . Compliance with prior report on examination 27
12 . Summary of comments and recommendations 29
Appendix A
pµ-.
STATE OF NEW YORKINSURANCE DEPARTMEN T
25 BEAVER STREETNEW YORK, NEW YORK 10004
May 31, 2002
Honorable Gregory V. SerioSuperintendent of InsuranceAlbany, New York 12257
Sir :
Pursuant to the requirements of the New York Insurance Law, and in compliance wit h
instructions contained in Appointment No . 21595 dated August 23, 2000, attached hereto, I have mad e
an examination into the condition and affairs of NAC Reinsurance Corporation as of December 31 ,
1999 and submit the following report thereon.
The Company's home office is located at 140 Broadway, Suite 5101, New York, NY 10005 .
The examination was conducted at the Company's administrative office located at Seaview House, 7 0
Seaview Avenue, Stamford, CT 06902-6040 .
Wherever the designations "the Company" or "NAC" appear herein without qualification, the y
should be understood to indicate NAC Reinsurance Corporation . Wherever the designation "the
Department" appears herein without qualification, it should be understood to indicate the New York
Insurance Department .
2
1 . SCOPE OF EXAMINATIO N
The previous examination was conducted as of December 31, 1994 . The current examinatio n
covers the five-year period from January 1, 1995 through December 31, 1999 . Transactions occurrin g
subsequent to this period were reviewed where deemed appropriate by the examiner .
The examination comprised a complete verification of assets and liabilities as of December 31 ,
1999, a review of income and disbursements deemed necessary to accomplish such verification, and
utilized, to the extent considered appropriate, work performed by the Company's independent certified
public accountants . A review or audit was also made of the following items as called for in the
Examiner's Handbook of the National Association of Insurance Commissioners :
History of the CompanyManagement and controlCorporate record sFidelity bonds and other insuranceTerritory and plan of operationMarket conduct activitie sGrowth of CompanyBusiness in force by statesReinsuranc eAccounts and recordsFinancial statements
A review was also made to ascertain what action was taken by the Company with regard to
comments and recommendations contained in the prior report on examination .
This report on examination is confined to financial statements and comments on those matters tha t
involve departures from laws, regulations or rules, or which are deemed to require explanation o r
description .
3
2 . DESCRIPTION OF COMPAN Y
The Company was organized under the laws of New York on May 6, 1929 . It was licensed and
began business in the same year . The original corporate title was Service Fire Insurance Company . This
was changed to No rth American Company for Property and Casualty Insurance in April 1976, and
effective Februa ry 10, 1989 , to NAC Reinsurance Corporation . On Janua ry 1, 2001, the Company's name
was changed to XL Reinsurance America, Inc . The Company's name change was approved by the
Depa rtment on January 9, 2001 .
The Company was controlled by NAC Re Corporation ("NAC Re"), a holding company, until
NAC Re was purchased by X .L. America, Inc . ("XLA") on June 18, 1999 . XLA is ultimately owned by
XL Capital Ltd ("XL Capital"), a Cayman Islands holding company .
On June 18, 1999, XL Capital completed its stock merger with NAC Re. As part of the merger,
XLA, a Delaware holding company, became the new U.S. holding company parent of NAC Re .
Following the merger, NAC acquired 100% of the common stock of four XLA subsidiaries : XL Capital
Assurance Inc . ("XL Capital Assurance"), a New York financial guarantee insurer ; XL Insurance
Company of New York Inc . ("XLNY"), a New York property & casualty insurer ; Intercargo Corporation
("Intercargo"), a Delaware corporation and parent of XL Specialty Insurance Company ("XL Specialty"),
an Illinois property & casualty insurer; and ECS Inc . ("ECS"), a Delaware corporation, which provides
underwriting, claims and other services to the property & casualty insurance and reinsurance industry .
NAC previously owned two other insurance companies : Greenwich Insurance Company and Indian
Harbor Insurance Company.
4
Share Repurchase Agreemen t
On September 30, 1999, the Company entered into a stock purchase agreement with XLA
whereby NAC agreed to purchase all of the issued and outstanding shares of capital stock of XL Insurance
Company of New York ("XLNY") . In exchange for the 1,200,000 shares of XLNY, NAC transferred
$99,377,905 in cash and securities to XLA . This amount was equal to the policyholder surplus of XLNY
as of August 1, 1999 . The agreement was approved by the Department in September 1999 .
On September 30, 1999, NAC entered into a share repurchase agreement with XLNY in which
NAC agreed to sell 780,000 shares of XLNY stock for $65,000,000 . This agreement was approved by th e
Department on November 19, 1999 .
Dividend of NAC Re International Holdings Limited to NAC Re Corporation
Effective September 30, 1999, the Company issued a dividend to NAC Re Corporation consisting
of 100% of the outstanding shares of NAC Re Inte rnational Holdings Limited . This transaction was
approved by the Department on September 30, 1999 .
As of December 31, 1999, the Company's paid up capital was $4,200,000 . This consisted of
40,000 shares of $105 par value per share of common stock, all issued to NAC Re Corporation .
A . Management
Pursuant to the charter and by-laws of the Company, corporate powers shall be exercised by a
board of directors consisting of not less than thirteen nor more than twenty-one members .
The following were the fifteen members of the board of directors as of December 31, 1999 :
Name and Residence Principal Business Affiliatio n
Martha Graeme Bannerman Executive Vice President , General Council & Secretary,Greenwich, CT NAC Reinsurance Corporatio n
Brian Martin Boornazian Senior Vice President & Chief Property Officer,Rocky Hill, CT NAC Reinsurance Corporation
Celia Reznick Brown Senior Vice President, Manager of Human Resources &Rye Brook, NY Assistant Secretary,
NAC Reinsurance Corporatio n
Nicholas Mark Brown, Jr. President & Chief Executive Officer,New Canaan, CT NAC Reinsurance Corporation
Christopher Frederic Buse Senior Vice President & Manager of Casualty Treaty,Wilton, CT NAC Reinsurance Corporatio n
Richard Joseph Callahan President ,New Canaan, CT Greenwich Insurance Compan y
Gregory Alan Douglas Senior Vice President & Manager of Casualty Facultative,Ridge field, CT NAC Reinsurance Corporatio n
John Christopher Hodge Senior Vice President & Chief Information Officer,Allendale, NJ NAC Reinsurance Corporatio n
Carl Fred Madsen Executive Vice President & Chief Underwriting Officer,Fairfield, CT NAC Reinsurance Corporatio n
Richard H . Miller Senior Vice President , Chief Financial Officer & Treasurer,New Fairfield, CT NAC Reinsurance Corporatio n
Thomas William Muller Senior Vice President, & Manager of Property FieldMonroe, CT Operations,
NAC Reinsurance Corporation
Douglas Lester Olsen Senior Vice President & Manger of Claims,New Hyde Park, NY NAC Reinsurance Corporatio n
Laura Ann Shanahan Senior Vice President & Manager of Bond Profit Center,Garden City, NY NAC Reinsurance Corporation
George Francis Stoffel Senior Vice President & Manager of Casualty Clash,Seaford, NY NAC Reinsurance Corporation
Name and Residenc e
Thomas Albert WeidmanWest Hartford, CT
Principal Business Affiliation
Senior Vice President & Chief Actuarial Officer,NAC Reinsurance Corporation
A review of the minutes of the board of directors revealed that board meetings were generally wel l
attended .
The senior officers of the Company at December 31, 1999 were :
Name
Nicholas M . Brown, JrRichard H. MillerMartha G. BannermanBrian M. BoomazianRobert M. CoopThomas W. Muller
Laura A . ShanahanCelia R . BrownGregory A. DouglasDouglas L . OlsenGeorge F . StoffelChristopher F. BuseJohn C. Hodg e
David B. PorteusThomas A. Weidman
B . Territory and Plan of Operation
Title
President & Chief Executive OfficerSenior Vice President, Chief Financial Officer & TreasurerExecutive Vice President, General Council & SecretarySenior Vice PresidentSenior Vice PresidentSenior Vice PresidentSenior Vice PresidentSenior Vice PresidentSenior Vice PresidentSenior Vice PresidentSenior Vice PresidentSenior Vice PresidentSenior Vice PresidentSenior Vice President
Senior Vice Presiden t
The Company operates primarily as a reinsurer and is authorized to transact the kinds of busines s
as specified in the following numbered paragraphs of Section 1113(a) of the New York Insurance Law :
Paragraph Line of Business
3 Accident and health4 Fire5 Miscellaneous property damage6 Water damage7 Burglary and theft
7
Paragraph Line of Business
8 Glass9 Boiler and machinery
10 Elevator11 Animal12 Collision13 Personal injury liability14 Property damage liability15 Workers' compensation and employers' liability16 Fidelity and suret y17 Credi t19 Motor vehicle and aircraft20 Marine21 Marine protection and indemnity
The Company is .also authorized to write workers' compensation insurance as may be incidental t o
coverages contemplated under paragraphs 20 and 21 of Section 1113, including coverages described in
the Longshoremen's and Harbor Workers' Compensation Act (Public Law No . 803, 69th Congress as
amended; 33 USC Section 901 et seq . as amended) and the kinds of insurance and reinsurance as
specified in Section 4102(c) of the New York Insurance Law . The Company is authorized to transact
within the State of New York the business of special risk insurance as defined in Article 63 of the New
York Insurance Law .
Based upon the lines of business for which the Company is licensed, and the Company 's current
capital structure , and pursuant to the requirements of Articles 13 and 41 of the New York Insurance Law ,
NAC Reinsurance Corporation is required to maintain a minimum surplus to policyholders in the amoun t
of $35,000,000 .
In addition to New York, the Company is authorized to transact business in all states of the Unite d
States, the District of Columbia, Puerto Rico and Canada.
8
The Company solicits business directly from insurers and through reinsurance brokers . The
business is comprised of approximately 65% casualty and 35% property business ,
C. Reinsuranc e
Inter -Company Pooling Agreement
The Company participates in an inter-company pooling agreement with four of its affiliates . The
pooling agreement provides for sharing of premiums, losses and expenses based on the percentage of each
company's pool participation. This agreement became effective on July 1, 1999 and was approved by the
Department on September 30, 1999 . The original pool percentages were not used in the 1999 pool
calculations . The Company amended these percentages, as shown in the following chart :
Original AmendedParticipation ParticipationPercentage Percentage
State of (Effective (Effectiv ePool Company Domicile 7/1/99) 12/31/99)
NAC Reinsurance Corporation NY 78 .2% 76%XL Insurance Company of New York NY 6.4 7XL Specialty Insurance Company IL 5.9 7Greenwich Insurance Company CA 4.8 5Indian Harbor Insurance Company ND 4 .7 5
Total Pool 100% l00%
Section 1505(d)(2) of the New York Insurance Law prohibits an insurer from entering into an y
agreement with any member of its holding company system :
" . . .unless the insurer has notified the superintendent in writing of its intention to enterinto any such transaction at least thirty days prior thereto . . . and he has not disapproved itwithin such period . . .(2) reinsurance treaties or agreements . . ."
