Capital Ltd. (XL)

Q1 2010 Earnings Call

May 4, 2010 5:00 pm ET

Executives

David Radulski – Director Investor Relations

Michael McGavick – President, Chief Executive Officer

Simon Rich – Interim Chief Financial Officer

David Duclos – Exec. VP., Chief Executive Insurance Operations

Jamie Veghte – Exec VP., Chief Executive ReInsurance Operations

Irene Esteves – Chief Financial Officer

Analysts

Joshua Shanker – Deutsche Bank

Jay Gelb – Barclays Capital

Vinay Misquith – Credit Suisse

Clifford Gallant – Keefe, Bruyette & Woods

[Amud Reza – Bauman Capital]

Paul Newsome – Sandler O’Neill

[Doug Mewerter – RBC]

Brian Meredith – UBS

Ian Gutterman – Adage Capital

Presentation

Operator

I would like to welcome everyone to the XL Capital Ltd. first quarter earnings call. (Operator Instructions) I would now like to turn the call over to David Radulski, XL’s Director of Investor Relations.

David Radu lski

Good evening and welcome to XL Capital’s first quarter 2010 earnings conference call. This call is being simultaneously webcast on XL’s website at www.xlcapital.com. We’ve posted to our website several documents including our quarterly financial supplement and our fixed income portfolio data.

On our call today, Mike McGavick, XL Capital’s CEO will offer opening remarks. Simon Rich, our Interim CFO will review our financial results followed by David Duclos, our Chief Executive of Insurance Operations and Jamie Veghte, Chief Executive of ReInsurance operations who will review the segment results and market conditions. Sarah Street, our Chief Investment Officer is with us today and available for Q&A.

Before we begin, I’d like to remind you that certain of the matters we’ll discuss today are forward-looking statements. These statements are based on current plans, estimates and expectations. Forward-looking statements involve inherent risks and uncertainties and a number of factors could cause actual results to differ materially from those contained in the forward-looking statements, and therefore you should not place undue reliance on them.

Forward-looking statements are sensitive to many factors including those identified in our annual report on Form 10-K, our quarterly reports on Form 10-Q and other documents on file with the SEC that could cause actual results to differ materially from those contained in the forward-looking statements.

Forward-looking statements speak only as of the date on which they are made and we undertake no obligation publicly to revise any forward-looking statement in response to new information, future developments or otherwise.

And with that, I’ll turn it over to Mike McGavick.

Michael McGavick

Good evening. I’m pleased to report to you another quarter of solid operating results even as the global P&C industry experienced some of its worst quarter one-cat events ever. Our nearly break even P&C combined ratio of 100.5 included a 14.3 points from the Chilean earthquake and storm Xynthia as our estimates from these losses from these two events remains within the preliminary range we published in March.

We did see some offsets against these caps with 6.9 point of positive prior year development, mostly from short sale property lines in both Insurance and ReInsurance. For the fourth consecutive quarter, we grew out book value for ordinary share, this time another 7% to $26.38 and by 8% intangible book value per share to $23.92, and total shareholders’ equity increased from $9.4 billion to $10 billion.

The first quarter caps impact on operating income and the continued increase in our shareholders equity resulted in annualized operating ROE of 6.9% for the first quarter. Without the impact of the two named cats, our operating ROE would have been 14.2%.

We see these results as an endorsement of our continued discipline in both underwriting and risk management, and I’ve said before, and I’ll say it again, perhaps as much for the benefit of any XL underwriters who are listening in, XL will not write coverage at uneconomic price levels.

So while we grew our P&C top line by 2.3% year over year, much of that growth, as we had anticipated and predicted at the beginning of the year, came from lines we found attractive, including aerospace, cat and DNO as well as several long time customers returning to XL. We welcomed them back.

Meanwhile, we continue to lower our premiums written for multi-year Insurance premiums and from uneconomic businesses such as casualty, factory and Insurance that we exited last year.

It was a quiet quarter for our investment portfolio, which is looking more like the P&C portfolio should, as our optimization program continues. And while we saw the benefit of a $522 million in favorable marks to market this quarter, I should remind you that what goes up goes down and as interest rates can rise or fall, we’ll just have to see what happens next.

We do know that our excellent liquidity and well-matched asset liability profile will let us ride out any interest rate volatility.

On a risk management note, in March of 2009 we instructed our portfolio managers, and here I guess I’m more in line with current news, I instructed our managers back in March of 2009 to stop purchasing sovereign debt from Greece and Ireland and severely restricted exposures to the debt of Portugal, Italy and Spain.

So our cumulative exposure to sovereign debt from these five countries is down to approximately $34 million or less than one tenth of one percent of our entire investment portfolio, including no exposure to Greece.

Likewise, we made significant progress on another risk management initiative. Last week, as you well know, our ordinary shareholders approved several proposals, most notably our change of parent domicile from the Cayman Islands to Ireland.

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