XL Group plc (XL)

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XL Group (XL)

Q4 2012 Earnings Call

February 07, 2013 5:00 pm ET

Executives

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

Michael S. Mcgavick - Chief Executive Officer and Director

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

Gregory S. Hendrick - Executive Vice President and Chief Executive of Insurance Segment

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

Susan L. Cross - Global Chief Actuary and Executive Vice President

Analysts

Jay Gelb - Barclays Capital, Research Division

Michael Zaremski - Crédit Suisse AG, Research Division

Michael Nannizzi - Goldman Sachs Group Inc., Research Division

Gregory Locraft - Morgan Stanley, Research Division

Vinay Misquith - Evercore Partners Inc., Research Division

Joshua D. Shanker - Deutsche Bank AG, Research Division

Jay Adam Cohen - BofA Merrill Lynch, Research Division

Brian Meredith - UBS Investment Bank, Research Division

Meyer Shields - Stifel, Nicolaus & Co., Inc., Research Division

J. Paul Newsome - Sandler O'Neill + Partners, L.P., Research Division

Ian Gutterman - Adage Capital Management, L.P.

Josh Stirling - Sanford C. Bernstein & Co., LLC., Research Division

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

Ryan J. Byrnes - Langen McAlenney

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 Fourth Quarter 2012 Earnings Call. [Operator Instructions] Please be advised that this conference is being recorded. I would now like to turn the call over to Dave Radulski, XL's Director of Investor Relations. Please go ahead.

David R. Radulski

Thank you, Shirley, and welcome to XL Group's Fourth Quarter and Full Year 2012 Earnings Conference Call. This call is being simultaneously webcast in XL's website at www.xlgroup.com. And we posted to our website several documents, including our quarterly financial supplement. On our call this evening, you'll hear from Mike Mcgavick, XL Group's CEO, will offer our opening remarks. Pete Porrino, XL's Chief Financial Officer, will review our financial results; followed by Greg Hendrick, our Chief Executive Insurance Operations; and Jamie Veghte, our Chief Executive of Reinsurance Operations who will review their segment results and market conditions, and we'll open it up to questions. Among those also 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 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 in 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 turn it over to Mike Mcgavick.

Michael S. Mcgavick

Good evening. We're pleased to report that 2012 was a year of progress across XL and our fourth quarter continued that momentum. A year ago, we committed to expand margins and we were able to do so due to a combination of price increases, greater underwriting vigor and being more disciplined about our spending, while also benefiting from a benign year as with respect to non-CAT large losses.

We also said we would buy back shares. We estimated that we would buy back about $400 million worth and maybe more if the year progressed better than we expected. In the end, we bought back about $500 million in shares that we associate with our 2012 performance, $402 million during the year itself and another $98 million in January, a delay made necessary by the uncertainty around the losses caused by Superstorm Sandy.

And in connection with buying back our shares, I would observe that this level could go higher in 2013 if the year plays out as we expect. It is not our goal to expand our capital buffer but rather to keep it level. As we enter 2013, we intend to keep grinding away at what we must do to keep our progress going. As mentioned, we know from what we've heard so far in the earnings season, it is clear that 2012 was, in many ways, a light large loss year for the industry. These kinds of years come and go. What we feel best about is that with the tighter management processes we had been driving home these past several years, if 2013 were to be to an above-average year for large losses for the industry, we will perform much better than we have in the past.

So let me share some other results from the fourth quarter. Of course, the most notable event was Sandy, one of the top 3 insured storm losses in history and devastating to many on the East Coast. XL's current loss estimate of $355 million is in line with what we provided in our December release and we think is a continuing example of solid risk management and underwriting.

Greg and Jamie will provide more detail in a moment. But looking beyond Sandy, it is pleasing to us that our underwriting operations on an ex-CAT, ex-PYD basis continued to trend in the right direction.

Our Insurance segment delivered a 96.5 ex-CAT, ex-PYD combined ratio for the quarter. This segment was about breakeven for the year on the same basis, even after the very challenging quarter one results. But as we told you before, we won't be satisfied with our underwriting in this segment until we are regularly delivering a combined ratio of around 90%. The trend is in the right direction and we are pleased with the momentum.

Reinsurance, even after taking the brunt of our Sandy losses, had a combined ratio of 104.4% for the quarter and 96.9% for the full year on an all-in basis. We are very pleased by these underwriting results.

Turning to reserves. As you know, every second and fourth quarter, we make a deep examination -- someone just said I got the number wrong, 86.9% was the full year combined on Reinsurance. Thank you. We are very pleased, as I said, by those results. Turning to reserves, as you know, every second and fourth quarter, we make a deep examination of all of our reserves. And for the fourth quarter of 2012, this resulted in $98 million in releases.

As for our booked value, our fully diluted tangible booked value per share was $33.35 at year end. This was up 1.6% in the quarter and 18% higher than where we began 2012. The 2 largest contributors to this growth were gains in our investment portfolio, mark-to-market and net income.

A couple of last areas of comment. First, with respect to ROEs, and second with respect to pricing. As for ROEs, I would say our all-in 6.2% operating ROE for 2012 was not where we want it to be. But it is certainly an indicator of improvement, built upon an increasingly solid foundation. To be clear, driving a better ROE is best achieved by expanding our core operating margins. No other action makes a comparable difference. This grinding work will not stop. And as we get our operating earnings moving in the right direction, the goalpost we will focus on more and more is the ROE we produce. We really need to get back to double digits. And we are very driven to do so, even in this low interest rate environment, should it persist. In this connection, there is one thing you should know, and that is we are focused on getting to double-digit ROEs on an x AOCI basis, given that mark-to-market fluctuations, currently positive about $1.3 billion in our fixed income portfolio, could obviously turn the other way. As a result, we won't focus on these fluctuations and we'll focus on x AOCI ROEs in our drive toward double-digit performance.

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