9
The amendments to the pooling agreement were not submitted to the Department pursuant to th e
above cited section of the New York Insurance Law . It is recommended that the Company submit al l
amendments to the pooling agreement to the Department prior to implementation , as set forth in the above
cited statute .
Under the terms of the pooling agreement, 100% of the members' net premiums, net losses ,
insurance-related expenses and other related underwriting activities are assumed by the Company as pool
leader . Such items are reapportioned, and then ceded to the pool members in accordance with their
participation percentages . Any cessions to/from external reinsurers under reinsurance agreements placed
by the individual pool members occur prior to the cession of business to the pool leader .
Subsequent to the examination, an amended pooling agreement was implemented in order t o
clarify certain items as follows :
1 . Exclude specific lines of business from the pool .2 . Provide for "funds withheld balance . "3 . Provide that cessions to the pool will be on a "net basis . "
This amended agreement was submitted and non-disapproved by the Department on July 31, 2000 .
In April 2001, the Company submitted a second amended pooling agreement to the Department .
This agreement changes the pool percentages to reflect each participant's surplus at year-end . The poo l
percentages intended to be used for 2001 are as follows :
1 0
Pool Company
AmendedParticipatio n
State of PercentageDomicile (Effective 1/1/01 )
NAC Reinsurance Corporation NY 76%XL Insurance Company of New York NY 5XL Specialty Insurance Company IL 1 0Greenwich Insurance Company CA 5Indian Harbor Insurance Company ND 4
Total Pool 100%
The major change to this agreement was that cessions to the pool will now be made on a gross o f
reinsurance basis . Reinsurance will be placed by NAC as pool leader and reinsurance recoverables for all
pool companies will be assigned to NAC . This agreement was approved by the Department on August 6,
2001, however, it did not become effective until 2002 . The Company filed a third amended pooling
agreement effective December 31, 2002 which added 2 additional affiliates to the pool .
Ceded Reinsuranc e
NAC Reinsurance Corporation has numerous reinsurance agreements in effect that limit its ne t
exposure . A general outline of the principal agreements in effect at December 31, 1999 is as follows :
Type of Contract Coverag e
Property & Casualty
Multiple Line Aggregate Excess of Loss Section A :100% Unauthorized Coverage includes casualty, property, surety & ocean
marine with various limits for each, up to $5,000,000 .Written on a per occurrence basis .
Type of Contract Coverage
Section B:Net of all reinsurance, including section A for lossesexcess of 67 .5% of the subject net earned premiumearned in the respective agreement year; subject to amaximum limit of $25,000,000 for sections A and Bcombined in any one agreement year .
Multiline Basket Excess of Loss Section I - Property Catastrophe (U .S. and Canadian100% Authorized territories )
$15,000,000 of ultimate net loss with respect to eachand every loss occurrence excess of $90,000,000 ;subject to a limit of $30,000,000, with respect to allloss occurrences during any one agreement year .
Section 2 - Prouerty Catastronhe (Worldwide .excluding U .S . and Canada )$20,000,000 of ultimate net loss with respect to eachand every loss occurrence excess of $50,000,000 .Subject to a maximum recovery of $40,000,000, in anyone agreement year.
Section 3 - Casualty (Worldwide )$10,000,000 of ultimate net loss with respect to eachand every loss occurrence excess of $30,000,000 .
Section 4 -- Surety (Worldwide )$5,000,000 of ultimate net loss with respect to each andevery loss occurrence excess of $15,000,000, not toexceed $10,000,000 any one agreement year .
Property
Property Per Risk Excess of Loss $5,000,000 ultimate net loss any one loss excess of100% Authorized $5,000,000 . Subject to $25,000,000 with respect to
any one loss ; $25,000,000 in the aggregate .
Property Per Risk Excess of Loss $90,000,000 excess of $10,000,000, any one loss any5 Layers one risk; subject to an aggregate limit of $300,000,000,Mostly Unauthorized with respect to all losses during the period of these
agreements ,
Property Catastrophe Excess of Loss $80,000,000 excess of $10,000,000, each and every4 Layers loss occurrence and $190,000,000 with respect to allMostly Unauthorized loss occurrences during the period of these agreements ,
Various retentions throughout layers .
1 2
Type of Contract Coverage
Property Catastrophe - International $10,000,000 excess of $40,000,000, each and every100% Unauthorized loss occurrence and $20,000,000 all loss occurrenc e
during the period of this agreement . Territory:Worldwide (excluding the United States, Canada andtheir territories) .
Casualty
Casualty Contingency $12,500,000 ultimate net loss excess of an ultimate net100% Unauthorized loss of $7,500,000, each and every loss. Subject to a
maximum limit of $25,000,000, in any one agreementyear .
Other
$10,000,000 ultimate net loss excess of an ultimate netloss of $20,000,000 each and every loss, 66 .67%placed . Subject to a maximum limit of $25,000,000, inany one agreement year .
Workers' Compensation Excess of $195,000,000 ultimate net loss excess of $5,000,000Loss any one occurrence .8 Layer sMostly Unauthorized
Ocean Marine Excess of Loss $29,000,000 each and every loss excess of $1,000,0004 Layers each and every loss.Mostly Unauthorized
Surety - $7,500,000 in respect of any one principal or buyer in27% Authorized excess of $7,500,000 . Subject to $22,500,000 in73% Unauthorized respect of all principals or buyers during the term of the
agreement.
Aggregate Excess of Loss (Stop Loss) 100% of loss in excess of 70% of the subject net earned100% Unauthorized premium earned in the respective agreement year .
Subject to an aggregate limit of $18,000,000, in anyone agreement year .
NAC has several ceded reinsurance contracts that were not signed within nine months of thei r
effective dates . Chapter 22 of the NAIC Accounting Practices and Procedures Manual states that in orde r
to take credit for cessions as reinsurance, the contract must be signed within in nine months or less of it s
effective date . In addition, some contracts did not have executed interest and liability pages, while others
1 3
had not been reduced to writing . Nonetheless, the Company took credit in Schedule F of the annual
statement for these cessions . Additionally, Section 1308(a) of the New York Insurance Law requires that
the contract contain an insolvency clause in order to take credit for the reinsurance. Due to the
immateriality of the amounts involved, no examination changes were made to the financial statements
contained herein . However, it is recommended that the Company account for all reinsurance cessions that
have not been signed within nine months, in accordance with Chapter 22 of the NAIC Accounting
Practices and Procedures Manual (since replaced by Statement of Statutory Accounting Principles No .
62) . It is also recommended that the Company comply with Section 1308(a) of the New York Insurance
Law and maintain full and complete reinsurance agreements with insolvency clauses .
It should be noted that several amounts reported by the Company in Schedule F of its filed annual
statement amounts could not be supported by its internal records . The Company was either unable to
provide the documentation to support Schedule F amounts or the documentation provided did not agree
with the amounts reported. It is recommended that the Company exercise due care in maintaining
sufficient documentation to support the amounts reported in Schedule F of future filed annual statements .
After all ceded reinsurance is placed by individual pool members, the premiums and losses are
then pooled and subject to a 75% quota share agreement with the Company's affiliate, XL Insurance Ltd
(Bermuda). This agreement became effective on July 1, 1999 and was approved by the Insurance
Department on September 30, 1999 .
Subsequent to the examination, on August 2, 2000, the Department approved a revised agreement
that replaced XL Insurance Ltd (Bermuda) with XL Mid Ocean Reinsurance Ltd . ("XLMO") . Financial
guarantee and finite insurance are excluded under the agreement . XL Insurance Company of New York
1 4
("XLNY"), a pool member, is excluded from the 75 % quota share because it has a separate 90% quot a
share reinsurance agreement with XLMO . The remaining 10% of XLNY's business is ceded to the pool .
In conjunction with the 75% quota share , subsequent to the examination , the Company entere d
into a trust agreement with XLMO . This agreement was approved by the Depa rtment on August 21, 200 0
and was entered into to according to Regulation 114 in order to fund the unauthorized reinsurance penalty .
D . Holding Company System
The Company is wholly-owned by NAC Re Corporation, a Delaware company . An examination
review determined that the Company made the required annual filings, as registrant, pursuant to Articl e
15 of the New York Insurance Law and Depa rtment Regulation 52 .
As of December 31, 1999, the Company owned 100% of the companies listed below, which ar e
within its holding company system :
Company
Greenwich Insurance CompanyIndian Harbor Insurance CompanyXL Insurance Company of New York, Inc .XL Capital Assurance Inc.Intercargo Corporation (including XL Specialty InsuranceCompany)ECS, INC .NAC Re Investment Holdings, Inc .
An organization chart as of December 31, 1999, which details members of the system, is shown i n
Appendix A .
The chart in Appendix A is incomplete . Prime Advisors and Convenient Property and Casualty
are two affiliates missing from the chart . It is recommended that the Company follow the Annual
1 5
Statement Instructions when completing Schedule Y of the annual statement and include all required
affiliates .
During 1998, the Company organized NAC Re Investment Holdings ("NIH"), a non-insuranc e
investment company. Section 1603(a) of the New York Insurance Law states that :
"No acquisition of a majority of any corporation' s outstanding shares shall bemade . . . unless a notice of intention of such proposed acquisition shall have been filedwith the superintendent not less than 90 days . . .in advance of such proposedacquisition . . . " .
The Company failed to notify the Department of this transaction . In the future, it is recommended
that the Company comply with Section 1603(a) of the New York Insurance Law and notify th e
Department prior to making an acquisition of a majority of a corporation's outstanding shares .
Service Agreements
The Company is party to several service and expense agreements with its direct parent and its
affiliates . The following is a list of service agreements in effect at December 31, 1999 :
1 . Service agreement with XL Insurance Company of New York, Inc ., dated September 30, 1999,2. Service agreement with XL Specialty Insurance Company, dated September 30, 1999 .3 . Service and property agreement with Indian Harbor Insurance Company, dated August 28, 1992 .4. Service and property agreement with Greenwich Insurance Company (formerly known as Harbor
Insurance Company), dated December 13, 1990 .5. Service and property agreement with NAC Re Corporation, dated July 1, 1997 .
