XL Capital, the Bermuda-based insurance giant, announced profits of $214.1 million for the fourth quarter and $396 million for the whole of 2002 in their earnings release yesterday.

2002 was a much better year for XL than 2001 when the company lost more than $571 million.

Despite having to increase reserves by $215 million this quarter, XL achieved an enormous improvement on the bottom line with fourth quarter net income of $1.56 per share.

President and chief executive Brian O'Hara proclaimed it a "very good quarter with strong underwriting results".

The company delivered an operating return on common equity of 17 percent and book value per ordinary share increased to $44.48.

The $215 million reserve strengthening relates mainly to the US casualty reinsurance business, including $30 million for asbestos, which remains a minor exposure for XL.

Asked about these reserve increases, Mr. O'Hara told the Royal Gazette that XL had been ahead of the game in their underwriting discipline about seven years ago. At a time when certain competitors were very aggressively writing underpriced business, XL effectively put their pen away.

Mr. O'Hara said that the reserves that XL put up prior to 1995 mostly proved to be unnecessary, with the one exception being the US casualty reinsurance business (including some asbestos exposure) that was absorbed due to the acquisition of a company called Nac Re in 1999.

But he said that their levels of reserve increases in that sector were nothing compared to other players in the industry who have recently announced massive increases in reserves. On an annual basis, there was strong growth across the board: net premiums earned for the year rose to nearly 6 billion.

However this last quarter saw a large decrease in life business. Gross premiums written for life operations for the quarter were $220.7 million compared with $649.3 million in the fourth quarter of 2001. But Mr. O'Hara said that the decrease this quarter does not reflect a policy of withdrawing from the sector.

"It is difficult to draw a trend - the life sector is very lumpy" he said, pointing out that the life business is conducted on a large wholesale basis with one single account, for example, accounting for over $600 million in 2001. Levels are down this quarter but they might be up again next quarter.

This is why XL makes a distinction between its general and life operations in its published results, explained Mr. O'Hara.

Looking at the general insurance and reinsurance operations as a distinct entity, they had an impressive combined ratio of 97 percent for the year.

The loss ratios were 69 percent and 94.8 percent in the quarters ended December 31, 2002 and 2001 with corresponding expense ratios of 28.3 percent and 33.0 percent for the same quarters, respectively.

Investment results for general operations were flat at $168 million for the quarter, investment income for life operations were up at $32 million. Net realised gains on investments were $24 million for the quarter, but there was a net realised loss of $214 million for the year.

The company announced that all XL employee stock options granted in 2003 and beyond will be expensed over their vesting periods. A move which Morgan Stanley analyst, Alice Schroeder, says puts XL "On the honour roll."

"Our decision to expense stock options reflects XL's commitment to transparency in financial reporting and good corporate governance." said Mr. O'Hara.

He revealed that there had been large demand from institutional shareholders for XL to join other large insurers such as AIG and Chubb in this respect. Stock option expenses for the next year would work out at approximately 15 - 20 cents per share according to Mr. O'Hara.