XL Group plc ( XL)

Q3 2010 Earnings Call

November 2, 2010 5:00 PM ET

Executives

David Radulski – Director, Investor Relations

Mike McGavick – Group CEO

Irene Esteves – Chief Financial Officer

Dave Duclos – Chief Executive, Insurance Operations

Jamie Veghte – Chief Executive, Reinsurance Operations

Sarah Street – Chief Investment Officer

Susan Cross – EVP, Global Chief Actuary

Analysts

Jay Gelb – Barclays Capital

Josh Shanker – Deutsche Bank

Keith Walsh – Citi

Jay Cohen – Bank of America Merrill Lynch

Vinay Misquith – Credit Suisse

Paul Newsome – Sander O’Neill

Matt Heimermann – JPMorgan

Doug Mewhirter – RBC Capital Markets

Michael Paisan – Stifel Nicolaus

Ian Gutterman – Adage Capital

Greg Locraft – Morgan Stanley

Ron Bobman – Capital Returns

Presentation

Operator

Good afternoon. My name is Shirley, and I will be your conference operator today. At this time, I would like to welcome everyone to the XL Group plc Third Quarter Earnings Call. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks, there will be a question-and-answer session. Please be advised this conference is being recorded.

I would now like to turn the call over to David Radulski, XL Director of Investor Relations. Please go ahead.

David Radulski

Thank you, Shirley. Good evening. And welcome to XL Group’s third quarter 2010 conference call. This call is being simultaneously webcast on XL’s website at www.xlgroup.com. We posted to our website several documents including our quarterly financial supplement and our fixed income portfolio data.

On our call today, Mike McGavick, XL Group CEO will offer opening remarks; Irene Esteves, our CFO will review financial results followed by Dave Duclos, our Chief Executive of Insurance Operations; and Jamie Veghte, our Chief Executive of Reinsurance Operations, who will review the segment results and market conditions, and then we’ll open it up for questions. 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 statements in response to new information, future development or otherwise.

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

Mike McGavick

Good evening. Our third quarter results reflect continued solid performance offset by an unusual number of unrelated larger losses. But to give weight to my view on our strong underlying results, I would point to the fact that our overall P&C loss ratio of 64% barely moved year-over-year, despite these difficult and soft market conditions and our reinsurance segment had another terrific quarter with a loss ratio of 43% and a combined ratio of 75%.

At the same time, this is a quarter in which our earnings were affected by an unusual number of smaller catastrophes and large losses, such as the New Zealand earthquake, floods in Germany and higher frequency of other news worthy loss events.

As I have mentioned in my previous calls, by the nature of XL’s global footprint and the large limits and complex risk XL takes on, this kind of lumpiness will happen from time-to-time. Importantly, after review, these losses were consistent with our risk management and underwriting standards.

Prior year reserve development was again a strong contributor in the quarter and while these benefits of past reserving actions are realized, we continue to exercise the disciplined approach to establishing current reserve levels.

In reinsurance, we had an $86.8 million in a positive prior year development and in insurance we had a $4.5 million reserve strengthening. But let me point out, that in the third quarter is not one in which we do a deep review of some of the lines in insurance that have been among our best performing recently.

The fourth quarter will affect a more comprehensive review of all of our product lines so stay tuned. As we again -- and we again delivered strong book value per share growth for the sixth straight quarter this time by 6.6% on a fully diluted basis. Our growth in book value was driven primarily by the positive impact on investment portfolio mark-to-market of lower U.S. and U.K. interest rates.

You may recall at the beginning of the year we forecast a low double-digit ROE for the year, since then, between the caps that hit earlier in the year combined with the exceptional strengthening of our balance sheet in the year-to-date have held our operating ROE in the single digits.

Likewise at the beginning of the year, we forecast we might be able to incur some growth in our P&C gross written premiums, but as the markets have developed of course, the competition has intensified and our view, for example, I would point out that aviation might have had the shortest hard market in history, and so, our view now as we look forward to the end of the year is -- it might be flat or slightly down in terms of total gross written premium. This current market pricing makes it unlikely that we would meet that top goal that we have laid out. Our underwriters are simply putting down them.

Read the rest of this transcript for free on seekingalpha.com