XL Group plc (XL)

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XL Group plc (XL)

Q1 2014 Results Earnings Conference Call

May 2, 2014 8:00 AM ET

Executives

Dave Radulski - Director, Investor Relations

Mike McGavick - Chief Executive Officer

Pete Porrino - Chief Financial Officer

Greg Hendrick - Chief Executive, Insurance Operations

Jamie Veghte - Chief Executive, Reinsurance Operations

Sarah Street - Chief Investment Officer

Steve Robb - Controller

Susan Cross - Executive Vice President, Global Chief Actuary

Analysts

Jay Gelb - Barclays

Amit Kumar - Macquarie

Vinay Misquith - Evercore

Jay Cohen - Bank of America Merrill Lynch

Meyer Shields - KBW

Dan Farrell - Sterne Agee

Ian Gutterman - BAM

Mike Nannizzi - Goldman Sachs

Randy Binner - FBR

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 First Quarter 2014 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 Dave Radulski, XL's Director of Investor Relations. Please go ahead.

Dave Radulski

Thank you, Shirley. And welcome to XL Group's first quarter 2014 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 and a presentation titled Sale & Retrocession of Life Reinsurance Business.

On our call this morning, you'll hear from Mike McGavick, XL Group's CEO, who will offer opening remarks; Pete Porrino, Chief Financial Officer; followed by Greg Hendrick; and Jamie Veghte, who will review their segment results and market conditions. Others with us today include our Chief Investment Officer, Sarah Street; and our Controller, Steve Robb.

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'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.

Mike McGavick

Good morning and thank you for joining this call. If you will permit, I'd like to start with a quick personal note. This is a call I have been looking forward to for six years. We are very pleased on this call to be able to discuss the transaction we announced last night on our now largely exited Life Reinsurance businesses. I'm truly excited by the culmination of an effort that we started working on immediately after I was hired in 2008.

Here is how we are going to approach this call. We will get into the results from the quarter first, so you will hear from me, Pete, Jamie and Greg in the usual fashion. And then Pete and I will come back to discuss more fully the Life Re transaction as we want to them get into the details and give you plenty of time for your questions.

So with regard to the quarter, XL had a very good start to 2014, the solid results across both our core business segments and from our investment affiliates. In fact, across many total P&C metrics, this was one of the best quarters since the end of 2008. Our Insurance segment continued to improve and Reinsurance performed strongly in spite of the widely discussed tough market conditions.

Some of the results highlight. Excluding the first quarter of 2013, which we have noted in many ways was an outlier in terms of outperformance. Our total P&C combined ratio of 89.7%, our total underwriting profit of $145 million and our loss ratio of 58.9% are the best result since the fourth quarter of 2008. And once again we produced double-digit ROE of 10.4%, excluding unrealized gains on investments.

Contributing to the strong quarter was an Insurance segment underwriting profit of $45 million and an insurance accident year ex-cat combined ratio of 94.6%. Meanwhile, the 76.3% combined ratio for the Reinsurance segment is obviously a very strong result.

Now we do expect to see variations from quarter-to-quarter as we’ve discussed many times with you. We are mindful and this was a relatively low cat quarter and we of course know from last year. The strong starts do not necessarily project the same kind of performance across the entire year. All of that said, we like these results and we really like the way this quarter positions us for the rest of 2014.

With that, I am going to turn it over to Pete for a quick rundown of the financials in the quarter. Greg and Jamie will have the segment highlights, and then Pete and I will return to get into the details of the Life transaction. Pete?

Pete Porrino

Thanks, Mike, and good morning. Given all that we have to cover today, I’ll make my remarks brief covering four items, reserve development, expenses, investment results and capital management.

Prior year reserve development in the quarter was a net favorable $39 million or 2.7 loss ratio points, compared to $31 million or 2.1 loss ratio points for the same quarter in 2013. This reflects favorable development from short tail property and catastrophe lines in this A versus E quarter of $8 million and $31 million in the Insurance and Reinsurance segments. Our semiannual full actuarial review will be reported on next quarter. Our reserve related note, we do intend to publish our global loss triangles next week.

Turning to expenses, you may have notice that in prior years our first quarter expenses historically tended to be lower than the annualized run rate. In the past that was largely due to the lag in spend for technology and other areas in the first quarter, followed by a catch-up over the rest of the year.

We are doing a better job of more evenly distributing our spending this year, so that while total expenses in Q1 2013 were 9% higher than Q1 a year ago that were virtually even with the most recent three quarters. And as we’ve discussed on previous calls, we expect our total full year 2014 operating expenses to be higher than 2013 by mid single digits on annualized basis.

Regarding investments, our investment portfolio delivered solid total returns of 1.8% in the quarter, P&C portfolio was 1.5% and the life portfolio of 3.2%. We had a positive mark-to-market of $302 million, with $236 million, and $66 million between P&C and Life.

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