XL Group PLC ( XL)

Q4 2010 Earnings Call

February 8, 2011 05:00 pm ET

Executives

David Radulski – Director, Investor Relations

Mike McGavick – Group Chief Executive Officer

Irene Esteves – Chief Financial Officer

Dave Duclos – Chief Executive, Insurance Operations

Jamie Veghte – Chief Executive, Reinsurance Operations

Sarah Street – Chief Investment Officer

Susan Cross – Executive Vice President, Global Chief Actuary

Analysts

Vinay Misquith – Credit Suisse

Jay Gelb -- Barclays

Brian Meredith -- UBS

Jay Cohen – Bank of America Merrill Lynch

Keith Walsh – Citi

Mike Nannizzi – Goldman Sachs

Cliff Gallant – KBW

Josh Shanker – Deutsche Bank

Matthew Heimermann – JP Morgan

Ian Gutterman – Adage Capital

Jon Newsome – Sandler O’Neill

Doug Mewhirter -- RBC Capital Markets

Greg Locraft – Morgan Stanley

Presentation

Operator

Good evening. My name is Lisa, and I will be your conference operator today. At this time, I would like to welcome everyone to the XL Group Fourth Quarter and year end 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, Lisa. Good evening. And welcome to XL Group’s fourth quarter and full year 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 Susan Cross, our Global Chief Actuary, who will discuss our reserving process and recent development. Dave Duclos, our Chief Executive of Insurance Operations; and Jamie Veghte, our Chief Executive of Reinsurance Operations, will then review their 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 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 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. To open, I’d like to note that on this call, we’ll be structuring it a bit differently than we have on prior calls. You can expect this new template to be followed into the future. Three changes are most prominent. First of all, in the past I’ve opened with a talk that was mainly a regurgitation of the numbers that appear in the public materials that you have just received. As Irene Esteves has moved in from being our newest team member to being a real leader in our financial operations, I think it’s appropriate to have Irene go through these numbers and offer more granular commentary. So we’ll have Irene taking that part of my presentation into hers.

Second, these being the days of tough, soft markets, I think it’s appropriate to make available to you on a periodic basis our Global Chief Actuary, Susan Cross. Obviously attention to reserving is always important, but that’s particularly a focus on reserving during this stage of the cycle. Now I wanted to make sure she was available, because frankly, in this space, I feel XL has a great story to tell. We are very diligent and prudent reservers, and I think that’s holding this company in good stead.

The final change in these calls is I think it’s best if I focus my remarks on what we think about the five key drivers of shareholder value, and developments related to those five drivers during the quarter. We’ll follow this template into the future with, I hope, monotonous success. The five drivers of shareholder value that I’ll be focusing on are first of all, of course, underwriting excellence. Second, opportunities for strategic growth, third our strong risk management of the enterprise, fourth on optimizing our investment portfolio, and then fifth on operating and capital efficiency. So those are the five areas where I’ll bring forward some highlights of the quarter, and then Irene will take you into the details. Susan Cross will then provide the promised perspective on reserves, and then of course Dave and Jamie will talk about their respective operations.

So first, let’s start with underwriting excellence, the first of the five drivers that I mentioned. In a quarter like this, when our underwriting operations provide a 91.4% combined ratio, and a 94.8% combined ratio for the year, we are very pleased with the underwriting performance of the company. This was led by outstanding performance in our reinsurance operation, though I’d be quick to point out that a primary contributor to our results was, once again, prior year development, which reduced the current quarter by a combined 9.5 points. This is quality underwriting over time, and we feel good both about our results for the quarter and our results over time as reflected in this prior year development. This resulted in an annualized operating ROE of 10% for the quarter and 9% for the year.

The second thing I would comment on is strategic growth. First, our top line had a managed amount of year over year growth, but we did have some increases in Q4 because of an innovative coverage we developed for a large insurance client, that was booked in this quarter. In other areas of strategic growth, we are constantly reviewing opportunities to expand into new lines and geography that we believe will add value. In Q4, this included receiving our license to offer primary insurance in Chinese markets, and adding experienced teams in several new lines of activity for XL, including construction and surety. We also recently promoted Greg Hendrick, a proven underwriter, and former leader of our very successful remuda reinsurance businesses to report to me as the head of strategic growth, searching for new opportunities to apply XLs talents.

The third item I mentioned that I would comment on is our disciplined enterprise risk management. Since we last talked to you, I would note that we had a review, a report card of sorts, from Standard and Poor’s, that saw them increase our rating on enterprise risk management from adequate to strong, putting XLs ERM in the top quintile of companies that they rate. So this overall grade and advance for XL is terribly important as we seek to put the dark days of the (inaudible) explosions behind us, and really strive to have our arms around, completely, what it is we do. We’re very pleased with this achievement, and very proud of the work that Jacob Rosengarten and his entire team, and of many people involved in this across XL, and the progress we have made. As a side note, I would also mention that in the same period, S&P revised its outlook overall for XL to stable, and referred specifically to our strong franchise, strong operating performance, and strong, in fact in their words, extremely strong, capital position.

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