XL Group plc (XL)

Q2 2012 Earnings Call

August 7, 2012 5:00 pm ET


David R. Radulski – Investor Relations

Michael S. McGavick – Chief Executive Officer

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

Gregory S. Hendrick – Executive Vice President and Chief Executive Officer - Insurance Operations

James H. Veghte – Executive Vice President and Chief Executive Officer - XL Group's Reinsurance Operations


Jay Gelb – Barclays Capital

Matthew Heimermann – JPMorgan

Jay Cohen – Bank of America/Merrill Lynch

Michael Zaremski – Credit Suisse

Joshua Shanker – Deutsche Bank

Josh Stirling – Sanford Bernstein

Robert Glasspiegel – Langen McAlenney

Vinay Misquith – Evercore Partners

Michael Nannizzi – Goldman Sachs

Meyer Shields – Stifel Nicolaus

Randy Binner – FBR Capital Markets

Ian Gutterman – Adage Capital Management, L.P.



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 Second Quarter 2012 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. Please be advised that 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 second quarter 2012 earnings conference call. This call is being simultaneously webcast on XL's website at www.xlgroup.com. We've 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; Pete Porrino, XL's Chief Financial Officer will review our financial results; followed by Greg Hendrick, our Chief Executive of Insurance Operations and Jamie Veghte, our Chief Executive of Reinsurance Operations, who will review their segment results and market conditions. Then we'll open it up for questions. Among those also available for questions are Susan Cross, our Global Chief Actuary; Sarah Street, our Chief Investment Officer and Steve 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 on 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 at 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.

With that, I'll turn it over to, Mike McGavick.

Michael S. McGavick

Good evening. Tonight, we are pleased to discuss XL's second quarter results. Results with intermediaries have us greatly encouraged, and make no mistake. We are not yet where we want to be across the board, but our actions are taking hold and we are beginning to see emerge the target book we have discussed with you before. So while our work continues in absolute and relative terms this is a very solid quarter.

To give you a sense of what you can expect from this call. First, I'm going to give you a high-level look at these results, including a brief discussion of our reserve releases, I'll then briefly touch on pricing in the quarter, and then we'll turn to two noteworthy topics; the effect of drought impacting so much of the United States and the developing issues around LIBOR. I'll then turn it over to Pete for a closer discussion of our financial results and to Greg and Jamie to get more granular on our insurance and reinsurance performance.

Now, first to our overall results. As you saw in our release for the second quarter we reported fully diluted operating earnings of $0.71 per ordinary share and an annualized operating ROE of 9.1%. Again, this is a solid result, especially at this point in the cycle and at this point in XL's improvement. All of this translates to fully diluted tangible book value per ordinary share of $30.65, which is up 3.6% in the second quarter and 8.3% higher than where we began the year. We improved our loss and combined ratios in both insurance and reinsurance and reported a total P&C combined ratio of 90.8% more than four percentage points better than the second quarter last year.

And most notably, our insurance results continued their recent improvement. The Insurance segment combined ratio ex-cat, ex-PYD improved 98.5%, which is obviously still higher than we would like, but trending in the right direction.

It is also good to observe that this is the sixth consecutive quarter in which insurance produced a better accident year loss ratio ex-cats. So, as I say, we are delivering on the margin expansion, we expected. Meanwhile, Reinsurance delivered a combined ratio of 72.6%, another really stellar result.

Turning briefly to pricing; broadly, we continue to see improvement across the vast majority of our lines, especially in insurance and this progress has accelerated through the quarter.

On reserving, as you'll recall, the second quarter is one in which we regularly perform an in-depth reserve review, and you've already noted in our materials this review again resulted in sizable releases totaling $101 million a positive development in the quarter.

Now I'll touch on a couple of issues of note. First, with respect to the ongoing drought conditions; as you'll recall our exposure to risks in crop insurance have reduced over recent years, and while we do have some exposure that exposure is manageable and even in extreme conditions for us being unpleasant, but modest earnings event. Jamie will have more detail. Second with respect to LIBOR, I know there are a lot of questions on this topic, particularly as we are [writing] of relevant coverage both in the U.S. and abroad. Unfortunately, the reality is it's just too early to tell how this will play out.

And finally, I do want to recognize one change in our leadership team that's the addition of Eileen Whelley as our new Chief Human Resources Officer. Eileen has a deep resume, including top HR leadership positions both inside and outside of the Insurance sector and she is already taking a principal role in our ongoing mission to build on what I truly believe is the most talented group of risk professionals in the industry.

So, as I said at the start, we are encouraged by the results we've reported today. They demonstrate our continued progress and are directly tied to our focus on improving margins, while meeting the needs of our clients.

With that, I'll turn it over to Pete to discuss the financials in more detail.

Peter R. Porrino

Thanks, Mike and good evening. Operating income for the second quarter was $222 million or $0.71 per share on a fully diluted basis compared to operating income of $243 million or $0.75 a share in the second quarter of 2011.

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