XL Group plc (XL)

Q3 2011 Earnings Call

November 01, 2011 5:00 pm ET

Executives

Sarah Elizabeth Street - Chief Investment Officer and Executive Vice President

Michael S. McGavick - Chief Executive Officer and Director

David B. Duclos - Chief Executive of Insurance Operations and Executive Vice President

James Veghte - Chief Executive of Reinsurance Operations and Executive Vice President

Peter R. Porrino - Chief Financial Officer and Executive Vice President

David R. Radulski - Senior Vice President and Director of Investor Relations

Analysts

Michael Nannizzi - Goldman Sachs Group Inc., Research Division

Donna Halverstadt - Goldman Sachs Group Inc., Research Division

Randy Binner - FBR Capital Markets & Co., Research Division

Cliff Gallant - Keefe, Bruyette, & Woods, Inc., Research Division

Joshua D. Shanker - Deutsche Bank AG, Research Division

Gregory Locraft - Morgan Stanley, Research Division

Vinay Misquith - Evercore Partners Inc., Research Division

Brian Meredith - UBS Investment Bank, Research Division

Unknown Analyst -

Michael G. Paisan - Stifel, Nicolaus & Co., Inc., Research Division

Jay A. Cohen - BofA Merrill Lynch, Research Division

Keith F. Walsh - Citigroup Inc, Research Division

Presentation

Operator

Good afternoon. My name is Shirley, and I'll be your conference operator today. At this time, I would like to welcome everyone to the XL Group plc Third Quarter 2011 Earnings Call. [Operator Instructions] Please be advised this conference is being recorded. I would now like to turn the call over to David Radulski, XL's Director of Investor Relations. Please go ahead.

David R. Radulski

Thank you, Shirley, and welcome to XL Group's Third Quarter 2011 Earnings Conference Call. This call is being simultaneously webcast in XL's webcast at www.xlgroup.com. We posted to our website several documents including our quarterly financial supplement. On our call today, Mike McGavick, XL Group's CEO, will offer opening remarks. Peter Porrino, XL's Chief Financial Officer, will review our financial results; followed by Dave Duclos, our Chief Executive of Insurance Operations; and Jamie Veghte, our Chief Executive of Reinsurance Operations, who'll review their segment results and market conditions, then we'll open it up for questions. Also in attendance and available for questions are Susan Cross, our Global Chief Actuary; Sarah Street, our Chief Investment Officer; and Stephen Robb, our Controller.

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 and 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 of 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 S. McGavick

So the interesting quarters that have characterized the year 2011 continue. It has been an extraordinary quarter at XL. It is a mix of good and a few not-so-good items, as it always is. On the not-so-good side, we saw heavy catastrophe activity, as did the industry. But on the good side, once again, we saw the progress that we have made in ERM at XL showing through as our performance in catastrophe terms, we think, was very much in line with our peers and in some cases, even a little better. And happily, prior quarter Cat events continued to perform as predicted at the time.

Now also on the not so good side, we saw a difficulty in our large property line, which produced one very large loss. And that large loss has been the continuation of a pattern of larger losses that we have seen out of that operation. On the good side, you can be assured that the new leadership we installed over that book in 2011 gets it, as do all of us. Make no mistake. As underwriters, we do not find an x Cat, x PYD combined ratio of 101.7% acceptable at any point in the cycle. But back on the good news side, our challenges are on a short-tail line of business. And we believe the underwriting actions, many of which are already underway, will take hold relatively quickly

But bringing all of that up relates to the quarter just passed. And that belies the fact that generally here at XL, we are extremely excited about the market that is increasingly near at hand. Broadly speaking, nearly every line of business with a notable exception of U.S. D&O is showing -- is now showing either flat or positive rate change for the second straight quarter. In fact, overall in this third quarter, we saw 2 points of rate when you take away the negative pricing in professional lines, and this is the continuation of a trend for the second straight quarter with positive rate. And we believe this understates our progress as it has been accelerating each month throughout the quarter. Now I'm not here to call it a hard market yet. But clearly, managements in our industry are becoming frustrated by reality. The reality that we are in a prolonged low interest rate environment, the reality that for some companies, I think, reserves are running dry, and the reality that the sector has been underpricing most of these products for an extended period of time.

Now while I'm on the topic of reserves running dry, you will notice that there was relatively minimal prior year development at XL in the third quarter. But you will recall from prior calls that we do not do a deep examination of our reserves during the first and third quarters, so it is not unusual for us to have a third quarter likeness. And some will note that this third quarter PYD is less than the same quarter a year ago. But that quarter was driven by specific case anomalies as we described at the time. My point is that this quarter does not mean anything with respect to the overall level of redundancy at XL, which has been favorably reviewed by industry analysts including many on this call.

Now getting back to the larger story, why do I say we're so excited? Most of our businesses are performing very well. The businesses where we've had some noise have our arms around it, and we think quick actions will have great effect. And the reality is if a market starts to turn, you want to be the company who has momentum, the company who has been adding to the talent on the ground working with clients. And we have been adding to our underwriting talent, both in terms of the underwriting in the existing businesses, and we've been adding new lines of businesses where we think we had access to superior talent to drive into these markets. Again, we are very excited about our strategy and its particular timing as we see the markets right now.

Taken together, this is one of the really extraordinary times for XL. We believe we are positioned correctly, and we're ready to get to work. And we are hoping what we are seeing early signs generally holds true to the end of the year. Now let me be a more specific.

As you've seen from our release in the quarter that had significant Cat losses, we generated operating earnings of $0.28 per share and an annualized operating ROE of 3.6% in the quarter. As I've done on recent calls, I'll briefly describe it in the context of the 5 drivers that build value for XL shareholders: Underwriting excellence, strategic growth, strong enterprise risk management, optimized investing and operating and capital efficiency. First, with respect to our underwriting, our reinsurance operations, again, produced outstanding results with the combined ratio of 78.8%. Our insurance segment's combined ratio of 112.2%, as was described, was impacted by Cat losses and one large non-Cat property loss.

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