Bermuda-based insurance giant XL Capital has generated record first-half net income for the year.

In its latest quarterly financial update the company reported that for the six months ended June 30, 2004, net income available to ordinary shareholders increased 39 percent over the same period in 2003 to a record $815.8 million, or $5.88 per ordinary share.

Net income available to ordinary shareholders for the quarter ended June 30, 2004 was $363.6 million, or $2.62 per ordinary share. This compares with $347.7 million, or $2.51 per ordinary share, for the quarter ended June 30, 2003.

?XL delivered its second highest level of quarterly net income ever this quarter, after our record performance in the first quarter. These results underscore the increasing value of our global diversified platform, significantly expanded product capabilities and focus on improving penetration of existing customer relationships,? said Brian O?Hara, president and chief executive officer of XL.

Annualised net income return on ordinary shareholders? equity for the quarter was 21.7 percent compared with 20.8 percent for the same period last year. Net income excluding net realised gains and losses on investments, and net realised and unrealised gains and losses on credit and investment derivative instruments, net of tax for the same period increased 23 percent to $637.7 million or $4.60 per ordinary share.

For the quarter, this amounted to $308.9 million, or $2.23 per share, an increase of 15 percent over the same quarter in 2003, and annualised return on ordinary shareholders? equity on the same basis was 18.4 percent compared with 16.1 percent a year ago.

?The combined ratio for our general operations in the quarter was 87.6 percent, reflecting the strength of our underwriting discipline and continued solid market fundamentals, despite increasing competition in certain product lines,? said Mr. O?Hara.

?Our life and annuity operations continue to gain critical mass. During the quarter we completed a single premium annuity reinsurance transaction, representing $898 million in up-front premium, with a major UK life insurance company. This was the fourth transaction with up-front premium in excess of $500 million that we have completed since entering the business in 1999. We continue to deliver strong returns to shareholders,? he added.

In terms of specific results for segments within the company, underwriting profit for insurance operations for the quarter was $109.8 million, an increase of 41 percent over the second quarter of 2003. Net premium written increased 36 percent to $1.2 billion, the company stating that this was driven primarily by higher new business volumes, commutations on certain reinsurance treaties, greater retentions on new and existing product lines and the impact of favorable foreign exchange movements.

The combined ratio for the segment improved 2.3 points compared with the 2003 second quarter to 89.7 percent. XL stated that this was driven by a 2.4 point improvement in the acquisition expense ratio, due primarily to changes in product mix.

The loss ratio in the quarter of 63.8 percent was essentially flat versus the 2003 second quarter. XL also noted that during the quarter, the company announced two important new initiatives within this segment: the launching of its whole account commercial property initiative with capacity of up to $500 million and the commencement of primary directors? and officers? liability coverage in Europe.

Underwriting profit from general operations within the reinsurance segment for the quarter was $108.9 million, an increase of 71 percent from the second quarter of 2003. Net premium written increased three percent from the 2003 second quarter to $537 million, and according to XL this was driven primarily by the impact of favourable foreign exchange movement.

A low level of large losses in the quarter compared with the same period last year contributed to a 9.6 point improvement in the loss ratio to 53.3 percent, which XL said is among the lowest loss ratios in the company?s history.

The acquisition and operating expense ratios increased modestly and the combined ratio was 84.4 percent. Also within the reinsurance segment, income from life and annuity operations for the quarter was $19.5 million, an increase of 68 percent from the second quarter of 2003. Net premiums written increased $917 million to $968 million.

Total income contribution in the quarter for financial products and services operations more than doubled over the second quarter of 2003 to $37.8 million, comprised of $33.0 million from financial operations and $4.8 million from life and annuity activities.

The company reported that the majority of this increase resulted from a positive $47.7 million change in fair value of derivative form transactions, comprised of both increased premium and positive price and credit changes, which offset a $9.1 million decrease in underwriting profit and a $15.3 million reduction in equity in net income of financial affiliates.

XL said that the decrease in equity in net income of financial affiliates was driven primarily by its affiliate Primus Guaranty Ltd., reflecting a negative change in the market value of that company?s credit default swap portfolio in the quarter as compared to a positive change in the same period in 2003.