Since the Company 's purchase by XL Capital Ltd in June 1999, the Company has not been
complying with any of the above service agreements . NAC appears to have been paying most of the
expenses such as rent, utilities and personnel . However, with the advent of the pooling agreement on July
1, 1999, these costs were shared by pool members according to pool percentages . Expenses were not
allocated to other members of the holding company system that were not members of the pool .
1 6
It is recommended that the Company enter into written agreements that provide for all expenses to
be properly allocated among members of the holding company system .
Subsequent to this examination period, in April 2001, a revised service agreement was submitte d
to the Department . This agreement was approved on August 2, 2001, with an effective date of April 1 ,
2001 .
Tax Sharing Agreemen t
The Company part icipates in a tax sharing agreement with its four pool members, seven additional
affiliates, and its parent,. XLA. This agreement is in effect for the year 1999 and subsequent and was
approved by the Department on October 29, 1999 . Upon review, it was determined that the agreement i s
in compliance with the minimum guidelines set forth in the New York Department's Circular Letter No .
33 (1979) .
E . Significant Operating Ratio s
Based upon the results of this examination, the following ratios have been computed as o f
December 31, 1999 :
Net premiums written in 1999 to surplus as regards policyholders .64 to 1
Liabilities to liquid assets (cash and invested assets less investments 121%in affiliates)
Premiums in course of collection to surplus as regards policyholders 94% *
*The last two ratios presented above are outside the benchmark ranges of the Insurance RegulatoryInformation System established by the National Association of Insurance Commissioners . The unusualvalues result from examination changes to the Company's investment and losses, as set forth furtherherein .
1 7
The underwriting ratios presented below are on an earned/incurred basis and encompass the five-
year period covered by this examination :
Amounts Ratios
Losses and loss adjustment expenses incurred $1,718,160,760 76 .82%Other underwriting expenses incurred 794,291,473 35 .51Net underwriting gain (loss) (275,737,786) (12 .33)
Premiums earned $2,236,714,441 10 .0°
F . Abandoned Property
Section 1316 of the New York Abandoned Property Law requires ce rtain unclaimed insuranc e
proceeds to be reported to the State of New York by April 1 S` of each year . A review of the Company's
records revealed that although it did not have any monies to remit, it did make the appropriate filings for
all years during the examination period . However, the Company did not retain copies of the filings for the
years 1995, 1996, and 1997 .
It is recommended that the Company retain copies of all abandoned property filings until the
examination report for those years has been filed .
C . Section 310 of the New York Insurance Law
Section 310(a)(3) of the New York Insurance Law provides that :
"the officers and agents of any insurer or person shall facilitate such examination and aidsuch examiners in conducting the same so far as it is in their power to do so . "
It would appear that the Company did not comply with the above provisions of the law ,
demonstrated by the following :
1 8
■ The designated contact person did not have the authority, knowledge and experience toeffectively facilitate the examination ;
■ Requests for information were not responded to in a timely manner ;R Documentation provided was often inaccurate and incomplete .
Management has attributed the lack of timely responses to examination requests to several factors ,
including employee turnover and the integration of the company 's operations into the XL organization .
Additionally, once management was made aware of the lack of cooperation issues, a new contact person
was appointed and information was received in a more timely manner .
Nevertheless the above significantly increased the length of the examination, increased the cost o f
the examination to the Company, and put a strain on the Department's resources . It is recommended that
during future examinations, the Company comply with Section 310(a)(3) of the New York Insurance
Law. It is further recommended that the Company take the following corrective action to facilitate future
examinations :
■ The role of the Company contact person is to facilitate the examination . Individualsassigned to this function must have broad authority and appropriate knowledge ;
■ Responses should be qualitatively reviewed before submission to examiners ;
■ Sufficient human resources must be committed to facilitate the examination process .
After the contact person was changed, information was received in a more timely manner . Also,
some delays may be attributed to high turnover in employee personnel .
H . Accounts and Record s
i . Annual Statement Balance s
During the course of this examination, it was discovered that some of the annual statemen t
balances in cash and payable for securities were incorrectly classified . It is recommended that the
Company take proper care when completing the annual statement and classify all balances correctly .
1 9
It was discovered that the Company did not have support for several of the annual statemen t
balances as follows :
■ Reinsurance payable on paid losses & loss adjustment expenses - In examination testing of thisaccount, it was revealed the Company set up a payable based only on an e-mail from an affiliate . Also,the Company failed to provide information on a timely basis and when provided, it did not tie to theannual statement .
■ Other expenses - Examination testing of this account revealed that the Company was unable to providesupport for three of the five balances requested .
■ Loss portfolio transfer - The Company was unable to provide any support for the balance sheetliability of $1.26,000 .
It is recommended that the Company maintain support for all annual statement balances .
ii . Reinsurance Payable on Paid Losses & Loss Adjustment Expense s
During the review of Reinsurance payable on paid losses & loss adjustment expenses ,
'discrepancies were found in two of the four balances tested . These discrepancies resulted in a $988,000
understatement of the reinsurance payable account . Due to the immateriality of this amount, no
examination change was made . However, it is recommended that the Company report accurate amounts
in its filed annual statements .
The open items report balance for NAC Re International, an affiliate, was $18,786,870 , however ,
the Company reported $26,231,000 in Schedule F, Part 1 . No support could be provided for thi s
difference . Section 1505(b) of the New York Insurance Law states :
"The books, accounts and records of each party to all such transactions shall be somaintained as to clearly and accurately disclose the nature and details of the transactionsincluding such accounting information as is necessary to support the reasonableness ofthe charges or fees to the respective parties ."
20
It is recommended that the Company comply with Section 1505(b) of the New York Insuranc e
Law and maintain support for all transactions with affiliates .
iii . Interest and Dividend Income Due and Accrued
In the examination review of interest and dividend income due and accrued, it was noted tha t
thirteen of the fifteen sampled interest calculations were done incorrectly by the Company. Examination
review indicated that this was due to an error in the Company's program for calculating accrued interest .
Although the differences found were immaterial, it is recommended that the Company use a more accurate
system for calculating interest and dividend income due and accrued .
2 1
3 . FINANCIAL STATEMENT S
A . Balance Sheet
The following shows the assets, liabilities and surplus as determined by this examination as of
December 31, 1999 and as reported by the Company :
EXAMINATION COMPANY
Surplu sLedger Non-Ledger Not-Admitted Admitted Increas e
Asset s Assets Assets Assets Assets Assets (Decrease)
Bonds $1,234,728,571 $3,748,012 $1,230,980,559 $1,230,980,55 9Preferred stocks 1,272,250 $(672,250) .600,000 600,00 0Common stocks 393,162,667 (170,646,534) 80,371,000 148,324,133 222,516,133 $(74,192,000 )Cash on hand and on deposit 97,286,034 97,286,034 97,286,03 4Other invested assets 27,736,991 27,736,991 27,736,99 1Premiums, agents' balances in
course of collection 43,474,743 41,498,000 609,562 84,363,181 42,865,181 41,498,000Premiums, agents' balances
and installments booked bu tdeferred and not yet due 71,019,431 71,019,431 71,019,43 1
Accrued retrospective premiums 9,333,302 9,333,302 9,333,30 2Funds held by or deposite d
with reinsured companies 9,714,325 9,714,325 9,714,325Reinsurance recoverable o n
loss payments 40,290,145 40,290,145 40,290,145Federal income tax recoverable 39,937,763 32,372,000 72,309,763 39,937,763 32,372,00 0EDP equipment 1,305,063 1,305,063 1,305,063Interest, dividends and real
estate income due and accrued 19,561,121 19,561,121 19,561,12 1Receivable from paren t
subsidiaries and affiliates 63,903,441 63,903,441 63,903,44 1Accounts receivabl emiscellaneous 3,935,875 625,349 3,310,526 3,310,526
Total assets $2,037,100,601 5(77,887,663) $85,353,923 $ 1,880,038,015 $1,880,360,015 $(322,000)
2 2
Liabilitie s
Loss and loss adjustment expensesReinsurance payable on paid lossesand loss adjustment expenses
Contingent commission sOther expense sTaxes, licenses and feesFederal income taxesUnearned premium sFunds held by Company under reinsurancetreatie s
Amounts withheld or retained by companyfor account of other s
Provision for reinsuranc ePayable to parent, subsidiaries & affiliatesPayable for securitie sLoss portfolio transferAccounts payable miscellaneous
Total liabilities
Policyholders' Surplus
Capital paid upGross paid in and contributed surplusUnassigned fund s
Surplus as regards policyholders
Total liabilities and surplus
SurplusIncrease
Examination Company (Decrease)
$1,175,734,849 $986,734,849 $(189,000,000 )
79,983,9275,044,265
28,742,9211,386,801
53,90776,373,885
3,803,977
2,443,39 495,354,400
234,407,539116,600126,000923,056
79,983,9275,044,26 5
28,742,9211,386,801
53,90776,373,885
3,803,977
2,443,39420,115,400 (75,239,000 )
234,407,539116,600126,000923,056
$1,704,495,521 $1,440,256,52 1
$4,200,000463,608,962
(292,266,468)
$175,542,49 4
$1,880,038,015
$4,200,000463,608,962(27,705,468 )
$440,103,494
1 .880 .360 .015
$(264,239,000 )
$(264,561,000)
$f261561,000
Notes :
The Internal Revenue Service has not commenced any audits of the consolidated income taxreturns filed on behalf of the Company . The examiner is unaware of any potential exposure of theCompany to any further tax assessment and no liability has been established herein relative to suchcontingency .
