XL Group plc (XL)

Q2 2010 Earnings Conference Call

August 3, 2010 5:00 PM ET


David Radulski – Director, IR

Michael McGavick – President and CEO

Irene Esteves – CFO

David Duclos – EVP and Chief Executive, Insurance Operations

James Veghte – EVP and Chief Executive, ReInsurance Operations

Sarah Street – Chief Investment Officer


Jay Gelb – Barclays Capital

Matthew Heimermann – JP Morgan

Jay Cohen – Bank of America Merrill Lynch

Doug Mewerter – RBC Capital Markets

Brian Meredith – UBS

Vinay Misquith – Credit Suisse

Joshua Shanker – Deutsche Bank

Ian Gutterman – Adage Capital

Keith Walsh – Citigroup Inc



Good afternoon. My name is Shirley (ph) and I will be your conference operator today. At this time, I would like to welcome everyone to the XL Group TLC Second Quarter Earnings Call. (Operator Instructions) I would now like to turn the call over to David Radulski, XL’s Director of Investor Relations.

David Radulski

Thank you, Shirley. Good evening and welcome to XL Capital’s Second Quarter 2010 Earnings Conference Call. This call is being simultaneously webcast on XL’s website at www.xlgoup.com. We’ve posted for 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. Irene Esteves, our 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 they 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’re 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. XL Group provided investors with another quarter of solid results.

We generated net income to ordinary shareholders of $192 million or $0.56 per ordinary share.

For the fifth straight quarter, we grew book value per share, this time by 5% and tangible book value per share was up by 6%. These gains were driven by investment portfolio market to market and net income.

Operating return on equity for the quarter was 10.5%. Our investment portfolio’s favorable market to market of 349 million this quarter was driven by interest rate declines even as corporate credit spreads widen. We believe our repositions to be in sheet portfolio weathered this latest credit market turmoil relatively well aided by its limit of exposure to the impacted Euro denominated governments.

Our P&C combined ratio is 92.2% and was still at 99% excluding prior year development.

In addition, we made another big step forward to complete our focus on our core team sheet strategy with our previously announced termination of the Syncora EID guarantees.

In the quarter, we also completed our redomestication to Ireland and we are very pleased that both S&P and Russell decided to retain XL in their U.S. indexes.

Also, our advances in risk management continued to bear fruit. One example of this is the fact that Fitch (ph) recently confirmed our insurance financial strength rating at a strong and upgraded our outlook to stable. Another example of our ERM progress in seasoning is the fact that our current loss estimates for the Chilean earthquake and windstorm Cynthia remained within our original arrangements as has been true for every cat events since your current management team was assembled.

Likewise, we have seen no material change in the property losses, we announced for the Deepwater Horizon Tragedy. Now, I’m on this Deepwater topic, perhaps I can save some time later. Similar to our peers in the marine and excess casualty markets with regards to the reliability as too complex and we think still too early to predict anything meaningfully.

Before handing it off to Irene, I would like to take Tom Hutton for his service on XL’s Board of Directors and particularly for his role as Chairman with our Special Committee on Enterprise Risk. Tom’s time with us and his success during that time is well illustrated by our Board’s recent determination that ERM at XL is now seasoned enough to allow our Special Committee on Enterprise Risk to be merge into a newly combined Risk and Finance Committee, and you can look forward to seeing transparency around XL’s approach to risk management in our upcoming 10-Q.

Now, I’d like to turn it over to Irene Esteves. This is her first call, of course, as our CFO. I can tell you that she has hit the ground running, already made substantial contributions and we are delighted she is here. Irene?

Irene Esteves

Thanks, Mike, and good evening. Turning to our summary financial results on slide four, operating income for the second quarter was $243 million or 0.71 for ordinary share. An annualized operating ROE of 10.5% compared to $291 million or 0.85 for ordinary share and 20.1% respectively in the prior year quarter.

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