XL Group plc (XL)

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Start Time: 17:00

End Time: 18:30

XL Group plc (XL)

Q4 2013 Earnings Conference Call

February 05, 2013, 17:00 PM ET

Executives

Michael S. McGavick - CEO

Peter R. Porrino - EVP and CFO

Gregory S. Hendrick - EVP and Chief Executive, Insurance Operations

Jamie H. Veghte - EVP and Chief Executive, Reinsurance Operations

David R. Radulski - SVP and Director of IR

Analysts

Michael Zaremski - Crédit Suisse AG

Jay Adam Cohen - Bank of America Merrill Lynch

Jay Gelb - Barclays Capital

Gregory Locraft - Morgan Stanley

Joshua Shanker - Deutsche Bank AG

Meyer Shields - Keefe, Bruyette, & Woods, Inc.

Brian Meredith - UBS Investment Bank

J. Paul Newsome - Sandler O'Neill

Vinay Misquith - Evercore Partners Inc.

Amit Kumar - Macquarie Research

Ronald Bobman - Capital Returns

Ryan Byrnes - Janney Montgomery Scott

Josh Stirling - Sanford C. Bernstein & Co.

Ian Gutterman - Balyasny Asset Management L.P.

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's Fourth Quarter and Full Year 2013 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. Welcome to XL Group's fourth quarter and full year 2013 earnings 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.

On our call this evening, you'll hear from Mike McGavick, XL Group's CEO, who will offer opening remarks; Pete Porrino, XL's Chief Financial Officer, who'll 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.

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 for the date on which they're 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 share with you XL's fourth quarter and full year 2013 results. 2013 was a good year for XL with many important metrics demonstrating our continuing year-over-year improvement. As regards to fourth quarter itself, our assessment is a bit more mixed.

While we like a lot of what occurred including the strong performance in many of our businesses, we did see large loss activity in the fourth quarter as occurred in the third diminish the result. More on the fourth quarter in a moment, but overall we feel good about the year now in the books and very good about how we are positioned for 2014 and for the future.

I'll start with some highlights of the year. Our operating return on equity, ex unrealized gains and losses, increased to 12.5% for the fourth quarter and to 10.2% for the full year. Our overall P&C combined ratio improved by close to 4 points versus 2012. Total P&C gross premiums written increased for the fourth straight year as we continue to implement our plans for each of our businesses. For the fifth consecutive year we grew our tangible book value per share delivering increased value to our shareholders. These are solid indicators of our progress.

From a segment perspective, we also saw good practice. For example, Reinsurance delivered a very strong 81.4% combined ratio for the year and an underwriting profit for the eight consecutive year, and suffice it to say in the midst of tough market conditions and international CAT activity in the quarter which Jamie will discuss more later in the call, we are very proud of what our Reinsurance colleagues produced for the year.

In Insurance, 2013 marks the first year since 2009 in which the Insurance segment delivered an underwriting profit. The segment's total combined ratio of 97.1% is the best result in five years. The segment's accident year combined ratio of 96.7% and the loss ratio of 65.9% are also the best performance in these metrics since 2007.

Now as I noted at the opening of my remarks, there was a contrary note on the fourth quarter, as you've seen in our release. In the fourth quarter as in the third quarter, we experienced mutual losses; in this quarter mainly in our North America property book that affected the Insurance action quarter combined and loss ratios.

As you know, these metrics are the focus of much of our attention and the slowing of our progress here does temper on our overall assessment, though only a bit. It is tempered by the fact that the 96.7 insurance accident year, ex combined ratio we delivered in the fourth quarter is no where we wanted or expected to be at this point. But as we have reviewed the second half of the year, we find this level of loss activity to be an aberration when viewed against our full year performance.

For example, for the full year 2013, the combined ratio for our North American property book on the same accident year, ex CAT basis, was 74.3% and the combined ratio for North American P&C was at 91%, continuing their march to our overall target. The fact is that the property group experienced one bad quarter and essentially a year's worth of large losses in the fourth quarter which capped on an otherwise strong year. This isn't going to cause us to change our plans.

As we continue to remix our portfolio, very much a work in progress, we will be even better able to absorb losses like this as they might come and we can see where this balancing effort is already at play. For example, throughout the year we grew our highest margin insurance businesses by over 10% while reducing our lowest margin businesses by 4%, further improving our mix. And to continue the trend we've reported last quarter, year-to-date 70% of insurance businesses had improved loss ratios versus the prior year on an accident year ex CAT basis.

Even in Reinsurance we are seeing the same effect. While we had a degree of CAT losses in our international book in the quarter, the Bermuda reinsurance business produced a combined ratio of 26.2%. And when you look at it from the top of the house, like we do, the total mix of all of our insurance businesses is moving us in the direction we want with a total P&C accident year ex CAT combined ratio of 92% for the 2013 year.

So already we are seeing the effect of a diversified portfolio and more books of business that are producing profit for the enterprise as a whole. We expect benefits from this to only increase as our remixing produces a higher number of margin expanding and less correlated businesses. This will reduce the impact of these outlier quarters.

Turning back to the financials for a moment, and Pete will have more detail on this in his section, we were helped by the strong performance of risk assets in both the fourth quarter and throughout the year, leading to significant earnings from our investment affiliates. In fact both the P&C and Life investment portfolio strongly outperformed their benchmarks during the year helping to dampen the impact of rising interest rates.

As we continue to gain traction from New Ocean, our joint venture with Stone Point Capital, in the end we are consistently looking to our progress over time and from this perspective, we saw a lot of what we like in 2013; a continuing success for Reinsurance, the first underwriting profit for the Insurance segment in four years, the achievement of a double-digit net ROE, it is the direct accumulation of the various actions we have taken to build a solid and strengthening foundation.

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