23
B. Underwriting & Investment Exhibi t
Surplus as regards policyholders decreased $231,481,724 during the five-year period, January 1,
1995 through December 31, 1999, detailed as follows :
Statement of Incom e
Underwriting Income
Premiums earnedDeductions :
Losses and loss adjustment expensesincurred
Other underwriting expenses incurredTotal underwriting deduction s
Net underwriting (loss)
Investment Incom e
Net investment income earnedNet realized capital gain sNet investment gai n
Other Income
Miscellaneous (loss)Total other incom e
Net income before dividends to policyholdersand federal and foreign income taxes
Federal and foreign income taxes incurre d
Net income
$1,718,160,760794,291,473
$481,205,056126,689 .367
$(7,508,373)
$2,236,714,44 7
2,512,452,233
$(275,737,786 )
607,894,423
(7,508,373 )
$324,648,264
50,250,05 4
$274.398 .210
2 4
Capital and Surplus Accoun t
Surplus as regards policyholders, per reporton examination as of December 31, 1994
Gains in Losses i nSurplus Surplus
Net income $274,398,21 0Net unrealized capital gains/losses $176,550,560Change in non-admitted assets 71,161,06 5Change in provision for reinsurance 89,472,40 0Change in foreign exchange 1,733,267Surplus contribution 146,556,000Dividends to stockholders 313,518,672
Total gains and losses $420,954,210 $652,435,934
Net decrease in surplus as regards policyholder s
Surplus as regards policyholders, per report onexamination, as of December 31, 1999
4 . COMMON STOCKS
$407,024,21 8
231,481 724
$175,542.494
The examination asset of $148,324,133 is $74,192,000 less than the $222,516,133 reported by th e
Company as of December 31, 1999 . The examination change is comprised of the following :
Loss reserve strengthening of insurance subsidiariesSubsidiaries' additional provision for reinsurancerelated to loss developmen tSubsidiaries' addition premium development*Section 1408 disallowance
Total
$(59,600,000)
(8,190,000)13,104,000
(19, 506,000 )
$(74l92,000 )
*Section 1408(b) of the Insurance Law states that,.
25
"in no event shall the aggregate value of insurance company stock be allowed in excessof 50% of surplus to policyholders or 60% of the surplus of the insurer, whichever isgreater . "
Due to the increase in losses and related surplus decrease, the maximum allowable investment i n
insurance companies decreased .
5. PREMIUMS IN COURSE OF COLLECTION
The examination asset of $84,363,181 is $41,498,000 more that the $42,865,181 reported by the
Company as of December 31, 1999, The examination change is due to premiums recorded after th e
statement date but due as of the examination date .
6 . FEDERAL INCOME TAX RECOVERABL E
The examination asset of $72,309,763 is $32,372,000 more than the $39,937,763 reported by th e
Company as of December 31, 1999 . The examination change is due to the decrease in federal income tax
incurred for the examination period because of the increase in losses incurred . The Company received
this amount in two installments in 2002 .
7 . LOSSES AND LOSS ADJUSTMENT EXPENSE S
The examination liability of $1,175,734,849 is $189,000,000 more than the $986,734,849 reported
by the Company as of December 31, 1999 . The examination analysis was conducted in accordance with
generally accepted actuarial principles and practices and was based on statistical information contained in
the Company's internal records and in its filed annual statements . The $189,000,000 increase is based on
the Company's subsequent two year loss development at December 31, 2001 .
26
8 . PROVISION FOR REINSURANCE '
The examination liability of $95,354,400 is $75,239,000 more that the $20,115,400 reported by
the Company in its December 31, 1999 filed annual statement . The change is detailed as follows :
From loss reserve strengthening (related to the 75% quota sharereinsurance agreement with an unauthorized affiliate) $(78,033,000)Unused letter of credit with above affiliate 24,085,000Additional losses ceded (to third party unaffiliated unauthorize dreinsurers) (3,996 000)
Additional unearned premiums ceded (to third party unaffiliatedunauthorized reinsurers) (17,295,000 )
Total $(75,239 .000 1
9 . MARKET CONDUCT ACTIVITIE S
The Company is in the reinsurance business only ; consequently, it does not have direct contac t
with insureds or claimants .
The Company placed no advertisements during the examination period.
10 . SUBSEQUENT EVENTS
Subsequent to the date of this examination, 'the Company received surplus contributions totaling
$506,000,000 . The contributions were received as follows :
27
Contributions
$120,000,000$186,000,000$200,000,000
Year
20002001As of May 2002
During the 2000 and 2001 years, the Company wrote gross premiums of $1,154,000,000 and
$1,423,000,000, respectively. On a net basis, the Company wrote $182,000,000 and $228,000,000 in
premiums in 2000 and 2001 . In addition, the Company had a reported surplus to policyholders of
$639,000,000 as of December 31, 2001 .
11 . COMPLIANCE WITH PRIOR REPORT ON EXAMINATION
The following recommendations cited in the prior report on examination as of December 31, 1994 ,
are summarized below (page numbers refer to the prior report) :
ITEM PAGE NO.
A . Managemen t
i . It is recommended that directors who are unable or unwilling to attend meetings 5consistently should resign or be replaced .
The Company has complied with this recommendation .
ii . It is recommended that all future changes to the Company's charter be 6completed in accordance with Sections 1206(a)(4) and (b) of the New York StateInsurance Law .
The Company has complied with this recommendation .
B . Reinsurance
i . It is recommended that the Company amend its reinsurance contracts to comply 9with the provisions of Section 7427 of the New York State Insurance Law .
The Company has complied with this recommendation .
28
ITEM PAGE NO .
ii . It is against public policy in the State of New York to reinsure extra contractual 10obligation coverage providing for reimbursements of punitive damages .Accordingly, it is recommended that the Company exclude coverage for extracontractual obligations in its contracts.
This comment no longer applies ,
iii . It is recommended that the Company have all reinsurance agreements signed in 10a timely manner.
The Company has not complied with this recommendation . A similar commentis contained in the current report on examination .
iv, An analysis of the Company's First Multiple Excess of Loss and Clash Cover 15Agreement raised a question regarding the level of risk transfer ; however, this issuewas resolved when the Company indicated that they will cancel the agreementeffective December 31, 1996 .
This comment no longer applies .
v. It is recommended that the Company comply with Section 1308(e)(1)(A) of the 17New York State Insurance Law .
The Company continues to cede more than fifty percent of its unearne dpremiums in force under a 75% quota share reinsurance agreement with an affiliate .This agreement was approved by the Department .
C . Abandoned Property Law
It is recommended that the Company make the proper filings under the captioned law .
The Company did make filings during the examination period, however no copies 20of these filings were retained by the Company . A comment is contained in th ecurrent report on examination .
D . Accounts and Records
i . It is recommended that the Company amend its custodial agreement to include the 21additional provisions which are deemed to be representative of good busines spractices for the contents of such agreements .
The Company has complied with this recommendation ,
ii . It is recommended that the Company amend its letters of credit to comply with 22Regulation 133 .
2 9
ITEM
The Company has complied with this recommendation .
PAGE NO.
iii . It is recommended that the Company repo rt the value of its electronic data 23processing equipment in compliance with Section 1301(a)(18 ) of the New YorkInsurance Law .
The Company has complied with this recommendation .
12 . SUMMARY OF COMMENTS AND RECOMMENDATION S
ITEM
A. Reinsurance
PAGE NO .
It is recommended that the Company submit all amendments to the pooling 9agreement to the Department for approval, in accordance with Section 1505(d)(2 )of the New York Insurance Law ,
ii . It is recommended that the Company account for all reinsurance cessions that 13have not been signed within nine months as deposit accounting as set forth inChapter 22 of the NAIC Accounting Practices and Procedures Manual ,
iii . It is also recommended that the Company comply with Section 1308(a) of the New 13York Insurance Law and maintain full and complete reinsurance agreements withinsolvency clauses .
iv . It is recommended that the Company exercise due care in maintaining sufficient 13documentation and records to support the amounts reported in Schedule F offuture filed annual statements .
B . Holding Company Syste m
i . It is recommended that the Company follow the Annual Statement Instructions 14when completing Schedule Y of the annual statement and include all require daffiliates.
ii . It is recommended that the Company comply _with-Section 1603(a) of the New_ - _ 15York Insurance Law and notify the Department prior to making an acquisition o fa majority of a corporation's outstanding shares .
iii . It is recommended that the Company enter into wri tten agreements that provide 16for all expenses to be properly allocated among members of the holding compan ysystem .
3 0
ITEM PAGE NO .
C . Abandoned Property La w
It is recommended that the Company retain copies of all abandoned property filings 17until the examination report for those years has been filed .
D . Section 310 of the New York Insurance Law
i . It is recommended that the Company comply with Section 310(a)(3) of the New York 18Insurance Law .
ii, It is further recommended that the Company take the following corrective action to 18facilitate future examinations :
■ The role of the Company contact person is to facilitate the examination .Individuals assigned to this function must have broad authority andappropriate knowledge ;
• Responses should be qualitatively reviewed before submission toexaminers ;
• Sufficient human resources must be committed to facilitate theexamination process .
E . Accounts and Record s
1 . Annual Statements Balance s
i . It is recommended that the Company take proper care when completing the annual '18statement and classify all balances correctly .
ii . It is recommended that the Company maintain support for all annual statement 19balances ,
2 . Reinsurance Payable on Paid Losses & Loss Adjustment Expense s
i . It is recommended that the Company report accurate amounts in its filed annual 19statements .
- -i . It-is-recommended-that-the-Company-complywith Section 1505(b) of-the-New York 20Insurance Law and maintain support for all transactions with affiliates .
3 . Interest and Dividend Income Due and Accrue d
It is recommended that the Company use a more accurate system for calculating 20interest and dividend income due and accrued .
APPENDIX A
FEINXL CAPITAL LTD - Cavman
98-0191089EXEL HOLDINGS LIMITED - Cayman
XL Insurance Ltd - BermudaXL Financial Assurance Ltd . (85 %) - BermudaXL Capital P roducts Ltd - BermudaXL Investments Ltd - Bermuda
X.L. Investment Private Trustee Ltd . - BermudaXL Investments (Barbados) Inc . - Barbados
First Cumberland Bank, Inc. - BarbadosGarrison Investments Inc. - BarbadosKensington Investments Inc . - Barbados
XLB Partners Inc . - Barbados INCCumberland Holdings, Inc. - DE
98-0174616Cumberland California, Inc, - OF
XL Capital Holding Company ChartAt December 3 1 , 1999
98-0174621
Pareto Hughes Research (30%) - DE95-4590570
Pareto Partners (30%) - CA13-3609837
Cumberland New York, Inc, - DE98-017161 9
95-4627316Pareto (30%) - N Y
InQulsLogic Ltd . - BarbadosInQulsLogic Inc . - DE
06-1542517RlskConnect Ltd, - Barbados
RlskConnect Inc. - DEFinancial Securi ty Assurance International Ltd . (80 %) - BermudaXL Global Se rvices ( Bermuda ) Ltd. - BermudaXL Holdings Barbados Ltd . - Barbados
X .L . America, Inc. - DE06-1516268
ECS INC. (71%) - PA23-2152934
ECS Alternative Market Services, Inc. - PA23-2741979
ECS Holdings, Inc . - Df23-2683777
ECS International, Inc . - DE23-2683775
ECS Asesores en Seguros Medloamblentaies, S .A .R .L . - SpainThe ECS Group, Ltd -- UK
2711579
ECS Underwriting Ltd . - UK2549841
Environmental Compliance Svcs Ltd. - UK2551297
Consulting Services International Ltd . - UK2551297
NAIL #
ECS Asesores en Aseguramlento de Rlesgos Amblentales S .A . de C .V. - MexicoRisk & Insurance Services, Inc . - Barbados
ECS Underwriting, Inc . - PA23-2901851
ECS Claims Administrators, Inc . - PA23-2614107
ECS Risk Control, Inc . - PA23-2321718
ECS Child Care Center, Inc. - PA23-286619 2Brockbank Insurance Services, Inc . - C4Global Credit Analytlcs, Inc . - OEXL Global Services, Inc . - DE06-152732 1NAC RE CORPORATION- DE 2058313-3297840
NAC Re International Holdings Ltd - UKNAC Reinsurance International Limited - UKDenham Syndicate Management Ltd - UKStonebridge Underwriting Ltd - UKNAC Re International Services Co ., Ltd - UK
NAC Reinsurance Corporation (A - 76%) - NYNAC Re Investment Holdings, Inc . - DE
06-152960 6
95-1179095
06-1346380
13-3787296
11Q07 13-4709733
36-341466 7
36-3081634
85-0277191
AA-004102
Greenwich Insurance Company (A - 5%) - C4
Indian Harbor Insurance Company (A - 5%) - ND
XL Insurance Company of New York, Inc . (A - 7%) - NYXL Capital Assurance Inc, - NY
Intercargo Corporation - BE
International Advisory Services Inc . - IL
XL Specialty Insurance Company(A - 7%) - IL
Intercargo Insurance Company HK Ltd . - HKIntercargo International Limited - SVI
22322
3694 0
4019 3
37885
ECS INC . (29%) - PA23-2152934Prime AdvisorsConvenient Property & Casualty
Sovereign Risk Insurance Ltd . (50 %) - BermudaX .L . One Ltd . - Bermuda
XL Europe (50%) - Republic o/IrelandX .L . Two Ltd . - Bermuda
XL Europe (50%) - Republic of IrelandXL Australia Pty Ltd - AustraliaXL Prevent Ltd - UKLe Mans Re (A - 99%) - France
IPT Compliance Limited - UKEXEL Cumberland Limited - UK
Pareto Partners (30%) - UKPareto Australia - Australia
Vision Loyal Ltd . (30%) - UKInQuisCapital Holdings ( Bermuda ) Limited - Bermuda
InQuisLoglc (Bermuda) Limited - BermudaRlskConnect Limited - Bermuda
FEIN #
Annuity Life & Re (Holdings ) Ltd (12%) - BermudaEXEL Acquisition Ltd . - Cayman
GCR Holdings Limited - Cayman (In Liqu/datlon)Reeve Court Insurance Company ( .04%) - BermudaReeve Court Holdings Ltd . (50%) - BermudaX.L . Property Holdings Ltd . - BermudaMid Ocean Limited (100%)- Cayman
Mid Ocean Holdings Limited - BermudaXL Mid Ocean Reinsurance Ltd - Bermuda
ECS Reinsurance Company Inc .- Barbados98-0086637
Sunshine State Holdings Corporation (24%) - FLThe Shipowners Insurance and Guaranty Company Ltd, (4 .6%) - BermudaGlobal Capital Underwriting Ltd . - UKLARC Holdings Ltd. - Bermuda
Latin America Reinsurance Company W . - BermudaRidgewood Holdings Company - Bermuda
Admiral Group Limited (10%)The Brockbank Group Plc - UK
Brockbank Holdings Limited - UKBaltusrol Holdings Ltd - Bermuda
County Down Limited - Corporate member Syndicate 1253Dornoch Limited - Corporate member Syndicate 1209Brockbank Underwriting Limited - UK
Brockbank Personal Lines Limited - Syndicates 153/7253Cassidy Brockbank Limited (Dormant)Brockbank Syndicate Management Limited - Syndicates 588/861/1209
Brockbank Syndicate Services Limite dSextant International Limited (20%)
NAIL #
Company is a member on NAC Reinsurance, Intercargo Pooling Agreement with Individual company pooling Ws noted.
Respectfully submitted ,
/S/Mary Meaney, CF EAssociate Insurance Examiner
STATE OF NEW YORK )) SS .
COUNTY OF NEW YORK)
MARY MEANEY, being duly sworn, deposes and says that the foregoing report submitted by her is true to th e
best of her knowledge and belief.
/S/Mary Meaney
Subscribed and sworn to before me
this day of 2002.
Appointment No 1 59
STATE OF NEW YORKINSURANCE DEPARTMENT
1, [E1C p . LEVIN . , Superintendent of Insurance of the State of New York,pursuant to the provisions of the insurance Law, do hereby appoint:
Mary Mcaaey
as proper person to examine into the affairs of the
NAC Reinsurance Corporatio n
and to make a report to me in writing of the condition of the said
Corporation
with such other information as.:*e shalt deem .requisite.
In Witness Whereof, l have hereunto subscribed by thename and affixed the official Seal of this Department, atthe City of New York,
this 2j L day ofAurast . 2004
Nf1L D. LEVINSuperintendent of Insurance
Exhibit 3
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PRICES
AdjDate Open High Low Close Volume Close"
14-Jan-05 76.81 77.32 76 .81 77 .06 760,400 75 .4 8
13-Jan-05 76 .66 77.30 76.45 76 .80 1,048,400 75 .22
12-Jan-05 75 .65 76 .25 75 .55 76 .11 639,000 74 .5 5
11-Jan-05 75 .60 76 .04 75 .37 75 .86 457,600 74 .3 0
10-Jan-05 76.25 76 .38 75 .64 76 .02 586,000 74 .4 6
7-Jan-05 75 .80 76 .40 75 .70 76 .09 936,700 74 .5 3
6-Jan-05 75.95 76 .37 75 .20 76 .00 782,300 74 .4 4
5-Jan-05 76.75 76 .85 75 .70 75.95 710,600 74 .3 9
4-Jan-05 76.50 77 .06 76 .31 76 .68 1,190,000 75 .1 0
3-Jan-05 77 .15 77 .50 76 .35 76 .50 969,100 74.9 3
31-Dec-04 77 .95 78.18 77 .62 77 .65 222,900 76 .0 5
30-Dec-04 77 .98 78.07 77,74 77 .74 309,800 76 .14
29-Dec-04 78 .00 78 .19 77 .75 77 .94 486,700 76 .3 4
28-Dec-04 77 .71 78 .11 77 .66 77 .89 335,400 76 .2 9
27-Dec-04 78 .35 78 .36 77.28 77 .65 491,000 76 .0 5
23-Dec-04 78 .35 78 .71 77 .62 78.47 519,200 76 .86
22-Dec-04 79.18 79 .18 78 .39 78 .52 558,500 76.9 1
21-Dec-04 79.25 79 .38 78 .47 78 .94 460,300 77.32
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XL : Historical Prices for XL CAPITAL LTD - Yahoo! Finance
20-Dec - 04 79 . 40 79 .45 78 . 35 78 . 80 464 , 700 77 .1 8
17-Dec - 04 78. 00 79 .41 77 .98 79 .20 1 , 013,200 77.5 7
16-Dec - 04 79 . 70 79 . 70 78 . 31 78 .65 605 , 000 77 .0 3
15-Dec - 04 79 . 30 80 .00 79 . 03 79 . 56 627,500 77 .92
14-Dec - 04 78 . 93 79 . 52 78 . 30 79 .40 619 , 600 77 .77
13-Dec-04 78 . 26 79 . 03 78 . 26 79 . 02 573 , 700 77 .4 0
10-Dec-04 79 .16 79 . 16 77 .48 78 .19 599 , 400 76 .5 8
9-Dec-04 76 .77 77 . 83 76 .47 77 . 83 424 , 500 76 .23
8-Dec- 04 76 . 65 77 . 03 76 . 55 76 . 81 353 , 000 75 .2 3
7-Dec-04 77 .37 77 . 80 76 . 62 76 .63 757 , 700 75 .06
6-Dec- 04 76 .75 77 . 50 76 . 25 77 . 37 566 , 400 75.7 8
3-Dec- 04 76 .35 77 . 28 75 . 89 77 .14 717,500 75 .5 5
2-Dec- 04 75 . 30 76 . 81 75 . 30 76 . 39 773 , 500 74.8 2
2-Dec-0 4 $ 0 .49 Cash Dividen d
1-Dec-04 75 .50 75 . 86 75 , 31 75 .86 494 ,200 73 .8 2
30-Nov- 04 75 . 25 75 .59 74 . 74 75 . 36 767 , 300 73 .3 3
29-Nov- 04 75 . 23 75 .50 74 .72 75 . 00 352 ,600 72 .9 8
26-Nov- 04 74 . 87 75 .30 74 .71 75 . 07 137,500 73 .0 5
24-Nov-04 74 . 70 74 . 89 74 .43 74 . 87 295 , 900 72 .8 6
23-Nov-04 74 . 66 74 .71 73 .84 74.20 421,800 72 .2 1
22-Nov-04 74 . 22 . 74 . 83 73 , 96 74 . 55 441,500 72,55
19-Nov-04 74 . 60 74 .72 73 . 59 73 . 97 743 , 400 71 .9 8
18-Nov-04 74 .80 75 .15 74 .44 74 . 53 342 , 000 72 .5 3
17-Nov-04 75 . 08 75 .44 74 .48 74 . 64 362 , 900 72 .6 3
16-Nov-04 75 . 01 75 .62 74 ,74 74 . 83 544 , 900 72 .8 2
15-Nov-04 74 .25 75 . 14 74 .25 75 .00 670,000 72 .9 8
12-Nov-04 74 .65 74 . 65 73 .27 74 . 25 691 , 700 72,25
11-Nov - 04 73 . 55 74 . 58 73 . 50 74 . 50 519 , 600 72 .5 0
10-Nov-04 73 . 85 73 . 95 73 . 11 73 .44 827 , 200 71 .4 7
9-Nov - 04 73 . 12 74 .23 73 .12 73 .83 577 , 000 71 .8 5
8-Nov - 04 72 . 41 73 . 25 72 . 41 73 .12 499 , 800 71,1 5
5-Nov-04 73 . 25 73. 50 71 .57 72 .65 879 , 100 70 .7 0
4-Nov-04 71 .35 73. 00 71 . 30 72 . 87 819 , 900 70.9 1
3-Nov - 04 70 . 90 71 .45 70 . 70 71 .29 1 , 194,300 69 .37
2-Nov-04 72 .06 72 . 07 69 . 93 70 . 60 1,396,800 68 .7 0
1-Nov-04 72 . 63 72 .66 72 . 10 72 .26 464,200 70 .32
29-Oct- 04 72 . 00 72 . 50 71 , 50 72 . 50 598 , 900 70 .5 5
28-Oct- 04 71 .65 72.11 71 .37 72 . 00 644 , 900 70 .0 6
27-Oct- 04 70 . 50 71 .92 70 . 35 71 .65 900,300 69 .7 2
26-Oct-04 69 . 00 70 . 82 68 . 93 70 . 69 1,035,100 68 .79
Page 2 of 3
http://finance .yahoo.com/q/hp?s=XL&a=09&b=17&c=2003 &d=00&e=14&f=2005&g=d 9/22/2005
XL: Historical Prices for XL CAPITAL LTD - Yahoo! Finance
25-Oct-04 67 .10 67 .90 66 .75 67 .62 699,000 65.80
22-Oct-04 68 .10 69.05 67 .95 68.00 769,000 66.1 7
21-Oct-04 68 .15 69.12 68 .06 68.20 836,900 66.37
20-Oct-04 67 .60 68 .68 67 .03 68.47 1,539,700 66 .6 3
19-Oct-04 69 .28 69 .75 67 .49 67.67 2,764,700 65 .8 5
18-Oct-04 69 .35 70 .19 68 .70 69.27 1,577,600 67 .4 1
15-Oct-04 67.65 70 .50 66 .70 69.50 4,297,300 67 .6 3
14-Oct-04 73 .95 74 .08 69 .80 70.40 2,494,200 68 .5 1
13-Oct-04 74 .00 74 .37 73 .67 73,94 506,000 71 .9 5
" Close price adjusted for dividends and splits ,
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XL Capital Ltd . (XL) At 12;11 PM ET : 65.34 ♦ 1 .29 (1,94% )
11 Inmw A[Jj sckesr ry
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SET DATE RANGE ADVERTISEMENT
DailyStart Date: Oct 17 12003 E9 . Jan 1, 2003 C Weekly
End Date: Jan 14 12005 C Monthly
C Dividends Only
Room
First I Prey ! Neg I Last
PRICE S
Date Open High Low Close VolumeAdj
Close *
12-Oct-04 73 .61 73 :61 73 .04 73 .34 491,400 71 .37
11-Oct-04 73 .62 74 .08 73 .60 73 .85 209 ,500 71 .87
8-Oct-04 74 .03 74 .38 73 .49 73 .63 308 ,000 71 .6 5
7-Oct-04 74 .53 74 .58 74 .02 74 .02 970,600 72 .0 3
6-Oct-04 74 .63 75 .13 74 .41 74 . 68 662 ,500 72,67
5-Oct-04 74 .87 75 .17 74 .51 74 .60 441,400 72.59
4-Oct-04 74 .55 75 .48 74 .55 74.87 572,800 72.86
1-Oct-04 74 .00 74 .65 73 .68 74 .40 524,500 72.40
30-Sep -04 72 .15 74 .00 72 .11 73 .99 882,100 72.00
29-Sep-04 72 .67 72 .67 72 . 11 72.46 488 , 800 70 .5 1
28-Sep -04 72 . 95 73 .21 72 .48 72 . 66 648 ,500 70 .7 1
27-Sep-04 74 .00 74 .07 72 . 68 72 . 74 928 ,400 70 .7 8
24-Sep -04 73 .54 74.01 73 .30 74 . 01 595,300 72 .0 2
23-Sep -04 74 .05 74.42 73 .47 73 .55 916 ,100 71 .5 7
22-Sep -04 74 .45 74.45 73 .70 73 .97 627, 100 71 .9 8
21-Sep -04 73 .73 74.77 73 .73 74 . 68 693 ,700 72 .6 7
20-Sep -04 73 .40 73.81 73 .28 73 . 73 666 ,200 71 .7 5
17-Sep-04 73 .05 73.36 72 .99 73 . 16 568 , 000 71 .1 9
http :// finance.yahoo . com/q/hp?s=XL&a=09&b=17&c=2003&d=00&e=14&f=2005 &g=d&z=66&y=66 9/22/2005
XL : Historical Prices for XL CAPITAL LTD - Yahoo! Finance
16-Sep-04 72,20 73 .03 72 .10 72.93 374,000 70.97
15-Sep-04 71 .90 72.40 71 .25 71 .87 488,000 69 .9 4
14-Sep-04 71 .52 71 .95 71 .50 71 .85 796,700 69 .9 2
13-Sep-04 72,05 72.15 71 .45 71 .45 1,203,300 69 .5 3
10-Sep-04 72 .50 72 .71 71 .57 71 .82 660,200 69 .89
9-Sep-04 72 .80 72.87 72 .27 72 .40 706,900 70 .4 5
8-Sep-04 73 .69 73.69 72 .50 72 .80 851,900 70.84
7-Sep-04 73 .50 74 .36 73 .41 73 .68 931,700 71.70
3-Sep-04 72,49 73 .30 72.16 73 .10 1,020,600 71 .1 4
2-Sep-04 69 .40 72 .39 69 .20 72 .39 2,400,400 70 .4 4
1-Sep-04 69 .71 69.79 69 .05 69 .43 710,400 67 .5 6
1-Sep-04 $ 0 .49 Cash Dividen d
31-Aug-04 70 .75 70 .75 69 .82 70 .20 474,900 67 .8 4
30-Aug-04 70 .10 70 .99 70 .00 70 .75 595,600 68 .3 7
27-Aug-04 70 .60 70 .83 69 .83 69 .95 547,800 67 .5 9
26-Aug-04 71 .00 71 .34 70 .66 70 .69 273,100 68 .3 1
25-Aug-04 70.45 71 .20 70.19 70 .90 470,200 68 .5 1
24-Aug-04 70 .56 70 .75 70 .22 70 .61 407,900 68 .2 3
23-Aug-04 71 .35 71 .66 70 .32 70 .52 416,800 68 .1 5
20-Aug-04 71 .83 72 .00 71 .07 • 71 .42 448,500 69 .0 2
19-Aug-04 71 .50 71 .84 71 .27 71 .83 470,100 69 .4 1
18-Aug-04 70 .71 71 .73 70 .17 71,60 536,100 69 .1 9
17-Aug-04 70 .58 71 .56 70 .57 71,07 659,400 68 .6 8
16-Aug-04 69.52 71 .10 69,52 70 .58 667,200 68 .2 0
13-Aug-04 69.62 69 .90 69 .16 69 .52 577,600 67 .1 8
12-Aug-04 70 .05 70.05 69 .14 69.62 885,700 67 .2 8
11-Aug-04 69 .64 70.28 69 .26 70.28 696,000 67.9 1
10-Aug-04 69 .19 69 .82 69 .10 69 .63 842,400 67.2 9
9-Aug-04 69 .15 69 .45 68 .46 68 .87 480,700 66.5 5
6-Aug-04 69 .03 69 .40 68 .58 69 .00 718,600 66.6 8
5-Aug-04 69 .65 69 .70 69,10 69,12 593,100 66 .7 9
4-Aug-04 69.60 69 .90 69 .08 69 .26 517,600 66 .9 3
3-Aug-04 70 .11 70 .13 69,66 69 .69 790,700 67 .3 4
2-Aug-04 70 .55 70 .55 69 .65 70 .06 1,210,900 67 .7 0
30-Jul-04 71 .20 71 .20 70 .22 70 .68 1,098,600 68 .3 0
29-Jul-04 71 .95 72 .17 71 .09 71 .20 1,217,300 68 .8 0
28-Jul-04 71 .25 72 .18 70 .77 71,08 1,343,800 68 .6 9
27-Jul-04 71 .30 71 .51 70 .35 70 .75 1,506,100 68 .3 7
26-Jul-04 70 .15 71 .38 70 .09 71 .09 1,570,000 68 .7 0
23-Jul-04 69 .96 69.96 68 .65 69 .01 810,700 66 .69
Page 2 of 3
http ://finance .yahoo.corn/q/hp?s=XL&a=09&b=17&c=2003&d=00&e=14&f=2005&g=d&z=66&y=66 9/22/2005
XL: Historical Prices for XL CAPITAL LTD - Yahoo! Finance
22-Jul-04 70.47 70.47 69.40 69 .96 1,000,100 67.60
21-Jul-04 72 .40 72.72 70.36 70 .41 1,219,200 68.04
20-Jul-04 74 .28 74,29 71 .19 71 .94 1,879,500 69 .5 2
19-Jul-04 73 .60 74.68 73.34 74.38 605,600 71 .8 8
16-Jul-04 74.62 74.62 73 .43 73.43 800,200 70 .9 6
15-Jul-04 75 .30 75.40 74,43 74.62 477,100 72 .1 1
14-Jul-04 76 .08 76.09 74 .62 74.84 584,500 72 .3 2
13-Jul-04 76 .05 76.62 75 .62 75 .99 286 ,300 73.4 3
12-Jul-04 75 .50 76.11 75.06 75.93 476,100 73 .3 7
Close price adjusted for dividends and splits .
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XL Capital Ltd . (XL) At 12:12PM ET : 65.33 1 1 .30 (1 .95% )ii d~. ~ i ~ wwN ,wMwwwwn -
i t to FREEYRADES
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Historical Prices Get Historical Prices for :
SET DATE RANG E
Start Date: Oct 'j '; 17 12003 Eg . Jan 1, 2003
End Date : rJan 14 2005
re . Daily
C Weekly
C Monthly
C Dividends Onl y
First I Prev I Next I LasPRICE S
Date Open High Low Close VolumeAd j
Close`
9-Jul-04 75 .00 75 .73 74 .97 75 .66 304,300 73 .1 1
8-Jul-04 . 75.05 75.35 74 .65 74 .92 370,900 72 .4 0
7-Jul-04 74 .90 75.80 74 .75 75 .45 649,000 72 .9 1
6-Jul-04 75 .02 75.55 74 .54 75 .23 435,700 72 .7 0
2-Jul-04 75 .45 75.68 75 .08 75 .14 441,300 72,6 1
1-Jul-04 75 .65 76.42 74 .77 75 .14 651,800 72 .6 1
30-Jun-04 75 .30 75 .62 75 .08 75 .46 714,800 72 .9 2
29-Jun-04 75 .10 75 .21 74 .75 74 .92 729,900 72 .4 0
28-Jun-04 76 .00 76 .35 74 .95 74 .98 368,000 72 .46
25-Jun-04 76 .00 76 .28 75 .35 75 .79 579,000 73 .24
24-Jun-04 76 .70 76 .87 75 .96 75 .96 399,000 73.40
23-Jun-04 76 .80 76 .80 75 .83 76 .37 801,800 73 .80
22-Jun-04 76 .77 77 .20 76 .58 76 .75 509,600 74 .1 7
21-Jun-04 77 .35 77 .54 76 .71 76 .98 414,600 74 .39
18-Jun-04 77 .35 78 .31 76 .96 77 .03 772,800 74 .44
17-Jun-04 77 .90 . 77 .95 76 .68 77 .57 616,300 74 .96
16-Jun-04 77 .62 78 .10 77 .50 78 .04 585,600 75 .4 1
15-Jun-04 77 .12 77 .78 77,06 77 .66 941,000 75 .0 5
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14-Jun-04 76.55 77 .21 76 .30 76 .93 1,000,600 74 .34
10-Jun-04 76 .45 76 .60 75 .98 76 .19 494,800 73 .62
9-Jun-04 75 .30 76 .34 74.99 76 .00 867,000 73 .44
8-Jun-04 74 .84 75 .40 74 .61 75 .30 886,400 72 .76
7-Jun-04 75,00 75 .05 74 .64 74 .83 505,000 72 .3 1
4-Jun-04 74 .65 74 .95 74 .07 74 .40 546,600 71 .89
3-Jun-04 74 .75 74 .75 73 .88 73 .92 591,200 71 .4 3
3-Jun-04 $ 0 .49 Cash Dividend
2-Jun-04 75.00 75 .28 74 .75 75 .09 898,800 72 .0 9
1-Jun-04 74.65 74 .80 74 .07 74 .80 486,500 71 .8 1
28-May-04 74.60 74 .70 74 .10 74 .65 394,200 71 .6 7
27-May-04 74.,80 74 .99 73 .85 74 .46 510,800 71 .4 8
26-May-04 75.11 75 .42 74 .44 74 .70 618,600 71 .7 1
25-May-04 74 .50 75 .30 73 .00 75 .07 850,800 72.07
24-May-04 74 .50 75 .25 74 .00 74 .40 543,100 71 .43
21-May-04 74 .46 75 .04 74 .00 74 .20 582,300 71 .2 3
20-May-04 74 .10 74 .63 73 .75 74 .40 780,500 71 .43
19-May-04 74 .61 75 .30 73 .75 74 .17 762,300 71 .2 0
18-May-04 74.50 74 .60 74 .09 74 .36 397,900 71 .39
17-May-04 74.50 74 .63 73 .65 74 .10 579,700 71 .1 4
14-May-04 74.70 74 .75 74 .40 74 .67 641,300 71 .6 8
13-May-04 74.70 74 .97 74 .56 74 .75 831,200 71 .7 6
12-May-04 74.50 74 .85 73 .67 74 .80 1,293,500 71 .8 1
11-May-04 74 .11 74 .66 74 .11 74 .50 446,500 71 .5 2
10-May-04 74.47 74 .52 73 .02 74 .11 813,600 71 .1 5
7-May-04 75.80 76 .08 74 .55 74 .67 559,700 71 .6 8
6-May-04 76.55 76 .74 75 .89 76 .15 520,200 73 .1 1
5-May-04 76.54 77 .54 76 .51 76 .72 570,700 73 .6 5
4-May-04 77.24 77 .50 76 .46 76 .65 785,600 73 .5 9
3-May-04 76.35 76 .93 76.05 76 .50 733,500 73 .4 4
30-Apr-04 77.60 77 .60 76.23 76 .35 704,100 73 .3 0
29-Apr-04 77,53 78 .27 77 .23 77 .52 730,600 74.42
28-Apr-04 77 .95 78 .11 77 .08 77 .24 586,800 74 .1 5
27-Apr-04 77.80 78 .60 77 .65 78 .19 528,800 75 .06
26-Apr-04 78.47 78 .52 77 .19 77 .30 343,300 74 .2 1
23-Apr-04 78.60 78 .65 77 .99 78 .47 418,200 75.33
22-Apr-04 78.19 79 .30 76.70 78 .52 1,252,400 75 .3 8
21-Apr-04 78.10 78 .50 77 .41 78 .18 546,000 75 .0 5
20-Apr-04 79 .45 79 .61 78 .02 78 .09 793,500 74 .9 7
19-Apr-04 79 .05 79 .73 78 .95 79 .55 759,500 76 .37
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XL : Historical Prices for XL CAPITAL LTD - Yahoo! Finance
16-Apr-04 77.90 79 .50 77 .72 79.21 946,400 76 .0 4
15-Apr-04 76 .96 78 .00 76.76 77 .90 1,090,800 74 .7 9
14-Apr-04 77.50 77 .64 76 .79 77 .00 785,900 73.92
13-Apr-04 78 .89 78 .89 77 .51 77 .67 609,500 74.56
12-Apr-04 78 .50 79.05 78 .28 78 .88 561,300 75.73
8-Apr-04 78,80 79 .02 77 .89 78 .15 651,800 75 .03
7-Apr-04 78 .45 78.75 77 .98 78 .25 884,200 75 .1 2
6-Apr-04 77 .88 78.90 77 .88 78 .66 841,700 75 .52
5-Apr-04 76 .45 78.20 76 .40 78 .11 1,118,700 74 .99
" Close price adjusted for dividends and splits .
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XL Capital Ltd . (XL ) At 12 :12PM ET : 65.334 1 .30 ( 1 .95% ). . .
~i°~ y yU * FRE E
TMM$10 CASH ~
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SET DATE RANGE ADVERTISEMENT
C: DailyStart Date : Oct i w 17 12003 2003an 1, t' : Weekly
End Date: Fan-ffl 14 2005 C Monthl y
r Dividends Onl y
First I Prev I Next I Las t
PRICES
Date Open High Low Close VolumeAdd
*Close
2-Apr-04 77.45 77.48 75.75 76 .26 783,900 73.2 1
1-Apr-04 76 .10 77 .36 75.95 77 .06 759,100 73 .9 8
31-Mar-04 76.25 76 .25 75.45 76.04 881,600 73 .0 0
30-Mar-04 74 .82 76 .45 74,82 76 .08 687,200 73 .0 4
29-Mar-04 74.85 74 .98 . 74.50 74 .82 1,035,200 71 .8 3
26-Mar-04 75.00 75,37 74 .70 74 .80 472,100 71 .8 1
25-Mar-04 74 .65 75 .19 74.22 75 .00 1,085,900 72 .0 0
24-Mar-04 74.52 74 .98 74 .06 74 .30 780,600 71 .3 3
23-Mar-04 75.03 75.10 74.51 74 .55 749,400 71 .5 7
22-Mar-04 75.19 75 .20 74.45 74 .95 1,560,500 71 .9 5
19=Mar-04 75.22 80 .18 75.01 75 .41 1,837,800 72,40
18-Mar-04 75.19 75 .24 74 .85 75 .18 2,071,100 72 .17
17-Mar-04 74.50 76.52 73 .90 75 .19 3,209,200 72 .18
16-Mar-04 73.40 74 .75 73 .40 74 .63 1,484,100 71 .65
15-Mar-04 74 .90 74 .91 72 .43 72 .44 1 ;078,300 69 .54
12-Mar-04 74.74 75 .45 74 .61 74 .96 664,300 71 .96
11-Mar-04 74.30 75 .72 74 .23 74 .60 896,400 71 .62
10-Mar-04 76.38 76 .57 75 .25 75 .35 371,300 72.34
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XL : Historical Prices for XL CAPITAL LTD - Yahoo! Financ e
9-Mar-04 77 .75 77 .79 76 .05 76 .47 498,300 73 .4 1
8-Mar-04 77,75 77 .89 77.40 77 .74 358,600 74 .6 3
5-Mar-04 76 .87 77 .99 76 .77 77 .75 629,500 74 .6 4
4-Mar-04 77 .20 77 .52 76 .60 77.10 402,500 74 .0 2
4-Mar-04 $ 0 .49 Cash Dividen d
3-Mar-04 76 .64 77 .98 76 .54 77.69 640,600 74 .1 1
2-Mar-04 76 .55 77 .10 76 .29 76 .64 485,700 73 .1 1
1-Mar-04 76.88 76 .88 75 .93 76 .34 691,400 72 .8 3
27-Feb-04 75.90 77.45 75 .87 76 .66 809,000 73 .1 3
26-Feb-04 74.88 75 .97 74 .85 75 .74 687,500 72 .2 5
25-Feb-04 74.85 75 .39 74 .70 75 .25 624,800 71 .7 9
24-Feb-04 75.00 75 .33 74 .23 74 .91 1,110,500 71 .46
23-Feb-04 75 .25 75.58 74 .71 75 .15 951,300 71,69
20-Feb-04 75 .96 .76 .14 74 :95 75 .10 1,139,500 71 .6 4
19-Feb-04 77 .08 77.08 75,66 75 .90 944,700 72.4 1
18-Feb-04 77 .50 77 .70 76 .49 77 .08 1,219,400 73.53
17-Feb-04 78 .00 78 .70 77 .74 78 .42 1,268,900 74 .8 1
13-Feb-04 78 .60 78.70 77.05 77,30 928,400 73 .7 4
12-Feb-04 79 .80 79.80 78 .40 78 .60 806,900 74 .9 8
11-Feb-04 80 .25 80 .45 78 .73 79 .64 1,652,300 75 .9 7
10-Feb-04 81 .70 81 .94 81,05 81 .54 543,600 77,79
9-Feb-04 81 .20 82 .00 81 .05 81 .53 515,500 77 .7 8
6-Feb-04 79 .80 81 .40 79.80 81 .40 597,700 77 .6 5
5-Feb-04 78 .70 80 .25 78 .68 79 .90 953,200 76 .2 2
4-Feb-04 79 .43 79 .51 78 .25 78 .34 570,400 74 .7 3
3-Feb-04 80 .00 80 .50 79.50 79.67 449,300 76 .0 0
2-Feb-04 79 .70 80.34 79.57 79.90 556,000 76 .2 2
30-Jan-04 78 .70 79 .75 78 .64 79.50 664,500 75 .84
29-Jan-04 79 .00 79 .06 77 .87 78 .70 701,900 75 .0 8
28-Jan-04 78 .96 79 .47 78 .25 78 .27 664,500 74 .67
27-Jan-04 78 .80 79 .21 78 .49 78 .96 575,100 75 .3 3
.26-Jan-04 79 .50 80 .20 78 .45 79 .05 798,200 75 .4 1
23-Jan-04 79 .31 80 .65 79 .26 79 .50 799,200 75 .84
22-Jan-04 79 .53 79 .95 79 .01 79 .13 458,300 75 .4 9
21-Jan-04 78 .80 79 .64 78 .57 79 .45 906,600 75 .79
20-Jan-04 78 .80 78 .95 78 .60 78 .76 765,800 75 .1 3
16-Jan-04 79 .30 79 .75 78 .64 78 .94 1,295,300 75 .3 1
15-Jan-04 80 .60 80 .64 79 .00 79 .15 1,350,300 75 .5 1
14-Jan-04 77.85 80 .75 77 .61 80 .50 3,354,800 76 .79
13-Jan-04 78.14 78 .65 77 .59 77 .85 1,568,500 74 .27
Page 2 of 3
http ://finance.yahoo .comlq/hp?s=XL&a=09&b=17&c=2003&d=00&e=14&f=2005&g=d&z=66&y=198 9/22/2005
XL: Historical Prices for XL CAPITAL LTD - Yahoo ! Finance
12-Jan-04 77 .25 79 .74 77,25 78 .02 1,759,800 74 .4 3
9-Jan-04 76.42 78 .20 76 .42 76 .93 680,900 73 .3 9
8-Jan-04 76.10 76 .53 75.35 76 .42 985,300 72,90
7-Jan-04 77.60 77 .88 77 .05 77.19 667,100 73 .64
6-Jan-04 77 .31 78 .11 77 .15 77 .82 572,100 74.24
5-Jan-04 78 .25 78 .99 77 .59 77 .74 516 .600 74 .16
2-Jan-04 78 .00 78 .79 77 .48 77 .69 638,600 74 .1 1
31-Dec-03 77 .25 77 .87 77 .20 77 .55 423,600 73 .98
30-Dec-03 76 .86 77 .57 76 .69 77,15 628,500 73 .60
Close price adjusted for divid ends and splits ,
First I Prey I Next I Last
f'1 Download To Spreadshee t
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Quotes delayed, except where indicated otherwise .Delay times are 15 mins for NASDAQ, 20 mins for NYSE and Amex . See also delay times for other exchanges.
Historical chart data and dally updates provided by Commodity Systems, Inc. (CSI) . International historical chart data and daily updates providedby Hemscott Americas . Fundamental company data provided by Capital IQ . Quotes and other information supplied by independent providers
identified on the Yahoo! Finance partner page . All information provided "as is" for Informational purposes only, not Intended for trading purpose sor advice . Neither Yahoo! nor any of Independent providers is liable for any informational errors, incompleteness, or delays, or for any actionstaken in reliance on information contained herein, By accessing the Yahoo! site, you agree not to redistribute the information found therein .
http ://finance .yahoo.com/q/hp?s=XL&a=09&b=17&c=2003&d=00&e=14&f=2005&g=d&z=66&y=198 9/22/2005
XL: Historical Prices for XL CAPITAL LTD - Yahoo! Finance Page 1 of 3
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XL Capital Ltd . (XL)
. ;N dvublemba~
Free Trades Still Just $7 ,
Historical Price s
SET DATE RANG E
Start Date : Oct ' ° 117 2003 Eg . Jan 1, 2003
End Date : Jan 14 12005
ADVERTISEMENT
f: Dail y
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f: Monthl y
C' Dividends Onl y
First I Prev I Next Las t
PRICES
Date Open High Low Close Volume AdjClose*
29-Dec-03 76 .81 77 .12 76 .45 76 .96 556,500 73 .4 2
26-Dec-03 76 .86 77,03 76 .67 76 .81 102,500 73 .2 7
24-Dec-03 76 .45 77 .18 76 .42 76 .80 194,600 73 .2 6
23-Dec-03 76 .80 77 .03 76 .05 76 .86 640,400 73.32
22-Dec-03 74 .70 76 .93 74,01 76 .80 1,102,700 73 .2 6
19-Dec-03 74 .28 74 .92 73 .85 74 .52 822,200 71 .09
18-Dec-03 73 .66 74.20 72 .99 74 .06 456,900 70 .65
17-Dec-03 73 .41 73 .84 73 .19 73 .84 512,800 70 .4 4
16-Dec-03 72 .95 73,44 72 .80 73 .41 591,400 70 .03
15-Dec-03 73 .90 73.93 72 .77 72 .95 819,100 69.5 9
12-Dec-03 72,80 73 .41 72 .56 73,35 917,200 69 .9 7
11-Dec-03 72 .50 73.05 71 .98 72 .80 1,047,600 69 .4 5
10-Dec-03 73 .00 73.37 72.46 72 .67 969,100 69 .3 2
9-Dec-03 73,77 73.77 72 .60 72 .60 837,600 69.26
8-Dec-03 73 .80 73 .83 73.26 73 .52 873,900 70.14
5-Dec-03 73 .60 74.08 73.40 73 .93 826,700 70 .53
4-Dec-03 73 .25 75 .22 73.25 73 .60 1,733,200 70 .2 1
4-Dec-03 $ 0 .48 Cash Dividend
start doing
http://finance.yahoo.com/q/hp?s=XL&a=09&b=17&c=2003&d=00&e=14&f 2005&g=d&z=66&y=264 9/22/2005
XL : Historical Prices for XL CAPITAL LTD - Yahoo ! Finance
3-Dec-03 75 .95 75 .95 73.50 73 .61 1,570,000 69 .76
2-Dec-03 76 .68 77 .15 75 .52 75 .85 654,600 71 .8 9
1-Dec-03 76 .00 77 .46 75.91 76 .68 1,041,900 72 .6 7
28-Nov-03 75.00 75 .35 74 .62 75 .20 361,600 71 .2 7
26-Nov-03 74 .40 75 .27 74 .01 75 .18 444,600 71 .2 5
25-Nov-03 74 .10 74 .46 73 .80 74 .20 465,000 70 .32
24-Nov-03 73 .15 74 .18 73 .15 73 .92 647,200 70 .0 6
21-Nov-03 73.00 73 .65 72 .96 73 .10 484,300 69 .28
20-Nov-03 73 .20 73 .35 72.60 72 .62 700,700 68 .8 3
19-Nov-03 73 .00 73 .69 72 .95 73 .00 929,100 69 .1 9
18-Nov-03 74 .16 74 .35 73.64 73 .66 1,110,100 69.8 1
17-Nov-03 73 .90 74 .39 73.72 74 .20 1,209,800 70.32
14-Nov-03 74 .70 74 .82 74.09 74 .65 1,171,300 70 .7 5
13-Nov-03 74 .38 74 .93 73 .96 74 .83 1,775,900 70 .9 2
12-Nov-03 72 .50 74 .72 71 .90 74 .57 2,598,700 70 .6 7
11-Nov-03 70 .57 72 .70 70.57 72 .48 2,321,800 68 .6 9
10-Nov-03 68 .50 70 .72 68 .50 70 .57 1,501,500 66.8 8
7-Nov-03 68.82 69 .48 68.12 68 .50 1,228,700 64 .9 2
6-Nov-03 68 .11 69 .00 67 .75 68 .96 1,372,200 65 .3 6
5-Nov-03 68 .50 68 .50 67.05 68,11 997,600, 64 .5 5
4-Nov-03 68 .90 69 .02 68 .18 68 .50 719,400 64 .9 2
3-Nov-03 69 .50 69 .50 68 .65 68 .90 1,050,700 65 .3 0
31-Oct-03 69 .08 69 .89 69 .08 69 .50 533,200 65 .8 7
30-Oct-03 69 .47 70 .30 68.70 69 .08 1,221,900 65 .4 7
29-Oct-03 68 .32 70 .10 68 .25 69 .47 1,873,000 65 .8 4
28-Oct-03 68 .93 69 .15 67 .70 68 .31 1,272,200 64 .74
27-Oct-03 69 .37 69 .82 68 .81 68 .93 927,600 65 .3 3
24-Oct-03 68 .35 69 .38 67.97 69 .20 1,381,600 65 .5 8
23-Oct-03 68 .82 69 .16 68 .15 68 .56 1,168,400 64,98
22-Oct-03 69 .95 69 .95 68 .50 68 .82 1,217,600 65 .2 2
21-Oct-03 71 .25 71 .26 69 .81 69 .95 1,983,500 66.29
20-Oct-03 72 .60 72 .75 69 .30 70 .35 6,618,400 66.67
17-Oct-03 75 .00 75 .65 69 .75 73 .37 11,458,700 69.54
" Close price adjusted for dividends and splits .
First I Prey_ I Next I Last
f `t Download To Spreadshee t
Add to Portfolio . ' Set Alert Et Email to a Frien d
Get Historical Price s for Another Symbol : , Symbol Lookup
Page 2 of 3
http://finance .yahoo.comlq/hp?s=XL& a=09&b=17&c=2003&d=00&e=14&f=2005&g=d&z=66&y=264 9/22/2005
XL: Historical Prices for XL CAPITAL LTD - Yahoo! Finance Page 3 of 3
• Stock Screener • plits
• Mergers & Acquisitions
Copyright © 2005 Yahoo! Inc . All rights rese rved . Privacy Policy - Terms of Service - Copyriaht/IP Policy
Quotes delayed , except where indicated otherwise .Delay times are 15 mins for NASDAQ, 20 mins for NYSE and Amex . See also delay times for other exctlancles .
Historical chart data and daily updates provided by Commodity Systems Inc, (CSI) . International historical chart data and dally updates providedby Hemscott Americas . Fundamental company data provided by Capital IQ . Quotes and other information supplied by independent providers
Identified on the Yahoo! Finance partner page . All information provided "as is" for Informational purposes only, not intended for trading purposesor advice . Neither Yahool nor any of independent providers is liable for any informational errors, incompleteness, or delays, or for any actionstaken in reliance on information contained herein . By accessing the Yahoo! site, you agree not to redistribute the information found therein .
http ://finance .yahoo.com/q/hp?s=XL&a=09&b=17&c=2003&d=00&e=14&f 2005&g=d&z=66&y=264 9/22/2005
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